A Prediction on the Global Economy and the Gold Price

Today we read one of the best overall summaries of where the global economy currently sits.  Not from an economist.  Not from a Central Banker.  Not from a financial advisor. 

But from the Board of a slightly unusual gold company we closely follow– Seabridge Gold. 

Invest a few minutes of your time to read the full “Gold Market” excerpt from Seabridge’s most recent shareholder report, as it is also one of the best summaries of where we are heading.  

However for the pushed for time we have summarised their main points as this:  - (somewhat strangely/unluckily??? there are 13 of them!)

1. Things aren’t as rosy as they appear.
2. Another collapse in asset prices (shares, real estate) is highly likely
3. Therefore more government stimulus (read bailouts) and potential for inflation much sooner than anyone expects
4. The developed worlds banking system is still in trouble.  Prime mortgages and commercial real estate is next to fall as a new wave of mortgage resets hits the US.  Europe is no better.
5. China is in a government induced lending bubble
6. Recent banking profit increases are merely due to trading and changes in accounting rules i.e. they are not real!
7. The American consumer will not make a comeback to save the world by spending
8. Unemployment will continue to rise and stay high for many months yet
9. Worldwide government deficit funding required for this year is $5.3 trillion!  This can’t be met by savings so will be met by more money printing.
10. Central banks will purchase more gold to offset risk of currencies (See our news item “Central Banks don’t want to sell their gold” to add support to this statement
11. This deficit funding crisis poses the greatest threat to the financial system and the stability of the world’s major currencies.
12. The commonly held deflation argument ignores historical examples of inflation rising hand in hand with unemployment and negative growth.
13. Their overall conclusion: we are headed towards inflation, government redistribution of income (read higher taxes), loss of confidence in fiscal and monetary authorities, declining faith in fiat currencies and a much higher gold price.
     

Why should you believe these guys over Central Bankers, World Leaders and mainstream economists?

For one, their track record is one of predicting the current mess.  Consider this statement from their May 2007 report, and recall that this was just prior to the beginning of the current crisis:

“At Seabridge, we believe that the global liquidity boom will exhaust itself and a contraction will set in. Central Banks worldwide will try to forestall a slowdown by attempting to maintain system liquidity at any cost because they know that we are in the midst of a credit boom, not a real economic boom. Yield and credit spreads will widen as inflation expectations and perceived risk begin to mount. In these circumstances, gold will outperform all other asset classes and currencies including industrial commodities. With input costs such as oil and steel falling relative to the gold price, gold equities will outperform gold as operating margins improve. That is what we see ahead, but we cannot know when.”

Wow!  Pretty on the money so far.  Could they be wrong - yes.  But we would put more faith in those that predicted the current state of play, than governement leaders, officials and economists who did not.

The other point to note is that they are not just talking heads on TV.  They have “skin in the game”.  If they get this wrong and the global economy is in fact a-okay and the gold price goes down, they go broke. 

You see, their entire business model is based upon a rising gold price.  They foresaw this current crisis and when the gold price was very low at the turn of the century they snaffled up gold resources cheaply with the intention of holding them while the gold price rose.  They don’t operate gold mines but rather just “find, evaluate, acquire, explore and develop gold deposits”.  In fact they actually sell mines that are ready to produce or partner them out to larger companies. 

As they say on their website Seabbridge Gold’s objective is “effectively turning cash into gold, contrary to the gold industry’s current practice of converting gold into cash flow”.

They are turning their cash into gold – have you considered doing the same with some of yours too???

 

 

Do you agree with us and Seabridge?  Leave a comment below either way.

Let’s Audit the Federal Reserve!

There is a growing wave of support for an audit on the US Federal Reserve (the entity that controls the US money supply).  And our favourite US congressman Senator Ron Paul is leading the way.  He is trying to pass a Bill that will do exactly that.
 
Basically the Bill wants more openess from the Federal Reserve and it also wants restrictions placed on them.  The problem in the past with the Federal Reserve is that they were meant to protect the consumer.  How much protection was there when all these Sub Prime mortgages were handed out to anyone wanting to buy a house? Zilch!!!!
 
In 1994 Congress gave the power to the Federal Reserve to ban sub prime mortgages and limit credit abuse, but do you think Alan Greenspan did anything about it?  Again Zilch!!!!
 
With this new bill seeking to be passed by Ron Paul, there will be restrictions on how much the Federal Reserve will be allowed to protect the consumer.  The power will be taken away from the Federal Reserve to “protect the consumer”. Perfect and about time!!!!
 
This Bill is also going to prohibit the Federal Reserve from dishing out billions of dollars to failed companies.  Why was a failing insurance company like AIG given a $82billion handout?  Let them go the way any failed business should go.  Wind them up and call in the receivers.  But no, the Federal Reserve decided to pump billions into this institution. What do the Federal Reserve know that they are keeping away from the public?  Why was it too big to fail?  Does it have something to do with this derivative ticking time bomb?  I think so!!!
 
And lastly, the Bill will open up the Federal Reserve to highlight what they are buying up themselves.  And how about we do an audit on how much gold the USA really has.  Or have they lent that out to suppress the price of Gold?
 
If the USA want to be a truely democratic country, then the very highest level of the money chain should be transparent for all to see. If it’s not transparent, then what are they hiding from the public? Lets find out what it is. Maybe there is less gold in Fort Knox than we think; Maybe it has been leased out to supress the price of Gold

Lets use the internet to get the Ron Paul Bill passed.  Given the US dollar is the world’s reserve currency, a more transparent Fed will be good not only for the US but for the rest of the world as well.

Update: 2 Sept 2009 - According to the Business Insider, it seems the bill has a good chance of being passed.  Though it still remains to be seen if “the powers that be” manage to get it blocked somewhere along the line.  The ultimate power to print money is not given up easily…

Learn more about the Federal Reserve, the structure of the global monetary system and how while this structure may be inherently unfair, you can profit from it nonetheless.  Get access to our FREE 8 part eCourse now.

Weekly Wanderings 25 August 2009

In this new addition to the site we try to make some sense of the financial world.  These weekly meanderings, will introduce you to commentators that we find to be sharp and on the ball, and to news items that have grabbed our attention over the past week, and why we see them as important.  Don’t forget we continually update our articles elsewhere on the site as well…

 

I always check out Prieur du Plessis each week. He writes the investment blog: Investment Postcards from Cape Town, and  every few days posts a list of items that he has recently come across. There is generally a gem or two to be found among the list, which include audio and video clips as well as web articles. Prieur is well connected around the investment world, and he is smart and thoughtful. Here are a couple of items he posted recently…

• Nouriel Roubini (Financial Times): The risk of a double-dip recession is rising

Nouriel is a leading economist who, contrary to some,  actually saw the crisis coming last year. Now, he discusses the way things are shaping up.

“The recovery will be far less robust than the optimists think. There is now a rising risk of a double-dip W-shaped recession if oil, energy and food prices continue to rise - as they are now - faster than economic fundamentals warrant”.

• Floyd Norris (The New York Times): America may need to find another financier, August 21, 2009.
  Floyd often has pertinent observations to make.

As the United States rolls up record budget deficits, Asian countries are showing a reduced willingness to finance the debt. The US treasury is being forced to sell huge amounts of treasury bonds, just to keep the economy from collapsing.

We say: the current rate of offerings for sale is running at five trillion dollars per year. Can anyone spell the word “U-N-S-U-S-T-A-I-N-A-B-L-E”?

 

Meanwhile, over at King World News, Eric King presents a fascinating selection of interviews each week. Eric is a long-time friend of Jim Puplava at FinancialSense.com, and has often been a guest on Jim’s radio show that he presents each weekend. Eric has also stepped in and acted as a host himself on occasion.

Eric is another extremely astute observer of the financial scene, and particularly of the precious metals market. He is also very well connected in that business, and even though King World News hasn’t been running long, the site has hosted some excellent interviews with such heavyweights as Dr Marc Faber of the Boom Doom and Gloom report, Bill Fleckenstein of Fleckenstein Capital and Gerald Celente of Trends Research Institute. There are also weekly reports from Ted Butler on the metals market and Barry Ritholz on the business week plus lots of other good stuff.

This week, there was quite a discussion on silver; check out,  amongst others, the audio file which contains an excellent interview by Eric of Bob Quartermain, CEO of Silver Standard Resources.

 

Meanwhile, the Fed is meeting at Jackson Hole, Wyoming……..

A Reuters story appeared, headlined Fed Official: Rates to Be Kept Low Past Upturn.  It began…

“Financial markets have not fully understood that the U.S. Federal Reserve’s pledge to keep interest rates exceptionally low for an extended period means they will stay low beyond when officials normally would raise them, a top Fed official said on Friday. ‘I don’t think markets have really digested what that means,’ St. Louis Fed President James Bullard said in an interview.”

 A prize for all those who can see the I-N-F-L-A-T-I-O-N coming down the pike…….

 

That’s all for this week, folks. Look for us again next week.

Zimbabwean Dollar backed by Gold?

Zimbabwe’s Central Bank Governor Gideon Gono has suggested reviving the Zim dollar by linking it to the gold reserves they hold in the country.  “We can even print gold coins.  The Zim dollar can then gain as it is anchored on gold. We need to think outside the box.”

Wouldn’t that be Ironic?

Not surprisingly the locals don’t have a lot of trust in Mr Gono as he was the same reserve bank Govenor that was responsible for the mad money printing and last years resultant 230,000,000% inflation!  A multi currency system introduced put the brakes on the government money creation and therefore has tamed inflation.  But Zimbabwe is left with incredible unemployment which reached 95% earlier this year, so no production equals no money.

Interestingly a gold backed currency would make it very difficult for the Zim government to go down this road again, however they have a long road ahead to restore agricultural production - previously the mainstay of their economy. An outcome that appears unlikely with the same crooks at the top.  Zimbabwe is further proof that all fiat currencies eventually return to their true inherent value - ZERO!  Beware the current actions of Central Bankers throughout the World.

China reduces US treasury holdings

Following on from last months news item that China doesn’t trust the US Dollar, further evidence of the fact care of China Daily….

China has reduced it’s net holdings of US treasury debt by 3.1% to $776.4 billion during the month of June 2009.  This is Chinas first reduction this year, but it’s the biggest percentage drop since 2000, and is another sign that China is getting nervous about holding so many US dollar denominated instruments.  

It’s possible this was to help fund some of the many overseas asset purchases that they’ve been scooping up recently.

Note: China and Japan hold approx 45% of US treasury Securities, or close to $1.4 trillion between them.  Source Wikipedia.

There won’t be any housing led recovery in NZ anytime soon

As we discussed in “Green Shoots? – Don’t believe the hype”, we believe comments coming from world and central bank leaders and economists that the worst of the recession may be behind us are likely very premature.

They’re still coming though.  For example here in New Zealand, BNZ bank economists recently stated that the housing market may drive the first stages of economic expansion after an 18-month-long recession that may be all but over.    Housing has fallen enough to spark a “significant bounce” in activity in the next 12 months, BNZ says. But that will come through a rise in house building, not another house-price boom.

If house prices did take off again, it would be a “bad sign” for the economy, suggesting few had learnt the lessons of the past.  The leading indicator for housing is sales turnover, which slumped by two-thirds to about 4000 in May. Sales have since improved to more than 6000 a month. That is still about half peak levels, but the demand for housing is buoyed by rising net migration, which could reach 30,000 over the next year, BNZ says.  At the same time, house-building approvals are down to record lows, suggesting not enough homes are being built to meet demand.  House building should also get a boost because the cost of debt is falling and shorter-term interest rates are expected to stay low until late next year.  Household spending usually follows house building. Retail spending should start to creep up late this year, supported by tax cuts and net migration, BNZ says.  That will be offset by the impact of unemployment rising to just under 8 per cent and higher savings rates.

So BNZ believe - as do many - that rising net migration and record low new building approvals will lead to growth in the property market.  Albeit in construction rather than house prices they hope.

However a recent interest.co.nz report shows that currently there is an oversupply of rental property with high vacancy rates and rents actually decreasing.  It is hypothesised that this is due to people downsizing, reducing work travel distances or moving into shared accommodation.  Also that students may be moving back in with Mum and Dad.  All likely solutions in tougher times we should think.

The “net migration causing housing market growth” argument seems to ignore the fact that in a struggling economy it is possible that these people returning to or migrating to NZ may struggle to find employment themselves. 

We reckon this may even be happening already.  Last week ASB reported on the latest unemployment numbers (emphasis added ours)…

The unemployment rate increased sharply to 6% from 5%, despite the number of employed holding up better than we expected. Rather than job losses, the increase in unemployment reflects an increase in the number of job seekers.  The pool of job hunters increased due to growth in working age population. Also contributing to the increase was the rise in participation. The size of labour force increased 0.6%, and, combined with a 0.4% loss in employment, pushed the unemployment rate up a full percentage point. The last time unemployment jumped by a full percentage point was in September 1988.

So while there are not as many job losses, (if you believe the numbers - read our previous article here for why you shouldn’t) there is an increase in the number of people looking for work.  ASB go on to explain how usually in a weak labour market there is a drop in the number of people actively looking for work as they give up searching or else study instead.  This isn’t occurring and they surmise this may be due to “the higher indebtedness of households compared to previous recessions.”   No kidding – if you’ve got a monster mortgage you most likely won’t say “Forget this looking for work malarkey, I’m going off to get a student loan”.

But could it also be that “net migration”, the supposed salvation of the New Zealand property market, is also adding to the numbers looking for work?  We don’t see it as being too long a bow to draw that the numbers looking for work are also going up due to migrants arriving and not finding work in a down economy.  And if the green shoots of recovery wilt as we believe will happen in the not too distant future, then it’s not going to get any easier for migrants, or anyone else for that matter, to find work.

So our argument linking these stories together – patience, we are getting there slowly -  is that…

If the “net migrants” can’t find work, they may also struggle to afford to purchase a home.  Given that the disparity between the cost of buying versus renting is still so great, and there is a surfeit of rental accommodation, it would seem a reasonable argument that a portion of this increase in population may end up renting not necessarily by choice, but by circumstance.  The “housing shortage” is only a shortage if there are enough people looking to buy. 

This would make the BNZ and many in the mainstreams argument of any housing led recovery null and void we reckon.  Therefore a temporary blip up in house prices now, but more pain to come in the form of higher unemployment and more house price declines in the near future.

Do you agree?  Leave a comment below.  We like a good argument discussion!

Why the 6% unemployment rate is a fallacy

The 6 August 2009 Statistics New Zealand press release for the Household Labour Force Survey told us that…

In seasonally adjusted terms, the unemployment rate continued to rise, reaching 6.0 percent during the June 2009 quarter… Both the number of people unemployed and the unemployment rate have been increasing for the past six quarters.

The unemployment rate rose by 1.0 percentage point during the June 2009 quarter, the largest quarterly increase since the September 1988 quarter.

No major surprises that the unemployment rate is rising but the 6% unemployment rate only tells part of the story.  Here in NZ just like in most other western countries the calculation which determines the unemployment rate is not as simple as who doesn’t have a job taken as a percentage of the population.

Without drowning you in university level statistics a few important and little known facts about the unemployment rate as per the Statistics NZ website include…. 

You are classed as employed if you work for 1 hour or more a week, even if this 1 hour is unpaid in a family business. 

To be considered unemployed you must be “without a paid job, available for work and had… actively sought work in the past four weeks…” 

So if you’ve just been down sized from 40 hours to 10 the unemployment rate doesn’t take you into account.  In fact as long as you are still working one hour a week you are still “employed” and so not included in the unemployment rate.  And as per the above definition if you’re a 19 year old whose just lost your job but your parents get you to work at least 1 hour in the family business to help pay for your board, you are also officially “employed”. 

You are also not classed as being in the labour force and therefore not included in the survey where you are:

• attending educational institutions
• having personal or family responsibilities such as unpaid housework and childcare
• not actively seeking work 

So therefore if you have given up searching for work and instead choose to study further you do not appear in the numbers.  Or if you have simply given up looking for work (i.e. as per the definition - you haven’t actively sought work in the last 4 weeks) you are also excluded.  Also anyone on a sickness benefit is also excluded. 

So you can see the definition of employed is very broad, while the definition of unemployed has quite specific provisos placed upon it. 

(The video cartoon below gives a humerous take on just who is and who isn’t included in the unemployment numbers…)

 

All in all, you can see the current rate of 6% likely significantly misrepresents the number of people who have lost their job or had their hours of work reduced. 

And we won’t even get into discussing “seasonal adjustments” and how these can skew numbers. 

While the specifics of how rates are calculated vary from country to country most, like here in New Zealand, use the international standard definitions specified by the International Labour Organization.  In the USA the official rate is currently running at 9.7%.  However a private company, Shadow Government Statistics, uses previous definitions which have changed over the decades to exclude categories like “discouraged workers” - meaning you’ve given up looking for work - to determine the actual unemployment rate.  Thus they show the true US unemployment rate to be over double the official number at more than 20%! 

As Mark Twain said - There are 3 kinds of lies: Lies, damned lies and statistics.   

While “numbers don’t lie”, the people who construct the definitions that determine how the numbers are interpreted still can.  So you can see, it pays to look closely at government statistics no matter where in the world you live.

Central Banks don’t want to sell their Gold

Central banks have just signed a new Central Bank Gold Sales Agreement that reduces the quota of gold bullion they can sell each year by 20%, down to 400 tonnes.  However in the last 5 years central banks gold sales had only reached about 75% of the previous agreements limit anyway. 

It seems that Central banks are becoming more and more reluctant to part with their gold bullion holdings and some like China as per our recent report here, are actually more likely to be adding to their reserves in the future.  We think it is worth taking note of the fact that Central Banks would prefer to have more bullion on hand compared to other paper based currencies.  The full Reuters article apptly titled ”The investment case for Gold” is here.

U.K. Royal Mint Doubles Gold Output

The UK royal mint has doubled it’s gold output over the last year due to surging gold investment demand.  However gold production fell 41% in the second quarter compared to the prior quarter.  This was while global stock markets surged higher.  Could it be that everyone thinks it safe to get back in the water, hence the recent drop off in demand for gold?  We would be inclined to think the opposite.  The full bloomberg article is here.

Gold Bull Market Resumption in second half of 2009?

Chris Puplava over at FinancialSense.com has recently published an article discussing possible strength of the gold market in the second half of 2009.

We provide a link to the article here, and we summarize his arguments below, with our added comments highlighted in red.

Over the last year Chris has developed two proprietary gold market technical indicators which purport to indicate market direction in the gold price. They have certainly proved their worth at indicating market tops and bottoms in the past, and right now they are indicating extremely oversold conditions in the gold market, thus suggesting that we are close to an important low.

There are seasonal patterns also in the gold market, and typically the seasonal pattern for gold is for strength in the second half of the year.

The Market Vectors Gold Miners (GDX) exchange traded fund is also suggesting that we are are close to an important low.

Perhaps most significantly, the US dollar is currently at an important inflection point. Chris goes into this in some detail; we would like to emphasize further that there are important ramifications arising from the “Obama Health Care plan” - if this gets passed, then it commits the US government to considerable extra expenditure - this at a time when the Treasury is already haemorrhaging red ink.

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