Michael Pento continues:

“Gold investors are faced with two scenarios -- Either the mining shares have already priced in a massive reduction in the price of gold, and in that case they are fairly valued here, or they have priced in a correction in gold that is simply not going to materialize.  In the latter case, mining shares are severely undervalued.

If the mining shares are correct in what they are forecasting, gold would have to experience a correction.  If that takes place, the mining companies would be forced to shut down operations across the globe. 

Precious metals companies are now pricing in the notion that central bankers will fiddle while the global economy burns to the ground, and that would be an unprecedented occurrence in the history of fiat money.  In my opinion, these shares need to be accumulated on this panic selling....

Continue reading the Michael Pento piece below...


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Pento also had this to say:  “The prevailing view amongst Keynesians is that the austerity measures being taken in Europe, to prevent a complete currency and bond market collapse, is the cause of their current recession.  But blaming a recession on the idea that an insolvent government was finally forced into reducing its debt is like blaming a morning hangover on the fact that you eventually had to stop drinking the night before.

There is now a huge debate over whether the developed world’s sovereigns should embrace austerity or increase government spending in an effort to boost demand and avoid a full-blown economic meltdown.  Former U.S. Secretary of Labor and current professor of public policy at the University of California, Robert Reich, recently wrote a commentary titled, “We Should Not Imitate the Austerity of Europe.” 

In it, Mr. Reich contends we should simply; “Blame [the recession] on austerity economics — the bizarre view that economic slowdowns result from excessive debt, so government should cut spending.”  He continued, “A large debt with faster growth is preferable to a smaller debt sitting atop no growth at all.  And it’s infinitely better than a smaller debt on top of a contracting economy.”

But Mr. Reich and those like him who vilify austerity measures are ignoring the reality that investors, in periphery European sovereign debt, had already declared those markets to be insolvent.  Sharply rising bond yields in southern Europe and Ireland were a clear signal that their debt to GDP ratios had eclipsed the level in which investors believed the tax base could support the debt. 

Once sovereign debt has risen to a level that it cannot be paid back, by definition, the country must default through hyperinflation or restructuring.  However, in the unlikely scenario that the bond market actually has it wrong, a dramatic reduction in government spending gives sovereigns their only fighting chance before admitting defeat and pursuing a default strategy.

If these governments can quickly balance their budgets and lower the level of nominal debt outstanding; it gives them a chance to restore investors’ confidence in the bond market, bolsters confidence in holding the Euro and offers the hope that the private sector can rapidly supplant the erstwhile reliance on public sector spending.

Keynesians must realize that it was the high level of government spending, supported by a compliant central bank, that initially caused the debt to GDP ratios to skyrocket to the point where governments were deemed insolvent.  These governments already tried over-borrowing and spending and it didn’t work.  How is it possible to believe that adding even more public sector debt, most of which is printed, can fix the problem?

Public sector spending doesn’t grow an economy.  Instead, it just adds to the debt and thus, increases the debt to GDP ratio.  Yet more government spending, or investment as they like to call it, guarantees the bond market will be correct in judging Europe sovereigns bankrupt. 

Additional public borrowing not only increases debt but steals more money from the private sector that would otherwise be used to pare down onerous household debt levels or invest in the private sector—the only viable part of the economy that can support growth.  It would also cause the ECB to print more money and create more inflation; resulting in a further reduction of economic growth and the standard of living.

The sad truth is that austerity is coming to Europe regardless of whether it is voluntary, or because the international bond market forces it upon them.  Pursuing voluntary austerity measures gives Europe, and indeed the developed world, their only chance before defaulting on the debt. 

Indeed, Japan and the U.S. now have a better opportunity than Europe to make austerity measures work.  That’s because both their bond markets are currently quiescent; despite that fact that both of their debt to GDP ratios are far worse than in the Eurozone -- EU (17) debt to GDP is 87%, while the U.S. has 103% and Japan has 230% public debt to GDP ratio.  But the bottom line is that austerity is the market-based mechanism to countervail decades of profligate government spending.

Forcing down a few more drinks to delay a hangover isn’t a very good strategy.  Mr. Reich and the rest of the Keynesians should acknowledge that it is impossible for individuals, or a nation, to stay drunk forever.”

To Learn more about Michael Pento’s financial management services CLICK HERE. 

© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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Eric King

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