In an utter and complete repudiation of its founding principles, the European Union’s central bank (ECB) has decided to copy the U.S. Federal Reserve’s 2008-2009 strategy of “papering over”
Europe’s massive debt problems. The ECB will provide nearly unlimited credit to Europe’s sovereign borrowers, while also buying troubled assets from Europe’s largest banks.
This latest development has caused a significant change in what I call “the most important chart in the world.”
Readers of my investment advisory are familiar with the chart by now… as we’ve been publishing it nearly every month… and even more frequently in the daily S&A Digest. It shows the value of U.S. government long bonds represented by the ETF (NYSE:TLT), the price of gold represented by the ETF (NYSE:GLD), and the price of silver represented by the ETF (NYSE:SLV).
This is the battle for monetary supremacy… The market is arguing over a fundamental question: What is money? Dollars? Gold? Or silver?
For more than 60 years, the U.S. dollar has unquestionably been the world’s safest, most liquid form of money – its reserve currency. During times of economic trouble, investors rush to buy U.S. bonds as a safe haven, causing their value to rise sharply.
And that’s what happened – briefly – during the Greek crisis last month. But then, something changed. As soon as the ECB announced its big bailout and established a swap line with the U.S. Treasury (more about this below), investors realized there’s no real difference between the U.S. dollar and the euro. They are simply different names for the same thing: paper money. And investors understand the value of paper money may finally collapse under the weight of these massive sovereign debts.
What did investors buy when they sold the U.S. dollar in this crisis? Where did they run? As you can see, in reaction to the ECB announcement, investors bought gold… and to an increasing degree, silver. I believe this preference for metallic money will continue to strengthen as the financial problems of the U.S. Treasury begin to mount.
If you ignore this trend, you will be financially destroyed over the next several years. If you act now to protect yourself and your family, it will be the greatest single investment decision of your life.
Now… let’s look more closely at what the Europeans have done to stave off the collapse of the European Union…
To maintain a veneer of legality, the ECB will create an off-balance-sheet entity to “borrow” roughly $1 trillion from itself, the U.S. Federal Reserve, and the IMF. Europe’s member states agreed to guarantee these debts, which the ECB claims will be “riskless” because they’re simply loans between central banks.
At the root of every paper currency arrangement is a simple scheme to grant credit where none is due. In this case, the scheme is designed to give credit to bankrupt governments in the European Union, via guarantees from those same bankrupt governments and additional credit from the U.S. Treasury, which is itself a troubled creditor at best.
In short, the ECB is going to print up lots of euros and give them to the least creditworthy states and the worst bankers in Europe.
The politicians apparently believe this massive infusion of new money and credit will “jumpstart” the European economy, which will then produce enough tax revenue and banking profits to finance these new debts. Don’t laugh…
Meanwhile, to ensure this action doesn’t result in a collapse of the euro currency, the Federal Reserve has agreed to open a “swap” line, which will allow the ECB to fund as much of these news “loans” with dollars as is necessary to prevent a run on their currency.
Will this work? At the risk of dramatic future inflation, will creditors really be willing to accept devalued euros, which offer investors almost nothing in interest payments? I don’t think there’s a chance in hell.
The reason paper money systems always fail is because they provide no practical limit to credit. New currency reserves can always be printed. Bad debts – credit defaults – can be “papered over” rather than restructured. The stability of paper money systems seems like a virtue. The ability to simply manufacture money – without a deposit or true asset as collateral – is the ultimate financial sinecure. As long as confidence in the system remains, the amount of credit that can be manufactured seems limitless.
Unfortunately, this always leads to more debt. At some point, the whole system simply collapses. The debts become so large, they create an untenable economic imbalance, overwhelming the real economy. And when the credit bubble finally bursts, it doesn’t destroy just one or two banks’ house of cards. It wipes out the entire system, which is linked together by the currency itself.
Remember… this just isn’t about problems in far-off Europe. The U.S. is in the same situation: under huge debts we cannot hope to repay.
In tomorrow’s essay, I’ll show you my current analysis of the U.S. situation. It’s grim. In the meantime, I recommend you protect yourself by holding real assets… like energy, gold, and silver bullion.
Investors have turned to gold ETFs as a safe haven during the recent stock market turmoil. They offer a great way to protect you against risk in your portfolio during uncertain times. We have put together some ETF options in gold for your viewing below:
The investment SPDR Gold ETF (NYSE: GLD) seeks to replicate the performance, net of expenses, of the price of gold bullion. The trust holds gold, and is expected to issue baskets in exchange for deposits of gold, and to distribute gold in connection with redemption of baskets. The gold held by the trust will only be sold on an as-needed basis to pay trust expenses, in the event the trust terminates and liquidates its assets, or as otherwise required by law or regulation.
The investment ETF (NYSE: GDX) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the AMEX Gold Miners index. The fund generally normally invests at least 80% of its total assets in common stocks and American depositary receipts (ADRs) of companies involved in the gold mining industry. The fund is nondiversified.
The Funds ETF (NYSE: GDXJ) investment objective is to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Junior Gold Miners Index (the “Junior Gold Miners Index”). For a further description of the Junior Gold Miners Index, see “Junior Gold Miners Index.”
The objective of ETF (NYSE: SGOL) the newly listed shares is to reflect the performance of the price of Gold bullion, less the Trust’s operating expenses. The Trust is open ended and is designed for investors who want a cost-effective(1) and convenient(2) way to invest in Gold as well as diversify their Gold holdings.
The investment ETF (NYSE: UGL) will seek to replicate, net of expenses, twice the performance of gold bullion as measured by the U.S. Dollar p.m. fixing price for delivery in London. The fund normally invests assets in financial instruments with economic characteristics twice the return of the index. It may employ leveraged investment techniques in seeking its investment objective.
The investment ETF (NYSE: DGL) seeks to track the price and yield performance, before fees and expenses, of the Deutsche Bank Liquid Commodity Index – Optimum Yield Gold Excess Return. The index is a rules-based index composed of futures contracts on gold and is intended to reflect the performance of gold.
The investment ETF (NYSE: DGP) seeks to replicate, net of expenses, twice the daily performance of the Deutsche Bank Liquid Commodity index – Optimum Yield Gold Excess Return. The index is intended to reflect changes in the market value of certain gold futures contracts and is comprised of a single unfunded gold futures contract.
The objective ETF (NYSE: IAU) of the trust is for the value of its shares to reflect, at any given time, the price of gold owned by the trust at that time, less the trust’s expenses and liabilities. The trust is not actively managed. It receives gold deposited with it in exchange for the creation of baskets of iShares, sells gold as necessary to cover the trust’s liabilities, and delivers gold in exchange for baskets of iShares surrendered to it for redemption. The trust is not an investment company registered under the Investment Company Act of 1940 or a commodity pool for purposes of the Commodity Exchange Act.
The investment ETF (NYSE: DZZ) seeks to replicate, net of expenses, twice the inverse of the daily performance of the Deutsche Bank Liquid Commodity index – Optimum Yield Gold Excess Return. The index is intended to reflect changes in the market value of certain gold futures contracts and is comprised of a single unfunded gold futures contract.
The investment ETF (NYSE: GLL) will seek to replicate, net of expenses, twice the inverse daily performance of gold bullion as measured by the U.S. Dollar p.m. fixing price for delivery in London. The fund normally invests assets in financial instruments with economic characteristics inverse to the index. It may employ leveraged investment techniques in seeking its investment objective.