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Rick Rule continues:

“I suspect that today we are seeing the beginnings of a more conventional trade, the realization that the entire fiat currency complex has the same sets of issues, and that a partial position in precious metals makes sense the liquid portions of portfolios.

Certainly European investors have immediate cause for concern. With the latest European advances, Greece has more aggregate debt than it had before the recent bailout and haircut, and market interest rates on Greek debt, and Greek credit default rates, guarantee a continuing crisis in the country.

Meanwhile, Greek banks have experienced a classic run, where depositors have withdrawn their deposits and transferred them outside of Greece, fearing a forced surrender of domestic savings, and an enforced conversion from existing euro deposits into Drachmas....

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“These deposit outflows have been replaced by European credit instruments, meaning that the Greek banks have shifted their deposit liabilities from private Greek citizens to Eurozone taxpayers.

This problem would be merely serious, were it confined to Greece, but there is increasing evidence that it's not. It is increasingly apparent that Spain, Italy, Ireland and Portugal all have problems at the sovereign level, and at the commercial bank level.

Domestic political constituencies in all of these countries will likely wish to pursue a course similar to the one in Greece; transfer private savings out of broken banks, and sovereign domestic bonds to avoid capital and exchange controls. At the same time, they will lobby for European injection of capital to refinance their unsustainable debt and living standards.

For confirmation of that, note Silvio Berlusconi's statement today that if the European community were not willing to assist Italy with a massive infusion of newly printed Euros into the Italian sovereign market, and into facilities for Italian banks, that Italy should say, ‘Ciao’ to the Euro! The sovereign finance mechanism in Europe today is a farce. It is also important to note that Belusconi’s statement lit a fire under the gold market today.

The ECB and other institutions make unlimited low cost credit facilities, newly printed (counterfeited) Euros available to the banks, with flexible durations, and the banks buy newly issued sovereign bonds at a higher interest rate. This fraud makes the banks look stronger, even in the face of bank runs, and it looks like there are buyers for these otherwise unsalable bonds.

What really bothers me personally is that I see the markets assuming that in the first instance these problems can be socialized rather than realized, secondly that northern Europe can and should bail out the European periphery, and that the US can and should be the final line of defense.

We are engaged in the same fiscal insanity in the United States. We have lived beyond our means for two decades, and financed our profligacy with debt. We have attempted to deal with structural issues with counterfeited liquidity, and the above described funding mechanism, where we introduce unlimited government low interest credit facilities to the banking sector.

This reinvests the proceeds in government debt, is alive and well in the US, on a truly epic scale. I have no idea how this plays out Eric, but perhaps today's breakout in gold and silver provides a clue as to how some investors view the future.”

Rule added this regarding the mining shares:  “Assuming the up-move in gold and silver prices continues, this can only be good for the real gold and silver stocks. Select equities are very cheap. The ultra high net worth speculator community will be strong net buyers of select equities, and I think we will see a stealth bull market emerge, driven by patient value buyers such as myself, and by merger and acquisition activity.

These are the times where solvent, courageous, hardworking speculators make absolute fortunes, particularly in the private placement space, and the rest of the participants get shaken out, or buried. Repositioning ones portfolio from weak to strong is critical, the strong will thrive, while the weak will expire.”

The interviews with Don Coxe ($538 billion BMO), Art Cashin ($612 billion UBS) and Rob Arnott (Oversees $100 billion) are available now.  Also, be sure to listen to this week’s line-up of other KWN interviews which include Newmont CEO Richard O’Brien, John Hathaway and James Turk by CLICKING 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.

Eric King

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