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By Robert Fitzwilson of The Portola Group

July 28 (King World News) - Investors Must Prepare Now For Chaos & Wealth Destruction


When it came to investing short-term money in the 1970s, the available tools were bank certificates of deposit, bankers' acceptances, Treasury bills, etc. Each placement of funds was into a specific instrument with an issuer and a maturity date. Often there was a coupon, but in many cases the return came from a discount offered from the value at maturity. It was a cumbersome process....


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Another choice was “deep-discount bonds." These were bonds that were issued many years before at rates that were laughable in the 1970s but were considered fair at the time of the offering. At the time of our purchases in the open market, the bonds were close to maturity but still trading at a steep discount due to the secular rise in interest rates. The original buyers of the bonds had been ravaged by that rise in rates as well as the effects of runaway inflation.


During that decade, money market funds were born. Those funds were a great convenience. Instead of having to buy and sell specific money market instruments, one could invest in a fund, and the fund would do all of the portfolio work. Eventually the funds allowed for checking account-like privileges. Those funds also had the comforting characteristic that the share price stayed at $1, with the dividend yield washing out the interest income and any price changes fort the underlying portfolio assets.


Last week the Securities and Exchange Commission announced new rules for money-market funds. Funds will now be allowed to deviate from the heretofore sacrosanct $1 pricing model. The abilities to charge penalties for withdrawals as well as to delay payment were also part of the announcement. This should be considered an omen to investors when considering how much capital to maintain in these funds as well as the investment strategy of the funds in which money has been invested.


We have gone from the birth of the money-market fund concept in the 1970s to perhaps the beginning of its demise. Investors sent the message that funds would be chosen on yield. Fund managers heard that message and have often invested in instruments that might have a higher yield along with higher risk. The SEC might have taken a look at the aggregate portfolio composition for the industry, and its announcement should send a message that somebody is very concerned about the possibility of a run on the money-market industry.


Investors should be worried too. There is a presumption that the central banks can stabilize markets in a panic. Perhaps the changes are a prudent preventive measure. On the other hand, given the $29 trillion in stock market purchases by central banks, the ballooning of central bank balance sheets by what must be tens of trillions of dollars, the belief in unlimited fiat money creation might be a stretch.


The changes in the money fund rules were just one of a stream of warnings that the chaos that many have warned is in our future might be uncomfortably close. Street violence is on the rise in many countries. The situation in Ukraine continues to edge toward open warfare. Crucial parts of the Middle East are seeing war.


There are signs that Saudi Arabia and Libya might be next. We are seeing a rekindling of ancient hatreds in Gaza. However, the most important conflict is the civil war occurring within Islam itself. That civil war is close to engulfing the entire region in a monumental and historic battle for dominance. Expect the price of oil to head much higher.


The move away from the dollar is now in full force with the BRICs announcing their own version of the World Bank and International Monetary Fund. It remains to be seen how far away from the dollar world commerce can stray, but the desire and motive to challenge the dominance of the dollar is clear. It has also been reported that the large central bank purchases of gold might be part of the strategy for anchoring the finances of this new entity. It can only be good for gold as well as a clear indication that the reserve status of the dollar is at risk.


Last week showed little change in most asset classes. However, there was a sudden spike at the close of trading for gold and silver. As Andrew Maguire has suggested, tomorrow could be a very interesting day for the precious metals and the miners. The spike on Friday might have been a matter of the central planners and the institutions interested in lower prices for the metals getting nervous about what might occur as options expire and large orders for physical metals hit the market. We will soon see.


For the year, the precious metal mining companies continue to lead the pack by a wide margin. The Amex Gold Index (HUI) is ahead by 22 percent. That can be compared to the S&P 500 stock index, ahead by 7 percent, and the Russell 2000 stock index, down by 2 percent. If Andrew’s suspicion is correct, next week could see explosive moves higher in the HUI, increasing its already huge lead over traditional stocks. Unfortunately, global strife and conflict can only add to the toxic mix ahead. So it is extremely important that investors be properly positioned ahead of the coming chaos.


© 2014 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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