Thu, Jan 30, 2014 - 1:17am
This is a metals site, right? Is this not a simple, basic question that one would ask when one first decides to investigate the purchase of an ounce of gold? Of course. But, think long and hard about this simple question, because it sets up the whole discussion:
What does an ounce of gold cost?
No, it is not a trick question. The correct answer requires an understanding. But, the smart ones say, sure, spot, futures, what is the premium, etc. But, stop right there. Let's talk about the real issues.
Before we get there to the answer, let’s look at some facts and connect a few dots. Oh yeah, and let’s brag a little for getting the taper correct, too.
Mr. TF, as good a chartist as he is, is also a mighty fine prognosticator.
TF called the BLT long ago (Bernanke Legacy Taper). Of the pundits, TF was the first one ever, from what I recollect, to correctly make this call. I recall agreeing with him, but I was not 100% committed at the time, as my analysis was more like guesswork. I really did not understand why he was so damn sure of himself, and even more puzzling, how the hell could he have gotten it so damn correct? No one else got it close.
So, let's look as some more. Just a short time ago, TF expressed, eloquently, but firmly, and even posted an excellent guest post from an astute thinker which explained, convincingly, that there was and is NO CHANCE that QE ends, ever. Stated succinctly, QE in the form of FRN creation to purchase US Treasury debt, cannot ever end. Ever.
The reason for that is simple: interest payments paid to hold new debt must increase, to absorb the new borrowing, to reflect the risk and devaluation over time of the dilution of the FRN by the constant increase in their supply by the FED. Simple, right? We all agree on that concept, don't we?
So, as interest rates increase, the existing payment obligations on existing debt increase; the flow, as they say on ZH, will have to increase simply to be able to service the debt. The interest payments are not at all about paying OFF the debt, or paying DOWN the debt. No, not at all.
The interest payments are SOLELY about debt service; that is, keeping payments current so as not to default. IF interest payments, and interest payments only are timely paid, then the market says: Go ahead USA, keep creating FRN's out of thin air, we know you will pay off eventually, but we need to NOT lose money so we need to be paid interest to make up for the loss of purchasing power from your central bank creating more and more FRN's from thin air. Keep the payments coming, and we will gladly let you borrow forever and ever.
Eventually, though, as more debt gets piled into the system, from continued creation of FRN’s by the FED to purchase US debt, the interest payments alone–no principal is being paid at all–will surpass the GDP of the USA. Once that situation is reached, that payment obligation, that is, simple debt service of existing debt, in the form of interest only payments, will go parabolic eventually, the timing being defined mathematically depending upon the interest rate. It is NOT IF, IT IS WHEN!
So, IF the FED stops QE of Treasury debt, that demand sopped up by the FED purchasing US Treasury debt will have to be made up somewhere else. That fall off in demand will have to be made up somewhere, for sure, but there will not be an increase by others unless something changes. Since there is no other good collateral that can be posted, or anything of a secured nature that can be liened, because the sovereign debt repayment pledge is about as good as it gets, short of the creditors occupying the debtors' land and physically taking the goods and services in repayment, the creditors can only accept the sovereign debtor's promise to pay backed by the taxpayers' efforts. As Jim Willie says it, the USA debt is backed by the IRS payment stream.
If interest rates do not increase, then no rational market participant will risk buying US Treasury debt which will in essence guarantee losses unless interest rates go up accordingly.
Simple thought, really it is. QE of US Treasury debt stops = interest rates increase on new debt = higher debt service payments.
The whole scheme collapses once interest rates result in payments exceeding current cash flow revenue. So, either revenue increases, or interest rates must NEVER go up, or else the system collapses. Guaranteed.
Everyone here has been warned, repeatedly, of this reality.
Now, the facts are coming in fast and furious. One need only look in a cursory manner to see signs everywhere.
Today, the readers here all saw with clarity the TF magic of his predicting what the FED would do. Note well, that Pining equally called this outcome, he even had a pretty picture, too. Heck, even a lowly humble attorney, like me, was able to make this easy prediction. How did we know?
Remember, I said it was a near 100% certainty. How could I know?
I have been reading this blog since the inception. I have read and read and read, and studied, and questioned everyone and everything. I read everything that people post, I have no agenda, I censor no one, and I prefer to be challenged in my viewpoints, rather than have a monolithic echo chamber. I am a critical thinker.
I am sure that I have also sounded like a complete dufus, knowing nothing, but asking questions and trying to learn, and getting angry replies to my posts from people who would rather attack than help. No matter, any of it.
Slowly, over time, the basic kernels of universal truth took hold, expanding, until at one point, it became clear what the western banking system was really about. When was that magic moment? I am not sure. But it happened here, on this blog, from all the great thinkers, teachers, and the patient types who put it all together, every day and night, for free, out of a spirit of sharing and helping. I am truly grateful.
Now, it is time to pay attention again, in a most important way.
The FRN system is under severe pressure. Signs are everywhere. Western banking will radically change, forever, and those forces of change are acting on the system in a major way as I write this.
Capital controls (China, Russia, Argentina, et al.), forced purchase of USA FRN by the populace (announced by Obummer last night) bail-ins (Cyprus for sure, and other western sovereigns pending), currency devaluation (Venezuela, Argentina), US dollar hegemon collapse (look at all the trade agreements that allow for trade to be settled in currencies other than the US dollar), all of this, is happening in real time right now.
Now, ask WHY such dramatic steps are being taken by the western banking system?
Now, ask WHY the stories are coming fast and furious that gold is moving to the East, that demand for gold by the East is INSATIABLE, and then add to that the anecdotal stories by Andrew Maguire, Jim Willie, and others that gold is both moving East dramatically and per Willie, simply vanished from western control, forever, and what conclusions can be drawn?
None of this is mysterious to anyone that has been a regular reader here at tfmetalsreport for any length of time.
The FED HAD TO TAPER, a BLT if you will, because the only important thing going on now is MOPE. Of course the FED cannot end QE for US Treasury purchases, but paying lip service as to MBS purchases is critical for the banksters to keep alive any semblance of confidence in western banking. There is no longer any real housing market. It is broken beyond repair. There are pockets, but not any real market. Finance is broken. MBS is broken. Freddy and Fanny are broken and broke. Asset values are historically completely out of whack compared to median incomes. Yet, home prices are high, and climbing. Who is buying with all cash? Who is the landlord renting out millions of formerly owned homes? What segment of society will step forward and buy homes like before? Who is going to buy all of the boomer homes once they pass or downsize?
From what source will the formerly consumer driven economy find a new revenue stream? If there is no consumer consumption, then what is going to expand the economy and help pay debt service on the massive interest payments?
Is the picture starting to become clear?
Now, knowing all of this, let’s go back to the question above:
What does an ounce of gold cost?
If you said anything relating the cost of one ounce of gold to a fiat currency, then there is simply more work to be done on your part, and you best get educated before this fiat scheme collapses.
The correct answer is, naturally: Priced in terms of fiat? Who cares? Just get more as soon and as fast as you can while these low prices in terms of fiat exist and the physical gold is available.
The same goes for silver, too.
Please prepare accordingly.