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      The outlook for the precious metals complex in 2007 remains strong and even Wall Street pundits are predicting $725 gold and $20 silver by year's end.  In 2006, gold and silver posted significant gains of 23% and  38% respectively.  I predict that this is the year that economists, financial analysts, and average Americans will begin to realize that our nation is facing what David Walker at the GOA calls “a major fiscal crisis” as mentioned on CBS 60 Minutes on July 8, 2007. 

     This warning is similar to Steven S. Roach, chief economist at Morgan Stanley, who suggests that we only have a 10% chance of avoiding “economic Armageddon” due to economic distortions and our twin deficits in the U.S.  The Fed policy of reducing interest rates to near zero with sixteen consecutive interest rate reductions beginning in 2001 has now caused the largest speculative real estate bubble in history.  Now that rates have been raised again this is causing the inevitable contraction or bust in the so-called business cycle. 

      So how large is this asset bubble in the housing market?  Outstanding household mortgage debt in the U.S. now totals a staggering $9.4 trillion dollars.  To better appreciate how large this speculative bubble is, from 1950 to 2000 accumulated household mortgage debt totaled $4.8 trillion dollars.  In only five short years, from 2001 to 2006, the American people signed on to an additional $4.6 trillion dollars – a figure that originally took fifty years to amass!  This is very big and very dangerous.  Sub-prime lenders account for 10% or more of this mortgage debt and several companies are beginning to default to their underwriters – typically large banks.  A large bulk of securitized mortgage debt has been sold in credit derivatives markets and a significant amount is being held by foreigners like China and Japan.  The contracting housing bubble is a risk contagion that can easily spread to other capital markets and I predict that this news will get much worse as the year progresses.

      At the same time that the Fed is trying orchestrate a “soft landing” for the economy it is forced to keep interest rates high, or at least high enough to attract foreign capital, but this also slows economic activity in the U.S.  It is a classic Catch-22 scenario.  After every boom there is a bust and it is likely that the Fed will not escape receiving blame for the coming meltdown.  All the while, the Fed is monetizing the national debt at an alarming rate.  So much so that they have suspended the broad money (M-3) reports exactly one year ago (March 2006).  The actual annual inflation rate is continuing at roughly 10% or more.  Another way of putting this is that our currency is being devalued by 10% each year.  How can investors and fixed assets keep pace with this steady erosion, fraud and hidden taxation?  How long will foreigners keep underwriting our debt-based economy and hold on to our U.S. securities and currency reserves?

     According to the London Herald Tribune (2/26/07), among the forty-seven major central banks of the world the Red Chinese hold a disproportionately large amount of foreign currency reserves – nearly $1 trillion.  Of this amount, fully one-third is in U.S. dollars and the Chinese are beginning to diversify out of the U.S. dollar and U.S. securities.  This is a trend that we will begin to see more and also hear more about in the coming months.  In his new book, The Coming China Wars, Peter Navarro points out the inevitable confrontation with the U.S. and China’s willingness to commit economic warfare.  This will certainly happen if Taiwan declares independence from Red China and involves the U.S. in defending this tiny island.  Although there is a virtual news blackout on this tense geopolitical development we can expect that it will become newsworthy starting this year and definitely into 2008.  Pentagon and intelligence think tanks are very much concerned about the coming China wars and China's growing military power.