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The Global Financial Crisis Is Not Over


There are many more hurdles to overcome -- and Bernanke should know this.

Friedrich A. Hayek (1899-1992), Austrian economist, author and 1974 Nobel Prize-winner for Economics wrote: "With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people."

The global financial crisis is over. Politicians, central bankers, economists, and mainstream market commentators have jubilantly declared it so. Everything is okay again; the equity markets are up 50%.

Yet these same experts were oblivious to the looming debacle in financial markets, notwithstanding the incontrovertible evidence so glaringly obvious to those that cared to delve beyond the superficial. Why now should such unsubstantiated, historically ignorant, and fundamentally illogical conclusions be met with anything other than skepticism and guarded optimism?

I don't share their opinion. I opine that this is but the early stages of this monetary quandary. This whole crisis is a simple monetary issue, not an economic issue -- a fact that appears foreign to most.

Indeed, following the two previous periods of wildly excessive monetary growth in the twentieth century, 1920s and 1960/70s, one ounce of gold purchased the Dow Jones Index.
Today it takes ten ounces. Further, each of these periods led to significant distortion in economic activity, dysfunction in banking, and currency markets with resultant unprecedented official/government intervention. Ultimately, these interventions led to the complete disintegration of the currency system of the day, producing massive increases in the gold price.

I contend that one ounce of gold will again buy the Dow -- I don't know at what level, just that it will. It may be that, due to continued extreme monetary inflation, the Dow hits 30,000. That same monetary inflation will drive gold exponentially higher as investors seek refuge from glaringly obvious currency debasement by the accumulation of hard assets rather than paper promises.

Similarly, the Dow could be 3000 as the crisis deepens with spending contraction leading to nasty corporate earnings disappointment, no matter the stimulus. The capacity for gold and silver to absorb significant capital flow is small indeed, given the global investment pool. And for gold to double or triple from here wouldn't take much of China's multi-trillion dollar reserves. My point being that I expect precious metals to outperform all other asset classes on a relative basis.

Given that the typical "balanced portfolio" is effectively 70% (or more) equity market exposed, it's not difficult to comprehend why I assert that a quantifiable and transparent precious-metals portfolio is a prudent and essential risk diversifier at all times, none more so than today. The global macro economic picture is ominously bleak, notwithstanding the best efforts of officials to circumvent the simple economic law of supply and demand.

The recent 50% rally in equity prices is fundamentally challenging for my firm, but we understand that markets don't move in straight lines. And as Keynes famously remarked
"Markets can stay irrational for longer than you can stay solvent."
No positions in stocks mentioned.

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