World’s Mountain of Debts, The Bullion Crosses the Maginot Line

``The fundamental question is whether a central bank can manage the supply of money and credit better than the free market otherwise would. We shouldn't kid ourselves about the true nature of the Fed, which is inherently incompatible with real free market capitalism. Centralized planning of the money supply is a form of economic control that significantly affects prices, wages, and production levels.”-Congressman Ron Paul

If inordinate liquidity drives the global equity assets, various carry trades and the creation of myriad financial claims intermediaries have likewise spawned rising asset classes on a global scale.

To show you the collective thrusts of global governments underpinning the present inflationary cycle we note that government printing presses have been in full throttle cranking out eye boggling debts in an effort to appease short term demands by voters and investors alike. With the advent of paperless electronic money, today’s money system is produced by simply pressing on a single button.

Analyst David Fuller of Fullermoney.com says that the reason why all central banks are flooding the money system with paper money is because:

1. No country wants a strong currency due to globalization's competitive pressures.

2. They still fear deflation more than inflation.

3. They believe that they can get away with printing money because wage pressures are muted while China and other developing countries keep the cost of manufactured goods down.

Of course one cannot discount that given the high leverage of the today’s monetary system, the only way out of the debt cycle aside from debt repudiation is to invariably print more money to drive down the value of their currencies which they will use to pay back creditors!

Debt Pyramid Courtesy of Larry Edelson for Safe Money/Weiss Inc.

``Where you find major debt excesses — that’s where you can also expect the greatest pressures on governments to generate more inflation.” notes Larry Edelson of Weiss Inc.. Mr. Edelson enumerates the geographical breakdown of private and public debts into the following:

Europe: $2.6 trillion

Asia (excluding China): $747 billion

Latin America: $760 billion

Third-world countries overall: Some estimates place third world debt at $2.1 trillion.

In the USA: Over $39 trillion. That’s more than $141,000, for every man, woman and child.

To consider these are interest bearing debt instruments which does not include:

the derivatives market which in the US alone stand at $96.2 trillion (Comptroller of the Currency).

Other financial obligations not included are the US government’s future state welfare commitments in Medicare and Social Security to the tune of $20 TRILLION, according to the US General Accounting Office study.

With similar welfare obligations subscribed to by governments of major industrialized economies as Japan and Germany.

Obligations by private companies to guarantee mortgage/asset backed securities underwritten by agencies as Fannie Mae and Freddie Mac.

In short, the mountain of debt has become so pervasive that it adds up to about $200 trillion (see table beside) or about 3 times more than the world’s GDP!

So while the inflationary nature of central bankers mostly in cahoots with politicians have spawned rising assets values, it has also fostered a highly levered consumer demand and excess capacities in various other parts of the world.

Today, the global commodity cycle has likewise been an outgrowth of the inflationary tendencies of collective governments.

Gold, Economist John Maynard Keynes’ (the paramount icon of Central bankers and politicians) barbaric metal crossed the ‘Maginot line’ to close above the $500 threshold level and register a 22-year high at $503.3 per oz.! Other metals hit pivotal milestones, Silver at an 18-year high, copper and lead to FRESH record highs, aluminum to a 16-year high and zinc to a 15-year high! Even sugar hit a 9-year high while cattle futures hit a two year high.

30-year Gold Chart Pre-Breakout courtesy of kitco.com

Some central bankers as Argentina, South Africa and Russia have aired their intent to increase Gold into their reserves, while the opening of the Dubai Gold and commodities exchange has expanded investor’s access to commodities.

First, my predictions for gold to hit these levels at this time frame have been attained albeit we could see some profit taking in the near future following its extended rise. To share the observation of CLSA’s jetsetting analyst Chris Wood, ``It is also hard to escape the thought that gold might be rising in the short term for the simple reason that just about everything else has been rising too.”

Second, for as long as central bankers continue with their inflationary proclivities, fiat currency values of all cuts will continue to see massive depreciations of their intrinsic values relative to finite precious metals and other commodities, regardless of a hyperinflationary or a deflationary outcome.

Third, gold has cut a swath along major currency levels signifying a new phase in its bullmarket and underscoring my outlook (see September 12 to 16 edition Gold At Fresh 17 Year Highs; Currency-wide bullmarket begins!). To quote veteran analyst Richard Russell of the Dow Theory Letters and one of Wall Street top market timers,

``Gold has entered a new phase. This phase is characterized by gold separating itself from all paper currencies including the dollar. It's clear that something has changed -- that gold is now being accepted by sophisticated investors, not as a speculation, but as an alternative currency. Thus, over recent weeks while the dollar was strong, gold has continued to climb. Such action would have been considered almost impossible even a few months ago.

``Gold is now being accepted as the fourth currency along with the dollar, the euro and the yen. But there is a difference. Gold is also being recognized as the tangible currency and the ONLY SAFE currency. That gold pays no interest -- but is still at an 18-year high in terms of dollars -- is a testament to its value and safety in the eyes of sophisticated investors."

Fourth, rising gold prices across all major currencies are not merely signs of attendant inflation (expansionary money policies and NOT rising prices) but rather symptomatic of underlying monetary stress in contrast to what has been parlayed by mainstream media. While gold has risen alongside the US dollar in the interim, this does not mean that the US dollar’s woes are over (see above). Nor does Warren Buffett’s trimming of his anti-US dollar losses suggest that he capitulates! In fact, outgoing Federal Reserve Chair Alan Greenspan in his latest public appearance admonishes on the possible significant impact from the fiscal imbalances ``In the end, the consequences for the U.S. economy of doing nothing could be severe.''

Lastly, gold is now prominently featured as an alternative investment class which has slowly pervaded into the mainstream school of thought. Alongside most of the contrarian analysts, I believe that gold is in a fledging phase of its bullmarket cycle with conservative targets at $873 per oz (1980 nominal high) and about $1,800 (inflation adjusted) over the coming years. It is when mainstream bankers and hard core central bankers ‘capitulates’ or turn into the bullish gold camp when its climax would have been reached. As far as we are concerned the indicators of bullishness are still within the periphery.