Calling the Bottom at $50 Oil

With oil, gold, commodities and stocks all falling, many investors are wondering where the bottom in these markets will be. I think we are very close. These assets cannot fall forever, even though it seems like there is no end in sight. There are incredible bargains out there already, but many of these assets (despite already being under valued) continue to fall. Holding cash (and in particular the US dollar) has been the best place to put money for the last few months, but I expect this to change very soon. Cash buys a lot more today that it did a few months ago since many investors exited their positions and ran into cash and bonds. This was in large part due to the spectacular rally in the US dollar, fueled by fears of deflation. My prediction is that when oil approaches $50 a barrel, the deflationary mindset will change to one of inflation. Investor sentiment can change on a dime and have profound and immediate effects. At one time, everyone thought buying sub-prime mortgages was the best thing since sliced bread, and another day, investors all tried to exit their positions in these toxic assets. Those who were unable to get out near the top quickly found the market to be illiquid and discovered that they could only receive pennies on the dollar for what was very recently a highly coveted asset.

Inflation will return with a vengeance and drive up commodities, oil and gold, followed even by nominal gains in stock markets around the world. People have been rushing into dollars for the past couple months, but I think this trend will reverse very soon and everyone will be running away from the dollar and other cash positions in a rush to own real assets.

I think the US dollar will find a top when oil falls to around $50. When this happens, OPEC countries will suffer significant pain since their revenue is totally dependent on high oil prices. Oil prices at these levels will virtually bankrupt many OPEC countries and most will no longer have the money to continue to buy US debt. In fact, OPEC countries will actually have to sell their dollar reserves in order to finance government expenditure as their oil revenues decline. As OPEC countries start selling their dollar reserves, the dollar will fall sharply and eventually collapse completely. I do not know how quickly the decline in the dollar will occur, but I suspect that the fall could be even faster than its recent assent.

Investors with cash on the sideline need to start making plans immediately to get rid of any US dollars and US dollar denominated assets they are holding. As oil drops below $60, investors should start spending their fiat currency (especially US dollars) on these undervalued assets. By the time oil drops below $55 everyone should be almost fully invested. And if oil falls to $50 or below, it is time to back the truck up. It is not certain that oil will fall to exactly $50 a barrel because it might only fall to $53, or go lower to $47, but I predict the bottom will occur somewhere around the $50 level. Therefore, I do not recommend that anyone try to time things exactly perfectly, or to buy in at the exact bottom. Investors who try to time the bottom perfectly may end up being too late and will be stuck trying to get rid of their dollars after the mindset has already changed. The important thing is to get out of dollars before the mindset changes from deflation to inflation, since it will be much more difficult to buy into hard assets at a time when there could be a run on the dollar.

There appears to be many traders who are also betting on $50 oil as oil options soared after the OPEC cut failed to support prices.

Bloomberg: Oil Options at $50 Soar After OPEC Cut Fails to Support Prices. October 24th, 2008.

What will ultimately push oil down close to $50? Just pick an event. It could be further weakness in stock markets or continued deterioration in the global economy. Anything that would continue to show slower global economic growth or deflation will continue to push prices down. An economic or political crisis may erupt that would suggest less demand for oil, pushing the price down. So even though I am pretty sure that oil will bottom around $50, it is not guaranteed that gold will be dragged down also. Depending on what event pushes oil lower, gold may rise as oil falls. A crisis that would push oil lower could simultaneous push gold higher since gold traditionally rises in a crisis situation. The gold market is also very small and there is a lot of demand, therefore it is possible we have already seen the bottom in gold. There is so much demand for gold that all the buying should support prices to some degree. Gold could act as the canary in the coal mine as prices may rise in anticipation of what is to come and start blazing a trail that other commodities will eventually follow. Stock markets will probably bottom when oil reaches $50, whereas this is not necessarily the case for gold. When investors put their cash to work, they should first buy gold, then silver, then foreign stocks, and then oil. Investors not already holding gold should purchase some immediately, and then enter the stock markets as oil falls below $60, and finally the oil sector when oil falls below $55. Then sit back, buckle your seat belts, and prepare for a bumpy ride.

Investors should load up on physical gold and silver, (and maybe platinum and palladium as well), gold mining stocks, oil and oil sector stocks, agriculture, other commodities and foreign currencies. The large gold mining stocks will be the first to move up, followed by spectacular moves up in junior gold miners with defined deposits as money rushes into the ground. Foreign stocks in Asia that trade at low P/E ratios and pay huge dividends are ideal. Stay away from any investment in the Middle East and focus on counties like Australia, Canada, Brazil, Russia, Indonesia or Norway for energy stocks. Oil stocks in a country like Australia may be preferable to oil stocks in Canada because Australia will be selling their oil to richer Asian counties whereas Canada sells most of their oil to poor Americans. With the low value of the Australian dollar, foreign investors should get a lot of bang for their buck with many of these Australian investments. I also think that agriculture stocks in New Zealand look very attractive because they provide exposure to the Asian markets while still being a modern industrialized western nation where investors may feel more comfortable.

To all of those who thought that the economic crisis got bad during September and October… you ain’t seen nothing yet. The events that have occurred in the last two months were not the crisis; they were the lead up to the real crisis. The real crisis begins when the dollar starts to fall, and this is a crisis that cannot be solved by the Federal Reserve and the Treasury printing up more money. The current actions that have been taken to postpone the crisis will soon accelerate the crisis if policy remains unchanged. With everyone in the media talking about deflation, the inflation will take everyone by surprise causing a mass exodus from the US dollar and into traditional inflation hedges like gold and commodities.

The Two Dumbest Guys in America Who Got it Right

Patriot Radio News Hour - Wednesday, October 22nd, 2008

Archived Shows

I've been listening to the Patriot Radio News Hour since the start of the year. They are self procliamed right-wing wacko extremists who do a radio show out of beautiful vacant Dear Valley Arizona. They have been selling gold to the American people for the last decade, warning anyone who will listen that the financial collapse was coming. These guys do not have fancy University degrees or experience in the financial community, yet they somehow knew what the best and brightest could not understand.

When I first started listening to their show, I felt that they were a little over the top, and were overstating the dangers in the economy in order to sell more gold. But I kept listening to them none the less because they were hilarious and they provided a lot of economic news that the mainstream media conveniently would fail to mention. But after listening for a few weeks, I realized that these guys were not as crazy as they sounded. I discovered that almost everything they were saying was correct, and I have watched the economy collapse exactly the way they said it would. They deserve a lot of credit for getting everything right at a time when almost everyone else got it wrong. I listen to their show everyday because they are the only people who really understand the Government's agenda and what is really occurring in the economy. If you have never listened to their show, I would encourage everyone to put on their tinfoil hat and listen to today's show.

Bank of Canada Cuts Rates as Canadian Dollar Tumbles

Even though the Canadian dollar has been in freefall this month, the Bank of Canada decided to cut rates by a quarter of a point on Tuesday, October 21st, 2008. Since many had speculated that rates would have been cut by fifty basis points, the Bank of Canada is now able to claim to be more hawkish on inflationary pressures by only cutting 0.25%. The justification many have given is that it gives them more room to make further cuts in the future. But with the Canadian dollar in free fall, is it responsible to be setting rates at 2.25%?

Canada has one of the lowest interest rates in the world.

One American dollar currently buys $1.25 Canadian dollars. And one Canadian dollar only buys 80 American cents. Only a few months ago, the currencies were hovering around par. A graph of the Canadian dollar versus the US dollar over the last year illustrates the steep decline.

Canadian Dollar vs. US Dollar

To be fair, the US dollar has been strong against most currencies as of late, but the Canadian dollar has been very weak against many other currencies as well this past year.

Canadian Dollar vs. Euro

Canadian Dollar vs. Japanese Yen

Canadian Dollar vs. Swiss Franc

Canadian Dollar vs. Singapore Dollar

Canadian Dollar vs. Chinese Yuan

Even with the price of gold falling below $750 US, gold remains above $900 Canadian.

To find the price of gold in Canadian dollars:

Click Here for the American Dollar spot price of gold.

Click Here for the currency converter.

How much more can the Canadian dollar fall against other major currencies? Unfortunately, the Canadian dollar can fall a lot more. Canada is a commodity rich country, meaning that our dollar tends to trade in line with commodity prices. With lower commodity prices, especially with oil trading below $70 a barrel, the fundamentals of the Canadian dollar are very weak at the moment. From a macro perspective, the country is entering a recession and our housing bubble is in the early stages of deflating. Enormous unfunded liabilities, mostly retirement payments and medical care costs for retiring baby boomers, are coming due over the next two decades. Artificially low interest rates have expanded the supply of money and credit, which dilutes the value of the currency.

To see where the Canadian dollar might be headed, we can look at how the currencies of similar countries are performing. Most people would consider Australia to be the country most like Canada. Our two countries and economies are similar in many respects. The Australian dollar was nearly at par with the American dollar this past July, but has since fallen even more than the Canadian dollar to under 70 American cents.

Australian Dollar vs. US Dollar

If the Canadian government and Bank of Canada want to stop the steep decline in our dollar, monetary policy will have to be tightened by dramatically raising interest rates. This will have the effect of curtailing reckless borrowing and spending and encourage Canadians to replenish their savings. This course of action will bring about a much needed recession that will purge the imbalances in our economy that have been built into the system over the last decade. When Central Banks, like the Bank of Canada, set interest rates at an artificially low level, capital is inefficiently allocated and malinvestments are made. The misallocation of capital is not the fault of the free market or entrepreneurs; it is caused by the Central Bank artificially setting interest rates below the free market level. As the Canadian economy continues to deteriorate, the free market will most likely take the blame for the crisis and the government will interfere even more in the economy to try to fix the problem that they themselves created.

Money is the most important aspect of any economy and therefore when central economic planners at the central bank tinker with the system by fixing the rate of interest, the free market is not able to function properly. This is not because of an inherent flaw in the free market system, rather it is government interference in the market that screws everything up and creates the booms and busts. Once a boom has been created, a bust is inevitable. Attempting to keep the economy in the boom phase is impossible after it begins to turn to a bust. Attempts to keep the boom going are futile and come at the expense of currency devaluation like we are experiencing now. Capitalism cannot be blamed for current and future economic problems because true free market capitalism cannot exist when interest rates are arbitrarily set by central economic planners meddling in the economy. If we do not change course, imbalances will continue to grow within the economy and the recession will ultimately turn into an inflationary depression. If fiscal and monetary policy remain unchanged after entering an inflationary depression, a hyperinflationary blow out and complete economic collapse will follow.

There are big problems in Canada. These problems were created by government and central banks and the solutions they provide to the problems they created will make everything a lot worse. Government can only make the situation better by doing less, not more. They can help the economy by eliminating previous legislation and regulations rather than creating new ones.

There is a housing bubble in Canada that has recently started to deflate. The excess of credit that was pumped into the system while savings were falling. fueled a speculative housing bubble and allowed debt to expand to unserviceable levels. Even though I do not think the problems we face in Canada are as severe as in the United States, we none the less face many of the same issues. Canadians who believe that housing prices cannot fall dramatically can simply look to our neighbours to the south where prices in many areas have totally collapsed. The recent fall in the value of the Canadian dollar caused an equal fall in the value of Canadian houses. The fact that our currency got devalued, made all assets priced our currency less valuable. When a house, bank account, or income is priced in a foreign currency, a substantial amount of wealth is actually realized to have been destroyed. And if the Canadian dollar stays this lower or heads lower, the present value of future earnings just got hammered.

Canadians are not able to afford these expensive house prices since on average we do not have enough savings or high enough incomes to justify these outrageous prices. This temporary increase in the value of houses allowed the government to charge higher property taxes and received more though sales taxes from the excess spending generated from the increased debt that went along with the illusion of wealth. The increase in government revenue was not saved for the future, rather it was spent on current government expenditure. Even though the government took in huge taxes from baby boomers over the boom years, the government still spent more than it taxed and has accumulated massive unfunded liabilities that will be impossible for this younger generation to pay. The government should have been saving some of the tax money that they collected from the baby boomers in order to fund the retirement that they promised they would provide. Instead of this, the government did not save anything, and actually spent more than they took in and promised more than they could deliver.

How did Canadians get into this mess? Canadians trusted that their government would take care of them and they believed the promises made by politicians that they could improve the general quality of life without requiring hard work and sacrifice. The politicians who got elected were the politicians who promised the most benefits to special interest groups. Parents will vote for a candidate who promises to fund public schools while lowering taxes on middle income families. Elderly and retired people will vote for a candidate who promises better health care and retirement benefits while increasing taxes on the working class. Poor people will vote for the candidate who promises the biggest welfare checks and social safety nets while taxing everyone who produces the wealth they are stealing. With candidates trying to please all the special interest groups, they end up promising everyone that they will be able to make their lives better without making anyone else worse off. The more money that government spends is more money that they waste and Canadians would be a lot better off without this massive government trying to run the economy and take care of everyone.

We live in a globalized world, and the value of the currency of a country is vitally important to the health of the economy and the prosperity of the people. Constant currency devaluation will always lead to higher domestic prices in the future. Those who claim that a weaker currency will not cause domestic prices to rise are dead wrong. Canadians import most of their consumer products from abroad, so most of those prices will certainly go up. Domestically produced products will not rise as dramatically because the labour costs to produce those products fell in tandem with the currency. Producing cheaper goods by devaluing the salaries of the workers is not an ideal way to build a prosperous economy. It was Henry Ford, who once owned a great car company, who realized that by paying his workers a high enough salary, they could afford to buy the products that they themselves produced. But even though labour costs have fallen due to the depreciated currency, the capital costs have remained the same. In a global market, it makes no difference what the nominal price of a barrel of oil costs in any one domestic currency, because the price is determined at a global level. Even though oil fell below $70 US per barrel, the price of oil in Canadian dollars is still above $80. Therefore, if a Canadian farmer is competing with an American farmer, the currency devaluation has certain effects. The currency devaluation does not affect the price of the final product produced. If both farmers grow wheat, the price of wheat is determined at a global level and both farmers will get an equal amount of money for their product. So currency devaluation will not affect the real revue received by the farmers. The Canadian farmer will receive increased nominal revenue, but no increase in real revenue. The Canadian farmer will have no change in nominal labour costs, but will have lower real labour costs. And the Canadian farmer will have increased nominal capital costs, but no real increase in capital costs. Therefore, the profits for the farmer come only at the expense of cheaper labourers , since the increased nominal revenue is somewhat offset by the increased nominal capital costs. So even though the Canadian farmer receives more Canadian dollars for his harvest while leaving his nominal labour costs unchanged, the farmer is forced to pay higher capital costs (such as oil). Canadian consumers are stuck paying higher prices for domestically produced products without seeing an increase in their wages.

However, if a company uses skilled labour, these businesses will have to increase labour costs at close to the same rate as the currency devaluation. If the wages of a skilled labourer decrease because of currency devaluation, they are free to obtain a similar job in a foreign country that is able to pay a higher wage. The price of skilled labour can be looked at as a global good with a set world price for skills that are in demand. Therefore, businesses will have to pay a higher nominal price for skilled labourers which reduces the increased in profits. Given this fact, it is the poor unskilled workers who suffer the most from inflation, since their wages do not need to be increased, meanwhile, prices for necessary global goods are increasing.

Businesses that derive their revenue stream from within Canada (typically service industries) are at a particular disadvantage. Even though these businesses receive the same lower real cost of labour, they also receive lower real revenue streams. Their nominal revenues and labour should remain the same. If anything, their domestic revenue streams are actually likely to decrease in nominal terms also as people are forced to spend more money on necessary global goods that have all risen in price, leaving less money to spend on discretionary products and services. Increases in capital costs affect these businesses in the same way as the exporters, yet they do not receive the same increase in nominal revenue to offset the increase in capital costs. Therefore profits for domestic service industries, which compete for capital goods on the global market, will face increased costs and decreased profit margins, at a time when the domestic demand is falling. Service sector industries are then faced the situation of wanting to lower prices to attract more demand and wanting to raise prices to offset the increase in capital costs.

A devalued currency increases exports, which benefits those who export domestic products. The majority of the population in the country does not benefit from a devalued currency. Exports are increased for two main reasons. The first reason is that the labour costs went down which increases their competitiveness though lower costs. And secondly, Canadians are now a lot poorer and are therefore unable to afford to consume as many domestically produced goods, requiring them to be exported. So is increasing exports really all that good for society if it comes at the costs of lowering wages resulting in everyone being too poor to buy the goods that they produced?

China has a lot of exports because they devalued their currency, and their economy is growing rapidly. But since the currency is intentionally devalued by their communist government, the Chinese people do not get to enjoy consuming the goods they produce. As a result, a lot of the population in China has to work very hard producing many products, but they tragically put them all on ships and send them around the world to countries that have stronger currencies. A devalued currency results in a nation of slaves who produce goods that they cannot afford to consume. The notion that a devalued currency is somehow a good thing is preposterous. It benefits a few people at the expense of many. It steals wealth from those who have saved and gives to those who have borrowed. If a Canadian saved dollars in a bank account, from the perspective of everyone else in the world, that person just got about 10% - 20% poorer over the last year. However, if a Canadian had debt in Canadian dollars, from the perspective of the rest of the world, the debt burden just got reduced. And since the federal government is in the most debt out of anyone, they are able to create money and credit out of thin air, which devalues the currency, and allows them to repay their debt in depreciated currency that they counterfeited. When Canadians receive these debt payments in the form of government pensions, the retired population will be outraged that the checks they receive do not buy anything. Even those that are “inflation adjusted” will not keep up with prices since government numbers understate real world inflation.

The Canadian government needs to stop the madness that they created. Houses, condominiums and apartments are still being constructed because banks are still loaning out money to fund these construction projects. And since the banks are giving out credit that they got from the counterfeited money they received from the Central Bank, rather than true savings, that money will inevitably be malinvested. Credit can only be created though real savings. Savings can only be created by under consumption, where people spend less money than they make. Trying to create credit without savings will only lead to inflation and greater imbalances in the economy. This course of action makes things better in the short run, but ultimately makes things much worse in the long run. Lowering interest rates to prevent a recession will only postpone the underlying problems and does nothing to solve them.

The Bank of Canada (unlike the Federal Reserve) still publishes the M3 money supply which is the broadest measure of the amount of Canadian dollars in existence. In August 2007, the M3 money supply was approximately $1,142,475,000,000 or about $1.14 trillion. In August 2008, the M3 money supply was approximately $1,277,530,000,000 or $1.28 trillion. The money supply increased by over 11% in one year, meaning that there are 11% more Canadian dollars than there were last year. Is it any surprise that the value of our money is going down and prices are going up when money is being created at this pace?

Gold is Not Falling… The US Dollar is Rising

Gold fell below $770 US in trading today as the US dollar index surged above 83. As a Canadian investor, the drop in the gold price today was not very significant measured in Canadian dollars. Gold is still well above $900 in Canadian dollars, and the fall to around $770 US, only pushed gold down slightly to around $930 Canadian. As long as gold falls only when the dollar rises, foreign investors should experience very little fluctuation in the price movement. Until gold falls below $900 and $850 in Canadian dollars, I do not think that it is fair to claim that the value of gold is actually falling.

It is far more accurate to look at the price of gold, not as fundamental weakness in the metal, but as artificial and temporary strength in the dollar. At some point, the dollar will turn around and start to fall against all the major foreign currencies and the decline could be faster than the assent. The rise in the value of the dollar can only be explained through deleveraging, a misguided flight to “quality”, or the last remaining bubble yet to burst. With ridiculously low yields on treasury bonds, and Helicopter Ben making frequent money drops, the dollar in the long run will likely be one of the worst positions to hold. The current strength in the dollar can disappear as quickly as the dot-com stocks of the late 1990’s, or the inflated housing prices that existed throughout most of the United States. Even though the rise in the dot-com stocks and housing prices were equally as irrational as the current rise in the dollar, the increases happened none the less. Rational investors who looked at the insane price valuations of these assets were shocked at how high these prices went, when the fundamentals kept getting worse. The same can be said for the current rise in the dollar. I am surprised by the current strength in the dollar, in the same way that many were surprised at the high prices of dot-com stocks and houses.

It is important to recognize that the rise in the dollar is temporary. How high the dollar could go in anyone’s guess. Earlier this year, I would have never dreamed the US dollar would ever get back up this high to begin with. I think if people really understood what was occurring, no one would want to hold dollars. But the vast majority of investors have no clue what is happening to the economy and are buying up dollars, just as many were buying up dot-com stocks and mortgage backed securities at one time. Anyone who followed the herd in the past got burned when the bubble finally popped, so investors must resist the temptation to jump on board with the rising dollar. At some point, the dollar bubble will burst. I predict that the US dollar index will break below 70 sometime in 2009, which will be followed by a very steep decline, as the dollar enters new territory on the dollar index, without any support below.

In the mean time, investors holding US dollars should be thrilled at the artificial and temporary purchasing power their greenback provides. This phony rise in the US dollar is allowing holders of US dollars to purchases assets, such as gold, at a big discount. It is impossible to call the top in the dollar, and therefore impossible to call the bottom in gold, but I would encourage any investors who are still holding onto dollars to start looking at the types of assets they would like to buy. When the dollar turns around to head lower, the decline could be swift, so investors will have to be ready to dump their dollars at the first sign of trouble in order to get out ahead of the masses. Holding onto dollars is very dangerous, since dollars can be dumped in overseas markets. Investors do not want to wake up one morning to find out that the dollar lost its phony purchasing power while they were sleeping.

When the dollar bubble bursts, the dollar index will fall and gold will rise. Investors who manage to buy cheap gold with their expensive US dollars before this turning point will experience incredible profits while the majority of Americans discover that their money no longer buys anything.

How to Fly a Money Helicopter

Free market forces are causing credit to contract in an attempt to reign in years of excess borrowing and spending, purge malinvestment and liquidate bad debt so that the economy will be cleansed of these imbalances. Even though this would be a painful process, resulting in a sharp recession, it is ultimately preferable to government’s alternative. If the government would stay out of the way and allow and allow the free market to work, the recession would be brief and America would regain its economic strength on sound footing, allowing for real economic growth to take place. However, the government is telling voters that by interviewing in the economy, the government will be able to prevent the recession from happening. The government is correct that this course of action will prevent a recession, but only at the cost of causing a much longer and harsher inflationary depression. Choosing between a recession and a depression is like trying to choose between the lesser of two evils (a lot like the current presidential election). Even though both choices are bad and will cause significant suffering, a short recession is far more favourable. But politicians do not want to be accused of doing nothing while their constituents suffer, so they will take action that ensures the suffering lasts a lot longer than it has too.

Bernanke is trying to fight the free market forces that are causing credit to contract and is attempting to reinflate the bubble by printing money. He is touted as a student of the Great Depression and is under the false belief that a contracting money supply is what caused the Great Depression, when in fact, it was the expantion of the money supply during the 1920's that ultimately lead to the bust. Bernanke will therefore battle the credit crunch by finding ways to increase the supply of money and credit to get Americans to continue to borrow and consume. There is an incredible amount of liquidity (inflation) being pumped into the system in order to try to keep the boom going. The US government even resorted to mailing out $160 billion worth of checks a few months back and now has plans to mail out an even bigger one. These types of policies are wildly inflationary and fit the definition of a helicopter drop. Continued helicopter drops will eventually lead to hyperinflation, which seems to be the road that Bernake and Paulson are leading us down.

So if money printing and helicopter drops are designed to keep the phony borrow and spend economy going, there are much more effective ways to do this. To really get the credit flowing that will result in the spending that drives the GDP figures, the government needs control of the credit card companies.

Credit cards are what enabled the reckless consumption that drove the consumer economy. And the illusion of home equity allowed banks to lend money to bankrupt individuals who were then able to pay off their credit cards with home equity loans. Now that there is no more home equity to extract, credit card bills cannot be paid, causing credit card companies to reduce spending limits or cut off service to risky customers, leaving the consumer with no where else to turn to borrow money. The credit card is the last line of defense for Americans and many are simply running their cards to the limit in order to maintain their lifestyles. When the credit cards get cut off, Americans will no longer be able to consume anymore and the majority of the consumer spending based economy will collapse. Even though consumption in the United States has already fallen dramatically, I believe that most of the remaining consumption is only made possible through credit cards.

As more and more people default on their credit card loans, the credit card companies will eventually go bankrupt. The scary thing about credit card default is that people are defaulting on the minimum payment. Credit card debt can be enormous, but the monthly payments may be very small in comparison. Therefore, when people default, it is not because they are unable to pay back the full balance, it is because they are unable to pay back only a small fraction of their total debt. This will translate into enormous losses for the credit card companies which should push most of them into bankruptcy. If credit card companies actually tried to collect payment on the full amount that they were owed, virtually no one would be able to pay back the full balance within a short time period. As credit card debt compounds with interest, it is unlikely that Americans would ever be able to completely pay off their credit cards and so they simply continue to run up more debt until minimum payments cannot be made.

If the government wants to keep the helicopter flying and continue to fight the credit crunch, the government should take control of all the credit card companies. Politicians can sell this plan to the public by blaming the greedy credit card companies for charging too much interest and requiring unreasonable monthly payments. The next President could explain that the government action would lower the interest rate and monthly payments, allowing struggling families to get more time to get back on their feet, and reduce the anxiety of trying to make these payments every month. It should be easy to convince the public to support this plan because everyone hates credit card companies and the plan can be packaged in a way that makes it seem that government is protecting the public from the evil corporations that are destroying American families.

Once the government has control of all the credit cards and all the credit card debt that is attached to it, they can consolidate all this debt, which is now owed to the federal government. The government will then reduce the monthly payments to something very affordable. The government then sends everyone a new government credit card with a very high limit, low interest rates, and low monthly payments. People are then free to use this new credit card to pay the monthly payments of their previously consolidated debt, as well as use the card for new spending. A second credit card is then sent to everyone, which also has a very low monthly payment. The second card is used to pay the minimum monthly payments on the first card.

Example: Joe the Plumber and his family have a total of $100,000 of credit card debt. His combine monthly payments have reached $2000 a month. Times just keep getting tougher for Joe ever since he was fired from his job for not having the proper certification. Joe cannot afford to make these minimum monthly payments and has no money or credit that he can spend to put food on the table. The government then comes to the rescues of Joe the Plumber! The government buys up all his bad debt, bailing out the lenders who made the bad loans, and reduce his monthly payments to only $200 a month. The government then gives Joe his two new credit cards. After he gets this new credit card, he uses it to pay off his first $200 payment on his old debt, and then goes out and spends $4800 over the course of the month. So he still owes $200 per month on his old debt, and has now accumulated $5000 of new debt on the first credit card. The bill for his new credit card comes and he finds out that he owes a minimum of $10 for this month on his $5000 balance, which he can pay using his second government credit card.

With low interest rates and small monthly payments, people can continue to pay off credit card debt, with more credit card debt. And as long as limits are continually increased, people can keep spending money into the economy virtually without limit.

With government book keeping, it would appear Joe the Plumber is a very low credit risk because he is always making his minimum payments on time. Therefore, it is justified to increase his line of credit, because he has been so responsible with making his payments. And as the interest on the principle increases, the government can actually claim to have made a profit. The debt can be packaged up with a full guarantee of the government and sold aboard. These securities could have very high yields because it is possible to allow for the interest on the principle debt to be high, as long as minimum payments are low. And even though it is impossible to repay the principle without going into more debt, the value of the security will increase at the rate of interest on the principle. There will be no risk of default, since Americans can always pay the minimum payment with a new credit card, and foreigners would prefer these securitized assets to treasuries because they are backed by the government and pay a higher yield.

The problem with this plan is that when people figure out that they can spend unlimited amounts of money then everyone will go out and spend as much as possible. Therefore, the government will have to ensure that a small percentage default in order to prevent reckless spending. If people realize they can spend a reasonable amount of money for the foreseeable future, they will have an incentive to not run their cards up to the limit. The government could fix the default rate at 2%, and therefore the most reckless two percent of the population will go broke and no longer qualify for the government credit cards. People will realize that if they run up more debt than their neighbour, they could be out on the street. This way, everyone will spend relatively similar amounts, and only those who spend to excess will be eliminated from the program. But because the 2% of the population that will be defaulting will likely be poor minorities, there will be plenty of sympathy to help them through government welfare. So if people cannot be responsible to spend within their limits using the government credit cards, the government will regulate how much they can spend by adjusting the value of the welfare check they receive.

Marc Faber – Current Views on the Economy and What to Expect in the Future

Marc Faber Interviewed at Slovenia Resource Conference (04:21) [October 11th, 2008]

Marc Faber Interviewed by CNBC (03:26) [March 18th, 2008]

Marc Faber Interview [October 14th, 2008]
Part 1 (07:05)
Part 2 (07:05)

Marc Faber Lecture at Slovenia Resource Conference [October 11th, 2008]
Part 1
Part 2
Part 3
Part 4
Part 5
Part 6
Part 7
Part 8

The lecture given by Marc Faber at the Slovenia Resource Conference was very helpful in explaining the current economic situation and what is to be expected in the future. I would encourage anyone who wants to see some clear information and coherent analysis, to watch the recently uploaded videos of the lecture on youtube I posted above.

Similar sentiment was echoed by Puru Saxena in his recent commentary.

His suspicion is that the dollar will continue to strengthen in the short run, and gold could drop to $700 or even $600 an ounce. There are two factors that he suggests that could push gold lower in the next few months. The first is that further deleveraging will continue to force selling and drive all asset prices down further. Secondly, is the possibility that the market has made a short term bottom, the economy starts showing signs of recovering and markets will rebound, shifting the mainstream perception to thinking that the worst is over, and there is no need to own gold. He has compared the current period to that of after the crash of 1929, where stocks were oversold, and rallied back over 50% (but did not make new highs) before ultimately turning around to make new lows as the country entered depression. He expects markets to make this short term bottom sometime in October or November of this year, allowing for the possibility that this low has already been reached, and markets will regain some of their losses in the next few months.

Long term however, Faber is very bullish on gold, as he recognizes that Ben Bernanke is a money printer, who is destine to send the price of gold much higher as the dollar is debased. He expects gold to outperform the stock markets, and also predicts a one to one ratio of the Dow Jones to gold in a few years. He is predicting the bankruptcy of the US government and the devaluation and possible destruction of all fiat currencies sometime down the line.

Even though I recognize the possibility that gold will fall below $700, I would still recommend that everyone should buy some physical gold as soon as possible. The last time gold fell below $800 an ounce, many gold bugs turned bearish and started talking about $700 and $600 gold. This was the time when gold had its most spectacular rally, including an $80 move in four hours of trading, ultimately brining the price above $900. Sharp corrections in the gold price are designed to shake out the weak and leveraged players in the market so that the bull is able to charge forward with as few speculators on its back as possible. Those who are waiting for gold to hit $700 or $600 may end up finding themselves left in the dust if they fail to enter the market before the rush into the small asset class. And if gold makes another quick move above $900, those waiting for $700, may then wait for $850 gold. But then if gold surges ahead over $1000, those waiting for cheaper prices will be forced to make a difficult decision. Either they will have to pay a much high price than they were originally hoping, they can pray that the price of gold comes back down to a cheaper price, or they may never buy gold at all and miss out on the bull market. Someone who was thinking of buying at $800, but tried to wait for gold to go to $700 or $600, will ultimately find it difficult to ever justify paying $1000, $1200, $1500, $2000 or more for the same ounce of gold. Therefore, it is much better to be a few days too early, than one day too late. The economic situation is critical enough that it is better to err on the side of caution, rather than risking holding onto worthless dollars. Anyone buying gold at these prices is guaranteed to make money in the long run, so it is not necessary to time the markets perfectly. Those who buy into the gold market now or who are already holding positions should not be scared by further declines in the gold price. Any further drops should be looked at as tremendous buying opportunities because the long term fundamentals for gold show no sign of changing any time soon. There are too many people around the world who understand the severity of what is occurring, and will hold onto gold no matter what. A drop in price will not necessarily lead to more selling, and may in fact encourage more buying instead. Further declines in the gold price may lead to more shortages and higher premiums in the physical markets. So even if investors are waiting to get a cheaper gold price, there is no guarantee that there will be any physical metal available to purchase if the price does fall. With high demand for physical gold and fear of counter party risk, investors are starting to take delivery on COMEX contracts. Many of these contracts are in danger of default which would send the price of gold much higher very quickly. Massive short positions that have to be covered at some point may be forced to go into the tight market to buy the physical product in order to make delivery, resulting in default and/or much higher prices.

I believe that gold prices in the short run will be determined by the US dollar. If the US dollar continues to rise above 83 on the dollar index, then gold prices will likely fall. If this is the case, I expect the declines in gold measured in foreign currencies to not be as severe as US dollar declines, since gold has performed much better lately from the perspective of non-US investors in most foreign currencies. However, if the economic crisis takes another turn for the worse, like the possibility of another large bank failure, a run on the banks, a large company going bankrupt, an entire State (like California) going bankrupt, or even a terrorist attack, war with Iran, flu pandemic, power outages, internet systems crashing, and countless of other unpredictable events could cause a flight into both gold and the dollar, which would both be viewed as a safe haven and could rise in tandem. And there is always the risk of foreigners dumping dollars or big money players buying into the small gold market, both of which could send gold much higher virtually over night.

A further rise in the US dollar will have to compete against Ben Bernake and his money printing. With the Federal Reserve now loaning out an average of $437.5 billion per day, it certainly brings into question how much longer the dollar can strengthen considering that the monetary base is exploding at an unprecedented rate. Central Banks around the world have already pledged to lend out “unlimited” dollars to solve the financial crisis, which should prevent the dollar from strengthening, in addition to the fact that bond yields are incredibly low. The Federal Reserve is trying to pump enough money into the system to fight the credit contraction, and currently, the credit contraction is winning the battle. But I would caution investors who think the Credit Crunch will overpower Helicopter Ben Bernake, for he is the money printing champion of the world and inflationary forces are certain to return with vengeance.

There are good arguments for both gold going lower, and higher in the short run. No one has a crystal ball and is able to predict short term moves with any degree of certainty. In the long run though, the price of gold has to go much higher, which is all that really matters.

The Petro-Dollar Collapse

Another attack on the dollar could come from the seldom discussed and widely misunderstood relationship between the dollar and oil.

Ron Paul explains this relationship in the following speech on the House Floor.

Ron Paul – The End of Dollar Hegemony: Dollar Backed by Oil [February 15th, 2006] (09:54)

Ron Paul – The End of Dollar Hegemony [FULL SPEECH] [February 15th, 2006] (34:49)

After Nixon closed the gold window, the dollar was no longer backed by gold, and many think that the dollar is backed by nothing. I would argue that the dollar is actually backed by oil and the military superiority of the United States, which is necessary to maintain that backing. A deal was made with OPEC in the 1970’s to price oil exclusively in dollars. Since every economy in the world needs oil in order to grow, they therefore need US dollars to buy that oil. As the oil price goes higher, countries now need to accumulate more and more dollars in order to afford the more expensive oil. Even though countries like China have trillions of United States dollars, with oil at $150 a barrel, they would need to have a lot of dollars in order to be able to afford to import all the oil they are going to need to grow. When the price of oil was being projected at over $200 a barrel, many predicting much higher numbers in the long run, the countries around the world would be unable to dump dollars because then they would not be able to import any oil. Looking at the dollar from this perspective, a rise in oil prices should fundamentally increase the value of the dollar, since the commodity backing the dollar is increasing in value. Conversely, a fall in oil prices should fundamentally weaken the value of the US dollar. If oil prices fall to $50 a barrel, countries like China no longer have any use for the trillions of US dollar reserves; because they do not need as many in order meet the oil demand in their country. For this reason, the current expansionary monetary policy combine with the fall in oil prices puts the dollar in a very vulnerable position.

If the dollar to oil relationship (petro-dollar) is maintained, a total collapse in the value of the dollar may be impossible. Devaluation is possible through increasing the supply of oil, reducing the demand for oil, or an inflationary monetary policy where the Federal Reserve prints money at a much faster rate than oil is being pumped out of the ground and being consumed. With excess money printing, like we are seeing today, this should cause the value of the dollar to go down, but also cause the dollar value of oil to go up. Foreign countries will have to make sure they buy enough dollars in order keep up with the rising price of oil. So as long as oil is priced in dollars, it prevents a global run on the dollar. Because as the dollar is devalued, oil becomes more valuable in terms of dollars, requiring the countries to buy more dollars in order to be able to afford the more expensive oil.

So if anyone was still wondering what the real reason was for the invasion of Iraq, they can look no further than Saddam Hussein's decision in the year 2000, to price oil in Euros instead of dollars. Hugo Chavez in Venezuela was considering this move as well, but was then faced with a CIA sponsored coup in an attempt to overthrow the government and prevent them from making this policy decision to stop accepting dollars for their oil. And of course, the most recent oil producing country to stop accepting dollars is Iran, who is now selling their oil for Euros and Yen. Since Iran is such a big oil producing country and are allied with Russia, another large oil producing country, they together could destroy the petro-dollar, causing the US dollar to collapse. If large oil fields open in Northern Russia and Indonesia, for instance, and are allowed to price oil in any foreign currency without risk of US invasion, then the petro-dollar would be destroyed. The United States has over 700 military bases spread out over 130 countries, which are used to police the world, protect US interests in foreign countries, and maintain the dollar oil relationship. If the economic situation deteriorates to the point where the US government is no longer able to maintain their trillion dollar a year empire, the troops would have to come home and the world would be liberated from the petro-dollar stranglehold the US held over the world for the last few decades, which allowed for the imbalances and the phony consumer based American debt economy.

The system that was set up allowed the US government to expand the money supply and run trade and budget deficits for decades. The excess dollars were exported out of the country and were accumulated by people and businesses and stored as reserves in Central Banks around the world. Back when the United States had a sound economy and produced a lot of goods for export, the US dollar was very valuable because it could be converted into gold at a fixed rate of $35 per ounce, it could be used to buy the high quality products that the United States exported, and it could be used to invest in profitable and productive businesses.

These days, the only thing of value that can be bought with US dollars is oil. The world already lost a fortune investing in dot-com stocks and mortgage backed securities, so other than buying oil, there is not very much use for paper dollars. Of course the OPEC countries are the ones who are stuck accumulating vast quantities of these dollars without them being able to buy much with them. The original OPEC deal set up in the 1970’s to price oil in dollars was contingent on the Arab states investing a portion of their dollars back in the United States by loaning the dollars back to America under generous terms and buying up the debt. Dollars that were not used to buy up debt could be spent on US produced military equipment (to strengthen their control over the citizens of their country) and financing the socialistic economies and the lavish lifestyles and magnificent palaces of the princes and sheiks. Can this giant Ponzi scheme go on forever?

New Highs in Gold and Where We Go From Here

James Turk, founder of GoldMoney.com published a commentary on gold breaking to new all time highs in many currencies around the world. In addition to looking at gold's new highs, he goes into detail about the ballooning debt problem America faces. He also provides evidence of "unlimited" dollar creation that I alluded to in my October 14th post "Bulls Get Caught in the Credit Crunch" when I stated: "With the Fed and other central banks around the world offering “unlimited dollars” to combat the credit crisis, it should be clear that inflationary pressures will continue to mount." I did not explain why i put "unlimited" in quotation marks at the time, but James Turk noticed the same language and explained it better than I could have in his most recent commentary.

“Gold’s New Records” By James Turk [October 18th, 2008]


Looking at the long term graph of the gold price in Canadian dollars, it is clear that gold has been in an uptrend since the year 2000. And the uptrend got steeper and much more volatile near the end of 2005, making a new all time high on Friday, October 10th, 2008. Gold looks like it is at an all time high by historical standards, since we are near the same nominal value as 1980. But when comparing the price of anything today, to the price of something a long time ago, the price needs to be adjusted for inflation. Even using the government inflation numbers (which systematically tend to under report inflation), the gold price today in inflation adjusted terms would have to be over $2000 to reach the old 1980 high. The economic and inflation problems that Canada and America face today are arguably far worse today than they were in the 1970's. It is very possible that gold will break to new all time inflation adjusted highs during this secular bull market and has the potential to never reach a top, if paper currencies continue to be debased.

Even as the gold price went up and down over the last few years priced in American and Canadian dollars, the price of gold in Zimbabwe dollars kept going up. And unless there is some policy reform in Zimbabwe, there is no top to the price of gold in Zimbabwe dollars. And with the United States and many other countries around the world adopting the same monetary policy as Zimbabwe, there is no top in sight for the gold market, priced in depreciating paper currency. The government and central bank will only stop inflating, when the public finally realizes that they will never stop inflating. And when people figure this out, the currency then becomes worthless, and a new currency will be born.

Hopefully the new currency will be gold or another market determined money, rather than a new digital fiat currency control by a world central bank, which has the same potential to be inflated and destroyed. If the world comes out of this crisis with one fiat currency and with one central bank, the people of the world will forever be enslaved and controlled by the elites who have the power to create new money. If we end up with a North American central bank, European Central Bank, and Asian Central Bank, the effect will be similar to have just one central bank, since all three banks will be controlled by the same people. With control over the money supply, central economic planning results, where the elites control the direction of society by implementing certain monetary and fiscal policies. Hopefully, the people of the world will realize that the crisis was caused by government intervention in the free market, and that capitalism is not to blame. In which case, the world would experience a freedom revolution, with sound money at its core, leading to a new age of property, freedom and technological growth that would propel society into a new golden age, overtime eliminating war, poverty and hardship around the world.

Is Gold Still a Safe Haven for Investors? - A Canadian Perspective

With gold finishing the week by falling under $800 US an ounce, many investors are scratching their heads, wondering how the safe haven metal could be falling during such a severe and unprecedented global economic crisis. The banking systems in countries around the world are crumbling, requiring governments to intervene in order to keep them from collapsing. Counter party risk is now a primary concern for anyone lending or investing money in this environment. Most people would have expected gold to thrive in such an atmosphere since holding physical gold has no counter party risk, no risk of defaulting and no risk of fraudulent accounting practices or corrupt management. Gold does not pay any dividends or interest. There is no growth potential in gold. It simply sits there being gold. And as the years go by, an ounce of gold, will always be an ounce of gold. It does not pay investors anything or grow into something bigger… because it does not have to. Gold is money. It has been a store of value for the people of the world for thousands of years. As empires have risen and fallen and currencies created and destroyed, gold has stood the test of time and protected wealth throughout history.

Canadian stock markets have been hit hard this month, along with every other market in the world. The sharp fall in the price of oil and other commodities is taking its toll on the commodity-heavy TSX. Canada’s biggest customer, the United States, is maxed out, unable to afford to consume our natural resources.

The Canadian dollar had been strengthening over the recent years against the US dollar, but lately took a nose dive as this economic crisis unfolded. The two currencies were near par throughout the first half of 2008, but began to slip in mid July, before tumbling in October as the markets crashed. One US dollar currently buys $1.18 Canadian dollars, and our Canadian dollar buys less than 85 American cents. This should come as some comfort to those who have lost money in American stock markets, since they are able to add almost 20% to their stock values on the currency exchange back to Canadian dollars. On the other hand, when looking at declines in the Canadian stock market from a US dollar perspective, the losses are even greater.

For some strange reason, Canadians always look at the American dollar price of gold. Canadian financial television shows and newspapers rarely quote the price of gold in Canadian dollars. As a result, Canadian investors perceive that the price of gold is falling, creating the impression that gold failed to act as a safe haven during this economic crisis. This could not be further from the truth. Gold made a new all time high in Canadian dollars this month, at a time when every single asset class, in all world markets, was getting crushed. Why did the media fail to inform the Canadian people that gold broke to a new all time high, especially at a time when peoples’ wealth was being obliterated? Stock markets have retreated to levels not seen in a long time, erasing years of profits and leaving investors with nothing to show for their long term approach. Gold on the other hand has been a great investment for the past decade and has now asserted itself as one of the best performing assets this millennium, whether anyone wants to admit it or not.

A decade ago, if investors had bought gold at under $300 US, they would still be sitting on an over 150% gain, despite the recent pullback below $800 US. Many long term investors would be thrilled with these kind returns after what has happened this month to the stock markets. But even though the price of gold has been steadily rising in the last decade, very few financial advisers recommended the metal as a core asset for investment portfolios. One explanation is that when people go to the bank or a coin store and buy physical gold, investment advisers do not get to line their pockets from selling overvalued stocks.

So is gold still a safe haven for Canadian investors? Gold started the year by breaking out above the old 1980 high of $850 US, making its way above $900 in January. It made a new all time high in March, during the Bear Sterns Crisis, soaring above $1000 an ounce. At the time, the Canadian and US dollars were virtually at par. Gold fell from its March high, bounced back up off the old $850 high, but broke below that important support level in August, bottoming in September at under $750. This was followed by a spectacular rally, including an $80 move in four hours of trading, bringing gold above $900 US briefly, before crashing to where we are now, below $800 again.

But Canadian investors need to keep in mind that the value of the Canadian dollar started to weaken in July, before tumbling in October. When gold made its move above $900 US earlier this month, gold actually made a new all time high in Canadian dollars, briefly breaking above $1100. Even today with gold below $800 US, gold is still well above $900 Canadian dollars and still higher year to date. Any Canadian who had the foresight to buy physical gold this year is probably pretty happy with their investment, especially in comparison to all of those in the stock markets. Gold did exactly what it was supposed to do. It protected the wealth and purchasing power of Canadians. It preserved savings when the value of the Canadian dollar was falling. It held relatively steady in a time when almost all assets, both good and bad, were being sold off in the rush for liquidity. And for some people around the world, such as those in Iceland, owning physical gold meant the difference between preserving wealth, and virtual bankruptcy.

In recent months, the physical precious metal markets have been experiencing shortages, particularly the various one ounce coins. Even the headquarters of the Scotia Bank in downtown Toronto was sold out of all one ounce gold bullion bars at one point. People all around the world have been in a panic to get their hands on the physical metal, and suppliers simply cannot keep up with demand by individual investors for the small coins. The Canadian Gold Maple Leaf, American Gold Eagle, South African Krugerrand, and especially some of the older $20 Liberties or Saint Gaudens are commanding incredible premiums. Therefore, if investors bought these coins when they were readily available at low premiums, not only to do they get the appreciated value of the gold, but also an increased premium that adds a second layer of profits. Buying gold coins at anywhere close to spot price on EBay these days is almost impossible, whereas in the past, buying though EBay generally had some of the lowest prices.

The good news for investors is that the ship has not set sail yet if they still want to climb on board the golden lifeboat. It is my opinion that the price of gold remains grossly undervalued and is set to explode upwards when the US dollar bubble finally pops. Government fiat currency is being created out of thin air by central banks all around the world. There is no end in site to the money printing, especially as baby bombers retire and demand their retirement benefits, which government has already spent. The result of all this government intervention in the free market will have to be paid through inflation, making gold far more appealing than paper currency in the long run.

Worried investors have already sold their assets as the markets declined, but most have simply put their wealth into cash or cash equivalents. And even though many stocks and asset classes in the markets were overvalued, selling real assets for paper money is like jumping out of the frying pan and into the fire. Stocks, bonds and cash should all be sold off in favour of physical gold, since gold is expected to gain tremendous value verses paper currencies and the stock market for many years to come. Investors still in the stock markets, who have lost a fortune and refuse to accept fire-sale prices for their valuable assets, may find that the undervalued gold mining stocks provide the best chance at a quick recovery, even though they remain under considerable stress.

With many Canadians wondering whether or not their money, their investments, and their retirement accounts are safe... unfortunately, the truth is that none of them are safe. There is still a lot of downside risk in many stock markets, especially the American markets. The government has already spent the money that was paid into the Canada Pension Plan and saved nothing to fund future medical expenses for retiring baby boomers. The government will be forced to create the money out of thin air to fund future obligations. And with central bankers around the world running the printing presses at full speed in an attempt to slow down the economic crisis, this makes holding onto paper currency very dangerous. The United States is on the verge of a financial collapse that will send shock waves around the world. The US dollar, the world’s reserve currency, is at risk of totally collapsing. And since all other currencies are backed by nothing but US dollars and other fiat currencies held in the reserves of Central Banks, all the currencies of the world are in danger of losing value they never really had in the first place. Owning physical gold that you can hold in your hand may end up being the only thing separating the people of the world between prosperity and poverty. I am confident that any Canadian who sells their house now, near the peak of the bubble, and buys gold with their profits, will be in much better off financially over the next few years. At some point, there will be a global rush into gold and I am hoping that Canadians get on the lifeboat before the economic ship that we are all on sinks to the bottom of the ocean.

The US Economy Hits an Iceburg

The economy of the United States is a lot like the Titanic; a ship we all thought was unsinkable. Even though the ship is no doubt impressive, it is not as structurally sound as we had once thought. The politicians over the years have insisted on driving it at full speed despite holding the iceberg warnings in their hands the whole time. But the US economy hit an iceberg, and it is only a matter of time before it sinks. There were opportunities in the past to slow down or change course, but everyone was too preoccupied with the lavish lifestyle on the wonderful ship to worry about such disastrous situations. Everyone was so confident that the ship could not be sunk, that we did not even leave enough lifeboats for everyone to survive. Now that we have hit the iceberg, that we were destine to hit sooner or later, those of us on the ship have no choice but to get our friends and family on the few existing lifeboats while they are still available. Most people on the ship woke up from their deep sleep to the sound of the markets crashing and institutions failing as the side of the ship smashed into the iceberg. But there are still few who realize that the extent of the damage that has been done is severe enough to sink the ship.

Efforts taken by government to pump out the water will buy us time, but weeks or months only. From this moment on, no matter what we do, the economy will collapse. And though many are crying out that the economy can’t sink! I assure you, she can. And she will. It is a mathematical certainty. The lifeboats will be seated according to class and those lucky enough to get a seat are hoping that they aren’t too crowded. The water is freezing and there aren’t enough lifeboats. Not enough by half.

Once everyone on the ship realizes that the ship is actually going down, there will be a mad scramble by the lower and middle class of our society to get on the few remaining life boats as most of them have already departed with the upper class passengers who left with enough room to put their feet up. Hopefully as many people as possible will make the decision to get onto these lifeboats while they are still around. Even though it is a difficult choice to get off the comfortable ship and get into a small, cramped lifeboat, it is a decision that needs to be made soon. The water may be choppy, your seat on the boat might not be too comfortable, but this is far better than the alternative of staying on the ship and dying in the comfort of your bed as the ship sinks to the bottom of the ocean.

The lifeboat that I speak of is physical gold and silver that can be held in your hands, along with foreign currencies and dividend paying foreign stocks. To get into the lifeboat, you need to get rid of US dollars and dollar denominated assets and put your savings into hard assets that have real value rather than worthless paper currency that is being printed into oblivion. The ship will finally sink when the dollar collapses and anyone still onboard will be plugged into the cold water, grasping onto whatever floating debris that remains.

$50 Oil – Was Lindsey Williams Correct?

[VIDEO] Lindsey Williams – Predicts $50 oil on the Alex Jones Radio Show [ July 28th, 2008] (05:44)

In July 2008, Lindsey Williams went on several radio shows and told the world what was going to happen over the next twelve months. He said that the following was going to occur:

John McCain will win the 2008 Presidential Election. Lindsey Williams suspects that there will be an event just before the election that will ensure that McCain will be elected. Large oil fields in Northern Russia (or North of Russia) and Indonesia will come online, flooding the world with light sweet crude. Oil will fall to $50 a barrel. The Middle East will go bankrupt and will no longer be able to afford to buy US treasury bonds. They will have to dump their dollar reserves to fund social services and other government expenditures. Lindsey Williams predicted that Middle Eastern countries would dump trillions of US dollars onto the market, virtually overnight, resulting in a collapse in the dollar. American will see a financial collapse that will be so great, that it will take years for the country to recover. He claimed that all of these events will be perfectly in line with plans to create a North American Union and issue a new currency. These events were all planned in advance, behind the scenes, by the elites of the world.

When I first heard Lindsey Williams say these things in July, I took notice. At the time, I knew that the economic collapse and dollar crash was coming eventually, but oil going to $50 a barrel seemed impossible. The thinking last summer was that high oil prices were hurting the economy and it seemed possible that rising oil prices would eventually destroy the American consumer and bring about the economic collapse from high prices. Inflation would continue to drive the price of oil higher and the value of the dollar lower. It seemed very counter intuitive that low oil prices would actually bring about the collapse, but it made logical sense none the less. For those who understand the relationship between the dollar and oil, it is actually a low oil price that hurts the value of the dollar because the dollar is essentially backed by oil. Iranian President Mahmoud Ahmadinejad told the BBC that "They [the US] get our oil and give us a worthless piece of paper." But I have known for many months that the economic collapse was coming and that the dollar bubble would burst, I just did not know what the pin would be to finally pop it. But considering where we are now, I believe that oil falling to $50 a barrel will be the pin that pops the US dollar bubble that will result from the economic destruction in the Middle East. The more i see as time goes on, the more I am becoming convinced that the scenario that Lindsey Williams laid out for us in July of 2008, will ultimately come true.

The first interview I heard Lindsey Williams give last summer was on July 9th, 2008 when he claimed that oil was going to $50. Keep in mind that at the time, the price of oil was above $140. People in the media were talking about $200 oil and everyone seemed in agreement that there was an energy crisis in America with no clear solution. At the time I recognized that a parabolic move to the upside would probably result in a correction. I figured oil would probably drop to $120 and with $100 acting as strong support if it ever got that low. After oil fell below the $100 support, I figured we could go to $80 to test the bottom trend line. And now that we’ve broken below $80, I am becoming more and more convinced that Lindsey Williams is once again correct and oil is going to $50.

At the time I am writing this, oil is at $78. A move down to $50 would still be a significant drop from this price. But I think from this level, oil going down to $50 is very possible. We saw oil sell off along with the markets in the past few weeks because the oil markets were worried that the world would enter a global recession. I think that the economy of the United States will continue to deteriorate as continued government intervention fails to stop the crisis. As the US economy collapses, global markets will continue to suffer along with them in the short run at least. The fears of global recession will be far more pronounced as it becomes a reality in many parts of the world. The economy in the United States and others around the world will continue to get worse and there will be one crisis after another. This will contribute to the cries of demand destruction. And if two new oil fields are opened up at the same time there are fears of global recession, these forces now seem more than adequate to push the price down to $50 a barrel and $2 a gallon the pumps.

When I first heard Lindsey Williams make these predictions, I was skeptical. Who wouldn’t be? Oil at $50 a barrel seemed like a million miles away back in early July 2008. But I had said at the time that I would not bet against him. He offered a plausible scenario for the collapse of the dollar, and as unlikely as it seemed at the time, it certainly seems a lot more likely now. I recognized that there was a chance that he was correct, and as time unfolds, I am becoming convinced that he will be proven correct again. Most political pundits believe that Obama will win the election in a land slide. But if we see McCain win the election, I will officially be afraid. If McCain wins, I think everyone needs to give credit to what Lindsey Williams has been saying, because these are seemingly impossible predictions that are coming true before our eyes. So if McCain wins the election and oil goes to $50 a barrel, we can expect the dollar to completely collapse shortly afterwords, probably within a few weeks. When this happens, I will be telling people to read this post so that they can understand that this was predictable and inevitable, and that there is precious little time to get out of dollars and into gold, foreign currencies, foreign stocks, and other hard assets. You should also stock up on food and water and anything else that you think you will need in the coming months as the world economy copes with the destruction of the world’s reserve currency. We can expect the following events to occur during a dollar collapse in the United States (and possibly other countries as well): There will probably be no food in the grocery stores, no gas at the gas stations, no electricity or heating and no airplanes out of the country. Those in the United States should immediately get themselves and their money out of the country. Because if the currency collapses at the speed that Lindsey Williams said that it would, this will create shortages, civil unrest and rioting, which will justify martial law within the United States.

So if you are reading this, and John McCain is President and oil is around $50 a barrel, that means that the dollar is on the verge of a complete collapse. And I don’t think any of us want to imagine what life would be like in the United States after the currency collapses. Now is the time to panic. Get out now!

There are now many respected people and institutions, including Merrill Lynch and Goldman Sachs, who are predicting $50 oil.

CNBC - "Commods Bull Goldman Turns Bearish, Warns on $50 Oil" [October 13th, 2008]

Financial Post - "Why OPEC Won't Fight Hard for $100 Oil" [October 7th, 2008]

Reuters - "Analysis: Oil can fall to $50-$60 if credit stays tight" [October 13th, 2008]

Calgary Herald - "Slump could trigger $50 oil" [October 3rd, 2008]

Forbes - "Russia Kudrin: no oil output cut, ready for $50/bbl" [October 11th, 2008]

Watch the following lecture and interview and hear for yourself what Lindsey Williams has been saying, noting the dates at which he made his predictions.

Lindsey Williams Lecture – The Energy Non-Crisis [December 2005] (01:15:08)
http://video.google.com/videoplay?docid=3340274697167011147

Lindsey Williams – Interviewed by Jeff Rense [July 22nd, 2008] (4 Parts)
Part 1 (10:01)
http://www.youtube.com/watch?v=cBKB7-LvAik
Part 2 (09:52)
http://www.youtube.com/watch?v=JFy-rye_ek4
Part 3 (09:55)
http://www.youtube.com/watch?v=K8W6GVOY-PM
Part 4 (06:16)
http://www.youtube.com/watch?v=JvcQx9EqGw4

The Energy Non-Crisis – Online Book (Full Text)
http://www.reformation.org/energy-non-crisis.html

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Other Interviews and Lectures Lindsey Williams:

Lindsey Williams Lecture - Syndrome of Control [December 1986]
http://video.google.com/videoplay?docid=5541564304553695985

Lindsey Williams Lecture – The Energy Non-Crisis [May 2006] (1:24:01)
http://video.google.com/videoplay?docid=-7889976507340301551

Lindsey Williams – Interviewed by Butch Paugh [July 9th, 2008] (5 parts)
Part 1 (09:42)
http://www.youtube.com/watch?v=wQDw9M_2dGw
Part 2 (09:36)
http://www.youtube.com/watch?v=9h6Nzr_8lKI
Part 3 (09:42)
http://www.youtube.com/watch?v=Fke1xjLLn-E
Part 4 (10:06)
http://www.youtube.com/watch?v=FeuvaE9Ia7A
Part 5 (10:18)
http://www.youtube.com/watch?v=U9q9hYDmBeQ


Lindsey Williams – Interviewed by Liberty Radio [July 25th, 2008] (3 parts)
Part 1 (10:54)
http://www.youtube.com/watch?v=qQ-kplx2X8M
Part 2 (08:31)
http://www.youtube.com/watch?v=Z0e1Mw0uPKk
Part 3 (08:46)
http://www.youtube.com/watch?v=RYwQL1nGZNI

Lindsey Williams – Interviewed by Alex Jones [July 28th, 2008] (7 parts)
Part 1 (10:44)
http://www.youtube.com/watch?v=5QsKUMm906Y
Part 2 (10:56)
http://www.youtube.com/watch?v=4t1O4Xhy4bo
Part 3 (10:59)
http://www.youtube.com/watch?v=-LYTp0OTRro
Part 4 (10:58)
http://www.youtube.com/watch?v=aNmMF4QEhTM
Part 5 (10:57)
http://www.youtube.com/watch?v=1CDN1eiNyZ8
Part 6 (10:56)
http://www.youtube.com/watch?v=G-DBhFe2QZA
Part 7 (04:57)
http://www.youtube.com/watch?v=ytOtYcLXAWk

Bulls Get Caught in the Credit Crunch

VIDEO: Ron Paul on Fox Business - Free Markets vs. Socialism & The Dollar Crisis [October 14th, 2008] (05:02)

After last weeks market crash, I think it is clear to everyone that the bears who analyzed the US financial landscape had been correct all along, while the bulls watched their profits from the last eight years disappear. However, the same people who have been bullish for all these years, remain bullish going forward still, as they now claim that the bottom is in, and now is a good time to be buying. The DOW is considerably lower than at any time over the last five years, and is lower now than at the turn of the millennium. But in addition to the nominal dollar value of the market being lower, when factoring in inflation, or measuring the market in foreign currencies or gold, the decline is even more dramatic.

If it were not for the rampant inflation that the government and Federal Reserve force fed the American economy, the declines would be observed as more severe. Inflation acts as a cushion to the dollar value of the stock market so that people cannot as easily comprehend the loss of the purchasing power that their money has lost by investing in over valued stocks whose business model depended on a phony, debt laden, consumer economy. People perceived inflated asset bubbles in stocks and real estate as real wealth, all the while believing that the economy of the United States was on sound footing.

But the wealth effect that Americans enjoyed was never real wealth. It was debt. Americans spent all their savings, and then resorted to borrowing money from abroad. Now America has spent all the money that they borrowed by squandering it on consumption rather than using it for productive purposes. America is now bankrupt. Americans thought that they could base their economy on the idea of borrowing scarce saving from the rest of the world, in order to consume products that were produced by the rest of the world. But Americans are waking up to find out that their access to credit is being cut off, and the Government is doing everything it can to get the credit faucets turned back on so that their bubble economy does not completely implode.

Savers around the world who lent money to America are now realizing that they are not going to get paid back, and their markets are now coming to grips with this reality. The investments the world made in America with their saving are now considered toxic assets worth only a fraction of their original value. However the problems that America faces are much more dangerous than that of the rest of the world. Because once foreigners stop lending money to America, the whole foundation the borrow and spend economy comes crashing down. This is what we are witnessing today.

The modern American economy was built on access to cheap credit. But what is credit and where does it come from? Well, credit is basically money and it comes from savings. America used to be the biggest creditor nation, because they had a lot of savings. Americans worked hard to produce goods and services, and then consumed less than they produced, which created savings. The savings could then be invested as credit and used to make capital investments to make people more productive. The interest gained on their savings allowed for greater future consumption, which came at the expense of reduced consumption in the present. But over the last few decades, the politicians that Americans elected have spent the country into bankruptcy. America spent all their savings, and then turned to borrowing the savings from the rest of the world to provide credit to the economy. But now, all that money is gone too, and foreigners are reluctant to lend any more. This is why we are in a credit crunch. But it’s really a money crunch. America is broke. America has no more savings, and the rest of the world does not want to lend out any more of their savings. And without any available saving, there can be no credit. And without credit, the house of cards that is the American economy comes crashing down.

What the government, Federal Reserve and the Treasury are doing is trying to replace the lost credit with a printing press. This is impossible. If the Federal Reserve creates money and credit out of thin air and drops it from helicopters onto the economy, this will only create inflation and will not replace genuine savings. Creating massive inflation also discourages real savings because inflation acts as a tax on earnings and savings that is only observed in rising prices sometime in the near future. The government is trying to turn the credit faucets back on with a printing press. All of these bailouts and the liquidity that is being injected into the system is all just inflation, which is stealing wealth from anyone holding dollars, dollar denominated assets, and future payments that are all denominated in dollars. The media constantly claims that these are taxpayer funded bailouts. However there is no talk about raising taxes. In fact, both major candidates want to lower taxes. So if all the money the government is throwing at this mess is not coming from taxpayers, and its not being borrowed from abroad, it must be coming from a printing press. They are creating all of this money and credit out of thin air, and that is going to affect everyone. Now that we are going down this path, it will become more and more difficult to change course as the system becomes more and more dependent on an ever increasing money supply. This path poses the very real danger of a hyperinflationary blow out that can ultimately destroy both prosperous and insolvent businesses alike. If the government would stay out of the way and allow the free market to bring upon the much needed recession, the dollar could be saved, many businesses would go bankrupt, but some would survive and go onto becoming the basis for a new economy. There is no doubt that the recession would be very painful, as Americans would be forced to pay the price for years of excess consumption. But as bad as this scenario would be, it is preferable to the Government’s alternative which threatens a decade long depression that would end up causing far more suffering as the agony is simply prolonged and the imbalances worsen. But if the government continues to bail everyone out, and prop the system up, it risks destroying everything, forcing Americans to rebuild from the ground up after the whole economy is completely destroyed and the dollar is totally worthless. It would be much easier to drastically reduce government spending now and being the rebuilding process while the global economic system is still functioning and the currency still has value.

The only long term solution to this problem is to stop spending and replenish the pool of savings by purging the excesses from the economy through the liquidation of bad debt. Business that are not solvent need to go bankrupt, and Americans must stop borrowing and consuming, and go back to producing and savings. But the Government is not letting this transition happen. Politicians are claiming that this transition would be too painful, and therefore the government must intervene in the free market to prevent the disaster. But unfortunately, the government cannot prevent the disaster; they can only make it worse. Government created these problems in the first place by intervening in the free market and encouraging all this reckless borrowing and spending. Now they are trying to get the country out of this mess by doing more of the same. America will never be able to dig itself out of the hole that it is in with the government forcing everyone to keep digging deeper. And we are in grave danger of digging ourselves in so deep that we will never be able to get out.

With respect to recent stock market action, I believe that the markets in the United States are still in a bear market. They have been in a bear market for about eight years, and it looks like things just took a turn for the worse. But on Monday, October 13th, 2008, the market has a spectacular bear market rally after the prolonged crash the previous week, causing many investors to think that the bottom is in and that stocks are headed higher. I do not think this is the case. This was the 5th largest one day percentage move in the Dow Jones Industrial Average (dow) in history, and all four of the previous larger moves came during the Great Depression where despite the spectacular rallies, the market continued to go much lower over the following years. So I think the US markets will continue to go lower. It is impossible to say exactly when they will break to new lows. It is possible that we move higher in the short run, but I think the bear market is still very much in tact, and US assets have a lot further to go on the downside. I would encourage investors to use these rallies to sell their positions in US markets, and instead take positions in physical gold, the gold mining sector or undervalued foreign markets, particularly Asia, and hold these assets for many years to come. US markets will continue to slide down the slippery slope of hope, occasionally experiencing spectacular sucker’s rallies to lure investors back into the market. Whereas assets like gold will continue to climb the wall of worry, slowing climbing higher, occasionally experience violent corrections, designed to scare away timid speculators who are not confident in the long term fundamentals and therefore lack the conviction to remain the bull market for its duration. Even though the US markets erased pretty much all of their gains over the last eight years, many foreign markets are still considerably higher than they were at the start of the millennium. Even though there were violent corrections in the foreign markets in response to the crashing American markets, I still believe that many foreign markets outside the United States are still in secular bull markets. I expect foreign markets to recover long before the American market even begins to show signs of a real bottom, and many of these foreign markets will go onto make new highs in the coming years and decades. The crashes in foreign markets offer excellent value for long term investors who are able to lock in high dividend yields in conservative, respected companies with very low P/E ratios. With the dollar recently rising against most foreign currencies, this is the ideal time to spend your overvalued dollars on undervalued assets. However, I would caution any foreign investor that foreign markets may not have bottomed and could fall lower as the global economic crisis unfolds. Even though I still believe there is incredible value out there already, prices could still get cheaper still once the most recent government intervention fails and the economic crisis takes another turn for the worse.

In terms of putting some numbers on where I think the markets are heading, it is difficult to predict the dollar values of the assets, because it is difficult to predict what kind of value the dollar will have going forward. I prefer to measure asset values against the price of gold, rather than against the price of the US dollar because measuring assets in dollars does not account for the rampant inflation that is eating away at its purchasing power.

At the moment, the dow is at about $9,300. And gold is at about $840. Therefore, the dow/gold ratio is calculated by dividing the price of one share of the dow by the spot price of gold. 9300/840=11.07. Therefore, we can say that the dow to gold ratio is about 11:1. Late last week, the dow/gold ratio fell below 10:1. I expect this ratio to fall to around 5:1 sometime in 2009. Followed by a roughly 2:1 ratio in 2010, and a 1:1 ratio in 2011. These are just guesses as to when these ratios will occur. But I am confident that at some point in the future, there will be a 1:1 ratio of the dow to gold. However, if the government still maintains the same type of economic policies by this time, it is possible the dow to gold ratio could go even lower, maybe even as low as 0.25:1 in gold’s favor. This could happen in a hyperinflationary outcome where there is such a flight to gold that overinvestment in the sector occurs and bubble prices result.

The stock market bubble of 1929 reached a peak with a dow/gold ratio of almost 20:1. After the crash, and once the depression set in, the ratio fell to about 2:1 in the early 1930’s. In the late 1960’s, the ratio peaked at almost 30:1, before falling to about 1:1 in the early 1980’s. And in the year 2000, we saw a dow/gold ratio peak of over 40:1. And just eight years later, we hit 10:1, which is a 75% decline in the value of the dow measured in gold. Even now pricing the dow in dollars, the dollar value of the dow is now lower than it was in the year 2000. But if you price the dow in gold, oil, Euros, Canadian dollars, wheat, soybeans, copper, etc. the value has declined substantially. The idea that you can just buy into the stock market and hold for the long term and make money is not true. If you buy overvalued assets, you are probably not going to make any real money.

With the Fed and other central banks around the world offering “unlimited dollars” to combat the credit crisis, it should be clear that inflationary pressures will continue to mount. The financial media is still fearful of a deflation because banks are unwilling to lend money, but I am confident that the central banks will come up with creative ways of introducing massive inflation into the system. They are able to do this through bailouts, auction lending, buying up stocks or other assets, and even mailing out checks to every American in the hopes that they go and spend the money on consumption. Given these facts, I will admit to the possibility that the dow has bottomed valued in dollars. I still think that the dow will make at least one more new low in dollars before the inflation really takes over and drives prices up, but it is impossible to say with any certainty at the moment. Since the Fed now seems to be printing up money and buying stocks with it, the fed will be able to control the dollar value of any asset it wants. As more inflation is created by the Federal Reserve, this will put upward pressure on the dollar value of US stocks. So next year, if gold hits $2000 and ounce, the DOW might be at $10,000, which is a moderate increase from today’s prices. But in my opinion, this would still be considered a decline in real terms. If inflation gets as bad as I think it will, we could see the dow go to $36,000 for instance. But if this happens, then gold will also be about $36,000 an ounce and gas might be $30 a gallon at the pumps. So if we start to see sustained gains in the dollar price of the dow, this will be due to inflation. If the inflation can be kept under relative control, we could see the dow hovering around this range for many years as inflation eats away at the underlying value of the assets. Absent inflation, I think the dow would fall to around $3000, which would represent its true value based on the current value of the dollar. I of course do not expect the dow to fall anywhere close to 3000, because I think the fed will print enough money to erode the dollar’s value so that any asset measured in dollars will look like it has not lost as much value as it really has. So I am certainly not advocating selling US stocks and buying US dollars instead, because I think that is just jumping out of the frying pan and into the fire. I am recommending people sell their US stocks and US dollars, and buy gold, foreign currencies, and foreign stocks. If I had the choice of holding dollars for the next 10 years, or holding US stocks for the next 10 years, I would still take US stocks. Even if this decision had been offered to me before last week’s 20% crash, I would still take the stocks long term over the dollar, knowing I would lose around 20% over the course of the next week. In my opinion, the real danger is in the value of the dollar, and in fact, all currencies around the world. Even though I think US stocks are over valued, I think the dollar is even more over valued.

The true crisis that the US and the world face is a rush out of the dollar. There are so many dollars already in circulation, being held by central banks and citizens all around the world, that if the value of the dollar started to fall precipitously, this might cause people to dump dollars, leading to a crash that could come about very quickly. And since other currencies are backed by nothing other than dollars, then people may lose faith in all paper currencies and scramble to buy up real assets instead of holding onto the depreciating currencies. Like Voltaire said, “Paper money eventually returns to its intrinsic value – zero”. The world’s experiment with paper money over the last 35 years is likely coming to an end. And with Bernanke running the printing press at full speed to fight the credit crunch, a substantial decline in the value of the dollar is all but guaranteed, and a Weimar Republic or Zimbabwe style hyperinflation is looking more and more likely. This is the end game scenario that investors need to prepare for by owning physical gold and real assets around the world like utilities, agriculture, energy and commodities, especially in the Asian-Pacific region.

The United States is in the early stages of a complete economic collapse that will be followed by a currency collapse. Unfortunately, things are going to get a lot worse before they get better. This is not the time to be optimistic or pessimistic; it is time to be realistic. The US Government is grabbing power on the march towards a totalitarian government that will threaten the prosperity and liberty of people in the United States and around the world. A dangerous shift away from personal freedom and towards government control is well underway. The bright beacon of freedom that used to shine from America is quickly fading away. As people continue to give up their liberty for security, they will end up with neither.