Gresham’s Law Squared – Gearing up for game over
by Paul Mylchreest
Originally posted Feb 24, 2011
It’s getting serious, Gresham’s Law is kicking in and this isn’t any “run-of-the-mill” Gresham’s Law either – it’s “Gresham’s Law Squared”. Not only is there huge hoarding of gold and silver, but it is being compounded by the simultaneous transformation of the gold and silver markets themselves. Having been dominated by paper claims to bullion, all that matters now is ownership of the physical metal itself.
The price of gold and silver on your Bloomberg screen is actually a HYBRID price of physical bullion and a larger amount of “paper” bullion, e.g. unallocated gold and silver, exchange traded futures, OTC derivatives and some ETFs. The paper bullion price and the metal price are still the same, but this market structure (which had successfully channelled much of the demand away from physical metal) is now breaking down.
When the screen price accurately reflects the prices of physical gold and silver per se, they will need to be FAR higher than you see today. Right now, the frontline in the battle between “real” money and paper currency is in the silver market, but most remain blissfully unaware of the significance of what is taking place. The world’s financial system, as currently configured, is falling apart. The vast majority, including bankers and brokers (who should know better), don’t appreciate it – a sort of tragi-comedy really. The bubble this time is in the money, so nobody will be spared. Buying gold and silver is the fear AND greed trade!
So here we are, waiting for the “event” which triggers a loss of confidence across the system. Will it be a sovereign, a US state, a bank, QE3 or QE5, the oil price, Chinese fixed investment, a false flag event (a convenient distraction/excuse) or a revolution? When it happens, the speed at which capital will move in today’s over-liquefied world will take people’s breath away. Where will it go? This is the global end of normal (baby) so that, first and foremost, it will go into the strategic assets: gold/silver, energy, food/agriculture, rare earths, etc, (as well as the equities of the financially strongest economies).
Bernanke’s QE2 is nothing short of economic warfare, in the form of a wave of inflation, directed at the rest of the world and even his own population (at least anybody without a large stock market, commodities or precious metals portfolio). This inflation is not temporary, as per the false reassurances, it’s baked in. Here is Martin Armstrong recently talking about the US budget deficit:
“A friend of mine on Capitol Hill, among others there, tells me there is no solution whatsoever until there is a MAJOR crisis.”
In response, creditor nations have no other choice than to cut purchases of US Treasuries (China is selling), leaving the Fed increasingly standing alone. Rampant or hyperinflation results from the complete loss of confidence in a currency and we are being steered in this direction by the gentlemen above. Sure, they are smartly dressed, well educated (kind of) and pretend to know what they’re talking about with their carefully worded “policies”. It’s all NONSENSE. All they’re doing is leading us down a well-trodden path which has happened time and again throughout history.
In the meantime, there is evidence that the correction in gold and silver prices during January/ early-February-2011 only accelerated the process of Gresham’s Law Squared. In this scenario, buying some junior gold and silver exploration & development plays could translate into “Gresham’s Law Cubed”. (See note at end of article)
Like wild dogs which have been cornered, our central banking friends are likely to strike back at some point, since gold and silver are their mortal enemies. So expect the unexpected. The enemies of gold and silver are twofold, benign economic conditions and rising real interest rates. The former is not on the horizon, so they might try to bluff the market into believing the latter – for a while anyway. We all know that they are well behind the curve on inflation. So don’t be surprised if, for example, a manipulated Non-Farm Payrolls (unemployment) report out of the US is used as the catalyst for a (small) coordinated rate rise across the US, UK and Europe.
The problem for these gentlemen and their political brethren is their insane policy of trying to solve a debt crisis with MORE DEBT. We are already past the point of no return in the current monetary system and anything other than a very modest rise in rates will only bring systemic collapse sooner rather than later. Hu Jintao was only stating the obvious on 17 January 2011 when he said that the dollar reserve system is a “product of the past”. The bark of these wild dogs (and “monetary drug dealers”) is much worse than their bite.
If you think about it, the whole basis of world finance and the world economy as we know it – and all those millions of forecasts for corporate earnings and economic data generated by legions of analysts in investment banks – are based on one critical assumption. It all hinges on the “greater fool theory” continuing to apply to buyers of US Treasury bonds (and the debt of other western governments along with Japan) and that a demonstrably insolvent US government can continue to find “investors” prepared to lend it gargantuan amounts of money. Kick away the rotting foundations beneath the world’s reserve currencies and everything changes.
Do you remember the bit in the movie, “The French Connection”, where the mobsters bring in “Howard the chemist” to test the purity of the smuggled heroin. Howard puts his apparatus together, heats up the “testing material”, and comments as he watches the mercury rise: “Blast off: one-eight-oh…Two hundred: Good Housekeeping seal of approval. Two ten: US government certified. Two twenty: lunar trajectory, junk of the month club, sirloin steak. Two thirty: Grade A poison…(the mercury finally hits 240) Absolute dynamite! Eighty nine per-cent pure junk. Best I’ve ever seen.”
How about “Triple A-rated” poison instead of Grade A poison?
Just as “strange women lying in ponds distributing swords is no basis for a system of government” (quoting Monty Python), the greater fool theory shouldn’t inspire confidence in our current financial system, but it should inspire a response. Gresham’s Law is global, are you in or out?
Note: These stocks should have the greatest leverage to bullion prices in the medium term if they execute well and big funds, as well as retail investors, increasingly buy in. Examples from the 1970s prove this in spades – I wish I’d owned the “5,000 bagger”. I’ve cut back some positions in some major gold and silver companies to fund small positions in a string of these (admittedly risky) juniors. I already had positions in ECU Silver and Fortuna Silver mines, which are development plays/early producers, and I’ve bought some South American Silver, Bear Creek Mining, Vista Gold, Minco Silver, Gold Bullion Developments, Arian Silver, Axmin, PC Gold and Majestic Gold.
Written by aurick
25/02/2011 at 11:35 am
Tagged with Bernanke, Budget Deficit, currency debasement, debt, economic collapse, economic crisis, economic warfare, Gold, Great Depression, Gresham’s Law, hyperinflation, Japan, Martin Armstrong, OTC, OTC derivatives, Precious Metals, QE2, Quantitative easing, Real Interest Rates, sovereign debt, unemployment, United Kingdom