The Coming Worst Financial Crisis Of Our Lives

September 2, 2013

HAS THE GOLD MARKET MADE ITS LOW? -- I have been burning the midnight oil since the beginning of July trying to figure out an intelligent and useful answer: I now finally feel confident enough to state that June 30^th was most likely the low for GOLD, SILVER and the miners. Even though I am expecting some backing and filling (wishful thinking perhaps) because I don’t think that Bernanke and his thieving minions have completely given up their attempt to drive down the PM markets.

About the closest thing we have to a timely, nearly unequivocal fundamental fact to hang our predictive hat on is that Gold has been in backwardation for 30 consecutive business days. This should almost never happen -- and has happened only twice that I know of; in 1999 and 2008 -- because backwardation by all rights should just get arbitraged away in a day or so.

The fact that the market hasn't yet reverted to contango suggests that there isn't enough metal around in New York or London (at current prices) to allow arbitrage to work its way. A potential conclusion is that there is such huge demand versus supply at current prices that the price should not be able to go lower (and stay there). If that's true, it would argue in favor of the idea that the lows in June were "it" and that this tightness, combined with the short position and prior liquidation, means that prices are poised to rocket higher at sometime in the very near future. The problem is that no one knows for sure. I have talked to several people who are close to the metals trading industry (whom I have come to know ever since the 70’s Golden Bull), and they agree with my analysis. But there could be other technical explanations -- mostly having to do with the fact that interest rates are so low, so the carrying costs are also low -- that could mean my thesis is not wrong, but my timing might be off.

I can't believe it, but it took me well over a year to consider the possibility that Gold had slipped into a Bear Market. In any case, I am the consummate contrarian and I am not about to change now. I continue to maintain that Gold and Silver as well as the other PM’s were in a severe market contraction exacerbated by an historic ($1trillion plus) of concentrated manipulation. So I now think we are in the process of restarting the Bull Market, but I don't know for sure and can't know until it has resumed Bull Market status, (a significant breakout above $1500).

In his most recent Gloom, Boom and Doom report, Marc Faber discussed his experience at the tail end of the tech bubble and makes an important and related point. He writes: "I had heavily shorted high-tech stocks in 1998 and subsequently I lost a ton of money. This episode is really a dark spot in my life as an investor and investment advisor. It taught me several lessons that I shall never forget. What I think about markets is completely irrelevant. What matters is what other people think about them. Fundamentally, I was right about the coming collapse of the NASDAQ however, for as long as the majority of other investors believed in the 'New Economy' theme, high-tech and communication stocks continued to appreciate." Those of us who understood that the dot-com boom was a bubble were all tortured until the bubble finally burst. That often happens in markets, where you are exactly right about what you think will happen, but the market doesn't agree with your timing, and until it does you have to manage your positions a lot more carefully.

Gold for me was a long term investment, the ultimate safe haven to protect your family type of investment that has no match: Certainly not Treasuries especially with an upside target of $6,250 by 2017. But I did neglect the number “1” rule of sound investing; “Diversification” that goes back as far as the Bible. As stated by King Solomon in Proverbs “of dividing your investments into 10”. How disappointing that I could not outsmart God (LOL). Nevertheless, for those of you who stuck it out with me, are you not now happy that you are still long Gold and Silver? And how many of the smart aleck’s who, to hear them tell it, sold out at the absolute high, but have not bought back in yet? And what about 2008? Where did they sell out and subsequently buy back in? I’ll match the value of their portfolios to mine in 2017 any time: winner take all.

It should be worth the wait

To state the obvious, when the Bull Market in Gold resumes, it will be easier to make money being long, though it will still be tricky. Unfortunately, trading and investing in Gold is more difficult than just investing in the stock market. It is more like managing a short position. Because the Fed is always there to knock the market down.

In the last 4 ½ years, GDP has grown at real rates of less than 2%, but the S&P 500 and other popular stock market averages have compounded at double digit rates and are now at (or close to) all-time highs. During the same time period, real median income is down 8.5%, fewer people are working and those that are, have not had wage increases that have kept up with inflation. The Fed continues to maintain a policy that has greatly harmed the middle class, but has been a huge benefit to large corporations and wealthy stockholders. If we do not come out the winner in 2017/18, we will be pretty dam close to the top. (I don’t want to jinx myself again by claiming the top spot.) Especially since I am still an 80 year old, one man show and I still have 3 books to complete before I leave this earth.

Some will call me a pessimist… I certainly am not, “I just calls them the way I sees them.” My fear is that the US is well on its way to becoming one Giant Detroit, especially if the Democrats win the next election. Right now, the country is being run by the unions, the far left academics and the ignorant socialist media. One day, America's debt plus the obligatory interest payments, Social Security and Obamacare will catch up with reality. Sadly, the nation at large will suffer much worse than during the 30’s when most individual Americans were much more self sufficient and did not count on Government handouts, as more and more people are now doing. But most important for the little guy, since we were in a period of deflation, all of their nickel and dime weekly savings that the insurance companies collected door to door every week increased their purchasing power of all their savings and facilitated them riding out the Depression without Government help.

It will take as a minimum a change of Government, but I fear even that would not be enough, since the majority of Republicans were educated in the same Keynesian, Galbraithian universities and the dollar denominated debts that have no means of repayment continue to weaken the Dollar, Economy and our Country. They devalue the dollar, because they mistakenly believe that more easily pat their debt that way.

Sadly they do not understand enough about how the Congress works to change that either. Without a change in how government works, we won’t be able to implement the necessary changes even if the new government can figure out what those necessary changes are.

RECORD HIGH MARGEN DEBT

The New York Stock Exchange tracks margin debt for the US market. The April 2013 figure of $384 billion marked an all-time high since records started being kept in 1959. When netting out account credit metrics, such as free credit cash and credit balances in margin accounts, total investor net worth just hit a record low since 2000 at $106 billion. In other words, investors rarely have been more leveraged than today. The S&P 500 closed at 1689.47 and has traded over the 1,700 level. The intra-day low on March 6, 2009, was 666, and the market closed that day at 683.38. That represents almost a 250% increase, which is staggering.

In a new research report, the market strategists at Deutsche Bank said that it is time to start getting nervous. Excessive margin debt can lead to panic selling if the market takes a steep leg down. Margin calls for people who have borrowed money to buy more stock often exacerbate normal stock selling as they are forced to sell stock to meet margin requirements. This can feed on itself and can turn a minor correction into a landslide. The Deutsche Bank team also has spotted eerie similarities in the current margin debt explosion to the 1999 to 2000 technology bubble and collapse and the great financial crisis of 2007 and 2008.

I have suggested for some time that although I was short-term bullish, I was nevertheless very nervous, expecting either a Black Swan, a completion of the “Jaws of Death Pattern” or both. In any case, any current additions to portfolios should be done very carefully, never forgetting to use trailing stops; and scaling into stock purchases or buying Calls. But more importantly, use trailing stop loss orders of 8% to 10%. I also have suggested that investors should review their portfolios and take their big gains. It makes sense to take the big winners and pare those against some losses and go to a cash position, especially after a four-year run.

BULLS make MONEY, BEARS make MONEY, Pigs Get Slaughtered

What else can you do to protect your investment portfolio? Here are some tried-and-true ideas that may help you to sleep better at night:

Take profits and go to cash. Lower your equity holdings to 50% or less of your total portfolio.
If you are reluctant to sell winners you think will go higher, sell covered calls on winners at or above where you are willing to sell the stock and use the money to buy Puts to protect your profits.
Take the proceeds from those covered calls and buy Gold and Silver.

MISCONCEPTIONS

1. As the currency goes down, everything else goes up at roughly the same rate. Not true. For example: If bread goes up ten times in price and if Silver goes up ten times in price, it does not matter what I buy and does no good to buy Silver... Not true. Put $100,000 into bread, try to find a proper storage place to store it and then watch your investment turn moldy before your very eyes! Or keep your money in cash and watch 90% or more of the value vanish. Silver going up at the same rate of bread is still 100% better than buying bread, and ten times better than cash!

In the last twenty years, fruit prices for apples and oranges have been a steady $1-2 per pound. But silver has moved from a low of $5 to a high of $50, and back to $23 today. Silver prices have already dramatically outperformed the price of fruit over the last decade.

It has been mostly true that for most hyperinflations, that the price of things denominated in foreign currency, has been somewhat stable. But the other hyperinflations will be significantly different from the inflation in the US, because of the size of the US economy, and by the education level of the populace, and by the options available. As there was hyperinflation in Zimbabwe, consider... how many coin shops were there in Zimbabwe offering silver to their people? None? There are 4500 coin shops across the USA! And then there is the difference in buying power. The people of the USA have enough money, and enough buying power, to significantly change the world market price of silver, but not the people of Zimbabwe! There is barely $2 billion worth of annual investment demand for silver. When the people of the USA decide they want silver, and can actually buy it, silver demand will a significantly increase, and it will really drive up the silver price, as it already has!

But consider also that merchants raise their prices at different rates and different ways, such as by reducing the size of the packages. They also raise prices whenever they feel like it, but more importantly when their costs go up. There is no national governmental price control board directing industrialists, capitalists and businessmen on when to raise prices to devalue the currency that government prints!

Some express another version of this myth. They say, "It does not matter what asset I buy to protect myself from inflation; housing, stocks and bonds, all are assets, and all will go up at similar enough rates." Not true. Bond values for one collapse as interest rates rise to match the inflation rate. Housing values collapse if there is capital flight and too many liberal policies in government, such as what happened in Detroit. Stock values collapse if tax rates go sky high or during nationalist confiscations or socialization or communism, or even by bankruptcy! And we have seen all of that in this past decade alone during this bull market in Silver and Gold!

The point is that Silver and Gold will outperform nearly all other things. Monetary demand will not flow into food items. Monetary demand will not flow into bonds that are being sold due to rising interest rates. Monetary demand will flow into Silver and Gold and probably Oil the only forms of true money. People will not be buying oysters in the half shells by the tens of billions of dollars. People will not be buying beaver pelts by the tens of billions of dollars. They will buy Silver and Gold like they always do as inflation fears increase.

2. The law today will be the law tomorrow during hyperinflation. Not true. Laws will change dramatically as the governments sense the danger of collapse and can get much worse, or much better, after a change in government or a liberty led revolution. This is why I consider education, specifically political education on the topics of freedom, liberty, and libertarian ideals, to be as important, if not more important, than advocating the purchase of Silver Bullion to protect yourself from inflation. But yes, buy Silver Bullion too! This way, the owners of the wealth of tomorrow will be more able to form a more free society in the future after the demise of the current forms of government around the world that rely on paper money for the source of their power.

3. I'll be able to ride it out here in the back woods of Colorado, Vermont or Alabama during hyperinflation. Maybe and maybe not. But it is highly unlikely since not everything that is either wanted or needed is produced in either Vermont Colorado or Alabama. Many times, most of the wealthy people are forced to flee the country beforehand as things begin to noticeably deteriorate. Many fled communist China and ended up in Hong Kong. Many fled Nazi Germany; even high ranking officers sent their families abroad. God's great, grand plan might be for most people to flee to Israel. Israel is said to grow rich in Gold and Silver during the End Times. Ezekiel 38. Zechariah 14. But I would not bet my money on that interpretation. So, again, buy Silver and Gold! But remember, that might not be enough. Israel might be too small a country to accept all that many people plus they are sitting on a huge pool of Natural Gas just off their shores in the Mediterranean Sea as well as Shale Oil under the Dead Sea.

4. There is no risk of inflation when the bigger risk is deflation. Not true.

Deflation is a non-existent risk when government prints money to bail out the banks and big corporations. Deflation only happens when banks fail and when deposits vanish with the failing bank. Banks may be failing, but are often merged into larger banks. But depositors’ money is not vanishing at least not in the US.

The entire point of there even being a Federal Reserve is to prevent deflation and they do. They do more than that, they create inflation. Deflation only happens when there is a Gold Standard and when there is not enough Gold to back up the deposits. Then, the total amount of "currency" can go down because of the limited amount of Gold. If people want Gold or Silver, they have to go to a bullion dealer and when they buy Silver and Gold, they put pressure on the value of dollars to go down and Gold and Silver to go up, which is the exact opposite of deflation, which would happen when they go to the bank and redeem their deposits for Gold.

5. The dollar will not go down in value because everyone who owes dollars has a short position on the dollar that must be covered. Not true. Defaults happen! People actually fail to repay their debts! Can you imagine that?

Yes, the Federal Reserve bails out banks to prevent their failures. But who bails out individuals who must pay down debt? Nobody. When they fail to repay debt, it's the lenders who lose, but when those lenders are the banks that get bailed out, then no deflationary forces take place. Furthermore, look at the nature of this argument. Is debt like a short position on dollars? No, it's not. Consider the differences. The investor who puts on a short position in futures must put up collateral and mark to the market daily. Markets must deliver or buy it back, or their brokerage must, or the exchange must. A person or nation who owes dollars does not have two other wealthy and solvent entities who have signed on as co-lenders to securitize their debt.

Also, most dollar denominated debt is collateralized, such as by housing. In contrast, a short position in the Silver market does not necessarily have the corresponding Silver to back it up. Also, consider who is short Silver. It's mostly the banks. They will not likely be able to ever buy the ten years worth of annual production of Silver to give to people who demand their Silver and are content to let the large banks store their nonexistent Silver for them. Since the banks know they will not be able to cover, they never will. They may cover some shorts in the futures market from time to time to create extra volatility and to earn some extra income from moving the market around, but they will never call up all their Silver depositors and say, hey, we are delivering your Silver to you for free and now it's up to you to store it yourself! But the people might wake up and either demand delivery, or cash out and buy Silver elsewhere.

And who is short dollars or owe dollar debt? Many nations around the world, many cities and many states. Most are sovereign entities who have the right and duty to their own people to default and not pay dollars. Many have defaulted already. Many have the legal right to declare bankruptcy and they will. (DETROIT is the most recent example.) Did Argentina move heaven and earth to buy dollars? No. They defaulted and devalued their currency. The same thing will happen all over again. Debts are not always paid, they are often defaulted, bankrupted or simply not dollar denominated debts that are not paid and do not prop up the dollar. They devalue the dollar because they drive up interest rates as bond values crash.

6. The amount of currency must expand to have an expanding economy. Not true! The value of money can go up and does as the economy expands. In fact, that is exactly what took place in America for over 100 years, from 1776 to 1913 (there was of course no Central Bank during that time) There was consistent deflation at about 2% per year, and America grew from nearly nothing to becoming the Economic powerhouse of the world that won World War I All on deflation! Deflation is the natural Twin of increased productivity. As productivity goes up, prices go down. This is not a function of money, but rather, something that masks the hidden forces of inflation.

I absolutely hate the simple myth in the gold community that an ounce of Gold has always been worth about the price of a man's suit. Utter nonsense! By the time machines could make clothes, the value of a man's suit came way down! For over 100 years, Gold was $21.66/oz.! There is evidence online that it was $3-$6 for a man's suit in 1903.

GOOD LUCK AND GOD BLESS

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This letter/article, like all my others, 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. Although I include recommendations from time to time, being a bi-monthly publication, it is not meant to be a trading letter. 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.