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  Jim Kingsland

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  2/21/12

  We are now being led to believe that Greece and its creditors have reached what the media is calling a “deal”. It’s a deal alright, a deal for more failure since the $170 billion deal is largely predicated on Greece adhering to strict austerity measures to reign in spending and reduce debt to 120.5% of GDP. The Greek people will no doubt have a say in just how much austerity they are willing to accept. Austerity will be deflationary for Greece and you can bet your bottom dollar that Greece will have a tough time meeting deficit cutting goals with an economy hampered by austerity. Eco 101: economic growth means more tax revenue which is a doubtful prospect for Greece. The bottom line: we are seeing more of what has become known as kicking the can down the road with the usual does of adding newly created money to pay for the old money. Greece is saved from nothing and its creditors still face a potential CDS event once it becomes evident that Greece is missing its austerity targets.
  For now the markets are comfortable with believing the Euro is going to outperform the dollar because Greece has been “saved”. How long that lasts is anyone’s guess. Waiting in the wings with similar but larger problems is Portugal. Once the market gets by Greek nirvana, Portugal will be right there to dampen sentiment.

  So it’s no wonder that with a weaker dollar and the prospect of further printing on both sides of the Atlantic we see gold again flirting with the $1750 area. Near term choppy trading of late is going to give way to further stronger upside. I’m thinking $1680ish is a new bottom (post QEx) and a renewed testing of the $1800 area will come sooner rather than later and then on to new highs later in the year. Silver will be greatly challenged at the $35 mark due to many layers of margin hike still built into system. The prospect of $10,000 an ounce gold in several years, or less makes sense given the trillions of paper currency now in all corners of the globe, it’s just that the 1900 15 to 1 ratio with gold is a thing of the past. The chart below shows the market (for now) being comfortable with the silver to gold ratio at present levels of near 50 ounces of silver to 1 ounce of gold. That could still someday mean silver will flirt with $200, but it will be a scenario of silver following gold higher.

  

  Gold as Insurance
  Once again I remind you that guessing the eventual price of these metals when the financial system goes FUBAR is akin to parlor talk, or the sort of pontifications you might hear in a bar, or at a party. I for one don’t relish the idea of $10k gold, or a completely dysfunction financial system. The real reason to be in gold, or silver is to consider the metals as insurance against coming economic collapse from both over printing of fiat currency (too much debt) and over creation of credit default swaps (financial instruments that will back fire) whose notional value totals somewhere in the 1 QUAD-rillion dollar area. ‘How much money can I make in gold,’ is looking at things from the wrong perspective when considering a jump into physical gold. Billionare fund manager John Paulson was quoted over the weekend suggesting investors should be building positions in gold. Paulson says buy gold and consider it “INSURANCE” against a coming sort of inflation that hasn’t been experienced since the Revolutionary War in ton American shores: hyper inflation

  Related: Gold Bulls Expand as Billionaire Paulson Says Buy: Commodities – Businessweek http://buswk.co/xQ0FH9 via @BW

  Today’s $30 rise in gold puts it back into overbought territory for those readers who game the $GLD ETF.

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