The New Year Will Get More Chaotic
NEW YORK (TheStreet) -It's once again time for the obligatory "predictions" for the upcoming year. With the world being a crazier and more chaotic place than ever, such an exercise is inherently masochistic.
However, being a good sport, I'll peek into my own crystal ball and attempt to decipher my vision for the future.
In keeping with tradition, I must first review my
. As I attempt to "explain" how and why the world did not unfold as I predicted one year ago, two themes come into play: in one respect, I simply overestimated the speed at which events would progress in 2010; in the other, I grossly underestimated the human capacity for stupidity.
I expected civil unrest in the U.S. in 2010 due to the widespread recognition that the "U.S. economic recovery" was nothing but a
. Instead, Americans went through all of this year, acquiescing to the delusion that the U.S. economy is "growing".
I also expected clear acknowledgment of a "decoupling" between the U.S. economy (and a few other, weak western economies) and the rest of the world. Here I was wrong as well. With the American people not even willing to acknowledge their economic fantasy, it was obviously less likely that people across an ocean would see through the façade.
I was correct that western governments would have to make their "choice" between the expediency of more debt and money-printing or attempting to restore fiscal and monetary sanity to their economies. And I was correct that most would choose "expediency" (and future bankruptcy) ahead of attempted restraint.
Indeed, the only western economies which made any attempts at "austerity" were those who had it forced on them through the euro "debt crisis".
I was ahead of myself in predicting gold prices: looking for $1,500 an ounce by the spring of this year, and somewhere around $1,800 by year end. With respect to silver however, my crystal ball was functioning much more effectively -- where I stated that I "would not be surprised to see silver break $30 an ounce next year - if only briefly".
On that high note, let me turn now to 2011. I see a minimum of three dynamics, each of which is highly probable to occur next year, and each of which would cause an eruption in precious metals markets on a scale where "predictions" are impossible and/or useless.
They include the ignition of hyperinflation (with the U.S. being the most likely focal point); massive debt-defaults (in the U.S.) or debt-restructuring (in Europe) which would inevitably lead to western bond bubbles imploding; and a major "default event" in the gold and/or silver market.
As I have pointed out recently, "hyperinflation" directly implies near-infinite prices in precious metals, making any attempt at attaching a particular finite number to gold or silver prices absurd.
Should we suffer the catastrophe of a meltdown of all western debt markets, we could see anything happen to precious metals prices -- including a short-term decline -- during the massive panic that would ensue.
Flash back to 2008. Gold and silver were the only liquid assets during that crisis, other than the (misplaced) belief that fiat currencies and government bonds represented "safe havens". In a bond market meltdown, both bonds and the fiat currencies in which they are denominated will finally be recognized as the worthless paper that they are, making precious metals the sole liquid asset in western economies.
Should a debt-heavy western government with large gold reserves be forced into liquidating their gold to stave off bankruptcy, we could see such a liquidation cause a short-term plunge in precious metals prices (before they immediately reversed back higher than ever).
Naturally, a major default in precious metals markets implies nothing less than precious metals prices going ballistic - and again attempting to attach numbers to such a scenario is plainly silly.
Instead, I will force readers to make do with my conservative "worst case scenarios" for gold and silver prices. Seeing gold as having "underperformed" in 2010, I'm going to stipulate $1,800 an ounce as a "minimum price" for gold to hit in 2011.
For silver, I've already said my most "conservative" forecast for silver is for it to increase by $10 an ounce per year -- making $40 an ounce the "minimum price" which silver will reach at some point in 2011.
In the realm of economics, I feel somewhat more certain in looking forward. With the U.S. having totally abandoned any pretense of an "exit strategy" and instead continuing to exponentially ratchet-up its debts and money-printing, 2011 will be the year that the wheels fall off.
Expect many municipal defaults in the U.S., as a number of the thousands of insolvent local governments can no longer stave-off economic collapse caused by plummeting revenues and out-of-control spending.
Some will attempt to deal with this situation by simply erasing pension and health-care obligations to current and former government workers. Similarly, one or more U.S. states will reach the point of bail-out or bankruptcy, with Illinois and California clearly the "favorites" in this derby.
The U.S. federal government will respond in the same consistent manner in which it has acted throughout recent years: Bernanke's printing-press will be cranked-up yet faster -- and hundreds of billions of dollars will be dished-out to near-bankrupt state governments (or the U.S. will face cascading debt-defaults for dozens of state governments). This will be the event which exposes the "tough talk" of Republicans to bring federal spending "under control" as nothing more than the empty rhetoric that it is.
Across the Atlantic, Europe will also reach a turning point. Europe will have to choose between hyperinflationary money-printing or bond-holders can agree to significant "hair-cuts" -- allowing euro debt-sinners to service their debts with a currency still worth more than zero.
Having grossly underestimated "stupidity" in 2010, I will not make that mistake again. The bond-holders will choose not to grant any debt-forgiveness, guaranteeing that they take massive losses as they are repaid with near worthless currency. This road to hyperinflation will be too much for Germany to stomach, triggering a break-up of the European Union, and the death of the euro.
In commodity markets, the price of oil will zoom above the $100-a-barrel level. Given that a three-digit price for crude directly implies near-term bankruptcy (or hyperinflation) for the U.S., we can expect another major "assault" by the U.S. government on commodity markets, with China likely to once again act as a tag-team partner).
In short, the world will get still crazier and more chaotic for 2011. The likely result of that is that by the end of 2011 these predictions won't be worth any more than a U.S. dollar.
So have some fun picking apart my predictions for the upcoming year, but more importantly protect yourselves. The one prediction which can be made with the utmost certainty is that things will get much, much worse before they ever start to get better.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.