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On the eve of Independence Day, I urge you to declare your own financial independence — with precious metals.
It’s no secret that I think gold and silver are going to become a lot more expensive. I talk about the forces driving them higher in my new report, “Gold Fever — to $1,300 and Beyond.”
There are forces at work that will likely send the U.S. dollar much lower and precious metals much higher. Therefore, to guarantee your own financial independence, I think you should have a portion of your wealth in physical gold and silver.
I talk about seven of these forces in my report. But new forces come along all the time.
California … Spark for a New Gold Rush?
Case in point: California has run out of cash and is going to start issuing IOUs. This could be very bullish for gold. I’ll explain why. First, some background.
California is America’s most populous state with 38 million people. Its GDP of $1.8 trillion is the largest in the United States. Its economy is bigger than those of Russia, Brazil, Canada, or India.
As Martin Weiss told his readers last week …
The state faces a stunning $24.3 billion budget deficit. And the state has lost virtually all hope of President Obama declaring, “California is too big to fail.”
Maybe California will work out its budget problems (good luck to Governator Arnold). In the meantime, things look grim. Fitch Ratings downgraded its rating on California’s debt — to A-minus, giving it the lowest rating of any U.S. state — and warned it may lower the rating again.
But here’s the real problem, which is even worse …
California Is the Tip of a Financial Iceberg!
In fiscal year 2009, 48 states are experiencing revenue shortfalls. More than three quarters of U.S. states have already slashed their budgets by $31.6 billion, but that won’t bridge a Grand Canyon-sized budget gap of $350 billion to $370 billion projected over the next two-and-half years, according to the Center on Budget and Policy Priorities.
And those projections may be too optimistic. Sales tax revenues have fallen so sharply (down 26 percent in the first four months of the year), 48 states have a combined revenue shortfall of $166 billion in the coming fiscal year alone.
California’s immediate crisis is a $2.8 billion shortfall in July. It’s plugging that gap with its IOUs. But, by September, that shortfall will swell to $6.5 billion.
Investors can see the writing on the wall. They’re selling California debt like crazy. As the price of debt goes lower, yields go higher, pushing up the 30-year yield on California’s debt to 6.2 percent this week, up from 5.3 percent in May.
Again, this is the tip of the iceberg. The municipal bond market is a $2.7 TRILLION market. If other states and cities follow California over the cliff, we are going to see the municipal bond market seize up. This happened for a while last year when investors panicked, then has eased somewhat.
Still, U.S. municipal bond issuance dropped 15.9 percent in the first half of 2009 compared to the same period in 2008. That’s why so many states are grateful for the Obama bailout package — it pays for projects they couldn’t otherwise fund.
If other states follow California into insolvency, the next freeze in municipal bonds could be a deep freeze.
What would that mean?
- States would be forced to stop funding projects. Contractors across the country would stop being paid and their employees would join the unemployment rolls.
- Ditto for many state employees who would be furloughed or fired.
- And state economies, already under severe pressure, would careen into chaos.
This, in turn, will lead to MORE Americans living on the government dole. Welfare and unemployment will soar. And that means even bigger demands on shrinking government wallets.
And here’s an ugly little fact: Welfare and unemployment are already going through the roof. Take a look at this chart from Clusterstock …
So how does this relate to gold?
The Federal government has said it won’t bail out California. So, it will probably tell the other U.S. states tough luck as well.
But it still has to pay unemployment. It still has to make welfare payments.
Meanwhile, just like the states are seeing their sales tax revenues fall, the federal government’s revenue is also falling, even as spending soars. Federal tax revenues fell 34 percent — $138 billion — in April vs. a year ago!
Result: The fiscal deficit could top $2 trillion in 2009 — a whopping 15 percent of gross domestic product. That would increase by one-third the total stock of federal government debt outstanding. What’s more, the deficit will probably be even larger next year!
In a March 27 forecast, Goldman Sachs estimated average annual deficits of $940 billion through 2019. If this proves true, deficits would remain above 4 percent of GDP through the next decade, and the national debt would reach a whopping 83 percent of GDP, a level not seen since World War II.
Such Debt Was Once Unimaginable.
And It IS Unsustainable!
To pay for this, the United States will have to go deeper into debt, selling more Treasuries to foreign lenders who are getting pretty sick of footing our spendthrift ways and who are becoming skeptical of our ability to make good on our debts.
How can Uncle Sam possibly repay these mountains of debt? The only way to do it — that I can see, anyway — is to make those mountains into comparative molehills by devaluing the U.S. dollar.
I think that’s why the Chinese, Brazilians, and Russians, among others, are calling for a new, international super-currency to replace the U.S. dollar as the world’s reserve currency.
Will this change come soon? No. Will investors wait for an official announcement before stampeding out of the dollar? Heck, no!
Gold — the Best Insurance Policy
Against Your Own Government
One form of insurance for investors is to buy the same thing that the Chinese have been buying for months — hard assets and the companies that produce them.
That’s why the prices of oil, copper and more are going up in these “deflationary” times.
And what’s the hardest asset of all? Gold!
Silver’s pretty good, too. I think both have about 40 percent upside over the next year as the dollar goes lower.
Now, my time frame may be wrong. I may be early. But the long-term trend in gold is definitely up, and the trend in the dollar is definitely down.
Heck, just look at what’s happened over the past two years. The dollar is down, while gold is up 43 percent.
Sources: StockCharts.com
Do you want to take a guess where the next two years are leading us? With California leading the other states in a lemming-like rush over the cliffs of financial insolvency? With the Good-Time Charlies in Washington writing one bad check after another? With revenues falling and more workers being added to the public dole?
I’d say the dollar is going to go KER-SPLAT! And I think gold is going to soar!
This will not be an overnight process. But the big moves will probably be severe and sharp, and come so suddenly that they could take your breath away.
You want to be in gold stocks. Specifically, I like stocks of foreign gold miners, both large and small producers (not explorers), like I talk about in my new gold report.
You want to own physical silver and gold. I don’t mean ALL of your wealth needs to be in it, but you’ll want at least some gold and silver stashed away. Important: During times of great stress and panic, people throw money at problems, and it’s easy to get ripped off by unscrupulous dealers. I strongly recommend you DO NOT buy gold on eBay. Buy from a reputable dealer, someone who has been in the business for a long time.
You want to be prepared for the coming crisis. Cut down on your personal debt … don’t believe the chattering classes on CNBC that tell you the financial crisis is over. Prepare as if a financial storm is about to blow.
In a best-case scenario — where everything works out fine — all you have done is put yourself in better financial shape. In a worst-case scenario — a financial hurricane — you’ll want to be ready.
This storm could take time to brew. Use that time wisely. Declare your financial independence — buy gold now!
All the best,
Sean
P.S. My new report, “Gold Fever — to $1,300 and Beyond.” was just published. You can buy it TODAY! Don’t miss out. Get this report now, or you’ll wish you had.
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