We now live in a world where governments print worthless pieces of paper to buy other worthless pieces of paper that combined with worthless derivatives, finance assets whose values are totally dependent on all these worthless debt instruments.  Thus most of these assets are also worth-less.

So the world financial system is a house of cards where each instrument’s false value is artificially supported by another instrument’s false value. The fuse of the world financial market time bomb has been lit.  There is no longer a question of IF it will happen but only WHEN and HOW.  The world lives in blissful ignorance of this. Stockmarkets remain strong and investors worldwide have piled into government bonds in a perceived flight to safety. Due to a century of money creation (and in particular since the 1970s) by governments and by the fractal banking system, investors believe that stocks, bonds and property can only go up. Understanding risk and sound investment principles has not been necessary in these casino markets with guaranteed payouts for anyone who plays the game. Maximum leverage and derivatives have in the last 10-15 years driven markets to unfathomable risk levels, with massive rewards for the participants.

In the meantime central banks are cranking up the printing presses but as Bernanke recently said quantitative easing is an “inappropriate” description of what should be called “securities purchases”!  Who is he kidding? What the Fed is buying has nothing to do with “securities”. There is no security whatsoever in the rubbish the Fed is purchasing. They are buying worthless pieces of paper with worthless pieces of paper. This is the Ponzi scheme of all Ponzi schemes.

Let us be very clear, this financial Shangri-La is now coming to an end. The financial system is broke, many western sovereign states are bankrupt and governments will continue to apply the only remedy they know which is issuing debt that will never ever be repaid with normal money.

So why does the world still believe that the financial system is sound?

• Firstly, because this is what totally clueless governments are telling everyone and this is what investors want to hear.
• Secondly, whether governments apply austerity like in parts of Europe or money printing as in the US, investors want to  believe that any action by government is good, however inept.
• Thirdly, market participants are in a state of false security due to shortsightedness and limited understanding of history.
• Fourthly, as long as they can benefit from inflated and false asset values, the market participants will continue to manipulate markets.
• Fifthly, there has been a very skilful campaign by the US to divert the attention from their bankrupt economy and banks `to small European countries like Greece, Ireland or Portugal. These nations, albeit in real trouble, have problems which are miniscule compared to the combined difficulties of the US Federal Government, states, cities and municipalities.

Euro zone members can’t print money. Many EU countries are downgraded by US rating agencies which don’t dare to touch the US rating. The AAA rating of the US is an absolute sham and totally politically motivated. True to form, rating agencies will only downgrade debt once it has become worthless but never before.

Hyperinflation Watch

The result of massive money printing is a collapsing currency, leading to escalating prices and eventually hyperinflation. This is in simple terms how every hyperinflationary period in history has happened. If in addition, there are world shortages of food, energy and other commodities, this will accelerate the process.

There are currently a number of indicators all pointing to escalating money printing and an imminent start of a hyperinflationary era. Here are some of them:

1. Fiscal Gap widening at alarming rates in many major economies.
2. Commodity prices at all-time highs.
3. Long term interest rates rising.
4. Most Currencies falling.
5. Precious Metals at all-time highs against most currencies.

Fiscal Gap

Tax receipts are collapsing and government expenditure soaring in many major economies including virtually all southern European countries as well as in the UK. James Turk has produced on his fgmr.com site two excellent graphs for the USA and the UK showing the extreme severity of these two countries’ deficits.

Gold prices shrugged off global rate hikes Monday as trading stayed light and the Eastern Seaboard coped with the aftermath of a blizzard.

Gold for February delivery added $2.40 to $1,382.90 an ounce at the Comex division of the New York Mercantile Exchange. The gold price Monday has traded as high as $1,387 and as low as $1,372.70.

The U.S. dollar index was losing 0.16% to $80.34 while the euro was slightly higher at $1.31 vs. the dollar. The spot gold price was down $2.10, according to Kitco’s gold index.

The greatly talked about and feared event of a rate hike in China happened with little fanfare for gold prices. The People’s Bank of China raised the one-year lending rate by 25 basis points to 5.81% on Christmas, the second time in more than two months, to fight inflation. The one-year deposit rate rose to 2.75%.

China had raised the amount banks must keep in their reserves six times this year in order to take money out of circulation, but November’s inflation reading was still 5.1% vs. a year ago.

The much more aggressive step of raising key interest rates had been long feared by gold investors. Higher interest rates make it more appealing to keep money in the bank, and a higher lending rate makes it less appealing to borrow. Both might hurt consumer demand for gold, despite the fact that China had been actively trying to promote it.

It remains to be seen how demand for trading vehicles like foreign exchange-traded funds or a recently approved gold mutual fund, both of which give investors exposure to the international gold marketplace, will be affected. According to Kitco’s exchange-rate tracker, the gold price fell 0.08% in yuan terms.

China is the world’s largest gold producer and the second largest consumer of gold, importing 209.7 metric tons in the first 10 months of 2010, equivalent to 7.4 million ounces. While gold prices might be able to absorb a minor slowdown in gold demand, the long-term implication of an interest rate hike is positive real interest rates.

When inflation is high and rates are low, negative real interest rates ensue, which is typically a green light for gold prices. Gold becomes attractive when rates are negative because paper money is literally worth less and gold becomes a safer place to preserve wealth.

If rate hikes lead to positive real interest rates, gold becomes less seductive for investors.

China wasn’t the only country to raise rates this weekend. Russia raised the overnight deposit rate by 25 basis points to 2.75%, the first time in two years, and economists expect that Brazil, another booming emerging-market economy, will raise its interest rate in January.

Jon Nadler, senior analyst at Kitco.com, believes that one thorn in gold’s side in 2011 could be investment demand. “Overreliance in the gold market on investment demand presents some problems,” he says.

Nadler believes that a large part of why gold has hit new highs this year — the latest intraday high was $1,432.50 on Dec. 7 — is due to momentum investment buying, not fundamentals.

Investment demand can be fickle if “conditions change. … If in fact interest rates rise globally … that component alone could … induce some of the recently arrived hot money from hedge fund and ETF participation to seek other niches,” Nadler says.

Reaction to China was muted Monday by a blizzard on the East Coast of the U.S. and technical trading. Those traders still in the market will be looking to rebalance their portfolio headed into the new year, possibly dumping gold for profits, buying back positions on a pullback or adding gold to show they own it.

“Open interest in gold is still not growing because of profit-taking for year-end by funds and short-covering from traders,” noted George Gero, senior vice president at RBC Capital Markets.

Amid the technical landscape, North and South Korea are both ramping up their military rhetoric with North Korea bragging of its recent attack on Yeonpyeong and South Korea promising retaliation against any future attack. The latter is set to continue its recent series of military exercises.

Phil Streible, senior market strategist at Lind-Waldock, says he “wouldn’t be surprised if gold gets back above $1,400″ if the conflict escalates. But any type of rally before 2011 will most likely prompt a wave of selling as traders and money managers lock in previously missed profits.

Silver prices closed down 7 cents to $29.25 while copper ended 2 cents higher to $4.28.

Currently, the Comex is showing no reading for platinum; palladium prices were adding $8 to $766.20. Both metals received some rough news over the weekend. Beijing is limiting the amount of cars it will allow to be registered in 2011 to 240,000, about a third of those registered in 2010. Both metals are used in catalytic converters used in the exhaust system of cars to limit noxious emissions.

Streible said that initially there could be downside to palladium and copper prices: “The average vehicle contains about 50 pounds of copper. … But I think that India, their auto demand is just as strong as China, and if you get any additional boost in there, you’re probably going to see prices come back, stabilize and move higher.”

Gold mining stocks, a risky but profitable way to buy gold, were trading mostly lower. Kinross Gold was down 0.76% at $18.39, while Freeport McMoRan Copper & Gold was 0.65% higher at $118.94. Other gold stocks New Gold and Gold Fields were trading at $9.15 and $17.59, respectively.

Randgold Resources was down 3.46% to $81.29. The company lowered its production guidance Thursday for the fourth quarter due to political upheaval in the Ivory Coast, where its Tongon mine was starting to ramp up production and due to growing pains at its Loulo mine complex.

Former Federal Reserve Chairman Alan Greenspan
said the U.S. fiscal deficit is “scary” and the
federal government needs to cut spending on
entitlements.

“We’re involved in a dangerous game,” Greenspan
said yesterday at a foreign-exchange conference
in New York sponsored by Bloomberg LP, the
parent of Bloomberg News. “We’re increasing the
debt held by the public at a pace that is
closing” the gap between our debt and “any
measure of borrowing capacity,” Greenspan said.
“That cushion is growing very narrow.”

U.S. companies may be holding back on investment
because of the rising federal deficit, which
causes uncertainty about future tax policies,
Greenspan said in an opinion article for the
Financial Times this week. Weak investment by
businesses in capital equipment and fixed assets
has helped to crimp the U.S. economic recovery,
he said.

“You need” austerity, said Greenspan, a paid
speaker at the event. “We’re going to have to
start to cut” from government entitlement
programs, he said, adding that reducing the
budget is better than raising taxes in closing
the U.S. budget deficit. Still, Greenspan
reiterated that he supports allowing tax cuts
enacted under President George W. Bush to lapse
at the end of 2010.

The White House Office of Management and Budget
in July projected the deficit for fiscal 2010,
which ended Sept. 30, at $1.47 trillion and the
gap for fiscal 2011 at $1.42 trillion. President
Barack Obama formed a commission in February
charged with presenting a plan by Dec. 1 on how
to reduce deficits over the next decade.

Succeeded by Bernanke

Greenspan, 84, was chairman of the Fed from 1987
until 2006, when he was succeeded by Ben S.
Bernanke.

“It is crucially important that we put U.S.
fiscal policy on a sustainable path,” Bernanke
said in an Oct. 4 speech.

“The only real question” is whether adjustments
to taxes and spending will come from a “careful
and deliberative process” or from a “rapid and
painful response to a looming or actual fiscal
crisis,” Bernanke said in Providence, Rhode
Island. U.S. lawmakers should consider adopting
rules that limit federal spending or debt, he said.

Greenspan said that if the Fed decides to expand
its balance sheet through purchases of bonds, a
process known as quantitative easing, it may not
be enough to get “money moving” and spur growth
in the U.S. economy.

Should the Fed increase “excess reserves and
they just sit there on the asset side of
commercial banks’ balance sheets not being
relent, you’ve merely gone through an
interesting bookkeeping exercise,” Greenspan
said. “You’ve got to break that psychology that
prevents that current trillion” in reserves from
being relent, he said.

Record Low

Two-year Treasury yields fell to the lowest ever
yesterday, setting or matching a record for a
fifth consecutive day. Investors have stepped up
bets that the Fed will resume buying bonds to
keep borrowing costs low.

“It is very difficult to think through the
scenario by which you induce” commercial banks
to lend, Greenspan said. “If you don’t do this,
quantitative easing can’t do anything to speak of.”

U.S. central bankers have kept their benchmark
lending rate near zero for almost two years. In
March, they finished $1.7 trillion in purchases
of Treasuries, mortgage-backed securities and
housing agency bonds.

A slowdown in growth in the middle two quarters
of this year prompted the Federal Open Market
Committee last month to warn that inflation
rates were “somewhat below” its mandate to
achieve stable prices and full employment.

New York Fed President William Dudley, who is
also vice chairman of the FOMC, went further in
an Oct. 1 speech when he called current levels
of unemployment and inflation “unacceptable.”

“Further action is likely to be warranted,”
Dudley said.

Silver has been in the news after hitting a 30-year high of $22.08 last week. The commodity is being viewed by funds and institutions as an alternative to gold, which zoomed to a fresh record of $1317.42 an ounce (31.10gm) on Friday, and from which the white metal has taken cues. The price in Mumbai hit an all-time high of Rs 33,935 a kilo on Thursday. With silver continuing to rise despite a fall in the gold-silver ratio ( price divided by silver price), the white metal is showing signs of decoupling from gold mainly due to buoyant industrial and investment demand. In fact, silver holdings in the ishares Silver Trust, the world’s biggest ETF backed by silver, was at a record high of 9,786. 5 tonnes last week.

Cheap dollar lends sheen

To prop a faltering economic recovery, the US government is expected to go in for a fresh round of quantitative easing, or buying debt, which will infuse additional liquidity into the system. Expectations of retaining an easy liquidity regime by the Federal Reserve is pressuring the dollar, which on Friday was headed for a third weekly drop against the euro. Coupled with near-zero interest rate, the added liquidity will chase alternative assets to the dollar such as gold, silver and base metals. A weak dollar makes assets denominated in that currency cheaper for holders of other currencies, thereby increasing demand for such assets raising their prices.

Short-term correction likely

According to Gnanasekar Thiagarajan, director at Commtrendz, technicals indicate both gold and silver are deeply overbought and could correct by 10% once the international price tests $22.50 (Rs 34,000 local futures price). Silver ended down at Rs 33,840 on Friday. A stronger rupee could cap the gains in local markets. Gnanasekar believes rather than entering the market now, investors would be better of waiting at the sidelines for prices to correct and to seize the opportunity to enter once this happens as long-term fundamentals seem to be intact.

What drives a silver rally

Apart from tagging along with gold, silver takes price cues from the base metals complex and because of the gold-silver ratio. Buoyant demand for base metals is bullish for silver, which is viewed as an industrial metal, too. For example, in 2009, industrial applications accounted for close to 40% or 352,200 ounces out of total global supply at 889,000 ounces while jewellery demand was lower at 156,600 ounces. Currently, the ratio is a little less than 60. The higher the ratio, the more underpriced silver appears, launching a rally. For example, a rally in silver normally ensues when the ratio moves between 65 and 70. The 65-70 ratio has been hit twice over the past three to four months.

May 24 ……Gold climbed, snapping a three-day retreat, as renewed weakness in the euro revived demand for a haven and last week’s decline to the lowest level in more than two weeks boosted the metal’s allure.

Gold for immediate delivery, which slid to $1,166.30 an ounce on May 21, the lowest price since May 5, climbed as much as 0.7 percent to $1,185.05. The June-delivery contract in New York rose 0.5 percent to $1,181.60 at 9:07 a.m. in Singapore.

After the “selloff there’s some revived appetite for precious metals, including gold, as a decline in the euro reminds the market of risks linked to the region,” said Hwang Il Doo, a Seoul-based trader with KEB Futures Co. “The price declines are no more than a mere correction.”

The euro weakened against the dollar, ending a three-day gain, after European Union finance ministers pledged to stiffen sanctions imposed on high-deficit countries and ruled out setting up a mechanism to manage state defaults. The region’s debt crisis helped drive gold to a record $1,249.40 on May 14.

Gold slid 4.6 percent last week, the most since February 2009, as some investors reduced their positions as the euro advanced. The metal has strengthened 7.9 percent this year and is heading for a 10th annual gain.

Hedge-fund managers and other large speculators cut their net-long positions in New York gold futures in the week to May 18, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 231,670 contracts on the Comex division of the New York Mercantile Exchange, the Washington- based commission said in its Commitments of Traders report. Net- long positions fell by 4,155 contracts, or 2 percent, from a week earlier.

Silver for immediate delivery jumped as much as 1 percent to $17.8225 an ounce, and traded at $17.70. Platinum rose 0.4 percent to $1,507.20 an ounce, and palladium increased 0.5 percent to $439.13 an ounce.