In 2009, the U.S. media were finally forced to start comparing the current, U.S. economic collapse with the “Great Depression” of the 1930′s, simply because there were no other historical precedents remotely comparable to the current meltdown.
A recent question from regular reader “Johnny O” asked me how the gold market had performed during the U.S.’s first “Great Depression”, in order to (hopefully) gain some insights into how the gold sector would perform this time around.
After professing that I was far from an expert concerning that period of time, I suggested to him that the 1930′s made a poor comparison – since current parameters were so much more bullish for the precious metals sector than during the “Dirty Thirties”.
Before discussing the current fundamentals, I’ll take a minute to provide a few details from that era, in order to illustrate those drastic differences. To begin with, in the 1930′s the world was officially on a gold standard. While this period of time marked the “beginning of the end” of our last gold standard, the important factor relating to the gold standard was that the U.S. government had (officially) fixed the exchange rate of gold with the U.S. dollar.
When the Great Depression started, that price was fixed at $20.67/oz. In 1934, that exchange rate was revised to $35/oz (where it remained for several more decades). Thus, the first and most important difference with the 1930′s is that during that period of time the only way one could make money investing in gold would have been to speculate on the fixed exchange-rate being changed. When it comes to placing “bets” in the market, speculation of that nature would be akin to a poker-player trying to make an “inside draw” on a straight.
Therefore, the most important dynamic in the modern gold market is that the price of gold is not officially fixed, while the unofficial price-fixing of the anti-gold banking cabal for the last three decades has resulted in the price of gold being dramatically undervalued versus every other commodity and/or financial asset (since gold is both).
The combination of a century of official and unofficial price-fixing had the effect of driving investor dollars away from this sector, to a degree never before seen in history. This means that gold is not only a grossly-undervalued asset, but one with many decades of pent-up demand – for a market where gold is allowed to trade at its fair market value.
We thus have a confluence of factors resulting in an explosion in investor demand, for a grossly undervalued commodity – at a time when more than a century of nearly continuous price-fixing is finally coming to an end. Do not be deceived by recent anti-gold propaganda that investor-demand is falling off (see “Gold Market Strong, But Not TOO Strong”).
The gold-haters pointed out that Q3 demand for gold was weaker than it had been for the last three quarters, but ‘forgot’ to mention that it is stronger than at any other time over the last decade – a decade in which the price of gold has already quadrupled. This enormous demand comes despite what is essentially a price-boycott this year by Indian bullion-buyers, who have historically been the biggest international buyers of bullion.
However, there can be no stronger signal that Indian acceptance of permanently higher gold prices is on the way, than how the government of India jumped into the gold market with the purchase of 200 tons of IMF gold. While total Indian demand for 2009 amounts to less than half of 2008 demand, the 32-35 tons which Indian bullion dealers imported in December is more than ten times the paltry, three tons it imported one year ago. Meanwhile early this year India was actually a net exporter for a very brief period of time.
More than compensating for the temporary drop-off in Indian demand was the explosion in investor demand from China (see “China urges citizens to buy gold/silver”). Not only did the Chinese government finally relax domestic rules on the purchasing of gold after 50 years of preventing small investors from entering this market, but it went one step further – officially endorsing precious metals as a prudent investment for Chinese citizens on a government owned and operated television station.
With China and India representing two of the world’s most robust economies today, and most likely the destinations/repositories for much of the wealth which will be generated this century, it is hard to imagine more bullish supply/demand fundamentals for the precious metals market.
These fundamentals are certainly not just some temporary quirk or aberration in global markets. The reason why this market has been strong for a decade – and getting steadily stronger – is that the parameters of many of the world’s largest and most important economies have never been so seriously impaired.
Primarily, this is an issue of debt – or rather, the grossly excessive debt-levels of one Western economy after another (along with Japan). Again, this is no surprise. Such debt-levels are the inevitable consequence of allowing the Western banking cabal to dictate economic policies for the last 50 years (if not much longer).
As economic historians like Darryl Schoon and Antal Fekete have pointed out for years, this is simply the repetition of a pattern that is as old as paper money, itself. Bankers ingratiate themselves with governments, usually through enticing them with the temptations of power and pseudo-wealth which come from excessive expansions of the money supply, and the parallel explosion in government debt which always accompanies it.
Inevitably, a major part of this campaign is to sever the connection between precious metals and the money supply (i.e. the “gold standard”), since it is mathematically impossible for the bankers to create mountains of paper money (and debt) over a short period of time when a gold standard is in effect. Governments forget the (numerous) past lessons of history, allow the bankers to rape their economies, then attempt to clean up the ‘wreckage’, and start over again (with a new gold standard) – once the bankers’ debt-orgies lead to the inevitable, massive defaults.
As a result, those attempting to compare gold as an investment today versus 70 or 80 years ago must take note of the following enormous differences.
In 1930, the world was on a gold standard, with (relatively) strong, solvent economies in most of the world – with the exception of Germany. At that time, no economy was stronger than that of the United States, despite the necessary economic correction it suffered as punishment for a prior period of economic excess.
Today, most of those same economies are swamped with higher debt levels than at any time in the history of these nations – with no economy being more insolvent than the United States. At the same time that the wealth-generation of the U.S. economy has been stripped away through the dismantling of most of its manufacturing base, it is forced to bear a debt-load far greater than that borne by the other 95% of the global population combined.
Obviously the combination of exponentially rising debts, ever more-reckless spending, and relatively no cash flow for this government must end in default and insolvency. Current policies (and propaganda) of the U.S. government are designed purely to hide the mountains of debt, and delay the inevitable default. The United States is long past the point where economic salvation is possible, through any combination of fiscal restraint and feasible, future economic growth.
It is only through every more-distorted economic “statistics” that the U.S. government has been able to hide its insolvency from its many, large creditors. Such deceit and concealment is rapidly coming to an end. As the sources for yet more U.S. borrowing totally dry up, the U.S. government has now been forced to the ultimate act of economic desperation: printing money to pretend to “pay” its bills.
Again, this act of desperation is also being (temporarily) concealed, through totally altering the reporting of its Treasury “auctions” so that even bond-dealers with decades of experience in this market have absolutely no idea who is buying U.S. Treasuries.
While the U.S. government claims that most of these auctions are “covered”, as a matter of elementary logic, such denials are obvious lies. The U.S. government is currently attempting to flog more of its debt than any other government has ever attempted in history – at a time when the amount of available dollars to soak-up those new debts is at its lowest level in at least a decade.
Obviously if you want to try to borrow more money than any other nation has ever attempted, you would go out of your way to increase the “transparency” of that bond market – to inspire the confidence of your would-be lenders. The only, possible explanation for the U.S. government going to extreme lengths to obscure its bond market is to hide the fact that the U.S. government has become virtually the only “buyer” for its own debt.
Ultimately then, what completely separates the current, Greater Depression which the U.S. is experiencing today from the Great Depression of the 1930′s is that the latter crisis was simply a de-leveraging of debt, accompanied by a (relatively) modest deflation from manageable amounts of defaulting debt.
Today, the U.S. is experiencing a solvency crisis through all aspects of its economy: its three level of government, its corporations, and its individual citizens. All these groups are carrying their highest levels of debt in history, and none of them are capable of servicing that debt. Personal bankruptcies, foreclosures, and other forms of credit-default are already at epidemic levels in the U.S. economy, with all categories of delinquencies near or at all-time records.
The “mortgage modification” program of the Obama regime has been a dismal failure. Not only have there been no more than a tiny trickle of permanent modifications, but of those homeowners who had their payments reduced by 20% or more, even 40% of that group had already defaulted again in less than a year. The lack of any “fixes”, the millions of foreclosed homes held off the market by U.S. banks, and the next, huge wave of defaults from the next spike in mortgage resets together guarantee another leg down for the U.S. housing market. This next collapse will be at least as severe as the first plunge – and more broadly distributed.
Meanwhile, a decade of “extend and pretend” regarding corporate debt roll-overs, combined with the worst collapse in the commercial real estate market in history, mean that the corporate sector is just beginning its own, serial debt-implosions. The especially enormous defaults which have just begun on commercial mortgages ensure that the toll on U.S. banks will be far greater in 2010 than the 140 failures in 2009.
However, it is the three levels of the U.S. government who have the most serious solvency crises. Over just the next generation, the U.S. government is facing a $3 trillion per year shortfall just on benefit entitlements of existing social programs – for which not one penny of money has been set aside. Indeed, instead of saving money for when those trillions would be needed, the federal government has plundered over $4 trillion from various government “trust funds”, over just the last two decades.
Keep in mind that the California government, which is about 1/8th the size of the federal government was paralyzed for two months just trying to close a $20 billion budget-gap. This would equate to the federal government trying to reduce spending by a mere $160 billion. Instead, the federal government is faced with trying to close a gap twenty times that size, every year – for the next thirty years.
It is an utterly impossible task. The U.S. government has already become totally dependent on printing money to avoid defaulting on its current debts. This money-printing must either increase (leading to hyperinflation), or else the federal government would default on its debts (likely in less than two years) should it try to reduce its existing level of money-printing.
These are all dynamics which were totally absent went the U.S. suffered through its first Great Depression. It is the solvency crisis being experienced by the U.S., and to a lesser extent, the U.K., Japan, Iceland, Greece, and a few other European nations which is causing a global Renaissance for investing in precious metals.
The reversal by global, central banks from being huge, net sellers of gold to net buyers is the exclamation point which should hammer this concept home to every investor. When the world’s central banks, the peddlers of those mountains of fiat currencies, display an open preference for gold over their own paper, any investor who ignores this obvious warning does so at his or her own peril.
This is the first time in history that all the world’s currencies have been totally severed from a gold standard. This means there is no reliable comparison to be made between fundamentals for precious metals today, and any other time in history. Gold and silver have a 5,000 year track record as being the best “money” our species has ever devised. For those who would like a better understanding of why that is so, I recommend a prior commentary (“What is Money?”).
The current, global financial system is in the process of coming to an end – one way or another. History teaches us it is highly unlikely that this transition can be accomplished without economic catastrophe. As the only superior currencies in existence, it is inevitable that gold and silver will benefit, as the inferior paper currencies (which we mistakenly call “money”) suffer the same deaths that have awaited every other fiat currency, throughout history.
By Jeff Nielson – seekingalpha.com
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