2016 Fearless Gold Sector Forecast : Stay The Hell Away

Build Your Gold Watch List – but keep your portfolio in other sectors :

This past year was one of the worst ever for large mining companies, which suffered because of falling commodity prices and high leverage. They needed cash badly, and the streaming companies were more than happy to provide it. Mining giants such as Barrick Gold Corp., Glencore Plc, Teck Resources Ltd. and Vale SA all sold streams in 2015.

For junior or producing gold companies and their investors, the range of forecasts and continued volatility suggest it’s wiser to ignore the crystal balls for now and instead focus on what companies can control, like ensuring a sound business plan, keeping their balance sheets strong, monitoring costs, and building value for their shareholders.

Trends are against gold:

1) no inflation can be detected

2) rising interest rates offer a money making alternative while we watch and wait

3) global unrest in the middle East, Africa and Ukraine continue unabated but don’t move the panic button to ” buy”

4) Peter Schiff continues to see gold at $5,000  ( our best contrarian indicator )

This is the time of year when analysts roll out their economic forecasts for the New Year. For those who keep a close eye on gold prices, this can be a painful process.

It’s been another tough 12 months for the yellow metal, with prices falling for the third consecutive year — down about 10 per cent in 2015 alone. Prices touched a high in the neighbourhood of $1,300 and, as the year drew to close, they neared six-year lows around $1050.

That’s a big dive from the heady days of 2011, when gold hit over $1,900 an ounce.

What made things even more difficult for the sector in 2015 was the price volatility. Just when it appeared prices might be on a firm trajectory upward, they would then fall, creating more uncertainty among everyone from investors to gold companies.

That volatility is making it harder for prognosticators to estimate 2016 prices with any certainty. It’s the proverbial attempt to nail Jell-O to a wall.

That doesn’t prevent them from trying. But the resounding lack of consensus suggests it is a fraught exercise. Some are breathlessly proclaiming we’re on the brink of a new gold bull market. On the flip side, Goldman Sachs and JP Morgan predict it will fall to the psychologically important $1,000 US-per-ounce level — or lower — in 2016. Bank of America Merrill Lynch believes it will average $950 an ounce in early 2016 before recovering. Slightly more optimistic forecasters, like HSBC, predict gold will average $1,205 next year.

Gold is different from other metals in that its prices are not driven largely by typical supply and demand. While the prices of other metals, like copper or silver, tend to rise and fall as economies grow and shrink, a lot of different forces affect gold’s price. It’s used as a store of wealth, unlike most other metals (you don’t store copper to get rich), and it’s considered a “safe haven” — used as a hedge against political and economic uncertainty.

Inflation and the U.S. dollar are two major forces behind gold’s prices. In 2015, they didn’t work in gold’s favour. The collapse of the price of oil has kept inflation in check, which is bad for gold because of its role as a hedge against rising prices. The U.S. dollar has been strong — another blow for gold, which performs contrary to the greenback. Some say one of the reasons for the strong dollar was ongoing speculation that the U.S. Federal Reserve would raise rates for the first time in almost a decade. The Fed did that on Dec. 16, but there was minimal impact on gold due to the central bank’s dovish approach of a gradual tightening of future rates.


The dark side of metal streaming deals: Strapped mining companies trade future value for cash ( Financial Post )


In September, Robert Quartermain did something highly unusual for a mining executive — he signed a streaming deal with an early exit strategy.

Precious metal streaming companies looking to team up to tackle bigger deals

Valerian Mazataud/Bloomberg

Overwhelmed by the sheer volume of opportunities available in volatile commodity markets, precious-metal “streaming” companies are looking to team up to take on large acquisitions that they might not be able to readily afford on their own.

Continue reading.
Quartermain, the CEO of Vancouver-based Pretium Resources Inc., was alarmed at how much value miners are giving away in gold and silver stream sales, in which future output is sold at below-market prices in exchange for an instant cash infusion.

So when he sold a US$150-million stream on Pretium’s Brucejack project in British Columbia, he insisted that the deal include buyback options for Pretium in 2018 and 2019, and that it cap the number of gold and silver ounces that can be sold.

“When you start putting in higher levels of streaming, and the stream lasts forever, then the potential upside starts going to streaming holders and (away from) your existing shareholders,” Quartermain said in an interview.

This will go down as the biggest year ever for metal streaming deals, and it’s not even close. Miners have raised US$4.2 billion from 11 stream sales in 2015, according to Financial Post data. That is nearly double the US$2.2 billion raised in 2013, which is the second biggest year on record.

For the most part, mining analysts and investors have cheered these deals. But their sheer number has caused alarm for some observers, who worry that miners are giving away vast amounts of future upside once metal prices improve.

The metal streaming business was created back in 2004. In these transactions, a streaming company like Silver Wheaton Corp. gives a mining company an upfront cash payment. In return, it gets the right to buy a fixed amount of precious metals production from the miner at a fixed price that is far below the market price. The streamer can then sell the metal for a profit. The biggest players in this business are Silver Wheaton, Franco-Nevada Corp. and Royal Gold Inc.

This past year was one of the worst ever for large mining companies, which suffered because of falling commodity prices and high leverage. They needed cash badly, and the streaming companies were more than happy to provide it. Mining giants such as Barrick Gold Corp., Glencore Plc, Teck Resources Ltd. and Vale SA all sold streams in 2015.
On the surface, these deals made a lot of sense for mining companies. Their stock prices are so depressed that they do not want to even think about issuing equity. And the last thing this sector needs is to take on more debt. So they sold future metal production instead.

“When companies are between a rock and a hard place, they often sell what’s good because they can’t sell what’s bad,” said John Tumazos, an independent analyst.

The problem is that streams destroy much of the future “option value” for mining companies. Since the streaming metal is typically sold at fixed prices far below the market price, the streamers get all the benefit when market prices go up.

To take an extreme example, Silver Wheaton was buying silver from some mining companies at less than US$4 a pound in 2011, when silver prices rose to almost US$50. It was a massive transfer of wealth from mining companies to a streaming company.

Another concern is that streams can eliminate the exploration upside from a mine. If a miner has agreed to sell a fixed percentage of gold or silver production from a mine to a streamer, it will have to sell more metal if it makes a new discovery on the property and boosts production.

When companies are between a rock and a hard place, they often sell what’s good because they can’t sell what’s bad
John Ing, president and gold analyst at Maison Placements Canada, said streaming is reminiscent of hedging, in which metal is sold in fixed-price contracts. Hedging was all the rage in the gold industry in the 1990s, when prices were low. But it became a massive liability once prices rose far above the value in the contracts. Barrick had to spend more than $5 billion to unwind its hedge book in 2009.

Eventually, hedging became a toxic word in the industry. It is almost nonexistent today.

“It wasn’t until the price of gold went up that everybody realized what Barrick was leaving on the table,” Ing said.

“The same thing is going to happen (to streaming) when the price of gold goes up again. Not until then will people focus on the dark side of the streams.”

For investors that don’t like streaming, the good news is that miners are starting to preserve more upside for themselves in these transactions.

For example, Barrick struck a US$610-million stream sale with Royal Gold last August that guarantees higher sale prices down the road. For the first 550,000 gold ounces and 23.1 million silver ounces that Barrick delivers to Royal Gold, it receives 30 per cent of the prevailing spot prices. For every ounce after that, it receives 60 per cent of the spot prices. So if silver prices go up, Barrick stands to benefit.
Pretium Resources Inc.

Pretium’s Brucejack project in British Columbia.
Pretium went even further by negotiating optional buybacks of its stream and capping the total amount of gold and silver to be sold. If Pretium discovers more metal at the Brucejack project, it won’t go into the stream.

Traditional streaming companies like Silver Wheaton and Royal Gold are looking to buy streams that will last for decades, so Pretium’s deal is not for them. Instead, Pretium sold the stream to two private equity firms, Orion Resource Partners and Blackstone Group.

These companies are just looking for a good return and are not bothered by the idea of having their stream re-purchased in a few years. That is a relatively new concept in streaming, and it could be a game-changer if more private equity firms and other players decide to compete with traditional streamers.

Quartermain said his deal is proof that miners have alternatives to conventional streaming. He hopes other companies will follow Pretium’s lead and try to maintain some upside in these deals.

“We’ve shown you can, even in challenging markets, finance good projects and achieve that upside for shareholders,” he said.



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AMP Gold and Precious Metals Portfolio: The Gold Investor’s Handbook

by Jack A Bass


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China Calm Shattered: Probe Sparks Selloff in Stocks

  • Citic Securities leads losses after revealing investigation
  • Industrial profits drop 4.6% in October as slowdown deepens


  • China’s stocks tumbled the most since the depths of a $5 trillion plunge in August as some of the nation’s largest brokerages disclosed regulatory probes, industrial profits fell and two more companies said they’re struggling to repay bonds.

    The Shanghai Composite Index sank 5.5 percent, with a gauge of volatility surging from the lowest level since March. Citic Securities Co. and Guosen Securities Co. plunged by the daily limit in Shanghai after saying they were under investigation for alleged rule violations. Haitong Securities Co., whose shares were suspended from trading, is also being probed. Industrial profits slid 4.6 percent last month, data showed Friday, compared with a 0.1 percent drop in September.

The probe into the finance industry comes as the government widens an anti-corruption campaign and seeks to assign blame for the selloff earlier this year. Authorities are testing the strength of a nascent bull market by lifting a freeze on initial public offerings and scrapping a rule requiring brokerages to hold net-long positions, just as the earliest indicators for November signal a deterioration in economic growth. A Chinese fertilizer maker and a pig iron producer became the latest companies to flag debt troubles after at least six defaults this year.

Brokerages Plunge

“The sharp decline will raise questions whether the authorities’ confidence that we are seeing stability in the Chinese markets may be a tad premature,” said Bernard Aw, a strategist at IG Asia Pte. in Singapore. “The rally since the August collapse was not fundamentally supported. The removal of restrictions for large brokers to sell and the IPO resumptions may not have been announced at an opportune time.”

Friday’s losses pared the Shanghai Composite’s gain since its Aug. 26 low to 17 percent. The Hang Seng China Enterprises Index slid 2.5 percent in Hong Kong. The Hang Seng Index retreated 1.9 percent.

A gauge of financial shares on the CSI 300 slumped 5 percent. Citic Securities and Guosen Securities both dropped 10 percent. Haitong International Securities Group Ltd. slid 7.5 percent for the biggest decline since Aug. 24 in Hong Kong.

The finance crackdown has intensified in recent weeks and ensnared a prominent hedge-fund manager and a CSRC vice chairman. Citic Securities President Cheng Boming is among seven of the company’s executives named by Xinhua News Agency as being under investigation. Brokerage Guotai Junan International Holdings Ltd. said Monday it had lost contact with its chairman, spurring a 12 percent slump in the firm’s shares.

An industrial explosives maker will become the first IPO to be priced since the regulator lifted a five-month freeze on new share sales imposed during the height of the rout. Ten companies will market new shares next week. The final 28 IPOs under the existing online lottery system will probably tie up 3.4 trillion yuan ($532 billion), according to the median of six analyst estimates compiled by Bloomberg.



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End The Greek Ponzi Scheme: Cut Greece Loose


Now come Greeks bearing the gift of confirmation that Margaret Thatcher was right about socialist governments: “They always run out of other people’s money.” Greece, from whose ancient playwrights Western drama descends, is in an absurdist melodrama about securing yet another cash infusion from international creditors. This would add another boulder to a mountain of debt almost twice the size of Greece’s gross domestic product. This protracted dispute will result in desirable carnage if Greece defaults, thereby becoming a constructively frightening example to all democracies doling out unsustainable, growth-suppressing entitlements.

In January, Greek voters gave power to the left-wing Syriza party, one third of which, The Economist reports, consists of “Maoists, Marxists and supporters of Che Guevara.” Prime Minister Alexis Tsipras, 40, a retired student radical, immediately denounced a European Union declaration criticizing Russia’s dismemberment of Ukraine. He chose only one cabinet member with prior government experience — a leader of Greece’s Stalinist communist party. Tsipras’ minister for culture and education says Greek education “should not be governed by the principle of excellence … it is a warped ambition.” Practicing what he preaches, he proposes abolishing university entrance exams.

Voters chose Syriza because it promised to reverse reforms, particularly of pensions and labour laws, demanded by creditors, and to resist new demands for rationality. Tsipras immediately vowed to rehire 12,000 government employees. His shrillness increasing as his options contract, he says the European Union, the European Central Bank and the International Monetary Fund are trying to “humiliate” Greece.

How could one humiliate a nation that chooses governments committed to Rumpelstiltskin economics, the belief that the straw of government largesse can be spun into the gold of national wealth? Tsipras’ approach to mollifying those who hold his nation’s fate in their hands is to say they must respect his “mandate” to resist them. He thinks Greek voters, by making delusional promises to themselves, obligate other European taxpayers to fund them. Tsipras, who says the creditors are “pillaging” Greece, is trying to pillage his local governments, which are resisting his extralegal demands that they send him their cash reserves.

Yanis Varoufakis, Greece’s finance minister, is an academic admirer of Nobel laureate John Nash, the Princeton genius depicted in the movie “A Beautiful Mind,” who recently died. Varoufakis is interested in Nash’s work on game theory, especially the theory of co-operative games in which two or more participants aim for a resolution better for all than would result absent co-operation. Varoufakis’ idea of co-operation is to accuse the creditors whose money Greece has been living on of “fiscal waterboarding.” Tsipras tells Greece’s creditors to read “For Whom the Bell Tolls,” Ernest Hemingway’s novel of the Spanish Civil War. His passive-aggressive message? “Play nicely or we will kill ourselves.”

Since joining the eurozone in 2001, Greece has borrowed a sum 1.7 times its 2013 GDP. Its 25 per cent unemployment (50 per cent among young workers) results from a 25 percent shrinkage of GDP. It is a mendicant reduced to hoping to “extend and pretend” forever. But extending the bailout and pretending that creditors will someday be paid encourages other European socialists to contemplate shedding debts — other people’s money that is no longer fun.

Greece, with just 11 million people and 2 per cent of the eurozone’s GDP, is unlikely to cause a contagion by leaving the zone. If it also leaves the misbegotten European Union, this evidence of the EU’s mutability might encourage Britain’s “Euro-skeptics” when, later this year, that nation has a referendum on reclaiming national sovereignty by

withdrawing from the EU. If Greece so cherishes its sovereignty that it bristles at conditions imposed by creditors, why is it in the EU, the perverse point of which is to “pool” nations’ sovereignties in order to dilute national consciousness?

The EU has a flag no one salutes, an anthem no one sings, a president no one can name, a parliament whose powers subtract from those of national legislatures, a bureaucracy no one admires or controls and rules of fiscal rectitude that no member is penalized for ignoring. It does, however, have in Greece a member whose difficulties are wonderfully didactic.

It cannot be said too often: There cannot be too many socialist smashups. The best of these punish reckless creditors whose lending enables socialists to live, for a while, off other people’s money. The world, which owes much to ancient Athens’ legacy, including the idea of democracy, is indebted to today’s Athens for the reminder that reality does not respect a democracy’s delusions.

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Economic Updates : 2015 Forecast / Deflation

Two New Articles

1) Outlook for U.S. and global economies next year is cautiously optimistic

WTI – and Gold – Drops on Date – as Global Manufacturing Misses Estimates

West Texas Intermediate crude fell amid speculation that weakening manufacturing from Germany to China will cap global oil demand. Brent declined in London.

Futures dropped as much as 1.2 percent from the Aug. 29 close. Floor trading in New York was shut for the Labor Day holiday, and transactions will be booked for settlement purposes today. Purchasing manufacturing indexes for Germany, Italy, the U.K. and China all came in below estimates for August, while OPEC’s output increased to the highest level in a year.

“All eyes are on the demand side, and weaker statistics for example in China are bearish,” Bjarne Schieldrop, chief commodity analyst in Oslo at SEB AB, said by telephone. “The increase in tension between Russia and Ukraine is bearish for oil” because economic sanctions on Russia may eventually result in a slowdown in Europe, he said.

WTI for October delivery declined as much as $1.19 to $94.77 a barrel in electronic trading on the New York Mercantile Exchange and was at $94.88 at 1:46 p.m. London time. The volume of all futures traded was more than double the 100-day average for the time of day. Prices decreased 2.3 percent last month and are down 3.6 percent this year.

Brent for October settlement was $1.11 lower at $101.68 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude traded at a premium of $6.83 to WTI, compared with a close of $7.23 on Aug. 29.

Factory Output

China’s manufacturing slowed more than projected last month, joining weaker-than-anticipated credit, production and investment data in indicating that the economy is losing momentum. The nation is the world’s second-largest oil consumer.

Markit Economics’ euro-area gauge slid more than initially predicted, with the index for Italy unexpectedly falling below 50, signaling the first contraction in 14 months. In the U.K., manufacturing expanded by the least in more than a year.

A final reading of Markit’s U.S. manufacturing PMI is due today, along with the Institute for Supply Management’s factory index for August, which economists forecast will drop to 57, from 57.1 in July.

“There are slowdowns occurring,” Jonathan Barratt, the chief investment officer at Ayers Alliance Securities in Sydney, said by phone. “OPEC is producing enough oil to placate any issues.”

Production from the 12-member Organization of Petroleum Exporting Countries rose by 891,000 barrels a day to 31 million in August, according to a Bloomberg survey of oil companies, producers and analysts. Nigeria, Saudi Arabia and Angola led supply gains as new deposits came online, security improved and field-maintenance programs ended. Iran and Venezuela were the only members to reduce output.

Ukraine warned of an escalating conflict in its easternmost regions as U.S. President Barack Obama headed to eastern Europe to reassure NATO members. Ukraine’s army will take on Russia’s “full-scale invasion,” Defense Minister Valeriy Geletey said on Facebook, a shift away from the government’s earlier communication that focused on battling insurgents.

Dollar Strengthens Before Data as Bonds Decline With Gold

The dollar strengthened to a seven-month high against the yen, government bonds tumbled and gold fell before data that analysts forecast will show expansion in U.S. manufacturing.

The dollar climbed 0.6 percent to 104.93 yen at 8:42 a.m. in New York and gained 0.4 percent to $1.6535 per British pound. Yields on 10-year Treasury notes increased four basis points to 2.38 percent. Futures (SPX) on the Standard & Poor’s 500 Index added 0.1 percent after the index rallied the most since February last month. Gold dropped 1.5 percent.

U.S. investors return after the Labor Day break with manufacturing and construction spending reports. Gauges of factory output in Europe and China signal slower growth, boosting speculation that policy makers will need to boost stimulus measures. European money markets are pricing in about a 50 percent probability that the European Central Bank will cut interest rates by 10 basis points this week, according to BNP Paribas SA.

“In the U.S. across the board we have had strong data,”said Niels Christensen, chief currency strategist at Nordea Bank AB in Copenhagen. “That will keep growth momentum going. We have had a positive dollar trend for the past two months. I find it difficult to see this trend is going to disappear in the short term.”

U.S. Reports

The Institute for Supply Management’s August factory gauge probably held last month near the highest since April 2011, according to the median of 70 estimates in a Bloomberg survey. Another report probably will show U.S. construction rebounded in July, a Bloomberg survey showed. Reports yesterday signaled manufacturing slowed in China, the U.K. and the euro area.

The yen fell to its lowest level against the dollar since Jan. 16 amid speculation Japan’s Prime Minister Shinzo Abe will appoint an ally to head the ministry in charge of reforming the Government Pension Investment Fund, potentially boosting investment overseas. The currency weakened to 105.44 on Jan. 2, a level not seen since October 2008.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, climbed 0.3 percent to 1,033.71 and touched 1,034.16, the strongest since January.

The pound weakened after a YouGov Plc poll showed growing support for Scottish independence before this month’s referendum. One-month implied volatility on sterling versus the dollar jumped by the most in almost six years.

Government Bonds

European government bonds fell as Germany’s 10-year yield increased four basis points to 0.91 percent and the U.K.’s rose five basis points to 2.43 percent.

The euro overnight index average, or Eonia, which measures the cost of lending between euro-area banks, fell to a record minus 0.013 percent yesterday.

Corporate borrowing costs fell to a record in Europe, with the average yield demanded to hold investment-grade bonds in euros dropping to 1.28 percent, according to Bank of America Merrill Lynch index data. The gauge declined 19 basis points in the past month on stimulus speculation.

The Stoxx 600 of European shares fell 0.1 percent after increasing 0.5 percent in the past two days.

Vallourec SA climbed 4 percent after UBS AG advised investors to buy shares of the French producer of steel pipes for the oil and gas industry. Weir Group Plc gained 2.9 percent after Credit Suisse Group AG raised its recommendation on the British supplier of pressure pumps to outperform from neutral.

Mast Therapeutics Spec BUY

Target: US$3.00

Mast Therapeutics is a biopharmaceutical company
focused on its Molecular Adhesion and Sealant
Technology (MAST) platform to treat serious diseases
with significant unmet needs. Its lead product,
investigational agent MST-188, shows potential in
patients with sickle cell disease.
All amounts in US$ unless otherwise noted.

Life Sciences — Biotechnology
Investment recommendation
Reiterate BUY; $3.00 target on MST-188 potential in sickle cell disease
crises. MSTX’s lead candidate, MST-188, binds to hydrophobic surfaces on
damaged cells to reduce cell adhesion and blood viscosity. We expect
positive data from the Ph3 EPIC trial to show reduced length of SCD vasoocclusive
crisis (VOC) and we think recently acquired AIR001, nebulized
nitrite for PAH, complements MST-188 well. We see large market potential
for MST-188 given the unmet need in SCD and potential for combo-Tx. Our
$3.00 target is based on a pNPV analysis.
Investment highlights
 MSTX yesterday announced signing of a definitive agreement to buy
Aires in an all-stock transaction. Aires will bring along its Ph2 orphan
asset AIR001, a nebulized form of nitrite (converted in vivo to nitric
oxide) for pulmonary arterial hypertension (PAH). Nitric oxide is
thought to have potential benefits for PAH, SCD and CV disease (e.g.,
heart failure) by promoting vasodilation and regulating smooth muscle
proliferation, clotting and white blood cell adhesion.
 Aires cash balance to offset cost of AIR001 development in 2014.
Aires will bring ~$3M net cash to MSTX, which should cover ~$2M in
expected current R&D obligations from the Ph2 PAH trial currently
closing down and an investigator-sponsored PAH/HF trial.
 Next value inflection catalysts now likely from Ph2 strategies in ALI,
HF although largest inflection remains EPIC SCD data in Q4/16. We
expect next major data around H2/15 from a Ph2 acute limb ischemia
trial MAST intends to initiate soon. We think Ph3 EPIC enrollment is
on track to finish by EOY 2015 with new enrollment criteria
expansion, and we expect more updates on Ph2 ALI trial and plans for
AIR001 plans in the coming quarters.

Is The Fed Running A Ponzi Scheme

Madoff’s Ponzi Scheme Looks Like a Joke Compared to This

By Michael Lombardi, MBA for Profit Confidential


The “Bernie” Madoff name became famous while the stock market was falling during the credit and financial crisis. He was responsible for running one of the biggest Ponzi schemes in U.S. history—if I recall correctly, it was a $65.0-billion scheme. But as the scam got bigger, Madoff couldn’t go on. He was caught, prosecuted, and sentenced to more than 100 years in jail.

What did we learn from the Madoff ordeal? At the very least, we learned Ponzi schemes eventually become impossible to hide, no matter how smart and cunning the perpetrator.

Wednesday of this week, we learned that the Federal Reserve’s Ponzi scheme of printing paper money and giving it to the government via the purchase of U.S. Treasuries will go on.

While the Fed says it wants to keep the “stimulus” going until the economy gets better, as I have written in these pages many times, the Fed cannot stop printing because if it did stop, three things would happen: 1) the stock market would collapse; 2) housing prices would fall; and 3) the government would have no real buyer for its debt (especially in light of China and Japan pulling back on buying U.S. Treasuries).

Madoff’s $65.0-billion Ponzi scheme is nothing when I look at the U.S. national debt figures. While it looks like we are beyond the point of no return, our national debt level would have to double from $17.0 trillion to $34.0 trillion before our debt-to-gross domestic product (GDP) ratio matches that of Japan. (And don’t for a moment think that’s not going to happen!)

In 2011, only two years ago, we heard Congress debate whether they should increase our national debt limit or not. The theater of a government shutdown was on for a while; it drove key stock indices lower and bond yields higher. Now we’re at square one again. Secretary of the Treasury Jack Lew sent a letter requesting an increase in our national debt limit by October, or the U.S. economy would face a risk of default.

The bottom line, dear reader, is that the U.S. government is broke. To keep the government afloat from now until Congress passes a new national debt limit, the government has stopped investing into the pensions of federal government workers.

I don’t for a second doubt that Congress won’t raise the national debt limit—it will; it has done just that 78 times since 1960. Why would this time be any different?

What has happened so far—the massive printing of paper money—is just one part of the puzzle. The Ponzi scheme is complex and has many moving parts. The government’s failure to clamp down on spending is the main problem.

In the 11 months of the fiscal 2013 year, the U.S. government has incurred a budget deficit of $755 billon, according to the Bureau of Fiscal Services. (So much for those estimates that said the U.S. government budget deficit would be below $700 billion this year!)

The Congressional Budget Office (CBO) expects the U.S. government to continue posting budget deficits until 2015, when it says the annual budget deficit will equal two percent of the gross domestic product of the U.S. economy. (Source: Congressional Budget Office, September 17, 2013.) I don’t buy that prediction for a moment. Interest costs on the national debt alone could be a huge problem going forward.

For the government’s fiscal year ending this September 30, the U.S. government expects to have incurred $414 billion in interest payments alone. Assuming a national debt of $16.7 trillion, this equates to an interest rate of about 2.5%. But interest rates are rising!

And the more the national debt increases, the higher the interest payment. Think what will happen once interest rates in the U.S. economy start to climb higher, and when creditors start asking for higher returns due to our massive amount of national debt. Even if our national debt doesn’t change and interest rates go back to normal (it’s going to happen), the interest payments on the national debt would rise to over $900 billion a year!

Bring Social Security liabilities into the picture, and the future looks even more gruesome. According to the Pew Research Center, every day 10,000 Americans reach retirement age. (Source: Pew Research Center, December 29, 2010.) With the financial crisis having placed pressure on retirement savings, retirees are now relying on Social Security more than ever.

Right now we are seeing the government hoping investors will keep re-investing in U.S. bonds while the Fed picks up the slack. But what happens when they say, “We want our money back?” It will make Madoff’s Ponzi scheme look like a joke.