Bernanke - "Nobody really understands gold prices and I don’t pretend to understand them either."
Bond Bubble
Bang:
Systemic complexity and lack of redundancy result in unexpected collapse
Lack of trust stunts economic growth
World turns on U.S. and the Dollar and opts for an alternative reserve currency
Black swan: fill in the blank
Crack-up boom
Velocity of money slows to deflation or hyper-deflation
Inflation, hyperinflation
Unfunded liabilities
Municipal default-ageddon
Derivatives blow up
Obamacare and the Cloward-Piven Strategy
The One Bank presses CTRL+Alt+Del and Resets the System
Bernanke shows Yellen how to CTRL+P on his way out of the Fed.
Gold drains out of West until, for all intents and purposes, it's gone
Sharknado!
If you haven't already, buy gold and silver and hold it outside the banking system. Consider holding some cash outside the banking system in case the bang (crash) finally comes. Be prepared. Have a couple of weeks to a few months worth of water, food and other provisions in case things get sideways. I'm not too sure about the Zombie Apocalypse, but be on the lookout for the blood sucker below.
Ben Bernanke, Vampire Chairman (Photo credit: DonkeyHotey)
One of the definitions of hip from the Merriam-Webster dictionary is:
aware or appreciative of something —used with to<got hip to their plan>
Using the above definition, it's hard not to be hip to government. It seems omnipresent. So, while some might be appreciative of government (perhaps for higher taxes, endless war, Obamacare, the NSA, the IRS, War on Drugs, War on Terrorism, etc.), many are aware and wary of it like a gazelle
on the lookout for hyenas (jackals, IRS agents, TSA agents, Congressmen and other synonyms). But what else does being hip to government entail?
How about being hip to the Hidden Intervention Price (HIP) of everything government does? For all of that stuff - from the Post Office, to subsidies to favored businesses, and from foreign aid to military spending and social programs - there is a hidden, or unseen, price. Sure, if you build a shiny new aircraft carrier and load it with missiles you have those high tech weapons of war, at least until they are used during the next war in Iraq, Iran, Syria, Libya, Iran, North Korea or fill in the blank. Yes, if you teach a man or woman to swipe an Electronic Benefit Transfer (EBT) card for their next meal, they don't need to learn to fish, and you'll keep government bureaucrats "gainfully" employed and their cronies who accept the EBT cards fat and happy. But, at what price?
Let's start with something simple. When government takes a dollar from you and gives it to someone else, that is one less dollar you have. Whether or not you want shiny warships, or a War on Drugs, you're going to get them. There is no choice. It's an all or nothing proposition. There is no a la carte menu to choose from. As a side note, I played a small role in creating anti-drug propaganda in Central America. Back then, the Columbian drug cartel could buy commercial jets, strip them down, fill them up with drugs, fly them into Mexico, unload them and abandon them. The jet plane was just a cost of doing business. I "fought" the drug cartel and the cartel won. But, I digress. The dollar taken from you and handed to someone else is taken by force. If you don't believe it's taken by force, stop paying your taxes. A friendly IRS agent will be dispatched to remind you that your taxes are overdue and that they will be paid one way or the other.
The process of wealth transfer isn't friction-less either. The path of that dollar from you to someone else is determined by a messy political process. There is lobbying of Congress. There are bureaucrats to be paid. A few years ago there were even ads on the radio practically urging people to file for food stamps - or SNAP (Supplemental Nutrition Assistance Program) as it is now called. SNAP sounds so chipper and easy. It pays to advertise, because there are now well over 40 million Americans on SNAP. That's somewhere around 15% of the population. Administering that dollar and siphoning off money to political supporters costs money. So, what started out as a dollar when it left your pocket, is not a dollar when it arrives in the receiver's pocket.
Worse yet, what's taken from you is choices. Every dollar taken from you by government limits your choices. Had the government not taken that dollar by force, you may have chosen to use it to help a family member, donate to a local charity, put new tires on your car, make repairs to your home, etc. Government grows not like Jack's magic beans, but more like a parasite living off its host. The parasite (government) / host (populace) relationship merely benefits government and other parasites. As a parasite, government sucks up our time and resources leaving us less well-off than before.
All of this government HIPness starts as a ripple, that becomes a wave, and ultimately transforms into a tsunami that destroys everything in its path. I call the process whereby government intervention slowly builds into a deadly destructive wave the Principle of Compound Errors (PCE). Unlike the Principle of Compound Interest, the Principle of Compound Errors is one of the greatest destroyers of wealth known to mankind. So what is PCE? PCE is HIPster government on steroids. Clarence Carson in "The Hidden Fallacies Behind Intervention" wrote:
Government intervention is a kind of self-fulfilling prophecy. It is premised on the notion that the market and economy are out of kilter and require the ministrations of a benevolent government. As soon as government begins to intervene, they do get out of kilter; it does introduce defects into whatever market or economy it intrudes. Each intervention sets the stage for an endless round of further interventions in the futile effort to bring the whole back into balance. Mises gives us an example of how this would work if government attempted to lower the price of milk for children. If the price is fixed below the market level, he says, there will be less milk available because many producers would lose money at that price. The government would then be faced with this alternative: either to refrain from any endeavours to control prices, or to add to its first measure a second one, i.e., to fix the prices of the factors of production necessary for the production of milk. Then the same story repeats itself on a remoter plane: the government has again to fix the prices of the factors of production necessary for the production of those factors of production which are needed for the production of milk. Thus the government has to go further and further, fixing the prices of all the factors of production—both human (labour) and material—and forcing every entrepreneur and every worker to continue work at these prices and wages.
Government intervention led us down the primrose path to Obamacare. During World War II the United States imposed wage and price controls. This laid the groundwork for Employer Sponsored Health Insurance:
...the link between employment and private health insurance was strengthened by three key government decisions in the 1940s and 1950s. First, during World War II the War Labor Board ruled that wage and price controls did not apply to fringe benefits such as health insurance, leading many employers to institute ESI. Second, in the late 1940s the National Labor Relations Board ruled that health insurance and other employee benefit plans were subject to collective bargaining. Third, in 1954 the Internal Revenue Service decreed that health insurance premiums paid by employers were exempt from income taxation.
Wage and price controls ended up radically changing our entire healthcare system in the United States. One error -- wage and price controls -- gave birth to a system of employer sponsored health insurance that has almost completely severed any connection between patients and the cost of their healthcare. Once people no longer directly paid the costs of their medical treatment or medicine, prices skyrocketed. From 1977 to 2007 healthcare costs in the United States have risen nearly 8% per year according to the OECD.
So, what is the government's "solution" for the healthcare inflation disaster it created? Obamacare. Why not? If at first you fail -- fail, fail again. In the process of compounding its past errors, the government has accelerated and expanded them. The Healthcare.gov web site has been an unmitigated disaster. Many hoping to register and log in to the site have found it impossible. But, that's just the visible manifestation of Obamacare's failure. The ill effects began far ahead of the Healthcare.gov fiasco. For example. I know of an advertising agency that had just over 50 employees that ended up letting go of a few of them and putting off plans to move to a new location due to Obamacare. This story is being repeated all over the U.S. Many businesses are reducing full-time staff and replacing them with part-time staff in order to avoid having to provide insurance for them.
All of this almost certainly leads to a single payer healthcare system because government cannot admit failure. They can only break things and then offer to fix what they broke in the first place. HIP government will continue to intervene until the Principle of Compound Errors wipes out any trace of free markets and personal freedom. That's what government HIPsters do.
After a parabolic move to almost $50.00 in 2011, it has taken silver several years to consolidate. So, the question on the minds of many in the silver community is, what does 2014 hold for the silver price? Don Harrold of the Day Trade Show, in a little over 15 minutes, explains why he wouldn't bet against silver in 2014.
Below is one chart view of the silver price. If I had to guess, it's possible the silver price could continue to consolidate, and then move up somewhere in the May to August 2014 time frame.
Could the silver price go higher sooner? Time will tell. Important resistance on the way back up will be found between $24 to $26.
While I have been skeptical for quite some time about the silver price, I have become more optimistic over the past few weeks given the charts and price action.
If you haven't watched the Monty Python video above, go ahead and do so first, then read on. It's important, plus you'll need the laugh.
Did you watch the video? Good. Hope you enjoyed it.
Like the character played by John Cleese in the sketch, you have been sold a Dead Parrot. In this case, the idea that America exists. It doesn't. It hasn't for a long time.
Some argue that America strayed from its Constitution, leading to the current state of affairs - leviathan government, NSA spying, reduced freedom, endless wars, etc. However, you could trace the long slide to the moment when America traded its weaker form of government, under the Articles of Confederation, for a stronger one under the Constitution.
Setting the above argument aside for the moment, the Constitution created a republic with three co-equal branches. It divided power, not only between the legislative, executive and judicial branches, but also between the state governments and the federal government. State power was intended to act as a buffer between the federal government and the people.
This constitutional construct began to fall apart almost immediately from the foundation of the republic. Whether Marbury vs. Madison (Judicial Review), the emphasis of the popular vote vs. the Electoral College, the Civil War and the effective end of nullification, the 16th Amendment (direct taxation), 17th Amendment (direct election of senators) and the Federal Reserve Act - each represented a step away from a sounder structure towards a less sound one.
The combination of the 16th and 17th Amendments with the Federal Reserve Act, in particular, undermined the foundations of the constitutional system. Power was tilted heavily toward the Federal Government and away from the states, and thus from the people. The 17th Amendment effectively eroded the role of the states as a protector of the people. All of this leads us to today.
America is dead. It's as dead as Monty Python's ex-parrot. No politician can revive it. Barack Obama can't "hope it" back to life. The Republicans can't wish it back into existence. Don't even talk about a third party. Why? Karl Denninger writes how America is now past the tipping point.
There were 108,592,000 people in the United States in the fourth quarter of 2011 who were recipients of one or more means-tested government benefit programs, the Census Bureau said in data released this week. Meanwhile, according to the Census Bureau, there were 101,716,000 people who worked full-time year round in 2011. That included both private-sector and government workers.
There are more people receiving government benefits than workers to support them.
He continues:
None of the people getting means-tested government benefits will ever vote to reduce them, nor vote for any politician that will reduce them.
But it's factually much worse than it first appears because federal government workers will not vote to fire themselves either, just as the 17th Amendment (ed: The worst thing to ever happen to this country) is inviolate because
Does it make sense yet? This is not a small margin and it cannot be politically reversed because the margins are too high. Were the skew relatively small (and it looks small until you subtract out federal workers) you could potentially do so, because some people won't vote and you could "motivate the base." But note that with the federal workers out, and we're not subtracting the State workers, which also exist on this same largesse, you can't get there because this means nearly 40% of those receiving such benefits would have to stay home when reductions are proposed, and they never will.
As such you cannot vote your way out of this.
You cannot politically organize your way out of this.
You can't do it in the Democrat Party and you can't do it in the Republican Party. Nor can you do it in a third party.
Every single person who argues otherwise is an idiot or worse, a fraudster (if they have run the numbers above.)
It's over unless people go on strike, peacefully resist and deny the government beast the consent and money needed to keep it alive. However, it doesn't take as much to collapse the system as you think. Once you collapse the system there are risks: 1) It doesn't come back to its former state; 2) The system comes back extremely slowly resulting in shortages, civil disorder, unemployment, etc.; or 3) During the collapse some unsavory group takes over and you end up worse off than what you started.
Even if the people react, there is a good chance that we're already past the tipping point. The Senate isn't going to vote to allow the states to choose senators again. Congress isn't going to vote to repeal the 16th Amendment and the tax revenues it brings. The Federal Reserve, and all those who benefit from its existence, aren't going to allow it to be dismantled. The people receiving government benefits aren't going to vote for politicians who take them away. Federal employees aren't going to vote for politicians who cut their jobs and benefits. It's difficult to imagine one of the above things happening, much less all of them.
So, what can you do? One of the smartest things you can do is buy physical gold and silver and hold it in your personal possession. Keep it out of the banking system (safe deposit box, etc.) where it could be taken from you. Build up some cash savings and, again, keep them outside of the banking system. Have several weeks to several months of fresh water, and food on hand in case there are any disruptions that prevent you from making normal purchases at the grocery store. Finally, consider other residency or citizenship options outside of the United States. One excellent source of information is Sovereign Man. All is not lost. The situation is not hopeless. But, you must be willing to take responsibility for your own future and not expect that any one government or country is the solution to the challenges you face.
In case you disagree with the above analysis, here's Monty Python's rebuttal:
A gold-standard 1928 one-dollar bill. It is identified as a "United States Note" rather than a Federal Reserve note and by the words "Will Pay to the Bearer on Demand," which do not appear on today's currency. This clause became obsolete in 1933 but remained on new notes for 30 years thereafter. (Photo credit: Wikipedia)
For years, with a few twists, the precious metals narrative has been the same. A U.S. Dollar, no longer tied to gold backing and printed at an ever-increasing rate will lose it's value, resulting in massive inflation and higher gold and silver prices.
Or, if you prefer, the available supply of silver is decreasing as demand soars. Some even say that demand has outstripped supply for years. Have not been able to locate the issue, but recall that the Kiplinger Letter in the 1980's was pushing short supply narrative sighting increased demand due to film used in cameras and increasing demand from China.
How about this one? The massive U.S. government debt is unsustainable and will lead to an existential crisis (e.g., Dollar collapse) that will pull the rug out from the Dollar and send the metals to the moon.
COMEX default, gold-backed Yuan, precious metals prices falling below mine cost of production, manipulation, Armageddon...and the list of narratives seemingly goes on ad infinitum.
Barry Ritholtz writes that "Everybody loves a good story". While he opens his story referring to Wall Street, it applies equally to gold and silver.
When it comes to storytelling, we have a long and venerable history of narrative. The spoken word emerged millennia ago — before even the Greeks — when the only way to share knowledge was verbally, person to person, generation to generation.
It is in your DNA to love a good story. You know, neat tales with heroes and villains and conflicts to resolve. A good story pushes our buttons, is exciting and memorable.
It should come as no surprise that Wall Street also loves a good story. And when Wall Street spins a yarn, its emotional pitch drives sales.
Ritholtz later continues:
Of course, many of these stories turn out to be wrong. Surprisingly, that is not what gets us into trouble as investors. As it turns out, it doesn’t matter whether a story is true or false. It may be counterintuitive, but even true stories can end up being money-losers.
What matters most to you as an investor is the entire concept of the narrative. You have a natural tendency to want an emotionally satisfying tale — and to make investments based on that — despite times when the actual data may be telling you something different.
The fear trade doesn't seem to be panning out. Stocks climbed, gold fell. It appears that the economy can teeter on the edge of a precipice for longer than many anticipated.
None of this is to say that gold and silver prices won't eventually end up much higher. At the same time, it's a valuable exercise to, from time to time, examine the stories you listen to, believe, tell others, and most importantly - the ones you tell yourself. What if those stories are wrong? What if you're missing some important detail?
A good story is enjoyable to listen to. A story can clarify or cloud our understanding. It can even make us feel better about ourselves. But, believing the wrong story can cost us dearly.
Editor's Note: This article was originally published in April of 2011 on the Daily Libertarian. The Daily Libertarian, apparently, is not an active site at this point in time. Some of the predictions made in this article are now obviously wrong. This was written at a time when silver was approaching its high price and many were predicting $200 silver as evidenced in a previous post here. At a later point, we plan to flesh out more arguments for $200 silver or $150 silver, which also seems to be a common level that some are predicting. Originally the title for article was "Silver is Screaming". The article was followed by another in June of 2011 titled "What's Silver Saying?" Hope you enjoy this article. If you have any questions or comments please feel free to leave them in the comments section. If I were the Mogambo Guruover at The Daily Reckoningmight open by ranting about how the idiots at the Federal Reserve are creating Too Much Freaking Money (TMFM), leading to a devaluation of the U.S. Dollar and increasing food, fuel and commodities prices. However, I don't need to scream, silver is yellingat the top of it's lungs. What's silverscreaming about?
Silver's screaming about the incredible shrinking dollar - whether measured by the U.S. Dollar index (DXY), or one of the Trade Weighted Exchange Indices, the message is the same. The U.S. Dollar is going down like the Titanic.
It may not be obvious to Helicopter Ben Bernanke, but the rise in silver prices has coincided with the decline of the dollar. While the DXY was falling from around 120 to below 75 from 2000 to present, silver bumped along around $5.00 per ounce for years before beginning it's climbto $43.00 per ounce at present. Sadly, but not surprisingly, the declining dollar is the result of a deliberate government policy of devaluation. In "The Global Recession Risk: Dollar Devaluation and the World Economy" by Pelaez and Pelaez, they discuss how a 40 percent devaluation of the dollar might be necessary in order to bring the current account deficit (CAD) of the U.S. back into balance. Interestingly, a FEDPOINTfrom the Federal Reserve Bank of New York outlines why a country might devalue its currency and what effects that might have. The effects of devaluation reads a bit like those warnings on prescription drugs:
A significant danger is that by increasing the price of imports and stimulating greater demand for domestic products, devaluation can aggravate inflation. If this happens, the government may have to raise interest rates to control inflation, but at the cost of slower economic growth.
Another risk of devaluation is psychological. To the extent that devaluation is viewed as a sign of economic weakness, the creditworthiness of the nation may be jeopardized. Thus, devaluation may dampen investor confidence in the country's economy and hurt the country's ability to secure foreign investment.
Let's see - inflation, higher interest rates, jeopardized creditworthiness and inability to secure foreign investment. Sign me up Dr. Kevorkian! The flip side of increasing exports and closing the current account deficit is that Americans will have to reduce their consumption plus ("The Global Recession Risk: Dollar Devaluation and the World Economy" by Pelaez and Pelaez):
The US must abandon residential
construction in favor of export activities and the rest of the
world must buy American goods and services. The US government as
well as those of surplus countries must engage in fiscal consolidation.
Does any of this sound familiar? It should since we're living it right now.
Devaluation also aids the United States with at least two other issues:
Reduces the burden of the U.S. debt by allowing it to pay its creditors in increasingly worthless fiat currency.
Pushes China to unpeg its currency from the dollar allowing its currency to float. Most likely this causes the Renminbi (RMB) to appreciate against the dollar. This makes Chinese imports more expensive when priced in dollars and helps reduce the current account deficit.
People are waking up to the cold, stark reality of devaluation. The dollar in your pocket is likely worth less today than it was yesterday. Government policy is designed to force you to consume less and save more. But, why would you save an increasingly worthless fiat currency like the dollar? Many people refuse to do so. Purchasing silver isn't just for survivalists waiting for something to hit the fan or silver bugs. Silver has become the common man's way to unplug from the government controlled currency matrix and hold onto money (yes, silver and gold are money) that maintains its value as the dollar declines.
Here's the part where, if I were really clever, I would write some vaguely wordedquatrains in dead languages, and let you interpret them. Fortunately for you, and unfortunately for me, I'm not that clever.
The decline of the dollar is an ongoing trend. Devaluation is a deliberate, coordinated government policy. In January 2002 the U.S. Dollar Index (DXY) was roughly 120. By December 2004 it had declined to 81.
By June of 2010 the DXY had made a pretty stunning recovery to around 88. Using the January 2002 to December 2004 decline as a guide, I am predicting the DXY to decline to about 60 by May 2012. That also lines up pretty nicely with an overshot - 50 percent instead of the 40 percent decline - thought necessary to bring the current account deficit (CAD) back into balance.
So, what does that mean for the price of silver?
I believe silver will go to $200 per ounce, perhaps more. How did I get there?
This is based on a few different factors. First, even though it was the subject of manipulation by the Hunt brothers, silver did reach $50 per ounce. Inflation adjusted silver, to match the $50 high, would have to be valued north of $100. The number I hear thrown around often is $140 per ounce. I haven't checked the exact number out, but that doesn't sound far off.
Second, the gold-silver ratio is declining. A year ago it was around 60 to 1. Today it is around 35 to 1. This combined with experts Peter SchiffandJames Turkpredicting gold prices of over $8,000 per ounce lead me to believe that $200 per ouncesilveris not an unreasonable expectation. In fact, both men are predicting a 1 to 1 ratio of Gold/Dow ratio - in other words if an ounce of gold is $10,000 per ounce then the Dow will be 10,000. Although I'm not sure gold and the Dow will meet at such a high level, I would not be surprised if the Dow declined 25-35 percent and gold climbed to meet it somewhere around $8,000-$9,000 per ounce. A 40 percent decline in the Dow would put it around 7,200. With a 35 to 1 gold-silverratiosilverwould be priced around $205 per ounce.
So, at $43 per ounce, it looks like silver is just warming up its lungs. Yes, it may be screaming, but think how hoarse it (and perhaps you) will be from screaming as it approaches the $200 per ounce mark. Of course, if I'm wrong, my next prediction may be written in quatrains.
Many people ask, "Has Gold Price Reached it's Low?" While it's not absolutely clear that it has, signs are accumulating that indicate gold has probably reached it's low and will climb higher over the course of the next several months.
Gold Price Near Resistance
Gary Wagner, who we recently highlighted for his charts indicating gold could dip as low as $1030 per ounce, now says if gold can break through the $1,339 level that it should continue to climb.
Bullion Banks Running Out of Gold?
Zero Hedge highlighted how JPMorgan's gold vault is emptying out at a rapid clip. This led us to bring up the possibility of a short squeeze driving the price of gold up.
The cause of today’s spectacular rise in the gold price is the reality that with Friday continues large drops in the Comex warehouse gold inventory. No cogent argument can be formed against the reality that because of the continued fall in gold inventory that within in 90 days or sooner the Comex must change its delivery mechanism.
Futures speculators have responded to this year’s extreme bearishness plaguing gold by amassing wildly-outlying record short positions in it. These huge and highly-leveraged bets can only be unwound by buying gold futures to cover the shorts. As gold continues rebounding out of its recent hyper-oversold lows, the futures traders on the short side will have to buy. This will likely fuel a massive short squeeze.
Their article concludes:
And given such extreme spec gold shorts, widespread despair, and gold recently hitting the most oversold levels by far of its secular bull, it is due for a monster upleg. As this accelerates, the leveraged shorts will be forced to buy back the gold they owe at increasing rates. This will feed on itself and likely ignite a buying panic. It will very likely lead to the biggest and fastest upleg of gold’s entire secular bull.
China Seeks to Displace U.S. Dollar as Reserve Currency As outlined in "China Maneuvers To Take Away US' Dominant Reserve Currency Status" China is buying vast quantities of gold in an effort to displace the U.S. Dollar as the reserve currency. Their effort includes creating a trade settlement system which also utilizes the yellow metal. Inflation QBAMCO expects inflation:
Inflation will be the means to de-lever systemic balance sheets and it will affect different equities in different ways, at different times and in very different magnitudes. We believe the implied mandate, long precedence and demonstrated current willingness to inflate will ultimately sustain and increase the money stock, which in turn portends further nominal gains.
Taken separately any of the above could be discounted. Together, it becomes more difficult to deny that it appears a number of events are coming to a head which could potentially drive the price of gold higher. From gold pressing through technical resistance at the $1,339.00 level to signs that the bullion banks may be running out of gold have the potential to ratchet prices higher - perhaps to new records.
Gold Jewelry Necklace with Golden Coins (Photo credit: epSos.de)
We have examined many predictions, price targets, and charts for both gold and silver. For example, Gary Wagner's forecast for $1030 gold. However, what if these forecasts are incorrect and the low is already in for gold?
1. The bullion banks run low on gold and cannot deliver enough to meet their obligations. JP Morgan has seen a serious amount of gold flow out of its vaults recently. This scenario has been discussed for many years, but - should JPM and other bullion banks be forced to default on their obligation to deliver - the price of gold should move higher.
2. Either independent of, or in conjunction with, a failure of bullion banks to deliver, higher gold prices could result in a short squeeze. It wouldn't take a huge rally in the price of gold to wipe out the shorts.
At maximum leverage, a mere 6.4% gold rally would wipe out 100% of the capital risked by gold shorts! While not all futures traders run with minimum margin, plenty do. The faster that gold rallies, the more pressure it puts on these guys to buy offsetting futures longs to cover. Short squeezes are born when just a small fraction of traders are forced to cover, unleashing buying pressure that sucks in many more.
With gold significantly oversold, it seems only a matter of time before the price rebounds.
The extreme price levels often present the greatest risk, and the potential for the greatest reward. While gold could certainly drop lower - to somewhere around $1,000 (give or take), you should not take for granted that it's a foregone conclusion. Markets are nothing if not unpredictable.
American Eagle, design by Adolph Weinman. (Photo credit: Wikipedia)
It doesn't seem like too much of a stretch considering how far silver has fallen already, that it might reach $15 per ounce. Will it? Silver remains enigmatically unpredictable.
One place to start to look at the charts as Don Harrold of The Day Trade Show has done.
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