Is Gold Still the Answer for Investors?
Though late to the party as usual, the proverbial man on the street – along with members of mainstream media and Wall Street heavyweights – is finally waking up to the decade-long, 700% increase in the price of gold, joining a growing buzz around the monetary metal. From questions whether gold is in a bubble to predictions that soaring prices are just around the corner, one thing is clear: a new phase of awareness for gold is upon us. How far might it move before these troubling times are over?
The Big-Picture Economic Environment
Kicking things off, I would like to explore several themes in order to put the current economic situation in context.
For example, continuing weakness in employment and housing indicates that the big slowdown that started in 2007 persists. Actually, the economy never exited the recession but rather – thanks to massive intervention – enjoyed a temporary reprieve that I have called the "Eye of the Storm."
We experienced the first part of the storm from 2007 to 2009, but by late 2009 and into 2010 massive bailouts, stimulus, and deficit spending produced a false-dawn recovery. This recovery was most pronounced in the financial sector where the government transferred toxic private-sector debt – including large amounts held at Fannie and Freddie – onto the government's own balance sheet.
We now are entering the second half of the storm, as it is becoming impossible to ignore the unprecedented and intractable sovereign debt problems sweeping the globe. These problems are especially obvious in the weak countries of Europe where punitive levels of interest rates are pushing weaker members of the eurozone to the brink. As the parts begin to fail, so will the whole.
And the US is not so far behind, with its own historic levels of government debt and deficits running at levels never seen before.
As we at Casey Research have warned of ahead of time, in their attempts to avert a 1929-style depression, governments took on the bubble in toxic private debt, stupidly transferring that burden onto the government (and taxpayers), causing the problem to morph into today's sovereign debt crisis. Simply, with the government debt too big to ever be repaid, we are now beyond the point of no return.
The private debt problem is not resolved, either. That's because much of the bad debt on the books of corporations and financial institutions was hidden through "Extend and Pretend" practices, starting with the elimination of mark-to-market accounting requirements. Much of this debt will eventually be revealed to be in default.
Worse, because sovereignties around the world have caused their finances to deteriorate to such extreme levels, they are now ill prepared, and maybe even unable, to step in yet again to soften the blow of private-debt deleveraging and write-downs. As a consequence, the next part of the storm could be prolonged as companies and banks are dragged down.
Furthermore, due to their poor decision-making to this point in the crisis, the governments themselves are now facing a loss of confidence in their sovereign debt, evidenced by soaring interest rates and the rising cost of credit default swaps (CDS) for the PIIGS.
There is no way to recapitalize the Greek debt, and Finland is right to demand collateral, which it recently has. The contagion will extend to the other PIIGs and to the stronger European countries of Germany and France – they can't also bail out Spain and Italy, which are too big to fail, without destroying confidence in their own economies. Yet absent such a bailout, massive restructuring of weak-country debts held on the books of the banks in the stronger countries will further exacerbate and extend the crisis.
Meanwhile, the European Financial Stability Facility (EFSF) is too small, and the resources to cover all the countries in trouble just aren't there. Economists now understand that the PIIGS are well past the point of no return with 130% or so of debt to GDP. The European Central Bank (ECB) will be expanded, like other central banks, to print more euros, but still the system is going to face more debt problems.
The ratio of debt to GDP in Europe, the US, and elsewhere (which is projected to only increase from here) will lead to the sort of problems historically associated with Latin American banana republics, collapsed communist states, and certain countries in Africa. While this is not being adequately discussed in the mainstream, the debt of the supposedly advanced countries is projected to explode beyond the levels that are already tormenting the PIIGS. Put another way, in the decade just ahead, I expect the advanced countries to undergo the same pain we are already seeing in the weak countries.
Read the full article here
The Big-Picture Economic Environment
Kicking things off, I would like to explore several themes in order to put the current economic situation in context.
For example, continuing weakness in employment and housing indicates that the big slowdown that started in 2007 persists. Actually, the economy never exited the recession but rather – thanks to massive intervention – enjoyed a temporary reprieve that I have called the "Eye of the Storm."
We experienced the first part of the storm from 2007 to 2009, but by late 2009 and into 2010 massive bailouts, stimulus, and deficit spending produced a false-dawn recovery. This recovery was most pronounced in the financial sector where the government transferred toxic private-sector debt – including large amounts held at Fannie and Freddie – onto the government's own balance sheet.
We now are entering the second half of the storm, as it is becoming impossible to ignore the unprecedented and intractable sovereign debt problems sweeping the globe. These problems are especially obvious in the weak countries of Europe where punitive levels of interest rates are pushing weaker members of the eurozone to the brink. As the parts begin to fail, so will the whole.
And the US is not so far behind, with its own historic levels of government debt and deficits running at levels never seen before.
As we at Casey Research have warned of ahead of time, in their attempts to avert a 1929-style depression, governments took on the bubble in toxic private debt, stupidly transferring that burden onto the government (and taxpayers), causing the problem to morph into today's sovereign debt crisis. Simply, with the government debt too big to ever be repaid, we are now beyond the point of no return.
The private debt problem is not resolved, either. That's because much of the bad debt on the books of corporations and financial institutions was hidden through "Extend and Pretend" practices, starting with the elimination of mark-to-market accounting requirements. Much of this debt will eventually be revealed to be in default.
Worse, because sovereignties around the world have caused their finances to deteriorate to such extreme levels, they are now ill prepared, and maybe even unable, to step in yet again to soften the blow of private-debt deleveraging and write-downs. As a consequence, the next part of the storm could be prolonged as companies and banks are dragged down.
Furthermore, due to their poor decision-making to this point in the crisis, the governments themselves are now facing a loss of confidence in their sovereign debt, evidenced by soaring interest rates and the rising cost of credit default swaps (CDS) for the PIIGS.
There is no way to recapitalize the Greek debt, and Finland is right to demand collateral, which it recently has. The contagion will extend to the other PIIGs and to the stronger European countries of Germany and France – they can't also bail out Spain and Italy, which are too big to fail, without destroying confidence in their own economies. Yet absent such a bailout, massive restructuring of weak-country debts held on the books of the banks in the stronger countries will further exacerbate and extend the crisis.
Meanwhile, the European Financial Stability Facility (EFSF) is too small, and the resources to cover all the countries in trouble just aren't there. Economists now understand that the PIIGS are well past the point of no return with 130% or so of debt to GDP. The European Central Bank (ECB) will be expanded, like other central banks, to print more euros, but still the system is going to face more debt problems.
The ratio of debt to GDP in Europe, the US, and elsewhere (which is projected to only increase from here) will lead to the sort of problems historically associated with Latin American banana republics, collapsed communist states, and certain countries in Africa. While this is not being adequately discussed in the mainstream, the debt of the supposedly advanced countries is projected to explode beyond the levels that are already tormenting the PIIGS. Put another way, in the decade just ahead, I expect the advanced countries to undergo the same pain we are already seeing in the weak countries.
Read the full article here
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