This chart shows the annual Federal spending surplus/deficit. I'm still waiting for someone to explain to me how the Government can possibly stop the freefall pattern in this chart. Cut entitlements and defense spending back 50% each? We would still be in deficit spending. Raise taxes? That's the last thing that needs to happen if the Government at all wants to try and stimulate any meaningful, "organic" economic growth.
Please keep in mind that the numbers behind the chart represent ONLY "on-budget" spending items. It does not include the 100's of billions being spent to keep FNM, FRE, FHA, GNMA, FDIC, GM, GMAC, unemployment claims loans to States ($38 billion so far) etc alive. Obama said he was going to put the expenditures in "the war on terror" back on budget, but I have not read any references to him doing that. In other words, the REAL deficit spending number is more like $2.5-3 trillion this year. We'll know at year-end when we see the year-over-year increase in outstanding Treasury debt exactly what the real deficit spending number is.
Here's one scenario that would take gold to $15,000/oz: the world demands a gold-backed reserve currency; the U.S. reveals and prooves to everyone that it still has 8100 tonnes of unencumbered gold sitting in "deep storage" at West Point and in other Federal depositories; the U.S. then revalues the price of gold up to $15,000, which would be the price level required to restore the full gold backing of all outstanding Treasury debt, per Bretton Woods. My bet is that there will be another world war before that scenario plays out (nothing like a good old fashioned war to get the economies of the world jump-started and people employed).
BP update: Get out while it still has market value. As one who rode Enron short from the low $40's to $10, this situation and the chart pattern is eerily similar. This disaster is way worse than BP and the Obama people are revealing, if they even know just how bad it is, and the impending tropical storm/hurricane season will have the effect of throwing "gasoline" on this "inferno." This is one for the ages and so far Obama's handling of the matter makes Bush's handling of Katrina look brilliant.
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I don't know if you read the post at the link I sent you a while back, but your scenario is roughly the same as the one at the blog in question. Once difference was that re-pricing gold was discussed within the context of a "nuclear option" for Europe. Simply revalue the various gold hoards held by central banks in the various nations comprising the euro by 15 to 20 times spot prices, and Voila! much of the debt is wiped away. The word is that the gold that is exchanged between central banks is already trading hands at vastly higher prices than paper and spot prices.
ReplyDeleteAnd if they make USD convertible to gold, what then? They will run balanced budget? ;-)
ReplyDeleteif the USD is convertible to gold, the U.S. can not spend/borrow any more money than is represented by it's marginal GDP. So yes, it would force the balance of payments to balance out, ultimately.
ReplyDeleteEdwardo, do you have a link to something that talks about where gold is changing hands among CB's at higher prices.
ReplyDeleteHere's the exercise that I think is relevant: imagine that China announces that they want an offering of 100 tonnes of bona fide custody physical gold that China would assume custody of at their own depository. At what price do you think that some entity would offer 100 tonnes of gold? That's the real market price for spot physical gold...
FOFOA on two-tiered gold price
ReplyDeletehttp://fofoa.blogspot.com/2010/05/open-letter-to-emu-heads-of-state.html
This month's Jim Willie newsletter covers a 'Northern Euro' that allegedly will be sprung on the world next summer, with partial gold backing. His May 26 article touches on it here:
ReplyDeletehttp://financialsense.com/fsu/editorials/willie/2010/0526.html
If true, they'll no doubt beat us to it.
O/T - Dave, this is my first post after reading daily for some time - thanks for your work here. -JC
Hey JC thanks for the feedback and the link. I like Jim Willie's work. His intel is usually on the money.
ReplyDeleteTHanks for the link JR. I recall starting to read that FOFOA piece and bailed cuz it was so long and verbose. Check this out:
ReplyDelete"Governor Gramley replied: "I think you have to reckon with the fact that one of the Fed's assets is gold certificates, which are priced, as I remember, at $42 an ounce, and if we were to price them at market prices, the Fed's leverage would look a lot less than it is now."
That statement by Gramley is horseshit because the gold supposedly owned by this country is not the Fed's gold, it is the U.S. Treasury aka the taxpayer's gold. It has nothing to with the Fed's balance sheet.
Here's the other problem I have with "ANOTHER'S" analysis. He is saying the value of CB gold is based on the price times the number of times one ounce of gold is leased out (leveraged). But that can only be when the world is willing to accept "full faith and credit" paper, of which gold leases are a part.
BUT, when the time comes that everyone who is long a lease claim - and long Comex gold contracts - wants actual delivery of the physical gold, THAT's when the fun begins - perhaps a world war. AT THAT POINT IN TIME, the music stops and everyone who is in possession of unencumbered physical bullion will reap the benefit of a price explosion that will make the Dutch tulip bulb bubble look tame.
Someone who is long gold via a lease claim is not really long gold, therefore the price of transaction is not a valid market price.
The VALID market price of gold will be established when an entity like China wants to find out at what price they can acquire 100 tonnes of "clean" gold that entails bona fide physical delivery.
Where's that price? $2000? You're too young...$2500? Maybe. We won't know until we know. But what I do know is that the current spot price is a fraud and anyone buying now is the beneficiary of "economic rent."
If gold goes $15K per oz, how much will the Saudis want for a barrel of oil? Tradionally they want to exchange 15 or so barrels for an oz of gold. That puts oil up to $1,000 per barrel. So, would gasoline go for about $25 per gallon? Hmm, that is $500 for a 20 gallon tank full. If your winter heating bill is $1500 then be prepared for next winter's bill to be 12 grand. At these rates our country would be debt free and dead broke. If it were as easy as raising the POG it would have been done a long time ago.
ReplyDeleteYo Durango! Well, take a look at this sequence of currency deval/price explosion:
ReplyDeletehttp://nowandfutures.com/us_weimar.html
Don't think for a second that can't happen here. The ultimate formula to bring this country's extreme spending excesses of the last 39 years into balance will be that the market will ultimately force some form of extreme austerity, whether it's thru massive dollar deval or a deflationary depression or both.
I don't know exactly what it will look like but I do know it will be unbelievably painful for ALL but the top 1% of wealth holders.
And by the way, when oil hit $150, the gold/oil ratio was 6.7.
6.7 meant that gold was readily available to satisfy the needs of the oil producers.......since then its been rising rapidly at 16 and counting signafying that physical gold is getting very hard to come by in big quantities.
ReplyDeletethere is no way that cb's sell physical gold to each other at spot price. there is evidence by gata stating that the imf gold selling is just an accounting change and that the gold is double counted. try to buy gold from the cb's like eric sprott and you will never get spot in fact you wont get it at all, most people would probably say because the imf doesn't have it others would say that its because its valued much higher.
the flow of gold is much smaller of that then silver for instance which is a big reason why it costs 60+ times more, there is no way anyone has 1 tonne for sale that easily of gold, for silver it would easier to get not saying they would get it but 77 million gold vs 680 million silver mined every year.
if we look at the comex, 24 million oz are still waiting for delivery of the silver metal but 1.3 million are waiting for their gold....
do you think they would have 24 million oz ready of gold (28 billion)? a wealthy person or nation would need that type of delivery to save them, not 24 million oz of silver (480 million)
I am wondering how that gold oil revaluation would affect other oil producers since the majority of US oil actually comes from Canada now.
ReplyDeleteThanks Dave for the reference. I used to go to that fabulous site and then stopped. It is like having our secret Investor Wikipedia.
ReplyDeleteMike, you make a good point. As physical gold becomes more in demand we will indeed see the POG going up. The banksters will do everything they can to keep the POG down so they can continue their theft.
Perhaps oil producers would accepted an Au/Oil ratio of 6.7. But the dollar cost of energy would still bring the country down if the POG when to 15K. Energy costing that much would demolish productivity and insure a deflationary collapse.
$15K is not solution but actually a new perspective of the bankster's problem. The brilliancy of 20th Century banking/theft was to use cheap oil/energy to create more wealth for everyone and then steal a small percent from everyone each year using monetary expansion.
The bankster game is based on cheap energy in terms of gold!! Raising the POG to solve the debt crisis solves the debt issue but leaves the banksters with national productivities that are too low to steal from using the printing press. Bankster leaches need a healthy body to live off of.
A rising POG is the canary for the rising cost of energy, not just inflation!! If the cost of energy goes too high, real productivity will be insufficient to pay off the high debts and the bankster gig is up. If that happens the banksters will need a worldwide RESET...unfortunately that usually takes a war followed by new agreements,currencies, exchange rates and new ownership of gold and energy.
Despite the US weakness, the US still has the trump card of having over 900 military bases around the world. The dollar might be paper but it is backed by guns. The US is not in the Mid East for nothing. The US presence there is a continual message to the world that the US has enough might to keep the price of energy low. The US gig may be up soon, but the fighting has hardly started. This may be a sick reality but it if you are an oil producer in the mid east, and you are forced to sell cheap energy in the name of being protected, then you know how the game is being played.
As investors our perspective is financial. If you are a Mid East oil producer, your perspective is on of being extorted to sell your energy for a measily 15 oz of gold.
Thinking in terms of raising the POG to pay off debts is logical but the extortion game being played on this planet is keeping the POG down!! Thousands die every year to keep the POG down.
Extortion, not logic rules.
Stocks are a terrible investment. No dividends. All gains based on the greater fool theory. Works so long as money supply expands and the Ponzi continues. Any contraction will see a corresponding drop in the stock market. Any contraction actually results in the collapse of the US economic system. Although I understand the many desires to let the system fall apart, but the ramifications are too far reaching and dire. It is reminiscent to the fall of the Roman Empire. A farmer on the outskirts of the empire may complain of taxes and the decadence of the cities, but to wish for its collapse is to wish for barbarian invasion, pillage, rape, death, disease, and famine. Prolonging the dieing system as long as possible may be the only option available. Giving time for preparation.
ReplyDeleteThe price of oil in dollars will have nothing to do with what the rest of the world will paying for oil. The price of oil in dollars will hit the moon because the dollar will be substantially devalued against everything. The U.S. is losing cache in the middle east despite its military presence. China has already armed Iran with missiles that are technologically superior to anything we have. Saudi Arabia has been recently cutting multi-100 billion dollar oil supply deals with China - to be settled in yuan. Iran will only sell oil Japan - Japan's largest supplier - in yen.
ReplyDeleteYou have to step outside of the the U.S.-centric/U.S. dollar - centric mindset. It is dissolving before our eyes. The BEST think geostrategically from China/Russian veiwpoint is the U.S. whittles away its military resources in Afghanistan. Japan has already announced that it is withdrawing naval-based refueling assets that support the U.S. war in Afghanistan this fall from the region.
You are very correct that our situationn is analogous to Rome. It is also analogous to Weimar Germany. The rest of the world was not paying the prices that Germans were paying in 1923. The mark collapsed. Germany was essentially the global gorilla back then. It made one more push to reassert its dominance and look what happened. We can only hope and pray that the U.S. does not follow that course. Unfortunately, Rome took that same route...
Dave, I'd love to hear your thoughts on this:
ReplyDeletehttp://www.mineweb.com/mineweb/view/mineweb/en/page33?oid=105721&sn=Detail
Gold could fall below $1000 by year end - Natixis
While there are some good reasons to hold gold at the moment, many of the drivers behind gold's strong, decade-long run look like they have begun to turn.
Goldman Sachs sold $250 million of BP stock before spill
ReplyDeletehttp://rawstory.com/rs/2010/0602/month-oil-spill-goldman-sachs-sold-250-million-bp-stock/
Anonymous, if that's how you feel, you should sell. I'm not going to make any arguments against entities that think the gold bull is done. I present enough every week on this blog. I just got refuting that piece of shit article from Brett Arends at the WSJ given to a client by their other investment advisor. That investment advisor is a bean counter with no relevant financial markets/Wall Street experience.
ReplyDeleteThere is a lot of disinformation and outright lies being thrown out in the media.
Do your own due dili.
To anonymous: The article says, "And, he says, "should we see a resolution of the current sovereign credit problems in Europe, should the Chinese economy return to steady growth with less concern about overheating and inflation, the investment thesis for gold, we think, is fundamentally undermined."
ReplyDeleteIs this guy nuts? How could the debt problems possibly get resolved? The US is worse than EU! There is not a chance in hell anyone is going to be able "grow" their way out of it. It's now seen as a good thing if a country's deficit is brought down to 3%, that's still a deficit! I'll risk that $1000 price, thank you!
Great article. PS don't you mean 'fort knox' instead of 'west point'? Or is there gold at west point i am unaware of?
ReplyDeleteThanks for the feedback. That's a great question. Most people don't know this, and I don't remember what year it occurred but you can google it, the bulk of the gold being kept at Ft. Knox was moved to what was termed "deep storage" at West Point. It is thought that the gold was probably either leased out and delivered or sold outright. The U.S. Govt doesn't deny this statement or allow a physical audit. The gold that remains at Ft. Knox is there for the benefit of tourists.
ReplyDelete