Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
The collapse of U.S. economy is a certainty – only the manner of the economic collapse has yet to be determined. In time the global derivatives bubble will produce the same result which has occurred to every other currency not backed by gold throughout history: those currencies, our “money”, will become worthless.
Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below Part 4 of further reformatted and edited excerpts from Jeff Nielson’s (www.BullionBullsCanada.com) original 7000 word presentation* at the “World Money Show” investors’ conference in Vancouver for the sake of clarity and brevity to ensure a fast and easy read as follows:
Derivatives: An Unregulated $1 Quadrillion Market
Warren Buffett famously described derivatives as “financial weapons of mass destruction”, and for a very good reason. While U.S. “unfunded liabilities” are larger than the entire global economy, the derivatives bubble is twenty times as large as the entire global economy.
The derivative market is unregulated. It is totally lacking in “transparency”, meaning that all we know about this $1 quadrillion mountain of banker-paper is what the bankers tell us. During the 2008 U.S. financial crisis, the Wall Street banks required $10 trillion in loans/hand-outs/guarantees just to temporarily prevent their bankruptcy – more than all other bail-outs/hand-outs for all the rest of the world, for all of history, combined – and the entire crisis was based upon settling the derivatives positions of only one company: Lehman Brothers – a Wall Street investment bank.
Even that $10 trillion was not enough to prevent the collapse of the U.S. financial sector. The Wall Street banks also needed to have the U.S. accounting rules changed, so that they could assign their own “fantasy valuations” to the debts/assets on their books, instead of the actual market value of those assets. Keep in mind that without the most-radical accounting changes in history, instead of these Wall Street banks reporting (supposed) “record profits” they would be reporting their own bankruptcies.
All Is NOT As It Seems
While they brag about “billions” in supposed profits, there are still trillions of dollars of “toxic assets” being hidden off of their balance sheets. We know there has been no increase in the real value of these “assets” through the reports of failed U.S. banks. In just two years, the average amount of losses sitting on the books of these banks when they collapse are now five times as large (relative to the value of their assets) as when the first bank-failures occurred. Thus, if anything, these “toxic assets” are even more worthless than when the collapse began.
Despite this huge mountain of unstable debt, Wall Street actually increased the size of the derivatives bubble by 30% since the U.S. housing-bubble first burst causing Neil Barofsky, the U.S. “watch-dog” assigned to oversee the “TARP” bail-out of U.S. banks, to exclaim recently that the risk of collapse of the entire U.S. financial sector has increased not decreased saying:
“Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding road, but this time in a faster car.”
A Serious Dilemma Faces Investors
There is no solution for the U.S.’s economic problems. With U.S. hyperinflation likely, but a deflationary collapse still possible, this not only creates a frightening scenario for us to face as individuals, but a serious dilemma for investors. Do you prepare for deflation, or hyperinflation – or, is it possible to prepare for both? Such a defensive investment philosophy is called “wealth preservation” and, in my opinion, investors need a precious metals component in their portfolios, because for thousands of years, precious metals have been the best investment vehicle for wealth preservation. Why is that? Because they are currencies which cannot be diluted through inflation or destroyed by imploding debt.
The 4 Qualities of Good Money
1. Uniform
Uniformity simply means that any one unit of currency is identical to all others. In the case of gold and silver, any gold or silver coin is identical to all others. Conversely, gem-stones (which have been used as “money” in previous eras) are not of identical quality/composition, and thus gem-stones have not been able to stand the test of time as a form of money.
2. Evenly divisible
Being evenly divisible is self-explanatory. With gold and silver being very malleable, and having a low melting-point, these two metals have always been evenly divisible. In comparison, gem-stones (for example) are not capable of being equally divided.
3. Rare or “precious”
Gold and silver are “rare” in that they are less-common than almost all other metals. They are “precious” because their aesthetic qualities are also superor to other metals. Thus, gold and silver are precious and rare.
Conversely, while paper “money” is both uniform and evenly divisible, it is neither rare nor precious. The paper it is printed on has no intrinsic or aesthetic value, while paper money literally does “grow on trees”. This provides a very interesting perspective on the old saying that “money does not grow on trees”.
4. A “store of value”
Ultimately, what is most important for any “good money” is that it must be a store of value. Indeed, it could be argued that the first three characteristics simply explain why gold and silver are a “store of value”, while paper money is not. However, regardless of the physical characteristics of money, the true test for any “good money” is how well it retains the wealth of the holder.
Once again, there is no comparison between precious metals and paper currency. In the less than 100 years that the Federal Reserve has existed, the U.S. dollar has lost approximately 97% of its purchasing power.
It important to understand the above properties of “good money” because, contrary to the economic propaganda from the mainstream media, current events are unparallelled throughout all of history:
– more countries are carrying debts than at any time in history
– the aggregate size of these debts are more than ten times greater than at any other time in history
– the whole world is off of a “gold standard” for the first time in history – meaning there is nothing “backing” all these mountains of debt.
What Happens to Money During a Deflationary Implosion or a Hyperinflationary Scenario?
a) Hyperinflationary Scenario
Gold and silver have always retained 100% of their value in past hyperinflationary environment while paper instruments (money) have gone to zero.
b) Deflationary Implosion
The circumstances surrounding a potential deflationary collapse are unique this time round in that we are not talking about a “recession” or even a “depression”, but instead about entire nations effectively going bankrupt by defaulting on their massive debts. With none of the world’s currencies backed by anything, paper “money” is now essentially nothing but the unsecured “IOUs” of the governments issuing those currencies. As such:
1. if/when these governments were to start defaulting, then billions (trillions?) of dollars of government bonds would have very “questionable” value – if not become totally worthless
2. if/when government bonds became worthless, then the paper currencies of those governments would also become worthless
3. if/when government bonds became worthless, then the government would have no ability to borrow any money to fund government spending – and would have no choice but to simply print unlimited (infinite) amounts of un-backed paper money that would be nothing more than “unsecured IOUs” which begs the question: What is the value of an IOU from a debtor who has already defaulted on his debts? Answer: zero.
In both scenarios, paper currencies would go to zero. Where a deflationary implosion differs from hyperinflation is that in such an implosion, all asset-prices become severely depressed – which is why generally during deflations people move to cash. However, because that cash itself could easily become worthless, that is why you need to hold “good money” – and the only “good money” is gold and silver.
Conclusion
In either a deflationary implosion or a hyperinflation scenario, some (and perhaps all) paper currencies will go to zero. In contrast, during the nearly 5,000 years that gold and silver have been used as “money” by our species, they have never lost a significant portion of their value.
Gold and silver represent the ultimate “stores of value” – and thus the best protection from the events which lie ahead. [Got gold?]
*http://www.bullionbullscanada.com/index.php?option=com_content&view=article&id=11900:debt-denial-and-default&catid=64:presentations&Itemid=141
Editor’s Note:
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
– Permission to reprint in whole or in part is gladly granted, provided full credit is given.
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