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Markets to Get Crushed, Gold to Soar
James West
Markets got crushed last week as the main catalysts of economic collapse continued to converge and interact to eradicate risk capital appetite. Both the Fed and European Central Banks are exuding a “deer in the headlights” kind of paralysis. Their only strategy appears to be finding new ways to load up the countries wallowing in debt with more debt at lower rates but for longer durations. Meanwhile, the assets they demand as collateral are the only ones worth anything. Thus, the Greeks are getting raped, and nothing worth anyting in Greece will be owned by Greeks.
That same fate will soon start crawling up the Euro ladder.
The S&P 500 extended the worst weekly drop for U.S. stocks since 2008, as both Treasury Secretary Tim Geithner and President Obama worked hard to try and convince European leaders to attack the sovereign debt issue by printing more currency.
Thankfully, the Europeans are capable of understanding that flooding the economy with more debt through currency creation in the American style is a recipe for more disaster down the road. The banks who are the true government of the United States seems incapable of comprehending how offenisive it is to the rest of the world to have the nation upon whose currency everyone is choking wag their finger in our faces and chide us for not doing enough to mitigate the damage.
I think its safe to say the rest of the world is starting to looking beyond the looming collapse of the global economy at how we reinvent the system without the U.S. dollar and the Euro and Yen. In the meantime, the United States is going to keep trying to drag Europe into the same kind of un-repayable debt swamp the U.S. is in so that when the national defaults start happening, the misery will be shared, and every government will be on the same hot seat.
And its about to get a lot worse.
All risk capital is going to be heading for the sidelines, and its only the multi-billion dollar fixed income investors who are forced into buying flattened yield curve treasuries because they can’t afford to buy nothing.
Among metals and energy explorers and producers, the markets are in the midst of another seizure that will likely see the TSX Venture heading for below 1400 in the near term and even below 900 in the not quite-as-near term.
The hammering of commodities is a result of the same sequence of events that caused commodities to get nailed ahead of equities bottoming in 2008, as deteriorating asset values trigger margin calls and general fear on a grand scale, and so the things that still have value get sold at auction to pay for the things with no value, yet are owned on leverage.
This time, it’s the hedge funds and ETF’s that will lead the de-leveraging stampede, and at the end of the day, that’s good news for precious metals.
Gold lost $100 on Friday last week, bringing the total losses from its 6th of September high of $1923.70 to 13% to close Friday at $1662.
For those of us who watch the gold market, its cause for excitement, and not alarm. Everytime gold loses 10% or more in a short timespan after a gain of more than 10% in an equally short timespan, it’s the precursor for a period of consolidation before the next new high is reached.
In 2008, gold lost better than 13% twice.
First was in March 08 on the Fed’s interest rate cut of .75% to 2.25%. It had touched a new high of $1033 the day before, and promptly fell back to $876.
Then again when after hitting $936.30 on October 10th, 2008, it lost 27% of its value briefly when it touched $681 on October 24, 2008, before closing that day just under $730.
At the end of 2010, gold touched 1227.50, then lost 12.4% in a breathtaking drop to 1075.20 over a matter of two weeks.
The pattern then is that each time gold sprints to a new high, it miraculously gets kneecapped and the wind leaves it sails and for a while it muddles along until the next geo-economic oh shit moment happens and the battle hardened gold players come back.
There’s a lot of people with short memories who scream gold bubble every time this pattern repeats itself, and they are the noise in the marketplace designed to frighten average investors away from gold. While its true that nothing goes up forever, gold is responding to the continuing manufacture of debt and currency that is the financial ruling classes favorite method of bankrupting ordinary working stiffs and taking away their homes cars and toys.
Gold will resume its upward march precisely until the debt and currency nations among the G7 default through hyperinflation, and when ultimately a new currency that is managed collectively by the most prosperous nations is put forward. So that time is nowhere in sight, though the continuing viability of the current system is clearly growing more doubtful.
Make no mistake. This is a resumption of the crash that started at the end of 2008. Be ready to buy gold and silver when those markets turn, which they certainly will. The next peak in the gold price should be above $2200, and if the pattern of the last decade holds, that should be within the next 12 months.
At this point, buy I’m buying no equities whatsoever, and look to gold and silver as the only long term safe haven asset class.
I’m James West, and this is the weekend edition of Midas Letter.
Sept. 26, 2011