Bank & Government Collapses, Gold Spike Coming

With continued volatility in major markets, as well as gold and silver, today King World News interviewed James Turk out of Europe. Turk told KWN, “if the central planners try to paper over the insolvency of governments and many of the big banks with more money printing, then gold, silver and the mining shares will rocket even higher than I can imagine.”  Here is what Turk had to say about the recent action:  “The significance of the big jump on Friday in gold, silver and the mining shares cannot be overstated, Eric.  It was very important for a number of reasons.  First, it was a continuation of the trend we spoke about on Thursday.  The precious metals and the mining shares are showing clear, independent strength.”

“In other words, even though stock markets around the world the past few weeks have generally been in a nosedive, gold, silver and the mining shares are climbing higher.  Independent strength like this is normally very bullish, and it bodes well for the precious metals and mining shares in the weeks and months ahead.  It also suggests that, like last year, this summer is going to be another good one for the precious metals.

Second, the big gains for the precious metals and mining shares on Friday are very rare.  Gold was up 3.7% in just one day, and the XAU Index of mining shares climbed even more.  It rose 5.8% from the day before.  We haven't seen big daily percentage gains like these since the precious metals started climbing after the Lehman Brothers collapse....

“Remember, from those lows back in late 2008, gold and the XAU Index eventually more than doubled in price, and the HUI went up more than four times.  It was from those lows where silver began its meteoric five-fold increase when it nearly touched $50 last year.

I think there are many reasons to expect history to follow a similar pattern with the precious metals climbing much higher from here, Eric, especially given how quickly the sovereign debt and banking crises are worsening.  The Economist magazine described this relationship very emphatically and with some humor:  “Banks and their governments are propping each other up like Friday night drunks.” 

That's pretty funny, but the unfolding crises are getting deadly serious.  The reality is that their joint debt binge is over.  Governments have run out of money, and both they and the banks can no longer increase their leverage.  I am talking about insolvency and many broken promises on the near horizon because they cannot prop up each other forever, which brings up the third point that I take from Friday’s market action.

Note how silver underperformed gold on Friday. Silver only rose 2.7%, which of course was a big 1-day jump but not as big as gold.  This underperformance was another unusual event for a day when the precious metals scored big gains, but it is what one would expect in an unfolding fear-event like we spoke about on Thursday.

Silver didn’t fall on Friday like copper and a lot of other commodities, but silver's underperformance compared to gold reflects the fact that silver is still influenced by the global economic outlook, rather than the way I see it, which is that silver is a substitute for gold.  In other words, both 56 ounces of silver and one ounce of gold enable you to exit the fiat currency system, and silver is the more undervalued of these two precious metals. 

But the important point that KWN readers need to consider is that silver underperformed on Friday because we are moving into a fear event.  Driven by fear of a global melt-down, investors went headfirst into the safety of gold, the world’s premier monetary metal, so again, we did silver underperform just a bit.

I’ll of course add quickly though, Eric, that I am not bearish on silver.  But the gold/silver ratio may not fall at the same pace like it did when these two metals started climbing after the Lehman collapse.  It may be a while before silver starts outperforming gold, but it will eventually rise faster than gold when investors better understand how undervalued silver is relative to gold.

Now over the next few days, Eric, gold might test $1600 while silver tests support at $28.  It is not unusual for them to take a breather after Fridays’ big gains, particularly given that London is closed until Wednesday.  But as the time passes and we move further away from last month’s low prices, the odds improve that another important low is behind us in this decade-long precious metals bull market. 

In time, last month -- and indeed this whole correction over the past several months -- will become a distant memory just like the price correction and the low in the precious metals reached in late 2008 after the Lehman Brothers collapse. 

But here's the important point.  In contrast to the rush into liquidity that was the primary factor driving all markets during that collapse back in 2008, it is looking more and more likely that this time we are headed into a fear event.  It’s a scary prospect, Eric, but every investor’s fear can be lessened by knowing that they own physical gold and physical silver. 

There is one last point I would like to leave with KWN readers.  We do not need any QE to make gold soar if we are entering into a fear event.  But if the central planners try to paper over the insolvency of governments and many of the big banks with more money printing, gold, silver and the mining shares will rocket even higher than I can imagine. 

After all, when fear of losing your money in a banking collapse and government insolvency becomes the foremost driver of investor thinking, the sky will be the limit for gold and silver.”