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Bullion as an Alternative to Shorting, Part 2

In Part 1, I explained that investing in bullion was a good proxy for shorting U.S. Treasuries. In this installment, I will apply that analysis to other U.S. asset-classes.


Part 1, I discussed the world's largest and most obvious asset-bubble (excluding the derivatives market): the U.S. Treasuries market. While I pointed out that this market was an obvious target for shorting, I also explained to readers why there were simply too many risks associated with shorting this opaque, and highly-manipulated market.

I explained that investing in bullion ("long") was a good proxy for shorting U.S. Treasuries, and concluded that this proxy was a safer, superior substitute for that short-position. In this installment, I will apply that analysis to other U.S. asset-classes: the financial sector, and the U.S. dollar, itself.

When Wall Street's multi-trillion dollar Ponzi-schemes imploded (based upon the U.S. housing-bubble, which they also created), it was common knowledge that the entire U.S. financial sector was leveraged by an average of 30:1. It is a matter of simple arithmetic to observe that with such extreme leverage, it only takes a loss of a little over 3% on the underlying assets to take all bets at 30:1 leverage to zero.

Given that most of Wall Street's leverage was based upon the U.S. housing market, and given that the U.S. housing market plunged by roughly 30% (in its first collapse), you don't have to be a mathematician to figure out that this was 10 times the decline necessary to take the entire, U.S. financial sector to zero.

Clearly, most U.S. banks are hopelessly insolvent. The "mark to fantasy" accounting rules, conveniently created just before the much-hyped "stress tests" of U.S. banks, can hide the bankrupt status of these corporate shells, but it certainly does nothing to change that reality.

Because these bankrupt entities (collectively) have market capitalizations in the trillions of dollars, once again we see a U.S. asset-class where shorting the market would seem like a no-brainer. However, as with the U.S. Treasuries market, as soon as we take a closer look at this sector, we see a saturation-level of corruption, and a total disconnect from all market fundamentals.

Not only does the U.S. financial sector benefit from the 24/7 market-pumping activities of the Plunge Protection Team, but it has been allowed to rig markets to a much, much greater degree through its trading algorithms. This "high-frequency trading" allows the Wall Street Oligarchs to lead around market-sheep by the nose, even more successfully than the legendary "Pied Piper" was able to lead astray children.

And when these trading-algorithms blow up, and cause all these manipulated equities to begin to revert to "fair market value," the so-called regulators simply cancel any trades they don't like -- and give Wall Street a do-over. Given that level of market fraud, it's easy to see how some of these fraud-factories could go an entire quarter where they "made money" in markets every day.

However, even this extreme level of market-rigging isn't enough to satisfy (and protect) these financial Oligarchs. As the Crash of '08 intensified, and these bankrupt-banks plunged closer and closer to their "fair market value" (i.e. zero), the Oligarchs ran crying to the SEC, hid under its skirt, and demanded "protection."

The primary perpetrators of countless billions of dollars of naked shorting (i.e. counterfeiting shares) demanded that not only should they (and only the Oligarchs) be protected from naked shorting (which was/is already illegal), but that they should be "protected" from all shorting (i.e. a total ban on shorting the stocks of these bankrupt banks).

With a level of market-rigging which exceeds anything seen in the most-crooked casinos, clearly it is much more perilous to short U.S. financial stocks than to short U.S. Treasuries. Once again, we must ask ourselves "is there a good proxy" for this short-position?

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We can answer this question by envisioning what would happen if these banks were successfully shorted, or just look at the simpler scenario of what would happen if/when investors desert this sector. As with U.S. Treasuries, it seems very obvious that those deserting U.S. bank stocks and those looking to capitalize on the exodus out of this sector would both be drawn to bullion.

These bankrupt-banks are still being depicted by media-shills as blue-chip stocks. Thus, it is only natural that when this mirage of value/stability evaporates (as the U.S. economy plunges in its next leg lower) that there will be another massive wave of investor capital looking for a safe-haven. As I have already established, U.S. Treasuries are not/cannot be considered a safe haven, while gold and silver retain their status (acquired over 5,000 years) of perfectly preserving/protecting investor wealth.

Amazingly, even after the U.S. dollar has lost 96% of its value (in the less-than 100 years in which it has been "protected" by the Federal Reserve), there are still vast numbers of media talking-heads and pseudo-analysts who refer to the U.S. dollar as a safe haven. This is despite the fact that its steady march toward zero (along with every other paper, "fiat" currency) has been accelerating in recent decades.

Beyond it abysmal market-performance, any close examination of the fundamentals of the U.S. dollar show that it is already worthless. Since the gold standard was "assassinated" by Richard Nixon in 1971 (when the U.S. defaulted on its obligations), every new unit, of every fiat currency is created through the issuance of new debt. This means that every currency unit is literally the unsecured IOU of the government which issued it. As I have observed in a number of previous commentaries, the value of any unsecured IOU of an insolvent debtor is zero (or very close to it).

By any rational analysis of debts and liabilities, the United States is clearly more insolvent than any other significant economy in the world (with $60 trillion in total public/private debt + another $70 trillion in "unfunded liabilities"). Thus, while all of this banker-paper has little value, the U.S. dollar is not only the least-valuable, but (as with U.S. Treasuries) the entire global economy has already been saturated with this worthless paper.

Once again, this is a U.S. market where taking a short position, would seem like a "sure thing." However, when we look at global "FX" markets, we see the one market on the planet which might be even more heavily-manipulated than U.S. equities markets. One of the best "reasons" as to why the U.S. dollar hasn't already acquired its near-zero value is because most of the other governments of major economies are trying to destroy their own currencies, in what is euphemistically described as "competitive devaluation."

Since all of our wealth (except for what we hold in bullion) is denominated in these endlessly "devalued" currencies, what all of our governments are trying to do is to destroy all the wealth of their own citizens. This fact alone should cause any sane individual to gather what cash he can, and immediately convert it into bullion.

The process I just described is also a way of saying that holding bullion is a "hedge" or "short" of all these fiat currencies (including the U.S. dollar). And unlike true "short positions," which always imply a high-level of risk, bullion as a proxy-short of currencies is essentially a risk-free trade.

With bullion, we not only have an asset-class which is guaranteed to retain the wealth of the holder, but it is becoming relatively more-scarce both relative to global incomes and the global population. Saying that something is "relatively more scarce" is the same thing as saying that the "good" in question is becoming relatively more valuable.

Conversely, the insane money-printing of our governments (and the bankers who goad them onward) means that these paper currencies are being diluted at the fastest rate in history. Quite obviously, any portion of an investor's portfolio which they would like to use to short all this debauched paper would be much more wisely invested through purchasing bullion.

As I continue to recommend bullion as a proxy for various other investments, it is only natural that critics would raise the issue of diversification. In the conclusion of this three-part series, I will take a close look at both the myths and realities associated with diversification.

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.