The central point of our 2011 Forecast for gold, silver and platinum was a specific prediction that the general public would begin to lose faith in the ability of the political and financial systems to restore stability and prosperity to this globe’s financial affairs. Our supposition was that, at present, very few people harboured such doubts, but as the year progressed, the number of skeptics would rise and, as that number increased, additional funds would pour into the precious metals and they would rise, with our forecast for gold calling for $1,850 by year-end 2011.

During a recent interchange of correspondence with a good friend, I recalled a quote from a chess book which fits the above description to a ‘T’.

I happen to love chess, and in the history of that game one of the most important contests took place at the ultra-important 1914 international tournament in St. Petersburg between the reigning world champion, Emanuel Lasker and the man who subsequently took the crown away from him, Jose Capablanca. This was one of Lasker’s great games and his biographer wrote...

“The spectators had followed the final moves breathlessly. That black’s (Capablanca’s) position was in ruins was obvious to the veriest tyro.”

In a similar manner, I believe it is becoming obvious to the veriest member of the general public that the world’s financial position is “in ruins.” The cat is out of the bag. The financial leaders of this planet have blundered and ‘check-mate’ is staring them in the face. One can only wonder from which direction the coup de gras’ will come from. Will it be a collapse of important currencies? Will it be rampaging inflation? Will it be a breakdown of international trade? Will it be from civil disorder and rioting (as in London this weekend!) which takes place when governments can no longer pay wages and welfare in meaningful currency?

The world has quite suddenly been confronted with an immense array of important and negative developments. Here is a “short list” of some of the most serious.

• For the first time in history, American government debt was downgraded by an American rating agency, in this case from AAA to AA+ by Standard & Poor’s following the market closes on Friday afternoon.

• Nation after nation in Europe is facing bankruptcy and the only means of avoiding such calamities is a full-scale money printing (physical or electronic) binge by American or European monetary authorities – or both simultaneously.

• Quite suddenly, the AAA bond rating for yet another major economic nation, in this case France, is being called into question.

• Stock exchanges around the world are simultaneously undergoing severe bouts of selling and this includes Europe’s largest economy, Germany, where the decline in the DAX Index has been one of the most severe, casting doubt even on that nation’s economic recovery (see chart).

As might have been expected, while confidence in the world’s economic structure has been diminishing, the funds turning toward gold in particular have surged and this morning gold took off with a “whoosh”, rising at times by as much as $60 over Friday’s commodity markets’ closing prices, taking the yellow metal for the first time in history above the $1,700 level. Even conventional economic commentators have been unable to ignore gold’s powerful moves during the past few weeks.

After reviewing a thick stack of articles which has accumulated over the past weekend and this morning, please allow me to offer some thoughts about where we are headed.

Unless dramatic and decisive action is taken to correct the underlying problems of debt and deficits – which clearly are the real causes for the S&P downgrade of American debt – no true solution can take place which offers the possibility of real improvement over time. Yet, we are confronted with the sad fact that the monetary authorities seem to be trying the same old remedies again, hoping somehow for new and different results. This reminds us of Einstein’s famous saying that one definition of insanity was to try the same thing over and over again expecting a different result.

In the present case, both the U.S. Secretary of the Treasury Geithner and the European Central Bank are calling for more intervention by central governments to buy up bad debts of troubled nations. That is precisely the path that has been followed over the past couple of years and it has only served to worsen underlying conditions.

In a morning television interview, Geithner first said that Europe needed, “…an unequivocal financial backstop…so there is no doubt in anyone’s mind that those countries across Europe have the ability and the will to meet their obligations”, then added he hoped that European officials would, “…step up and provide more forceful support for the countries under so much pressure.”

As if heeding Geithner’s comments, European Central Bank (ECB) authorities immediately stated they would intervene in debt markets on a large scale to buy up Spain and Italy’s failing debt paper.

However, there is a huge problem. According to the latest financial statements, the ECB has only about 82 billion Euros in assets and a significant portion of those are at risk of evaporating should their holdings of weak nations’ debt decline further. Exactly how a bank in such precarious position is supposed to undertake purchases where the total might reach into the hundreds of billions of Euros is a valid question – and if the ECB is counting on ‘donations’ from member nations, that raises the question of where those nations are supposed to obtain such capital.

Returning to the S&P downgrade of U.S. debt paper for a moment, we cannot help but note the reaction of President Obama to such news. Instead of acknowledging the horrendous levels of government debt and continuing high deficits - which were the primary factors leading to the downgrade - all the President could do was to cast blame on the rating agency itself. He offered no plans at all relating to how the U.S. could begin to reduce debt nor how it could begin to ACTUALLY reduce deficits.

(NOTE: The President is scheduled to make yet another nationwide address later this morning. We cannot help but note that the securities markets have frequently plunged dramatically during and following his recent speeches.)

Why is it the phrase ‘burying your head in the sands’ keeps coming to mind?

In our opinion, it is due to the combination of factors noted above that the precious metals continue to show strong relative strength.

As of 9:15 AM PDT, many markets are making very significant moves. Gold is presently trading near its high for the day, close to $1,715, up about sixty dollars on the session while silver has once again traded above the $40 level. Base metals continue to sell off and mining share indexes have regained some lost ground and are up about two percent so far this morning. Financial markets are sharply lower in both Canada and the USA with the TSX Index down by about 270 points while the Dow is down by close to 330.

In other markets, long term interest rates have plunged once again, crude oil is also down very sharply to near $83 per barrel and the U.S. Dollar is slightly higher in currency markets.


All quotes US$ unless otherwise noted.

Next Melman Minute scheduled for Wednesday, August 10, 2011