Excerpts from James Turk’s forecast for 2011

General scenario: “Growing nervousness about the worth of government paper in particular and more generally, about the reliability of financial promises, will lead to a stampede out of currency-based assets.  These include government paper, corporate paper and bank deposits.  This money will move into tangible assets – particularly the precious metals – and near-tangible assets, e.g., the stocks of mining companies and other commodity producers.  In this environment commodity prices will soar.”

“…all commodity prices across the board will climb as the US dollar moves ever closer to the hyperinflationary abyssThe US government is already insolvent, but carries on like a zombie.  Not for much longer though.  The direct federal debt (ignoring the tens of trillions of its contingent liabilities) is $14 trillion, an increase of nearly $5 trillion in three years.  A 1% rise in interest rates adds $140 billion to the federal government’s deficit.  That $140 billion is more than 5% of annual government revenue.”

“The unspoken reason for the Federal Reserve’s QE policy is that the US government cannot afford higher interest rates.  The financial consequences are straightforward.  Higher interest rates will increase the US government’s borrowing costs, thereby raising its annual deficit, causing it to borrow even more money and therefore pay even greater amounts to meet its annual interest costs, with the result being yet a bigger deficit.”

“Clearly, what I am describing is a financial death spiral that always leads to hyperinflation when the debtor is a profligate, out-of-control spender with the ability to create money out of thin air, which all governments now do.  Rather than cutting back spending to borrow at amounts the market is willing to lend to it, a government on a hyperinflationary path keeps spending and borrowing.  The central bank steps in and turns that government debt into currency, which explains exactly the essential nature of QE.”

“The important point I am making is that the US government is already far down the road that leads to hyperinflation.  This approaching hyperinflation will be the dominant theme for markets in 2011, and everyone has to adjust their portfolio strategy for this event.  In short, the US dollar will be destroyed by hyperinflation – an eventuality that will become increasingly obvious in 2011 – unless things change right away.  I see no inclination of any change coming, so I think it is possible that hyperinflation and a collapse of the dollar could occur by the end of 2011.”

On Gold: “Gold will reach $2000 per ounce ($64.30 per goldgram) in the first half of 2011.  Look for gold to exceed $1,800 by the end of Q1.  The low for the year will be made in January, probably in the first week.  Thereafter, look for gold to continue the hyperbolic uptrend it is already tracking.”

On Silver: “Silver will reach $50 per ounce, probably in Q1 2011.  It will then take a breather by moving sideways, trading in a range between $50-$38.  It will do so in order to consolidate its tremendous gains, which if my $50 target is reached will be a more than three-fold increase in price from the year’s low of $14.82 in 2010.”

On Mining Stocks: “This year will be a great one for the mining stocks, which have been out of favor all decade long.  The bear market in mining stocks began with the collapse in Bre-X back in 1997, and it ended with the collapse of Lehman Brothers, when the juniors were totally decimated and even the best mining stocks were selling at unbelievable values.  Consequently, I expect the XAU Index will exceed 300, and I expect most of that gain to occur in the first half of 2011.”

On bonds: “Avoid all government paper, and if you own a corporate bond, make sure it is convertible into equity.”

On Bailouts: “I expect another “Lehman Brothers” event in the first half of 2011.  It might be a bank, but it could just as easily be a government.  However, if another Lehman-like event occurs, the response by gold and the mining stocks will be completely different than 2008; this time they will rise, not fall.  The event this time will be a ‘failure’, not a ‘collapse’ like Lehman.  The Lehman collapse resulted in a rush by countless overleveraged debtors to get liquid.  The failure I expect in 2011 will have a different result.  There will be a rush to safety, meaning the avoidance of counterparty risk.  The best way to avoid counterparty risk is to own gold and silver.  The second best way is to own the shares of top quality commodity producers.”

“To explain, the serial bailouts of banks and countries over the past couple of years will I expect come to a head within the next few months, i.e., in the first half of 2011.  Governments and central banks will hit a wall when the market for government paper collapses.  Look for more failed auctions like the ones we saw last year in the UK and China as well as with the ECB.”

On Policy: “The right way would be to reverse the bad policies they have been pursuing.  Any society built around a free market and protected by a rule of law that secures the right to private property needs sound money.  It can’t survive on fiat currency.  It doesn’t need bailouts that add yet more financial obligations on an already overburdened middle class.”

“The wrong way would be more of the same, particularly more government debt and monetization of that debt by central banks.  When faced in the first half of 2011 with a financial and monetary blow-up that will make the Lehman Brothers collapse look like a cakewalk, policymakers might finally see the light and be motivated to change.  We can always hope.  Or they could make matters even worse by imposing capital controls and Draconian measures like higher taxes, closing markets, forcing pension funds to buy worthless debt and probably dozens of other terrible things that governments may call remedies but really are desperate acts that damage our capitalist society.”

“Personally, I am not optimistic that governments will do the right thing.  The reason is captured in a quote in The Telegraph by Germany’s chancellor, Angela Merkel.  I am not picking on her, but am highlighting her quote because I think it accurately captures what all politicians are thinking today.  Commenting that the eurozone was “facing an exceptionally serious situation”, she went on to say “the primacy of politics over markets must be enforced.”

“Ponder that comment for a moment.  That is very scary talk.  She is in effect saying that markets be damned because politics are more important, even though it is the free market and not government that creates the wealth that raises mankind’s standard of living.”

On lifestyle: “Become self-reliant, and most importantly, do not rely on any government.  Learn from those who were not prepared for Katrina.  Even though they lived in a hurricane zone, they thought they could rely on the government to help them, but everyone who ended up in the Superdome looking for help suffered as a result.”

In sum: “A financial Katrina is coming, and I think it will hit in the first half of 2011.  It will be an unprecedented crisis because the US government is tapped out and the serial bailouts of governments and banks worldwide are coming to a head.”

“As a result, government policies that have led to monetary debasement for decades are going to accelerate in 2011.  Be ready for it.  If governments continue to follow the wrong policies and make the wrong decisions when confronting some critical moments in the months immediately ahead, then the sky is the limit for gold and silver as national currencies hyperinflate and approach a total collapse.  Consequently, everyone needs physical gold and physical silver now more than ever.”

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