Jim Sinclair | Greece is merely the first in a chain of sovereign defaults

This week in our musings, we have some thoughts of our own – and thoughts of others that we have found interesting….

So you’re wondering if gold’s in a bubble?

One current point of interest is investing legend John Paulson’s recent establishment of a gold fund. Several commentators have pointed out that although he has put in $150 million of his own money, he has managed to raise only $90 million so far from other investors. They see this as a negative indicator of the status of gold as an investment.

WE say it’s great news!! It means that the mainstream has a long way to go – how mainstream commentators can argue that gold is in a bubble is beyond me. If Paulson had started a tech fund in 1999, he would have raised $100 billion in a heartbeat, as Fred Hickey of the HighTech Strategist pointed out on Financial Sense Newshour this week. Now, that’s what a bubble looks like, folks!

Diamonds are forever…. This week Eric King interviewed Pierre Lassonde again. We cover the interview in greater depth below, but one of Pierre’s stand-out comments was the following. Eric asked Pierre how he had figured out the growth of the diamond market, and his answer was: “Eric, it’s very simple. So long as there are women on this planet, diamonds are gonna be worth a lot of money”.

And then, there’s that rapidly increasing number of wealthy Chinese ladies….. You think they’re any different?

Here are our subjects this week.

·         Global debt – deflationary collapse or inflationary depression or both?

·         Pierre Lassonde on the Gold Market

·         The legendary Mr Gold, Jim Sinclair, talks to Eric King

 

Global Debt: Two possible paths with the same endpoint

From Earthblog news we have the following essay by Craig Harris. Here is another author who sees the crippling effect of ever increasing debt.

As we move forward into 2010, it is becoming increasingly apparent to many observers that the financial breakdown which started in 2008 is by no means over.  We are seeing increasing investor concerns regarding the solvency of not just individual corporations, but entire countries. In 2009 Iceland went bankrupt and in 2010 concerns are emerging regarding Greece, Spain and spreading across all of Europe. The long term viability of the Euro is even being called into question as I write this essay today.

What we are seeing is the result of an ever increasing and now unpayable amount of debt which is spreading like a terminal cancer across the entire western world. There have been many fiat currency systems devised throughout history, and they all have one thing in common. They all eventually went bust, because it is human nature to want something for nothing and spend money you don’t have to spend when there is no restraint or restriction against doing so. The total amount of debt has now exceeded the capacity to finance the debt except by creating ever more debt.

The entire western world has been financially controlled and mismanaged by an international syndicate of central bankers for the past several decades. This, along with unrestrained government spending has brought us to a terminal stage of collective bankruptcy as the power and control has shifted from the many, to the few who are now desperately attempting to maintain the status quo with various financial band aids,  shell games,  and smoke and mirrors “solutions”.

The worlds financial markets are now gyrating day by day as market participants move like a flock of sheep or school of fish seeking safety by abandoning one currency after another depending on the day.  The fact is however that in almost if not every Western G7 economy, the government is technically bankrupt, with orders of magnitude more debt than can ever be repaid in constant dollars. Even moreover, there is also massive insolvency among the corporations and the populations of these countries.

Where do we go from here? There are only two possible paths, and they both have the same endpoint which is systemic breakdown and failure.

The worlds central banks can continue printing money (monetizing the debt) in an attempt to keep the western banks solvent and inflate away the unpayable debt, or they can stop monetizing the debt and watch the entire western world collapse into a complete systemic breakdown of insolvency and deflationary collapse. If there was no printing press, if we were not all on a fiat money system, this would be the only choice. With a printing press, which is the only tool they have to attempt to “solve” this problem and save themselves from collapse and insolvency, they are going to keep using it.

The point of this essay however is to argue that whichever path is taken, the end result is going to feel the same for most of the worlds citizens. Whether by deflationary collapse or inflationary depression, the citizens of the western economies are going to experience a rapid decline in their standard of living either because the money they have won’t have the same purchasing power (an inflationary depression) or because they have no money to spend (a deflationary collapse). This will come amid sustained high levels of unemployment, and increasing government authoritarianism to combat increasing social unrest and decay.  It’s not much of a prognostication, because it’s already happening right now in countries like Greece.

I feel strongly that the G7 central banks will continue to take the path they have already embarked on, which is to save themselves by printing money, exacerbating the existing issue which is too much debt. The larger point however is that regardless of the path they take, the Western World is bankrupt from a decades long party of borrowing to spend money they didn’t have to spend. I’m taking cover as the house of cards comes down.

Pierre Lassonde on the Gold Market

Eric King’s latest interview with Pierre Lassonde.

Once again, we urge you to listen to the complete interview at www.KingWorldNews.com , but if you would like a quick summary, here it is.

Pierre entered the mining business in the early 70’s, and in that period the gold price went from $35 per oz to $180 per oz. As the sentiment on gold became positive, many mining companies raised capital, borrowed money, and then when the gold price subsequently collapsed, many companies went bust.

Two lessons to be learned if you run a mining company, with equivalent lessons for us as investors:

(1) Stay out of debt to the banks – they will bankrupt you in the down cycle.

(2) Have a lot of cash on hand, ready to buy assets on the cheap.

Gold is once again money – more gold has been sold for investment this year than was sold as jewelry. Also central banks are buying now versus selling previously.

Diamonds

Three large mining companies, Rio Tinto, BHP and Anglo-Gold control the diamond mining business. There are very few high quality diamonds found each year – they command very high prices.  If you can find ‘em, diamonds are a great business to be in.

Global debt overhang

As we also heard last week from Jim Rickards, central banks are far more afraid of deflation than inflation. Hence they are far more inclined to err on the side of inflation. Pierre has an illuminating metaphor for this – his bathtub analogy. Imagine a bathtub with a lot of holes in the bottom with water pouring out of them, and an array of taps at the top fully open and pouring water in. The water pouring out at the bottom represents a deflationary effect – vanishing wealth. The water pouring in represents central banks’ attempts to reflate their economies by printing money. At the moment nothing much seems to be happening. However, if the holes are gradually plugged, eventually the water will overflow the bathtub – leading to massive inflation. On the other hand, if the holes remain, or more holes are created due to, for example, more sovereign debt crises, central banks will have to pump up the money supply even faster to try to keep the reflation going.

Declining gold production.

With gold above $1000 per oz, enough marginal properties have been brought back into production to flatten out production levels from the previous annual declines. On the other hand, quality reserves are being depleted. If the gold price were to come back down to say $700 per oz, the resulting destruction in the gold mining business would be catastrophic. 

Gold stocks have underperformed relative to the gold price over the last seven years because their costs have risen as the quality of ore bodies has gone down. So whereas the gold price has risen pretty dramatically, mining company profits have not.

Gold price going forward

Look at seasonality effects – annual low point is usually May – June. We could see $950 then, but probably not much lower than this. We could possibly be looking at a return to $1200 around September. According to Pierre, we are likely to remain in phase 2 of this gold bull market for 2-3 more years, thus seeing steady gains, punctuated by corrections, and then entering a manic phase lasting several years subsequently. Pierre had a wonderful phrase to describe this latter phase – the gold market could end up “with a Tina Turner pair of legs”!

Investment in gold mining companies

Number one rule: Look at the track record of the CEO.

The legendary Mr Gold, Jim Sinclair, talks to Eric King

 

A catatonic Washington taken over by Wall St.

Major international investment houses are the unseen hand moving the markets. They have been enriched by bailouts and no action has been taken against their predatory activities. They are still using derivatives to make their bets and raid the markets.

Paper Market versus Physical Market

The banksters can manipulate the price of paper gold seemingly endlessly to pick your pockets, but they cannot control the price of bullion which remains in a high demand – short supply situation.

Political view will dominate

Whenever there is a conflict between being re-elected and choosing the right course for the economy, politicians can be relied upon to do things that they hope will get them re-elected. So, in the US, if there are signs of a weakening economy around September, another stimulus package is highly likely to be proposed, again increasing the likelihood of hyperinflation down the road.

The upcoming volatility in the gold price will set your hair on fire!

There are secret meetings of bankers around the world – protected by the military. The sociopath financiers are out of control. Greece has been under financial attack – if Greece falls, is that the end? No, it’s the beginning of a chain of sovereign defaults. What happens when these guys decide to attack individual states within the US?

So many individual states in the US near bankruptcy.

Why is there almost total media silence on this?  Right now the financial acetylene torch is on Greece – but look out when that torch starts homing in on US states.

 

 

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