The Dollar Rally Is Hugely Bullish for Precious Metals
Source: Stewart Dougherty (5/7/10)
It is arithmetically impossible for the U.S. government to pay its debts. . .unless it hyperinflates the dollar into worthlessness.
As we all know, the dollar's sure-to-be-ephemeral Lazarus rally is due to the euro's extreme distress, which has been caused not just by Europe's hopeless fiscal problems, but by the Greek populace's response to their country's particular version of them. The violent Greek protests demonstrate that there is little understanding among the people about the "endgame" nature of their nation's and the West's fiscal, financial and economic crisis.
This is because citizens worldwide have deliberately been given by their ruling elites a World Class education in Stupidity when it comes to government budgeting and spending, national deficits, sovereign debt, citizen entitlements, government salaries, public welfare programs, government employee and military pensions, socialized health care and virtually all other fiscal matters of state. When it comes to government finance, the people are living in a state of sheer cluelessness and delusion, which is exactly what governments want. If the people truly understood how their money, financial futures and general welfare are being destroyed by governments' fiscal lunacy, the whole world would "go Greek."
The citizens have also been awarded, compliments of the financial master class, doctorates in ignorance in the subject of how the money elite, epitomized by Goldman Sachs, has over the past 20 years plundered the West and sucked its national economies dry. Apparently, the people, at least in Greece, believe that protests, Molotov cocktails and rage can bring back to life the parched economic waste land they now inhabit. But that earth has been so mercilessly scorched by the uncontained and sociopathic predations of politicians and their money power blood brothers that it will be years before true rehabilitation can be achieved, if the people are fortunate.
In the context of Europe's broad and intensifying public and private financial crisis, the dollar is now rallying in what is simplistically and repeatedly referred to by state television's mouthkateers as a "flight to safety." State media always finds it appealing to reduce complexity and the unknowable into sculptured sound bites, so that it can act intellectually superior, condescend to the people and please its masters.
For anyone to consider the fiat dollar a "safe" asset is monetary insanity, given that the United States is the most hopelessly indebted nation in the world. The likelihood that the federal government will control its deficits, no matter what vast new taxes might be imposed or what kind of transformational epiphany it might experience as to its criminal and treasonous fiscal negligence is roughly zero. And the probability that the nation can pay its exploding debts or fund its contingent liabilities, which now exceed $100,000,000,000,000.00 ($100 trillion), is precisely zero.
Let us repeat that last point, to be categorical and to excise any lingering "audacious," sugar plum hopes dancing in citizens' brains: It is arithmetically impossible for the United States government to pay its debts or contingent liabilities, unless it hyperinflates the dollar into worthlessness. The claims of various government carnival barkers, state media spokespersons and self-serving, parasitic, bankster shills that America can "grow" its way out of its debt grave are cold, callous and cynical lies told for exactly one purpose—to falsely elevate consumer confidence, and convince people to go shopping so government can kick the fiscal time bomb down the road. (We outlined this sad reality in copious numeric detail in a previous article, entitled America's Impending Master Class Dictatorship. It is available at many fine websites, via a Google search.)
So the question becomes: Given that America's severe fiscal crisis undoubtedly is well-known to big money, why on earth is big money flooding into the risky fiat currency known as the dollar? The answer: Because big money does not know what else to do with itself right now. Therefore, hundreds of billions of euros and other currencies perceived to be at-risk are flowing into what big money views as the "least worst" currency at the present time—the dollar.
Consider an analogy: There is a large haunted house high on a hill. It is old and made of wood that is as dry as the Sahara. There is no fire department within 500 miles of the house, and the water well has run dry. There is a party at the house for rich and influential guests, including politicians, central bankers and money managers, who have come from all over the world to have a good time.
The house is full to the rafters with the signature arrogance, haughtiness and self-importance of these self-anointed masters of the universe, and soon the party is in full gusto, with the drinks flowing. And as they drone on to each other about Keynesian solutions, quantitative easing, nationalized health care, Davos, financial weapons of mass destruction, stimulus packages, federal reserve toxic-asset warehousing, rescuing the housing market by federalizing Fannie Mae and Freddie Mac, and the like, it becomes clear that these people are nothing but pompous, overpaid, delusional, self-serving, immoral, parasitic idiots.
In a daze, one of the Greek guests drops a cigarette on the floor, and his bedroom catches fire. Because the house is desiccated, the fire spreads fast toward the bedrooms of the visitors from Portugal, Spain, Italy and Ireland, and it won't be long before half the house is a raging fireball. The celebrants gather in the main hallway in a panic. "Where should we go? Where should we go?," they feverishly ask one another. Then one of them gets a great idea: "Let's go to the other side of the house, where the Americans are staying. Surely we will be safe there." So all the guests go racing down the hallway toward the rooms where Geithner and Bernanke reside, while the fire, inflamed by its natural prey drive, is in hot pursuit.
They stampede into the American suite and slam the door shut. "Phew! We're safe!," they say, as they head over to the well-stocked bar to continue the party. But the fire, overhearing them, says, "Safe? I don't think so. You haven't seen anything yet, you puffed-up little idiot non-savants." The fire then exhales a gust of flame down the hallway, incinerating it. The fire has the fever, and surely it won't long before the entire structure is an inferno.
That home on the hill is the 'Haunted House of Fiat Currencies.' It is on fire, and there is absolutely nothing that can put it out, other than water cannons drenching it with truth, common sense, honesty and reform—and washing away the plunderers and thieves who have laid waste to public and private finance through their epic power-lust and greed. Because the deployment of such water cannons would be embarrassing and inconvenient for the idiot non-savants, that solution will not be implemented. Instead, gasoline will be poured onto the fire, in the hope that maybe it will rage on forever, creating a distracting spectacle that will obscure the crimes of the arsonists who ignited it in the first place.
When the fire started, big money might have done the smart thing and simply left the house. Instead, big money stayed in the house on the assumption that it could continue to party while sidestepping the fire by going from room to room. Big money was so inclined to habit that it could not think "outside the house."
In time, and not much of it, thinking outside the haunted house is going to become a requirement for big money, because the whole house is burning down. Big money is going to be forced to flee disintegrating fiat currencies, which have all been set on fire. But where can big money go?
Big money could go into equities, but the conflagration at the haunted house is going to create a Depression (look at Greece), and that is not good for stock prices. So Equity Avenue will not be a great road to travel. Big money could go into bonds, but they are ground zero when it comes to fiat currency risk. And at current yields, particularly for U.S. debt, they are the proverbial guaranteed certificates of confiscation.
How about real estate? Big money has been there and done that, and it didn't work out very well, to which currently skyrocketing CMBS defaults testify. Maybe big money could show up in force at upcoming Sotheby's and Christie's auctions. But those auctions are infrequent, and there are never enough chairs for big money. Diamonds? They have certainly been a long-time friend of big money, but again, there aren't enough of them. Moreover, the transaction logistics are tedious, and the buy/sell spreads are irritating. And besides, how do you front-run, flash trade, black box or algorithmicize them?
So where is all the money going to go, now that the haunted house is burning down?
The fact that big money is now fleeing into U.S. Treasuries reflects desperation—not enlightened financial strategy, and is surely a short-term fix that indicates big money's lack of perceived options. Big money is trying to buy time, as it figures out what to do. If big money is concerned about the euro, then surely it is similarly concerned about the dollar, because the situation in the U.S. is the mother of all ticking fiscal time bombs. By moving into the dollar, big money appears to be saying that it is trapped; but is it, really?
The fact is that big money now has an opportunity to make some seriously big money. As one room after another in the haunted house is consumed by flames, big money is going to have no choice but to get creative, and think outside the house. Ultimately, it is going to jump out the nearest window before it gets burned. By a simple process of elimination, it is going to realize that precious metals in general—and gold and silver, in particular—represent an enormous opportunity, given the huge sums of big money that need to find a new home, and the extreme shortages of physical metal available in the marketplace.
Big money is going to be way too smart to buy the ETFs that have been pimped to retail investors as a way to sterilize their money and keep it out of the metals markets for which it was intended. No, big money is going to want the real thing—physical—and it will not be available at today's prices in the quantities big money will desire and require. Big money is going to do its supply/demand calculations and realize that any price less than $5,000 per ounce for physical gold and $300 per ounce for physical silver is dirt cheap. And big money is going to be relieved that it has at last found an asset class that cannot be created to infinity by politicians and central bankers who have now demonstrated without a shadow of doubt that they are monetarily insane, greed- and power-diseased destruction devices who are completely clueless as to what to do, and just making things up as they go, one error after another after another.
Big money may have many failings, but it does have proven survival instincts, and it will not go down in flames without a fight. Up until now, when it comes to precious metals in general and gold and silver in particular, much of big money has been illiterate. It never had to learn about precious metals, because investing in other asset classes, such as equities, bonds and real estate, was like shooting fish in a barrel. Now this has changed, and big money is taking a crash course in financial and monetary safety, and in alternative asset classes. Once it learns that there really is no other place to go, it will gravitate to gold and silver, in size.
The current dollar rally proves without question that enormous sums of money are running to safety. Big money knows that the dollar does not represent genuine safety, but it is the only storm port it knows—at least for now. What is significant is that gold has risen from $250 to $1,200 per ounce without big money; that move was engineered by little money, which is early, quiet and smart. When big money wakes up to the paucity of viable options and sees the large opportunity precious metals represent, the flood of money into the sector will become a torrent.
To put the opportunity in context, one statistic is illustrative. At $1,200 per ounce, the total gold reserve of the U.S., is worth around $314 billion. The country's fiscal year 2010 deficit is projected to be $1.6 trillion. In other words, this year's deficit will amount to more than 5 times the value of the nation's gold. To fund the deficit, the government and federal reserve will have to create that $1.6 trillion out of thin air; and, over the next decade, it will have to create, at minimum, an additional $7.5 trillion to cover projected federal deficits. This is above and beyond the existing national debt of $13 trillion, which alone is 41 times the value of the nation's gold.
To put this another way, the fiscal year 2010 deficit in the U.S. alone would purchase, at today's price, 30% of the gold ever mined since the beginning of civilization. In other words, one nation just lost, in one year, the equivalent of one-third of the total global value of the gold that has been mined worldwide over the past 5,000 years. That same nation has promised to lose, over the next decade, far more than the current total value of all gold in existence. Do you think there might be a supply issue when more and more people figure out what is really going on?
Nations throughout the world face the same deficit and debt pandemic. They can print money high into the sky, but they cannot print precious metals. Big money is going to do its sums, and it is going to like what it sees.
Not to mention that golden swans are aloft, and are preparing to land any time. We estimate the probability that America's Fort Knox gold reserve exists as stated by the government to be between 0%–5%. In other words, there is a 95+% probability that some or all of America's gold is gone. The federal reserve's panic about being audited, and its outright refusal to audit the nation's gold supply, can ONLY be cause for grave concern; or, optimism, if you have traded Federal Reserve Notes for gold. What is the Fed so worried about? America's gold supply (or what is left of it. . .if anything) belongs to the people, not the Federal Reserve, the Treasury, JP Morgan Chase, Goldman Sachs, HSBC, the White House or Congress.
Why won't the government show its citizens their gold? The likely reason is that it is not there any longer, because it was peddled away by a Fed that got in way over its head, and played derivative and swap games that blew up in its face. If that particular golden swan comes in for a landing, which we view as inevitable, the price of gold will go in the opposite direction—skyward.
As these developments play out "Zimbabwe moments," the inflection points when fiat money supply goes exponential, hang over the Western world like swords of Damocles. Desperate central bankers will attempt to carpet-Zimbomb their economic landscapes with dying fiat currencies in a vain attempt to keep the wheels on their crippled and careening fiscal and monetary systems. These alchemists and witch doctors have demonstrated that they couldn't care less if their misguided actions result in zombie nations populated by financially paralyzed Zimbombwees, as long as they can continue to pontificate at fancy, meaningless hearings, fly around in private jets and act like gods. Throughout their histories, central banks, in particular the Federal Reserve, have shown a total lack of humility or remorse despite the damage they have done to the nations they have despoiled. Looking forward, we should expect nothing but escalating trouble from them. . .and it.
Big money, which up until now has been no friend of the common man, is being forced to abandon its long-time comfort zone—the burning house. It has run to dollars for now, creating a false rally, and is about to discover the unparalleled financial virtues of precious metals. As it makes its move into metals, especially gold and silver, it will light the way for an enormous popular migration out of phony fiat currencies and into the world's only true and honest money.
Stewart Dougherty is a specialist in inferential analysis, the practice of identifying historic and contemporary patterns and then extrapolating their likely effects upon the future. Dougherty was educated at Tufts University (B.A., magna cum laude), and Harvard Business School (M.B.A. and an academic Fellow). He can be reached at: [email protected]. He is not affiliated with or compensated by those he references or recommends. He does not offer investment or trading advice, and nothing in this article should be construed as such. This article represents the author's personal opinions, and nothing more. The reader has the author's permission to share, print, reprint, forward or post this article, provided that the content is not changed and the author is acknowledged. Copyright 2010 by Stewart Dougherty, with all rights reserved.