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How Investors Should Proceed as Summer of Debt Continues in US, Europe


US, Europe will likely continue to inflate their way out of debt crises, printing money and debasing their currencies, so keep an eye on precious metals -- but don't buy just yet.

Given all the possible permutations of the continuing debt dilemmas in both the United States and Europe, finding a way to profit from the potential effect they'll have on the markets is a complex challenge. Indeed, the current global landscape is fraught with so many cross-currents that calculating potential causalities is becoming less of a science and much more of an art.

In the US, failure to raise the debt ceiling will end the country's ability to continue its "Ponzi scheme" of issuing ever more Treasury debt to cover principal and interest payments on existing debt.

The debt situation also leaves the dollar in a growing state of uncertainty. If Congress is forced to make serious cuts in the Obama Administration's proposed budget, it should strengthen the US currency – but further legislative inaction and the very real specter of a US debt default could just as easily provoke a run on the dollar.

In Europe, things are even worse.

The European Monetary Union (EMU) has threatened to cut off Greece if that country does not enact and implement austerity measures. However, given the exposure the major European banks have to Greek debt, it's doubtful the EMU can actually afford to carry through on its threat.

On the other hand, what's the effect if the EMU doesn't cut off Greece, continuing to prop up an essentially insolvent nation with what is little more than a money-printing bailout? Does this set the precedent for a broadening wave of "Euro-QE" – one that could expand to Italy, Ireland and Spain as those other "PIIGs" begin to suffocate in their own mud-pits of debt?

The answers to all those questions are still educated guesses, but one thing is certain: The rapid expansion of debt denominated in any particular currency eventually leads to the devaluation of that currency – be it the US dollar, the euro or a player to be named later. Certainly, over the short term, bounces and rallies can occur, but in our view, the long-term trajectory of such currencies will always be to the downside.

After all, those who've studied their economics know that no government in the recorded history of humankind has ever succeeded in overcoming an astronomical debt burden by debasing its own currency and allowing inflationary forces to run their debilitating course. Yet, this seems the exact tactic the economic regimes in the United States and Europe are currently resorting to.

So, what should investors look to do as the world's "Endless Summer" of debt progresses?

Given my firm's view that the US and Europe will continue to inflate their way out of these debt crises, printing money and debasing their currencies, we tend to favor precious metals – but we wouldn't look to buy just yet.

That's because recent economic numbers indicate the potential for a continued sell-off in stocks through the summer – a sell-off that could spark margin calls and raise liquidity issues among large investors who also hold positions in precious metals and commodities. That, in turn, would prompt a sell-off in gold as well.
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No positions in stocks mentioned.

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