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Thursday, September 29, 2011


The number one reason to own gold is that we're not experiencing a liquidity crisis. We're experiencing a global solvency crisis.

What does that mean and what's the difference?

A liquidity crisis is provoked by a temporary mis-allocation of capital which provokes a knee jerk fear based response from the public. It is solved by dumping capital into the affected areas, calming the markets and then redirecting future capital more productively. For example: your broker dumps your portfolio into "structured products." You suddenly need cash but can't raise any because all you money is locked up. But you still have a good job and relatively low debt burden. You're just in a temporary liquidity crisis. You borrow some money and pay it back when you're structured products mature.

A solvency crisis is provoked by excessive debt. Debt service keeps the debt growing and simultaneously sucks productive capital out of the system. When debt levels rise beyond the reasonable expectation of ever being paid down - the affected system eventually collapses. That is the solution. In time a new more efficient entity replaces the old dead entity. That is the basis of all capitalism. For example: You borrow ten million dollars to buy a mansion. The real estate market collapses, your house is worth 1 million, you owe ten million and you lose your job. This is a solvency crisis. You solve it by declaring bankruptcy, and starting over.

The global banking system is insolvent. Central Banks have bailed out large member banks but the central banks and the governments they represent are all holding far more debt than they can ever hope to repay. They can manage this situation for a long time by creating ever more debt and absorbing bad debt from the weakest balance sheets onto the strongest balance sheets. For example Germany can absorb Greece's debt, as long as they don't mind becoming insolvent themselves when Ireland, Spain, Portugal and Italy demand the same treatment.

But eventually everyone goes bust, and is forced to start over. As that happens gold becomes the de facto currency of last resort. We are in this process now. That's why gold has moved from 300 dollars an ounce to 1600. Not because of "speculation" but because central banks are protecting their sovereign states by purchasing a debt free currency. Yes, gold is correcting now. So use this opportunity. Because global insolvency is insoluble.

And, in case you think China will solve all our problems:

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