AGORACOM Small-cap Investor Relations Blog

This Is A Dynamic Image, So Price May Differ From Original Post Date

At the risk of celebrating too early as I watched gold sky-rocket this morning, I waited until the end of day to have gold confirm a $35 rocket ride and a closing price of $1,384 and change.  I won’t go into the QE2 analysis – because you (should) know that story very well by now.   In case you don’t, here is a quick link to Google’s QE2 + Gold news articles.

When I first started this blog, one of the topic categories I created was “Gold $1,000” in February of 2007.  It was ambitious because gold was trading in the $650 range, yet here we are trading 113% higher after 45 months.  Today, I’m officially changing the name of the category to Gold $2,000 and feel more confident in that number being reached than I was about gold hitting $1,000 back in February 2007.

Why Is Gold A Better Bet To Hit $2,000 Than It was To Hit $1,000?

I will quote from one of my previous posts as the foundation for gold appreciation remain intact and even stronger than before:

Gold is now silently being recognized as the world’s reserve currency. Fiat currencies are being printed at will with no accountability. This paper inflation is weakening the purchasing power of world currencies, and the risk of rendering them worthless is rising. Nations have elected to print and spend instead of stimulate economies through investment, tax reductions, and technological advances. Gold is now seen as a safe haven. Our conservative investment portfolio has a concentration in Gold, Mining Stocks, and Silver in anticipation of this fundamental expectation, and in response to technical analysis charts. We believe Gold is going much higher over the coming years. (Via Technical Indicator Index)

Bottom line? Most world Governments are broke. They’re broke at the Federal, State and Local levels. The response has been to print and borrow more money. You don’t need a fancy graph or chart to tell this is going to end badly. Rather, just imagine what your grandfather would say if he was sitting beside you right now. When you’re broke, you cut spending, stop borrowing and sell assets to pay down your debt. You make sacrifices and start all over again as best you can. As an individual or small business, this is what your lenders would force you to do.

Governments are no different except for the fact they can photocopy as much money as they need. That’s fine and dandy in the short-term – but how much confidence would you have in the long-term prospects of someone that kept handing you photocopied IOU’s?

If you understand this concept, then you now understand why investors are losing confidence in currencies and turning to gold.

AMERICA IS FINE WITH THIS SCENARIO – SO EXPECT MORE AND MORE

To this, I will add the following new revelation – the USA is just fine with this entire scenario for one very powerful reason … they would never be able to make interest payments on their debt if Treasuries dropped and rates increased.  Never.  See, as long as a person/government can continue to make its monthly payments, creditors won’t call in loans no matter how nervous they are about the debt owed to them.   Make the monthly payments and everyone prays for another day.

Stop making the payments – and all hell breaks loose.  Treasuries start selling off like wildfire and interest rates rocket.  This very scenario happened to Greece in May when rates went from 7% to 22% in one day before the EU saved the day (temporarily).

DEVELOPING NATIONS ARE HUGE BENEFICIARIES OF QE I AND II – NO MATTER HOW MUCH THEY COMPLAIN

On the flipside, a huge beneficiary of QE1 and 2 have been developing economies.  Why?  American institutions are borrowing money at ridiculously low rates and putting it to work in developing economies that are actually growing.

Yes, these developing nations are publicly bitching about the risk of “heating up” from inflation – but they have two significant internal controls to keep a lid on things.  Tax rates and government spending.  As things heat up, they can simply raise taxes and lower government spending, leading to fiscal utopia.  Citizens won’t mind because they’re making a boat load of money from $USD inflows.

You might be wondering why I didn’t add interest rates as a third inflation control tool for developing nations.  I’ll leave that answer blank for now and look forward to seeing your responses below.

CONCLUSION – GOLD, GOLD GOLD

The gravy train can only stop once the US economy begins to achieve actual GDP growth, lower unemployment and rising real estate prices.  When that will happen is anyone’s guess. Until then, this mad cycle will continue …. and gold will climb.

Now you know why Gold $2,000 is much more likely to happen than Gold $1,000.

Regards,
George

As I write, DEC Gold is up $25 to $1,372.  Most commentators are discussing the usual suspects, which can be summarized as follows:

• Weakening $USD
• Anticipation of QE2
• Erosion of confidence in $US (and all fiat currencies)
• etc., etc.

However, I strongly believe a big reason behind gold’s recent surge has been the very issue I raised on October 5th in my article:  Checkmate – US Real Estate On The Verge Of Imploding, Pushing Gold Closer To $2,200.

If you are not fully up to date on this issue, then you need to read the article and get up to speed now.   Specifically, I stated:

Well, we are about to learn that markets can only be artificially maintained for so long. Eventually, they break free and revert to their true pricing levels. US Real estate is about to go through a mean dose of reversion, while simultaneously providing gold with additional fuel for $2,200.

Since then, in just a matter of a week, the problem has escalated to the point of this headline earlier today: Attorneys General in 49 States Join Foreclosure Probe. Highlights of the story include:

• The states will conduct a coordinated inquiry into whether banks and loan servicers used false documents and signatures to justify hundreds of thousands of foreclosures

• States including California and Colorado asked lenders to stop foreclosures.
• The attorney general of Ohio last week sued Ally Financial Inc., claiming fraud in foreclosure practices.
• In December, a GMAC employee said in a deposition in a foreclosure case in West Palm Beach, Florida, that his team of 13 people signed about 10,000 documents a month without verifying them.
• Bank of America Corp., the largest U.S. lender, extended a freeze on foreclosures to all 50 states Oct. 8 as concern spread among federal and state officials that homes were being seized based on faulty data.

HOW BAD IS THIS AND WHAT DOES IT MEAN?

I can go on and on – but the most important question that should be on your mind is “What are the potential economic and market implications of this?”. The answer can be summarized in the following statement by Georgetown Law Prof Adam Levitin:

The mortgage is still owed but there’s going to be a problem figuring out who actually holds the mortgage, and they would be the ones bringing the foreclosure.

You have a trust that has been getting payments from borrowers for years that it has no right to receive. So you might see borrowers suing the trusts saying give me my money back, you’re stealing my money.

You’re going to then have trusts that don’t have any assets that have been issuing securities that say they’re backed by a whole bunch of assets, and you’re going to have investors suing the trustees for failing to inspect the collateral files, which the trustees say they’re going to do, and

You’re going to have trustees suing the securitization sponsors for violating their representations and warrantees about what they were transferring.

If this were to come to pass — and plaintiffs lawyers will certainly be eager to show that their clients were paying the wrong mortgage holders — the value of all instruments (including the performing ones) could plummet.

BANKS COULD GET CRUSHED AS THIS MAY BE “TOO BIG TO SAVE”

In short, the whole system could freeze overnight.  I’m not so sure it hasn’t already frozen.  With the exception of brand new homes, who would risky buying a re-sale home now?  Title Insurance companies have already stopped insuring re-sales of foreclosed homes – but how long will it be until that is extended to all homes that:

• Were bought out of foreclosure in the past 5 years
• Whose mortgage may be in good standing (or slightly delinquent) but is “Title Undefined”

The big losers will be the banks and Wall Street because:

• They are not receiving any payments
• They will be sued by customers that purchased Mortgage Backed Securities that failed to properly have mortgages attached to them
• Underwriters face the threat of making CDO investors whole (Trillions of dollars)
• If fraud is proven, mortgage originators could be help liable.  They may be long gone but the securitizers (Wall Street) are not.

Given the fact we are talking about Trillions of dollars, the banks and Wall street firms can potentially go from “Too Big To Fail” to a problem that is “Too Big To Save”.  Major US banks could literally be shut down overnight, with shareholders losing every penny and bond holders forced to take a major hair cut.

Yep, it could get that bad.  Even it was 1/2 as bad, the inevitable outcome is another economic crisis of epic proportions that pushes investors away from the $USD and into gold.

Stay tuned.

Regards,
George