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Gold and Energy Advisor's Real Wealth

Real Wealth #251  12/16/2009



Gold hits $1200 and consolidates: $1600 target for gold in 2010

Dear Subscribers,

 

The two most common questions from subscribers that have been flooding my inbox lately are: Are we out of “trouble”? and Is the crises and recession over?

 

Sadly, my answer is: I’m afraid not.

 

First of all, I don’t believe in jobless recoveries. With a real unemployment rate of over 17% and so many small and medium sized businesses in such dire condition, I believe the numbers are going to get worse before they get better. 

 

I still believe that last year’s credit and banking panic was just the first of several financial crises that we and the world’s financial markets will suffer over the next decade.

 

We’re already seeing great financial distress in Europe. Their economies are in terrible shape and getting worse. Problems in Greece, Ireland and Austria being reported in the financial media the last few days are symptomatic of wider spread problems throughout the entire European Union. Still, this is a side show to the bigger mess still being created and compounded here in the United States.

 

In my last issue of the Gold & Energy Advisor I included a quote from Michael Lewitt’s HCM letter that gives what I consider the best appraisal of the danger ahead...

 

“Investors need to begin

preparing... [for] an extremely ugly

denouement for the U.S. currency”

 

“On November 23, 2009, The New York Times published one of the most alarming articles concerning the United States’ fiscal situation that have appeared in a long time. Entitled ‘Federal Government Faces Balloon in Debt Payments’, the article described that the White House is now forecasting that the annual cost of servicing the national debt (currently topping $12 trillion and projected to reach $20 trillion by the end of the next decade) will exceed $700 billion in 2019, up from $202 billion this year.

 

“To place this in context, ‘an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.’ This is only part of the story, however; it does not include the costs of funding $350 billion collective deficits that individual states and local governments will run in each of the next two years. Zimbabwe’s got nothin’ on us.

 

“The obvious truth is that such a debt burden is unsustainable... Accordingly, the U.S. government will have little choice but to monetize the debt through further debasement of the currency and/or inflation and will inevitably face increasingly higher costs for selling its debt. While the current arrangement of mutually assured destruction with its largest creditors (currently China and Japan) is allowing America to delay the day of reckoning, reports like that in The New York Times are increasingly calling attention to the coming storm.

 

“Nobody can say precisely when the tipping point will come, but investors need to begin preparing well in advance for what is likely to be an extremely ugly denouement for the U.S. currency and U.S. dollar-denominated assets. It is hardly a coincidence that the price of gold, which is the anti-fiat currency, has been inexorably rising as concerns about the unsustainable U.S. fiscal posture have been growing.”

 

I was amazed to read the other day that while the Federal Debt explodes, 19% of the Federal work force is now making over $100,000 a year. On top of this, they also receive 80% of their salary and health benefits for life after 30 years of service. It used to be people took civil service jobs for LESS money than private industry for the security and the pension. Somewhere along the line, the Federal government began to run the country like our domestic auto manufacturers. While GM and Chrysler have collapsed, the U.S. Government continues with the same business model.

 

Meanwhile...

 

The Federal Reserve Is Helping the Nations Big Banks Loot the American Public – Setting the Stage for an Even Bigger Financial Crisis. All So They Can Grab Billions in Unjustified Bonuses! 

 

The Federal Reserve now owns over $1 trillion of mortgage-backed securities, which is 45.6% of all assets on its balance sheet. One year ago, mortgage-backed securities were only 0.6% of the Federal Reserve's total assets!

Making matters worse, even though the folks at Wells Fargo, Bank of America, Citigroup and the other big banks have been making headlines about repaying their TARP borrowings, the Federal Reserve continues to supply massive "backdoor credit" to these very same institutions.

 

While it’s true, the banks are repaying TARP loans, it’s also true these very same banks are STILL selling their toxic mortgage-backed assets to the Federal Reserve. In fact, the pace of MBS buying by the Fed has accelerated, matching almost dollar-for-dollar the funds the banks have been repaying to the TARP and other credit facilities.

 

In other words, the banks are merely repaying the government with one hand while borrowing from the government with the other hand...

 

The Federal Reserve is very highly leveraged, much more than most banks. It is carrying $2.15 trillion of debt on $52.8 billion of capital, giving it a leverage of 40.8-times more debt than capital. The Federal Reserve's mortgage-backed securities alone, represent 19-times its capital, meaning that if the true value of these assets is 5.3% less than their book value, the Federal Reserve's capital is wiped out, effectively making it another insolvent institution.

Given that Fannie Mae is itself insolvent and most other mortgage generating federal agencies are not far from perilously sliding down to that same dire financial condition, it is reasonable to assume that the true value of these mortgage-backed securities is less than 94.7% of their book values. Therefore, on a strict accounting basis, the Federal Reserve is probably insolvent.

That said, the Fed could always remedy its "insolvency" by creating more dollar bills for itself. And, in fact, the Fed is already in the process of doing this exact thing. How else could its assets have mushroomed from $800 billion last year to more than $2 trillion currently?

 

No, the crises and recession is long from over. It’s NEVER been more important to own gold than now. In the next few years, we’re going to see a massive monetary collapse that will make last year’s panic look like a walk in the park.

 

The U.S. Mint Can’t Keep Up with Demand for Silver and Gold Eagles and Buffalos

 

The U.S. Mint has suspended the striking of silver and gold coins. There is no indication that this suspension will be short term or long term. What I can tell you is my sources are telling me that the mint can’t get enough gold and silver blank planchets. Demand for gold and silver is so great the mint can’t keep up with demand.

 

Dealers I have worked with for as long as 30 years are telling me they can’t get their hands on ANY 1 ounce MS70 Gold Buffalos or Eagles.  It has been taking my staff and me as much as 2-3 weeks to fill orders BEFORE the mint suspended production.

 

I have managed to locate 167 MS70 Gold Buffalos this morning; but delivery will not be made until after January 3, 2010.  If you’ve been thinking about buying gold, I strongly suggest you consider calling one of my gold specialists at Finest Known, LLC at 1-800-697-GOLD (4653) and make arrangements to reserve some of these coins.

 

Yes, gold is down from its recent highs, but keep in mind gold’s pull-back mirrors the pull-backs it has taken the past few years. For example, earlier this year when I was being interviewed by TheStreet.com, gold was in the mid $750 range and I predicted it would hit $1200 by the end of 2009. It did.

 

I believe gold will hit $1600 sometime in the next 12 months and surge over $2,000 an ounce by 2011, although I would not be surprised to see it hit that target this coming year.

 

Please don’t be caught without physical gold. Make sure you have your IRA loaded with physical gold. Call one of my gold specialists at Finest Known, LLC at 1-800-697-GOLD (4653) and let them help you prepare for the trouble ahead.

 

If I’m right about the fiscal and monetary nightmare ahead, my prediction of $5,000 gold may prove to be very conservative. Those who do not take my warnings seriously may well be financially wiped out in the very near future.

 

Sincerely,

 

James DiGeorgia

 

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