No Time Left, Gold & Silver to Go Sky High

By Dominique de Kevelioc de Bailleul

Either something huge is coming to the financial markets, or something huger, or even huger yet lurks.

Consider the following, though not close to being all inclusive of the warning signs riddled throughout the global geopolitical-financial landscape.

  • George Soros dumps stocks and loads the boat with gold
  • John Paulson has nearly half his portfolio invested in gold
  • PIMCO recommends gold
  • Chinese importing record-high shipments of gold
  • U.S. Mint sold 191 times silver ounces to gold ounces for 1st week of Aug.
  • Spanish bonds drop nearly 200 basis points within two weeks
  • Baltic Dry Index makes fresh all-time lows.
  • The German, Dane and Dutch people balk at PIIGS bailout
  • U.S. and China economies are rolling over; Europe in depression
  • Israel’s allegedly insane PM may trigger WWIII with Iran
  • Invasion of Syria likely
  • U.S. government preparing for revolution
  • Lyndon La Rouche says threat of nuclear war the highest since Bay of Pigs
  • Rule of law unofficially suspended in the United States
  • Gun sales and “prepper” industry go vertical

And all of those troubling events, and many more, are unarguably traced to a coming collapse of the U.S. dollar.  The world has been dependent upon the dollar for trade and banking reserves for 68 years, and it’s removal as a working global exchange vehicle cannot lead to anything favorable, financially or politically.  History tells us so.

Adding to the chorus of dollar collapse prognosticators comes the folks at Charles Nenner Research Center, an outfit that’s been on a long winning streak of successfully predicting with astounding accuracy the cycles of the gold market, currencies and equities.

Nenner warned of an intermediate top in gold as it crossed $1,900 and not to expect anything too troubling for the euro during drama surrounding the crisis in Greece.

Though not as well-known as heavyweights John Taylor of FX Concepts or the parade of guests of Eric King’s King World News, Charles Nedder’s work deserves a fair amount of attention.

Though his demeanor on camera appears somewhat awkward and unpolished, the man who frequently wears a yamaka on air has outshone the best analysts of economic and market cycles.  He doesn’t mince too many words and gets to the point rather quickly during his interviews.

Speaking with Financial Survival Network host Kerry Lutz, managing director of Charles Nenner Research Center, David Gurwitz, says Nedder’s research indicates that gold should easily go to, “for sure, $2,100, $2,500” per ounce as the world begins to scramble out of the U.S. dollar—the world’s reserve currency that, he predicts, will collapse within 15 to 18 months.

“Gold is going to $2,100, $2,500 and silver should go back up to $49 . . .” says Gurwitz.

Moreover, Gurwitz says Nenner expects a strong euro against the dollar in the coming year, or so—a prediction that’s also consistent with other extreme dollar bears, such as Europacific Capital’s Peter Schiff and ShadowStats’ John Williams.  Both Schiff and Williams see 2013 as the turning point in the dollar’s relative strength against other major currencies.  And all three forecast a dollar collapse within two years to 30 months.

“Our dollar should fall apart in about 15 to 18 months, which is just going to create a whole mess of things,” says Gurwitz.  “And the euro will be the currency of choice, which it is now, believe it or not.  And he [Charles Nenner] has been saying to people for a while, ‘don’t short it; don’t short it; don’t short it’ and he’s been right.”

In March of 2011, Nenner told Fox’s Bull and Bears the DJIA would drop to 5,000 and that war would break out by the close of 2012.

In May of 2012, Nenner told Bloomberg if the weak nations of the eurozone left the supranational currency, the euro would take over the role as the safe haven currency, which suggests, maybe, that a resolution of the global financial crisis will include some, or all, of the PIIGS leaving the common currency by 2014.

Mr. Big dumps Bank of America

After making headlines last year for his brilliance in foreseeing a rebound in bank stocks following the March 2009 stock market crash, hedge fund manager John Paulson has made headlines again, but not for his record fee take down, but for his recent timing blunder from his substantial sale of his fund’s stake in Bank of America (NYSE: BAC).

According to a CNBC news report, the $38 billion Paulson & Co. founder sold shares in BAC through to the announcement made by the bank that it had settled for $8.5 billion with angry investors who bought misrepresented mortgage-backed securities related to the bank’s Countrywide subsidiary.

CNBC’s Kate Kelly reported Thursday that Paulson had sold a “substantial portion” of his stake in BAC in April and May, citing persons close to the transactions.  According to SEC form 13-F, Paulson & Co. held 123.6 million shares of BAC with a market value of $1.65 billion.

Paulson’s dumping of BAC during the second quarter comes off the heals of his fund’s liquidation of 80,000 shares of Citigroup (NYSE: C) and 2 million shares of CIT Group (NYSE: CIT) during the first quarter, which strongly suggests that he has become less optimistic about the future of the banking industry, maybe even less sanguine on the outlook for the U.S. economy—as the banking sector traditionally leads out of economic recession.

However, Paulson’s positions within the banking sector, specifically in BAC, have taken a backseat to the rest of the story behind the man who charged his investors $5 billion in fees last year for his stellar market performance.

Paulson’s “brilliance” last year may have been a fluke (or the result of collusion with Goldman Sachs on some MBS deals), speculate analysts.

In the case of BAC, since the beginning of 2011, shares of BAC have dropped approximately 20%, leaving Paulson & Co. investors with an estimated $200 million – $300 million haircut to the funds NAV.  And now, CNBC reported that its sources told the financial news outlet that Paulson may be considering buying BAC back, now that the bank has decided to settle the Countrywide MBS class action suit.

Following BAC’s late-afternoon announcement on Wednesday, shares of BAC soared 3% to more than $11.  Some stock technicians suggest that Paulson was fell for an amateur-like whipsaw.

His recent substantial loss in BAC follows another large loss, an embarrassing one, on Sino-Forest (TRE.TO), a Chinese tree plantation.  After research firm Muddy Waters released a report in early June that asserted Sino-Forest overstated its timber holdings, shares of TRE plunged 71% on the Toronto Stock Exchange (TSX).

For the year, TRE has dropped 85%.  Paulson & Co. took a $750 million loss on TRE in June, according to the Wall Street Journal.

Overall, in stark contrast to last year, 2011 has so far been a tough year for Paulson & Co.  Through June 10, Paulson’s flagship Advantage Fund Plus has shed approximately 20% off its NAV, according to two WSJ sources.

George Soros dumps his Gold— was it too early?

Soros has sold his gold.

Anytime a famous billionaire investor makes a significant position move in his clients’ portfolio the tag-along investors sifting through SEC form 13-Fs for clues to the thinking of the rock stars of finance will know about it—though with a time lag, as the required filings are submitted quarterly.

The latest musings among financial writers and investors have focused on the disagreement between Soros and another bigger rock star, John Paulson, regarding the outlook for the monetary metal—gold.  Soros is out, and Paulson is apparently holding for the big move.

So who’s right?

Arguments for the end of the decade-long gold rally generally fall into four theses, a combination of the four, or all of them.

1) The Fed is done with so-called “quantitative easing.”

So Bernanke implies—for now.

Unless Fed chairman Bernanke can find a buyer of a trillion dollars of U.S. Treasuries each year, or is willing to face derailing a U.S. economy on the brink of another full blown Depression brought on by more than $2 trillion deficits, which will then include soaring interest payments of more than $100 billion for each 1% rise in rates—then Bernanke is bluffing, again!

Bond king, Bill Gross, asked the question of many investors in his PIMCO March Outlook letter:

“Who will buy Treasuries when the Fed doesn’t?” Gross asked rhetorically.  If the Fed has been buying up to 70% of new issuance by Treasury, who will takeover the massive buying?

So the Morton’s Fork Bernanke faces is to either continue debasing the dollar to “grow” into the unserviceable U.S. debt levels, or face a collapse of the U.S. Treasury market as higher yields blow out an already blown out federal budget deficit, creating a negative feedback loop.

That Morton’s Fork favors gold.  Gold is primarily an alternative to the debasement of fiat paper money AND a place to park capital during times of uncertainty or a deflationary collapse.

2) Inflation is low and will remain low

Does anyone but the Fed chairman and his groupies believe inflation has been low?  That’s one of the big lies from the Fed.  (See Shadowstats.com)

“To tell deliberate lies while genuinely believing in them, to forget any fact that has become inconvenient, and then when it becomes necessary again, to draw it back from oblivion for just so long as it is needed. …”

George Orwell, 1984

3) In the end, the U.S. dollar will eventually become stronger than the euro

That may be true.  But does it matter if the euro falls faster than the U.S. dollar on its way to the “currency graveyard” as James Turk of Goldmoney has said?  Both central banks are debasing their respective currencies.  In fact, the world’s top two currencies have been devaluing against all widely-traded commodities, (except natural gas) what appears to be, in a coordinated manner.

And Bernanke’s suggestion, which he made in his speech in Atlanta yesterday, that soaring commodities prices have little to do with Fed policy of a dollar devaluation rings, at best, conveniently incomplete and hollow, and at worst, another lie—through omission by the Fed chairman of widely-know correlations documented between a currency’s purchasing power against a basket of commodities over time.

4) Everyone’s in gold.  It’s a bubble.

That’s probably the weakest argument of all.

Marc Faber, editor and publisher of the Gloom Boom Doom Report, was asked by CNBC’s Joe Kernen in April if he thought there was any truth to the gold bubble thesis.

“If it [gold] were a bubble, a lot of people would have gold.  The whole world would be trading gold 24 hours a day,” said Faber. “But I don’t think it’s really a bubble. I think gold is maybe cheaper today than it was in 1999, when it was $252.”

Faber also said he routinely assesses sentiment among investors regarding gold at his speaking engagements.  Usually, he counts less than five percent of the audience who raise their hands in favor of gold as an investment. Sometimes he sees no hands raised, he said.

“And my daughter, she lives in Germany. She walks by a shop when she goes home from work. She said people are lining up to sell gold—the jewelry. So, I don’t think that it’s a gold bubble,” Faber added.

Following Soros’ investment themes may be better than most fund managers of his size.  But investors should remember that another investor legend, who may be more well-know—and liked, Warren Buffett, sold his monstrous stake in silver at approximately $8 per ounce.

Unless Soros is waiting for a big drop in the price of gold (or is pondering buying physical metal, instead), he’s most likely far too early in calling for a long-term top in the gold price.

Wasn’t he who said in June 2010, “We’ve have entered act II” of the crisis, referring to Greece’s sovereign debt problems and the potential flight out of the euro experiment.  When did that crisis get resolved?  And how does the U.S. (indeed, the world) come out smelling like a rose if the euro collapses while U.S. and untold other foreign banks, who are joined at the hip with European sovereigns and banks, become insolvent?

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)