With continued volatility in global markets, today one of the top economists in the world sent King World News an incredibly powerful piece warning that the price of gold may finally be set to skyrocket as the West edges closer to collapse. Below is the fantastic piece from Michael Pento.
By Michael Pento of Pento Portfolio Strategies
September 26 – (King World News) – There has been an unprecedented attack on gold and mining shares over the past three years emanating from financial institutions in order to support the government’s supposed success in bringing the economy back to health. And even though gold mining shares are down 85% during this tenure, the case for owning gold-related investments has never been more compelling…
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The reason to own gold is the same today as it has been for thousands of years: It is the perfect store of wealth. Gold is portable, divisible without losing its value, beautiful, extremely scarce, and virtually indestructible. It is simply the best form of money known to mankind.
The Case For Gold
The case for keeping your wealth in gold is bolstered when real interest rates are negative, faith in fiat currencies is crumbling, and nation-states are insolvent. The massive and unprecedented “quantitative easing” programs and zero interest rate policies among the Bank of Japan, People’s Bank of China, European Central Bank, and Federal Reserve clearly show that central banks have no escape from manipulation of their bond market, currencies, equities, and economies. Fed Chairman Janet Yellen’s recent tacit admission that the fed funds rate must remain at zero for at least a full seven years was a clear validation of this premise.
Japan And The United States Are In Serious Trouble
For example, if the Bank of Japan were to stop buying every Japanese government bond issued, interest rates would skyrocket, the stock market would crash, and the economy would melt down in a matter of days. This is because any nation that has a debt-to-GDP ratio of 250 percent, is more than a quadrillion yen in debt, and is in a perpetual recession should never be blessed with a 0.3% 10-year note yield.
Turning back to the Fed’s recent decision to hold rates at zero, its inaction should lift the veil on its omnipotence. As Clark Kent can attest, being “Superman” is easy; returning to normal can be awkward.
With $44 trillion in total non-financial debt, which is up $12 trillion in the last 10 years alone, we have also become a highly indebted nation that has become completely addicted to lower rates. The U.S. high-yield bond market, which was the catalyst of the 2008 financial crisis, has grown to $2 trillion in size — a full $1 trillion of these new loans has been added since 2009.
Trouble – Subprime Mortgages Are Back With A Vengeance
But high yield isn’t the only lesson unlearned since the 2008 crisis. According to CNBC, nearly two-thirds of the high-risk Ginnie Mae-guaranteed securities are issued by independent mortgage banks, affectionately referred to as part of the “shadow banking system.” And those independent mortgage bankers are deploying some of the most sophisticated financial engineering that this industry has ever seen. Sound familiar? With credit scores of 520 and down payments of just 3.5 percent, subprime mortgages are back with a vengeance.
Therefore, a rise in rates would cool the already lukewarm housing market. According to the National Association of Realtors, sales of existing homes dropped 4.8 percent in August month over month to a seasonally adjusted annual rate of 5.31 million. Home ownership rates at 63.4 percent are already at the lowest level since 1967. Rising interest rates would not cause renters to become homeowners. Instead, rising rates would likely send the home price-to-income ratio, which is at 4.4, crashing back to its long-term average of 2.6.
Higher Interest Rates Would Bankrupt The United States
Turning to the interest paid on U.S. bonds, mean reversion of the 10-year note would bankrupt the Treasury. This is because that average rate is north of 7 percent. If the Treasury was forced to service the existing $13.2 trillion of publicly traded sovereign debt at that rate it would take about 30 percent of all federal tax revenue. Just imagine what will occur when rising rates cause the economy and revenue to decline as deficits explode. Remember that annual deficits soared to $1.5 trillion during the Great Recession; and that was with interest rates plummeting toward 2 percent.
And then we have emerging markets, where a rise in US interest rates will reveal one of the great instabilities in the global economic system. A total of $9.6 trillion in U.S. dollar-denominated debt is owned by non-U.S. borrowers. When the U.S. dollar strengthens, the cost to those foreign borrowers rises…a lot. Emerging-market economy debt is now 167 percent of their gross domestic product. This is up 50 percent since 2007, according to figures from the Bank for International Settlements.
This led the economy of Brazil, which was already suffering the effects of a slowdown in China, to announce austerity measures totaling $17 billion to bridge the gap in its budget, after Standard & Poor’s Ratings Services downgraded the country’s rating to below investment grade.
Low Interest Rates And The $2.5 Trillion Stock Buyback Binge
Turing back to the U.S. stock market, low interest rates have fueled a whopping $2.5 trillion stock buyback binge since the end of March 2009. Higher interest rates would see the end of this corporate buyback scheme, which provides an artificial boost to earnings per share and share prices.
And not to forget the several hundred trillion dollars’ worth of interest rate-sensitive derivatives, including credit default and interest rate swaps underwritten by institutions, which again will have to crawl back to the government for another bailout once their bets become insolvent.
Finally, seven years of ZIRP have forced pension plans far out along the risk curve in search of higher returns, vastly increasing the equity exposure in the portfolios in an attempt to generate the necessary 9 percent average annual returns. However, the Dow Jones Industrial Average is already dropped to a two-year low without one single basis point rate hike in the last nine years. Yellen and Co. must be aware if a cycle of rate hikes were to take place now, it would not only bring increased competition for stocks but also help push the anemic global economy into a recession. As a result there wouldn’t be a solvent public or private pension plan in the whole country.
The Case For Rising Gold Prices
The Fed is beginning to wake up to the fact that there is no easy escape from its artificial zero interest-rate policy. The Fed will not be able to move very far off of the zero-bound range before the yield curve inverts and the United States and indeed the entire global economy melt down. This means real yields will become more negative, the U.S. dollar will lose more of its purchasing power, and economic instability will intensify over time — the perfect fundamental backdrop for rising gold prices.
As the credibility and effectiveness of central banks come more into question, investors will seek comfort in gold because it is the sole monetary solution that has stood the test of time. This is why there is a direct inverse correlation between the faith in fiat currencies and the price of gold. Every few decades a reminder is needed that all fiat currencies throughout history have lost all their value.
Therefore, if you are among those who own gold and gold mining shares, consider yourself a part of a small and fortunate club, a cadre of investors who will be able to maintain their purchasing power and standard of living, while those with complete faith in fiat currencies get summarily remanded to the lower class. ***KWN has now released the incredible audio interview with the top trends forecaster in the world, Gerald Celente, where he discusses the failure of the elite’s propaganda machine, what to expect from the gold and silver markets as the global unwind accelerates, and also gives the KWN listeners a peak at what surprises he expects for the rest of the year, and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
***ALSO JUST RELEASED: Gerald Celente – The Equity Market Crash Will Impact Everyone In The World CLICK HERE.
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