A Zombie Financial System, Black Swans and a Gold Share Correction
The world’s financial system died in mid-September of 2008. Since then it has become something out of Night of the Living Dead, in other words, a zombie. Central banks around the world came up with an interesting new concept that you could somehow borrow and spend your way to prosperity. Great concept but it seems to have failed utterly.
We have a zombie financial system now and the world owes more than at any point in history. Most governments are functionally bankrupt yet they want to borrow and spend more in the hopes that if it didn’t work before, maybe it will somehow work if they do more of it. Our grandchildren and their children are going to be paying for this monumental stupidity.
In my opinion we began a correction in gold and silver last week. As Tom McClellan has observed a number of times, full moons tend to mark either reversals in the metals or acceleration in the direction they were moving before the full moon. On the 18th of August we had a full moon and I think silver and gold have turned down. I’d love to see a full-blown correction. The boat is getting way too crowded with everyone on the same side of the boat.
Gold shares, silver and gold are leading the correction lower. The XAU, the HUI, silver and gold all set at least a short-term high in the first week of August. This gold rally is thirty weeks old and getting pretty long in the tooth. All things change.
I’ve sold a couple of thousand copies of my book. Many readers feel that the chapter on taking a profit is the single most valuable chapter in the book. Lots of my readers have made hundreds of percent on gold and silver shares. Have a plan. If we are going into a massive correction, it will be the single best time in your lifetime to invest in resource shares. But the XAU and HUI could be down 40% or more. Have a plan. Either sit on your hands until it ends and ride it out or take some money off the table. Now would be a good time to be cashed up. Remember, nobody ever went broke taking a profit.
I follow a lot of different indicators to give me a feel of where we are. One is the ratio of the number of ounces of silver it takes to buy one ounce of gold. When I was writing Nobody Knows Anything the ratio was about 83-1 and I talked about that being an especially safe trade.
Since anyone with any "cents" is holding some physical gold or silver or both, if the ratio goes above 80-1 you should sell your gold and buy silver. That ratio dropped to below 66-1 in late July, early August before heading higher. As I write, the ratio has climbed to about 71-1. That is an important sign of stress in the financial system. If it goes above 80-1 the system will be on the verge of an implosion.
We have flocks of black swans circling and no one knows which will land first.
I was warning of the dangers of derivatives as early as January of 2002. After the financial system collapsed in 2008 I followed up with another good discussion of derivatives. In 2002 derivatives were about $100 trillion. By late 2008 they were nearing $700 trillion. Today they are about $500 trillion.
As a measure of just how important gold is to the world financial system in comparison to interest rates, interest rate derivatives are about 1300 times greater than gold derivatives. We have a lot of me-too parrot websites talking about manipulation and conspiracies but logic tells us Central Banks worry about interest rates and couldn't care less about the price of gold.
Central Banks didn’t care when gold was $252 in 1999 and they didn’t care when someone suppressed gold all the way to $1923 in September of 2011. It’s way too small a market.
There is something Central Banks do worry about and that’s the US Treasury Bond market. The US T-Bond market looks as if it has made a blow-off top in early July. In our zombie financial system, last week Greek bonds were paying a lower interest rate then US Bonds. That’s insane but no more insane than something that has never happened in world history. We have $13 trillion in bonds world wide with a negative interest rate. In 5000 years such a thing has never taken place. If it was such a great idea, you would think that it would have occurred to someone somewhere before. It hadn’t.
I read something last week that made me realize how important the $500 trillion in derivatives is today. There are nearly 5,000 ETFs. That’s totally nuts. I asked one of the most sophisticated investors I know how many ETFs he thought there were in the world. He said, maybe 100. That’s not even close.
By now even the BIS is beginning to figure out that the counterparty risk of derivatives is uncontrollable. Basically when the system starts to come apart as we all know it will, counterparty risk is going to go through the roof and we will have a series of cascading defaults. All of the ETFs are going to fail. All 5,000 of them. There are too many to save.
Here’s what that means for ordinary investors. Perhaps you are listening to George Soros talk about shorting the S&P and going long gold. Or you would follow Lord Rothschild into gold and out of ordinary shares. For months Stanley Druckenmiller has been telling people to get out of shares and into gold. So you go buy an ETF that is betting on being short the S+P and you buy a pro-gold ETF. The S+P goes down 1000 points in a week as gold goes up $800.
You sit back smoking a big fat stogie and sipping on a dry martini with just a twist of lemon and think about how rich you are. But when you contact your broker, you find that you are penniless. You have lost every cent you invested. With 5,000 ETFs and $500 trillion in derivatives, when the system blows and it will very soon, the risk is no longer market risk. It’s counterparty risk.
The counterparties to your S+P short and gold long can’t pay up. Your money goes to money heaven and your wife runs off with the tennis instructor. Even your dog hates you. You forgot about the real risk of ETFs and derivatives.
If you can remember back to the dog days of 1997 when we had the Asian Financial Crisis, commodities were going limit up and limit down daily. Market risk morphed into counterparty risk. Even though investors were legally responsible for their margins, the prices were moving so rapidly that the back office of Refco/Lind Waldock couldn’t keep up. The guy running Refco fudged the books for eight years until an auditor picked up on the $430 million in losses dating back to 1997 and 1998. When the counterparty can’t pay up, the clearing house is on the hook.
I don’t even want to get into the insanity of the US presidential election. We have a choice between full-blown corruption and a fool. The FBI just announced there were another 14,900 emails that Hillary forgot to turn over. And Donald Trump is learning that maybe you should keep your mouth shut about illegal immigrants when it appears your wife was working on a tourist visa when she first came to America. And for the few Americans who still trust the news media, their constant unbridled attacks on Donald Trump will soon show just how much the mainstream media can be trusted to be “fair and unbiased.”
When empires are about to fail, war looks like a great alternative to fool the masses as to what is really going on. Obama and the Congressional/Military/Industrial complex have been pushing both Russia and China closer to war for years. One day soon someone is going to feel as if they have been pushed too far.
We just thought the Pentagon was corrupt back in 2001 when on September 10, 2001 it was revealed that the Pentagon couldn’t account for $2.3 trillion that they had spent. But recently it came out that in fiscal 2015 the Pentagon couldn’t account for $6.5 trillion. In the same way that 911 made a great cover up for the missing $2.3 trillion, what will the Pentagon invent to hide the missing $6.5 trillion? War is one alternative.
And while that may sound goofy, it sounds goofy to me and I wrote it, the German government is discussing how to tell their citizens to stock 10 days food and 5 days water in case of an attack or catastrophe. Perhaps someone knows something that we don’t.
We are in for interesting times between now and the election. The Chinese think interesting times is a curse. They are probably right.