Only Gold Can Beat the Credit Crunch

Of course - to any Wall Street power broker, economist, or US policy maker, this headline means the equivalent of “Only Space Aliens Can Halt Teenage Pregnancies”. In other words, it’s a total non-sequitur to them.

So what? Who cares about Wall Street, economists, or politicians? Individual investors, business owners, workers, fathers, mothers, and college students, they are the ones who must survive if the United States is to survive the mounting credit collapse more or less intact. Why worry about those who caused the mess?

The point is that Wall Street or US politicians cannot and will not save investors. They are not concerned with investors, only with themselves. Investors must save their own little selves - and the only way to do that is by jettisoning the world of contracts, paper, and electronic currency blips.

In other words: in this mounting flood, better not wait to get bailed out. Start swimming, find something that still floats - and hang on to it for dear life!

Gold investors, on the other hand - or what usually goes under that name - are having their own problems. Their favorite paper plays - gold stocks and mutual funds - are under siege as well. Big time.

We are entering very paradoxical times. They are the times

When Metal Floats - and Paper Sinks

Extremely nasty-looking head an shoulder formations have traced themselves out against our computer screens on both the XAU and HUI indexes,

Some of the gold mutual funds like Fidelity's FSAGX have already fallen off the right shoulder.

All the while, gold remains relatively well-supported and actually shows a possibility of reversing its recent mini-decline as of 12-17-07, the time of this writing.

Here is a quick rundown of gold and the fundamentals it is exposed to.

Its breakdown from the green and blue consolidation patterns is minimal, and is a false signal. It has survived far worse in its six-year bull run. Currently, it hasn't even broken down from its new, steeper trajectory of phase 2 of the bull market, or from its “second gear” status.

Gold’s candlestick chart is showing a classic “doji” reversal pattern while simultaneously trying to bounce off its 50 day moving average.

Instead, gold chart shows a reversal pattern that is in the process of being confirmed.

Simultaneously, the dollar is showing its own reversal signs: a "doji" after a long white candle.

Ironically, inflation fears are what propelled the dollar up from its recent downward course, tracing the bottom of its 50 day moving average. Even more ironically, the very same thing now threatens to become the undoing of this attempted bounce. Why?

Because the financial world - and I mean the entire world of finance - is in utter panic mode over the huge jump in the US CPI last month, the biggest in 34 years.

As I keep saying: the financial world is hooked on crack, and now that crack is threatening to become really, really scarce.

The credit collapse demands lower interest rates while inflation fears demand the opposite. Neither policy option is a painless one. For policy makers, both options are tantamount committing suicide - while doing nothing will mean certain death.

There is an easy escape route open to them, but they would rather let themselves be kicked in the groin for days on end than voluntarily take that route.

The “crack” we are talking about, of course, is ever lower interest rates; massive, never-ending easy money infusions. Last week the Fed gave the markets just a trickle of what they cried out for - but it wasn't enough, and the markets howled like addicts going through withdrawal.

Just so as not to completely tick off his customer base, the federal Crack-Pimp in Chief graciously tried to apply a worldwide, central bank-coordinated band aid to the pulsating gash that is now bleeding red ink all over the world’s financial centers.

The 'knife' that carved this gash into the financial system's was the jagged blade of monetary reality: the realization that debt cannot be piled on debt forever. To no one’s surprise, the band aid wasn’t big enough. The bleeding of red ink continues, and the life-draining fluid is carried onward by deep sea currents in the ocean of profligate credit

Now, Bernie's got a problem.

Bernie’s Problem

He thought he could just get into his proverbial chopper and throw confetti-money out the Fed’s discount window with both hands, all to the roaring joyous cheers of the markets below.

But it isn’t working as planned. He’s stuck. He can’t even get his helicopter off the ground.

Bernie is afraid to throw his load of inflation-confetti. Sharply rising prices that even the doctored official statistics can’t hide are putting him in a bind.

Although the Fed’s actual function is to trap the world in never-ending debt-inflation, it can carry its mission out for only so long as the world doesn’t smell the rats that are running the institution. The world must believe that the Fed’s job is to control price-inflation - or else the jig is up.

That dark and ominous lie has now been shoved into the light of day, courtesy of the credit crunch. Mainstream investors can’t see it yet. They are still rubbing their eyes from the sudden intrusion of sunlight into their once mercifully darkened world, but they will adjust to the day’s harsh realities very soon.

If Bernie throws his load of confetti by buying even more long term treasuries to depress interest rates, US prices will skyrocket, and the Ben will lose all of the ‘credibility’ his predecessors have so carefully built up. If he doesn’t, however, the credit crunch will grab him by the neck and squeeze until he passes out - and the Fed's credibility will still be gone.

What Can You Do?

As discussed in “Credit Crunch - or Credit Collapse?” the reason we are in this mess is debt. Not “too much” debt, but debt itself - for the financial world is made of nothing else.

Fiat money is debt. To preserve the illusion that the debt resulting from its creation process can and will be paid back, more fiat money must be created - and that can only be accomplished by creating more debt.

There is only one way to ultimately retire a debt, and that is by giving value.

At rock-bottom, the only value there is is human ingenuity and willingness to work. Since that his hard to carry around in your wallet, though, people need a medium of exchange, but it had better be a reliable one.

Gold is that reliable medium of exchange. So is silver.

It is also a reliable store of value - because there is only so much of it. In an environment of rising gold production costs and declining ore grades, combined with world-wide efforts to shut gold mining down altogether because for environmental reasons, its capacity for storing value is now becoming clearer than ever.

It is the reason why gold stocks (paper contracts) are sinking, while actual gold (the metal)is floating on this ocean of debt.

The Coming Flood

Because gold’s supply is finite, the flood of fiat-money created over the past three decades has no choice but to adjust downward until true value-parity is reached between it and the finite supply of gold.

In the process, the real value of gold in terms of human productivity will become crystal clear - as will the comparative lack of value of the banker barons’ credit-spawn. It will happen. It’s unavoidable - and it’s already in process.

The question is whether it will happen in a catastrophic way that kills virtually every economy that has built its existence on this pile of debt-manure, or whether there is an escape hatch, a life-saving 'beach' somehwere that ordinary people can swim toward to find refuge from the oceans of debt.

Only gold as currency can save people and economies from this ungodly flood. In the upside-down world of debt-money, gold literally floats to the top all by itself. If people are penalized by law for hanging onto it, they will drown.

This penalty is imposed by by taxing gold and silver for alleged “value-appreciation,” or capital gains.

Gold and silver do not really ‘appreciate’ in value. It is fiat money that drops in value. Yet, in the eyes of the law as it currently stands, you are taxed for this illusory appreciation whenever it occurs. In essence, you are made to pay for the relative under-performance of the fiat currency.

To put this into visual terms by using our “oceans of debt” analogy, capital gains taxation of gold functions like the tether of a buoy. Gold floats on debt, but capital gains taxation makes sure that you won’t try to hang on to the golden buoy when the debt-waters are rising.

By abolishing any taxes on gold-appreciation, the tether is cut, gold can float, and drowning investors have a life-saver to hang on to.

That, however, only works if another set of laws is repealed.

Legal tender laws require you to accept fiat whenever someone offers it to you in payment for a debt. Only if you are free to contract for payment in gold at whatever rate you and your counter party may agree can gold work as a real currency.

Once the right to contract is fully restored, you can make an agreement with your employer, for example that says you will work for gold or silver. You employer, in turn, can agree with his suppliers and customers to transact in bullion. Eventually, bullion will circulate the same way paper or electronic credits circulate today. The fact that we now have digital bullion available as a convenient form of payment brings the whole proposition into the twenty-first century.

Fiat paper or computer credits will always have some value because it is so convenient. That guarantees a minimum level of demand, at least. Where exactly this demand will find its equilibrium with this horrendous oversupply of fiat is yet another story. Only a truly free market can help us find this equilibrium.

The Breaking Dam

In the current situation, there is absolutely no point in hand-wringing and complaining. The deluge of debt has been held back by a huge concrete dam, of sorts. The ‘concrete’ consists of one part public ignorance and two parts official deception. It has been holding up for a little over thirty years now - but it is crumbling fast.

At the current stage of the credit crisis, we have witnessed tiny trickles turn into major torrents. The really big break is still ahead - but the time for liquidity band aids is long gone. This dam will not be patched up. Once ignorance is penetrated by knowledge, there is no going back.

There is only one thing that can guarantee that a maximum amount of Americans will survive the dam’s final break: Let them have some gold to hang on to and float to financial safety.

Ron Paul is the only politician in America who even talks about that solution. His proposal to let gold and silver freely compete with fiat is the only one that can save American families, businesses, workers - and therefore the entire US economy.

Will he be elected?

It’s up to you.

Will his plan be implemented, even if he isn’t elected?

That’s also up to you.

Got gold?

Alex Wallenwein
Editor, Publisher
Just like driving your car, investing only makes sense if you can see where you are going. The Euro vs Dollar Monitor is your golden windshield wiper that removes the media's greasy film of financial misinformation from your investment outlook. Don't drive your investment vehicle without it!

December 18, 2007.

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