Why Did Silver & Gold Collapse? Mike Maloney and Chris Martenson

Before you watch this video I would like to put out a few of my thoughts on this subject. I feel bad that it seems like now the only time I write about precious metals is when they’re experiencing big down moves, but in honest it is pretty much down moves are pretty much the only thing that’s been going on in the last 2 years.

You can search the Gold tag, at the bottom of this post and look back to see that I’ve never been someone to make outlandish calls on precious metals. So many people feel the need to make such claims, as though an honest assessment isn’t good enough, the one that stands out in my mind comes from about a year ago when James Turk was going on and on about silver being in a “bullish flag pattern” and that it would almost immediately shoot to $70 per ounce. These calls are possible and frankly I do expect big up moves in the future, but just be weary of anyone who is trying to sell you something and always be leery of anyone in any market who acts like they can time explosive moves.

People ask me if in the light of this substantial down move if I have lost faith in the PM story or regretted purchasing precious metals. The answer is very much no on both counts. I want to be clear before I’m accused of being a permabull, I do have scenarios which would cause me to consider an exit strategy from PM’s (and commodities in general). Most permabulls in any sector are bullish regardless of any news and any scenario, I do not fit this description. Here are 3 main events that would cause me to consider leaving PM’s.

1) The US Government balances the budget and begins running trillion dollar surpluses.
2) Interest rates rise 10%+
3) Stop all forms of “QE” which is currently 85+ Billion per month

These are the 3 main factors which brought on a precious metals bull market, so until these change, long term I cannot see how the bull market would not continue. Let me address these points

1) The government has run trillion dollar deficits for the last 5 years, nothing within the economy has changed and I can only assume this will continue at least for the remainder of Obama’s term. This is only part of the story of course, since the real troubling fact is the unfunded liabilities which are between 4-6 trillion per year. Major budget deficits are here for the foreseeable future. Our national debt after nearly 230 years was 4 trillion dollars, after only 8 years of Bush II the debt had doubled and now just 4 years of Obama the debt has doubled again. Just to put this spending in perspective.

2) Interest rates are currently set by the evil banking cartel known as the Federal Reserve, a look back in history shows that when Fed Chairman Volcker raised interest rates to nearly 20% it put the brakes on inflation of the 70’s and contributed strongly to collapse of the gold and silver price. The big difference is at the time the national debt was under 1 trillion dollars, so even if all of that debt were subject to 20% per year interest it would only be a measly sum of 200 billion, or roughly 3 months of QE. This is put into perspective when you look at what the interest payments would be today on our 16+ TRILLION dollars of debt, a massive 3.2 TRILLION dollars per year. This exceeds total revenue brought into the federal government by all forms of taxation. This would mark the endgame for the US federal government.

Another reason interest rates will not rise is because it would collapse the fragile housing market. On the typical home loan a 1% rise in interest rates is $100 per month. So if interest rates went back to historical levels of say 8% this would mean an extra $500 on to the typical mortgage, this is to big of a shock to be absorbed, people could no longer afford housing and therefore prices would plummet.

3) This is the most likely of the 3 to happen, although I think the odds are very strong that it will not happen. The federal reserve bankers, armed with a printing press have worked diligently to re capitalize their wall street co workers (conspirators) after billions of bad loans and cascading derivatives exposure. The economy even with the federal government spending biblical amounts of money, and the fed expanding it’s balance sheet at a record pace is on life support. I see literally no signs of an improved economy in my day to day life, the cost of living is prohibitive, decent jobs are almost impossible, housing is still expensive etc. So I cannot see them stopping the presses during such a scenario.

As I’ve briefly outlined I not only think they won’t do these things, they literally can not do them. Doing them would lead to a total US stock, bond and housing market collapse. I can not envision a scenario where these events do not unfold, if you do please email me [email protected]

To touch on another subject which I find fascinating is market psychology. Not just PM’s but any and all markets. I’m always amazed how people change as price changes, take bitcoin as another recent example. It had been treading along at 4 dollars pretty much since it’s inception, a few big players moved in and it went to 30, then 100, then 200, then 250 and when it hit 150 on the way up the buzz I heard online was deafening. EVERYONE was talking about bitcoins, most of whom had known about it for years, but suddenly they wanted a slice of the pie. It is the same thing I’ve heard from coin dealers, at $40+ everyone and their brother wanted silver, below 30 now though nobody wants it. Silver is still silver, nothing has changed regarding mine supply, money creation or industrial demand yet now it is more than 50% of of it’s 2011 peak and the silence is deafening. So don’t let the markets rule you, I think Warren Buffet is a douche but his “be fearful when others are greedy and greedy when others are fearful” comment is right on the mark. It goes hand in hand with this chart

 

The way to make money in any market is to notice something and act before the crowd does, long or short it doesn’t matter. But these are times when you can use the MSM brainwashing to your financial advantage, you can see things down the road that others simply cannot. So I would wait for the bloodshed to show some signs of letting up and I would treat this opportunity like I treated oil at $35 per barrel in 2007. The miners have been slaughtered and barring absolutely catastrophic events (major bankruptcies etc) I think they’re presenting long term several hundred percent moves pretty much across the board.

Largest Dutch Bank Defaults On Physical Gold Deliveries

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Last week, a rubicon was crossed in the precious metals market as one of the largest banks in Europe defaulted on their gold contracts, and informed their customers there was no physical gold available for delivery.

ABN AMRO, the largest Dutch bank in the Eurozone, issued a letter to their gold contract customers of failure of delivery, and instead will pay account holders in a paper currency equivalent to the current spot value of the metal.

ABN AMRO, the biggest Dutch bank, has sent a letter to its clients stating that they will no longer be able to take physical deliveries of the gold they have bought through ABN. Instead they are offered money at the current market rate for gold. Basically, instead of owning a risk free, physical asset (a gold bar or a gold coin), the bank’s clients now own a monetary claim on ABN AMRO, being exposed to the bank’s credit risk. – Voice of Russia

Over the past two months, there has been a concerted effort by the major Western banks to bring down the price of gold and silver, even as countries like Russia, Iran, and China continue to accumulate the physical metal in large quantities. Like the folly of betting against the stock markets when the Fed is pumping up equities with $85 billion per month, going against the J.P. Morgan silver short machine in the futures market has been a losing proposition for silver bulls.

Interestingly for Europe however, since the Eurozone crisis spread from Greece to Spain, Italy, and Cyprus, the fastest growing currency being purchased by retail investors is Bitcoin. Bitcoin is a digital currency that is out of the control of sovereign central banks, and to this point, has not been manipulated by inflationary monetary policy.

In investing circles there is an adage which says, if you don’t hold it, you don’t own it. Whether it is land, metals, or other hard assets, if it is held in a bank, in a paper instrument, or in a paper currency, the documented owner has management control, but not physical control. And as the world saw last month in Cyprus, the government, or even a major bank like ABN AMRO, can change the terms of a contract at any time, and return to investors asset values set by the bank, and not the customer’s intention.

SourceWikipedia: A source is the start, beginning, or origin of something.

My Thoughts On Silver 12/20/12

I have written several times over the last few years with my investment advice, which is namely buy guns ammo gold and silver. Had you followed this advice you are doing quite well for yourself financially and are more prepared the 95% of the country. I came into the silver game relatively late buying my first silver rounds in the low teens. So I come at this from an entirely different view than someone who either bought in the 40’s or has sat on the sidelines watching.

First, silver has gone from $2 to $50 in a decade, anyone who was early to this game was handsomely rewarded for their patience. So people can say today “silver is a crappy investment” but anything which has been up several hundred % in the last decade of two major market crashes has not been a crappy investment. Some people say that it has topped, and run out of steam here at $30. Seeing as we’ve been here for a year and a half this argument seems somewhat valid. My view of the rise of silver and gold post 2008 is that they assumed their roles as inflation hedges and protection against tail risk, so when the Federal Reserve embarked on endless QE’s and Bush and Obama had their respective giant “stimulus” the world took pause and didn’t know exactly what to expect since such reckless monetary policy had never been undertaken by an economy of such size. Inflation has been constant (as it has been since 1913) but it hasn’t been hyperinflation. As with anything over time even the extreme can seem normal, 10’s of billions in Fed money creation and trillion dollar deficits are now normal and don’t even have an effect on the stock market. The pure crazy of DC and the Fed doesn’t surprise anymore, billion dollar companies going bankrupt is nothing but a weeks worth of news.

So what will it take for gold and silver to head to all time highs? More unexpected craziness. This could take several forms, loss of reserve currency status, war, derivatives implosion, trillion dollar stimulus etc. Any of these things could be a catalyst for rockets in the precious metals sector.

I gave my last Gold and Silver advice in Sept 2011 (time flies) and I stand by every word of it.

The bottom line is this, only you know your financial situation. I think it is paramount to have your preps in order and I see precious metals as nothing but preps for your financial future, they are not necessarily preps post SHTF, so don’t think you can forsake guns and ammo and post SHTF just buy body guards, you will be in for a rude awakening.

I am of the opinion having very carefully observed the market for the last 5 years that major events will happen in a short time frame, until then we are on the slow burn, don’t expect to look online one day and see triple digit silver without major events going on in the world.

ALL Paper Money Eventually Becomes Worthless

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We often read or hear quotes like “paper money eventually fail” and “paper money always returns to its intrinsic value which is zero.” In this article, we provide evidence why these statements are true, backed by research in which 599 different forms of paper money have been analyzed. We explain in an easy to understand way what money fundamentally is, how monetary policies of governments are affecting everyone of us and how gold is first and foremost an alternative form of money (for each and every one of us, not only for an elite). Courtesy of Vince Cate for the incredibly valuable research and David Morgan who referred us to the research materials.

Gold analysts argue that gold is the only form of real money, as it is the only tangible form of money that has survived 5,000 years of monetary history. Against that background, a critical event has taken place on August 15th 1971: former US President Nixon “closed the gold window.” He announced the decision to give up the Bretton Woods agreement (click to see the original version of his speech). What seems to most people a political decision is in reality affecting everyone of us in a way only a minority of people can understand. In fact, it’s touching our lives today more than ever.

President Nixon ended the Bretton Woods agreement, which was a worldwide agreement to use the US dollar as the only world reserve currency. The exchange rates between foreign currencies and the US dollar were fixed at a low rate to stimulate economies worldwide. Moreover foreign holders could redeem their dollars for gold at a fixed rate of $ 35 per ounce. So a certain amount of gold should be held by the US as their reserves. As such, it was a form of a worldwide gold standard. President Nixon however “concluded” it was better for the American citizens to give up the Agreement and – more importantly in our opinion – to entirely cut the tie between the paper money (bank notes and regular coins) and its gold backing, as announced at this point in his speech. The President clearly stated: “Your dollar will be worth just as much tomorrow as it is today. The effect of this action is to stabilize the dollar.” Well, looking at the long term chart of the value of the dollar, it seems that those words were to be taken very, very literally. On the following chart, we see a waterfall decline in the value of the dollar since the 60’s, which only deteriorated after 1971.

long term value US dollar gold silver insights

The President’s story was that the “international money speculators” were to blame. There has indeed been international pressure on the dollar but a far more important reason – at least in our opinion – was  either not told by the President (likely), either not known (unlikely). The fact of the matter is that the US had to deal with an unstable monetary policy which was caused by structural imbalances in the monetary system worldwide. Because of the artificially low exchange rates set in 1944, exports to the US have been rising continuously, leading to excessive holdings of US Treasuries held by central banks (redeemed by US dollars). Foreign holders of US Treasuries and dollars, had to expand their monetary base to “control” the inflation that the US was exporting.

Initially 75% of the US monetary base was backed by gold, while in 1971 that same ratio had reached a lamentable 18%, as appears on the following chart.

Now once monetary stability is given up and government debt is (too) easily created, it’s very hard to leave that path and return to discipline. The path of the least short term resistance paves the way for longer term loss of control. That’s exactly what happened with the dollar in 1971: an unstable monetary expansion in the 60’s questioned the value of the US dollar as a world reserve and its ability to pay the holders of the dollars back in gold (the key principle under the Bretton Woods agreements), which lead to distrust. That’s the real story in our opinion and a much more important one which should have been told the hard working citizens.

gold dollar holdings bretton woods gold silver insights

Now in an earlier article, we wrote that a stable monetary expansion is a condition for economic stability. A fixed amount of Gold compared to the monetary base has a stabilizing effect in terms of economic growth. Since 1971, that important moment in time, the whole world was cut from a gold standard and it hasn’t been restored since then. The fact that the whole world is living for 40 years on a monetary system that is backed by nothing is frightening, given all the above and what you’ll read in the next chapters. Who could realize back then, when listening to the speech of President Nixon, that his measures would be felt two generations later?

What is of particular interest to us, is the viability and the future of a purely paper based money system like the one we have today. The dollar, the euro, the yen are all called “fiat money” because they aren’t backed by anything tangible. In its essence, paper banknotes were only a promise from the bank to exchange it for a certain amount of a real asset (almost always gold or silver). Over the past four decades however, the concept of money has been reduced to the promise, cutting every tie with a real backing asset.  That’s why it’s called fiat money. Do you see what money IN ESSENCE is and what it HAS BECOME?

Taking the above insights into account, you should rightfully worry when looking at the following chart. The chart represents the monetary base in the US (very often mentioned in the blogosphere and internet press, see more monetary and gold charts). The chart shows the situation in the US only, but it is critical to understand that the whole world lives on a paper based money system today. The scale is unprecedented.

monetary base US 1900 2012 gold silver insights

The monetary environment we are living in, is a ticking time bomb.  The evidence is there by looking back in time and see what happened in similar monetary environments. We have been searching for historical evidence for a longer time but only found very recently the type of research we have been looking for. Vince Cate wrote an excellent piece that was presented by the well respected David Morgan during the Silver Summit 2012 (at the end of October). The researcher analyzed 599 paper based money forms over the past millennia. We are privileged to publish the conclusion of the research:

Isn’t it spectacular the number of paper money currencies no longer in circulation?  This analysis includes 599 paper money currencies that have ceased to be used as money.

Of these 599 dead paper currencies:

  • (30%) 184 ended monetary unions, dissolution or other reforms, such as the creation of the Euro in 1999 (and its physical use since 2002);
  • (15%) 94 ended through acts of independence (former colonial states renaming or issuing new currency);
  • (27%) 156 were destroyed by hyper-inflation (caused by over-issuance of paper money by governments and central banks);
  • (28%) 165 were destroyed by war (deemed invalid through military occupation or liberation).

The Second World War saw at least 95 currencies vanish as nations were conquered and liberated. Next to this, however, hyperinflation is one of the greatest calamities to strike a nation.

The figures are clear. ALL the 599 analyzed paper money systems did disappear.

Furthermore, the study pointed out that the median age for all existing “paper currencies” in circulation is only 38 to 39 years. Earlier in this article, we mentioned the 15th August 1971,which marked the end of Bretton Woods and the start of the US dollar as the world reserve currency backed by nothing but promises and trust. That’s 41 years and 4 months ago.

Additionally, we have summarized a couple of valuable insights from the study:

  • The British Pound, as defined in 1560, originally represented one troy pound of sterling silver.
  • In order to finance the wars with both France and Scotland, Henry VIII reduced the precious metal content of the English coins, enabling him to mint more of them, increasing the nominal value in circulation but slowly eroding confidence in the coinage.
  • Paper banknotes were first issued in Britain shortly after the establishment of the Bank of England in 1694.
  • As of January 2009 it takes £82.50 to purchase that same troy pound of sterling silver bought for £1 four-hundred-and-fifty years ago – a loss of value equaling 98.8%.

Given all these insights and the fact that the whole world is using the US dollar as the reserve currency, a failing dollar has the potential to result in one huge global catastrophe. We can’t imagine how serious it can be, as this situation of one global fiat currency system (backed by nothing tangible) hasn’t happened before in history.

Do you see why gold is called “sound money”? Do you see the untold necessity to hold physical gold and silver, to protect from what is coming sooner or later?

Readers looking for more in-depth insights are advised to visit this research page. It contains an incredible amount of insights and historical data related to money and currencies, gathered by Vince Cate.

In closing, we want to share some food for thought for the reader. David Morgan mentioned in his speech at the Silver Summit 2012: “There is only truth in the universe and resistance to it”. Think about it.  If all of the above has empirically be proven, then why do our policy makers continue on this path?