We now know which “choice” the Fed has made. We knew all along that they would have to make a “choice” as to what they would “sacrifice”. On the one hand they could allow Mother Nature to work and destroy all of the malinvestment in the banking and financial sector. This, is the way it used to be, recessions would wipe out the over leveraged positions and cleanse the system of bad and ill used debt, thus clearing the way for a new business cycle free and clear of any “dead weight” debt to act as a drag on growth.
On the other hand, they could act to backstop everything financial (on the planet no less) and not allow debt to fail. Of course, they are only backstopping the bad debt owned by the “FoF” (friends of the Fed) financial institutions. At every turn, no matter the size, the Fed (in their own words) has acted as “lender of last resort”, they have created and lent whatever amount to whatever institution in whatever jurisdiction anywhere in the world. They have simply denied Mother Nature’s cleaning crew to come through and clean out debt that should never have been created in the first place.
The Fed chose option #2, which when all is said and done, absolutely, 100%, no ifs ands or buts, means the destruction of the U.S. Dollar as not only the reserve currency but more than likely as a currency at all. If you think about it, this is quite ironic because the Fed has chosen a path which guarantees the destruction of their one and only product, Dollars.
We were already well down the path of Dollar destruction when the latest QE (to infinity) was announced. Foreigners had already figured out the game and have drastically slowed their purchases of Treasury bonds AND stepped up their purchases of Gold bullion. Please remember, Gold is a finite asset and as you know, there are at least 100 “paper” ounces out there for every 1 real ounce that exists and can be delivered. The table is absolutely set for a “cash call” where investors request their metal to be delivered.
No matter how you look at it or how you want to describe this situation, the current setup is going to end in THE BIGGEST bank run in history! It may not be called a “bank run” but this is exactly what it is. Once in motion, it will accelerate and probably take no more than 2 weeks to be “complete” By “complete” I mean that there will be no Gold, none, zero, NOTHING available for purchase anywhere at any price. The shelves will be cleared and only restocked at a rate of whatever the mines can produce. The current production rate globally is only 2,500 tonnes, I highly doubt that even 1 ounce will be made available to us “retail schleps”. THIS is why you need to own metal NOW and have it secured BEFORE the coming “bank run” is triggered.
I do want to mention that once the bank run has occurred, mine supply will be THE only means to acquire metal and no matter how high the price, supply will not and cannot expand rapidly nor in any size of consequence. It is for this reason that it is a mistake to give up on the mining shares. The ONLY new Gold coming into the system will be the product of these mines that comes from Mother Earth. I consider them the next global central bank of central banks.
Yes I know, I will probably get some flaming e-mails telling me how stupid I am and all about nationalization of the mines. I agree to some extent (even the stupid part), some mines will be nationalized, but certainly not all and not on a completely global basis which is why you need to be diversified geographically. The mines that remain as independent operations will in essence have a monopoly on the creation of money. They will be so profitable that any “nationalizations” incurred or tax rates at 99% will be more than overcome by even just ONE position!
The shares are EXTREMELY cheap now, 2 months ago they were as cheap in relation to Gold as I can remember at any time in history and as cheap as they were at the bottom in late 2008. This in my opinion represents the opportunity of a lifetime and liquidating over the past year will be seen to have been a major error. The old standard that the shares “have 3 to 1 leverage” to the price of Gold has not held for the last 5 years, in my opinion the next few years will make up for that by having far greater leverage because they are starting from a very depressed level. The ones that don’t get nationalized or are not in a 99% tax jurisdiction may even have 30 to 1 leverage because of their profitability. Of course this is all just speculation on my part, if I am wrong and your “financial house” has a foundation built of physical metal, you are a winner. If I am correct, the ownership of shares will make you more wealthy than you’ve ever dreamed. Time will tell.
Disclaimer: This article reflects the opinions of Bill Holter and is not necessarily the opinion of Miles Franklin Ltd. Please see our full disclaimer for more details.