Don’t Trust the U.S. Government, says Marc Faber

Speaking with UK-based financial magazine, Money Week, famed Swiss investment manager Marc Faber said America needs to experience “a devastating crisis” before real growth and jobs can be created.

Foretelling the inevitable burst in debt several years before the collapse of Bear Stearns, Faber’s has gained a reputation as someone who is able to spot the effects of years of mal-investment within the U.S. (and globally), dispassionately, while others cannot, or won’t.

As today’s disciple of the Austrian School’s Karl Menger, Ludwig von Mises, and Friedrich Hayek, Faber’s track record of “getting it right” has amassed him a huge following of investors grown weary of the 1984-like communications and deceptive practices of the U.S. government and its financier cohort, the U.S. Federal Reserve.

Faber’s forecasting record and delivery style on the deteriorating state of the U.S. has taken on a air akin to the counterculture revolutionaries of the 1960s but with a viewpoint more focused on financial and economics matters—ironically, maybe, directed to the same a demographic most affected due to inability to recover in time for retirement—the Babyboomer.  Faber, himself, is 65-years-old—another Babyboomer who still sports a ponytail and distrusts those in authority to take selfless actions for the sake of the greater good.

Faber told Money Week that the debt hasn’t gone away in the U.S.  Instead, it’s grown much larger but shifted into the form of public debt and away from the ones who created the original oversized debt load in the first place.  And the only way out of a default (either outright, or through inflation) is “to impose a flat tax and cut government expenditures by 50%.”  But only a financial catastrophe would affect those cures, he said.

The consequences of attempting to solve a U.S. solvency crisis with ever more debt from Treasury and the Fed doesn’t have Faber chanting the “king dollar” mantra on public airways to millions of U.S. viewers each day on programming outlets such as CNBC.

He points out that in dollar terms, the rebound in the S&P from the March 2009 low appears to some investors that an economic rebound in the second half of 2011 and 2012 is expected.  But when the S&P is priced in other currencies, such as the Swiss franc, Australian dollar, Japanese yen, as well as the monetary metals, gold or silver, equities have dropped from 50% to 80% since the market peak of 2007, he said.

Of the various forms of protection from future dollar declines, gold is his favorite.  Gold (and silver) doesn’t have a constituency to placate, especially as it relates to the U.S. dollar.

“Not to own gold is to trust the value of paper money and the government’s integrity,” said Faber.  “No one in his right mind could trust the U.S. government any more.”

And finally, Faber shrugs off the talk of a gold bubble.  He insists that the bubble is NOT in the gold market.

He said the world is, instead, “grossly underweight gold” but “flooded with U.S. dollars.”

“Insufficient silver to meet the settlement,” says Rick Rule

In a startling interview on King World News yesterday, Rick Rule told KWN’s Eric King the suspicion surrounding COMEX inability to settle the March and subsequent nearby contacts could be justifiable.

“There has been so much physical buying that it’s widely reported that the mints are having difficulty obtaining coin strip in the face of overwhelming coin demand,” said Rule. “There has been suspicion with the March settlement and with subsequent near-term settlements that there will in fact be insufficient silver to meet the settlement requirements in those near month futures contracts.”

Rick Rule, founder of Global Resource Investor, now part of $9 billion Sprott Asset Management, suggested that global investors seeking haven from an unprecedented coordination between central banks to devalue its respective currencies have turned to gold and silver as a final refuge.

It should be noted that today’s currencies of choice, the Swiss franc, Canadian dollar, Aussie dollar, Brazilian real and Malaysian ringgit are tiny markets struggling to offset the onslaught of newly created dollars by the U.S. Federal Reserve into the global monetary system.

Most recently, central bankers of these currencies have been watching export data especially closely during the dollar’s plunge below the 78 level in the USDX for signs of slowdown in vital industries and employment within their respective economies.  Too much tightening hurts demand for exports, whereas too little tightening exposes consumers further increases in the rate of change in consumer prices without the mitigating effect of a strong currency against the global commodities complex priced in U.S. dollars.  Gold and silver, Rule said, are “without a political constituency for devaluation.”

“It is true the dollar is the world’s reserve currency so it’s the fiat currency that everybody is reserving special wrath for, particularly in view of the profligate nature of US debt issuances,” Rule continued. “But there’s a bigger problem with regards to fiat currencies that people have, because if you are going to somewhere other than gold, what is the fiat haven? I don’t see a fiat haven, and that’s problematic.”

If there was any doubt of today’s silver market once again proving the principles of Gresham’s Law (also known as, Copernicus-Gresham Law) cannot be denied forever, a plausible explanation for a remarkable 144% rise in the silver price from the Jun. 7, 2010 low of $17.22 would soon be forthcoming from Fed chairman Ben Bernanke.

But, alas, Bernanke won’t be cornered into Gresham’s argument.

“I don’t fully understand movements in the gold price,” Bernanke said on Capitol Hill in early June 2010. Ditto, of course, for an explanation for the rise in gold’s kissing cousin, silver, which historically takes center stage with its breathtaking moves in previous capital flights out of the U.S. dollar—post Brenton Woods.

According to Wikipedia, “Gresham’s law states that any circulating currency consisting of both ‘good’ and ‘bad’ money (both forms required to be accepted at equal value under legal tender law) quickly becomes dominated by the ‘bad’ money. This is because people spending money will hand over the ‘bad’ coins rather than the ‘good’ ones, keeping the ‘good’ ones for themselves.”

Fears of the U.S. entering a full-scale, third war in Libya; the effects on global markets post a bona fide end to QE2 in June; another financial blowup in Europe (this time Spain); a business-as-usual approach to a fiscal 2011 $1.6+ billion deficit in Washington; Japan; further oil price shocks; or a combination of any of these are driving an increasingly jittery investor into taking the plunge into an asset class which has been out of favor for more than 30 years.

And since silver’s tiny $75 billion market remains the smallest against all competing legal tender “currencies” (none of which, is backed by gold or silver bullion; the Swiss franc came off the gold standard in 1999) near-panic demand is overwhelming available supply, suggesting further increases in the silver price may be needed to induce potential sellers to meet current demand for the metal.

“Well I think part of what’s happening in the silver market is the fact that the market is in backwardation which is to suggest that the spot price is ahead of the futures price,” Rule explained. “This is the opposite of a contango which is what normally what happens in metals markets.  It is obvious that there is incredible tightness in the physicals market.”
“It’s obvious from those statistics that the near-term silver supply, in particular the physical supply, is extremely tight, and as a consequence of that extremely volatile…We’re in an extraordinarily tight market.”

 

At 9:55 a.m. (EST) spot silver trades at $42.54 per Troy ounce, up $0.89, or 2.13 percent.