Economist John Williams: Hyperinflation by 2014

Ridiculing Europe’s handling of the financial crisis has become a popular go-to talking point for the dollar bulls.  Yes, there are still some diehard old timers on Wall Street (Art Cashin, not among them) who cannot image their Wall Street careers without the benefit of a credit bubble gravy train.  Those same tired cheerleaders also tell us that a rebound in the U.S. economy is inevitable “because we always bounced back before” in the hopes of sucking the public into the markets one more time in order to make those bonuses.

The U.S. may bounce back in nominal terms, priced in dollars, but not in real terms, argues economist John Williams of  Williams told listeners of Financial Sense News this weekend he believes the March 2009 collapse is merely a precursor of even more grave consequences for an already battered dollar following the $5+ trillion of stimulus the Fed has injected into the financial system since the start of QEI during the spring of 2009.

“Hyperinflation in the United States will be particularly painful,” said Williams, noting that the U.S. has no backup currency to the dollar in the event of a sudden panic out of the dollar, which he believes will be not later than 2014.  At least in Zimbabwe, he said, commerce continued via a black market settled in U.S. dollars.  But in the U.S., “we don’t have a backup system here,” he said.

Williams acknowledges the hesitancy among central bankers to trigger a run on the U.S. dollar until they’ve diversified enough dollars into other currencies (such as the euro, some of the hard currencies, and gold) to weather the coming collapse.  That is especially true in the case of the Bank of China, which has on numerous occasion complained about U.S. monetary policy and the effects on food and energy prices in the People’s Republic of China.

Moreover, China’s state-sponsored rating agency has already stated that the dollar is systematically being devalued, and has lowered its rating of U.S. Treasury debt.  The Chinese want out of the dollar.

“They [the Chinese] want to get out of the dollar as quickly as they can,” said Williams.  “No one wants to create a panic.  Everyone wants to get out as whole as possible.”

Williams expects the inevitable fate of the dollar will shock the world. It’s going to zero—in real terms, in purchasing power.

“Gold is the primary hedge against what’s happening here and what going to happen to the purchasing power of the U.S. dollar, which is eventually going to decline to zero,” he warned.

As far as the timing of a dollar collapse, Williams told FSN’s Jim Puplava it could happen at any time.  There are numerous possibilities or surprises lurking that could trigger a panic, precipitated by politicians or a Black Swan event.  But the outside of his timetable for a dollar collapse is 2014; but he gives a better than 50 percent chance of the event happening sooner.

3 Gold Stocks to Watch

Yamana Gold Inc. (NYSE: AUY)

Goldcorp Inc. (NYSE: GG)

Barrick Gold Corp. (NYSE: ABX)

A Gold crash coming?

If you’re loaded up on gold, silver and commodities, congratulations, you’re in good company.  Mega hedge fund managers John Paulson, David Einhorn, and George Soros (rumored to have sold his GLD for gold stocks) are with you.  Iconic investors and gurus, Marc Faber, Jim Rogers, Jim Sinclair, James Turk and Richard Russell are on board the gold train, as well, along with many more lesser-known brilliant investors.

So, should the above-mentioned investors be frightened by articles published by Reuters, entitled, “Gold crash: What could trigger the inevitable”?  That’s the title of a piece posted on the news agency’s Web site over the long weekend.

From the start, the premise of the article’s title, that a gold crash is inevitable, is flawed.  Long-time gold expert Jim Sinclair, Richard Russell of the Dow Theory Letters, James Grant of Grant’s Interest Rate Observer, and World Bank president Robert Zoellick would most likely disagree with a gold crash theory, as these three men suggest highly that some form of a gold-backed currency, including a gold-backed U.S. currency, or not, must eventually become part of the new international monetary regime.

Under that scenario, as outlined on many occasions by James Sinclair, gold would most likely trade within an elevated band (instead of fixing the price) as central banks become locked in a gold-backed regime that loosely resembles the articles set forth at Bretton Woods in 1944.

The inevitable gold crash?  It’s much more likely that a crash in the U.S. Treasury market should be assessed as inevitable.  PIMCO’s Bill Gross would be loaded to the gills with U.S. Treasury notes bonds if gold was destined to crash.  Gross is not. In fact, the Bond King has no bonds in his BOND fund.

Can you imagine McDonald’s not offering hamburgers?

The article goes on to suggest that betting on the dollar’s next direction is akin to gambling.  In the short run, the author is spot on.  But, as a long-term investors, which the author believes is the only way to play this financial debacle, betting on the dollar’s demise is for the foolhardy—better yet, for the “nervous Nellies.”

“The clearest threat to gold’s reign as the reserve currency of nervous Nellies is a possible rebound of the dollar,” according to Reuters. “Given the congressional wrangling over the debt limit, budget and growing inflation, betting on the buck is like trying to figure out whether a racehorse will finish. They often pull up lame.”

The author suggests that a miracle is in the offing and that politicians who know that shutting down the U.S. Government to save the dollar is political suicide (the 1992 Congress comes to mind) and will miraculously learn the meaning of noblesse oblige and do the right thing for the country.  But, until we see Ben Bernanke and Ron Paul scheduled to a duel on the White House front lawn, the author may be onto something.

Holders of gold will take the other side of this author’s bet in a New York second, and have, by betting on a racehorse that’s come in first, without except, for more than 5,000 years. And not only have the heavy weights of finance mentioned above taken that bet, but central banks around the world, who have collectively become net buyers of gold, are increasingly placing that bet, too.  According to another Reuter’s article published in April 2010, central banks have become net buyers of gold in 2009, a first since 1989.

And as far as the author’s points regarding a “strengthening U.S. economy and rising interest rates . . . derailing the epic yellow metal mania,” they are as flawed as the title of the piece.

Mania?  This Reuters writer originally suggested that gold investors are nothing but “nervous Nellies,” which is quite the opposite mindset to the greed thesis characterized by manias?  So, which is it? Is fear or greed driving the decade-long gold price rise?

Reuter’s point that a strengthening U.S. economy will save the day and stop the embarrassing ascent in the gold price may well be true in a relativistic context, but not in real terms, however, which is the whole point of the Fed’s zero interest rate policy (ZIRP) and the investor revolt into the gold market.  Real interest rates at, or below, zero propel the gold price, not nominal GDP.  So, the notion that gold doesn’t throw off income is a species one within today’s financial environment of near-zero Treasuries at the short end while food and energy prices soar well past the double-digit mark.

And as far as the case that higher stock prices presage an economic turnaround in the U.S. economy has less to do about a real strengthening economy, but has more to do with institutional investors locked into the bond/stocks allocation charters betting on a devaluation, a la Zimbabwe—wherein the Zimbabwe stock market, in one year, outpaced the returns of the S&P over its entire history as an index.

And lastly, higher interest rates, as Swiss money manager Marc Faber has stated, mean nothing if the rate of inflation is higher than the Fed’s federal funds rate—as during the 1970s. Maybe the author was too young to remember that golden decade of wealth destruction, which in real terms eclipsed the the wealth destruction of the Great Depression.

And since this present crisis is expected to dwarf the financial pain of the 1970s, it makes a lot of sense for investors to become “nervous Nellies”—and fast.

Yamana Gold Inc. (NYSE: AUY)

Gold Corp. Inc. (NYSE: GG)

Barrick Gold Corp. (NYSE: ABX)

Shocking Gold Prediction for the Summer; 3 Hot Gold Stocks

James Turk, gold guru and founder of bullion storage service Goldmoney, predicts a rapid rise in the gold price during the precious metals historically seasonally weak summer months.

Commenting on King World News today, Turk said the gold market won’t follow the past 29-year history of seasonal weakness during the summer months of June through August.  Instead, he expects a rerun of the breathtaking move in gold that took place during the summer of 1982, during which time the gold price soared 50% amid speculation that the Mexican government would be denied credit amid fiscal and economic conditions in that country.

In 1982, Mexico had devalued the peso three times and nationalized the banking system in an effort to right imbalances in the country’s national debt levels and trade.

“I think this summer is going to surprise a lot of people,” said Turk. “Many are thinking this is going to be another typical summer where precious metals prices are weak, but it doesn’t always happen that way Eric.  Sentiment is set up this way because it has been 29 years since we have seen a big rally in the summer. Back in 1982, the Mexican debt default lit a fire under the precious metals and the gold price nearly doubled over the next six months.”

Turk sees similarities to Mexico in Europe.

Today, Greece’s fiscal problems rival Mexico’s of 1982, said Turk, and further complicated by the added instability in the currency markets that may develop from the Federal Reserve’s stated intention to end new debt purchases in the U.S. Treasury market in June.

“This year it is not Mexico in the headlines, but rather Greece that is ready to default,” Turk explained.  “Of course the other big news item coming up this summer is the Federal Reserve’s announced intention to end QE2.  It’s amazing that so many market participants are taking the Federal Reserve at their word.”

As a regular guest of King World News, Turk had previously made similar statements regarding his expectations of lofty targets for gold during the seasonally weak period for the yellow metal.

On May 3, as gold and silver were in the midst of a sell off phase, Turk said, “You know my longstanding price projections have been $1800 gold and $50 silver by the end of June.  Silver essentially reached my target already, so it would not be surprising for it to move sideways in a large trading range waiting for gold to catch up. But regardless of when those price targets are reached, KWN readers need to focus on the fact that the U.S. dollar remains in a long-term bear market.”

Turk appears to be sticking with his May 3 target of $1,800 for gold, even after its $100 pullback of two weeks ago.

Incidentally, Turk’s interview comes on the heels of reports out of the former Soviet Union satellite country, Belarus, that authorities there had devalued its nation’s currency, the ruble, by 36% against the U.S. dollar.

Bloomberg reported that Belarusian Prime Minister Mikhail Myasnikovich said the Russian-led Eurasian Economic Community is prepared to lend Belarus at least $3 billion in response to the crisis.

As Turk has always held, currency crises are typically foreshadowed somewhat but happen quickly and suddenly.  He expects further surprises in the months and years to come.

Newmont Mining Corp.  (NYSE: NEM)

Goldcorp Inc. (NYSE: GG)

Barrick Gold Corp. (NYSE: ABX)


Gold stocks breakout!

—Short covering rally could be imminent, John Hathaway

Yesterday’s continuation of Tuesday’s record high close in the Gold BUGS Index (HUI) has gold traders speculating whether the big rally in gold shares is finally near.

The Gold BUGS Index, which stands for Basket of Un-hedged Gold Stocks, closed at a record high of 597.14 on Wednesday from its previous record high of 576.48 set on Dec. 7, 2010.

As gold traded within a relatively tight range of $1,306.00 and $1,444.40 set on Sept. 29, 2010, and March 7, 2011, respectively, a significant number of gold stock traders remained convinced that gold’s rally would stall for a while, then correct.

Fears of another trigger for a “risk-off” event from growing uncertainties in the Middle East, the protracted European debt crisis, unresolved U.S. budget woes, then, black swan events in Japan, oil and commodities prices, or the steady accumulation of all those episodes would finally crack the equities market’s winning streak.

“Gold shares have been hesitant, acting as if gold didn’t belong at $1,440; and now that gold seems to want to stay there I think people have to revise their expectations for the gold stocks,” John Hathaway, director and general partner of Tocqueville Asset Management, told King World News on Tuesday.

Hathaway’s view of the gold stocks sector is consistent with larger marquis name hedge fund managers John Paulson, George Soros and David Einhorn, who presently hold significant amounts of gold shares among their top picks, according to SEC documents.

But many lesser-known hedge fund managers hold insignificant portions of gold shares, if at all.  In fact, hedge fund managers as a group have taken outright short positions on the gold miners while simultaneously taking long positions in the world’s preeminent monetary metal—a net bet that gold shares will underperform the metal on the way up, or down.  That could change dramatically, according to Hathaway.

“I just see three, four, five percent moves in some of the big cap stocks, not the little ones,” he said, “and that’s a sign of money coming in either to cover shorts or to initiate positions on a breakout.”

Since the start of the gold rally in 1999, gold stocks had outperformed the metal (HUI/Gold ratio) until Jan. 2004.  Since the start of 2004, however, the ratio dropped until May of 2005, at which time the ratio began to rise again.  But as the HUI/Gold ratio neared the Jan. 2004 high in Feb. 2006, the ratio again declined and has not come close to an assault on the Jan. 2004 high since.

Today, the ratio is 0.409 (above the 50-day and 200-day moving averages), down 35% from the Jan. 2004 high of approximately 0.625.

However, the gold stocks may soon have their day in the sun as the HUI achieves a new high, and will soon burn those hedge funds on the wrong side of the gold stocks trade, said Hathaway.

“I keep breadth on my screen and I think it was a 9-to-1 upside day which is very, very good.  You know there was nothing wishy washy about this at all so yeah, I think these hedge funds are going to get roasted.”

3 Gold Stocks on the Move

Goldcorp Inc. (NYSE: GG)

Barrick Gold Corp. (NYSE: ABX)

Yamana Gold Inc. (NYSE: AUY)