The Gold Market Discussion with Jim Clark, 2-20-15

The Gold Market Discussion with Jim Clark, 2-20-15

by Jim Clark

Gold and silver prices dipped earlier in the week only to recover and end strong, closing at $1,208 and $16.32 respectively. There was some heavy physical buying that came in when gold briefly fell below $1,200 an ounce.

Have you ever heard the old Chinese saying, “May you live in interesting times”? People have debated whether this saying is a blessing or a curse. But, regardless of how you believe, we do indeed live in very interesting times. Just reviewing the headlines this week reminds us of how volatile things are becoming globally. On the financial front things couldn’t look worse.

  • Market Left stunned by Germany rejecting Greek extension proposal.
  • The Fighting still Rages After Ukraine “Ceasefire” Deal
  • Russia Recently Sold Record Amount of US Debt.
  • China Resumes Selling of US Debt
  • Possible US Supply Chain Interruption (Ports)

Things continue to look bad for Greece and Germany to get any deal done and Grexit becomes a more likely scenario. Greece leaving the Eurozone would be devastating for Europe and the common currency. Some estimate the Euro would drop to .90 on the US dollar. With the volatility we are seeing in the currency markets already, this will only add to the uncertainty. Of course, with any Greece exit of the Euro, pressure would mount in Italy, Spain, Ireland, and Portugal to follow because of the crippling austerity in those countries. Here we are again talking about the PIIGS countries. The only difference this time is gold is $1,210 not $1,800, once again a reminder of the buying opportunity right now.

Russia continues to add to the uncertainty by selling the most US debt on record. Russia sold 20% of its holdings of US debt or $22 billion. China also decreased their overall holdings of US debt in the most recent reports.

Another recent development that is gaining a little more traction in the media is the disruption of inventory flows in our West Coast Ports. If these disruptions were to continue, you could see some real impact to already declining US GDP. There are already talks of looming shortages as supplies bottleneck. This supply disruption could lead to a drop in US GDP which will delay the Fed’s ability to raise rates and give the Fed no ammunition as we head into another recession.  This development could force the Fed into more QE as the liquidity crunch continues.

Our national debt has increased upward at more than 9% per year. At that rate the official US national debt will exceed $30 trillion before January 2021, unless our financial system crashes first. Each year the US and many other governments take in revenue, spend it, and then add more debt. The US owes compounding interest on the larger debt. The government pays interest on the loans from previous years, and debt increases rapidly-too rapidly to be repaid without massive inflation. Central banks purchase the debt in order to support the global financial system and prevent the deflationary depression that every banker and politician fears.  So more and more money is printed and infused into the system causing it to become more fragile, more dangerous, and more unstable each year. The consequence of that printing over time is inflation.  You can be sure that governments will continue to spend more money they can collect, and deficit spending will expand with wars and turmoil in the Middle-East and elsewhere. Senator Rand Paul recently stated that, “Once upon a time, your dollar was as good as gold. Then, for many decades, they said your dollar was backed by the full faith and credit of government. Do you know what it’s backed by now? Used car loans, bad home loans, distressed assets and derivatives.” He went on to say that, “The Fed’s book-keeping and monetary policies could lead to serious economic trouble.”  Today the central bank is leveraged three times greater than Lehman Brothers was when Lehman Brother went belly up.

The extraordinary loose monetary policy in the US was introduced in late 2008 when the global economy was in free fall and the US economy and domestic product was plunging.  Today, the US economy has been growing for several quarters, yet the proposal of taking even modest steps toward a normal monetary policy, such as raising the interest rates from zero to 0.25%, has been met with alarm by the Fed. Charles Evans, president of the Chicago Fed and a voting member of the board that determines rate policy, said last month that raising rates too soon would be a catastrophe. Former CEO of General Electric Jack Welch called a possible spring rate hike ludicrous.  The fact that there is even a debate about a tiny quarter-point rate hike tells us that these extraordinarily low interest rates have failed to deliver a robust recovery.  Moreover, these artificially low rates have dangerous side effects as some asset markets reach historically high valuations and investors have to keep reaching for riskier investments to earn a decent return, while savers are deprived of interest income.

This makes gold and silver an important part of your financial insurance when a crisis occurs in the system due to years of quantitative easing, zero interest rates, massive fiat money creation, and deficit spending that has resulted in $200 trillion of global debt. Gold holds its value when other currencies become volatile and rises with inflation. The price of gold and silver now below production cost is a reminder of the value in today’s market.  Call one of our Precious Metals Experts today and learn how to protect your wealth in times of financial uncertainty.

I’ll be keeping a sharp eye on the market, and I hope you do the same!