Gold Still On Its Way To $5,000
by: Marvin Clark
August 23, 2011
To summarize, the reasons I believed gold would rise to $5,000 an oz. included the following:
- The US would lose its AAA credit rating within two years
- A global recession would find developed nations unable to service their debt
- The Chinese economy is not large enough to prevent a global slowdown
- Financial insolvency would begin appearing at the state and municipal levels
- US debt would be abandoned by foreign investors
- Corporate profits would continue robbing the economy of disposable [wage] income
- The US dollar would continue to lose value relative to gold
- Gold would become a de facto world reserve currency
- New wealth in the Emerging Markets would push outward gold’s supply/demand curve
- Social unrest and political instability would make gold a safe haven for wealth
- America’s only long-term remedy for its financial woes is pursuing a transformative “next new thing.”
On Friday, August 19, 2011, gold closed at 1853.10. That’s a 51% increase. The week before, the CME hiked its margin requirement for gold by 22%. It had little effect on the yellow metal. Expect other margin hikes to follow although doing so will only cause greater consternation. On August 17, Reuters reported that Hugo Chavez, the elected leader of Venezuela, announced the nationalization of the entire Venezuelan gold industry. This move was on top of a Bloomberg story on Venezuela’s repatriation of 99 tons of gold being held by the Bank of England.
On August 1, the BBC reported that South Korea's central bank purchased 25 tons of gold in June and July, its first gold purchase in 13 years, since the 1997-1998 Asian financial crises. This is viewed as diversifying away from the US dollar.
Gold imports by India, according to the World Gold Council, the world’s biggest consumer, amounted to between 950 metric tons and 1,000 tons, a record.
As of last May, the Hong Kong Mercantile Exchange opened for business and began trading 32 Troy Ounces Gold Futures and 1,000 Troy Ounces Silver Futures contracts. Around the world, gold bullion is getting the green light to go higher.
Many of my observations have come true while others are moving in the direction of becoming true. US treasury debt is the only portion of my analysis that has gone in the opposite direction – to date.
What would make me feel obligated to change my forecast on gold? If true price discovery were to reenter the marketplace and real dollars stop servicing worthless assets. Also, the return of robust GDP growth, which would generate an increase in tax receipts, thus reducing budget deficits.
And yes, we need to address reasonable and significant spending cuts on needless military and non-military programs and outdated foreign commitments. Playing policemen to the world is not in the financial cards moving forward. Those who know the cost of everything and the value of nothing should not be allowed to lead America during these turbulent times into the 21st century.
Only then will the cost of and the return on capital, adequate labor compensation, and sustainable expansionary GDP growth policies cancel the need for investors to seek protection from precious metals.
We are going to slip into a recession later this year. The arithmetic cannot be any clearer; cut spending and growth will fall. The Empire State index reported on August 15, fell nearly four points into more deeply negative territory at minus 7.72 in July. And the Philadelphia Fed survey shocked everyone with a decline to a minus 30.7 from a July gain of 3.2.
Goldman Sachs has reduced its forecasts for full-year 2011 GDP growth to 1.5% from 1.7%. JP Morgan has reduced its 2012 GDP forecast to a sub 1%. Bank of America (BAC) announced it is cutting 3,500 jobs by the end of the third quarter. Further restructuring will grow that number to 10,000.
The third decline in four months suggests the depressed housing market won't help the U.S. economy recover this year.
Home sales fell 3.5 percent in July to a seasonally adjusted annual rate of 4.67 million homes. This pace is below last year’s 4.91 million home sales, which were the weakest sales figures in 13 years.
Next month is the two-year anniversary of the official end of the Great Recession. Meanwhile, impotent minds are gathering in Jackson Hole, Wyoming, as the Congress and President Obama vacation. Last year in Wyoming, Quantitative Easing II (QE II) was announced. There will be no QE III.
Across the pond, French President Nicolas Sarkozy and German Chancellor Angela Merkel have rejected the idea of issuing Euro bonds guaranteed by all their members. With the European Central Bank (ECB) version of TARP at $300 billion euros and debt exposure of several trillion euros, unbelievably, Europe’s problems are even greater than the US.
Furthermore, Merkel and Sarkozy share the same delusional infection gripping Washington DC; that debt restructuring and haircuts taken by bond holders of private debt, the admission of insolvency by institutions and their accomplices in high crimes in high finance followed by the dissolution of firms and the incarceration of perpetrators who broke the law, can be avoided using tax receipts, spending cuts, and increased competiveness. Solving Part B of the 2008 financial crisis requires going back and solving Part A.
Vice President Joe Biden was dispatched to China to tell US lenders that the vigorish will continue, on time, on our downgraded sovereign debt. His mission also is to inform our creditors that paying them is a “big f#@king deal.” Never mind the 70 – 80 members of the Lower House, or the sizable minority in the Upper House of Representatives in government, or the several declared Presidential candidates running in 2012, or the influential talking heads, that think it’s no big deal to default on the Chinese.
When congress reconvenes in September, its unmanly variation of suicide-by-cop – let the super committee cut spending and if it doesn't and we don’t have the nerve to do the right thing and cut spending ourselves, automatic across-the-board cuts will kick in – might be interrupted by another hostage taking episode for the government to continue operating as the fiscal year-end is 9/30/2011.
That upcoming insanity (doing the same thing over and over while expecting a different outcome) should be good for a one day drop of 1,000 points on the DJIA. October SPY puts anyone?
I do not feel a need to correct my conclusion regarding gold reaching $5,000 an oz. as the world recalibrates itself for the 21st century with current events. Last century’s powers-that-be can pretend the recalibration will be painless; however, the day of reckoning for our broken financial and political systems grows closer. By the way, silver will continue to rise as well.
This purgatory of economic stagnation and contraction and fiscal austerity and stimulation, brought to you by political ineptitude and myopia, will last in America until the 2012 elections; then things will worsen. The ramifications of any and all poor choices will reverberate throughout the US and global economies for years to come.
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