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Regardless of whether a compromise is
reached over the approaching lockdown of the United States ceiling and the raising
of the debt, this impasse has momentous significance for holders of gold
(SPDR Gold Shares (GLD)) and silver (iShares Silver
Trust (SLV)). The serious weaknesses of our economic
structure is exposing it as a paper tiger. Instead of seeking fiscal sanity,
the inability of our leaders to agree on even the smallest of issues is
reminiscent of the Roman Empire dealing out bread and circus to the masses
when Rome could no longer afford the good times and the games.
Let’s
look at the pathetic reality. Our legislators are unable to come up with as
little as 2% of a total budget measured in the trillions. While the
Republicans and the Democrats are separated by only several billions, the
underlying issues are ignored. This may be because we are witnessing political
theater in a dress rehearsal for the 2012 election. The actual battlefields
on which both sides face one another are not only fiscal, but ideological as
the debate raged over Planned Parenthood funding. The media in their attempt
to sell newspapers and program time sensationalize the basic issues. Simply
put, we are approaching insolvency. Our ship of state is sailing straight
into a sea of icebergs. Sooner or later we will have to come to grips with
the urgent reality that belts will have to be tightened. If we do not sober
up to the reality of our situation, the decision to keep our national vessel
afloat will occur whether we like it or not.
Remember that
we have to borrow forty-three cents out of every dollar that we use to pay
for our expenses. To put it succinctly, 50% of our population pays no taxes.
The revenues to pay our national debts are coming off of the hides of the
middle class, the wage earners and the small businesses. It is somewhat
peculiar that the basic truths for our survival are not mentioned. Do not be
diverted by the ambient noise that tends to complicate the issue. We have
been sidetracked by irrelevant issues; we are spending ourselves into a
financial quagmire. This is hurting the hard-working middle class who are
dealing with a deteriorating US dollar (PowerShares
DB US Dollar Index Bullish (UUP)) and simultaneously carrying the load of
increased tax burdens. Also long-term yields are rising and institutional
investors are selling their US debt holdings raising long-term yields (iShares Barclays 20+ Year Treas
Bond (TLT)).
It would all
be worthy of a Fellini farce if it weren't so sad. The situation cries out
for solutions I've proposed in the heat of the financial meltdown,
concentrating on precious metals and key natural resource stocks to hedge
against a dollar devaluation and burgeoning debts.
We have protected ourselves with gold, silver, and mining stocks (Market
Vectors Gold Miners ETF (GDX)), which have soared over the past two years
since the credit collapse.
What goes
completely unmentioned is the role of the Fed in the entire equation. The
Federal Reserve Bank is the one factor in this equation that has the
unquestioned, uncontrolled power to change unexpectedly the best laid plans.
The Fed is omnipresent, omniscient and omnipotent. All this time it watches
and waits. One change in the Fed discount rate, one raise in margin, one
change in the direction of interest rates and quantitative easing by the
Imperial Fed can rewrite the whole script. They are accountable to no one and
answer to no one. They can and have, if needed, print fiat money and cheap
paper to obfuscate growing budget deficits. All eyes are on QE ending in June
and what will occur with long-term interest rates (iShares
Barclays 20+ Year Treas Bond (TLT)). As the act
continues in Washington, as the Democrats and Republicans try to show the
masses who is more fiscally prudent, the reality is
that the Fed will have to continue printing cheap dollars to pay off huge
debts. Investors realize this and that is why we are seeing these major moves
in gold (Proshares Ultra Gold (UGL)) and silver (ProShares Ultra Silver (AGQ)).
Let us keep a
firm hand on the wheel and steer a sound course with the compass tuned to the
North Star of our technical discipline. It is important to remember that the
charts give us clues during this treacherous times
and allows us to go where the smart money is moving.
We are living
in extremely volatile times and the market will play on our mind and
emotions. That is why it is crucial that we become stronger than the average
investor who easily gets caught up with the herd mentality. These amateur
investors get aggressive at overbought levels and dump their positions during
sell-offs. Remember when you invest in anything you become subject to inner
feelings of anxiety and greed. You need to realize that a technical system
protects you from becoming subject to the dangerous, contagious emotions of
the investment community. I have unfortunately learned that what takes you
months to earn can be taken from you in a matter of days.
In August, I
predicted a major change in the gold:silver
ratio and believed silver would significantly outperform gold. On August 25,
2010, I wrote on my blog, “While I am bullish on gold, I believe
investors could see a higher percentage move in silver.” The gold silver:ratio has dramatically
favored silver since I wrote that. Silver is extremely volatile and has often
in the past exceeded its measured targets. It is much less reliable for
timing purposes than gold and could easily overshoot my late January $40
target. The US dollar is heading into new lows without showing any sort of
dead cat bounce, which is quite concerning. Investors have flocked to the
Euro (CurrencyShares Euro Trust (FXE)) which is
quite dangerous for some countries paying back huge debt burdens and for
countries who rely on exporting overseas. Do not be
surprised if we see some economic weakness resurfacing in the eurozone.
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