A Crisis vs. THE Crisis: Keep Your Eye on the Ball

A Crisis vs. THE Crisis: Keep Your Eye on the Ball

By Laurynas Vegys, Research Analyst

Today I want to talk about crises. Two of the most notable ones that have been in the public eye over the course of the past 6-8 months are obviously the conflicts in Ukraine and Syria. The two are very different, yet both seemed to cause rallies in the gold market.

I say “seemed” because, while there were days when the headlines from either country sure looked to kick gold up a notch, there were also relevant and alarming reports from Argentina and emerging markets like China during many of the same time periods. Nevertheless, looking at the impressive gains during these periods, one has to wonder if it actually takes a calamity for gold to soar.

If so, can the yellow metal still return to and beat its prior highs, absent a major political crisis or a full-blown military conflict? My answer: Who needs a new crisis when we live in an ongoing one every day?

More on this in a moment. Let’s first have a quick look at what happened in Ukraine and Syria as relates to the price of gold. Here’s a quick look at the timeline of some of the major events from the Ukrainian crisis, followed by the same for Syria.



There seems to be a fairly clear pattern in both of these charts. Gold seems to rise in the anticipation of a conflict; once the conflict gets going, or turns out not as bad as feared, however, it sells off.

We see, for example, that as the news broke that chemical weapons were being used in Syria and Obama was threatening to intervene, gold moved up. But when the US did not wade into the bloodshed and Putin proposed his diplomatic solution, gold slid into a protracted sell-off, ending up lower than where it began.

It’s impossible to say with any degree of certainty how much of gold’s recent rise was due to anticipation of the Ukraine/Crimea crisis, but there were certainly days when gold seemed to move sharply in response to news of escalation in the conflict. And again, after it became clear that the US and EU would do little more than condemn Russia’s actions with words, gold retreated. As of this writing, it’s down about $85 from its high a little over a month ago. (We think many investors underestimate the potential impact of tit-for-tat sanctions, but they are not wrong to breathe a sigh of relief that a war of bullets didn’t start between East and West.)

In sum, to the degree that global crisis headlines do impact the price of gold, the effects are short-lived. Unless they lead directly to consequences of long-term significance, these fluctuations may capture the attention of day traders, but are little more than distractions for serious gold investors betting on the fundamentals.

You have to keep your eye on the ball.

The REAL Crisis Brewing

Major financial, economic, or political trends—the kind we like to base our speculations upon—don’t normally appear as full-fledged disasters overnight. In fact, quite the opposite; they tend to lurk, linger, and brew in stealth mode until a boiling point is finally reached, and then they erupt into full-blown crises (to the surprise and detriment of the unprepared).

Fortunately, the signs are always there… for those with the courage and independence of mind to take heed.

So what are the signs telling us today—what’s the real ball we need to keep our eyes upon, if not the distracting swarm of potential black swans?

The big-league trend destined for some sort of major cataclysmic endgame that will impact everyone stems from government fiscal policy: profligate spending, leading to debt crisis, leading to currency crisis, leading to a currency regime change. And not in Timbuktu—we’re talking about the coming fall of the US dollar.

The first parts of this progression are already in place. Consider this long-term chart of US debt.

Notice that government debt was practically nonexistent halfway through the 20th century, but has seen a dramatic increase with the expansion of federal government spending.

Consider this astounding fact: The government has accumulated more debt during the Obama administration than it did from the time George Washington took office to Bill Clinton’s election in 1992. Total US government debt at the end of 2013 exceeded $16 trillion.

Let’s put that in perspective, since today’s dollars don’t buy what a nickel did a hundred years ago.

Except for the period of World War II and its immediate aftermath, never before has the US government been this deep in debt. Having recently surpassed the threshold of 100% debt to GDP, America has crossed into uncharted territory, getting in line with the likes of…

  • Japan, “leading” the world with a 242% debt-to-GDP ratio
  • Greece: 174%
  • Italy: 133%
  • Portugal: 125%
  • Ireland: 117%

The projection in the chart above is based on the 9.4% average annual rate of debt-to-GDP growth since the US embarked on its current course in response to the crash of 2008. If the rate persists, the US will be deeper in debt relative to its GDP than Ireland next year, deeper than Portugal in 2016, Italy in 2017, Greece in 2019, and even Japan in 2023 (and the US does not have the advantage of decades of trade surpluses Japan had).

Granted, the politicians and bureaucrats say they will slow this runaway train, but we’re not talking about Fed tapering here. Congress will have to embrace the pain of living within its means. We’ll believe that when we see it.

But let’s take a more conservative, 10-year average growth rate (an arbitrary standard many analysts use): 5.3%. At this rate, the US will still be deeper in debt than Ireland and Portugal in 2017, Italy in 2019, Greece in 2024, and Japan in 2030.

Either way, this is still THE crisis of our times; all of the countries mentioned above are undergoing excruciating economic and social pain. It’s no stretch to imagine the kind of social and political turmoil that has resulted from the European debt crisis coming to Main Street USA, as American debt goes off the charts.

It’s also important to understand that the debt charted above excludes state and local debt, as well as the unfunded liabilities of social entitlement programs like Social Security and Medicare.

This ever-growing mountain—volcano—of government debt is a long-term, systemic, and extremely-difficult-to-alter trend. Unlike the crises in Ukraine and Syria (at least, so far), it’s here to stay for the foreseeable future. While some investors have grown accustomed to this government-created phenomenon and no longer regard it as dangerous as outright military conflict, make no mistake—in the mid to long term, it’s just as dangerous to your wealth and standard of living.

Still think it can’t happen here? To fully understand how stealthily a crisis can sneak up on you, watch Casey Research’s eye-opening documentary, Meltdown America.

11 thoughts on “A Crisis vs. THE Crisis: Keep Your Eye on the Ball”

  1. KaD – if I am reading that correctly – it was not exactly spelled out – they are saying that middle class jobs are being taken up by China/India etc., who are prepared to do middle class jobs at far cheaper rates.

    Well, duh. The middle class simply cannot value add enough to make them worth $50k per year. The world-wide rate for the jobs they do is a fraction of that. They do not have enough skills or talent or education to make themselves globally competitive.

    So the rest of the world will steadily eat away at their standard of living. The American middle class was a mirage – it was something that was never going to be able to exist perpetually. It sprung from circumstances that cannot be repeated, and from circumstances that no longer exist – there was a smallish population living in a large country with lots of resources and with a good quality of education relative to the rest of the world and which exited WW2 relatively unscathed. It was the Golden Ticket of circumstances. Via the heavy use of debt and by “redistribution”, the mirage was extended far past its real use-by date. And so the crash will ultimately be heavier than it ought have been.

    The highly skilled, intelligent, and well-educated will continue to do well. The middle class are screwed and will continue to be screwed. Efforts to mask the problems by targeting the rich will only make matters worth, as capital will flee, and those with capital will take their balls and go home.

    That the small business owner is becoming increasingly rare will make matters worse and worse.

    The new reality is coming, and folks need to get used to it. It is here, and it is not going away. Low wages and high prices are the new middle class norm. Take a look at much of Europe for what is coming. Get used to small houses, small cars, extraordinarily high cost of goods and low wages and high unemployment.

    The biggest pity of it all is that the young are going to be hard hit.

    I urge all young folks to learn to work hard, to educate themselves in tech/science fields, to learn to save and not spend, and to be prepared to persevere. It is going to be brutally hard. Those that are prepared may well thrive. Those that do not will be reduced to rioting for free shit that will eventually stop flowing.

  2. I put in an order at my local coin shop last friday for six one ounce, .999 gold canadian maple leaf coins. The owner is charging me about $50 over spot. Dollar cost averaging.

  3. LLPOH +100

    Excellent comments, there are a number of people that I wish I could get to sit down and read what you wrote again and again until it sinks in and they start to see into their future and what is coming at them and do what needs to be done to save themselves. But I know I’ll never reach them.

    I see clearly the same as you do and I see the future of these people that I can’t help. They’re dead men walking, blindly walking toward the day of their suicide, retired people that even now are just barely squeaking by month to month. Even small changes will drown them. The devastating changes will finish them. They’ll find themselves orders of magnitude beyond their ability to cope.

    And then there are the FSA, living a standard of living that most of the rest of the world would consider upper middle class, totally unsustainable therefore will soon end. They will then do the only thing they know, take.

  4. Thanks ASIG. Usually I get hammered and abused by some folks that believe that the middle class can indeed survive, if only govt was better, the rich were not so malevolent, etc. those folks dredge up numbers from fifty or sixty years ago and say “see, if we had that system the middle class wold be fine”. They do not understand that the unique set of circumstances no longer exists.

    If govt was fixed, if banksters were overthrown, if the free shit was stopped, if the rich pillaged less, it would help. But it would not stop the erosion of the middle class. It would help.

    I say again and again, five per cent of the world’s population cannot continue to absorb 25% of the world’s resources. The rich are consume more than their fair share. But it is the middle class, what is left of it, by their shear bulk, that is consuming the majority of that 25% of the world’s resources. The Merican middle class – say 150 million folks – is consuming around 15% of the world’s resources. About 2 per cent of the world’s population is consuming 15 per cent of all resources generated globally. That will not continue.

    The world will not allow it to continue.

    Americans talk about the 1%. America is the rest of the world’s 1%, and the rest of the world wants to redistribute the American wealth better. And in the end they will.

    Best be in the top ten per cent of the US population, or things will be ugly.

  5. “… The American middle class was a mirage – it was something that was never going to be able to exist perpetually. It sprung from circumstances that cannot be repeated, and from circumstances that no longer exist”…

    The industrial capacity of the rest of the world was obliterated by war. If that had not happened, it isn’t a given that America would’ve become the manufacturing powerhouse.

    But, it was squandered, so…

  6. I wanted to start a small business consortium so all could help each other out.

    The 1 person who was going to start it with me went out of business! The rest are barely making it & don’t seem very interested.

  7. I see nothing positive in the future. Everything is a racket – from health care to college educations.

    Glad I’m 64!

  8. The US produces less then it consumes. They (mainly the Chinese) give us the product of their labor in exchange for dollars. We think they will continue to do this, they will not. Because the truth is the leaders of China know the dollar will soon be worthless. So why, one would ask do they continue to accept dollars? The fact is dollars aren’t what they (Chinese leaders) are after. What they really want is our technology and they now pretty much have it all. So the next step is to get as much for the dollars that they do have before they destroy its value. They are in the process of buying up resources and stock piling as much as they can and also buying as much of American land, businesses and resources. Once that step is complete they will crash the dollar. Prices in the US will skyrocket and the standard of living in the US will plummet. We will no longer be able to buy Chinese products and will begin producing in the US again however we will only do so at the labor rates competitive with Chinese workers.

    Welcome to the new world.


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