The New Year has begun and we’re off to a good start. While worldwide economic health remains in limbo and European woes remain, there is a great chance the first half of this year will surprise us.
Hopeful numbers will come out of the US but the economic decay in 2012 will eventually accelerate enough to overshadow any signs of hope. In order to avoid an outright economic collapse, the governments of the world, in particular the US, will once again be forced to initiate massive amounts of Quantitative Easing (QE).
Euro-area banks just parked 455.3 billion euros with the ECB, the most since the euro’s introduction in 1999. Call it what you what, but it’s all QE to me – no matter how they spin it. Europe will more than likely fall into recession, which will affect American markets.
I don’t see any signs of major US growth for 2012. That means the numbers being forced to public eyes are more than likely fudged numbers with no real long term impact. While the market will react to these numbers, they will only for the short term.
People need to realise that as you get deeper into a credit cycle, it takes more and more credit creation to get the same dollar of real GDP growth. Right now we have an economy that’s overloaded with credit at every level which cannot be serviced successfully at either the consumer or government level. We’re falling deeper and deeper into the credit cycle in order to avoid US policy makers’ worst nightmare: deflation.
So how much credit creation will be necessary to generate that same dollar of real GDP growth? How much money needs to be printed to avoid another recession, when record amounts of money have already been printed in the last few years?
Total US debt and obligations is near $80 trillion and growing by at least $5 trillion plus every year. This debt is unserviceable unless the US chooses to raise taxes through the roof and cut entitlements. But no amount of taxes can be raised enough to bring the system into balance for one year, let alone for the ongoing future. Furthermore, you can cut every penny of government spending – less Social Security and Medicare – and the system still would be in annual deficit. That means massive cuts have to be put in place if there is to be any hope of restoring long-term solvency for the United States government.
But raising taxes and cutting entitlements won`t happen – especially during an election year and especially in this market environment. Doing so will cause further protests and riots, as we have witnessed in Greece as policy makers there have had to raise taxes and cut entitlements to meet financial obligations.
To service debt obligations and ensure that the economy does not fall back into a recession, the US will have to choose the path of least resistance: QE to infinite.
All is Not Lost
As a result of the actions necessary to sustain our economy, there will be one sector that I expect to breakout with tremendous force this year: Precious Metals.
I think the fundamentals for both gold and silver are so strong that the media and gold critics falling for the shorts last December are going to be left without the only thing that can save them from the future of exploding fiat debt: gold and silver.
The market is clearly oversold and I expect that we have seen a bottom in gold prices and even many gold and silver stocks.
For 2012, I don`t see any changes in themes as far as the markets and given that much of the gains in gold has evaporated in 2011, gold could make one of its strongest gains this year – possibly rising over 50%.
Smart money will be accumulating. When they make their move, their buying will beget more buying and we will see this trend continue with a lot of force – especially considering the vast discrepancy between the paper and physical market.
I expect central banks around the world to once again be net buyers of gold this year with record purchases (see The Hoarding Has Begun.)
This price increase and physical demand for gold will eventually trickle on down to the stocks associated with it.
Gold and Silver Stocks
Both gold and silver stocks are over sold and I think a breakout is occurring.
The paper shorts in silver, created by the same culprits who have done it time and time again (see The Silver Conspiracy), will be forced out. That means when silver rises, it will rise to the upside in a much more explosive manner – especially as the paper shorts create even more price imbalance in the physical market.
However, as long as the shorts can keep bullion prices under pressure, mining stocks will remain under pressure. But when the bullion prices achieve the levels that I think they are capable of reaching, the precious metals mining stocks will fly.
The correction of 2011 has set the stage for significant new highs in both the metal and the shares in 2012. Since the financial meltdown of 2008, the Fed has printed money to stabilize the financial system and the economy. While their actions have bought time, it cannot last and time is now running out. That means 2012 will experience further financial market turbulence, weak economic conditions, and further devaluing of the dollar.
When policy makers succumb to the truth, gold, silver and related stocks will be the only things left standing.
I am long, without margin, due to volatility.
Disclosure: I am long gold and silver, as well as long both major and junior gold and silver companies.
Until next week,
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