Global Gold’s Outlook Report: “Debt Is The Key Issue”

The latest “Global Gold Outlook Report” is out. Besides the main topic, which focuses on gold and what is going on in the physical market, the report briefly summarizes the interpretation of the Chase Manhattan Letter, stating that international wire transfers will no longer be possible. It also contains a short introduction about an upcoming conference in St. Kitts at the beginning of December. Readers who have ever wanted to enjoy a glass of wine while having a personal discussion with the likes of Doug Casey, Peter Schiff, Mark Skousen, or Harry Dent in a quiet and private environment should sign-up as soon as possible because there are only a few seats left available.

Finally, this quote from Jacob Burckhardt (“It is the historian’s function, not to make us clever for the next time, but to make us wise forever”) provides an introduction to a short summary from an outstanding book written by Murray N. Rothbard concerning the strong, 150-year alliance between politics and the banking system. More about that on page 7 of the document.

Claudio Grass wrote an additional remark to its subscribers in which he explained his veiw on the current environment.

“Most of what we consider as “wealth” today is nothing more than credit or debt. The debt levels are continuously climbing to new heights on almost a daily basis. We see two main options for the future: either governments and their central banks will inflate the problem away, or we could see a collapse of these debt levels (deflationary scenario). Although we think that the first scenario is much more likely and that it would certainly have a direct positive impact on the price of gold, we are also confident that even in a deflationary environment gold would perform well or, at least, preserve ones capital. Why? Simply because it has a value in itself, with no counterparty-risk and does not need a rating agency – history has proven that it is the ultimate and worldwide accepted form of money. In nominal terms, its price could decrease in the interim, but it offers an absolute form of an investment without a counterparty risk.”

The article from the outlook report “Between Tapering and US Government Shutdown, where did the gold go?”  looks at the key issue of our time: debt! The debt level has grown so massively that the US government was on the verge of default, with the partial government of two weeks in October. However, no agreement was reached, but a temporary fix to the matter which will eventually have to be settled in 2014. Both parties agreed on a temporary authorization of spending to January 15th – temporary fixes seem to have become a specialty of our politicians. The whole fiasco surrounding the government shutdown and debt ceiling was extremely hyped in the media and the commentators were actually implying the real possibility of a default of the United States.

But really, can the US really default on its debt? Or was there nothing else that the government could do to bypass the debt ceiling? What is the way out of this situation?

There is the rational viewpoint and a conventional one: cutting expenses and raising taxes. The problem is, however, that expenses are so much greater than revenues that this isn’t doable, at least politically.

There is another suggestion questioning why have a debt ceiling altogether? We are confident the US government would do everything in its power to find a way to circumvent its default. Desperate times call for desperate measures, and the absurdity of government “ideas” has no boundaries! Anyone remember the suggestion of the Trillion Dollar Coin? Money out of thin air, which the FED can virtually spend on anything it wants. How is this different from issuing bonds? Well, you are not issuing more debt! These are the magic words. Measures like these might reduce the debt burden but would have led to even more inflation. It is not even a solution to the underlying problem: debt! We do not necessarily think the government would have issued a trillion dollar coin, however, when politicians find their backs against the wall there is no telling what they will do.

How did gold react to all this? Initially, the downward trend continued along with other equities and commodities, as we have seen earlier this year in the market sell-offs. The gold price reacted rationally in our view. The market did not actually expect a default, although some yields around the 17th of October increased. The increase would have looked substantially different if a default was expected (and gold would have risen). Furthermore, most market participants thought (we disagree on this point) that the deadlock meant that the government might start massive spending cuts or at least be a bit more conservative. Once the “solution” was reached and it was clear that we were returning back to the “normal money printing” the gold price increased. Our standpoint has not changed: Gold has not entered a bear market. We’ve said it in our last outlook, this crisis and the previous sell-offs were NOT due to lack of physical demand. As much as 2013 has shown a frendy in gold sell-offs (particularly that of ETFs) in Western markets, the East kept on accumulating the real thing, namely India, China, Hong Kong and Russia.

Claudio Grass writes:

It will take time to see the upward trend in the gold cycle, and to recover from the big dive it has suffered in 2013. But instead of dropping the metal altogether, as Western investors are doing, those in the East are grasping the opportunity to buy all the metals they can get their hand on at these low levels and accumulate the metal. We are confident that current price levels are an attractive buying opportunity. Gold will always be a safe haven for investors! In fact, growth in physical demand in Asia (supported by the delivery delays reported in refineries) is a strong supporting factor that will support and drive up the gold price in the future.

Gold’s paper price

The outlook reports mentions how the gold price is more or less dictated by the price of gold on COMEX. Claudio Grass: “This is simply incomprehensible to me, especially when one takes into account that there are hardly any physical transactions. The chart shows the relation between registered gold to the open interest. For every contract worth 100 ounces, currently less than 2 ounces are physically available.”


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