This post is adapted from analysis which appeared last week in The Strategic Planning Group.For those of us watching the gold markets—that is, those of us anticipating the collapse of the euro and the eventual collapse of the dollar—the last week has been a scary ride: Gold has fallen over 8.6%, from a high of $1,730 on December 7 to $1,580 on December 14.
WTF???, I can practically hear everyone say. The fundamentals would point to gold being a safe haven play—it should not be falling: If anything, it ought to be rising.
But a fall of 8.6%? In a week?
The first thing that pops into my head is, Don’t Panic!!
The second thing that pops into my head is, This is to be expected—and is only a temporary pullback.
Let’s take the second notion first: The reason the fall in gold is to be expected—and the reason it might well fall further—is because of the euro.
As is becoming increasingly obvious, the eurocrats trying to sort through the European Debt Crisis don’t have a clue as to what they’re doing. They’re meeting—constantly—and wringing their hands—constantly—but they’re not actually getting anything done: They’ve become deers in the deadlights.
The obvious solution which would calm the markets and restore a semblance of normalcy would be for the European Central Bank (ECB) to act as the “lender of last resort”—that is, to print the eurozone out of trouble, just like the Federal Reserve has done with its iterations of Quantitative Easing.
Caveat: I’m not saying this is the right solution—I’m saying that this is the obvious, expeditious solution which would calm the markets.
But the ECB is not doing this—and apparently won’t be doing this—mainly because of German pressure: The ECB is sitting tight, not printing, letting the debt situation spiral out of control as the European Commission tries—and fails—to come up with a Grand Solution.
How is the debt crisis spiraling out of control? Well, sovereign debt yields are rising, to the point where Greece, Ireland, Italy and now Spain’s debt is becoming impossible to service—even as major funding requirements begin to loom on the calendar; the February–May period of next year is looking particularly ugly, on a Continent-wide basis. In fact, even the Germans are having a hard time selling debt, as was seen by last week’s failed auction of €6 billion worth of German bonds: They only managed to sell €3.6 billion, at a paltry bid-to-cover ration of 1.1. And this is the Germans we’re talking about!
This leads the markets to realize that it is only now a matter of time before the euro breaks up. The very reason that the ECB is not doing its own version of QE—fear that the euro will weaken irretrievably—is the very cause for the irretrievable weakening of the euro. The proposed Stability Pact that the United Kingdom famously vetoed last Friday—and which so dominated the news for a few cycles—was a side-show: Everyone realizes that the euro is through.
Thus the euro is falling—hard—against the dollar and the other major currencies. Consider the following two charts—the first of the euro over the last three months:
|Click to enlarge.|
|Click to enlarge.|
This is not a coincidence.
We have to remember the situation we are currently in. Apart from a sovereign debt crisis, we have a financial crisis in Europe: The banks over there are in terrible shape. No need to go through a list—they are teetering, one and all.
But then so are the American banks.
Because of this, when the euro falls against the major currencies, banks around the world are forced to shore up their capital requirements: The falling euro hits their capital tiers, forcing them to sell off assets in order to cover the hole in their balance sheet.
What commodity or investment has been rising steadily over the past three years? What asset class is the only sure bet against currency collapse?
Gold, obviously—and gold is fungible with any currency, instantly.
Hence what we are seeing—and what we will see again—is major players exiting gold positions in order to cover holes in their balance sheets.
In fact, from here on out, every time there is a big fall in any major currency, we can expect an attendant fall in the price of gold and silver.
Right now, we are seeing this in the eurozone: The euro broke through that magic $1.30 barrier—and gold fell 8.6%, like a rock.
This is the bad news.
The good news? These falls are technical, predictable, momentary, and so should not be cause for panic—
—rather, they are an opportunity: They are the time to buy.
Why is it a time to buy precious metals? Because the fundamentals of the situation are unchanged: The major countries are over-indebted, with over-leveraged banks teetering on the edge of insolvency. The only solution is for currency devaluation, in order to cut the real cost of these massive loans without causing an outright default or bankruptcy.
Gold and silver will counteract this currency devaluation. Thus gold and silver are the hedges against what is coming.
However, on the road to currency oblivion, inevitably we will see pullbacks in gold. These pullbacks will be because of two reasons: One is speculators—who are obviously riding the precious metals bandwagon—who will periodically get spooked and decide to cash out their winnings.
The second reason for these jolting pullbacks in precious metals will be because large institutions will need to cover their capital requirements, in the face of the collapse in the currencies.
Such as what is happening now.
When this happens, you have to remember two things: One, it is momentary, and two, it is a time to buy.
Why should you continue buying gold and silver, even after a fall of 8.6%? Because the fundamentals have not changed: The nations are all overindebted, and the banks are all insolvent. Devaluation—or collapse—are the only outs for this situation. And in either case—devaluation or collapse—gold and silver will be the only safe haven.
Think back a year: On December 14, 2010, the London afternoon fix was $1,395. On December 14, 2011 it was $1,600—a $205 rise, corresponding to just shy of 15%.
Has any other asset class risen 15% in a year? Has there been a galloping 15% inflation rate (according to official indices) over the past year? More to the point: Has the European situation been solved? Are the European banks hunky-dory?
To all these questions, the answer is one and the same: No. We are pretty damned far from hunky-dory. And in the absolute best case—that is, barring any catastrophic crisis, such as the (likely) break-up of the eurozone—we’ll continue to muddle along, while the central banksters continue their race to the bottom via stealth devaluation.
Thus gold and silver remain as sound an investment in the current macroeconomic climate as ever.
Remember that no investment ever goes up in a straight line—except of course Bernie Madoff’s investment funds. And we all know how that ended.
So to repeat: Don’t Panic!!, and also, This is to be expected—and is temporary.
I’m having The SPG Week In Words on
Sunday, 7pm EST[Already took place, and was a hell of a lot of fun; the recording of this broadcast and previous ones is available to SPG Members]. This is a regular feature of The Strategic Planning Group; here is the link to sign up[link now inactive]. If you’re interested, check out the SPG preview page.