Wednesday, December 02, 2009

More Chaos Ahead

It’s seems quite obvious that we are about to see something quite drastic happen. Chartists will tell you that gold is way over bought yet you have to wonder if the charts mean anything when the system starts breaking down and we start having massive failures throughout the economy, and those failures are out there.

The example of Dubai World should not be a shock to anyone, you can’t build up $60 billion of debt in a construction spree and expect to go unscathed in this depression; the bigger question is how many other Dubai Worlds are out there? My guess would be several to many!

What about the growing number of countries that could have their own crisis moments?

Japan has done everything but hand out printing presses to the public, yet deflation continues to pop up. To make things worse they have an insane level of government debt and the ability to sustain this debt and further stimulus is hampered by a drastically declined savings rate. I think Japan made a big mistake by not allowing deflation to take place naturally over the last 2 decades. The fact that they have a shrinking population should have allowed flat or slightly negative growth without the need to force growth through stimulus spending.

Greece has debt issues that could force the EU to bail it out or if they won’t it might force them to kick it out, or allow it to leave gracefully. The Baltic States look unlikely to qualify for Euro adoption as they struggle with massive GDP drops, debt and the need to maintain a stable peg to the Euro, while Spain, Portugal and Italy all face debt issues of their own.

The Fitch rating agency suggests the UK could have its debt downgraded next year and the UK has one hell of a lot of debt.

Even oil rich Russia has issues with large debts owed by both state and private enterprises such as Aluminum producer Rusal (which has defaulted on debt) and Gazprom, while both the Ukrainian state energy company and railroads require debt restructuring.

Can China maintain the growth it needs to keep all the peasants leaving rural areas busy and content?

There certainly has been a lot of growth in China but at what cost and how well planned was it. Monetary inflation is at high levels, the artificially weak Yuan is souring relations with the west as more and more jobs bleed to China. China has growing industrial capacity without markets for it. How exposed are Chinese banks should a recovery not allow them to utilize surplus plant and population?

China has been a wonder story of growth but lets face it, these guys are total novices in when it comes to running a market economy and since the experts screw up regularly its only a matter of time before something blows up in China’s face.

Bringing it back to the metals it’s no wonder that gold continues to move up so quickly (even when over bought) as no chart can tell you that the assumptions used to decipher it are no longer relevant and by what’s happening in rest of the economy taking these assumptions as valid and immutable is reckless at best.

An important item that does not seem to be getting any press right now is the rapid declines in the Comex silver stocks. I got out of the habit of checking these for a few months but when I came back I was surprised to find stock levels below 116 million ounces and even more shocked to see it fall to about 111.5 million ounces in just a few weeks. I don’t know what the magic number is but sooner or later industrial users are going to panic and the price won’t jump a buck or two but by $10 or more.

All I can say for sure is there will be more chaos ahead.

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