Clive Maund: The key point to grasp is that the world needs a "reset" and sooner or later it is going to get it. By that I mean that all the dross of debt and derivatives that have accumulated over many years and are now dragging the world economy into the mire are going to have to be cleared away before the world can move forward again. Many readers will be familiar with the experience of working at a computer that "locks up" when too many applications and programs are open. When you arrive at this point, you cannot move forward or back, and there is nothing else for it but to hit the reset or restart button. That is the point the world economy has now arrived at with this debt crisis, and the longer business leaders and politicians take to grasp the nettle and write all this debt and derivative mess off, the worse it is going to get. So what if banks go bust? You can always create new ones later.
The debt and derivative mountains are now so enormous that there is no way they can ever be repaid, and that means that they either have to be written off—the drastic but most effective solution—or hyperinflated away into oblivion, which is the politicians' preferred way of dealing with them because this route buys them the most time. The major underlying economic force at work is deflation—a period of severe contraction is required to purge the system of debt and to eliminate distortions and inefficiencies that have become a huge burden.
Deflation, however, involves widespread economic hardship, involving reductions in wages and massive unemployment and can create political instability, with the masses taking to the streets and rioting. This is why politicians fear it so much and will choose inflation or even hyperinflation over deflation. So they have been fighting tooth and nail to hold back the forces of deflation principally by expanding the money supply and bailing out failing entities.
The situation has now become dangerously unstable, as we are right on the cusp between plunging headlong towards a major hyperinflationary episode that would see most Western economies end up like Zimbabwe—hyperinflation is the route that politicians are trying to steer us along—and tipping back into severe deflation. The reason it is dangerously unstable is all the major world players have to play their part in staving off a liquidity crisis by printing money as necessary, flooring interest rates, and fighting hotspots, which flare up and threaten to create a liquidity crunch or drive up interest rates. Thus, Republicans not playing ball by trying to make a significant reduction in the deficit, or the discordant buffoons in Europe failing to stop interest rates on bonds skyrocketing are "letting the side down" and by so doing are risking a collapse in the markets, which will bring about the deflation they dread so much. This could happen any time, which is why the situation is so tricky for investors.
I believe that politicians will hold out for hyperinflation as long as they can, but at some point, which could be soon, they are going to lose control completely, and the world economy will collapse back into a deflationary depression, which is actually what it really needs to get this mess sorted out once and for all. Europe could well be the trigger for this, as its debts are totally unmanageable and its leaders lack the cohesion and decisiveness to flood the market with the liquidity needed to get things back under control.
TGR: You use a lot of technical charts to predict economic outcomes. One pattern you're seeing on these charts are "Broadening Tops," which you suggest are "notoriously treacherous and dangerous patterns that are little understood by the general investing public." In simple terms, please explain how these patterns come about and why investors should be concerned.
CM: After a major uptrend, the market, in this case the precious metals sector, starts trending sideways in a series of increasing wide swings, as has been happening with both the AMEX Gold BUGS and PHLX Gold/Silver Sector indices, and I can do no better than to repeat what Robert D. Edwards and John Magee, the authors of the "bible" of technical analysis (TA), Technical Analysis of Stock Trends, had to say about these patterns:
"If the Symmetrical Triangle represents a picture of 'doubt' awaiting clarification, and the Rectangle a picture of 'controlled conflict,' the Broadening Formation may be said to represent a market lacking intelligent sponsorship and out of control—a situation, usually, in which the 'public' is excitedly committed and being whipped around by wild rumors. Note that we only say that it suggests such a market. There are times when it is obvious that those are precisely the conditions that create a Broadening Pattern in prices, and there are other times when the reasons for it are obscure or undiscoverable. Nevertheless, the very fact that chart pictures of this type make their appearance, as a rule, only at the end or at the final phases of a long Bull Market, lends credence to our characterization of them. Hence, after studying the charts for some 20 years and watching what market action has followed the appearance of Broadening Price Patterns, we have come to the conclusion that they are definitely bearish in purport, that, while further advance in price is not ruled out, the situation is, nevertheless, approaching a dangerous stage. New commitments (purchases) should not be made in a stock that produces a chart of this type, and any previous commitments should be switched at once, or cashed in at the first good opportunity."
TGR: Part of your thesis for global economic demise involves American politics. On clivemaund.com you wrote: "(American) politicians are bowing to public pressure to do something serious regarding reducing the deficits, which is setting the stage for an economic implosion." If you were with the Fed or part of the Obama Administration, what measures would you have taken to avoid an "economic implosion?"
CM: I would take exactly the measures they have taken up to now, which is to "kick the can down the road" in the hope that some other schmuck will have to clear up the (bigger) mess later. That has been their "modus operandi" up to now and the only reason they are considering the "nuclear" option of actually trying to rein in the deficits is because they are coming under massive pressure from their constituencies to do so. The best way to avoid an economic implosion is not to allow the debts to become unmanageably large in the first place, but that would have involved restraint and sacrifice—something they were not prepared to accept—they wanted to "party now" and to hell with the future consequences—now they, or rather we, are slipping into the massive hole they have dug for us.
TGR: Could we still see some version of quantitative easing 3?
CM: Yes, we could and all it will do is create an inflationary depression that is later followed by a deflationary depression anyway, instead of just "taking their lumps" and allowing the deflationary forces to proceed and do their necessary cleansing work and run their course, which is going to happen eventually whether they like it or not. They are pushing on a piece of string—economies are so beset with distortions arising from excess debt and excessively low interest rates that they can print all the money they like, it won't drag the economy out of the mire.
TGR: That's the American economic picture. Let's look at Europe. Italy's 10-year yield recently climbed above 7%, while Spain recently sold less than its maximum target of debt as financing costs went up. And the extra yield investors demand to hold 10-year bonds from France, Belgium and Austria instead of German bonds of similar maturity, all increased to euro-era records. It certainly doesn't inspire investor confidence. What are your thoughts?
CM: I have long referred to European leaders as a bunch of self-serving buffoons and that is all they are. They have been assiduously digging a massive crater beneath Europe for years and now it is falling in and nothing can stop it. They have neither the money nor the ability to cooperate to stop Europe from sliding into chaos and disintegration.
The way to address the otherwise intractable European debt crisis is to simply write down all the debts to zero and say to the creditors, "Tough luck, you are not getting a cent." Chaos would ensue, of course, and banks would collapse, etc., but it really is the only way—to wipe the slate clean and start afresh. They won't do this of course. Instead, as in the U.S., they will possibly attempt bailouts and socialize the losses of large creditors like banks and major corporations and institutions by pushing the bill onto the general public in the form of austerity measures and tax hikes, and it is interesting to ponder the reason for this.
Why do European leaders put the interests of big business ahead of their electorates? The reason is that big business has much more power over them than the electorate has—big business essentially decides whether they have a chance at office or not, and how their careers develop when they are in office. We are all aware of the lobbying system in the U.S. and the persuasive power of campaign contributions, for example, and we can surmise that similar incentives exist in Europe. All the public has is its vote and its ability to protest, which only becomes a force to be reckoned with when the masses start to aggregate in the streets in sufficient numbers.
Austerity measures won't work, of course; they will simply reduce economic activity and tax revenues and so the debts will continue to grow and the vicious downward spiral will intensify. European leaders, by kidding themselves that they can ever pay down these debts, are like a man trying to swim with a refrigerator strapped to his back—he is going down and the only hope is to cut loose the refrigerator. Their only hope is to totally write off the debts and let the pieces fall where they will. If they are too mule-headed to do this, down goes Europe and the U.S. and the rest of the world into the bargain.
TGR: How should investors protect themselves from a plunge in global markets?
CM: Cash, bear exchange-traded funds (ETFs) and possibly options.
TGR: Moreover, is there a strategy or two that you're using to profit from the plunge?
CM: Cash, bear ETFs and options.
TGR: Despite all the signs pointing toward a market crash, you continue to recommend precious metals equities. This seems counterintuitive. What is your rationale for continuing to support these equities?
CM: It is counterintuitive. We have had to contend with conflicting indications, the principal contradiction having been between the ominous broadening patterns forming in the precious metal stock indices and until now the strongly bullish commitments of traders (COT) data, particularly for silver, which led us to adopt a bullish stance in recent weeks. So far this has paid off, as the sector has rallied from its October lows. However, with the latest COT data looking less bullish, and an increasingly dangerous pattern emerging for the broad U.S. stock markets, we have been cashing in our chips and adopting a more defensive posture.
TGR: Clive, you're based in Santiago and some Latin American countries, including Peru and Argentina, are imposing new royalties and/or taxes on mining companies. Do you believe this will prohibit direct foreign investment and deter the average precious metals investor? What's your perspective?
CM: It depends on the magnitude of these royalties and taxes. If they get too greedy and keep raising them, it will turn out to be counterproductive. It also depends on what the raised monies are being used for. If the mining companies are doing nothing to help local communities other than paying wages and are not making provision to rehabilitate land after mining activities, etc., then these levies are justified if they are used to achieve these aims. But if they are simply siphoned off into government coffers, then it is nothing more than government parasitism, like airport taxes.
TGR: What are some juniors you're following and that could offer some upside, post-plunge?
Although Alix Resources Corp. (AIX:TSX.V) has been drifting lower since early this month, technically its picture looks positive, as this reaction has been on light volume and it was preceded by two high-volume gap up moves, which is bullish. In adverse market conditions, it could drift back further towards the support at the early October lows at about CA$0.105, but with more drill results believed to be pending, it could turn higher again at any time. Around these levels and especially down towards CA$0.11, I like it as a speculative play with the potential for large percentage gains.
Following a big rise late last year and into this year, which led to its being very overbought, Aguila American Gold Ltd. (AGL:TSX.V) has reacted back and now appears to be basing above strong support at about CA$0.20. In adverse market conditions it could react back towards this support again, in which case it will be viewed as a buy. Volume and volume indicators are strong, which further suggest that it has bottomed and is basing.
Others that look promising include the Colombian gold explorer Galway Resources Ltd. (GWY:TSX.V), which is shaping up well on the charts with positively aligned moving averages. If it can take out the important resistance approaching CA$2, it should make further substantial gains. GoGold Resources (GGD:TSX.V) is well run, has been in a steady uptrend that shows no signs of ending and is viewed as attractive after its recent reaction between its August high and its low in mid-October at about CA$1.12. PMI Gold Corp.'s (PMV:TSX.V; PVM:ASX; PN3N.F:Fkft) recent big high volume gap up is viewed as a sign of higher prices to come. The gap move was due to a tripling of the company's gold resource at its Obotan gold project in Ghana.
TGR: What's your near-term outlook for precious metals, namely gold and silver, as we head into 2012?
CM: The near-term outlook for gold and silver is for a correction that should not see silver go below its recent panic lows set in September. Then everything depends on the manner in which the debt crisis is handled. If unlimited liquidity is created in an effort to paper over the cracks both in Europe and the U.S., then the sky is the limit for precious metal prices. But if deflation takes hold, then gold and silver are likely to drop with most everything else, although not as fast, as there will be few other safe havens in which to put your money.
TGR: Thank you for your insights.
Clive Maund has been president of www.clivemaund.com, a successful resource sector website, since its inception in 2003. He has 30 years of experience in technical analysis and has worked for banks, commodity brokers and stockbrokers in the City of London. He holds a diploma in technical analysis from the UK Society of Technical Analysts. He lives in southern Chile.
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1) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Alix Resources Corp., Aguila American Gold Ltd.
3) Clive Maund: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.