Originally published October 4th, 2015.
The fiat money system should be branded a "crime against humanity" because of what its unbridled excesses must inevitably lead to - chaos, destitution and war - which is what we are clearly heading towards.
Over the past year or so, the Fed let the idea take hold that it was going to gingerly start a rate rise cycle, which helped to fuel a big rise in the dollar. The ruse worked and the Fed got a lot of bang for no buck. However when push came to shove and the time arrived a few weeks back when they had to "put up or shut up", they backed down, and it became apparent that the whole thing was a hoax. They do actually want to start a rate rise cycle, in order to start trying to undo the enormous damage caused by their profligacy of recent years, and because they are gravely concerned about their own bloated balance sheet, but it is apparent to all and especially them that if they try it they will crash already very fragile stockmarkets and burst various asset bubbles simultaneously, like the Real Estate bubble, not to mention the towering derivatives overhang.
The problem is that these monstrous bubbles are already starting to burst, even without the catalyst of the Fed or other Central Banks raising rates, because the system is atrophying under the weight of an immense debt burden that has reached critical mass as "extend and pretend" has been continued towards its ultimate conclusion. Total world debt including derivatives is assessed at a cool $500 trillion. The system is clearly set to implode, and is already starting to, but surely there must be some way or ways to keep it limping along just that little bit longer so that those presiding over this mess can hang on in power for as long as possible. Happily for them, there is.
Normal people believe that interest rates can't go below zero or not by much, which is a reasonable supposition - after all, who but a lunatic would allow themselves to be charged for depositing money at a bank? Mad though it may seem, Europe has already proved this wrong by starting to levy charges against bank deposits. Although the percentages levied are thus far tiny, the fact that they have had the audacity to do this establishes a dangerous precedent. So we can expect NIRP (Negative Interest Rates Policy) to be an important plank in the "extend and pretend" endgame. Negative interest rates are of course legalized theft, but since those in power do not suffer from the weakness of embarrassment they will brazenly go ahead and take this route. Such action will naturally incite bank depositors to pull their funds to "stuff under their mattress" so steps will have to be taken to disincentivize and marginalize cash transactions.
The other main plank in the extend and pretend endgame will be to resume QE with a vengeance, and the failure by the Fed to raise rates by even a derisory amount some weeks back was an early smoke signal warning the world to expect QE4 to be wheeled out before much longer. The fact that they will have zero credibility when they do this doesn't matter to them - their credibility has already been shot anyway, so the way they see it they have nothing to lose. Such action will promote more bouts of QE around the world, as other countries compete to beat their currencies lower and lower.
Basics Of Fiat - More Money Does Not Mean More Purchasing Power...
In Britain they are continually running articles about the rising prices of property, especially in London, like this one in the UK Daily Mail entitled Britain's 1million Pound Homes, which only goes to show what happens when an ever intensifying blizzard of fiat chases a relatively fixed supply of property.
As economies continue to weaken under the crushing debt load, and governments are facing acute revenue shortfalls, they will resort to outright Grand Larceny on an unprecedented scale, as they proceed to plunder bank accounts via bail-ins and raid pension funds, first by compulsorily nationalizing private pension schemes, as happened in Argentina some time back. Might is right and feisty citizens will be forced to comply "for their own good", with euphemisms invented to sanitize the theft, similar to the term "Quantitative Easing", which sounds a lot blander and more acceptable than "Money Printing".
What options will investors have in this "brave new world" where bank deposits are in effect taxed and robbed, and the bonds of bankrupt governments and entities are a non-starter? For a while the stockmarket will be perceived as a refuge, despite the rotten state of the economy, because it will be a lot harder for the government to raid stocks accounts than it is for them to raid pension funds or for banks to rob bank accounts. So the message here if your money is in some pension scheme is to liquidate it if possible without penalty and invest the proceeds yourself in stocks, so that the government can't get its greedy maulers on your hard-earned money. The US stockmarkets are likely to benefit most as funds flee disintegrating debt-wracked Europe. Eventually however, most stockmarkets will get taken down as economic conditions deteriorate and the depression intensifies. In the conditions that will prevail, the Precious Metals sector looks set to be the star performer for reasons that we will now set out. The near-term outlook is for extreme volatility, with wild swings, and the risk of another plunge if the markets' expectation for another round of QE is not fulfilled in short order.
The conditions that already exist are widely perceived to be a state of deflation, but in fact they are those of recession verging on depression. At the same time most prices for normal goods are continuing to rise - the cost of living is continuing to rise whilst wages are stagnant, so people are getting poorer. Government statistics on this are of course a lie designed to make their policies look better and enable them to avoid making cost of living increases to pensioners etc. So what we have here is a state that may be described as an inflationary depression, and it's getting worse. The inflation is caused by all the QE up to now, and any further QE will exacerbate the situation, and this applies not just in the US but around the world. The depression is caused the $500 trillion debt overhang which is strangling the world economy.
So let's stop and think about this. We are heading into a situation where we have high inflation caused by endless competitive devaluation of currencies fuelled by rounds of QE, and interest rates that look set to stay either stay around zero or drop into negative territory. What asset class would perform best in such an environment? - gold, of course (and silver). Overall, gold will always rise in price to compensate for a drop in value of currencies caused by their reckless inflation, and further, in a negative interest rate environment, not only is there no opportunity cost loss in holding gold, there is an opportunity cost advantage, because you are not paying for the privilege of holding it (other than nominal storage costs).
What all this implies then is that gold is either at or very close to a major bottom here, and furthermore if this is the case, then the Precious Metals sector, which is now extraordinarily undervalued relative to gold, has huge upside potential from its current dismally low levels. This is a reason that we went for the sector on Thursday when it was hard down on an important support level affording a low risk entry setup, and we will be devoting more and more attention to it on the site going forward.