The Collapse of the Dollar

HOW REALLY BAD ARE THE ECONOMIC FUNDAMENTALS?

The economic situation looks under control currently, that’s because we are now in the eye of the storm. The longer this unbalanced situation goes on, the faster and more severe the eventual collapse will play out.

The main theme is that governments in the US and Europe have lost complete control over their spending and borrowing, which must ultimately result in a catastrophic crisis. Soaring debt accumulation, along with Europe Japan and USA race to devalue will continue until some kind of crisis arises; either internally or globally and when the markets blowup, it will bring about an abrupt END to this charade. The 2008 crisis was not the final collapse. The final chapter of the 2008 – 2009 meltdowns is still ahead of us. The same trend is forecasted for the rest of the world and up until now it is playing out almost exactly the way I have expected it to. Worldwide debt stands at $220 trillion, a figure that when compared with world GDP of $62 trillion, shows a debt to GDP ratio of 350% and still growing exponentially. Common sense should tell you that it is not sustainable.

THE CARDS HAVE BEEN DEALT

There is no stopping the Euro’s demise - are you protected? History tells us that "Nationalism will emerge. Healthier countries will not see fit to spend ALL their hard earned RESERVES to bail out their less responsible neighbors who to this day refuse to make any adjustments to their spending." And money will flow out of paper assets into gold and silver as debt creation continues to gain momentum and spread to the public. (Gold and silver are the only forms of money that governments cannot debase by creating additional units of it.)

Treasury Bonds: They have always been and for the time being, still are functions of a general flight to safety. An ever shrinking part of the world is still looking at US Dollar denominated assets as safe havens even though the US government is taking on an ever increasing amount of debt. However, it is imperative to understand that the purchasers in the treasury market are mostly the central banks themselves. Their intention is to prop up fiat currencies by buying sovereign debt. What this really means is that governments are taking on too much debt and turning it into currency. Most people don’t see this process; it also remains unreported by the mainstream media. This process, historically, is the final stage of a country destroying its currency. Unfortunately, it is taking place on a global scale, so it will undoubtedly result in an implosion of the whole fiat currency concept.

Unfortunately I cannot tell you the exact timing of the coming debacle.

Where do we stand today? The number of people with jobs (actually working) as reported by the Government is up 2%, while the number of people on disability is up by 15%. And yet the percentage of the population with jobs is fast approaching the lowest figure in history: People living on food stamps are up 44%, standing at 46 million currently.  One in four households lives on less than $25,000 a year.

Total debt has gone from 1.5 times GDP in 1980 to 3.5 times GDP today and climbing. 2012 was the 4th consecutive year in which the US ran trillion dollar plus deficits, with over $1.5 trillion projected for 2013 and continuing as far as the eye can see: When unfunded liabilities are included in the calculation (Medicare, Medicaid, Social Security which are nonetheless debt), the debt per family stands at over $2 million. The Government and the “Don’t Ask Don’t Tell” Media are trying to convince us that things are improving. The path to the final collapse has been slowed down by human nature. It takes a long time for people to change their beliefs on something. Our global society still believes that paper currencies still hold their value over time as they keep on accumulating and saving fiat based money.

A stanch Left Wing compliant media is a phenomenal tool for fooling people. Governments seem to be able to create as much currency as they want. But COMMON SENSE tells us that there are limitations. Yes, they can set interest rates at levels that signal to the market that economic conditions are fine: Even when underlying conditions are deteriorating. Lending at a very low interest rate gives the impression of a good creditworthiness. But that is a false premise. Nobody in their right mind lends money at ¼% to 0 % interest.

WE ARE IN A GOVERNMENT DEBT / BOND BUBBLE

Markets and people tend to go with the flow during a bubble. However, history has shown that as awareness slowly but surely sinks in; people suddenly wake up (usually triggered by a Black Swan event and move extremely quickly (witness the LEMAN BROS. affair). We also saw this in the last two bubbles. One year before the tech stock bubble imploded, everyone expected the future to be better than the past, but in the blink of an eye, the world was staring at a global depression. The same thing happened with the housing boom in 2008. Everyone was convinced that housing prices could only go up in 2007, yet one year later, the whole global financial system was on the verge of collapse. But the world still had full faith in the US Dollar and its Bond Market. Today, everyone believes in the safety of government bonds and they are parking their money there, even though they are not receiving any interest. Go figure. It is unknown when exactly the coming crash will take place (but it will) and the world will wake up suddenly, as their dreams become a nightmare… again!

HOW THE NEXT COLLAPSE WILL PLAY OUT

The structure of our financial system is a fascinating topic to explore. It gives us insights to describe the anatomy of the coming collapse. The best analytical framework explaining today’s system is described in “Currency Wars” by Jim Rickards, published in 2011. The author explains how complexity in our system has risen to the point where it shows unique characteristics, the most important one being that the propensity for catastrophic failure is an exponential function of complexity. In simple terms, it means that, when the system doubles in size, the instability goes up tenfold. It means as well that it requires exponentially increasing amounts of money (debt) to keep the system growing. The framework is revolutionary in that it perfectly describes today’s reality. Today, governments need more and more debt to generate the same amount of GDP. We need to borrow more only to stay in place but at the cost of a huge (almost certain) collapse of the system. But more importantly, the problems have become so huge that there is no longer a Lender of Last Resort big enough to bail anybody out.

The longer this process goes on, the faster and more severe the collapse will be. Suppose the final collapse strikes in 2013/15. By then, the system will have grown so complex, and the amounts of debt will be so huge that there will be no way to control it - the crash will take on a life on its own.

THOSE DEADLY DERIVITIVES

As early as February 2005, I warned about both the size and the exponential growth of derivatives, growing without any collateral. In fact, they are the “complexity story”. What most people do not realize is that banks report their net derivatives position (their long versus short positions) and only the net position is shown as their risk. However, the gross position is the real relevant number. To put things into perspective, the earlier mentioned $62 trillion global GDP should be compared with the gross derivatives figure which stands at more than a Quadrillion dollars of notional value. (How much is a Quadrillion?)

A derivatives meltdown will play out almost instantaneously, which is why they keep pouring money into Greece because a default of even one small insignificant country, no matter how small,  could be the Black Swan ( Lehman Bros.) that everyone fears, because it sets off a chain reaction of defaults. When one big bank faces some kind of trouble and fails, the banks with the largest exposure to derivatives (think JP Morgan, Citigroup, Goldman Sachs etc.) will realize that the bank on the other side of the derivatives trade (the counterparty) is no longer good for any of their obligations. All of a sudden their hedged positions become naked positions. The gross position becomes their net positions. The risk explodes instantaneously. Markets realize that all hedged positions are in reality not hedged anymore, and all market participants start bailing almost simultaneously. (Bail to where or to whom?) The whole banking and financial system freezes up. It might start in Asia or Europe, in which case Americans will wake up in the morning to find out that their markets are not functioning anymore; stock markets remain closed, money at the banks become inaccessible, etc.

It is really impossible to forecast the exact trigger that will cause the bubble to burst. What we clearly see today is that the fixed income (bond) market will be the epicenter of the coming shock. A lot of derivatives are hedges against bond portfolios, but most are against Sovereign Debt so the crack could start with trouble in Treasury Bond markets for example as US interest rates start rising or as no one except the Fed shows up for the next Bond Auction. The first reaction will be the Fed buying up all bonds that the US government is issuing, which would spook the markets instead of calm them down. This would set off a chain reaction as all bond holders try to dump their bonds.

Complex systems do not allow us (me) to determine things ahead of time. One of the few things we know, however, is that the mother of all bubbles will burst and that we created the conditions for this catastrophic failure.

You will then thank your lucky stars (and maybe me) that you have been accumulating Gold Eagles and Maple leafs for the last 12 years..

TRENDS FOR 2013 & POTENTIAL TRIGGERS FOR A TRUST CRISIS

POSSIBLE TRIGGERS:

• The erosion of the Petrodollar: Oil producing countries start dealing their oil in other currencies (mostly gold) with huge purchasers (think Iran, Russia, China, Brazil), resulting in a lower demand for dollars and a huge increase in the demand for gold. If central banks decrease their demand for US dollars, it would lower the value of the dollar and make inflation and interest rates explode. We have already witnessed the first sign when we forced Iran to start trading oil for gold and their major clients jumped at the chance to continue trading with Iran using gold to settle all trading.
• Expansion of the police state. The response to terrorism and public riots and instability is an increased control by the government; its happened all before (think Hitler Stalin and Chavez today) (think internet monitoring, surveillance systems, etc). And most important - an attempt to confiscate all the public’s guns. It creates conditions for domestic turbulence via civil unrest, resulting in an outflow of money and Rich people to other countries. The acceleration of this trend has already begun to be visible in 2013. Look for a possible government seizure of citizens’ gold and silver.
• State and local pensions begin imploding. States and localities cannot pay off their obligations anymore and could go bankrupt in 2013, resulting in a tanking municipal bond market.
• Threat of cyber war and cyber terrorism. The internet being an insecure system, the next war could result in a breakdown of the electronic system, which would spook the markets tremendously.

GOLD & SILVER – THE BEST STORE OF SAFETY AND PROTECTION OF WEALTH

Precious metals are where we hide when we do not trust the rest of the world. When things start really spinning out of control, everything could potentially be destroyed, but the only things that cannot be destroyed are gold, silver, platinum, food, oil and probably the mining stocks, among other tangible assets. With a limited supply and availability, a massive demand for precious metals will translate into exponentially rising prices. The ongoing destruction of fiat currencies will become increasingly apparent in 2013 -15. An increasing number of investors will understand that precious metals are holding and increasing in value while other assets are not.

Central banks have already reversed their 30 year penchant for selling gold and are already moving back into gold. China as the best example, imported 800 tons of gold in 2012. To put that figure into perspective: Their official reserves were 1,000 tons. The same trend is taking place in other countries (although on a smaller scale) like, for example, Russia, Brazil and several Asian countries. This increasing demand will be a main driver for higher prices beginning in 2013.

Downwards suppression of gold and silver prices (manipulation) can be the only explanation for all the strange price action in 2012 and before. In December for instance, huge amounts of short selling took place during the most thinly traded moments (during overnight trading sessions when the major markets are closed.). That is not how a market participant closes out a large winning futures position because all the subsequent trades are happening at lower prices. Commercial banks, together with western central banks, actively try to depress gold and silver prices to validate the existence of their fiat currencies. It has resulted in a controlled price rise, instead of an exponential one. But their end is in sight. People and investors need to look at these selloffs as an opportunity. A slow and steady bull market makes it possible to accumulate the metals in a steady way into weakness. At the start of 2013, the fundamentals justify much higher gold and silver prices.

Another respected hedge fund, the Pacific Group, has decided to convert one third of its hedge-fund assets into physical gold. The Pacific Group Ltd., which manages assets of over $100 Billion, believes that gold will continue to rise as governments print more money to pay off debt. Thus, continues the trend of some of the smartest money in the world diversifying more and more of their holdings into physical gold.

“The way I look at it, gold is anywhere from being seriously undervalued to being grossly undervalued,” We’re in the early stages of what in my judgment will most likely turn out to be the world’s largest short squeeze in history.”

“Trust in central banks by other central banks is in great danger.”

ZERO HEDGE

The big news this past month was the initial announcement by Germany that they would be repatriating their gold back to Germany and the political rhetoric that followed.

“In what could be a watershed moment for the price and future of physical gold, not to mention the stability of the entire monetary regime based on rock solid, undisputed faith and credit in paper money, German Handelsblatt reports in an exclusive interview that all official 3,396 tons of it is about to be partially moved out of the New York Fed, where the majority, or 45% of it is currently stored, as well as the entirety of the 11% of German gold held with the Banque de France, and repatriated back home to Germany.”  Andreas Dobret, member of the Executive Board of the German Bundesbank, adding that, “The Bundesbank will remain the Fed’s trusted partner in future, and we will continue to take advantage of the Fed’s services by storing some of our currency reserves as well as gold in New York.”

Seems to me like an attempt to calm the waters.

When Venezuelan President Hugo Chavez ordered the repatriation of 85% of the country’s bullion reserves from European Banks, most of which was held with the Bank of England, the move was dismissed as “unnecessary and expensive,” with others accusing Chavez of acting out of paranoia.

The reaction to Germany’s decision to do almost precisely the same thing is likely to be more muted so as not to start a stampede of other countries seeking to mimic the Bundesbank actions. Germany is the second largest gold holder in the world.

“This is a momentous development, one which may signify the end of mutual assurance and solidarity among central banks because if the central banks don’t have faith in one another, why should anyone else? Without trust the system falls apart. In the end, the criminals always turn against each other. This could be a sign that this end process is already underway.” I would have to agree with this assessment by Zero Hedge, especially on the heels of the “gold is money” announcement two months ago regarding the Basel III Accord, which should have gone into effect as of the first of the year (2013). Yet we haven’t seen or heard of any official announcement regarding this Why?

Taking into account the timing of these two events, how close they are in proximity to one another, it appears to me to be very bullish for gold. Yet the gold price for the moment seems to be caught in a very boring but tight trading range with little in the way of news to drive gold or silver significantly one way or the other. But this can and will change very quickly especially once the charts give a definite buy signal. So far, just as gold seems ready to break out to the upside, there is a sharp selloff into the close of trading. DON’T LET THAT SCARE YOU. I would use any follow up selling at the morning opening as a BUYING OPPORTUNITY.

I try to keep a balanced perspective on where precious metals prices and everything else I own are heading and why. I try to think of everything I can for each case and then look at which argument is more compelling at any particular juncture. At the moment, the odds are stacked in gold’s favor for moving higher in the bigger picture, but lower in the immediate to short term due to governmental interference, which appears to be excessive as of late. When this happened in the past, it was a sure sign that all the precious metals would soon go higher. Especially as large holders (think China) who buy in the money options and then demand delivery instead of just cashing in their profits.

To think that the government intervenes in the precious metals markets should come as no surprise as they lie and manipulate on just about every piece of economic and financial data they report. To really understand the specifics on how this is done, you should follow John Williams at his www.shadowstatistics.com. I don’t talk much about government rigging of markets because in the end anyone who tries to manage a market always loses, but it is important to understand this is part of the process of being an investor in an asset that is despised by the government.

When you are running a fraudulent fiat currency scam, a rising gold price exposes the fraud and signals investors and citizens to protect themselves from government devaluation by owning the metal itself. Politicians typically hate gold or the thought of backing a currency with gold because it keeps them accountable to the people. Ah, what a concept, keeping these thieves accountable to us and not their puppeteers!

John Williams is one person who I trust completely in his analysis of the precious metals markets and governmental statistical reporting. His newsletter ShadowStats.com is worth every penny in bringing to light government fraud on many levels. Once you read his newsletter, you begin to understand you can’t trust anything that comes out about government statistics in the mainstream media. It’s all just a pile of lies and grand deceptions to keep the people in the dark.

Matt Taibbi, the reporter from Rolling Stone magazine said the following:

“The public has been lied to so shamelessly and so often in the course of the past four years that the failure to tell the truth to the general populace has become a kind of baked-in, official feature of the financial rescue. Money wasn't the only thing the government gave Wall Street – it also conferred the right to hide the truth from the rest of us. And it was all done in the name of helping regular little people and creating jobs. "It is," says former bailout Inspector General Neil Barofsky, "the ultimate bait-and-switch."

The bailout deceptions came early, late and often. There were lies at the very outset, and others still being told four years later. The lies, in fact, were the most important mechanisms of the bailout. The only reason investors haven't run screaming from an obviously corrupt financial marketplace is because the government has gone to such extraordinary lengths to sell the narrative that the problems of 2008 were all president’s Bush’s fault and have now been fixed. Investors may not actually believe the lie at first, but they been overwhelmed by how totally committed the government, Wall St. and the Media have been, to selling it” Besides where else can the little people go?

Another item in the news is a series of statements that came from Boston University Economics Professor Laurence Kotlikoff. He is worried about America’s dire financial situation.  “The situation is getting worse and worse and worse.  We are running a massive six decade Ponzi scheme, and it’s fast coming to a real breaking point.” 

Dr.Kotlikoff calculates that the real government deficit is enormous and growing exponentially.  “It’s $222 trillion.  Last year it was $211 trillion.  We grew the deficit by $11 trillion in one year,” He also says, “We are actually in worse shape than any other developed country. “Ben Bernanke is playing with fire here because we could easily have a tripling of the INFLATION level.”

Independent economist John Maudlin recently said it this way “the newest changes to the tax codes are full of pork barrel spending:“These giveaways of taxpayer money make my blood boil. We're not yet at the endgame of the government's wasteful spending, as they have yet to even address the problem “Washington's debts are going to explode and crush us; they're also going to distort the free markets for years to come.”

Overall, we have to consider the fact that government and their central banks are very adept and convincing us that their way is the only way: But the fact remains, THAT IT WILL AT SOME POINT BECOME NO LONGER TENABLE–

In my mind, the long term reasons why precious metals will go much higher continue to grow on a daily basis. The idea that governments and their central banks will reign in their wanton ways and actually balance a budget or tell the truth is beyond believable at this point. We know what they will do at each and every financial hurdle they face, which is to lie, cheat, and steal and blame everyone else but themselves, while creating more and more Fiat money and deny any negative effects of their own behavior.

Historically this has been done by many different groups of politicians and banksters throughout the world, always with the same sad results. I know that in investing, timing and patience is everything, but trying to pinpoint the exact timing of this disastrous conclusion to this ongoing financial calamity and debacle is not necessary, as long as you take possession of your precious metals and keep them out of the grasp of the Banks.

You should notice that although I have been calling for a rally to new all time highs for the last several months, I recommended building up you cash and buying gold into2 or 3 day 100$ Selloffs. I also only recommended a very few special buys such as DDD at 40 now at 70. Once the PM’S are safely in your possession, just sit back and enjoy the ride as much as you can while the circus show of smoke and mirrors continues. In the end, you’ll be very right and a lot richer than you are today. Plus you will have built up your cash to take advantage of the coming crash when the timing is right.

HOW NOW DOW?

The uncertainty around the Fiscal Cliff continues to frustrate markets, keeping moves mild with a lot of back and forth daily moves but with steady progress to our anticipated new all time highs. Stocks should see vertical trends that are significant. I am still expecting the Jaws of Death pattern to be completed sometime during the first half of 2013. My best estimate at this time would by the middle to late March 2013 - we should see that final top maybe as high as 15,000. Volatility should then rise dramatically and a long stair step decline should begin the multi-decade BEAR MARKET.

GOLD & SILVER

Rush to Safety:  Americans buy half a billion dollars of gold and silver in January. There are no fundamental drivers for the almost daily and intraday back and forth wild swings, except for the market manipulation by the Bullion Banks, which they cannot seem to maintain.

The Bank of Korea increased gold reserves 20% last month to diversify investments, boosting holdings for the fourth time since June 2011 and underscoring increased demand by central banks. “Gold is a physical, safe asset,” the Bank of Korea said in the statement. The precious metal “is a way of diversification, which helps reduce investment risk in terms of our foreign-exchange reserves management.”

Russian Finance Minister Anton Siluanov speaking to reporters said that gold is seen by Russia’s central bank as a “rather stable” asset amid global monetary easing. The world’s biggest energy exporter saw gold and foreign exchange reserves rise to $524.3 billion in the week to Nov. 23. Central banks in South Korea, China and Russia realize that gold bullion is a safe haven asset, one that the western world does not yet seem to appreciate.

The HUI's Weekly Full Stochastic is now at oversold levels, which has happened only 6 previous times in the past 5 years. In each instance, the HUI rose at least 100 points. Once we get a new upside breakout in the HUI the next strong rally should also begin for Gold. There is also a strong possibility that Gold has bottomed. If it has not, the next strong support level would be around 1,640ish.

DO YOU HAVE THE COURAGE OF YOUR CONVICTIONS?

GOOD LUCK AND GOD BLESS

We are into the most trying times in our nation's history. We can either succumb to our Government’s folly and go down with the ship or personally prosper. As always, the choice is yours.

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Please Note: This article is for education purposes only and is designed to help you make up your own mind, not for me to make it up for you. Only you know your own personal circumstances so only you can decide the best places to invest your money and the degree of risk that you are prepared to take. The Information and data included here has been gleaned from sources deemed to be reliable, but is not guaranteed by me. Nothing stated in here should be taken as a recommendation for you to buy or sell securities.