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February 18, 2009 | By: Investment Capitalist |
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While investors are focusing all of their attention on US banks, another systemic risk is brewing, compliments of the Eurozone and Chinese Banks. Even Swiss banks are sitting on a time bomb, as all of them have lent trillions of Euros to Baltic states, Russia and Latin America. For all intents and purposes, these loans will not be paid back - they will default. Gold pricing is telling us that a huge credit event is looming, and this is not just in the U.S. This is going to be a global credit event. Gold does not lie.
Somewhere in the neighborhood of $11 trillion in Eurozone debt is starting to come due just when companies are strapped for cash and credit markets are frozen shut. Old world European companies are suffocating in debt after their borrowing binge in the last decade. At this level, European corporate debt levels are equal to 95% of GDP. The U.S. is at 50% of GDP.
Bank lending to Eurozone companies fell by 40% as the credit squeeze tightened last fall, resulting in $159 billion in bonds issued in January at punitive rates. This will restrict hiring, wage growth, and investment throughout the Eurozone. The amount of debt to be rolled over is massive and terrifying the smart money.
Because of this, gold is making new all time highs in every currency except the Yen and the US Dollar. Furthermore, gold has been moving in tandem with a declining Euro and rising dollar. This is not a sign of hyperinflation, as stated over and over by the television talking heads. Nor is it a sign of any inflation. This is a big, glowing, neon sign flashing “extreme credit stress”, in nearly every country in the world.
By credit stress, I mean the kind when Nixon took the dollar off gold, or when Humphrey confiscated gold to print money just before the depression kicked in. The rotation into gold is a response to fears that, in a fiat currency world, the printing presses running full steam in all G-10 countries will lead to massive devaluations with nowhere to hide. Therefore, to preserve purchasing power, gold is the only place to hide.
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