Golden Dreams & Global Nightmares
A good read. Pretty charts.....
It is now time once again to pause and view the global financial picture. The gold and silver markets have chopped mostly sideways for a very long time, and we are near a capitulation phase in investor sentiment. At AFE we are all heavily invested in our own product, namely physical gold and silver; therefore, we have an interest just as our clients do in knowing if this is a final top in precious metals.
Knowing this, we continue to step back and review the factors that may indicate if gold has reached the peak of its 11-year bull market. It is important to make sure that we isolate emotion from analysis, for it is the emotions of greed and fear that drive many investors to make poor decisions with their hard-earned wealth.
“Paper money has had the effect in your state that it will ever have - to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice.” - George Washington
Currency Wars and Weapons of Economic Warfare
On March 17th, 2012, the unprecedented step of severing a country from the global inter-bank settlement mechanism known as SWIFT was put into force. SWIFT, the Belgium-based Society for Worldwide Interbank Financial Telecommunication, shut 30 Iranian banks out of the system completely. This is the equivalent of having all of your bank accounts frozen, as you cannot transfer funds.1
We have entered a new era of economic warfare. Make no mistake, this is warfare being conducted on a global scale, and it is no less deadly than a kinetic war. After using the tool of being severed from the international payments system as leverage, the US and European nations are all but guaranteeing that the current system will be called into question. By removing a country’s ability to conduct international bank transfers over the SWIFT system, the USA is essentially forcing nations to take a good hard look at if they want to be next. This is not an idle concern, as the US has already made threats intimating this to several other countries.2
This policy is nothing more than the equivalent of the USA shooting itself in its own foot. Instead of compliance, the USA is incurring a massive move away from the USD. What happens when countries all unofficially start settling oil purchases with gold? By using these new weapons of Economic Warfare, Western Central banks run the risk of encouraging other nations to resort to alternate payment methods and systems. The move towards alternative methods is already underway.
There has been a tremendous amount of “scurrying activity” lately as countries position themselves to completely avoid SWIFT if necessary. This entire episode is like a bully (the USA) who has long dominated a playground by ordering around all the others on the playground and using various threats of military and financial use of force as the stick. Unfortunately for the bully, the others have decided to build their own playground and simply leaving the bully behind, not inviting him to play.
BRICS Sidestep U.S. Dollar Completely and Choose Chinese Currency for Trade Settlement
In a historic move, Brazil, Russia, India, and China have conducted negotiations to utilize the RMB for settlement of international trade. South Africa has joined this group and is expected to endorse Chinese currency as the currency of trade for these emerging markets.3 World Bank President Robert Zoellick has been noted as supporting a “BRICS Bank.”4 To put into perspective why this is important, developing nations now contribute almost 50% of new global economic growth and account for roughly 25% of global GDP.5
In the meantime, China continues to position its currency as a viable alternate to the USD for settlement of international trade. China’s President Hu Jintao recently stated that China will “…improve the flexibility of the Yuan exchange rate.” This could be interpreted as saying that China will eventually move to let the Yuan float against other currencies – a move that may be required in order to play the role of reserve currency for use in trade.6
Over and over, we continue to see signs that nations of the world are choosing alternatives to the USD. China is Australia’s largest trade partner as China gobbles up resources such as coal, iron, and gas. China and Australia have just entered into $31Bln Currency Swap.7 This will allow the two nations to settle trade in other than USD. To quote the Reserve Bank of Australia:
“The main purposes of the swap agreement are to support trade and investment between Australia and China, particularly in local-currency terms, and to strengthen bilateral financial co-operation.”
This is Reserve Banker code speak for, “Oh crap, we may need another way to settle trade in case the US goes totally ape**** on us too.”
Add to these events the continuing currency war, which is the intentional devaluation of currency (printing) to stimulate the economy and pay off debts with money that is worth less than it was before, and we have the makings of much higher prices of real goods (food, fuel, gold) - especially in USD terms.
“We are not going to just sit by and watch while other countries devalue their currencies to give them a competitive advantage.” - Guido Mantega, Brazil Minister of Finance
As this trend continues, lowering demand for the use of USD to settle trade will result in a lower demand for USD. Supply of USD relative to demand will cause its value to plummet. At some point, the USA is going to experience horrible levels of price inflation, and the only people who will be protected from it are those who have assets in “other than USD” such as gold, silver, or other tangible “real assets”.
There Is No Solution to the Debt Nightmare
The huge pile of progressively uglier sovereign, municipal, corporate and household debt is still there. Since the last Gold Drivers report I wrote six months ago, very little has changed. I recently finished Chris Martenson’s excellent book The Crash Course, which I read in its entirety on my iPad Kindle App during my most recent trip to China. One concept from his book really hit me like a brick. The idea is pretty simple:
Bubbles are generally uniform meaning they go up, peak, then down over generally uniform timeframes. If it takes 10 years for a bubble to peak, it will be roughly 10 years for it to bottom on the other side.
Debt is the world’s largest bubble. I am not going to get into a big discourse as to why this is true, most people either get this or they don’t.
The vast majority of financial professionals today, including our economists, regulators, and central bankers, assume that the next 10 to 20 years will follow the same trajectory as the last 10 to 20 years.
Once I had framed these basics, this chart proceeded to blow my mind:
more at link....http://www.silverbearcafe.com/private/04.12/dreams.html