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Why Gold Is a Sure Long-Term BetBy
Friday, May 21, 2010
What a spectacle...
In an utter and complete repudiation of its founding principles, the European Union's central bank (ECB) has decided to copy the U.S. Federal Reserve's 2008-2009 strategy of "papering over" Europe's massive debt problems. The ECB will provide nearly unlimited credit to Europe's sovereign borrowers, while also buying troubled assets from Europe's largest banks.
This latest development has caused a significant change in what I call "the most important chart in the world."
Readers of my investment advisory are familiar with the chart by now... as we've been publishing it nearly every month... and even more frequently in the daily S&A Digest. It shows the value of U.S. government long bonds (represented by the fund "TLT"), the price of gold (represented by "GLD"), and the price of silver (represented by "SLV").
For more than 60 years, the U.S. dollar has unquestionably been the world's safest, most liquid form of money – its reserve currency. During times of economic trouble, investors rush to buy U.S. bonds as a safe haven, causing their value to rise sharply.
And that's what happened – briefly – during the Greek crisis last month. But then, something changed. As soon as the ECB announced its big bailout and established a swap line with the U.S. Treasury (more about this below), investors realized there's no real difference between the U.S. dollar and the euro. They are simply different names for the same thing: paper money. And investors understand the value of paper money may finally collapse under the weight of these massive sovereign debts.
What did investors buy when they sold the U.S. dollar in this crisis? Where did they run? As you can see, in reaction to the ECB announcement, investors bought gold... and to an increasing degree, silver. I believe this preference for metallic money will continue to strengthen as the financial problems of the U.S. Treasury begin to mount.
 If you ignore this trend, you will be financially destroyed over the next several years. If you act now to protect yourself and your family, it will be the greatest single investment decision of your life.
Now... let's look more closely at what the Europeans have done to stave off the collapse of the European Union...
To maintain a veneer of legality, the ECB will create an off-balance-sheet entity to "borrow" roughly $1 trillion from itself, the U.S. Federal Reserve, and the IMF. Europe's member states agreed to guarantee these debts, which the ECB claims will be "riskless" because they're simply loans between central banks.
At the root of every paper currency arrangement is a simple scheme to grant credit where none is due. In this case, the scheme is designed to give credit to bankrupt governments in the European Union, via guarantees from those same bankrupt governments and additional credit from the U.S. Treasury, which is itself a troubled creditor at best.
In short, the ECB is going to print up lots of euros and give them to the least creditworthy states and the worst bankers in Europe.
The politicians apparently believe this massive infusion of new money and credit will "jumpstart" the European economy, which will then produce enough tax revenue and banking profits to finance these new debts. Don't laugh...
Meanwhile, to ensure this action doesn't result in a collapse of the euro currency, the Federal Reserve has agreed to open a "swap" line, which will allow the ECB to fund as much of these new "loans" with dollars as is necessary to prevent a run on their currency.
Will this work? At the risk of dramatic future inflation, will creditors really be willing to accept devalued euros, which offer investors almost nothing in interest payments? I don't think there's a chance in hell.
The reason paper money systems always fail is because they provide no practical limit to credit. New currency reserves can always be printed. Bad debts – credit defaults – can be "papered over" rather than restructured. The stability of paper money systems seems like a virtue. The ability to simply manufacture money – without a deposit or true asset as collateral – is the ultimate financial sinecure. As long as confidence in the system remains, the amount of credit that can be manufactured seems limitless.
Unfortunately, this always leads to more debt. At some point, the whole system simply collapses. The debts become so large, they create an untenable economic imbalance, overwhelming the real economy. And when the credit bubble finally bursts, it doesn't destroy just one or two banks' house of cards. It wipes out the entire system, which is linked together by the currency itself.
Remember... this just isn't about problems in far-off Europe. The U.S. is in the same situation: under huge debts we cannot hope to repay.
In tomorrow's essay, I'll show you my current analysis of the U.S. situation. It's grim. In the meantime, I recommend you protect yourself by holding real assets... like energy, gold, and silver bullion.
Good investing,
Further Reading:
The size of the U.S. government's obligations is so vast it's nearly incomprehensible. "But," Porter writes, "more important than understanding the size of this debt, it's vital that you understand its effects." As long as you understand the chart above, you're way ahead of the crowd. To learn more about what it means, click here: The Most Important Chart in the World Right Now.
"This is how America ends – with the lie that we all can live at the expense of our neighbor and borrow endlessly." Get more commentary from Porter, along with several ways to preserve your wealth, here: How to Protect Yourself from the End of America.
Market NotesTHE S&P 500 IS IN A BEAR MARKET It didn't take long for the market to close below our two major "lines in the sand."
In yesterday's Market Notes, we noted the benchmark S&P 500 was near two vital "support" levels. One was the closing price of the May 7 "Flash Crash." The other was the widely followed 200-day moving average. Yesterday's big decline caused flagrant violations of those two levels.
We don't like being the bearers of bad news or bearish analysis... but we know these violations will cause people to dump their stock holdings... with no regard to the value of the businesses behind those stocks. Stocks are in for rough going.
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