LAST CHANCE

For several years this blog has warned of inadequate policy formation, the necessity of owning gold as a hedge against financial default and the length of the crisis. This is a last warning.

Governments wont pay. Bonds will default and pensions will be decimated.

By 2020 Health Care services will be a fraction of what they are now.

Owning Gold is an insurance. Do not regard it as an investment.

Civil unrest will be become more violent.

Democracy will be undermined.

There is a sound principle that doctors are not allowed to cure themselves. The equivalent should be true today with politicians. Politicians are the root of the crisis (although they have ably helped by bankers) and yet they are charged with curing the crisis. A cure will not be found

Swiss fix Franc vs Euro

This is a very poor decision by the SNB. They will now find depositors from all over Europe choosing the Swiss Franc. Marginally solvent European banks will also choose the Franc as a haven. We are now in a new stage of Currency Wars and uncooperative economic decision making. That is dangerous.

Heading into the Storm

The markets are set for achieving the minimum objective of Dow : Gold of 5:1 On both sides of the Atlantic puerile posturing, ignorance and complacency by politicians only worsens the environment. The European banking system is close to insolvency ( liberal marking of debt and derivatives masks the danger) which has obviously wider ramifications. Bernanke's pledge to keep a quasi-zero rate policy for 2 years is not only unprecedented but is even more dramatic than QE3. Expect further dramatic liquidity injections (QE9, one day?) not because it works, but its the only tool that policy makers can think of as they are caught "in the headlights". If Gold reaches 2.800 this autumn, it might be worth considering taking a partial profit

What now?

Above you will see an update of a chart posted before (see blog 21 September 2010). It is a semi-logarithmic chart of the Dow priced in Gold, since 1921. Support is coming at 5 (Dow 10.000 / Gold 2.000 ?) This has been the minimum objective commensurate with the 1932-1935 basing in the stock-market. Its possible that in this Global Government Debt crisis the ratio falls even lower.

Politicians still do not appreciate the size of the problem. Markel and Sarkozy appear naive and Congress's teenage posturing lamentable.There are many years of debt-delevaraging ahead and the continual issuence of debt simply enslaves our children's generation to pay interest to emerging Asia.

STERLING VS EURO

The long term chart of Sterling vs. Euro confirms the budget proposal that the Government and Bank of England will sell Sterling to build up reserves of currency. Tight fiscal policy will be counterbalanced by weak monetary policy; QE keeping longer term rates artificially low and a weakening exchange rate to boost the export sector.

Unfortunately this policy is typical of a "race to the bottom" where countries try and weaken exchange rates (UK, USA) or impose capital controls (Brazil) to gain competitive advantage. It might be the case that countries that act in this manner quickly will get an advantage over countries that do not, but the sum total of such mercantilist behaviour is usually zero at best. A competitive battle between Coke and Pepsi where bottom line is paramount is quite different to a win-lose battle between countries. Mercantilism does not succeed now and Ricardo's view of comparative advantage means that free trade and cooperation always wins over a nationalistic competitive ethos. We are back to the 1930s.

On top of this, the UK policy of zero rates is understandable in terms of preventing a deflationary nightmare but zero rates distort capital formation. Investment is eschewed for speculation (commodities) hoarding (gold) or simply flees to other currencies that do pay interest.

We live in a world where there is little cooperation between the main players (G20) and if the UK and USA really think they can outwit China they are niave as well as isolationist.

Unfortunately (for students) this is the exception.

Texas University Endowment Storing About $1 Billion in Gold Bars

By David Mildenberg and Pham-Duy Nguyen – Apr 15, 2011 6:13 PM ET

The University of Texas Investment Management Co., the second-largest U.S. academic endowment, took delivery of almost $1 billion in gold bullion as the metal reaches a record, according to the fund’s board.

he fund, whose $19.9 billion in assets ranked it behind Harvard University’s endowment as of August, according to the National Association of College and University Business Officers, last year added about $500 million in gold investments to an existing stake, said Bruce Zimmerman, the endowment’s chief executive officer. The holdings reached about $987 million yesterday, as Comex futures closed at $1,486 an ounce.