By James Turk
Every once in a great while, the market offers a unique opportunity to buy precious metals ‘on the cheap’. I believe today is one of those moments.
There is ‘panic in the air’ and ‘blood in the streets’, which are conditions that open up unique opportunities. People who have used leverage to carry trading positions have been forced to sell their precious metals – throwing out the ‘baby with the bathwater’ – much like the panic that occurred after the Lehman Brothers collapse. The trigger this time though is not an over-leveraged investment bank, but rather, the sovereign debt of Greece and Spain.
Years of profligate spending and weakening economic activity are taking their toll. I highlighted in December that sovereign debt defaults were approaching as “countries around the globe run out of money and confront overwhelming debts that cannot be repaid.”
While Greece and Spain are now the trigger points, they are not alone. Nor is this problem of countries with too much debt unique to Europe. The debt of the biggest debtor of them all – the US government – is finally being called into question.
Reuters today reported: “If the U.S. economy grows anemically, already stretched government finances will be crimped, potentially putting downward pressure on the top Aaa U.S. rating, said Moody’s Investors Service.” To emphasize and make clear its point, the article went on to say: “If the Obama administration’s budget projections for rising interest payments on government debt are realized, ‘at some point, we don’t know when, there would be downward pressure on the U.S. rating,’ [Moody’s] said.”
The likelihood of sovereign defaults is growing. Greece and Spain long ago gave up their domestic currencies to become part of the eurozone. They cannot create euros out of ‘thin air’ to repay their debts with debased currency.
While both countries give lip service to reducing their annual operating deficits – but not their debts – in the future, neither is prepared to bite the bullet and make tough decisions to bring spending under control. Given the weak economic activity in both countries, raising taxes is unlikely to produce further revenue, making the default all the more likely. The discussion about default though is hiding a pernicious, developing force that portends a widening crisis.
Euros are being pulled out of Greek and Spanish banks and placed in German and French banks. The thinking is that if Greece and/or Spain leave the eurozone to once again issue drachmas and pesetas, their revamped currencies will be trade at a discount to euros. Therefore, to avoid losing purchasing power from this possibility, euros are moving out of banks from south to north. Thus, as the sovereign debt crisis spins out of control, it may cause banking crises in Greece and Spain as well as the other weak spots in the eurozone, namely, Portugal, Ireland and Italy, which bring me back to gold.
All Things Considered – John’s Commentary: Counterparty risk is growing. As it does, the precious metals become increasingly important to preserve wealth because tangible assets are not dependent upon the promise of any government or bank. Gold and silver are the ultimate safe haven, and right now they are being offered at bargain basement prices. More importantly, it is clear from the Fear Index that gold is a good value. See the related article below:
Two Important Messages from the Fear Index
By James TurkJanuary 20, 2010 – The Fear Index remains within its decade-long bullish uptrend, so we therefore know as a consequence that gold also remains within an uptrend. But the Fear Index is also giving us another important message. It is that gold remains undervalued.
Gold’s valuation is indispensable information given its exceptional appreciation this decade. In other words, even though gold has risen nine years in a row against the US dollar, it remains relatively cheap. This conclusion is illustrated with the following chart.
The dashed horizontal line on this chart marks 2.63%, which is the average value of the Fear Index since August 1971. That is the date when President Nixon – with total disregard to the US dollar’s 180-year history – turned the dollar into irredeemable fiat currency, in effect declaring by presidential edict that the monetary requirements of the Constitution were null and void.
The Fear Index is presently 2.05%. Note that it is lower today than August 1976 when the Fear Index was 2.28% and gold was $104. Therefore, gold at $1106 – its December 31, 2009 price – is even more undervalued than it was at $100 back in 1976. How is that possible? How can gold be more than 10-times more ‘expensive’ today and still be better value?
Simple. A 2010-dollar is not the same as a 1976-dollar. The dollar’s name has not changed, but the dollar has been terribly debased over the past 34 years. It has lost much of its “moneyness”– its innate value as money – in two insidious ways.
It has lost purchasing power because of inflation. Secondly, it also has 0.23% less gold-backing today than it did at the low point of the Fear Index in 1976. Even though dollars can no longer be redeemed for gold, dollars are still partially backed by gold. The Fear Index measures to what extent gold backs the dollar, assuming of course that the 261.5 million ounces in the US Gold Reserve really exist and have not been loaned out, encumbered or put in play as part of the gold price suppression scheme led by the US government.
What is clear from the above chart is that one cannot use the dollar price of gold to determine whether or not gold is good value. The purchasing power of the dollar and the extent of its gold-backing are ever-changing. So the dollar is not a good measuring stick. It is not a numéraire.
The important conclusion from the above chart is that gold remains relatively cheap. We should therefore continue to accumulate it.
All Things Considered – John’s Commentary: No one can predict the future. Precious metal prices may fall further. Then again, maybe today marks the low. But regardless, the risk of sovereign debt defaults is not going to disappear. Nor is uncertainty about the durability of the euro. And the dollar continues to be debased by reckless spending that is piling more debt upon the US government’s huge mountain of debt. These risks create an environment in which one seeks safety for their hard-earned assets, which is exactly what precious metals offer.
