9 Jul 2011

The new 30 Years War

The world is about to descend into a 30 year war as the battle for energy heats up, it has been claimed.
World security expert Michael Klare believes the next three decades will see powerful corporations at serious risk of going bust, nations fighting for their futures and significant bloodshed.
He said the winners in the race for energy security will get to decide how we live, work and play in future years - with the losers 'cast aside and dismembered'.
Conflict: Professor Michael Klare believes there will be bloodshed as countries seek to protect their natural resources
Conflict: Professor Michael Klare believes there will be bloodshed as countries seek to protect their natural resources
'Over the coming decades, we will be embroiled at a global level in a succeed-or-perish contest among the major forms of energy, the corporations which supply them, and the countries that run on them,' he told CBS News.
'Why 30 years?  Because that's how long it will take for experimental energy systems like hydrogen power, cellulosic ethanol, wave power, algae fuel, and advanced nuclear reactors to make it from the laboratory to full-scale industrial development.'

Professor Klare, of Hampshire College, predicted that nations would soon resort to armed violence in a bid to protect their natural resources.
He likened the looming conflicts to the 17th Century 30 Years War.
This was when Europe was engulfed, between 1618 and 1648, in a series of brutal battles between the imperial system of governance and the emerging nation-state.
Disaster: There was talk of a nuclear 'renaisasance' before the meltdown of the Fukushima Daiichi power plant in Japan
Disaster: There was talk of a nuclear 'renaisasance' before the meltdown of the Fukushima Daiichi power plant in Japan

He added: 'When these three decades are over, as with the Treaty of Westphalia [which ended the 30 Years War] the planet is likely to have in place the foundations of a new system for organizing itself - this time around energy needs.

'The struggle for energy resources is guaranteed to grow ever more intense for a simple reason: there is no way the existing energy system can satisfy the world’s future requirements.'

'In the meantime, the struggle for energy resources is guaranteed to grow ever more intense for a simple reason: there is no way the existing energy system can satisfy the world’s future requirements.
'It must be replaced or supplemented in a major way by a renewable alternative system or, forget Westphalia, the planet will be subject to environmental disaster of a sort hard to imagine today.'
Oil, coal and gas currently supply 87 per cent of the world's total energy.
Over the next 30 years an additional 40 per cent of energy will be needed to cope with the rising demand in China and other rapidly developing nations.
But oil is expected to reach a production peak in the next few years and then start an irreversible decline - and the accelerating pace of climate change will produce ever more damage.
Well placed: Spain has made significant investment in wind energy in recent years and could profit handsomely if a major breakthrough was made in its technology
Well placed: Spain has made significant investment in wind energy in recent years and could profit handsomely if a major breakthrough was made in its technology

A host of intense storm activity, prolonged droughts, lethal heat waves and massive forest fires will force politicians to impose curbs on carbon dioxide emissions.
A decrease in oil, and the CO2 limits, will mean that by 2041 fossil fuels will not be supplying anywhere near its previous level of world energy.
There will then be more emphasis on finding alternatives - and the countries or companies who succeed will be well placed to become the energy, and commercial, superpowers of the 22nd century and beyond.

Nuclear power is another option, and before March's core meltdowns at the earthquake and tsunami hit Fukushima Daiichi nuclear power complex in Japan, analysts spoke of a nuclear 'renaissance'.

As a temporary solution, energy experts believe finitely available natural gas could be an answer.
But the controversial procedure of obtaining it, called hydraulic fracturing (fracking), poses a threat to the safety of drinking water and so may by opposed.
Nuclear power is another option, and before March's core meltdowns at the earthquake and tsunami hit Fukushima Daiichi nuclear power complex in Japan, analysts spoke of a nuclear 'renaissance'.
They predicted that hundreds of new nuclear reactors would be built across the world over the next few decades. 
But the catastrophe increased public concern and so, Professor Klare said, it was 'unlikely' nuclear power would be one of the big winners in 2041.
He thought wind and solar power would go from around one per cent of the total world energy consumption in 2008 to a projected four per cent in 2035.
But this would prove 'small potatoes' if there were no major breakthroughs in the design of wind turbines, solar collectors and energy storage.
If those developments did occur, then he said China, Germany and Spain would be well placed to win the war as they have made significant investment in the technology.
In decline: The production oil is imminently set to peak and then fall into an irreversible decline
In decline: The production oil is imminently set to peak and then fall into an irreversible decline

Biofuels and hydrogen power could also make a significant dent into the energy supply, but he said it was too early to know if they would pan out.
A number of other energy sources, including geothermal, wave and tidal, were also all in the early stages of development and would require major breakthroughs to have any lasting effect.

'Were I to wager a guess, I might place my bet on energy systems that were decentralized, easy to make and install, and required relatively modest levels of up-front investment.'

Whatever succeeded, Professor Klare, who wrote 'Rising Powers, Shrinking Planet', said the world would be a 'far different place' at the end of the war in 2041.
He said it would be 'hotter, stormier and with less land [given the loss of shoreline and low-lying areas to rising sea levels]'.
Carbon emissions would be strictly limited and oil only available to those who could afford it.
He added: 'Were I to wager a guess, I might place my bet on energy systems that were decentralized, easy to make and install, and required relatively modest levels of up-front investment.
'For an analogy, think of the laptop computer of 2011 versus the giant mainframes of the 1960s and 1970s.  The closer that an energy supplier gets to the laptop model, the more success will follow.'

30 YEARS WAR: 1618 to 1648

  • Europe engulfed in series of brutal conflicts
  • It was, in part, a struggle between an imperial system of governance and the emerging nation-state
  • Historians believe modern international system of nation-states was crystallized in the Treaty of Westphalia of 1648 which ended the fighting
Giant nuclear reactors and coal-fired plants would, in the long run, only thrive in places like China were authoritarian governments still called the shots.
But the real promise would be when renewable sources of energy and advanced biofuels could be produced on a smaller scale with less up-front investment.
That way it could be incorporated into daily life even at a community or neighbourhood level.
He concluded in his report: 'Whichever countries move most swiftly to embrace these or similar energy possibilities will be the likeliest to emerge in 2041 with vibrant economies -- and given the state of the planet, if luck holds, just in the nick of time.'

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8 Jul 2011

Pierre Jovanovic on French Monetary History

Pierre Jovanovic (jovanovic.com) talks to the GoldMoney Foundation about a number of episodes in French monetary history, from John Law’s introduction of fiat money and the Mississippi Bubble. He explains how France repeated its mistake with the Assignat hyperinflation of revolutionary France, how Napoleon’s gold standard and the latin monetary union lasted over 100 years and how it was abandoned to fight the First World War. He talks about De Gaulle’s intention to return to the gold standard and his demands on the dollar’s gold convertibility which eventually lead to Nixon’s default on the US Bretton Woods obligations. He goes on to explain how gold has since been marginalized in France, despite its traditional role and long history

Without Low Interest Rates, The U.S. Financial System Dies

Right now, interest rates are near historic lows.  The U.S. government is able to borrow gigantic mountains of money for next to nothing.  U.S. consumers are still able to get home loans, car loans and student loans at ridiculously low interest rates.  When this low interest rate environment changes (and it will), it is going to absolutely devastate the U.S. economy.  Without low interest rates, the U.S. financial system dies.  When it comes to borrowing money, it is the rate of interest that causes the pain.  If you could borrow as much money as you wanted at a zero rate of interest for the rest of your life you would never, ever have a debt problem.  But when there is a cost to borrowing money that changes things.  The higher the rate of interest goes, the more painful debt becomes.
The only reason that U.S. government finances have not fallen apart completely already is because the federal government is still able to borrow huge amounts of money very cheaply.  If interest rates on U.S. government debt even return just to "average" levels, it is going to be absolutely catastrophic.
So what happens if rates go above "average"?
The reality is that if there is a major crisis that causes interest rates on U.S. Treasuries to go well beyond "normal" levels it is going to cause a complete and total collapse.
In 2010, the U.S. government paid out just $413 billion in interest even though the national debt soared to 14 trillion dollars by the end of the year.
That means that the U.S. government paid somewhere in the neighborhood of 3 percent interest for the year.
Considering how rapidly the U.S. dollar has been declining and how much money printing the Federal Reserve has been doing, a rate of interest that low is absolutely ridiculous.
The shorter the term, the more ridiculous the rates of interest on U.S. Treasuries are.
For example, the rate of interest on 3 month U.S. Treasuries right now is just barely above zero.
The Federal Reserve has been playing all kinds of games in an attempt to keep interest rates on U.S. government debt low, and so far they have been pretty successful at it.
But they aren't going to be able to do it forever.
Up until now, other nations and investors around the world have continued to participate in the system even though they know that the Federal Reserve is cheating.
However, there are signs that a lot of investors are finally getting fed up and are ready to walk away from U.S. government debt.
China has been dumping short-term U.S. government debt.  Russia has been dumping U.S. government debt. Pimco has been dumping U.S. government debt.
Others are taking things even farther.
In fact, there are some investors that plan on cashing in on the loss of confidence in U.S. Treasuries.  Renowned investor Jim Rogers says that he is now going to be shorting 30 year U.S. government bonds.
Just check out what Rogers recently told CNBC....
"I cannot imagine or conceive lending money to the United States government for 30-years at 3, 4, 5 or 6 percent —you pick a number — in U.S. dollars"
And he is right.  Who in the world would be stupid enough to loan the U.S. government money at a 4 or 5 percent rate of interest for the next 30 years?
Actually, most U.S. government debt is financed in the short-term these days.  In fact, the U.S. government issues a higher percentage of short-term debt than any other industrialized nation.
This trend really got started during the Clinton administration.  Back then they figured out that the U.S. could reduce its borrowing costs substantially by relying much more heavily on short-term debt.  The Bush and Obama administrations have continued this trend.
So these days the U.S. government constantly has huge amounts of debt that are maturing and that need to be rolled over.
This is great as long as interest rates stay very, very low.
But when interest rates rise the whole game will change.
In a recent article, Pat Buchanan explained that the Obama administration is being completely unrealistic when it assumes that interest rates on U.S. government debt will stay incredibly low over the next decade....
"The average rate of interest the Fed has had to pay to borrow for the last two decades has been 5.7 percent. However, President Obama is projecting the cost of money at only 2.5 percent.
A return to the normal Fed rate would, by 2020, add $4.9 trillion to the cumulative deficit"
Most Americans really cannot grasp how incredibly low interest rates are right now.
Sometimes a picture is worth a thousand words.
The following chart shows how interest rates on 10 year U.S. Treasury bonds have declined over the last several decades.
As confidence in the U.S. dollar and in U.S. government debt declines, interest rates will go up.
In fact, there are troubling signs that we are starting to see a move in that direction right now.  Last week, the yield on 5 year U.S. Treasuries experienced the biggest one week percentage jump ever recorded.
The big danger is that the political wrangling in Washington D.C. will start to cause a panic.  The managing director of Standard & Poor's recently told Reuters that if the U.S. government starts defaulting on debt at the beginning of August, the credit rating on U.S. Treasury bonds that are supposed to mature on August 4th will go from AAA all the way down to D....
Chambers, who is also the chairman of S&P's sovereign ratings committee, told Reuters on Tuesday that U.S. Treasury bills maturing on August 4 would be rated 'D' if the government fails to honor them. Unaffected Treasuries would be downgraded as well, but not as sharply, he said.
"If the U.S. government misses a payment, it goes to D," Chambers said. "That would happen right after August 4, when the bills mature, because they don't have a grace period."
When a credit rating gets slashed, interest rates on that debt can go up dramatically.
Just ask the citizens of Greece.
Today, the interest rate on 2 year Greek bonds is over 26 percent.
You are delusional if you believe that something like that can never happen here.
Right now the U.S. national debt is completely and totally out of control.  If the U.S. government had to start paying interest rates of 10, 15 or 20 percent to borrow money it would be a total nightmare.
This year the U.S. government will have income of about 2.2 trillion dollars.
If in future years the U.S. government is spending a trillion or a trillion and a half dollars just on interest on the national debt, then how in the world is it going to be possible to even run the government, much less balance the budget?
But rising interest rates would not just devastate the federal government.
It would become much more expensive for state and local governments to borrow money.
Student loans would become much more expensive.
Car loans would become much more expensive.
Home loans would become out of reach for everyone except the very wealthy.
As we saw during the housing crash of a few years ago, rising interest rates can absolutely wipe homeowners out.
On a standard home loan, if you change the rate of interest from 5 percent to 10 percent you increase the mortgage payment by approximately 50 percent.
If you change the rate of interest from 5 percent to 15 percent, you roughly double the mortgage payment.
As the 30 year fixed rate mortgage chart below shows, interest rates are near historic lows right now....
Keep in mind that even with such ridiculously low interest rates the U.S. real estate market has been deader than a doornail.
So what would a significant spike in interest rates do to it?
When all of these low interest rates go away the entire financial system is going to change dramatically.
A significant spike in interest rates would wipe out U.S. government finances, it would push state and local governments all over the country to the brink of bankruptcy, it would bring economic activity to a standstill and it would destroy any hopes for a housing recovery.
This country, and in particular the federal government, is enslaved to debt but right now we are not feeling the full pain of that debt because interest rates are so low.
If you want to know when things are really going to start coming apart, just keep an eye on interest rates.  When they really start spiking you can start sounding the alarm.
The truth is that the state of the economy is going to continue to get worse.  Our debt is growing every single day and our country is getting poorer every single day.  When interest rates start surging it is going to start knocking over a lot of dominoes.

I hope you are getting prepared for when that happens.


7 Jul 2011

The Sovereign Debt Crisis Is Never Going To End Until There Is A Major Global Financial Collapse

In the past, there certainly have been governments that have gotten into trouble with debt, but what we are experiencing now is the first truly global sovereign debt crisis.  There has never been a time in recorded history when virtually all of the governments of the world were drowning in debt all at the same time.  This sovereign debt crisis is never going to end until there is a major global financial collapse.  There simply is no way to unwind the colossal web of debt that we have constructed in an orderly fashion.  Right now the EU and the IMF have been making "emergency loans" to nations such as Greece, Ireland and Portugal, but that is only going to buy those countries a few additional months.  Giving more loans to nations that are already drowning in red ink may "kick the can down the road" for a little while but it isn't going to solve anything.  Meanwhile, dozens more nations all over the globe are rapidly approaching a day of reckoning.
All of the bailouts that you are hearing about right now are simply delaying the pain.  The reality is that when the "emergency loans" for Greece stop, Greece is going to default.  Greece is toast.  The game is over for them.  You can stick a fork in Greece because it is done.
One of the big problems for Greece is that since it is part of the euro it can't independently print more money.  If Greece cannot raise enough euros internally Greece must turn to outside assistance.
Unfortunately, at this point Greece has accumulated such a mammoth debt that it cannot possibly sustain it.  By the end of the year, it is projected that the national debt of Greece will soar to approximately 166% of GDP.
The financial collapse of Greece is inevitable.  If they keep using the euro they will collapse.  If they quit using the euro they will collapse.  When the rest of Europe decides that it is tired of propping Greece up the game will be over.
At this point very few people are interested in lending Greece more money.
As I wrote about yesterday, many of the nations around the world are only able to keep going because they are able to borrow huge amounts of money at low interest rates.
Well, nobody wants to lend money to Greece at a low rate of interest anymore.
Today, the yield on 2 year Greek bonds is back over 28 percent.
Fortunately for the rest of the world, Greece is just a very, very small part of the global economy, but when interest rates start spiking like that on U.S. debt or Japanese debt the entire world financial system will be thrown into chaos.
So why is there so much of a focus on Greece right now?
Well, there is a real danger that the panic will start to spread.
The other day, Moody's Investors Service slashed the credit rating on Portuguese government debt by four notches.
Portuguese debt is now considered to be "junk".
But even more alarming is that Moody's stated that what is going on in Greece played a role in reducing the credit rating of Portugal.
The following is a portion of what Moody's had to say when they cut the credit rating of Portugal by four notches....
Although Portugal’s Ba2 rating indicates a much lower risk of
restructuring than Greece’s Caa1 rating, the EU’s evolving approach to providing official support is an important factor for Portugal because it implies a rising risk that private sector participation could become a precondition for additional rounds of official lending to Portugal in the future as well. This development is significant not only because it increases the economic risks facing current investors, but also because it may discourage new private sector lending going forward and reduce the likelihood that Portugal will soon be able to regain market access on sustainable terms.
Do you understand what is being said there?
Basically, Moody's is saying that the terms of the Greek bailout make Portuguese debt less attractive because Portugal will likely be forced into a similar bailout at some point.
If the EU is not going to fully guarantee the debt of the member nations, then that debt becomes less attractive to investors.
The downgrade of Portugal is having all kinds of consequences.  The cost of insuring Portuguese government debt set a new record high on Wednesday, and yields on Portuguese bonds have gone haywire.
If you want to get an idea of just how badly Portuguese bonds have been crashing, just check out this chart.
But it is not just Portugal that is having problems.
Just recently, Moody's warned that it may downgrade Italy's Aa2 debt rating at some point within the next few months.
Spain is also on the verge of major problems and Ireland may need another bailout soon.
Things don't look good.
Unfortunately, if the dominoes start to fall the entire EU is going to go down.
Big banks all over Europe are highly exposed to sovereign debt and they are leveraged to the hilt.
It is almost as if we are looking at a replay of 2008 in many ways.
When Lehman Brothers finally collapsed, it was leveraged 31 to 1.
Today, major German banks are leveraged 32 to 1, and major German banks are currently holding a tremendous amount of Greek debt.
Anyone with half a brain can see that this is going to end badly.
So how is the European Central Bank responding to this crisis?
They are raising interest rates once again.
That certainly is not going to help the PIIGS much.
But Europe is not the only one facing a horrific debt crunch.
In Japan, the national debt is now up to about 226 percent of GDP.  So far the Japanese government has been able to handle a debt load this massive because the citizens of Japan have been willing to lend the government gigantic mountains of money at interest rates so low that they are hard to believe.
When that paradigm changes, and it will, Japan is going to be in a massive amount of trouble.  In fact, an article in Forbes has warned that even a very modest increase in interest rates would cause interest payments on Japanese government debt to exceed total government revenue by the year 2019.
Of course the biggest pile of debt sitting out there is the national debt of the United States.  The U.S. is so enslaved to debt that there is literally no way out under the current system.  To say that America is in big trouble would be a massive understatement.
In fact, the whole world is headed for trouble.
Right now government debt around the globe continues to soar at an exponential pace.  At some point a wall is going to be hit.
The Wall Street Journal recently quoted Professor Carmen Reinhart as saying the following about what we are facing....
"These processes are not linear," warns Prof. Reinhart. "You can increase debt for a while and nothing happens. Then you hit the wall, and—bang!—what seem to be minor shocks that the markets would shrug off in other circumstances suddenly become big."
That is the nature of debt bubbles - they keep expanding and expanding until the day that they inevitably burst.
Governments around the world will issue somewhere in the neighborhood of 5 trillion dollars more debt this year alone.  Debt to GDP ratios all over the globe continue to rise at a frightening pace.
Because the world is so interconnected today, the collapse of even one nation will devastate banks all over the planet.  If even one domino is toppled there is no telling where things may end.
The combination of huge amounts of debt and huge amounts of leverage is incredibly toxic, and that is what we have all over the globe today.  Almost every major nation is drowning in a sea of red ink and almost all of our major financial institutions are leveraged to the hilt.
There is only one way that the sovereign debt crisis can end.
Very, very badly.
I hope you are ready for what is coming.


Gold sets two-week high on inflation, debt worries

Gold prices climbed for a third day on Wednesday, rising to a two-week high after a rate hike in China put inflation concerns back in the spotlight and as worries over euro zone debt stoked safe-haven buying. After rising in tandem with oil and grains on Tuesday, gold broke away from a lackluster commodities complex and shrugged off a stronger dollar as risk-aversion pushed prices toward the top of the market's two-month trading range.
Gold bars are seen in this picture illustration taken at the Czech National Bank in Prague January 31, 2011. REUTERS/Petr Josek"People are choosing gold right now looking for some safe-haven investment and I think that might continue for a while," Michael Daly, gold specialist, at PFGBest in Chicago.
Spot gold's rose to $1,529.94 an ounce by 2:50 p.m. EDT from $1,515.70 late in New York on Tuesday. Earlier, it reached a two-week peak at $1,533.45.
U.S. gold futures for August delivery added $16.50 an ounce to settle at $1,529.20 an ounce, a 1.09 percent increase, after rising earlier to a two-week peak at $1,534.50.
"With China raising rates, and normally when a bank of that size raises rates it's negative for gold and silver, but I think savvier investors are more concerned about inflation, because higher cost of living is going to trickle down globally," Daly said.
Overnight, China's central bank increased interest rates by 25 basis points, its third increase this year, making clear that taming inflation is a top priority even as economic growth slows modestly.
"In real terms, you are not making any money by just holding cash. A lot of new middle-class Chinese have cottoned on to this, and there is a lot of demand for gold as a store of wealth under these circumstances," said VM Group analyst Carl Firman.
The euro slid for a second straight day against the U.S. dollar as the Chinese interest rate hike raised global growth concerns in a market already unnerved by the downgrade of Portugal's debt to junk.
Often this would weigh on dollar-denominated gold in overseas markets. But the risk aversion trade has drawn investors to both assets.
The metal was also lifted by concerns over euro zone debt after Moody's cut Portugal's credit rating to junk status, and an upcoming debate on raising the U.S. debt ceiling.
"The issues surrounding the euro zone are going to last for quite some time. So, they are something that markets are going to have to be dealing with on an ongoing basis," said Macquarie analyst Hayden Atkins.
Bonds issued by the euro zone's weaker countries came under intense pressure after the Moody's cut, which raised fears Portugal would also eventually be pushed into a debt restructuring.
Gold also received a nudge up from safe-haven buyers eyeing a report showing sluggish growth in the U.S. services sector in June.
Traders will be watching the European Central Bank's policy meeting on Thursday. The bank is set to lift euro zone interest rates to 1.5 percent and to show no softening of its stance that Greece must not default on its debts.
Expectations that the ECB will hike rates more quickly than the U.S. Federal Reserve have helped lift the euro more than 7 percent against the dollar so far this year, supporting gold.
Also on Thursday, U.S. weekly jobless claims are seen coming in at levels that continue to show a weak jobs sector, anticipating a tepid U.S. employment report for June on Friday. Economists, on average, look for payrolls growth of 90,000.
From a technical perspective, the precious metal is facing tough resistance after its latest break higher.
"We see resistance at $1,528, representing a 61.8 percent retracement of our June drop from $1,558 to $1,479," said ScotiaMocatta in a note.
Other analysts predict a longer period of sideways consolidation roughly between $1,475 and $1,550 an ounce.
On the supply side, investors were awaiting fresh developments in a strike in Freeport-McMoran's Indonesia mine, as well as the threat of a strike in South Africa's main gold mines.
Silver was up at $35.98 an ounce from $35.45 on Tuesday, after reaching a session high at $36.23. Spot platinum eased to $1,723.74 an ounce from $1,737.05, and spot palladium slipped to $764.85 an ounce from $770.38 on Tuesday.


6 Jul 2011

Eric Sprott: "Paper Markets Are A Joke: Prepare For Bullion Prices To Go Supernova"

"I think that the prices will continue higher. I mean the amount of money printing is unbelievable. I just think you have to take that initial stand in terms of buying it. I use the James Turk analogy: just keep dollar averaging. We have gone up eleven years in a row, this year it looks like it will be no exception; I would certainly think next year will be no exception. If we ever have QE3 announced, I think gold and silver will just go absolutely bonkers here. And so I just think you have got to step in there and own it; we’ve had these fears all the way along. You know, $400, and $500 and $700 and $800 dollar gold, everyone was afraid it was a one-time thing. I don’t think it is a one-time thing, I think it is a secular thing. It’s going to carry on for quite a while here until we find some resolution of these problems. And the resolution probably will be some form of default where people just have to expunge debts that cannot be repaid. So, you have got to be in some asset which will not be affected by that."
So predicts Eric Sprott, founder of Sprott Asset Management and famed investor. In this wide-ranging interview, he shares his insights on the precious metals markets - specifically what investors need to be aware of in terms of the way the markets are currently managed (manipulated), the macro outlook for the economy (grim) and the true value of gold and silver (very underpriced; particularly silver).
Eric sees the current "extend and pretend" intervention by world governments and central banks to prop of a fundamentally flawed baking system, particularly the vast money printing efforts of the past few years, as a ruse that is losing it's influence. Once enough people ask "Why have your money in a bank earning nothing? Why not have it in something that might at least maintain it’s purchasing power?”, the capital flows into the precious metals will dwarf current levels, sending bullion prices much higher.
Those interested in hearing Eric's insights on:
  • why we're in a global secular bear market for most assets classes
  • what the safest investment options are
  • how much precious metals exposure investors should have
  • the key factors that will drive PM prices much higher
  • the mindboggling supply shortage and manipulation within the silver market
  • why there may eventually be two prices for bullion: one for paper and (a much higher one) for physical & how high Eric thinks prices could go

should click here to listen to Chris' interview with Eric Sprott (runtime 38m:01s):

Or start reading the transcript below:

Chris Martenson: Welcome Eric, it's a real pleasure to have you today.

Eric Sprott: Chris, good to be here and thank you for all the work you are doing in apprising your investors of what's really going on in the world.

Chris Martenson: Oh thank you. We’ve been at it many years and unfortunately much of what I think both you and I saw coming - though unfortunately not enough others along the way - is really coming to pass. If I could, let’s start with your views. You have been advocating and creating investment vehicles for people to own gold and silver for a long time. How did you get to that position and what are your views on owning gold and silver at this point?

Eric Sprott: Sure. Well it all started, Chris, with our studies back in 2001 where we were entering into a secular bear market and wondering how you deal with that. And a typical response would be to own gold and silver, which is what we decided to do. I think the one thing that really tipped us into it was an analysis of the physical supply and demand for gold and some work by Frank Veneroso that suggested things would have to change dramatically in the physical gold market because the central banks were selling four to five hundred tons a year. And as you know, here we are eleven years later and now they are buying four hundred tons a year on balance, and this is in a market where the mines supply only twenty-six hundred tons a year. So that is a huge change that had to take place that Frank identified back then. He also identified that the gold companies would stop hedging. We’ve had the ETF’s come along. So we have had a lot of dramatic changes in the physical balance between supply and demand in gold. And that is really what took us there in 2000; to get actively involved in that particular market.

Chris Martenson: And looking at it today, has anything changed in that analysis? You mentioned a secular bear market, are we still in one and also has anything changed in the fundamental supply/demand equation that has actually tipped it one way or the other, further or less, since the initial analysis you looked at?

Eric Sprott: Sure. Well I do think we are still in the secular bear market and basically what people describe with the phrase “extend and pretend”. And we had the zero interest rate policy, the housing boom, the lending boom, TARP and TALF and all those things which try to delay what naturally should happen. When I look at the headwinds for gold and silver, I really believe that we have been aided and abetted by a lot of these policies, particularly QE1 and QE2 and the various printing mechanisms of the ECB and the Japanese government and almost all governments in the world. So as much as I would not have anticipated those types of developments happening, they have happened and they provide an even stronger headwind for people realizing that currencies are not going to survive and to maintain your purchasing power you have to own precious metals.

Chris Martenson: You know, I too have been surprised by how long all of this has stretched out. If you had told me five years ago - Eric if you had said “Chris, the Federal Government in the U.S. is going to be running a $1.6 trillion dollar deficit and the Federal Reserve is going to monetizing 75% of that and the bond markets will be relatively tame and the dollar will still be roughly where it is at”; I would have said you’re nuts. But here we are. And my view on this is that what we are kicking the can down the road. We have bought some time, - which I am thankful for personally - however the risks are now increasing. And the risk that I have identified that concerns me a lot is that, sooner or later, much is happening in Greece right now where suddenly the world wakes up and says “Hey, wait a minute. They can’t possibly pay that back. And at 22% interest rates on 2-year paper, they really can’t pay that back.” So suddenly the illusion is lifted. We have collectively suddenly gone, “Greece is not solvent. Oh, that’s terrible.” And now we are grappling with that. But that same dynamic can be extended to, I think, any of the governments that you just mentioned. It varies across Europe somewhat, but in Japan and the U.S. there certainly are fundamental mismatches between current productive economic output and the levels of indebtedness. We are printing our way to that. Is there a way that you can see that this could actually be turned around where it all sort of pencils out? Is there a solution to this that does not have to pass through a fiscal crisis and possibly a currency crisis?

Eric Sprott: Well Chris, it is very hard to imagine that happening. And then I look at really what has happened over the last eleven years since we hit the high in that, we basically created a problem in the world of banking business and I always think of banks as being levered 20 to 1. And when your paper assets start to decline, of course it does not take much of a decline to get rid of all the capital. And we have seen that in so many instances whether it is Iceland or Ireland or now the Greek banks. And all the moves that have happened so far, really have been in response to the problems in the banking system. That is why you have TARP and TALF and all those things because the banks basically were losing deposits and somebody had to come in and support them. That is what happened in the UK, it happened in Iceland, it happened in Ireland, it’s happening in Greece as is transpiring right now. And I think the big fear is that you cannot let one banking system go down without an impact on all the other banking systems. So collectively everyone is trying to support the banking system and I think people see through the ruse. And the natural reaction is “Well, why have your money in a bank when you earn nothing, why not have it in something that might at least maintain it’s purchasing power?”

Click here to read the rest of the transcript.


5 Jul 2011

SILVER GURUS: Paper to Physical Ratio of 25, 100, 500 to 1? Sprott, Martenson & Bix Weir

This is a long overdue precious metals update discussing the massive paper manipulation of the silver market. Featuring Eric Sprott, Chris Martenson and by phone, Bix Weir.

Got Physical Silver?

According to the annual report released by metals consultancy GFMS Limited for The Silver Institute, the annual industrial demand for silver will grow from about 487.4 million ounces recorded in 2010 to 665.9 million ounces in 2015. While emerging technologies are expected to contribute significantly to this demand, it is apparent that established uses will still be the major demand driver.
The highest end users of silver in 2010 were the thick film photovoltaic industry, the automobile industry, and the PCs and laptop manufacturing industry. Cell phones, PDPs, and button batteries were the other significant users of silver. Most of the new uses of silver are not new discoveries but are still termed ‘new’ since they have only begun to prove their commercial feasibility.
Silver electrodes are used in the LEDs and OLEDs of semiconductors used in solid-state lighting (SSL). The technology is already being used in traffic lights and some car headlamps, but technology to use it in signage, backlighting and other high performance applications such as televisions are still under development. Features such as dimming and uneven lighting are better performed by silver than by other alternatives.
Nanosilver is another material that is finding a growing number of uses, from textiles to medical devices. Catalysts, conductive/antistatic composites, silver impregnated water filters, silver algicides, and pigments are some of the applications already using nanosilver. The anti-bacterial and anti-fungal properties that certain refrigerators have are also because of nanosilver. New uses of nanosilver are in plastics, medical articles and devices, coatings and textiles. Some of the uses of nanosilver are still waiting for regulatory approval, which if granted, would increase the use of nanosilver in medical devices and electrical applications. The antibacterial properties of silver have already made the use of nanosilver a reality in the manufacture of sportswear, hospital gowns, bedding, and counter tops.
The increasing demand for power worldwide has forced engineers to consider superconductors for power trans-mission given their higher capacity and smaller volume in comparison with conventional cables. The technology can also be used in applications that require electrical energy to create a powerful magnet that can, for example, turn a motor. Superconductors can consequently be used in applications as wide ranging as hard disks to ships, from medical equipment to magnetic levitation trains. In this technology, silver is not used only for its excellent conducing properties but as a carrier metal. Besides offering fast heat diffusion, silver being a noble metal, will not react with the conducting material. The technology is still at a nascent stage with only Japan ready to begin operations by 2015 but it holds great promise.
Another potentially large-scale use of silver in future is in supercapacitors, which are similar to batteries but which have the additional property of being able to release and recoup energy very quickly. They can capture energy from various sources such as wind power or solar power. Supercapacitors can also be charged and completely discharged with no loss in performance. The role of silver in this technology is as electrodes in the form of printed silver. Although the awareness about the properties of nanosilver may limit the potential of this technology, it still has the capacity to achieve commercial success. Given the still unclear status of nanosilver, the chances of this technology succeeding are big.
In terms of price, silver is expected to continue rising this year. The price drivers are expected to originate from the investment industry and growth in industrial demand. Although the comparative high price of silver has made users look at viable alternatives, the transition is expected to take time and until then, silver will rule.


3 Jul 2011

Economic Armageddon and You

Every year when July 4th rolls around, Americans from coast to coast celebrate July 4th with cookouts, outdoor concerts and fireworks.  We love celebrating Independence Day and yet we are deeply enslaved to debt.  We like to think of ourselves as "free" and yet we have rolled up the biggest pile of debt the world has ever seen.  The people that we have borrowed all of this money from expect to be paid.  Sadly, instead of addressing the problem, we have been loading more debt on to the backs of future generations with each passing year.  What we are doing to our kids and our grandkids is so immoral that is almost defies description.  At the heart of this debt-based system stands the Federal Reserve.  It is a perpetual debt machine that was designed to trap the U.S. government in a spiral of debt permanently.  Today, the U.S. national debt is 4700 times larger than it was when the Federal Reserve was created back in 1913.  This year alone, we will add more to the national debt than we did from the presidency of George Washington to the beginning of the presidency of Ronald Reagan.  So yes, enjoy the hotdogs and the fireworks, but also remember that we will never be free as long as this constantly expanding debt problem is hanging over our heads.
If you know anyone that does not take our national debt problem seriously, please share with them the video posted below.  It is entitled "Economic Armageddon and You" and it is definitely worth the 5 minutes that it takes to watch it.  Someone out there did a really great job of explaining our debt problem in a way that almost anyone can understand....

So is there any solution to this problem?
Not under the current system.
The debt-based Federal Reserve system is designed to expand U.S. government debt indefinitely.  But of course all debt bubbles burst eventually and we are rapidly reaching that point.
It is being projected that the U.S. national debt will hit 344% of GDP by the year 2050 if we continue on our current course.  The truth is that it would never get even close to that high because the whole system would completely collapse long before then.
So what should we do?
We need to abandon our current debt-based financial system.  The way that our current system normally works, whenever more money is created more debt is also created.  Such a system is inevitably doomed to fail.
We need to transition to an entirely new system that has nothing to do with the Federal Reserve or Federal Reserve notes.  We need an entirely new system where the money is not based on debt.
But even though more Americans than ever are awake to the flaws in our monetary system, the truth is that neither major political party is remotely ready to even consider an end to the current financial system.
Many Republicans believe that if we can just cut government spending enough we can solve the problem.  Many Democrats believe that if we can just "raise enough revenue" we can solve the problem.
Neither of those solutions will work.
Many conservatives are so frustrated with the whole thing that they just want Congress to refuse to raise the debt ceiling.  I have taken a lot of heat over the past couple of days for suggesting that this is a bad idea.
If we refuse to raise the debt ceiling, our borrowing costs will absolutely explode.  Even if the U.S. government adopted a "balanced budget" by some miracle, the reality is that the federal government would still need to "roll over" very large amounts of debt every single year.  If interest rates on U.S. debt rise substantially it will be beyond catastrophic.
In 2010, the U.S. government paid $413 billion in interest on the national debt.
If interest rates were to start rising as a result of a debt default, interest on the national debt would likely double or even triple.
Look, if we want to come anywhere close to balancing the budget under our current system, it will be a whole lot easier to do if we are spending 400 billion dollars on interest on the national debt rather than 1.2 trillion dollars.
Today, the U.S. government only takes in about 2.2 trillion dollars in taxes.  How in the world are we going to have a chance if we have to pay out a trillion dollars just in interest on the national debt?
The yield on 10-year U.S. Treasuries rose from 2.86% to 3.18% just this past week.  Let us hope that this is not the beginning of a bad trend.
A refusal to raise the debt ceiling would also likely set off another recession (or worse).  The following is what a new article on CNBC says would happen if the U.S. does not raise the debt ceiling by August 2nd....
A U.S. default would not only be historic, it would also almost certainly lead to a new financial crisis. Interest rates would likely spike, equity markets would plunge along with the value of the dollar, and the country could fall back into a recession.
We have to raise the debt ceiling.
So does this mean that I am advocating "kicking the can down the road"?
If you are a conservative, you can still get the same result that you want without destroying the credit rating of the United States.
All the Republicans in Congress have to do is to pledge that they will never pass anything but a balanced budget for 2012 or for any year beyond that.  Without the permission of the House of Representatives, Barack Obama and the Democrats cannot continue their deficit spending.  The sad truth is that the Republicans have been enabling and actively participating in this debt binge all along.
A balanced budget would definitely hurt the economy, but at least it would not wreck our credit rating and cause our borrowing costs to multiply.
But is that what the Republicans are shooting for?
It is being reported that the Republicans and the Democrats have tentatively agreed to between $1 trillion and $2 trillion in budget cuts over the next 10 years.
So that comes to $200 billion in spending cuts a year at most.
Considering the fact that we are running budget deficits of about a trillion and a half dollars a year, that is not nearly enough.
So don't accuse me of wanting to kick the can down the road.  I want to actually do something substantial about the national debt.  I just don't think it is a good idea to trash our credit rating in the process.
It is the Republicans and the Democrats in Congress that are kicking the can down the road.
Trillion dollar deficits are not acceptable.  Our nation is on the road to financial ruin.
But it is not just the federal government that is in massive financial trouble.
The reality is that we have "government debt problems" from coast to coast.
Did you hear that the government of Minnesota shut down the other day?
As the financial health of almost every single state government continues to decline, this type of thing is going to become more common.
In the state of Illinois things are so bad that some income tax refunds have not been paid since 2009.  The following is a brief excerpt from an article on the Economic Policy Journal blog....

I repeat, this is no time to own state or municipal bonds. The desperation level at various states and municipalities is getting more and more intense.
With the start of a new budget year just two days away, thousands of Illinois businesses are still waiting for state income tax refunds dating back to 2009.
In a recent article entitled "Is The Economy Improving?", I went into greater detail about the horrific financial crisis that Illinois is facing....
Did you know that things have gotten so bad in Illinois at this point that the Illinois state government is letting bills go unpaid for long periods of time on a regular basis?
It's true.
Right now they have billions in unpaid bills and they are facing a financial future that is so bleak that it is almost indescribable.
In one recent article, author Stephen Lendman described the horrific financial crisis that Illinois is facing right now....
With spending exceeding revenues, and obligations not postponed, unpaid bills are growing "at a frightening rate. For instance, IGPA's Fiscal Futures Model indicates (they) could reach $40 billion by July 1, 2013, with an associated delay in paying those bills of more than five years."
Besides its $13 billion deficit and $6 billion in unpaid bills, its pension fund is about $130 billion in the red - a red flag that state workers may lose out altogether, wiping out their promised retirement savings.
But it isn't just the state government that is having problems.  According to Cook County Treasurer Maria Pappas, the average household in Chicago would owe a whopping $63,525 if all local government debt was divided up equally among all of the households.
How can we claim that our country is free when we are enslaved to such horrible debt burdens?
The borrower is always a servant of the lender.  As a nation, we are becoming a little bit less independent every single day.
So enjoy celebrating Independence Day while you still can.
If we continue on the path that we are currently on, nobody is going to be celebrating much of anything in the future.
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