I think this article is a great little piece about the dangers of hyperinflation. Just because the west hasn't had one in a while, dont forget that the whole of the USSR was crippled by hyperinflation as collapsed in 1991.
This is what I am seriously afraid of. If the next debt crisis involves the collapse of sovereigns instead of the collapse of banks, the fallout will be massive
[begin article]
By Tim Price, Contributing Editor, Money Morning It was a race to reach the border. On one side were the Austrian police and army. Their job was to seal every road and rail track in and out of the country. Against them were ordinary citizens. They needed to get their cash - their life savings and their life's work - out of Austria-Hungary before the security forces executed their blockade. When the Austro-Hungarian currency went down after World War I, it took savers with it. All the contingency plans and bail-outs and money printing came apart on one fateful day - the day Yugoslavia decided to quit the currency union. Then all hell broke loose. Savers raced across fields in the dead of night with wheelbarrows full of cash. One by one the other nations fell out of the currency union. Savers rushed from one country to the next across the old empire, in the hope of recovering some of their paper's value. The collapse of the krone tells me something very important about currency crises - they develop slowly at first, then very suddenly. So how can you protect your wealth if the euro goes the same way?
European Stocks Look Cheap - But They Could Get Cheaper
My colleague Seán Keyes wrote in more detail about the currency crisis in the Austro-Hungarian empire. There are some interesting parallels between what happened then and what's happening now. My concern is that if Greece is finally forced out of the euro, the crisis will burn quicker and brighter than ever before. Like Austrian and Yugoslavian savers in 1918, there'll be a race to evacuate wealth from the periphery before it's too late. Indeed, money is already fleeing the area. Spain is the latest country in the market's crosshairs. [I'm not sure if I agree with this next bit, but leave it in for completeness sake - CC] However, it isn't all bad news. We are now at a stage where European stock markets seem to be sensibly valued. A lot of the bad news is already priced in. SocGen analysts Albert Edwards and Dylan Grice recently compared US stocks to European ones. The cyclically adjusted price/earnings ratio (CAPE) smooths out profits over the economic cycle, Europe is much cheaper than the US. On this measure, European p/e ratios are now at a level they last saw in 1982, at the dawn of the last great bull market. That doesn't make them outstandingly cheap. I still expect a correction in stock markets courtesy of the debt crisis. But they are starting to look attractive. As Edwards and Grice suggest: 'Investors are reluctant to invest amid all the ongoing chaos in the eurozone. But the macro backdrop always looks awful when the market is this cheap.' So although I don't think the timing is yet right to be plunging into European stocks, it may well soon be time to start investigating some of the more compelling opportunities available in the eurozone.
Hang On to Gold
Equities, of course, are only part of the bigger picture. Gold remains attractive. Although it has had a less than stellar year so far, I'm willing to be patient. Consider what asset manager Simon Mikhailovich said during a recent interview with US financial newspaper Barron's. When asked if he could imagine another Lehman Brothers-style event, he responded: 'It's just a matter of time. This financial system is completely unsustainable... The ability of governments to sustain the unsustainable ultimately rests on their ability to maintain faith in their creditworthiness... 'If this devaluation of financial assets proceeds apace and the moment of clarity comes for many investors in the West who realise they need to diversify into assets that can protect against devaluation, demand for physical gold has the potential to rise dramatically.' The beauty of gold is that it offers a chance to protect against both deflation and inflation. It's difficult to point to gold's credentials as a deflationary hedge because prior historic periods of deflation occurred when its price was fixed. The most recent deflationary period was limited to Japan, at a time when the rest of the world economy was booming. But as deflation (in financial asset terms) is associated with acute financial stress, it seems reasonable to expect gold to provide some diversifying relief from that stress. Particularly because (unlike sovereign debt, for example) it is nobody else's liability. And as an inflationary hedge, it is worth noting that gold has remained a store of value for literally thousands of years. Gold is also now getting attention from the unlikeliest of sources. Bond fund manager Bill Gross of Pimco recently wrote: 'As [investors] question the value of much of the $200 trillion which comprises our current [monetary] system, they move marginally elsewhere - to real assets such as land, gold and tangible things, or to cash and a figurative mattress where at least their money is readily accessible.' In short, investors are faced with a choice between vast abundance (in paper assets and all things debt-like), and genuine scarcity (tangible and real assets, especially gold). In a deleveraging world and in light of the ongoing financial crisis, it makes sense to vote for scarcity. Tim Price Contributing Editor, Money Morning Publisher's Note: This is an edited version of an article that first appeared in Moneyweek UK
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The real lesson of all this is that as the crash proceeds apace, the value of gold will continue to climb, since it isn't paper. Once people lose trust in paper, or by extension, little bits of information stored on a computer somewhere, by realising just how brazen the banks in been in scamming them in any way possible, the focus will go back to physical assets.
However, I personally believe that the time to buy is now. Waiting for the crisis is too late, although I suppose you could make some money using leveraged options as the equities market crashes, but if the firm selling the options goes under, then theres no chance you will get your money back.
The bottom line then is not to buy Gold ETF's like SPDR, where you have no idea where your gold is, but from bailment firms like Bullionvault, where they keep accurate records and do not use fractional reserve banking methods, so you can be sure your gols id really there, instead of being continually diluted by the issue of more ETF shares, which is the principal mechanism that the big banks hav been using to keep the gold and silver price down.
It's starting to look like it's breaking down.. Gold finally broke $1600 today and shot all the way up to $1620 before drifting back to $1611.
I dont know where Gold will be going next, but I highly doubt it will go back below $1600, which was a massive psychological limit. I have no idea where JPM have their gold shorts, but given the fundamentals moving the gold market (massive sovereign buying, the fact that we are coming up to the end of the flat season for gold as the festival season starts up) I suspect they will have to write the positions off and pin it on someone as a rogue trade, which indeed they may have already done.
I dont have accurate information of exactly how much paper gold JPM is holding, I heard a reference to a short of 500million ounces of silver, which is massive. Given the importance of the gold market, I could easily believe they hold gold short positions of similar size.
If this is the case, then they will have to get govt money to help liquidate the position or go under. Given the way the USA works, I am very sure that the USG would not let JPM of Goldman Sachs fall, regardless of the damage to the rest of the economy.
After all, there's not really much they can do now, except hang on for the massive downward ride. The smart people will get into Precious metals, since everything based on paper will probably be rendered worthless, or to put it the other way, the likely hood of such a thing happening to paper that you own will be much higher.
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Christopher Carrion.
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