Wednesday, September 5, 2018

Are gold and silver again foreshadowing a new financial collapse as ratio between the two metals reaches astounding 84:1

While the 2008 financial crisis was at its heart a global liquidity problem, the two main instigators of course were the housing bubble, and the quadrillions in derivatives that grew out of this one asset class.  But while it would take another year and a half before the equity markets nosedived to a near record 60% off their all-time highs, there is growing talk that one of the biggest forecasters of that crash was that of gold and silver.

In a fiat currency system, the foundation of everything is above all trust.  Trust in a government's policies to grow an economy, trust in a central bank's ability to protect the monetary system, and just as importantly, trust in banks which act as the nervous system for the currency.

Needless to say one of the larger forecasters that something wasn't right back in 2007-08 was the fact that banks began to stop lending to one another in order to protect themselves as liquidity became scarce thanks to Greenspan's removal of the cheap money spigot.  And on the flip side of this was gold and silver, which has always historically acted as a balance scale to each particular nation's currency outside the abuse of paper manipulation.

Let's start with a little background. The mid-2000s' economy boomed in part because artificially low interest rates had ignited a housing mania which featured a huge increase in "subprime" mortgage lending. This - as all subprime lending binges eventually do - began to unravel in 2007. The consensus view was that subprime was "peripheral" and therefore unimportant. Here's Fed Chair Ben Bernanke giving ever-credulous CNBC the benefit of his vast bubble experience. 
The experts were catastrophically wrong, and in 2008 the periphery crisis spread to the core, threatening to kill the brand-name banks that had grown to dominate the US and Europe. The markets panicked, with even gold and silver (normally hedges against exactly this kind of financial crisis) plunging along with everything else. Gold lost about 20% of its market value in a single month: - Seeking Alpha
Needless to say, one of the primary reasons for gold and silver's selloff in 2008 was due to the fact that most gold trading was done in the paper markets, and thus was an easy investment to dump to acquire short term liquidity to protect other paper asset positions.

But when those assets also imploded, much of the world began to lose confidence in the dollar and in the entire financial system.  And this is why in a very short time following gold's decline down to $760, it rose to a new high of $1940 three years later when the dollar fell to 72 on the index.

So with this in mind are we once again seeing gold and silver be a major forecaster for a new and coming financial crisis?  We already have the housing component, as over the past three months nearly every indicator is signalling that the Bubble 2.0 has popped.  And we also have signs that interbank lending is drying up, as well as the Fed raising rates and removing cheap money from the equation.

Which leaves us with our last indicator, which is the fall in price of gold and silver and where the gold to silver ratio is now at an astounding 84:1.

For now the dollar remains strong because the start of the financial crash is beginning in the emerging market nations rather than in the West, and where we already have one and could potentially see two more very shortly enter into a hyperinflationary state.

And most interesting is that most of these emerging market countries are scrambling not for dollars but instead for gold, which could very well break through this time around and return to its rightful place as the global reserve currency.


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