Egon von Greyerz | Gold $5000-$10000?

This week in our musings, we report on some thoughts of others that we have found interesting (emphasis added throughout is ours….

• Eric King tells it like it is…

• Chris Martenson opines…

• Egon evaluates…  $5,000 – $10,000 gold?

Eric King, straight-talking as usual  (from King World News)

Mainstream Media Still Against Gold

June 7, 2010

As Bill Fleckenstein pointed out in his interview on King World News, the same people who were unable to recognize a bubble in real estate or stocks are now warning that there is a bubble in gold. I want for you all to learn to embrace this ignorant skepticism from the media because it is the best friend of a bull market and indeed gold is in a bull market.

Interestingly enough the bullion banks are now record short gold as Ted Butler noted in his interview (again on King World News) this last weekend. So we have a parade of people now calling gold a bubble and banks record short.

History would indicate this is about the time that the bullion banks will smash gold and pick the pockets of the large and small speculators as the price plunges. For readers, yes this may happen, but I would also remind readers that Jim Sinclair has pointed out in past interviews (on KWN) that these bullion bank traders have an arrogance about them. They believe “They are the market.”

As Mr. Sinclair has also pointed out, the traditional COT loses when these arrogant traders are up against a country. Well, it seems that countries are not only buying, but well heeled investors from all over the world, particularly the EU are also buying and this at a time when central banks are no longer net sellers.
Where does the gold come from to satisfy the insatiable demand now that the central banks are no longer willing to sell? I do not know and quite frankly don’t care. What is of more interest to me is the question of whether the bullion banks going to be able to smash gold or not, or will they have to retreat towards $1,400 to $1,500?

This is fascinating to watch but very dangerous to trade, so unless you are a seasoned professional stay out of the futures market or any type of leverage and simply purchase gold for delivery. Continue to accumulate gold on all pullbacks and dollar cost average into that weakness because we are in phase II prior to the mania.

Gold is your insurance and will rescue you when there is a monetary reset such as the one Felix Zulauf described in his recent interview on KWN (that I discussed in the last Weekly Wanderings Felix Zulauf on Inflation vs Deflation: Ed).

Here is a link to a piece that Steve Saville sent to us and it is an outstanding read. It deals with two recent articles in Barron’s and why they are gold bullish.

Eric King KingWorldNews.com

Chris Martenson Opines…

In the remarks below extracted from his paid newsletter, Chris explains what is underlying some recent public pronouncements….. I have great respect for his insights and strongly recommend you check out his site for yourself.   http://www.chrismartenson.com/martensoninsider

The Pressure Builds

Sunday, June 6, 2010, 6:10 am, by cmartenson
Well, what a lousy week in the stock and European bond markets that was. The S&P recorded its first weekly close below the 50 week moving average (wma) in a year.
It now seems probable that the rally over the past year was an ordinary bear market rally – albeit a long one fueled by the trillions of dollars in stimulus and thin-air injections – is over and done.

So the question is, what next?

The G20 Shocker

As pronounced as the stock market volatility has been, there are much bigger stories out there right now.  The biggest came out this morning and told of a pronounced departure of policy in the G20 that has far-reaching implications:
G20 drops support for fiscal stimulus
June 5 2010
Finance ministers from the world’s leading economies ripped up their support for fiscal stimulus on Saturday, recognising that financial market concerns over sovereign debt had forced a much greater focus on deficit reduction.

Wow. That’s an enormous departure from past policy and creates an enormous gap between major countries, primarily the US, UK and Japan on one side and everybody else on the other.

Consider that the US and the UK are currently running deficits well north of 10% of GDP and are politically committed 100% to continued stimulus as the means to stoke domestic demand.  But along comes the rest of the world saying that they are now committed to living within their budgetary means.

Worse, these converts to fiscal sanity have even thrown in the towel on the very idea that stimulus works:
The communiqué of the meeting made it clear that the G20 no longer thought that expansionary fiscal policy was sustainable or effective in fostering an economic recovery because investors were no longer confident about some countries’ public finances. “The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability,” the communiqué stated.
“Those countries with serious fiscal challenges need to accelerate the pace of consolidation,” it added. “We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions”.

Doubting the value of expansionary fiscal policy is the same as saying, “Keynesianism doesn’t work!” I welcome their belated discovery, but am also shocked by it.  Is it possible for economic sanity to break out across the world?
This is a profound event, the importance of which cannot be overstated.

Beggar Thy neighbor

In the 1930’s, during the depression, the practice of competitive currency devaluation as a means of lifting exports was known as the “beggar thy neighbor” policy.
Each country would seek to devalue its own currency because that would make its exports seem cheaper to the rest of the world and thereby lift their domestic industry and job growth.

So we keep our eyes peeled for any and all efforts to systematically weaken a currency to help our exports. Here’s one:
“I see good news from the current euro-dollar rate,” French Prime Minister Francois Fillon told reporters in Paris June 4. President Nicolas Sarkozy “and I have been saying for years that the euro-dollar rate didn’t reflect reality and was penalizing our exports,” he said.

Where Mr. Trichet is extremely happy to bring a weaker euro to his countrymen and colleagues, the US is going to find that the policy makes things much harder on its export markets and corporate earnings. But the worst of it is that where the US is seeking to stimulate domestic demand at any cost, the rest of the G20 is seeking to repair their domestic budgets. This will create enormous difficulties for the US to continue on its own path of $1.5 trillion deficits.  After all, who will continue to buy US debt when European budgets are being run on a much more sound and sustainable basis?  This is not yet clear and if it turns out that the US cannot fund its deficits, then the US will be forced into austerity by circumstances.

From The Outside In

For now, the world financial markets seem to complacently accept that the US represents the safest and most liquid market in the world.  Well, the liquid part may still be true, but the safest part just took a big hit with the G20 now offering the first glimpse of fiscal sanity we’ve yet seen during this crisis (or in decades).

Where the G20 has now seen that false growth spurred by growing government indebtedness is both fake and temporary, the US has yet to arrive at that same conclusion.  This means that the US will be continuing on a reckless path of monetary printing and deficit spending while a large portion of the rest of the world bites the bullet and begins to live within its means.

This means that the US markets are no longer the safest.  There’s a problem here and I only wonder how long it will be before the bond and dollar markets wake up to that fact.  It may be a while, but eventually they will and it will be a sight to behold.

Which means that the whole concept of “from the outside in” is in play. The trouble began in Greece, progressed to the center of Europe, and will someday arrive in the US markets.  It is virtually unavoidable at this point and the G20 announcement moves up the probable date.

Gold

My view of the dollar is that it is the worst currency out there…except for all the rest.
Not to be boring or anything, but gold performed beautifully during Fridays 300+ point Dow rout.  Instead of viewing this as a vote for gold, I viewed this as a vote against fiat currencies.   There is real fear out there right now that all of the various fiat measuring sticks are not as desirable to hold as compared to gold.

Certainly there was a bit of market fear playing into the price, but I suspect there’s more than a little concern over either the euro or the dollar as legitimate stores of wealth. The former because it might break apart and the latter because the US has said it will print up as many as needed to keep domestic demand artificially elevated.

Note that gold, a monetary metal, went up on Friday but that silver, an industrial commodity, went down.  This is what we might expect from a low growth environment that could lead to additional monetary uncertainty. The industrial metal goes down, the monetary metal goes up.

As an aside, my two-thirds to one-third split between gold and silver has always been partly a hedge; gold will perform well if the monetary system breaks down and silver will perform well if the economy takes off like a rocket (mainly due to severe depletion issues and the fact that silver has no substitutes for several critical applications). While silver still has some utility to me as a potential future monetary metal, I see that as further off and less certain than the story for gold.

We note that, along similar lines, the following article appeared in the China Daily of June 1.

West moving toward deeper financial abyss

By Lau Nai-keung
Published:6/1/2010

A year and a half after the first shock waves of the global financial tsunami, Western economies — including the US and the European Union (EU) but excluding Australia and Canada, which are big natural resources exporters — are marching toward economic failure. I base this assertion on just one thing: Their governments are afraid to do the right thing.

With the full knowledge of what their fatal policies will lead to, their politicians do not seem to have the political courage to rally the support of the people to accept the necessary pain and make the sacrifices as preached by the Washington Consensus. Instead, Western governments have taken the other direction.

Much attention has been focused on the stagflation effect of spawning banknotes from helicopters, a metaphor for monetary quantitative easing.

That was bad already. Worse, the money has been given to a bunch of rich crooks who created the present quagmire in the first place. This is more than robbing the poor to pay the rich.

It is a typical case of grave moral hazard, especially in the US, where those who follow the rules are being punished for the benefit of those who destroy them. The world is now turned upside down, and it clearly spells trouble.

Greece shows that the EU has fared even worse. The country’s public debt is 125 percent of its GDP. It was accumulated through the same old protracted over-spending channel. The 110-billion-euro bailout package from the EU amounts to half of its GDP. But when the necessary austerity measures such as scrapping the double pay and tax increases were introduced, they triggered a national strike and millions of Greeks took to the streets in protest that resulted in three deaths.

The most corrupting result is that the happy go-lucky Greeks got what they wanted, setting a bad example for other EU member states, especially the PIIGS (Protugal, Italy, Ireland, Greece and Spain) countries.

The US cannot help many of its state governments from going bankrupt despite having central economic authorities. The EU does not even have that. So, we are likley to see many more ugly conflicts and demonstrations.

Just one trend has been stable since the financial tsunami: Western government bond yields have been rising relentlessly. Which means the government bond market is now heading toward a collapse.

Western governments cannot help it, because Western politicians want to please their voters, and the only solution left, as many pundits have said is more borrowing from Peter to pay Paul, more smoke and mirrors, and more lies. In today’s globalized economy, the Chinese are therefore the designated international Peters who can always be forced to pay the Western Pauls.

Let us take a look at the US. Its government and agencies have by far the largest stock of interest-bearing debts of $15.6 trillion, and the greatest indebtedness to the rest of the world at $4.8 trillion. The US blames the over-saving in emerging economies, especially China, and their under-valued currencies, for this predicament. And the solution is to pressure China into revaluating the yuan, a position echoed by the EU.

If the US economy is still in negative saving, which is inevitable with its trillion-dollar fiscal deficit, the large part of the shortfall still has to be made up by multilateral trade deficit. Granted that a revaluated yuan will reduce its deficit with China, but this has to be compensated by deficits with other countries.

Apart from hurting China’s growth, revaluation of the yuan is not the way out of the woods for Western economies.

There are inevitable ramifications for this borrowing-money, borrowing-time policy because the production of debt cannot forever replace the production of goods and savings, and no country can borrow its way to prosperity. Higher bond yield means higher interest for mortgage and car loans, which apart from delaying recovery, will also mean a devaluation of the existing stock of bonds and houses, making the life of many governments and individuals even more difficult.

Yes, governments can and will default their debts, and more are expected to default in the next one or two years. And should the US and the EU bond market collapse, they and their economic troubles will be too big for other countries to save them.

The Western economies, having spent well beyond their means for years, should spend less for some time to pay off the debts, and should take this opportunity to change their lifestyle and consumption habits drastically. Their governments should punish the financial fat cats and protect the small guys from desperation. It now seems that more Americans and Europeans will learn from the examples of financial fat cats and the demonstrating Greeks.

Quantitative easing has produced two decades of sluggish economy in Japan despite the robust external environment. External conditions are not that favorable now, and the whole situation should be worse. Factoring in moral hazard as well as social injustice, that implies political and social turmoil. The US and EU are destined to head south, at least for a while. Some pundits are talking about a double-dip this year, and in the longer run, we can expect many more dips.

The author is a member of the Hong Kong Special Administrative Region Basic Law Committee of the National People’s Congress Standing Committee.

Egon evaluates…. $5,000 – $10,000 gold?

Egon von Greyerz of Matterhorn Asset Management in Switzerland is no stranger to these pages. In the interview below he discusses with a panel on CNBC his outlook for gold…