Lear Capital: The Gold Rally is Over! Not!

Dave EngstromToday, one faithful reader named Clay said it would be nice if he could get a comment from us on the recent wild price action in precious metals.  It is crazy isn’t it?

Let me first reiterate prior expressed beliefs, those being, nothing has changed.  Since 2008 not one – I mean not one single issue related to the financial crisis that erupted has been resolved.  In fact it’s gotten worse. 

Despite reports that unemployment has declined, the true data show that when you consider the discouraged worker, expired unemployment benefits, shorter work weeks, pay cuts and the conversion of full time jobs to part time, the employment situation in this country is worse than ever.

And, not to Grinch the Christmas spirit, but once the holidays are over, thousands of seasonal jobs will vanish and the jobs picture will change dramatically.  Let me give you some examples.  UPS reported hiring 55,000 additional workers for the holidays.  Fed Ex – another 20,000.  Retailers hired hundreds more thousands of seasonal workers as did certain manufacturers and distributors.  Unfortunately for these workers, when the holidays end so do the paychecks.

Granted some of these jobs are held by students and full time workers taking on temporary part time work.  But to think all this hiring had no short term effect on the jobs picture is just head-in-the-sand logic. 

Then there’s housing.  In November a Bloomberg article called the Housing double dip one of the "scariest business stories of 2011."  So, no improvement there either. 

Then there’s debt.  Since 2008 our debt crisis has reached gargantuan levels.  Even worse, it is planned to grow by trillions more over the next 10 years.  All this Super-Committee talk is just that – Talk!  They speak of $400 billion a year cuts in spending but only after they agreed to increase deficit spending each year by more than $1 trillion.  So, in reality, the cuts they discuss are really cuts to exorbitant increases already penciled into the budget picture over the next decade.

They say the real crisis in 2008 was averted.  That being a total collapse of the American financial system, one that could have driven us to third-world status in a matter of months, weeks or even days.  Subsequent actions by the Fed and government to print money saved us.  But, from what?  Enter gold . . .

As the crisis unfolded, gold prices really began to soar, more than doubling.  Governments started buying it, central banks turned from net sellers of gold to net buyers for the first time in 20 years and Gold ETFs sprung up to accommodate the paper gold investor.  In other words, much of the world failed to buy into the "crisis averted" story. 

To the extent gold prices have dipped now to levels below $1600 an ounce, they are still more than double where they were when stocks were at pre-crisis highs.  So begins the cry that the gold bull market is finally over.  Meanwhile, what have stocks done?  The Dow is down 15% from its pre-crisis high, the S&P is down 19% and the NASDAQ fairing slightly better, is down just 5%.  With a recovery like this, who needs a crash? 

The markets have been crumbling right before our eyes but never did we hear from the TV geniuses that the stock rally is over and it’s time to get out.  What we have heard is the perpetual recovery in motion chant.  The louder the chant the steeper the drop in stocks.   Almost as often as we have heard the recovery chant, we have heard the claim the gold rally is over.  Yet, each time the gold price pulled back, during this undeniable gold bull Market, the pull backs proved to be nothing more than normal periods of consolidation and profit taking.  Imagine that!  The gold bull market has now spanned more than a decade and more than once someone was compelled to take a profit.  The nerve!    

Now look!  As we exit our trance, it’s clear we should have believed the opposite of what we heard.  We shouldn’t have bought more stocks and we shouldn’t have sold our gold.  Now the chants have reached a crescendo.  Enter Europe . . .

Given our own debt crisis has only been a futile exercise in kicking the can down the road, the end of the road is getting closer and closer.  What that means seems to remain a mystery to most, except those like central banks who are buying gold.  It means, some day our debts will be so large that we simply cannot pay them.  It means default or print more money.  If we default, the dollar becomes worthless as do your dollar denominated investments.  It would happen fast. (My opinion) 

If we print more money to pay debts, as we have been doing, inflation begins to steal dollar value.  While it may be a slower death, the end is inevitable and the same as default.  Eventually, the dollar becomes worthless as do your dollar denominated assets. 

If you remain in denial and believe debt is something we will forever be able to deal with tomorrow, then what I have to say about Europe won’t matter.  If you believe or perhaps are starting to believe the end of the debt road is approaching, the truth about the European debt crisis will scare you out of your mind.  Caution you may be compelled to do as central banks are doing and buy more gold.  Don’t say I didn’t warn you.

Here’s some fun facts about the European Debt Crisis and your money.

1.  U.S. exposure to bad European debt is as high as $4 trillion, more than 6 times what vanished in the Lehman Bankruptcy.  A bankruptcy that almost crumbled the entire global financial system.

2.   A Greek default alone, could wipe out $1.6 trillion of U.S. wealth.

3.   Fitch Ratings, a premier credit ratings agency, reports that,"About half of the assets in the 10 largest U.S. prime money-market funds are invested in European bank debt."  That means the cash in your money market checking account could be at risk of vanishing in a European Debt Default. 

4.   Certificates of Deposit and savings accounts are FDIC insured.  Money Market Funds are not. 

5.   If the Euro crashes, billions of dollars in U.S. pension funds could be wiped out.  Does your pension Fund own European Debt. 

6.  Three of our largest U.S. banks have an estimated total of more than $60 billion of exposure to European debt.  Citigroup, JP Morgan and Bank Of America. 

This is all just the beginning of the story on the European Debt Crisis and your money. 

Ironically, it could be the default of Europe that crashes our own dollar.  I’m only speculating, but if Europe falls and takes the Euro with it, the Fed could be compelled to launch the mother of all QE programs.  Maybe this is why one analyst predicts the end of the dollar by 2013. 

Now, all this said, do you believe for a second the gold rally is over?  ———  I didn’t think so.  If you feel so compelled as to request more information on Gold and the global debt crisis, visit LearCapital.com today and request our latest special reports and world gold guide.

And if you have yet to receive your FREE End of the Dollar Video from Lear Capital, click here to get your free video today.

 

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