The reveal is happening. All that remains is the backlash.

For at least 4+ years now I have been writing that the global economic system is a debt Ponzi.  Back then the herd simply did not believe it.  Nowadays, however, these words are being repeated again and again.  They are being pounded into the collective head on every news outlet.  The confidence of the herd in the ability of central bankers to create perpetual prosperity is waning.  Most of the population is still in wait and see mode but an increasing number of people are making quiet preparations, hoarding food, buying physical gold and silver, etc.

The EU is currently on crash watch.  Its become a spectator sport with the ability to bet on it.  Looking at the deteriorating situation of the PIIGS and understanding how this will impact the regional masters (France and Germany), the collapse of the EU is a matter of when, not if.  Interest rates of the PIIGS debt is skyrocketing.  Euro-scammers are trying to find ways to default on Greece's debt without actually calling it a default.  They hope to avoid triggering a potential chain reaction of Credit Default Swaps and other derivitives that could take down the global financial system overnight.  Good luck with that.

Civil unrest in Spain is starting to smell a lot like that of Egypt and Tunisia.  The Spanish government banned the protests.  In response, the people ignored them.  Nothing says "you have become irrelevant" and "you only ever had power as long as we allowed you to have it"  like a week of public protests that run 24/7.  The Spanish government will soon have to make a choice: step down and let the Ponzi collapse or begin shooting its citizens like the criminal Syrian government has been doing.  Every day that goes by in which the edicts of government are ignored emboldens the people.  The emboldening brings increasing numbers of the more sheepish members of the herd into the mix.  There is nothing that is so feared by government as a repressed people who suddenly taste freedom.

Spain's unrest seems to have rekindled unrest in Italy.  The whole area (and in fact the whole world) is run by organized crime posing as government.  The EU Tower of Babel is teetering.  At the same time, China is over heating, the housing bubbles in Australia and Canada are rolling over (canaries in the coal mine of the coming collapse of the China bubble) and Japan is just plain old fashioned screwed.  Here in America, the ECRI is predicting another global slowdown this summer.  Economic slowing is the seeds of unrest no matter where you live.  What ECRI does is to watch the herd in an organized fashion and to make predictions based on what they see.  Their track record is not perfect but it is pretty good.

Of course, some of this is pretty easily predictable.  When Bernanke was printing money from thin air and dropping it on the economy from a helicopter, the economy started bouncing.  Unfortunately, so did gold and silver and gas and food prices.  Now that he is trying to pull back on the stimulus it is very unlikely that the recovery will continue.  The minute Bernanke puts the defib paddles down, the heart is going to weaken and stop.  This time it will likely happen much more quickly than the last time.  At some point the world is going to figure out that the heart is beyond saving and that's when the big global collapse will likely set in.  Unfortunately, these things often follow the laws of exponential awakening.  Most people think they will be OK until suddenly they are far from OK and there they sit, wondering what hit them and wondering what the heck to do next.  I urge people not to allow themselves to end up in that position.  Make some preparations.  If they never get used then consider it an insurance premium paid with no claim made.  The premiums are cheap right now.  If the global economy threatens real collapse again then the premiums will go up dramatically.  Complacency regarding this is just not a good Darwinian survival strategy right now.

When things begin to slow again, Bernanke will pull out the paddles for QE3 but I don't think it will work this time.  Exponentially more stimulus is having exponentially lower positive effects.  The global con is running very thin.  I think as soon as the metals markets see another QE happening, the mad rush into gold and silver will be screaming loud and clear, "all global fiat currencies are fraudulent" and it will wipe away the remaining complacency from the herd.  At that point I expect to see some real movement from the herd - some real fear - and quite possibly armed conflicts even in the USA.

Most people on the planet are still in denial.  They are Madoff victims looking at their account statements and thinking themselves in good shape.  They have made no provisions for the collapse of the debt Ponzi.  They are just hoping for the best and planning nothing at all.  They have been hypnotized into believing that government can and will save them should things go badly south.  This is like cattle standing in front of the slaughter house hoping that the rancher which herded them there will save them from becoming steaks. 

Silver at important support

Whether the imbalances are beaten out of the system via a deflationary crash or a massive inflationary spell, silver is likely to be a leading indicator.   Personally, I'm skeptical about any big crash in silver from here.  It has been beaten down for so many years to completely stupid and unrealistic levels of sub $10 that it has, in my view, far more long term upside than anything else.  I don't think the market is going to be generous enough to bash it down there again so that the newly awakened get a second chance at a long term sure thing.  Of course, if the Dow collapses then all bets are off in the short to medium term.

Having said that, silver is at an interesting support point.  It peaked at the exact point where it would form a parallel channel with the lower trend support line.  The correction has been larger than the 38.2 fib but there was definite support at that level on the way down and now there seems to be some resistance testing that level from below.   A break down below the lower support line will likely spell further buying opportunities but holding the line and then breaking back above the 38.2 % fib retracement level will likely signal another leg up.  Silver is still in significant shortage despite the recent sell off.  That exponential peak was put in place due to leveraged margin buying which has now gotten pared way back due to new margin requirements.  The next move up will not be nearly so fragile now that leverage has been greatly reduced in the equation by the COMEX con men. 

The Pain in Spain is Mainly in the Brain...

Reports are starting to surface of "austerity protests" in Spain that seem very similar to the early civil unrest in Greece and even the around the clock protests that toppled governments in the Middle East and North Africa.  What are the protesters protesting?  In a way, they are protesting a return to (forced) honesty.  They have become addicted to the wild credit based economy and now that credit is drying up they are unhappy that the enhanced lifestyle associated with debt based spending is also drying up.  Some of the people believe that protesting will force the government to return to the salad days of deficit spending.  These people literally believe that government is a never ending source of wealth and that it can spend any amount and accomplish any task if it just has sufficient will to do so.  The pain in Spain is mainly in the brains of people who believe this crap.  They need to wake and perhaps grow up but then they would have to take some personal responsibility for letting it get out of control in the first place.

Of course, I never underestimate the fault of government in creating these problems.  The Grand Illusion of debt based wealth was purposefully crafted by the Sultans of Scam, the new breed of economic alchemists known as central bankers.  Now that the con is dying under its own corrupt weight, someone is going to have to tell the people that it was always an illusion (Chris Christie and fairy tale promises, anyone?).  Failing that, the people are going to think that government is somehow holding out on them in which case they will feel justified to fight to get their "fair share" of the easy money (that certainly resides by the truck full just behind government doors..). 

It's a no win scenario going forward for the con men in government and central banker cronies.  Before this global economic scam is over and done with I predict literal hanging in the streets for some of them.  Some will be jailed, others will be snuffed quietly in their sleep (probably by their fellow bankers who fear they know too much) and some will actually be murdered in street violence.  That might seem a bold prediction if not a bit dark, but it will come to pass if history is any gauge of the future. 

If things still appear relatively calm it's only because the crap hasn't hit the fan yet.  I know this because so few people own gold and silver which means they are fully exposed to massive attack by flying crap.  That means their wealth is mainly in stocks and other dollar denominated paper investments.  Once the crap begins to really fly then lots more people will own metals than have ever done so in the past 50+ years.  Even you will probably buy some when you see so many others doing it.  Their move will validate your impulse.  The people are scared right now but not really angry yet because they think their stock accounts are still fat.  They live in pre-crash Madoff victim land.  They still think their accounts are actually worth what their monthly statement reads. They think they will actually get their promised government pensions, social security, IRA and 401k money, etc.  At some point a big portion of all of these things will be stolen some way, some how in order to pay for this global scam.  Then and only then will people be pissed to the point of taking noose in hand.  It may not be obvious yet, but its coming.

Euroland members working through the grief cycle at different rates

In one of Mish's recent posts, a German newspaper writes an open letter to the Greek government basically telling it that it will eventually default on its debt.  Instead of further chastising the Greek government for its out of control spending, the newspaper assures it that there is life after an economic default.  Remember, this is a member of the creditor nation saying this.  When Greece defaults, the Germans who foolishly / greedily loaned them money will have to mark down their bad loans and realize the losses they have been hiding on their books.  The open letter might as well have been to both the Greek government and the German lenders who lent them money.  Sounds to me like at least some on the German side have entered the acceptance stage of this financial crisis as defined by the Kubler-Ross model.

Mish goes on to indicate that the same fate is in store for Ireland, Portugal and Spain because what cannot be repaid will not be repaid.  I think everyone knows this is the case at this point.  If this is true then why is the German newspaper so eager to have Greece default?  People should be asking themselves this question as the defaults begin to pile up.  The reason is very simple:  Most of the money that was loaned was never earned.  It was conjured up from thin air as part of the fractional reserve lending scam.  The losses will mainly affect the population using the money supply, not the con men who have been gaming it.  If lenders had actually worked for the money that they lent out for interest then, trust me, they would not be nearly so unemotional about its pending loss.  The con men running the fractional reserve scam will not lose anything when the defaults occur because they never had any real skin in the game except perhaps their reputations.  Nobody will go to jail and very few will even be singled out for public humiliation.

When the Greeks and the rest of the PIIGS default, more con men will come rushing in with more credit based money that they did not have to earn before loaning out.  Their goal: operation Phoenix.  In other words, start a new debt Ponzi right from within the ashes of the old one that burnt down.  It is totally predictable that this will happen because there is no better business in the world than conjuring up something from thin air and then lending it out for interest which must actually be earned with real labor.  Fractional reserve lending is the ultimate something for nothing scam and too many people are now dependent upon it for it to stop.  Instead of feeding themselves by doing real work, they live big lifestyles by running debt Ponzis.  It's really good work if you can get it.  The only qualifications are that you have to be a crony of those in charge as well as being devoid of any moral substance whatsoever.

Is gold just another commodity?

The main stream media often refers to gold as "just" a commodity.  I heard the talking heads say this on CNBC the other day. However a closer examination of the facts shows that this is not true.  Commodities are things that we need in order to live rich, healthy, productive lives and include things such as food, oil, clothing (textiles), etc.  Commodities are a form of wealth.  It takes labor and energy to extract, refine, stockpile and deliver them.  Gold shares some of these traits which often causes people to confuse it with being a commodity. 

For example, gold is a form of wealth and it takes labor and energy to produce gold.  But gold is not just a commodity.  Gold is money.  Gold is not used to any significant degree by industry.  It is not consumed.  If the world ran out of gold tomorrow, nobody would go hungry.  People like to say "you can't eat (or wear or live in) gold".  I say "exactly".  That's one of the reasons why it is money and not a commodity.

Sure, gold is formed into objects like jewelry, but gold jewelry was originally invented to be money.  Gold chains could be shortened by cutting off a few links and using it to pay for things with.  Conversely, cotton is turned into clothing which is worn (consumed), wears out, and is discarded.  Corn and wheat are consumed to extract the nutrients from them and then remains are discarded.  Production and then consumption into nothingness is typicial commodity behavior.  Gold however, is not consumed and then discarded.  Gold is simply hoarded.  Hoarding without consuming is a trait of money.  As JP Morgan said, "Gold is money, and nothing else is".

Because people tend to think of gold as a commodity, during normal times gold and commodities can have high corellation in price movements relative to the fiat currency.  But we are not in normal times.  We are in the ending decade of a long term debt global Ponzi which has been driven by the dual scams of fiat currency and fractional reserve banking.  Some might even call it the end days of an 80 year cycle of dishonest money.  Because of this, gold is no longer trading in lock step with commodities.  The following chart plots gold against a major commodity ETF. As you can see, gold acted like a commodity until late 2008 and then it took on a new life of its own - a life that hasn't been seen in many decades.  Gold started to behave like money again.  People are even accepting it as collateral in trading operations.  There is no clearer sign that gold is becoming recognized as money again then the use of it on a day to day basis by moneymen.

Gold could correct a bit if the dollar breaks out (which it is threatening to do based on troubles in Euroland.  Again.).  However, the telltale event that I am looking for is when gold does not pull back (or the dip is quickly bought) when the US fiat currency strengthens against the other worthless fiat currencies of the world.  The world is not used to that happening.  We could be on the verge of seeing that right now.  Of course, it could also take a couple more years to occur.  Nobody can say for sure when it will happen.

Why do I think this would be important?  What would be so special about gold strengthening along with a rising dollar?  Well, as I have written many times before, the world expects gold to behave like a commodity even though it is the only true form of money on the planet.  When the dollar strengthens relative to other sovereign crap-cash, gold is supposed to respect the rising dollar by taking a big dip.  But if a rising dollar doesn't result in falling gold then it is a big sign that the herd is becoming less and less fooled by the annual seesaw act between competing fiat currencies.  The truth is that all global fiat currencies are failing albeit at different rates.  When gold rises at a time people expect it to be falling, increasing numbers of the herd will begin to see that the leaders of the herd no longer have the same trust in the fiat currency that they once did.  When these social signals hit a certain point, the herd will start to react.  Small initial reactions will eventually turn into a chain reaction.  Trust and confidence are funny things.  They can go out the window within a very short time frame (in other words, in about the amount of time it takes to say "Madoff accounts are worthless because he was running a Ponzi").

Obama seeks to obfuscate reality with more oil production

Over the past years I have written to family and friends on economic matters before starting this blog.  One of the things I have stressed time and again is a basic truth about gold which, given recent events, is worth revisiting.  One of the biggest economic traits of gold is that it is the only thing in the whole world that has the power to credibly declare fiat currencies as being fraudulent.  Since fiat currency is an extension of the government(s) that control it (them), gold is also one of the primary indicators (inverted indicator in this case) of public perception of government honesty.  The higher the price of gold, the less public trust there is in government and its funny money.

People have been calling fiat currency, including the US dollar, a fraud for a long time.  Credible people.  But this does not really catch on as absolute truth with the masses on its own merits because other people who are also viewed as credible (despite the fact that they are just good liars) come up with cover stories.  The average sheeple is left with a cacophony of raw data to sift through that is so convoluted and so complex and so utterly conflicting that their human minds simply give up trying to understand it all.  They sense that they are living with a ticking time bomb but since they don't understand how bombs work they have to listen to the words of "experts" on the matter.  On one hand, some experts are saying "This is a bomb with a timer.  It will eventually explode and you will be destroyed.  Move away now and save yourself from future pain and suffering".  On the other hand, people who rely on the productive output of the masses (because they live by taxation of that output and not by their own productive endeavors) tell the people "There is no danger.  The bomb is well understood and we have it under control.  The ticking noise should be ignored.  Please keep working.  After all, it hasn't gone off yet and thus it will likely never go off".  You can see how normal, undereducated economically but really good hardworking people would have a dilemma here.

Moving away from analogies into the real world, some people have been warning that the historic result of government money printing has been massive inflation or worse, hyperinflation.  They point to things like rising food and energy prices as evidence that they are right. Their government counterparts argue that rising prices are caused by other things like unrest in the Middle East, Greedy Arabs, Greedy Farmers and anything else under the sun.  Joe Sixpack (and even Joe White Collar Worker) watches all of it not knowing what to do.  Both sides seem to make credible arguments.  After all, there is civil unrest in the Middle East and North Africa (MENA) and oil prices have been rising.  Rising oil prices lead to higher costs for farmers and grocers so perhaps the problems in the MENA are causal.

The government hacks get away with making these types of arguments because few in the population read past the headlines and the main stream media sometimes puts the most important economic headlines on page 14.  So today we read (front page) that Obama is talking about increasing oil production in order to address high fuel prices.  The only problem with this is that there is currently an oil glut!  The Saudis, who in hindsight have been fairly truthful over the years in public statements, say (on page 14) that they need to decrease production because demand has fallen off.

And so here is the truth of the matter.  Both sides are right to some degree.  The Saudis know oil like nobody else.  They have been saying for a long time that oil above $80 cuts demand.  They think that the sweet spot for their profits is that $80/bbl number.  Above that amount, demand destruction outweighs the higher prices with respect to total Saudi profits.  I believe that the Saudis have been truthful on this matter.  High oil prices have reduced demand and so there is a glut.  They hardly know where to store the stuff.

For Obama's part, the glut has not reduced prices.  This is contrary to the laws of supply and demand.  The problem? THOSE GREEDY SPECULATORS.  Yes, that is what government always says when fiat currency and fractional reserve banking (i.e. credit) based bubbles occur.  And to some degree he's right.  The current demand for oil has nothing to do with consumption and everything to do with people wanting an inflation proof place to store their wealth.  These people are looking at the price of gold rising and they know that this is bad news for fiat currency.  Why?  Because you don't eat or drink gold and it can't power your factories and cars.  It is almost useless industrially because of its high price.  There is no way to blame the rising price of gold on greedy oil producers or greedy farmers.  What would it sound like if government insinuated that rising gold price was the result of greedy miners?  It would be a complete joke, a propaganda effort that would fall flat.  This unique nature of gold to be recognized as the ultimate safe store of wealth which is unaffected by industrial consumption based supply and demand issues makes its rising price the economic equivalent of a tsunami siren.  Platinum, for example, does not enjoy this status because its price is largely a function of the number of catalytic converters needed by the auto industry.  Is it any wonder that gold is now threatening to pass platinum in dollar price?

So back to Obama and the oil price.  If he moves forward in increasing the existing oil glut then he will likely scare the investment money out of that commodity.  Falling oil prices could be a leadership event for falling commodity prices which will keep the sheeple from rioting (for now).  But none of that addresses the fact that there is a lot of paper wealth running around out there looking for a haven to be stored in.  Government debt is a huge gamble in the minds of many.  The stock market has been going up in dollar terms but it has gotten killed in terms of commodities since the quiet crash of 2001.  In other words, the gains have all been inflation gains, not real gains.  What good is a stock that has doubled in price when gasoline has also doubled?  How much did you really make in this deal if the buying power stayed even despite the share price increases?  Let's not even talk about the tax liabilities you might have from all your stock market "gains".   The Dow vs Gold chart is instructive here.
As you can see, despite steady gains in the DJIA since March 2009, the Dow has been flat to down in terms of gold.  It used to take 15 oz of gold in order to buy one share of the Dow.  Now it only takes 8.43 oz.  In addition, the Dow is now fully priced (in terms like PE, dividends, etc.) at a time of high unemployment and rising prices.  Money in the Dow is getting very nervous after such a strong bounce given the fact that the Federal Reserve is putting the Ponzi Pump known as QE2 on hold in June to see if the economy will continue to improve without government driven (i.e. debt driven) economic stimulation.  I'm betting it won't.  I suspect that the holiday buying season will be bleak.

As the end game of the global economic debt Ponzi plays out we will no doubt see many government actions taken in order to try to escape the inevitable.  All this will do is push the bubble around resulting in unintended consequences.  One of these days it is very likely that government has cut off all avenues of escape for the hot money except into gold.  If that day arrives we could see tons of hot money chasing a very small gold market.  This would kick the economic tsunami sirens into high gear.  That which has been considered a risky investment for the last 40 years will eventually once again be regarded for what it has always been - the only real money on the planet.

Silver ain't no tulip.

If you are reading my obscure blog then you probably have better insight into the way things really work economically than most people.  To be clear, I make this statement not because you have learned anything from me but rather because in order to find my insignificant blog you had to do some searching for the right terms.  You had to already be looking for the right things.  Because of that, you likely already know about Tulip Mania from the 1600s.  Thus you already know that it was a textbook case of a mania.

A mania is a type of fad if you will.  People get "irrationally exuberant" about something and they get caught up in the moment.  They lose sight of context, of the horizon itself, due to all the noise and bustle of the other herd members around them.  When it comes to consumption we can look at things like Pet Rocks from the 70s and Beanie Babies from the 90s.  When it comes to economics we can look at Tulips from the 1600s, the South Sea Trading Company of the 1700s and many other examples going forward.

The flip side of manias are panics.  In cattlemen's lingo they are called stampedes.  The herd gets spooked, whether for good reason or just because it was time to run off some herd energy and all Hell breaks loose.  Common sense flies out the window until the herd is run out of steam and then the cowboys can round them up again.

Prechter does a good job of explaining manias, especially in his 2002 book, "Conquer The Crash".  It is well worth your time to read.  Prechter teaches that manias have an exponential left side of the curve as everyone piles in and then when everyone and their brother is "all in" the herd runs back out as the bottom drops out.  At the end of the day, true manias end up lower than where they started.  Another characteristic of a mania collapse is that the object which went mania will basically be screwed for a long time and oftentimes forever.  Too many people will have gotten burnt and confidence in the asset will have been lost by the herd.  As you can see from the South Sea chart below, the mania fully retraced and then the company eventually went bankrupt because it was nothing but a valueless scam the whole time.

Since late 2009, Silver has been on incredible tear rising from $9 to $50 in that time frame.  The cause: fear of Bernanke and his printing presses.  Now that it looks like Bernanke is going to stop printing QE2 money in June, the herd has run back out of silver taking it to the $35 range.  Traders will now determine whether this is just the Elliott Wave a-b-c pullback that refreshes (caution, these pullbacks have 3 common retracements: 38.2%, 50%, and 61.8%) or a complete run out of silver by the herd - a complete mania retracement.

My humble opinion on the matter is that the silver chart will eventually form some sort of inclining double bottom and then take off again to reach new highs.  In other words, and I do understand the credibility risk of putting this type of thing in writing, "it's different this time". I do not see silver fully retracing the mania price to below $9 again.  There are several reasons for this view:

• The recent radical decline in silver was not touched off by a loss of confidence.  Speculators had piled into silver on the COMEX on margin causing the price to rise exponentially.  The volume of silver metal trading was so high that COMEX was at threat of defaulting on delivery.  So COMEX raised its margin requirements dramatically which caused heavily margined buyers to sell in order to meet these requirements.  This is what caused the recent pullback - the forcefull ejection of the leveraged gamblers, NOT loss of confidence in the metal as a store of value.  IMO this is a critical differentiator from a mania.  People holding physical silver did not have a chance to sell because it all happened too fast.  Besides, nobody buys physical metal to flip it - flippers live in the SLV fund.  Physical holders have always been long term holders of the metal thus removing that supply from the market.  The reduced supply will put a floor on the price. 
• Physical silver buyers have been active for several years now at below $25/oz.  They did not all buy at $50 and thus they do not feel burned by the recent sell off.  Despite the recent collapse in price, most physical silver holders are still right side up.
• Above ground silver levels are at a historic low and I believe this is happening at a time of rapidly increasing industrial demand for the metal.  Unlike gold, silver is an industrial consumption metal.  More to the point, gold gets mined and then hoarded whereas most silver gets mined and then consumed.  While the economy has been stalled for the past couple years, technology continues to grow and silver is a technology metal.  Of all the metals, silver is going to be in greatest demand for the required technologies going forward: electronic devices, solar panels, electric cars, new materials sciences, etc.  Its physical properties of conductivity, reflectivity and malleability are standouts on the periodic table of the elements.  The value of platinum skyrocketed based on industrial demand by catalytic converters used for emissions control of internal combustion engines.  The rise in electric motor based transportation will fade platinum and highlight silver.  In other words, silver is not just a token for wealth like gold is.  Silver is a valuable commodity in its own right and it will eventually demand a premium price that will make $50/oz. seem like a good deal. 
• Bernanke may be stopping with the money printing for now but this is only so that he can check to see if the shock defibrillation of the economy has worked.  It's a cinch that it did not work given that jobs are not plentiful, salaries are flat and consumer prices for food and energy (nondiscretionary consumption items) are skyrocketing.  He may wait the rest of 2011 to see if the holiday buying season returns to life.  Heck, he might even get cocky and let the interest rates rise as if health has returned to the economy (or perhaps because congress stops letting him print up more money to buy treasuries with) but the reality is that the consumerist attitude of the herd is falling because the boomers, a large group which has high salaries and lots of wealth, are retiring.  They are looking to cut costs, not expand their stuff.  They will be selling assets and downsizing over the next decade.  They will stop being economic adders to society and begin to be economic dead weight.  Government cannot change that.  The herd is bigger than the government.  Because of this, at some point the presses will have to be fired back up again with a vengeance because without this the global debt Ponzi will collapse.  That is a 100% given.  People point to Japan saying that deflation can last 20+ years but they fail to admit that Japan's debt to GDP has skyrocketed to 200%.  Deflation will at some point be replaced by massive inflation in Japan and the same will eventually happen in the US.  Crooks are running the money supply and they will continue printing until they are kicked out.  Unfortunately, everyone running for president is a crook except Ron Paul and he likely won't have enough support to win in 2012.  Even if he does have the support someone else will be declared the winner IMO.  The state of the criminal organization running the show depends on not having honest leaders.

Bottom line is that silver will be turbulent (perhaps dramatically so) but it will eventually rise to unbelievable heights.  Gold continues to be real money, a token for wealth with little industrial value but with great historical precedent as money.  The dollar and all other fiat currencies continue to be debt based currencies which will all eventually collapse and expose themselves as being the engine of the largest Ponzi scheme in history - the sovereign debt Ponzi.