Thursday, February 18, 2010

Why gold (and silver, and oil) can only go up

The Face of modern government – Yes, folks, it's a brain-scrambled Rat!

As Uncle Gary has reported, the ECB is in a real fix. If it lets Greece go, then the 'New Europe' dream of Napoleon and Hitler is over. Before this dream shatters, however, the banks of northern Europe (including those of Switzerland) will collapse first. This is because they have enormous sums pumped into the Greek carry trade, buying Euro-denominated bonds off the Greek government for high interest rates, then using these as collateral with the ECB to borrow money cheaply (with which to buy more Greek bonds). This 'money-pump' seems like perpetual motion, until you realise that it is paid for by the risk of the Greeks defaulting on their high interest payments, which stiffs the banks who owe the lower interest rates to the ECB.

Confused? Welcome to the mysterious world of banking.

So why have the banks taken on this risk? Well, they have to keep making money to keep paying all of their outrageous bonuses and to keep themselves in enough funds to keep buying government bonds in places like England, Germany, France, and the US. If they keep buying these bonds, then the governments involved will keep rewarding them with favours. And the banks have assumed that the ECB will bail out Greece should push come to shove, therefore Greek government bonds (paying high interest rates) can be treated like German government bonds (paying low interest rates).

Profits will be privatised and losses will be socialised.

Because if all of northern Europe's banks go belly up, then so do all of northern Europe's governments, which are totally dependent on selling their bonds to keep their deficits going, to prop up their client states.

(Obviously you may be thinking here, why don't these governments just live within their means. Surely they're making enough in tax each year not to have to be reliant upon endless borrowing? As Mogambo Guru might say, ha ha ha ha ha ha. These governments would never dare charge as much tax as they actually spend. They would all be booted out of office immediately as people finally realised the cost of delivering all of the politicians' promises.)

So the ECB will, by hook or by crook, bail out the Greeks (and then the Spanish, and then the Portuguese, and then the Italians) by printing as much paper as is required. The ECB works for the banks it allegedly controls, just like any central bank, so it will do their bidding and act as a lender of 'last resort'. So the Euro is finished.

Next, comes the Pound. This weakling European country has been living beyond its means now since WWII, with one stupid government after another constricting the economy with taxes and regulations, to satisfy one voting group or another, and then making up the shortfall with borrowing, as taxation income has declined - as set against gold. Yes, there have been blips and even years when some of the debt was repaid, but not many. And certainly not enough.

So once the speculators have had their fun with the Euro, they will have their fun with the Pound. There are two 'mighty' currencies left, but before the speculators wreck those, they will probably take on the last 'medium-sized' currency, the Swiss Franc. Bubble-headed politicians in Switzerland are just as stupid as those in the rest of the world, and they have managed to finagle the Swiss off the gold standard. With Credit Suisse and UBS as much up to their necks in CDO slime as the rest of them, the Swiss Franc is almost Icelandic in its leveraged status, and will come crashing down too, to head towards the ultimate value of all fiat currencies, i.e. nothing.

Having dealt with the Euro, the Pound, and the Swiss Franc, the Dollar will finally come under its much deserved scrutiny. With the Chinese beginning to offload their US Treasuries, the time is not yet ripe for the Dollar (because of the lower-hanging fruit of the Euro, the Pound, and the Swiss Franc), but its time is coming. Finally, when the Dollar implodes, the Yen will be the only target left in the gun sights. It will be taken out too, because governments just cannot help themselves. Given the availability of a printing press, they just keep doing the same thing again and again, which is to keep pressing the button, just like those poor mice who have their septal nucleii neural pleasure centres stimulated by electrodes activated by a button they can press with their feet.

These mice just keep pressing the button no matter what, even starving to death within inches of copious amounts of food just so they can keep pressing that button. That is what the governments are, behind the five major fiat currencies, rats addicted to the pleasure button of monetized debt.

So there we have it, the 'Five Fingers of Death', as Max Keiser puts it, when he talks about these currencies.

So what do you do then, if you are a rich Arab, or a rich Chinaman, or a rich Anywhere-ian? You can't put your savings in the Euro, the Pound, the Swiss Franc, the Dollar, or the Yen? You slowly realise this over the next couple of years.

Where are you going to store your wealth? You've got to make it 'un-grabbable' by government, you've got to make it portable, and you've got to keep it liquid? Norway, Canada, Australia, and New Zealand, with their commodities-based economies, may be able to soak up some of it. But surely not in the volume required.

So that leaves three solutions: Gold. Silver. Oil. Okay, we can add palladium and platinum too. And a few other bits and pieces. But the really simple way out is obvious. Gold. Silver. Oil.

It's going to be a rocky ride, with lots of ups and downs, but if you want to keep things simple, you know what to do.

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