Central Planners Are About To Completely Lose Control

Today James Turk told King World News that “... central planners have hijacked the world's monetary system,” and they are about to completely lose control.  Here is what Turk had to say:  “After a week like last week, Eric, I always ask myself what if anything am I missing?  So I spent a lot of time this weekend going through the basics, and I have concluded that the premise upon which I have been recommending the ongoing accumulation of gold and silver still holds.”

“Currencies are being mismanaged, and gold and silver are the best protections against the erosion of the purchasing power of national currencies.  Consider some of the things that happened last week.  Most commodities resisted the selling seen in the precious metals.  Crude oil was little changed on the week and near multi-month highs.

The G20 meeting ended as all of them do, with rhetoric that is high-sounding but totally void of substance. Regardless what the G20 leaders say, we all know that there is an ongoing currency war being fought which started in 2008....

“Japan may have fired the latest salvo, but there are dozens of countries trying to debase their currency in an attempt to gain an edge in shrinking global trade.  This is taking place as economies around the world weaken, with some dipping into recession - and some like Greece and Spain actually in a depression.

The yield on the 10-Year Treasury is still around 2% and threatening to go higher in spite of all the Fed buying, and buy they (the Fed) did last week.  The Federal Reserve actually monetized $50 billion of debt during the week.  This latest round of creating dollars out of thin air has taken the debt it monetizes to a new record high. The Fed is thereby continuing the expansion of its balance sheet, which is now rapidly approaching $3.1 trillion.

And here is the key vulnerability, Eric, the US government can't afford a normal 6% interest rate, let alone one approaching double-digits which is really what is needed to offset the present risks that come with holding dollars.  A 1% increase in interest rates adds $160 billion to the US government's $16+ trillion debt load. 

Each 1% increase in interest rates is about 6% of the US government's annual revenue.  So a 4% jump in dollar interest rates would consume almost one-fourth of the US government's annual revenues, which in turn would cause it to borrow more, leading to higher interest rates and vicious spiral ending in hyperinflation.

In fact, given the ongoing bullish backdrop for the metals, we may be reaching the tipping point when the central planners completely lose control.  They are so fearful of that event, they attack the one market over which they have the most influence, and  which is also the one market that will send signals to the world most friendly to the central planners' cause - they trash gold.  And they do it by selling paper derivatives.

On Friday there was a headline saying “Gold futures tumble in wake of Fed's Empire State data.”  I mean, what does that have to do with gold?  All it says to me is that the central planners were using every news release last week as cover for their interventions in the market to make it look like investors were driving the price of gold and silver lower so government interference would be somewhat cloaked.

Who thinks this drop is going to dissuade Chinese buyers, who are now back in the market this week after being outré last week for their New Year celebration?  Who believes that the central planners are going to manage currencies to preserve purchasing power?

So why should the precious metals decline in a week in which the underlying fundamentals for gold and silver have become even more bullish?  It is more of the same, Eric.  It is the ongoing war between sound money and the central planners who have hijacked the world's monetary system.  Last week smacks of desperation by the central planners - they are losing control in so many areas that they want to keep the most important barometer from blaring a warning sign.  So they bomb gold.

Importantly, gold and silver still remain way undervalued.  So when I look at last week, I take the opposite view of most people who own gold and silver, many of whom wince when they think about last week.  I see it as an opportunity to do what I have been recommending for 12 twelve years now, which is to continue accumulating gold and silver on a cost-averaging plan because they remain good value.  Gold and silver will get you through the train wreck coming at the hands of the central planners.

I thought the low for the year in gold and silver would be made the first week of January.  Interestingly, last week gold made a new low for the year, but silver did not.  It is a potential bullish divergence between gold and silver, which often signals that the metals cannot be pushed any further.  Bullish divergences like these often mark a turning point.  In this regard, it is encouraging that both both and silver traded higher yesterday in Europe, so we will watch to see how this bullish divergence develops.

My colleague Alasdair Macleod recently put it very simply in a letter published in the Financial Times.  He said, ‘If you expect lots of monetary expansion over the coming years, paper money's value can be expected to decline.  If you expect governments to stop trashing their currencies, it probably won't.  That is what the future price of gold will reflect, pure and simple.’  So let me ask KWN readers one question, do they expect the central planners to do the right thing and protect the value of the national currencies they manage?”