Monday, September 5, 2011

James Turk: It's different this time (and perhaps it really is!)

I've been following James Turk for years now and his writings have become a trusted source of information to me over the course of that time.  Recently he was interviewed (again) on KingWorldNews where he cautioned people not to expect gold to drop along with stocks this time.

The key excerpt from his statements is this:

"A lot of people have been comparing today’s problems with those leading up to the Lehman Brothers collapse in September, 2008.  They have been fearful that when the next major stock market downdraft occurred that gold would be taken down along with it, just like what happened in the aftermath of Lehman.  We’ve discussed the fact that the Lehman collapse was a liquidity crisis in which everything was sold, even the highest quality assets, like gold, were sold because of the liquidity they offered.  
But what’s happening now, Eric, is not a liquidity crisis.  Everybody learned the lesson from the Lehman collapse to be liquid and control their use of leverage, particularly the big hedge funds.  So I want KWN readers to understand the major difference between then and now is that the principal driver today is not a rush to liquidity, but rather, a rush to safety...."

Traders historically become overleveraged in one asset.  Sometimes they bet wrong and that asset that they bought using leverage/credit begins to decline in value.  In hopes that the asset is just undergoing a short term pullback and with the intention of riding out the storm, funds will often liquidate other assets that they have profits in so that they can cover their margin calls related to the failing asset.  In other words, they sell the winners and backstop the losers.  While the intent here is  to never have to show a loss on anything, it seldom works out like that.

What Turk is saying is that we are beyond that stage in the game right now.  The heavy leveraged players have either imploded or scrambled to rein themselves in.  Hedge funds have been shutting down because they realize that markets have gotten chaotic and thus the risk associated with them can no longer be intelligently managed.  They can no longer be assured of making any money at all, to say nothing of the 30% returns that their elite clients have demanded in years past.  The lessons of Lehman have not fallen upon deaf ears in the financial community.

So, Turk sees an exodus into gold "for safety" but what he really means is that the flight to gold is actually a dash into cash.  Market participants are worried that collapsing governments will no longer be able to reflate the deflating global economy.  It causes them to worry about a stock market collapse and so they are selling stocks but they are also worried about fiat currency and so they now want real, historical, constitutional money, not fake fiat currency in the form of dollars or Euros.  It's the modern day market instantiation of the old saying, "You can't fool all the people all the time".  My personal corollary to that is "...and some of the time you can't fool anyone at all". 

We are now within the time of the Great Awakening - a time when people finally wake up and realize that they have been controlled by a global scam of fraudulent fiat currency and fractional reserve banking. A time when easy patsies to fleece are an endangered species and a time when those who go sheep hunting might themselves end up on the horns.   Money makes the world go 'round and when you have fake money then much of what happens in the world is also fake and fraudulent.  Money is the very basis of modern society and so when the money is corrupt, society itself cannot avoid also being corrupt.  Those who have benefited from the corruption are giving back money left and right because they fear the backlash of the people and they hope to keep whatever ill begotten gains they might have already squirreled away for themselves (including $200k per year pensions for life!).  They want to appear charitable, etc. but if you pull back the covers and really look past the headlines you will always find some greedy bastard who is simply smart enough to try to distance himself from the con before the people drag him into the street and he loses everything.

Like all things, this dash into real cash will run its course some day and when it does, those of us who are holding real gold and silver cash will be using it to buy up good assets on the cheap (rental properties in good shape, stocks with PEs of 5, PS of 0.5 and PB of 0.5 with dividends of 5-7%), etc.  We will spend our money (our gold) on these assets when all of the leverage and speculation has been beaten out of them (and then some).  The gold and silver coins will not escape our grasps easily as we have worked very hard to earn them. 

When will this day come?  Most gold holders will start to buy things with their golden money when the Dow:gold ratio is 1:1: or less.  In other words, when 1 Troy oz of 24kt gold will buy one "share" of the entire DJIA then "stuff" will probably have gotten cheap in terms of real money and thus people with real money will buy the stuff.   As you can see from the chart to the left, we are not there yet.  At the same time, look at how the 50 day moving average of this chart has broken down below the 200 day moving average.  This is the famous "death cross" that traders and their trading computers have respected for many years.  It suggests that the Dow:gold ratio has more to fall before people decide to spend their gold on other things.  In the short term, the ratio could pop backup so that it tests the underside of the downward sloping 50 day moving average curve (nothing goes straight up or down forever) but if that occurs then expect a rapid bounce back down off of that level so that the Dow:gold ratio reaches lower lows.

At the end of the day, holding gold is not a religion (at least not for intelligent people).  It is simply an act of saving cash.  It is saving real, honest money which is beyond government control.  Nothing more and nothing less.  Savings are meant to be spent when the time is right.  But none of this will change the fact that gold is money and everything else is credit.

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