Gold & Silver - 2005 to 2008

By: Nigel Maund | Sun, Dec 5, 2004
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"The Greatest Bull Market of all Time is about to Commence"

Introduction

As the dollar continues its steep descent to 75 on the Dollar Index, and the syndicated US propaganda machine's hacks, and talking heads, continue in their shallow "analysis" of the markets, the momentous importance of the world reserve currency's demise, and the underpinning fundamentals behind it, are all but glossed over, in order that Joe Public does not really understand the fate that will shortly overwhelm him. The DJIA, SPX and NASDAQ enjoy their pre-festive season bear market rally, and everyone is provided with the apparent impression that all is just fine and dandy on the good ship "USS America". The key thing is that consumers must not lose confidence in the all-important Christmas - New Year spending spree, and suddenly start to demonstrate a modicum of financial prudence.

Be that as it may, the storm clouds are gathering fast for the US economy and its ill-founded financial system. Time, that most valuable and irreplaceable commodity, is ticking by remorselessly. Neither the US Administration or the Federal Reserve has shown any wish to halt the dollar's collapse, instead citing its importance in reducing the US twin deficits. This sleight of hand, of course, overlooks several key issues, namely:

  1. foreigners, who hold trillions of dollars of US$ denominated securities and equities, are being defrauded by wholesale currency debasement on a truly epic scale. The size of the US$ devaluation offsets the apparent gains in the rise of bonds and equities, as opposed to those being made in European and Asian bourses, with the currency effect double whammy;
  2. US senior citizens, and savers generally, are watching their pensions and capital savings destroyed before their eyes, at a time when they will need the money to pay for fast rising day-to-day living expenses, medical care and accommodation;
  3. the psychological impact of watching the world's reserve currency behaving like a "banana republic's" pretty colored banknotes will have a long-term and damaging impact on foreigners willingness to retain the US$ as the world's "seigneur" currency, with all that this means for US economic advantage. This will cause a seismic shift in foreign exchange transactions around the globe, as individuals and countries rush to diversify currency transaction risks out of the US$.

The current collapse of the US dollar will not stop at 75 on the index. Sure, there will be a rally from an oversold condition at some point, however, until the fundamentals are addressed, which there is currently no willingness to do, the dollar will continue its collapse well into the New Year. No-one dare predict where the end is, because no-one knows. The vital question is "At what point does confidence finally fail in the US$?". With no link between any paper currency in the world, and any tied physical asset constraint, such as gold, paper money is only worth what people collectively think it is. To a large degree, this is set by the markets. In effect, it's a large confidence trick. However, so long as the markets accept the exchange for goods and services, the entire structure somehow works. However, Mr. Greenspan, America's great financial engineer and digital alchemist, is set to test the theory, quite probably to complete destruction. After all, people do not like being defrauded on a grand scale that all but amounts to legalized grand larceny. This is what the Fed is currently doing.

Meanwhile on the home front, individual Americans and, to a slightly lesser extent their European and Australian counterparts, continue to spend up to the hilt, using their house as a private bank to draw off capital, to keep the engines of growth churning along. The Real Estate bubble remorselessly grows ever larger to become by far the largest asset financial bubble the world has ever seen. Only the "galactic scale derivatives and hedge funds" monsters exceed it. The distortions in the global economy are at breaking point. All it needs is the trigger. The collapse of the US$ is the trigger.

The Precious Metals Bull Market

Mr. Greenspan is a man in a crisis with no levers to pull. He cannot raise rates as the bond, equity and real estate markets would collapse. This would develop into a "black hole - gravitational implosion scenario", where one event fed on the next until the entire financial system quite literally caved in. The alternative is for President Bush to raise taxes and cut back on Government spending. This too will have virtually an identical effect. Furthermore, with the "hors d'ouevre" Iraq virtually pulverized, Iran is lining up to be the "main course" in this Middle Eastern smorgasbord of conquest, which will ultimately result in the US controlling, with (behind the scenes) Israel, the entire Middle East and its vital petroleum resources. Of course, an extended Mid-East military campaign is likely to be another pricey military adventure, where lowering taxes and cutting expenditure is not an option. Right now, foreign, military, policy, outweighs any domestic US agenda, regardless of what ordinary American citizens want, or realize is in the immediate interests of their country and its people.

As a backdrop to the US domestic scene, there is the wider global one, in which rapidly developing economic and population giants, China and India, have entered the global resources market in a very big way. No longer are the fortunes of the commodities markets the preserve of the developed economies such as Japan, Europe and North America, and the manipulations of their various powerful and wealthy multinational corporations to the detriment of "third world" and other producing nations who have been effectively raped for centuries. China alone has as many people as all of the developed countries put together. Furthermore, it has a little sum of US$455 billion in US$ denominated assets piled up. This tidy sum increases by the day as the Fed's daily appetite for foreign funds runs at a cool US$ 2.7 billion. What is China going to do with this vast depreciating pile of essentially worthless FIAT paper? What would you do with it? Spend it on hard assets? .... well, this is precisely what China is doing. It has its eyes cast wide on gold, silver, nickel, iron and copper mines in Canada, Mexico, Chile, to mention but a few, and oil fields around the world. It is buying access to vital foodstuffs and consumables at an accelerating pace, because it fully realizes the shape of the world to come. The US, in 120 years of extreme profligacy, has wasted its natural resources on a scale hitherto unseen and unimaginable. The US internal development strategy will be shown to be severely wanting, and the US internal social, infrastructural and other problems will be thrown into sharp relief by the coming global financial crisis. Going forward, resource-poor America is highly vulnerable to global competition in the resource markets. The ballyhooed "War on Terrorism" is a great big smoke screen for sorting out Israel's foreign policy, in a manner it could never otherwise do, or hope to get away with, and, moreover, to control vital Mid East oil resources to prop up the US economy, and the US$ as a global currency. The Arab world fully realizes these "twin nation" objectives.

Since 2001, commodities, such as gold, silver, nickel, copper, lead, zinc, cotton, soya, cocoa etc have been in a bull market that mirrors the decline of the US$, in which they are all quoted on world markets. As the US$ continues its descent to unfathomed depths, the clamor for hard, commodity based assets accelerates. Furthermore, the Fed, now facing the chess game equivalent of "Zugzwang" (every move it now makes will lose), can do nothing other than stand by and watch the dollar decline continue until the point is reached where the US faces an "International Dollar Crisis". Then, like it or not, the Fed has to act and act resolutely. At this juncture, interest rates will skyrocket, bringing the great "Equities - Bonds - Real Estate Party" to its ultimate demise; i.e., a total train wreck that will make 1929 look like a children's tea party.

Before all this happens, the precious metals will have their revenge on the Fed's great FIAT experiment. Gold, in particular, will rise to US$ dollar prices that people would currently regard as completely insane. However, it is worth bearing in mind that in the 1930's, gold was fixed at US$16 an ounce. There are now US$185,000 in global circulation for every known ounce of gold on this planet. The rush for gold has already started, as the yellow metal enters Phase 2 of the greatest gold bull market the world has ever seen. In 2005, this rush is going to develop into an all-out stampede. Right now, all the world's precious metal mining companies put together have a market capitalization less than the Coca Cola company. This is going to change by entire orders of magnitude.

When the bond, equity and real estate markets finally collapse, as they will, the scramble for precious metals will become the greatest mankind has ever seen. It will be propelled by mans most basic instincts: fear and survival. Remember, no man or country has ever issued digital currency or paper currency in the unconstrained, uninhibited and totally uncontrolled manner in which the US has done. No country has ever amassed debt on such a mind boggling scale. No country has ever allowed its savings to collapse to such a pitiful level. The misallocation of resources, and dislocation of the economy is quite simply enormous and unsustainable. These vast distortions cannot continue much longer. Like the laws of pure science and economics, the correction is long past overdue as the fundamentals that drive society take over their natural control of events. Mr. Greenspan and his Federal Reserve are just mortal human beings, after all. There is one much mightier than he. Hubris has always been, and will always be, mankinds' ultimate undoing.


 

Author: Nigel Maund

Nigel H. Maund
MSc, DIC, MBA, F.Aus.IMM, F.AIG, F.SEG, FGS, MGSA
Economic Geologist
CliveMaund.com

The above represents the opinion and analysis of Mr. Maund, based on data available to him, at the time of writing. Mr. Maunds opinions are his own, and are not a recommendation or an offer to buy or sell securities. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Mr. Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications.

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