The size and existence of the modern state is limited only by the ability to borrow money; an ability dependent on the continuing value of fiat paper money.  That limit has now been reached. Greece is not just a country that overindulged on the bankers’ poisoned candy of cheap credit. Greece is the canary in the coal mine of the modern state.

When gold was removed from the international monetary system in 1971, US interest rates were 6%.  By 1980, however, US rates rapidly rose to 21.5% in order to contain virulent inflationary forces unleashed when ties between paper money and gold were cut. The separation of gold and money was unprecedented. So, too, would be the consequences.

CROSSING THE RUBICON: FALLING INTEREST RATES, THE DESTRUCTION OF CAPITAL AND THE END OF FIAT PAPER MONEY

US interest rates have now fallen for 35 years. In the short term, falling interest rates are viewed as positive, growth is encouraged and investors leverage ever-cheaper credit to reap ever-larger rewards in ever-expanding markets.

In the long term, however, continually falling interest rates are a sign that something is fundamentally amiss; that the requisite balance between credit and debt necessary for self-sustaining growth is missing. Continually falling interest rates—like continually falling blood pressure—indicates the presence of a pathological monetary state that is ultimately fatal.

In his article, Euthanasia of the Pension Funds, (Part 1) Professor Antal E Fekete pointed out the dangers of continually falling interest rates:

…a falling interest-rate structure has a deleterious effect on accumulated capital. Capital is destroyed across the board simultaneously and stealthily. By the time the damage is discovered, it is too late to do anything about it and firms go bankrupt in droves. The falling trend of interest rates is the unrecognized cause of the depression that is presently devastating the world economy.

…The last vestiges of the gold standard were unilaterally discarded by the government of the United States in 1971. This event was coincident with the onset of the greatest gyration in the rate of interest on a world-wide scale. In a decade interest rates shot up to two-digit figures in the high teens. Then a slow decline started in the 1980’s pushing interest rates relentlessly towards zero. The first move (rising interest rates) was accompanied with a great surge of inflation, wiping out a large part of the value of pension rights. The second move (falling interest rates), which is still continuing, has brought deflation. It has not yet fully manifested its corrosive on the pension funds as yet. Even so, the forces that drive the rate of interest to zero are squarely responsible for the erosion or destruction of all capital… 

CONTINUALLY FALLING RATES AND EXCESSIVE MONETARY GROWTH

Below, I combined a chart of falling interest rates (greshams-law.com) with a chart of the US money supply (St. Louis Fed), further evidence of the destruction of capital.

Because of the continuing increase in the money supply, the dollars of today are worth less than yesterday’s and those of tomorrow will be worth less than today’s. We are now, all of us, running faster and faster at unsustainable levels on a treadmill towards inevitable disaster.

pg. 64, Time of the Vulture: How to Survive the Crisis and Prosper in the Process, 3^rded. (2012), Darryl Robert Schoon

THE TIME OF THE VULTURE

When the Roman empire collapsed, even slaves feared what would happen next. It is no different today.

In the 1^st edition of my book, Time of the Vulture: How to Survive the Crisis and Prosper in the Process (2007), I predicted a financial crisis even more devastating than the Great Depression was about to happen.

Today’s devastation will be even greater, because paper money is no longer backed by gold. The coming deflationary depression will involve not just the collapse of capital markets but, in addition, a cataclysmic currency crisis caused by the global destabilization of money.

When stocks lose their value

That’s a terrible thing

When homes lose their value

That’s a terrible thing

But when money loses its value

That’s the most terrible thing of all

Time of the Vulture  (1^st ed. 2007)

When I published Time of the Vulture, Fed interest rates were 5 ¼ %. When the financial crisis began in 2008, the Fed slashed rates to almost zero, 0.0-0.25%, to provide markets with excessive levels of liquidity to offset the sudden and severe drop in global aggregate demand. 

Today, 90% of industrialized economies now have interest rates near zero or below zero.

In addition to near zero interest rates, central banks created excessive amounts of money by issuing trillions of dollars of bonds, e.g. QE1, QE2, QE3, QE4, etc. pushing unprecedented amounts of newly created money into global markets to contain the growing deflationary threat; and, while it failed to contain deflation, the excessive liquidity is now circulating in markets with no place to go, akin to moribund monetary edema.

In capitalism’s end game, capital instead of circulating in the economy accumulates in financial markets. Bubbles are the result, not economic expansion; and, as aggregate demand fatally slows, so, too, does the velocity of money.

       http://chartramblings.blogspot.com/2014_04_01_archive.html

Capitalism, like a bicycle, doesn’t do well at slow speeds

In the 1930s, when global demand collapsed, countries fought for shares of a shrinking market by levying  tariffs on imported goods. The US Smoot-Hawley Tariff imposed surcharges on over 20,000 imported goods to record levels. Enacted to protect domestic markets from foreign imports, the net effect, however, was to accelerate the collapse of international trade.

           http://www.theautomaticearth.com/2010/07/the-rise-and-fall-of-trade/

As in 1929, international trade fell in 2009; but, this time, countries moved to protect markets not with tariffs but by debasing their currencies with excessive money printing, making their exports cheaper in foreign markets.

Debasing currencies to obtain a trade advantage, however, is akin to the Chinese proverb, Drinking poison to quench thirst, 飲鴆止渴. While the advantages are temporary, the consequences are not.

In November 2012, I wrote:

There are only two possibilities left in the bankers’ end game. Either deflation’s growing momentum will pull today’s faltering economies into the ever-growing maw of a deflationary collapse or the continued printing of money to stave off such a collapse will end with the complete debasement of paper currencies in a hyperinflationary blowoff.

Schoon, The Tipping Point (2012)

Today’s excessive money printing—whether to gain a trade advantage or to prevent a deflationary collapse—will end in the cataclysmic collapse of today’s fiat currencies and the consequent disarray of global markets and sovereign states.

GOLD BULLION – A LIFE INSURANCE POLICY ON FIAT PAPER MONEY

When paper money dies, the payout will be spectacular

GOLD IS VOLATILE WHEN CONDITIONS ARE VOLATILE

GOLD IS STABLE WHEN CONDITIONS ARE STABLE

That’s it, plain and simple. The more chaotic the monetary conditions, the more chaotic the price of gold. Gold is a barometer of economic uncertainty. In times when inflation threatens, gold moves up and down. In times when deflation threatens, gold moves up and down. When both inflation and deflation threaten, gold moves rapidly up and down. 

Pg. 127, Time of the Vulture, 3^rd. ed. 2012, Schoon

After 2001, gold moved upwards, from $250 to $1900 in 2011. Since 2011, gold has retraced 42 % of those gains. This had a negative effect on many gold investors. Indeed, that was the purpose of the bankers’ war on gold after 1971.

For those who understand the tremendous financial and geopolitical forces that today are vying not so much for supremacy as they were previously, but for survival; gold remains as it always has been—a store of value in times of monetary chaos and economic distress.

In March 2007, I predicted that an economic crisis would happen. It did. That crisis has yet to run its course to make way for the better world to come. In my Dollars & Sense youtube video, Darryl’s New Prediction, see https://youtu.be/qZJCTCO36DM. I make another forecast.

These are interesting times. Get used to it.

Buy gold, buy silver, have faith.

Darryl Robert Schoon

www.drschoon.com

www.survivethecrisis.com

Back in March, Comex silver prices surged 13% in just 6 days as a massive Spec short position was squeezed. Could the same setup be appearing again, primed for squeezing later this month? It certainly appears that way.

Recall first the circumstances surrounding the squeeze last month. Conventional wisdom held that the FOMC meeting of March 17-18 was going to precede some sort of announcement of an imminent Fed Funds rate hike. In anticipation, momo-chasing Spec fund money came flowing into the short side of Comex silver.

In the three weeks between February 24 and March 17, Commitment of Traders data shows that the Large Spec GROSS short position in silver grew from 20,009 contracts to 37,238 contracts…an increase of over 86%…all while price was declining from a 2/26 intraday high of $16.62 to a 3/11 intraday low of $15.36. This massive buildup of Spec short positions left silver ripe for a “short squeeze” and, when the FOMC Fedlines of March 18 failed to include the anticipated rate hike language, it was off to the races.

Over the six trading sessions from March 18 through March 26, price rallied from $15.40 to $17.40, or roughly 13%, and over this same time period the Large Spec GROSS short position declined by nearly 15,000 contracts, back to near 22,000.

What has happened in the time since? Despite all of the lousy US macro data, including the awful employment data of two weeks ago, conventional wisdom has once again decided that rate hikes are imminent. To this end, silver has fallen back to near $16 and, with it, silver open interest and Spec shorting is rising once again. As of last evening, total Comex silver open interest now stands just 1,300 contracts below the all-time high of 179,123 set on March 18. Check this out:

To me the conclusion is quite clear. The risk in silver is NOT to the downside with a drop through $15.50. Instead, the risk is being taken by the Spec shorts. They are being set up once again for an epic squeeze. This move is not yet imminent and it may be timed instead for the next FOMC meeting in two weeks. This would coincide with May silver contract expiration and the mandatory Spec short-covering that would naturally occur anyway.

Therefore, could another squeeze and panic develop, similar in size and scope to March? Certainly. And could you profit from this move? Absolutely! Those willing to gamble in The Casino and confident enough to take a contrarian stand against the momo-and-headline chasing Specs, will very likely be richly rewarded. These profits can then be used to acquire additional physical metal to add to your stack in preparation for the eventual end of The Great Keynesian Experiment.

http://www.tfmetalsreport.com/

Although gold has rallied as expected in the last update, the advance has been modest and now it appears to be weakening again, and with its latest COTs showing a marked deterioration and the dollar maintaining its parabolic acceleration, it looks set to drop back along with silver. The long-term uptrend remains down.

On the 6-month chart we can see how gold’s advance following its breakout from a rather steep downtrend has already run into trouble at a resistance level, and it appears to be rounding over within a Dome pattern that looks set to force it into decline. If the dollar accelerates to the upside, looking likely at this point, then gold can be expected to drop back initially to the support shown in the $1130 – $1140 area, and then break lower. Moving averages are in bearish alignment.

We can see how weak gold’s latest rally has been on its 8-year chart – it didn’t even make it to the upper boundary of its major downtrend channel. This weakness along with the latest COTs and dollar action suggest that that gold will break below the lower boundary of the inner downtrend channel shown soon and drop more steeply into the zone of strong support shown and towards the lower boundary of the major downtrend, the move probably terminating in the $900 area as the C-wave of a giant A-B-C correction completes.

A few weeks back gold’s COT was quite strongly bullish, which is why we were bullish, and while we did see a rally it was limited in scope, but as we can see on the latest COT chart below, the Commercials are piling on the shorts again, and even more so in silver, which means trouble, and although they are not yet at an extreme, they have swelled enough to permit a drop.

The latest Gold Hedgers chart is in middling ground, and thus doesn’t provide us with much guidance one way or the other regarding the immediate outlook.

The latest Gold Optix has rallied off extreme readings on gold’s latest weak rally, and while it is still positive overall, it won’t prevent a further sizeable drop, which would of course return readings to extremely low levels.

Chart courtesy of www.sentimentrader.com

Rydex Precious Metals holdings are at an extremely low level, and have been for some time, which puts us on notice to look out for a final low in gold before too much longer.

Chart courtesy of www.sentimentrader.com

Turning to the dollar, upon which the outlook for most commodities depends, we can see on the 1-year chart for the dollar index that it continues to march higher, shepherded upwards by a clearly defined and steepening parabolic uptrend. On this chart you can readily see why trading on the basis of technicals can sometimes be a lot more worry free than trading on the basis of fundamentals. While a fundamental analyst may spend countless hours poring over information and inputs in an effort to determine the likelihood of the dollar’s uptrend continuing, the technical trader can simply declare, “I’m long while the dollar remains above its parabolic uptrend” and then go fishing, leaving the fundamental analyst moldering in his office, poring over details, most of which are irrelevant. It got a bit tricky after the last Fed meeting, which lead to the dollar reacting rather violently, and for a time it looked as if the dollar might have burned out, especially as there was quite heavy downside volume in the dollar proxy ETF, UUP, but last week, after finding support at the parabolic uptrend again, the dollar broke out upside from what it is now evident is another bull Pennant, this time more downward sloping. While it is still possible that a top area is beginning to form, the pragmatic trader can simply stay long until the dollar breaks down from it. We all know what happens when it does break down the parabola – it will be GAME OVER.

How high could the dollar get? While it could break down at any time, there is a chance that if it accelerates further it could get as high as 120 on the index. Such a move would really “put the cat amongst the chickens” and all hell will break loose, particularly in emerging markets. If you are an American citizen reading this, put a note in your diary to take an overseas vacation immediately if the dollar gets this high – you’ll get huge “bang for your buck” and as a dollar spender you’ll get treated like royalty, like in the good old days. However, we should stand ready for this parabolic uptrend to end at any time, and exit dollar positions if it does, or swap dollars for other currencies. If this happens at a high level, it will probably mark the final low for gold and silver.

The latest dollar hedgers chart is best described as “hair raising”. It is already at wild extremes, and while this won’t necessarily prevent further upside acceleration by the dollar over the short to medium-term, it puts us on notice to expect a savage decline once the parabolic uptrend fails…

Chart courtesy of www.sentimentrader.com

The latest US dollar Optix, or optimism chart, has moderated somewhat from last time, renewing short-term upside potential, although overall it is still decidedly bearish for the dollar…

Chart courtesy of www.sentimentrader.com

What would abort the bearish scenario for gold set out here? That is very simple to say – it would be a clear breakout by both gold and silver from their major long-term downtrend channels shown in this update and in the parallel Silver Market update, which would surely be occasioned by the dollar breaking down from its parabolic uptrend.