April 29, 2013
Bangkok, Thailand ABN Amro, the Dutch state-owned banking giant, recently revised its global macro and gold outlook, forecasting a $1,300 gold price by the end of this year. Moreover, the bank forecasts $1,000 gold by December 2014, and $800 gold in 2015. Why? "The authorities -- especially in Europe -- have acted to reduce systemic risks and inflation is going down rather than up. . . Other assets will become increasingly more attractive as the growth outlook improves." Wait, hang on; they lost me with the 'all is well in Europe' argument. Across the continent, the dominos are falling far faster than Angela Merkel, the ECB, and even the IMF can stand them back up again. Slovenia is now in need of a banking sector bailout. Even according to the OECD's latest economic survey of the country, "Slovenia is facing a severe banking crisis". This, amid continually rising debts and record high unemployment in the region. To put this in context, the number of unemployed in Spain now exceeds the entire population of Madrid... representing about 13% of the entire Spanish population and 27% of the nation's workforce. ABN Amro's reports go on-- "Systemic risks to the financial system and the global economy have declined notably, despite the bailout of Cyprus." Er, "despite the bailout of Cyprus..." You mean the one involving outright confiscation of people's money? The one where the Russians wagged their fingers at the EU for acting like the Soviet Union? Sure, despite the bailout of Cyprus, everything's dandy. And other than that, Mrs. Lincoln, how did you enjoy the show? ABN continues: "Another blow [to the gold price] will come when the Fed's first rate hike (that we expect in early 2015) comes into view." Now, bear in mind that US debt already exceeds 100% of GDP. Even using the US government's own ridiculous budget projections (which assume 3.5% REAL GDP growth) Uncle Sam will still accumulate over $5 trillion in debt over the next decade. But here's the thing-- the current $16.75 trillion of US debt has an average maturity of just 65 months. This means that the US government will be on the hook to repay a huge chunk of its debt within the next 5 1/2 years. So in addition to issuing $5 trillion (optimistically) in new debt, they'll also have to re-issue trillions more in existing debt. Someone is going to have to mop up all that debt. The question is... who? The Chinese are actually REDUCING their Treasury exposure as a percentage of total US debt (see chart). This is consistent with their objective to strengthen the renminbi. 
The story is the same with Japan at the moment, whose nominal US debt holdings have actually been decreasing. The US Social Security trust fund is also a major holder of US debt. Yet, according to the Washington Post, roughly 10,000 people EACH DAY become eligible to receive Social Security pension benefits. Given the increased outflows and high level of US unemployment (fewer people paying into the system), it's doubtful that the Social Security trust fund will have sufficient cash to bail out the Federal government. This leaves the US Federal Reserve as the lone player to mop up all this debt. There simply are no other options; the US government will default in all likelihood, unless the Fed continues debauching the currency to buy Treasuries. This will drive even more money into real assets, pushing prices higher... especially gold. Jim Rickards, fund manager and author of the acclaimed book Currency Wars, spoke at length about gold and the future of the global financial system at our Offshore Tactics Workshop in Chile earlier this month. Needless to say, his forecast for gold is... slightly different than ABN Amro's. Later this afternoon I'll send you a short video clip of his remarks so you can see this analysis for yourself. It's some of the best insight on gold I've ever seen. | 
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