Silver and Gold Prices Delivering Terrible News for America -- Dollar on the edge of free fall.

In the United States, the media's interest has been focused on who won the game that was the potential government shutdown. As usual the reporting is based on a sporting event and not the importance of the change of direction the shutdown represents. At the moment there is no winner or loser; that will be decided if and only if spending is dramatically reduced and government begins to shrink appreciably.

Many of us have repeatedly called attention to the financial markets and international uncertainty precipitated by American monetary, fiscal and foreign policies by focusing on bell-weather commodity prices, particularly precious metals. On Friday silver pushed above $40.00 a troy ounce for the first time since 1980 and gold reached a new all-time high in nominal terms at $1,474.19.

Recent predictions and those generally accepted by the markets have silver hitting $50.00 a troy ounce and gold to crash the $1,550.00 mark soon. While these rallies have had clear links to fears about inflation, there is more to this situation than just inflation fears.

In fact both markets actually have surplus supply. While demand is good, particularly for silver in industrial use, much of the demand is driven by investors. It is not a matter of industrial demand but rather demand driven by investors.

Recently, much of spike in bullion prices has been triggered by geopolitical tensions. In what has become the most inept handling of international crises in recent American history, the Obama administration has set in motion a potential radical takeover of the government in Egypt, a prolonged civil war and stalemate in Libya, a jihadist government in Yemen, and an open door for Iran to establish hegemony over the Middle East. The probability of a war involving Israel in the next few years has gone up exponentially.

Among other questions weighing on the markets are: what will the Federal Reserve do next? The latest round of quantitative easing is due to end within the next few months. As the American economy continues to flounder and stagnate due to the overbuilt housing markets and stubborn unemployment, will the Fed then launch yet another round of easing (in essence creating money)? The gold market is fully expecting that they will.

This will result in an even weaker dollar and as worldwide commodities are priced in dollars, the dollar value of these items will continue to rise. Hyper-inflation will no longer become a theoretical discussion.

If the Fed does not begin another round of easing, it will be only because current inflation has become such major concern that the Fed will have no choice but to raise interest rates to combat that potential debacle. However, another side-bar to the lack of another round of easing will be: who will buy the Treasury debt of the United States as it continues its enormous deficit spending without a significant rise in interest rates? A major buyer in the past, Japan, will no longer be able to buy US debt due to the enormous earthquake and tsunami damage; in fact it may be forced to sell part of its holdings, thus competing for buyers with the US Treasury. The US deficit problem will become far worse without substantial, not token, spending reductions.

There is no question that with the ham-handed and inept management of the revolt in Libya and the on-going upheavals in the Middle East, oil prices will remain high and will in all likelihood continue to rise further. Food prices and supplies are hitting crisis levels throughout the world, and have begun to impact the American consumer more so every day. The ostrich-like approach of the Obama administration and the Fed to these issues cannot continue much longer.

These rises in inflationary pressure have pushed US interest rates -- actual rates less inflation -- into negative levels. This is true also in China, where inflation has become the government's chief concern, as they have raised interest rates three times in the past five months. Co-incidentally demand for gold there has skyrocketed.

Per Jeffrey Currie of Goldman Sachs who predicts gold will hit $1,625 by the end of the year:

Gold is ultimately dependent upon real rates, which are a function of both inflation expectations and monetary policy. A top in gold prices will only become apparent when the risks of sovereign default are behind us with a clear and successful exit of the stimulus we've seen over the last few years.

These risks are extremely high, as most recently witnessed in Portugal which has had to ask the Eurozone for upwards of a 100 billion Euro bailout. The diversion of the government shutdown, while long on entertainment quality, is important only if it leads to a seismic shift in spending and tax policies in the United States. The Federal Reserve is essentially out of ammunition if it wants to maintain any semblance of credibility and not pursue monetary policies guaranteed to cause a massive financial collapse. It has already pushed the limit beyond the safety point.

The gold market is telegraphing to the world, and particularly Washington D.C., that there is no confidence that they can turn the ship of state around and make real substantive changes in fiscal and foreign policies. Commodity marekts are following:

hat tip: minyanville

The world is undergoing massive changes and challenges, yet never has America been in the hands of a more inept and ideologically driven government than it is today. As a result and as never before in it's history, the future of the country increasingly depends on the whims and actions of other nations and leaders, an outcome that can only lead to disaster.

There is still a slight window of opportunity open and that hope rests on the Republicans in the House of Representatives to curtail spending in future years, significantly reduce regulations and repeal laws such as ObamaCare. Also any potential Republican candidate contemplating running for President must forcefully and without hesitation speak out candidly in the bluntest language possible about the future and the devastating action of Obama and the Democrats, all the while doing so without fear of what may be said about him or her in retaliation.

Gold is ultimately dependent upon real rates, which are a function of both inflation expectations and monetary policy

It is amazing how few people understand gold, including this idiot, who being a New York banker apparently has lost sight of all sense of the fundamentals of an economy, in particular the cost of production. Gold, being a hard to produce commodity of some intrinsic industrial value has a fundamental value the is dependent upon the cost of service, labor, and other commodities that make up that production cost. So, price increases averaged over some period of time reflect increased price levels, i.e. inflation, which affect all factors of production (an old term that our paper chasing elite have long ceased to use).

This fundamental price, the cost of production is based upon hard realities. Now onto that base price is also built premiums based upon perceptions of currency risk (sovereign debt default or further inflationary pressures indicated by the rate of printing money which is indicated by the amount by which market interest rates lie below what are perceived to be natural interest rates that provide a reasonable return on capital). We have seen this before. The fundamental cost of a house is the economic value of the land + labor and materials to build the house. Our paper chasers on wall street have been willing to multiply that value by a large multiple, and when that multiplier began collapsing back towards levels that buyers with credit based upon real earning could actually pay, it began taking our whole credit system with it.

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