4. THE DESTRUCTION OFGOVERNMENT BALANCESHEETS AND THE WIDESPREADIMPLEMENTATION OF ZEROINTEREST RATE POLICIES MAYULTIMATELY RESULTIN HYPERINFLATION
As the result of the global financial crisiswhich enveloped the world betweenlate 2007 and early 2009, the world’sgovernments were forced to step inand bail out the financial sector whilepropping up overall demand in the faceof the collapse in the private sector.This unfortunately occurred as their ownrevenue streams were under severepressure due to the issues in the privatesector. To combat the massive deficitsthat inevitably resulted, widespreadquantitative easing (i.e. unfettered moneyprinting) was undertaken. That policy ishere to stay and the fiscal deficits in manycountries have now reached percentagesof GDP that have almost always resultedin eventual currency collapse. Thus, thefrightening term ‘hyperinflation’ is nowbeing heard with increasing frequency.
5. THE TRUE IMPACT OF THEMALIGN SIDE OF DERIVATIVES HASYET TO EXPRESS ITSELF
Remarkably, the notional value of derivatives has continued to grow, boththroughout the global financial crisis andduring the ensuing recovery period. Thefact that derivatives played a major rolein the financial meltdown seems to havebeen conveniently forgotten. Attemptsto regulate OTC derivatives, whichCongressional committees have beenwarned are “ticking time bombs” and“financial weapons of mass destruction,”surprisingly continue to meet resistance.The fact that many derivatives areessentially worthless but are being carriedon the books as ‘marked to model’ iscreating an extremely distorted picture of the health of the financial sector.
6. INVESTMENT DEMAND FOR GOLDIS RAPIDLY ACCELERATING BUTWE’RE ONLY IN THE EARLY STAGESOF THIS PHENOMENON
Despite the fact that gold has been risingsteadily for ten years and sophisticatedinvestors are climbing aboard to protectthemselves from the ravages of monetarydebasement, conventional institutions andthe average citizen remain largely unawareof gold’s utility. When the next leg of theglobal financial crisis arrives and stocksand bonds come under severe pressure,investment demand for gold couldpotentially rise exponentially. To facilitatethis demand, new gold investment vehiclesare being created including the very wellreceived Sprott Physical Gold Trust (seedisclaimer).
7. GROWING RECOGNITION THATMANY PAPER GOLD PRODUCTS DONOT HAVE THE GOLD BACKINGTHAT THEY PURPORT TO HAVE
At the March CFTC hearing with respectto position limits on gold and silver on theComex, Jeffrey Christian of CPM Metals,advertised on his firm’s website as “an experton precious metals”, openly acknowledgedthat transactions on the London BullionMarket Association (L.B.M.A.) are minimallybacked by available physical gold. Giventhat the L.B.M.A. has long been regardedas the exchange where physical gold istransacted, that qualifies as a remarkableadmission. Investors should also havestrong reservations about gold ETF’s,gold pooled accounts and gold certificateswhere the gold is unallocated and thus notspecifically accounted for.
8. MINE SUPPLY IS NOTANTICIPATED TO RISE FOR SEVERAL YEARS, IF AT ALL
Despite gold prices surging from a low of $252 per ounce in 1999 to over $1,200recently, mine production has been erodingfor nearly a decade. This suggests that minesupply is insensitive to higher gold prices,a fact confirmed in the 70’s when minesupply actually fell as gold made its historicrise from $35 per ounce to $850. AaronRegent, the head of the world’s largestgold company, Barrick Gold, was quotedat a conference in late 2009 lamentingthe state of the gold mining business. Hewent so far as to suggest that global goldproduction was in terminal decline despiterecord prices and the Herculean effortsby mining companies to discover new orebodies in remote areas. He actually alludedto “peak gold” by implying that productionhas already reached levels that can’tbe exceeded, an expression that is nowcommonplace in the oil industry.
9. CENTRAL BANKS ARE NEARINGAN INFLECTION POINT WHERE THEYWILL NO LONGER BE IN A POSITIONTO SUPPLY THE GOLD NECESSARY TOKEEP THE MARKET IN EQUILIBRIUM
The western central banks, who havesupplied massive quantities of gold to themarket over the past fifteen years, both
1. GOLD IS RETURNINGTO ITS TRUE HISTORICROLE AS MONEY
The role of gold in society was succinctlysummed up by J.P. Morgan in 1912 whenthe renowned financier stated that “Goldis money and nothing else.” Ironically,he made that comment one year beforethe U.S. Federal Reserve was created.There have been long periods (1980-2000 being one) when this immutablefact was dismissed. The fact remains,however, that every fiat currency systemin history has ended in ruins. Our currentexperiment seems to be headed down thesame disastrous path, thus allowing goldto reemerge as a currency once again.
2. THE INEVITABILITY OF ACOLLAPSE IN THE U.S. DOLLAR
The U.S. dollar is the world’s reservecurrency and thus anchors the world’smonetary system. Unfortunately, byvirtually any measurement we look at,the United States is beyond ‘the pointof no return’ with respect to its financialposition. Imbedded federal governmentdebt of nearly $13 trillion, unfunded futureliabilities in medicare, social security, etc.well in excess of $50 trillion and a currentbudget deficit of over 10% of GDP virtuallyensures ongoing massive monetarydebasement. When the near bankruptcyof the majority of the fifty states in theunion is factored in, the situation lookseven more dire.
3. OTHER SIGNIFICANT WORLDCURRENCIES OFFER NO REFUGE
The current travails of the European Unionare well advertised. The recent pledge of nearly $1 trillion in potential bailout moneyby Eurozone members and the IMF in thewake of Greece’s problems, coupled withthe fear of contagion throughout southernEurope, effectively disqualifies theEuro from serious consideration. GreatBritain is in such disarray that it doesn’teven deserve comment. Japan has arapidly aging population and embeddedgovernment debt that already exceeds200% of GDP. Even China, that paragonof all things financial and economic, issuspect. As the result of its bank lendingspree in 2009, the country is dealing withconsiderable overcapacity, an emerginginflation issue and a potential bad debtcrisis in its banking system.
B y : J o h n E m b r y , C h i e f I n v e s t m e n t S t r a t e g i s t , S p r o t t A s s e t M a n a g e m e n t L P U p d a t e d J u n e 2 0 1 0