How and why China will flood the gold market

Back in August we reported that the Chinese Government was encouraging it’s citizens to purchase gold and silver and why they might be doing it.  Here’s some more on the subject from Casey Research’s Jeff Clark…

 

By Jeff Clark, Editor, Casey’s Gold & Resource Report

As you read this, the Chinese government is doing an extraordinary thing… something nearly unheard of in the modern world.

It is encouraging citizens to put at least 5% of their savings into precious metals.

The Chinese government is telling people gold and silver are good investments that will safeguard their wealth. After last year’s meltdown in the stock market, people believe it. After all, Chinese citizens don’t receive government retirement money… and they don’t have company pension plans like people in many other countries do.

This is why folks in China are lining up outside of banks, post offices, and the new official mint stores to buy gold and silver (they especially like silver because it’s cheaper per ounce).

The Chinese attitude toward gold and silver is a striking contrast to the American attitude right now. I don’t recall a TV or radio ad from my congressman or President Obama encouraging me to buy gold or silver. Does your bank sell silver bars? Are gold mints popping up in your neighborhood? Are any of your friends, family, or coworkers scrambling to buy precious metals?

In spite of a few ads on television and satellite radio, buying gold and silver in the U.S. is still largely seen as a fringe-group activity. That’s not the case in China. And in the big picture, there are three distinct trends occurring in China today that many in the Occidental world are not paying attention to.

First, look where China stands as a gold-producing nation.

 

In 2008, China produced 9,070,000 ounces of gold, exceeding all other countries. Further, its production continues to rise, while many of the top-producing countries are in decline.

Second, China had the lowest per-capita gold consumption of any country over the past half-century. This year, it is widely expected that Chinese demand for gold will surpass that of India. In other words, they’ll also become the world’s No. 1 retail buyer.

Third, the Chinese government has been using its foreign exchange reserves to buy gold – a lot of it – and doing so on the sly. This past April, Chinese officials made a surprise announcement that they had been secretly buying gold since 2003, increasing their gold reserves by 76% to 33,886,000 ounces. The Chinese government now owns 30 times the gold it held in 1990. And China is believed to be a leading candidate to buy some or all of the 12.9 million ounces the International Monetary Fund says it will sell.

But all this production and all this buying isn’t enough…

Even though China is the world’s seventh-largest holder of gold, gold comprises but a tiny fraction of its reserves, as shown in the table below.

 

What would happen to the gold price if China increased its gold reserves to just 5%? What about 10%? To overtake the U.S. as king of the gold hill, it would have to buy all the gold held by the governments of France, Italy, and Germany combined. Can China really do any of that?

At $1,000 gold, to push China’s gold holdings to 5% of reserves would take $55.3 billion; to 10% would cost $144.4 billion; to be the world’s top gold dog would run $227.6 billion.

Chinese reserves are approaching $2.3 trillion, of which almost 70%, or $1.6 trillion, are denominated in U.S. dollars. The cost to become the world’s biggest holder of gold would be a pittance compared to the amount of money China has available. In other words, money is not a problem.

Combining the country’s massive holdings of dollars and the very real likelihood those dollars are going to lose much of their value, the motivation to buy tangible assets is urgent.

Further, keep this in mind: China’s reserves continue to grow. Therefore, the country must continue buying gold (or consuming its own production) just to maintain the small gold-to-reserves ratio it has, let alone increase it.

In addition to the government buying precious metals, Chinese citizens will continue gobbling them up, too. Demographics alone tell us why.

Government statistics show the average urban household in China has about US$1,300 in disposable income. Multiply that by the number of urban households in China and you come up with roughly $36 billion in available capital.

According to precious metals consultancy CPM Group, about 9.5 million ounces of gold will be turned into coins this year (including “rounds” and medallions). At $1,000 gold, that’s $9.5 billion, or only about one-third of the capital available in China.

The number is more striking for silver: Total coin production this year is expected to hit 35 million ounces, equaling $615 million or just 1.7% of the available capital in China. Of course, a lot of Chinese people want cars and refrigerators, etc., but it won’t take much of a shift of this capital into gold and silver to have a major impact on the global retail precious metals market. It may already be under way.

And long-term projections show the demographic trend won’t slow down: The middle class in China is expected to increase by 70% by 2020. So over these next 10 years, more Chinese and more money will be coming into the precious-metals markets, all at a time when inflation is almost certain to be high, adding to gold and silver’s appeal. Couple this with China’s long-standing cultural affinity for gold and you have the makings for a potentially life-changing gold rush.

If I were a crime detective, I’d say China has the motive, means, and opportunity to push gold and gold stocks much higher.

If you’re interested in taking a stake in China’s booming silver market, make sure to read the latest edition of Casey’s Gold & Resource Report. Jeff has turned up a small company poised to become one of the dominant mining companies in China. This company is sitting on an incredibly rich silver property… it’s heavily owned by its blue-chip management. It’s the one stock to own if China goes “silver crazy.” You can learn about this and all other stocks recommended in Casey’s Gold & Resource Report for just $39 per year. Try it risk-free for 3 months here.

One of the Worlds Largest Gold Producers to explore in Coromandel, NZ

Newmont Mining, one of the worlds largest gold producers has won the right to explore 3000ha near Pauanui in the Coromandel Peninsula of New Zealand, for gold and silver.

Newmont already has a large open cast mine in nearby Waihi which is nearing the end of it’s life.  You can read the full NZ Herald article here.

There is still potentially plenty of precious metals remaining in New Zealand to be mined although with much of it likely to be in conservation areas there will be many hurdles for potential miners.  The National Government has made murmurings of doing a “stock take” of what may be present however.

Unfortunately with much of the gold and silver mined in NZ being exported the gain to NZ of more precious metal being dug up is not as great as it could be.  It’s a pity more kiwis weren’t buying and storing some of their “wealth” in real money instead of in over-priced housing.

Where America went wrong and how to prepare for the consequences

Weekly Wanderings 24 November 2009

This week in WW, we are doing something different – concentrating on just one article. ‎

From Jim Quinn at www.TheBurningPlatform.com comes the following wonderful article – this piece ‎sums up our current situation better than I can do, so we publish it here in its entirety. ‎

‎ “Any people anywhere, being inclined and having the power, have the right to rise up, and shake off the existing government, and form a new one that suits them better. This is a most valuable - a most sacred right - a right, which we hope and believe, is to liberate the world.” 
Abraham Lincoln

All You Zombies

 

The LORD saw how great man’s wickedness on the earth had become, and that every inclination of the thoughts of his heart was only evil all the time.  The LORD was grieved that he had made man on the earth, and his heart was filled with pain.  So the LORD said, “I will wipe mankind, whom I have created, from the face of the earth—men and animals, and creatures that move along the ground, and birds of the air—for I am grieved that I have made them.”  But Noah found favor in the eyes of the LORD.

                                                                                    Genesis 6

Everyone is familiar with the story of Noah. God was angry at the evil and wickedness of mankind. God instructed Noah to build an ark in order to save his family and two of each animal on earth from the coming flood. Noah could have ignored God’s warning and continued to live his life as before. By heeding God’s warning and building the ark, Noah was able to save himself, his family, and two of every animal from death and destruction. The warning signs regarding the current American Crisis have been discernible since the 1990’s. The un-sustainability of the government’s fiscal social guarantees, the inevitability of peak cheap oil, and the policing of a far flung empire with troops in 130 countries, were all known during the 1990’s. Americans had swelled their use of debt since 1980 and had not saved enough for their looming retirement years. The culture wars fractured the country. Just like a squirrel prepares for winter by collecting acorns and storing them in his nest, Americans had an opportunity to prepare for the coming winter. Instead we squandered the remaining days of autumn, ignoring our monetary problems, buying $45,000 SUVs, borrowing at 125% of the value of overpriced McMansions, initiating wars of choice, expanding our empire and enlarging our police state.

We had the power to influence history in a positive manner. Appropriate preparation could have lessened the impact of the long cold hard days ahead. Some winters are bitter and deadly. Others are mild and harmless. Since most Americans, including our leaders, think linearly they never see the turning of the seasons of history until it is too late. We are currently in the midst of a Fourth Turning, and most people have no clue. With winter approaching, it is always wise to get the heater checked, buy some firewood, make sure the snow plow has gas, store some food and water in case of a blizzard, buy some salt in case of ice, and tune up the car.

 

 

Instead of having their heater tuned up, Americans decided a new kitchen with granite counters and stainless steel appliances paid for with a home equity loan was a better idea. Instead of buying firewood, Americans bought a 52 inch HDTV using their platinum credit card. Instead of making sure the snow plow had gas, Americans outsourced their lawn care and snow removal to illegal immigrants. Instead of storing food and water, Americans decided to spend their money eating out four times per week. Instead of buying salt for an icy winter, Americans bought salt for the rims of their margarita glasses. Instead of tuning up their cars, they leased a new BMW every two years. Bitter winds have begun to blow, dark clouds are on the horizon, and winter has arrived. The country is completely and utterly unprepared.

 

Only Noah Saw It Coming

 

       

 

Only Noah saw it coming
Forty days and forty nights
Took his sons and daughters with him
Yeah they were the Israelites

                                    Hooters – All You Zombies

The Hooters were a Philadelphia rock group from the 1980’s. The first concert I attended was a Hooters performance at the Spectrum. Their music still rings true today. The American zombies had a chance to prepare for the coming Crisis. They instead laughed at Noah. Now the pieces will fall on them. The pieces will fall on the average American and the elitist rulers in Washington and on Wall Street. When Strauss and Howe wrote their book The Fourth Turning in 1997 there was approximately a decade to prepare for the coming Crisis. They warned that the two parties needed to change their messages to prepare the country for the coming winter:

“Yet both parties are also harmfully post-seasonal. In their quest for an ever bigger harvest, Democrats want to remove sacrifice ever further from the public lexicon. They seek entitlements for every victim, including the entire middle class, without caring whether all this guaranteed consumption is sustainable. If Democrats get their way, they would impose huge debts and future taxes on Millennial children. In their quest for ever more individualism, Republicans want to make public authority ever more dysfunctional. They seek to starve all government of revenue and are willing to shut down whole federal agencies to make their point. If Republicans get their way, they would prevent Millennials from forging a positive bond with government and limit the public resources directed toward the care and schooling of the neediest children.”

The Fourth Turning requires personal sacrifice by all Americans and the government must be seen as a high functioning authority that protects its citizens and successfully accomplishes big missions. In the last twelve years, we have done the exact opposite of what was needed to prepare for the Crisis. The two Parties reached a consensus by increasing entitlements for everyone with passage of Medicare Part D, creating a new $15 trillion unfunded liability. George Bush provided rich people with entitlements of lower taxes and middle class entitlements with rebate checks. The banking industry was given free rein to rape the American public and the rest of the world with the repeal of the Glass-Steagall Act. Rather than killing or reducing governmental agencies, George Bush used 9/11 as an excuse to greatly expand government by creating the Department of Homeland Security and increasing Defense Spending by 200%. Democratic politicians, with the wholehearted support of George Bush, used their authority over Fannie Mae, Freddie Mac and threats against banks to open the mortgage market to people who had no means to actually make a mortgage payment. The two wars of choice in Iraq and Afghanistan have cost $934 billion since 2003.

 

  

In 1997, the United States spent approximately $300 billion annually on Defense related areas. Today, we are spending in excess of $900 billion in those same areas. At the end of 1997, the National Debt was $5.4 trillion. If Congress and the Presidents had chosen to prepare the country for the unavoidable Crisis period of twenty years, they would have scaled back government spending, tackled the Social Security and Medicare train wreck, developed a multi-pronged energy plan, and asked Americans to save. Instead, they pressed their foot to the accelerator as they approached a curve on a mountain road.

  

Today, the National Debt stands at $12.1 trillion. Our politicians proceeded to saddle us with an additional $6.7 trillion of debt in the space of 12 years, after taking 208 years to accumulate $5.4 trillion of debt. Based on current projections, the National Debt will exceed $25 trillion by 2019. These reckless actions were akin to entering winter by not paying your utility bill for a year, having your windows wide open, not having the oil changed in your car for 10,000 miles, and being two quarts low with your anti-freeze.

Strauss & Howe recommended that the country prepare in the following ways:

·         Prepare values: Forge the consensus and uplift the culture, but don’t expect near-term results.

·         Prepare institutions: Clear the debris and find out what works, but don’t try building anything big.

·         Prepare politics: Define challenges bluntly and stress duties over rights, but don’t attempt reforms that can’t now be accomplished.

·         Prepare society: Require community teamwork to solve local problems, but don’t try this on a national scale.

·         Prepare youth: Treat children as the nation’s highest priority, but don’t do their work for them.

·         Prepare elders: Tell future elders they will need to be more self-sufficient, but don’t attempt deep cuts in benefits to current elders.

·         Prepare the economy: Correct fundamentals, but don’t try to fine tune current performance.

·         Prepare the defense: Expect the worst and prepare to mobilize, but don’t pre-commit to any one response.

Rather than finding common ground and forging alliances, Baby boomer culture warriors upped the ante. The extreme wings of the Democratic and Republican parties gained control of the dialogue. Neo-conservatism has dominated the thinking in the Republican Party while ultra-liberals have dominated the Democratic Party. The culture has deteriorated, with the media perpetuating a nihilistic, selfish, materialistic attitude among the citizens. TV and movies have portrayed lives of the dregs and lowlifes of society as desirable and normal. The lives of washed up rock stars, drugged out TV personalities, vapid housewives, and brainless house flippers passes for entertainment in today’s society. Getting rich by any means necessary has been glorified.

  

The best and brightest MBA students graduated and trooped off to Wall Street. Working at real companies that produced something became passé. The degeneration of moral, ethical, and cultural standards has made it more likely that a fascist government could gain control during the Crisis. The dysfunction of both the Federal government and state and local governments have dramatically reduced the trust level of the American public in these institutions. During a Crisis, public faith in government is necessary for swift decisive action. With an approval rating of 26%, Congress is more despised than Osama bin Laden.

The politicians who have chosen to lie to the American people and not face up to the national problems of deficits, unfunded promises, and peak oil, have set the country up for a cataclysmic Crisis. The only statesmen who have spoken candidly about the coming Crisis have been David Walker and Ron Paul.

“Washington has charged everything to the nation’s credit card – engaging in tax cuts and spending increases without paying for them. Washington’s imprudent, unethical and even immoral behavior is facilitated by a lack of transparency.  While the US government is too big to fail, continuing on our current path will have adverse implications for our economy and international standing. The sooner Washington acts, the better. Our country, children and grandchildren deserve no less.”

                                                                                    David Walker – 9/2008

“We’re indeed stuck between a rock and a hard place, and we don’t talk about how we got here; we talk about how we are going to patch it up. The solutions proposed so far – stimulus packages, bailouts and interest rate cuts – just amount to printing more money, which will lead to greater currency devaluation, contribute to the rising cost of living, and further squeeze the middle class and our senior citizens.”

                                                                                    Ron Paul – 8/2008

A candid discussion of these issues has been avoided at all costs by the cowards who crawl around the halls of Congress. Politicians had a chance to stem the downward slide of cynicism, apathy, and disgust with government. They failed miserably. As the Crisis deepens, Americans will turn to those who told the truth. It is a small list.

Society needed to prepare our youth for the test that awaited them during the Crisis. Civic duty, teamwork, and a sense of community needed to be encouraged by adults in our youth. The Millenials (Hero generation) will be the generation on the front lines during this Crisis. The youth of today have been coddled, protected, and have not been required to participate in community efforts. Government efforts such as No Child Left Behind have been failures, as school districts concern themselves with bureaucratic test results and bringing the poor students up to average rather than giving added support to the truly outstanding students. Overall performance of students has continued to decline. Selfish narcissistic Boomer parents have concerned themselves with materialistic trinkets and their own self actualization rather than sacrifice for their children’s future. Our youth are entering the Crisis unprepared for the harsh winter.

The youngest Boomers reached the 50’s in 1997. Government leaders needed to prepare the Boomers for less benefits in the future, which would have pushed Boomers to save more for their retirement. The 50 year average national savings rate has been 6.5%. In 1997, the national savings rate was already below average at 4%. Government leaders urged Americans to buy houses, buy cars, and spend, spend, spend. The American zombies heeded the call and drove down the savings rate to below 0% in 2005. It has subsequently risen to 3% as the Crisis has unfolded. The Baby Boomers are completely unprepared for their old age and will fight all efforts to cut their benefits. Rather than accepting cuts in benefits to secure the future well being of their children and grandchildren, Boomers continue to push for more healthcare benefits. A bitter generational war is now a certainty.

 

“During the Crisis, the American economy will experience the most extreme shocks to asset values, production, employment, price levels, and industrial structure in living memory. The economy may also, at some point be pushed to the breaking point in order to produce the tools necessary to save the nation and, later the infrastructure that will underlie the next saeculum.” – Strauss & Howe – The Fourth Turning

What was required was a build out of our energy infrastructure, with natural gas, nuclear, geothermal, wind, and solar all playing a part in weaning us off Middle Eastern oil. Instead, the myopic government bureaucrats, NIMBY crowd and green extremists have succeeded in driving our usage of Middle Eastern oil to new heights as we now import 67% of all our needs. Peak oil will hit the United States like a sledgehammer. Americans needed to increase the national savings rate so we would have the ability to invest in new dynamic technologies. Instead we chose a debt fueled frat party, driving the national savings rate below 0%. The government needed to run budget surpluses as we entered the Crisis period. Accepting a recession during the Third Turning would have mitigated the chances of a Depression in the Fourth Turning. A recession was unacceptable to George Bush and Alan Greenspan. Tax rebate checks and 1% interest rates, along with Bush urging Americans to defeat terrorism by shopping, buying cars and buying houses, resulted in immense deficits. Obama has since added $1.8 trillion to the national debt in one year. Tax policy should have shifted toward taxing consumption and not taxing investment. The economic path chosen by our politician leaders has ensured a 2nd Great Depression.

 From a foreign policy and military preparation standpoint, our leaders have squandered an opportunity to strengthen alliances and form new alliances in advance of the coming battles. Every prior Fourth Turning has resulted in all-out war for survival. Strauss & Howe provided the roadmap to our future:

“But before the Fourth Turning catalyzes, America should gird for something else: a possible war whose scale, cost, manpower, armaments, casualties, and home-front sacrifices far exceed anything the nation would tolerate now.”

Instead of conserving our strength for the coming epic challenges, our leaders have engaged in two wars which have depleted our Treasury, stretched our manpower beyond the breaking point, used up valuable military equipment, strained our alliances, and diminished our moral standing in the world. These wars have revealed our weakness and have made it more likely that potential foreign adversaries will contest our super power status. These foreign ventures have failed to secure democracy in the Middle East or secure future supplies of oil. They have succeeded in inflaming the Muslim world and creating more terrorists than existed on September 10, 2001. The loss of credibility and moral high ground will make it more difficult for Crisis Saeculum leaders to rally the American people to a higher cause.

As I watch ancient doddering Congressmen parade and bluster while debating the Obama healthcare bill, I can’t help but think that these are the wrong people, at the wrong time, fighting the wrong war, for the wrong cause. The country is in the midst of a Crisis and our leaders have decided to expand the welfare state, bailout failures with our grandchildren’s money, expand our wars of choice, and stifle the ingenuity of the American people. This will surely not end well.   

Stupid Is As Stupid Does

 

During a Crisis the virtues of faith, trust, reliability, endurance, perseverance, frugality and self-sacrifice are essential. These virtues were indispensible during the Great Depression and World War Two. Strauss and Howe recommended preparation by individuals in the following areas:

·         Rectify: Return to the classic virtues.

·         Converge: Heed emerging community norms.

·         Bond: Build personal relationships of all kinds.

·         Gather: Prepare yourself (and your children) for teamwork.

·         Root: Look to your family for support.

·         Brace: Gird for the weakening or collapse of public support mechanisms.

·         Hedge: Diversify everything you do.

Your reputation will be crucial during the Crisis. Are you a man or woman of your word? Can your family and neighbors count on you? Your honor and word will be judged by others during the Crisis. If you are seen as an outcast, loner, or opponent of the majority, you risk personal harm. The materialistic investment banker swine who have feasted off the carcasses of the American middle class and senior citizens are at extreme risk. Their gated McMansion communities and their BMW getaway cars will not save them from the angry lynch mobs. The community will require your acquiescence to their norms. A more authoritarian government will punish those who do not fall into line. It will be important that your personal relationships with authority figures be in good order. The lone wolf will not survive the deep snows of a Crisis.

The final resolution of this Crisis will depend upon the youth of today. Their ability to function in teams and use technology to overcome their opponents will be critical. Boomer parents who have smothered their children, fought their battles, did their class projects for them, and generally coddled them, have not done them any favors. If they are unprepared or unwilling to take the mantle of the GI Generation, our society may be in its final stages. Social outcasts will not fare well during the Crisis. Strong families will be essential to survival, with multigenerational households providing support and safety in dangerous times. The continued disintegration of the family unit, especially in the inner cities, will make it more difficult for many in the Crisis. Divorce rates have declined to 40% of all marriages, but marriage rates have declined to a greater degree. Children living in one parent households have increased, as millions of men have shirked their fatherhood duties.

Provisional number of divorces and annulments and rate: United States, 2000-07

 

 

 

Year	Divorces & annulments	Population	Rate per 1,000 total population
2007 1	856,000	238,759,000	3.6
2006 1	872,000	236,172,000	3.7
2005 1	847,000	234,114,000	3.6
2004 2	879,000	237,042,000	3.7
2003 3	927,000	245,200,000	3.8
2002 4	955,000	243,600,000	3.9
2001 5	940,000	236,650,000	4.0
2000 5	944,000	233,550,000	4.0

The un-sustainability of Social Security, Medicare, Medicaid, and government employee pension plans was clear in 1997 and it is clearer today. Americans with half a brain should have seen that the government could never deliver on the social fiscal pledges they’ve made. The $100 trillion unfunded liability will never be paid. The government is going to stiff the elderly. Americans should have increased their personal economic security by saving for emergencies, saving for retirement, cutting back on their excessive lifestyle choices, distinguishing between needs and wants and ratcheting their lifestyles down to a sustainable level in an effort to prepare for hard times. Instead, millions of morons proved that stupid is as stupid does.

The average 401k balance for those over 60 years old is only $93,000. This is skewed higher by a few high savers. The median balance is in the range of $60,000. The Boomer generation has proven to be the most spendthrift, irrational, delusional generation in history. The life expectancy of a 60 year old is twenty years. How do these people expect to live twenty years on $60,000 to $100,000? A rational human being approaching 50 years old in 1997 with $50,000 in retirement savings should have realized their dire predicament and maxed out their savings for the next fifteen years.

Average 401(k) Balance by Age Group

Age         2007 Balance        2008 Balance

20s           $9,190                     $6,690

30s           $40,990                   $27,360

40s           $93,350                   $62,580

50s           $138,660                  $99,420

60+           $115,700                 $93,470

Source: Hewitt Associates

Instead of acting rationally, the Boomers went on a glutton-like spending spree, buying McMansions, beach houses, Mercedes, 60 inch HDTVs, electronic gadgets, and taking exotic vacations to the Far East. Household debt as a percentage of GDP soared from 90% in 1997 to over 135% today. Over this same time, personal savings plummeted. The delusional Boomers convinced themselves that 10% annual gains in the value of their houses for eternity would fund their every material desire and pay for their comfortable retirement. 

Option ARM loans, home equity withdrawals, auto loans, and credit card debt were the weapons of choice. In the last two years zombie Americans have learned a brutal lesson they should never forget. Home prices can drop 30%, but the debt remains like an anchor around their necks. Consumers increased their debt from $5 trillion in 1997 to over $13 trillion today. Most Americans are completely unprepared financially for a harsh winter.

 

The American financial system’s near disintegration in 2008, initiated by the housing crash, revealed who was swimming naked. If Americans had diversified their portfolios with foreign stocks, bonds, gold, and commodities they would have survived the stock market crash with minimal losses. We sit here late in 2009 with thousands of Boomers reaching the age of 60 every day. They are racked with immense debts, have saved little for their retirement, and have trillions of government IOUs in their pockets. The only way the government can pay these obligations is to double taxes on the children and grandchildren of Boomers. Will Boomers be selfish and egotistical enough to rob their kids because they chose not to prepare for winter?  

Ten Years Have Got Behind You

   

Ticking away the moments that make up a dull day
You fritter and waste the hours in an offhand way
Kicking around on a piece of ground in your home town
Waiting for someone or something to show you the way

And you run, and you run to catch up with the sun, but it’s sinking
Racing around to come up behind you again
The sun is the same in a relative way, but you’re older
Shorter of breath and one day closer to death

                                                Pink Floyd – Time

America has frittered away ten years. Americans missed the starting gun. If you had prepared for the Crisis and it hadn’t touched you personally, the loss of material satisfaction would have been a minor inconvenience. Strauss & Howe describe the implications of not preparing:

“If you haven’t prepared, you will have put much at risk. History warns that saecular winters can be searing times for everyone, especially for those who are caught entirely by surprise. No matter what your age, sex, income, race, family status, or line of work, sensible choices today could help you avoid truly desperate choices in the Fourth Turning.”

The sad truth is that the nation and most of its citizens did the exact opposite of what Strauss and Howe recommended in 1997. The nation and its people are now destined to experience a terrible winter on par with the Civil War and World War II, with no safety net. The politicians driving the country into this Crisis period continue to think linearly and will be blindsided as the Crisis deepens. Politicians in Washington continue to do business as usual, passing laws and programs that will only worsen the Crisis. Every prior Fourth Turning has seen a Grey Champion Prophet figure appear on the scene to lead the country through the storm. Washington, Lincoln, and FDR proved their mettle in times of extreme danger. Barack Obama is not today’s Grey Champion. He will be cast aside in 2012. A Boomer leader must arise to lead the country through the difficult days ahead.

With a National Debt projected to reach $25 trillion by 2019, a government that has promised Boomers $100 trillion more than it can deliver, the end of the cheap oil age, looming resource wars, and nuclear proliferation, it is hard to fathom a happy ending to this Crisis. We appear to be hurtling towards the abyss and no one in charge seems capable of averting disaster. Americans need to understand the danger that is approaching. The final outcomes of this Crisis range from Armageddon to a restoration of the American Republic. The final pages of the Fourth Turning are truly frightening. The possibilities according to Strauss & Howe are:

• The next Fourth Turning could mark the end of man. It could be an omnicidal Armageddon, destroying everything, leaving nothing.
• The Fourth Turning could mark the end of modernity.
• The Fourth Turning could spare modernity but mark the end of our nation.
• Or the Fourth Turning could simply mark the end of the Millennial Saeculum. Mankind, modernity, and America would all persevere. Afterward, there would be a new High.

 

“Lost Time, is never found again.”

 

The nation and its citizens have not made good use of our time. We have entered this Crisis severely weakened and vulnerable. Our appalling fiscal choices and failure to address the coming energy crisis have set us up for a calamity of epic proportions. The linear status quo statists argue that our ingenuity and technological prowess will save the day. They ignore the fact that our best and brightest have spent the last three decades focused on creating financial weapons of mass destruction, pilotless drones that make war as easy as playing on your PS3, improving the distribution chain for aerosol cheese, and inventing the drive thru fast food window. The corporate fascists who have Congress in their back pockets, supported by the Federal Reserve and the banking cartel, have raped and pillaged America to the point that there is nothing left for the middle class. The ruling elite have no intentions of relinquishing their wealth or control without a fight.

I’m just an average guy who has lived his whole life in suburban America. I’m the guy at the little league baseball field and the local ice hockey rink cheering my sons on. I shop at Wal-Mart and I take my family to the Jersey shore on vacation. I decorate my house with multitudes of Christmas lights every year after I untangle the ball from the previous year. I’m an average guy who is also a wide eyed realist. My heart and my mind tell me that our leaders have failed us mightily. The next 15 years will be full of pain, suffering and angst. In the previous two Crisis periods, America entered with the moral high ground. The Civil War was ultimately seen as a moral war to free the slaves. World War II was fought against evil Nazis and Fascists. I fear that America’s next Great War will be fought for oil. The shortsighted narrow-minded morons who have controlled our nation will try to cover-up their epic failures by falsifying the reasons for war. I have said this once in a previous article. I will not sacrifice my sons for oil. That is not a cause worth fighting for. Hell no, they won’t go.

I do not believe Americans will fall into line behind a leader whose cause is fighting to secure some other country’s oil. I do believe that the credibility and honesty of our politician leaders has been destroyed through their own corrupt immoral actions. A splintering of the country into competing factions and/or regions is a distinct possibility. There is precious little time left, as the howling blizzard gains strength. You will need to hunker down for a long hard winter. Build close relationships, protect your family at all costs, don’t trust government officials, don’t expect the government to honor any fiscal promises, don’t trust the mainstream media, learn to live locally, buy a gun, buy some gold and silver, and be prepared to fight for the truth.

   

To fight for the truth, join me at www.TheBurningPlatform.com.

Sovereign Debt Defaults, Peak Gold and Fake Gold

This week, we look at… possible defaults of the 3 major foreign debtors, Peak Gold, Fake Gold and what one might invest in after gold tops out – not yet, we hasten to add!  

SMART INVESTOR!!!

Martin Hutchinson is an experienced international banker. In the article below, he considers the possible effects of holding large amounts of foreign debt. London, Washington and Tokyo need to watch out…. 

·        Which big country will default first?

 

by Martin Hutchinson - November 09, 2009

Of the world’s six largest economies, three currently have budget and public debt positions that if allowed to fester will push those nations into bankruptcy (the seventh largest, Italy, also has a budget and debt position that is highly vulnerable, but its problems appear chronic rather than acute). Given the proclivities of modern politicians for delaying pain and avoiding problems, it is likely that festering is just what those positions will do. So which major country, the United States, Japan or Britain, will default first on its foreign debt?

The other three of the six top economies, Germany, China and France, appear to have fewer problems but are not out of the woods entirely. Germany has substantial public debt because of the costs involved in integrating the former East Germany, but those costs are now mostly past and the current government is highly disciplined – thus Germany is now the most stable major economy. France is less disciplined; its debt level is similar to that of Germany but its current budget deficit is much higher, at around 8% of Gross Domestic Product (GDP) in 2009, according to the Economist forecasting panel. However, its problems pale in comparison to those of the deficit-ridden trio. China has huge amounts of hidden debt in its banking system, which could well collapse, but its direct public debt is small, as is its budget deficit, so it is unlikely to enter formal default.

The worst budget balance of the three deficit countries is in Britain, where the forecast budget deficit for calendar 2009 is a staggering 14.5% of GDP. Furthermore, the Bank of England has been slightly more irresponsible in its financing mechanisms than even the Federal Reserve, leaving interest rates above zero but funding fully one third of public spending through direct money creation. Governor Mervyn King has a reputation in the world’s chancelleries as a conservative man of economic understanding. He doesn’t really deserve it, having been one of the 364 lunatic economists who signed a round-robin to Margaret Thatcher in 1981 denouncing her economic policies just as they were on the point of magnificently working, pulling Britain back from what seemed inevitable catastrophic decline. King’s quiet manner may be more reassuring to skeptics than the arrogance of “Helicopter Ben” Bernanke, but the reality of his policies is little sounder and the economic situation facing him is distinctly worse.

Britain has two additional problems not shared by the United States and Japan. First, its economy is in distinctly worse shape. Growth was negative in the third quarter of 2009, unlike the modest positive growth in the U.S. and the sharp uptick in Japan. Moreover, whereas U.S. house prices are now at a reasonable level, in terms of incomes (albeit still perhaps 10% above their eventual bottom), Britain’s house prices are still grossly inflated, possibly in London even double their appropriate level in terms of income. The financial services business in Britain is a larger part of the overall economy than in the U.S. and the absurd exemption from tax for foreigners has brought a huge disparity between the few foreigners at the top of the City of London and the unfortunate locals toiling for mere mortal rewards. A recent story that the housing market for London homes priced above $5 million British pounds was being reflated by Goldman Sachs bonuses indicates the problem, and suggests that the further deflation needed in U.K. housing will have a major and unpleasant economic effect.

A second British problem not shared by the U.S. is its excessive reliance on financial services. As detailed in previous columns, this sector has roughly doubled in the last 30 years as a share of both British and U.S. GDP. In addition, the sector’s vulnerability to a restoration of a properly tight monetary policy has been enormously increased through its addiction to trading revenue. The U.S. has many other ways of making a living if its financial services sector shrinks and New York is only a modest part of the overall economy. Britain is horribly over-dependent on financial services, and the painful if salutary effects of London costs being pushed down to national levels by a lengthy recession are less likely to be counterbalanced by exuberant growth elsewhere.

The other question to be answered for all three countries is that of political will. If as is certainly the case in Britain, deficits at the current levels will lead to default (albeit not for some years since the country’s public debt is still quite low), then to avoid default tough decisions must be taken. Britain is in poor shape in this respect. Its current prime minister, Gordon Brown, is largely responsible for the underlying budget problem, having overspent during the boom years, largely on added bureaucracy rather than on anything productive or value-creating. However, the opposition Conservatives, likely to take power next spring, are led by a center-leftist with a background in public relations and no discernable backbone or principles.

Britain has a history of such leaders, which it has managed to survive – the ineffable Harold Macmillan, in particular, who wanted to abolish the Stock Exchange and contemplated nationalizing the banks when they raised interest rates, was a man of outlook and temperament very similar to David Cameron’s. Macmillan was notoriously prone to soft options that postponed economic problems, firing his entire Treasury team in pursuit of soft options in 1958 and leaving behind an appalling legacy of inflationary bubble on his retirement in 1963. If Cameron is truly like Macmillan, his government’s response to economic and financial disaster will be one of wriggle rather than confrontation. With neither party providing solutions to an economic crisis, the British public is likely to discover that, unlike in the crisis of 1976, no solutions will be found. Default (doubtless disguised as with Argentina as “renegotiation”) would in that case inevitably follow.

The United States is in somewhat better shape than Britain. Its deficit is somewhat lower, at 11.9% of GDP in calendar 2009, although its debt level is higher if you include the direct debt of Fannie Mae and Freddie Mac, as you should. It also has lower overall levels of public spending, although spending is rising rapidly. Furthermore, it has a much more diverse economy and a healthier real estate market, so that further likely downturns in California and Manhattan real estate and the financial services sector can be easily overcome.

U.S. pundits like to whine about the impending deficits in social security and health-care, but the former is easily overcome by adjusting the retirement age while the latter could be greatly mitigated by simple cost-containment measures, such as limiting trial lawyer depredations, making the state pay for the “emergency room” mandate to treat the indigent and allowing interstate competition for health insurance. All those changes would be politically difficult, but they are clearly visible and involve no damaging cuts in vital services, unlike the changes that would probably be necessary in Britain.

The other U.S. advantage is political: it has an alternative to overspending.  Last Tuesday’s election results were a useful shot across the bows of the overspending consensus that had developed in both the Bush and Obama administrations (as well as among the ineffable barons of Congress) since 2007. Whereas voter concern about spiraling deficits and public spending has no satisfactory outlet in Britain, it can now express itself clearly in the U.S., producing either a sharp change of policy by the current administration and Congress or a change of administration in 2012. Since the likelihood of a reversal of policy towards sound budgetary management is greater in the U.S. than in Britain, the probability of eventual default is less.

Japan has already had its change of government, throwing out the faction of the Liberal Democrat Party (LDP) that regarded politics as the art of creating pointless infrastructure. Unfortunately, the Japanese electorate, faced in August with a no-good-choices problem similar to that of U.S. voters last year and British voters next spring, replaced a long-serving overspending government with another committed to a different set of spending priorities rather than to ending the spending itself. The Democratic Party of Japan (DPJ) has cut back sharply on the infrastructure “stimulus” but is showing signs of replacing it with social spending. It is also committed to economically dozy policies such as reversing postal privatization, organized with such great political effort by Junichiro Koizumi in 2005.

Japan does however have a couple of advantages that may enable it to avoid default. First, its public debt carries very low interest rates, mostly below 2% per annum, and is owned almost entirely by its own citizens. What’s more, state-owned entities such as the now un-privatized Postal Bank lend vast amounts of money to the government, acting as conduits to the less efficient bits of the public sector in the same way as do China’s state-owned banks. This is appallingly bad for the efficiency of the economy and for living standards, but it postpones default and makes it less likely.

Second, it’s not inevitable that the LDP’s wasteful infrastructure spending will simply be replaced by wasteful social spending. Finance minister Hirohisa Fujii is reputed to be a budgetary hard-liner. Further, at least part of the DPJ’s spending will take the form of handouts to families with children. Those may increase domestic consumption compared to exports and thereby balance the Japanese economy better, increasing its growth potential marginally. Nevertheless, since Japan’s public debt is currently around 200% of GDP, Japan is much closer to the default precipice than either the U.S. or Britain. Thus, while the better structure of Japan’s economy and its debt make Japan’s probability of default lower than Britain’s, it’s likely that if both countries defaulted, Japan would do so first.

We have not experienced a debt default by a major economy since the 1930s. That three such defaults are currently conceivable indicates both the severity of the current downturn and the wrong-headedness of the policies taken to address it. If it happens, a major sovereign debt default of this kind will cause the seizure of global capital markets, prolonging downturn for a decade or more.

We’d all better hope the urge for fiscal responsibility hits London, Washington and Tokyo pretty damn soon.

 

The Bears Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long ’90s boom, the proportion of “sell” recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.

 

Martin Hutchinson is the author of “Great Conservatives” (Academica Press, 2005). Details can be found on the Web site www.greatconservatives.com

 

·        Peak Gold 

Regular visitors to our site will know that we have discussed peak oil,  and  have directed readers to Chris Martenson’s Crash Course, where the concept is discussed in detail. In addition to oil, other commodities may also be approaching their peak (maximum possible) rates of production. Please not that this does not mean that that these commodities are running out – it means two things –  

(1)     the worldwide production rate has reached its maximum value, and

(2)     to obtain further supplies is becoming, and will become, increasingly expensive. 

·         The following comes to you, courtesy of Zapata George 

Is gold going to follow the way of crude oil? Do we have a “peak” of easily found gold behind us? It’s starting to look that way. Big, smart gold producers, like Barrick, mentioned in the article below, are taking off what hedges they have on to sell future production and are not planning any new hedges. At the same time, India recently bought one half of what the World Bank had for sale, and a number of federal banks have ceased their sale of gold. So, it appears as though with a peak of production that occurred in 2000 and has been in decline ever since, combined with falling ore grades, we may have another commodity peak. Remember, Mother Earth does not provide us with infinite amounts just because we “want” it. Economics 101 doesn’t seem to have taken this into consideration.

Here’s the article:

Barrick shuts hedge book as world gold supply runs out

By Ambrose Evans-Pritchard, International Business Editor
Published: 7:20PM GMT 11 Nov 2009

Global gold production is in terminal decline despite record prices and Herculean efforts by mining companies to discover fresh sources of ore in remote spots, according to the world’s top producer Barrick Gold.  

Aaron Regent, president of the Canadian gold giant, said that global output has been falling by roughly 1m ounces a year since the start of the decade. Total mine supply has dropped by 10pc as ore quality erodes, implying that the roaring bull market of the last eight years may have further to run.  

“There is a strong case to be made that we are already at ‘peak gold’,” he told The Daily Telegraph at the RBC’s annual gold conference in London.  

“Production peaked around 2000 and it has been in decline ever since, and we forecast that decline to continue. It is increasingly difficult to find ore,” he said. 

Ore grades have fallen from around 12 grams per tonne in 1950 to nearer 3 grams in the US, Canada, and Australia. South Africa’s output has halved since peaking in 1970.  

The supply crunch has helped push gold to an all-time high, reaching $1,118 an ounce at one stage yesterday. The key driver over recent days has been the move by India’s central bank to soak up half of the gold being sold by the International Monetary Fund. It is the latest sign that the rising powers of Asia and the commodity bloc are growing wary of Western paper money and debt.

China has quietly doubled holdings to 1,054 tonnes and is thought to be adding gradually on price dips, creating a market floor. Gold remains a tiny fraction of its $2.3 trillion in foreign reserves.  

Gold exchange-traded funds (ETFs) – dubbed the “People’s Central Bank” – have accumulated 1,778 tonnes, making them the fifth biggest holder after the US, Germany, France, and Italy.  

Ross Norman, director of theBullionDesk.com, said exploration budgets had tripled since the start of the decade with stubbornly disappointing results so far.  

Output fell a further 14pc in South Africa last year as companies were forced to dig ever deeper - at greater cost - to replace depleted reserves, not helped by “social uplift” rules and power cuts. Harmony Gold said yesterday that it may close two more mines over coming months due to poor ore grades.  

Mr. Norman said the “false mine of central banks” had been the only new source of gold supply this decade as they auction off reserves, but they are switching sides to become net buyers.  

Barrick is moving fast to wind down the remaining 3m ounces of its infamous hedge book over the next twelve months, an implicit bet on rising gold prices over time.  

Mr. Regent said the company had waited too long to ditch the policy, which has made the company enemy number one among ‘gold bug’ enthusiasts. The hedges oblige Barrick to deliver part of its gold into futures contracts set long ago at levels far below today’s spot prices.  

The strategy worked well in the falling market of the 1990s, but has cost the company dear in lost profits this decade. “Hindsight is always 20/20,” said Mr Regent, who was appointed from the outside earlier this year.  

Barrick bit the bullet in the third quarter, taking a $5.7bn charge against earnings on hedge contracts. Liberation is at last in sight. In 2001 the hedge book topped 20m ounces.  

Mr Regent said the hedge policy has weighed badly on the share price and irked investors, becoming a bone of contention at every meeting. The financial crisis brought matters to a head as markets fretted about counterparty risk. “It was clear to me that there were a significant number of institutions who wouldn’t invest in Barrick because of the hedge book,” he said.  

Barrick produced 1.9m ounces of gold last quarter, down from 1.95m a year earlier. Costs have been “trending down” to $456 an ounce, though rising energy prices pose a fresh threat. Total reserves are 139m ounces, far ahead of rival Newmont Mining at 86m.  

The hedge book venture has not been a happy one, but those who predicted that Barrick would eventually “blow up” on its contracts may owe the company an apology. 

 

 ·        Fake Gold?

Rob Kirby, who is a member of the Gold Anti-Trust Action Organization (GATA) and a frequent contributor to www.financialsense.com , has published an article concerning the possible circulation of fake gold bars, originating from the US…. 

Here is a summary of his findings. For a more complete discussion, check out Financial Sense. 

1. As I reported to you a few weeks ago, there were reports of 400 0z bars of gold found in the Bank of England filled with tungsten.  It was reported to you that tungsten has the same specific gravity of gold, so it is easy to manufacture a fake brick.  Only an electrical test could determine which bar is real. 

2.  Kirby also identified that the GLD list in London had the bar list go from 1381 pages to under 200 and then back to 800 pages, even though the gold inventory of GLD  was increasing from 1080 tonnes to gold to its present value of 1118 tonnes. 

3.  During the week of Oct 1.09, there were irregular physical gold settlements and the Bank of England had to intervene on behalf of JPMorgan and Deutsche Bank, as these two banks did not have the physical gold backing its delivery. 

4.  China is known as the knock off capital of the world.  Everyone thought that they were the manufacturers of these tungsten bricks. The Chinese were the ultimate buyers of these tungsten bricks and they decided that they needed to get to the bottom of this fiasco.  In their interrogation process they found the perpetrators and put them behind bars and in the process discovered that it was the USA who orchestrated the manufacture of these fake bars.  

5.   The USA manufactured  anywhere between 1.3 to 1.5 million bars of 400 0z weight or roughly 16,000 metric tonnes. The USA allegedly holds 8,000 metric tonnes of gold and the world roughly 30,000 metric tonnes.   

6.    Approximately  640,000 of these tungsten bricks of 400 oz weight were shipped to Fort Knox.  The weight in oz is 256 million oz, which is roughly the 8,000 tonnes of gold  that Fort Knox supposedly holds. 

7.    The remaining 8,000 metric tonnes were shipped to international centres and sold on the international market.  Many of these bars ended up at the GLD. 

8.    Kirby has documents which show that his folks have copies of original shipping documents with dates and EXACT WEIGHTS OF THE TUNGSTEN BARS SHIPPED TO FORT KNOX. 

9.     This may help explain why Rothschild’s left the gold market in 2004 as they probably knew that many of the bricks at the B of E were fake. 

10.   It may help explain why no news came out on the raid at the Nymex  in Feb 2004 where the District Attorney was investigating Stuart Smith, VP of operations at the Nymex. A search warrant was issued; he abruptly left and to this day has not been heard from. 

The above will help explain why I cannot balance supply and demand of gold.  We know that demand is somewhere around 4500 tonnes of gold and supply around 2400 tonnes and

thus the deficit has been funded with supplies from central banks.  The above ground gold supplied by the central banks came through the leasing process. The leasing of gold started in 1988 and with a deficit of 2000 tonnes per annum, the world should have run out of gold a few years ago.  It did not.

Now we know why!!!!!! Everything now makes sense and the balance of “gold” supplied into the market was in reality tungsten bricks.  

 

·        Investment after gold tops out? (No, not yet)

 

OK, so you’re smart and you’ve made a lot of money investing in precious metals, so what’s next? Eric deCarbonnel of Market Sceptics has put together an investment fund to invest in farmland in Russia.  

A sign of things to come?  We think so… 

*****Trip To Visit Black Earth Farmland In Russia*****

 

from Market Skeptics by Eric deCarbonnel

This is a quick entry to:

1) Let everyone know that I am organizing a trip to visit Black Earth farmland in Russia
2) Promote Regia Russia Agro Investment Ltd (the fund I launched to invest in Russian agriculture).
3) Highlight that now is the time to invest in agriculture
4) Announce that I am lowering the minimum subscription for Regia Russia Agro Investment Ltd.

1) *****Trip To Visit Black Earth Farmland In Russia*****

I am organizing a trip to visit Black Earth farmland in Russia. So far, at least 5 people are coming on trip. Please Email me if you are interested.

Dates for Russia trip

The plan is for investors to arrive in Moscow on the Saturday December 5 and leave Russia on Friday December 11. We will visit Black Earth farmland in the middle of the week (December 8^th and 9^th).

2) Regia is the only Russia Ag fund aimed at retail investors

When I became bullish on Russian agriculture in May 2009 and looked for an investment that I could recommend on my blog, I was surprised to discover that there are no “quality” funds for small investors. Instead, there were only a couple of institutional funds where the lowest minimum investment was at least a million dollars, out of reach for 99.999% of my readers.

At the time I thought, “This is a waste,” and decided to, if there was enough interest, start a fund to create an investment alternative for retail investors.

Today, Regia Russia Agro Investment Ltd is up and running and receiving subscriptions from international investors (Please Email me for a copy of PPM). For U.S. investors, a US Domestic LLC (ie: Regia Russia Agro Investment LLC) is being set up as a feeder fund (which should be ready before the end of November).

3) Now is the time to invest in agriculture

As I have been writing about for a while, the world is facing a food shortage and dollar collapse in 2009/10, both of which are bullish for agriculture. Right now, Black Earth farmland (ultra-fertile agricultural land found in Russia and Ukraine) is available at $270 per acre, less than a tenth of what comparable land sells for in the US and Europe. Now is the time to invest to take advantage of this amazing investment opportunity.

There is a delay of around one month between the time that Regia Russia Agro Investment Ltd receives subscriptions and when Black Earth farmland can be acquired (negations to acquire land can’t begin without first having the funds). When the global food shortage becomes really obvious (December/January timeframe), a panic will begin and money will pour into agriculture (and out of the dollar) around the world, very quickly raising prices. To maximize returns on an investment in agriculture, it is key to invest now while the market is still calm (ie: before dollar/food panic).

4) Lowering Minimum Subscription

As a result of gold’s recent appreciation, the minimum subscription amount is being lowered to 3000 grams of gold (1 gram of gold per share), which is about $106,500 right now ($35.5 per gram). As gold continues to appreciate, the minimum investment will be lowered as appropriate.

Under compelling circumstances, the minimum subscription amount can be waived for international investors.

There is a 10% discount to the Offering Price (.9 grams of gold per share) for first 100,000 gram of gold invested in fund.

Please Email me for a copy of PPM.

Goldmoney

Regia Russia Agro Investment Ltd is using Goldmoney to receive subscriptions. GoldMoney is a digital gold currency founded in 2001 by James Turk which allows the instant transfer of gold, silver and platinum between user holdings.

Here is the link for opening a Goldmoney account. The process is simple and transparent.

  

Marc Faber: The dollar to go up short term but go to zero in 10 years

Dr Marc Faber of the Gloom, Boom and Doom Report recently was on Bloomberg (video below) stating that while the US dollar may be oversold in the short term, in the long run, over say 10 years, it will go to zero .ie. be worthless.  On price deflation versus inflation he thinks we could get both concurrently.

Cash and US treasury bonds will be the big losers, while gold and commodities will be winners and stocks will also do better than cash.

Faber said Bernanke can be relied upon to continue to print money to prop up the stock market. 

However we say, remember you can still lose money in real terms (measured against gold) as stocks rise.  Choose them carefully and measure your returns against golds rise.  You should do the same with property.  Read this new article by J.S. Kim exclusive to GoldSurvivalGuide for more on how to track this by following Central Bank interest rates:

The Current Stage of the New Zealand Real Estate Cycle

The Current Stage of the New Zealand Real Estate Cycle

Today we have a very informative article from an aquaintance of ours who publishes some great information on “Crisis Investing”.  We follow J.S.’s thoughts closely and highly recommend his newsletter especially if you are interested in some very close guidance on investing in the stock market with far more detail that virtually any other newsletter around.  Read more about him at the end of the article…

The Current Stage of the New Zealand Real Estate Cycle

By JS Kim.

All real estate cycles, no matter in what country they occur, can be evaluated within the framework of the monetary policies undertaken by its Central Bank. By understanding a Central Bank’s monetary policies, one can understand the risk/reward setup of the real estate market in one’s country.

Today, I am going to evaluate New Zealand’s real estate market within the framework of the Reserve Bank of New Zealand’s monetary policies over the last decade or so. In recent years, the Reserve Bank of New Zealand (RBNZ) has drastically cut their interbank lending rates in line with other world leading central banks such as the Bank of England and the US Federal Reserve. Housing prices peaked in late 2007, spurred by cheap credit that the RBNZ had made available since December of 2001. In response to a growing housing bubble and in order to rein in malinvestment in the real estate market, the RBNZ pumped up interest rates to 8.28% in August 2007.  Housing prices dropped due to the RBNZ’s monetary policies, and from a high of 8.33% in November 2007, the RBNZ started slashing interest rates again - a whopping 15 times from the high watermark level just a couple of years ago to its current October 2009 interbank lending rate of 2.49%!

 Above, I’ve charted a history of the RBNZ’s monetary policy from February of 1994 to October of 2009 since understanding its monetary policy is often easier to do in a visual format. The RBNZ established interbank lending interest rates of 4.32% in February 1994, then increased this rate by more than 100% to 10.00% by October 1996, then slashed rates 67% to 3.30% by February 1999, then almost doubled them again to 6.50% by January 2001, then dropped them to 4.75% in December 2001, then tremendously hiked them to 8.33% by November 2007, and finally drastically slashing them again to a record low of 2.49% by October 2009.  These wild swings in interest rates are not healthy, not promotional of economic growth, and certainly not indicative of interest rate patterns that would predominate in a free market where supply and demand set interest rates. So why does the RBNZ engage in interest rate decisions that seem to be more the work of a madman than somebody interested in promoting sustainable growth?  

The answer is simple. Because the whole monetary system is fraudulent and unsound (a topic for another day), the RBNZ is forced to follow the lead of the European Central Bank and the US Federal Reserve or perhaps cause irreparable damage to the New Zealand economy. If these Central Banks act foolishly and irresponsibly, then often other Central Banks have no choice but to actively embrace similar policies. Former US Federal Reserve Chairman Alan Greenspan stated that the foolish actions of the US Federal Reserve in the 1920s almost caused the entire global economy to come crashing down. Today, the same shenanigans are once again occurring. If one can not see that the RBNZ is responsible for every real estate and stock market bubble and crash in New Zealand by way of their unnatural, interest-rate manipulations, one merely needs to study Austrian theories of money and credit to understand this process. In very simple terms, this is how the process works. 

When a flood of cheap credit is deliberately made available to investors by the RBNZ, as was the case from the beginning of 2002 through the end of 2004, this cheap credit creates much more liquidity than would be dictated by free market conditions. In turn, investors funnel this excess liquidity into real estate markets, thus creating massive distortions in prices above and beyond fair market values. In response, the RBNZ tightens interest rates (as happened from 2005-2007), causing malinvestment to cease and consequently, markets to correct or crash. Distortions are sold by Central Banks as “growth” and returns to fair market valuations are sold by Central Banks as “crashes” when neither explanation is honest or correct.  These are not mechanisms of a free market but mechanisms of interferences by Central Banks into free markets – a huge and very important distinction that is not understood nor appreciated by the great majority of investors. Central Banks also use this same free market manipulation and intervention scheme to manufacture artificial rallies in stock markets to sell the public on the idea of recovering economies when in essence, such “recoveries” are merely illusions that are destined to crumble.  

This cycle brings us to the present day situation in the New Zealand real estate market, where the following was reported in early November 2009: 

“New Zealand house prices advanced for the first time in 16 months in October, with a lack of houses for sale driving prices higher. Government agency Quotable Value’s residential house price index rose 0.2 percent in the year to October, compared with a 1.1 percent decline in September. It was the first increase in values since June 2008 but the trend in property values has been improving now for seventh straight months. The agency said market activity was well below spring levels, and the price was driven higher by buyers competing for a lower-than-usual number of listings.” 

In Auckland and Wellington, housing prices respectively increased 2.5% and 1.6% in October 2009 from the same period a year prior. In Auckland, average home sale prices reached a 22-month high in October 2009. In response to these “improving” signs, Peter Thompson, managing director of Barfoot & Thompson, stated: 

“It is a sure sign Aucklanders have shrugged off their concerns about the future, and are moving forward with their plans around home ownership. We’re seeing a slow, but steady, appreciation in sale values and we’re now back to the prices being fetched in the corresponding period in 2007 when the median was NZ$351,500.” 

However, one must always evaluate any rise in real estate prices within the framework of the purchasing power of the New Zealand dollar as the media always reports new highs erroneously in terms of absolute amounts of dollars but never in the context of inflation-adjusted dollars.  The RBNZ, from October 2007 to October 2009, dramatically slashed interest rates, thus deliberately weakening the New Zealand dollar by approximately 33% against gold (one of the only sound currencies in the world) in just two years time!   

Thus the “recovery” in New Zealand housing prices, due to the monetary policies of the RBNZ, ultimately created a loss in terms of real wealth for all New Zealanders and is merely an illusion. Remember, if “recoveries” are not a process of free markets, but are instead artificially manufactured by Central Banks by devaluing currencies, one can be left with MORE money that can purchase LESS – this is a loss, not a gain, in terms of real wealth.  In fact, when measured in terms of gold, even though Peter Thompson has claimed that the prices in October 2009 have now recovered to the equivalent median home prices of September 2007, it is not the amount of New Zealand dollars that you own that is important as I’ve just explained but it is what these dollars can buy. In terms of gold, in October 2009, these equivalent New Zealand dollars will now buy you 33% less gold than they would have in October of 2007. Consequently, a more accurate method of interpreting this recovery is in terms of gold and not in the absolute amount of New Zealand dollars. If one looks at this real estate recovery in terms of gold, one will realize a 33% loss of one’s wealth despite median real estate prices returning to their October 2007 levels.  

Currently, if the RBNZ keeps its word, interbank lending interest rates will remain at a record low 2.5% until the second half of 2010. Thus, given that this occurs, it would not be surprising to see property values in New Zealand continue to rise into the end of the year and the first half of 2010 and possibly throughout 2010 before the bubble bursts. However, much of the sustainability of the re-inflated New Zealand housing bubble will depend on the stock market bubbles in Europe, the US and China growing larger as well. If the illusion of these bubbles burst first, then the jig will be up. However, due to foolish and unsustainable monetary policies undertaken by the US Federal Reserve, there is a good chance that serious damage to the US stock market rally will not happen until sometime after this year. 

Because there are so many moving parts that determine daily price movements in real estate markets, I would have to follow New Zealand real estate markets daily and update my opinions daily about when I believe the New Zealand real estate market bubble is set to burst. However, I can tell you, beyond a shadow of a doubt, that the RBNZ’s monetary policies have created tremendous malinvestment in the New Zealand real estate markets (money inflow into real estate that would NOT happen under free market conditions). In turn, this malinvestment has created great distortion in real estate market prices. These distortions will also probably become greater before correcting back towards fair market valuations. 

This is not a knock against the RBNZ, but against ALL Central Banks. Central Banks never create any sustainable benefit to any party except the elite bankers of its nation. If you think this sounds conspiracy tinged, know that former Vice Chairman of the US Federal Reserve, Alan Blinder, in 1994, stated, “the last duty of a Central Banker is to tell the public the truth.” I think that the New Zealand real estate market has a little more wiggle room to move higher if one is already invested.  However, the risk-reward setup is terrible, in my estimation, for anyone seeking to enter real estate in New Zealand today. Understand the above artificial boom-bust cycle that Central Banks create as I have described it above, and you will understand, if you are currently invested, when to exit the New Zealand housing market in the future before it crashes. 

As you ponder the New Zealand real estate market’s future, always keep close to your heart and mind the following statement by John Maynard Keynes, the father of the modern day economic system instituted by all developed governments today: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. (1919)”  

If you understand this concept that less than one in a million understand even today, you should be able to use the policy decisions of the RBNZ to avoid getting hurt by the inevitable real estate market fall that is likely to happen sometime in the next year or two.  

 

About the author: 

J.S. Kim is the Managing Director & Chief Investment Strategist of SmartKnowledgeU™, a financial and research consulting company that offers hard-hitting investment guidance to help investors prosper during the ongoing and continuing global financial meltdown. His investment newsletter, the Crisis Investment Opportunities newsletter, has not suffered a single down year since its launch, returning +23.78% in just six months in 2007, +3.21% in 2008 and returning 37.54% YTD as of the end of September 2009. For more information, please visit http://smartknowledgeu.com

How Will Niagara Falls Fit Through a Garden Hose?

by Jeff Clark, Senior Editor, Casey’s Gold & Resource Report

“There’s no doubt in my mind that we’ll have a mania in gold. And because the gold and especially silver markets are so tiny, the rush into them will be like trying to push the contents of Hoover Dam through a garden hose. Our positions will go absolutely ballistic.” –Doug Casey, September 2009

Dear Readers,

Elmer Sutton’s eyebrows shot up when he saw the ad proclaiming gold stocks might make you wealthy.

It sounded like the perfect solution for his stock portfolio, loaded with investments going nowhere. He vaguely recalled hearing a little about gold, but if what the ad said was true, he thought he could make a killing.

So he called the broker and made an appointment for the next day. The broker seemed very knowledgeable and took the time to explain why he felt gold stocks were one of the best investments right now. He said this was not a get-rich-quick scheme, but that if you stuck with it, you could see potentially enormous profits. It sounded good. Elmer wrote a check for $2,500, and the broker bought three gold stocks for him.

The very next day, gold took a big drop and his spankin’ new gold stocks sold off hard. Not only that, there were riots in South Africa, where one of the companies was located. Elmer was instantly disgusted. He was losing money yet again. This time, however, he’d play it smart and get out before he lost it all – something his wife made sure he understood – so he hastily called the broker and told him he wanted his money back.

“Elmer, you can’t do that,” the broker told him. “This isn’t Woolworth’s.”

“I’m not buying them!” he yelled to the broker and slammed the phone down. Elmer wanted out, and that was that. He wasn’t about to lose any more money in the stock market.

Three years later, long after he’d forgotten about that broker, newspaper headlines were screaming about gold. Everyone at the party Elmer attended the night before was talking about how well their gold stocks were doing. His co-workers bragged about the good deals they were getting buying gold and silver coins. Everyone was talking about precious metals.

Elmer panicked; he didn’t want to be left behind. He scrounged around the house until he found the original confirmations of the trade he’d broken with “that broker”: 1,500 shares of Grootvlei at 35¢, 500 Anglo American at $2.50, and 1,000 Leslie at 50¢. He grabbed his newspaper and saw that Anglo was up 500% since then, and the others were paying dividends – this year alone – totaling more than he would have paid for his shares in 1976.

As the newspaper went limp in his hands, he had a vague recollection of the broker he met with and quickly tracked down the phone number. “I want to buy some gold stocks,” he breathlessly panted to the secretary answering the phone. She said the broker wasn’t in, and that while they would be happy to buy a stock for him, they were actually recommending investors sell their gold stocks.

Elmer couldn’t believe it. How ludicrous! Everyone he knew was buying, and he was personally acquainted with many people who were getting rich. He pushed on. “Look, everyone’s into gold right now. It’s on the front page of the paper, for crying out loud. So I want to buy some gold stocks right away.”

“That’s fine, sir, but I think you should talk to the broker first,” the secretary replied. “We really don’t recommend you do that.”

“I don’t care!” Elmer screamed, which he didn’t mean to do, but panic was setting in. “What’s this clown’s name anyway?”

“Doug Casey,” she replied.

Please Don’t Crowd the Emergency Exit

This true story explains how Doug Casey bought gold stocks at the very bottom of the market, as he took on those abandoned shares from Elmer. But today’s lesson underscores what Doug Casey saw back in the late 1970s: there’s certain to be a rush into gold and silver, and buying before Main Street catches gold fever is the only way to play this trend.

Because when Midas fever hits, prices will explode to the upside, for both the metals and the stocks. How do we know that?

First, let’s look at gold. If we added up all the gold ever mined on the planet, its total value would equal no more than $5 trillion at today’s prices. Yet, look at how this compares to the debt and bailouts and other monetary mischief of current governments…

 

Let’s make this chart very clear. Of the $5 trillion in gold ever mined…

• The U.S. government has thrown over twice as much at the economy in the past 12 months.
• The U.S. debt is more than double this amount so far this year.
• Total global government bailouts are almost four times larger (and this is a conservative figure; one estimate puts it at $24 trillion).

I intended to include annual gold production as one of the comparisons, but the chart isn’t big enough and neither is your monitor: 2008’s global gold production equaled about $73 billion, and to make that figure discernable on the chart would require the Global Bailouts bar to hit the ceiling above your head. That’s how small the gold market is.

The implications are undeniable: when the greater public rushes into gold – whether in response to inflation, dollar woes, war, whatever – the price will be forced up by an order of magnitude.

 

A Picture Is Worth a Thousand Dollars

While physical gold will protect our wealth, it’s the gold stocks that can potentially make us wealthy.

Once again, to get a sense of the Lilliputian size of the gold industry, I compared it to several other leading industries and stocks.

  

The value, as measured by market capitalization, of all gold producers around the world is less than Walmart’s. Every gold stock would need to nearly double just for the industry to match ExxonMobil. The oil and gas industry is about 12 times bigger.

When your neighbors and relatives and co-workers and friends all start clamoring to buy gold stocks, the pressure on prices will be enormous, rocketing our positions upwards.

Meanwhile – and admitting we’re first and foremost gold bugs – the picture for silver is even more dramatic. The potential for silver stocks is jaw-dropping.

 

 

If the gold industry is tiny, then silver’s $9 billion market cap makes it a nano industry. The entire silver industry is over 21 times smaller than gold’s! If gold explodes, silver will go supernova.

Consider these macro-facts about a micro-market and what they reveal about silver’s enormous potential:

• There are over 200 companies in the S&P 500 with a market cap larger than the entire market of silver producers
• There are five times more gold stocks than silver.
• Total silver production in 2008 was valued around $10.3 billion (at today’s prices). That represents just 1.5% of the $700 billion bailout last year, and 0.006% of the current U.S. monetary base.
• Of the 20 largest silver producers, only five actually call themselves a “silver” company, due to the fact that about 73% of all silver mined is a byproduct of other metals mining.

Any flood into the silver market would overwhelm it. In other words, the rise will be stunning. While it’s not going to happen tomorrow, I strongly suggest you get on board before that rocket ship takes off.

Just putting these charts together stirred my feelings of restlessness, making me anxious for the mania in precious metals to arrive. But the timing is not up to us. Be patient, because if you’re invested in gold and silver and the respective, high-quality stocks, you’re on the right side of this trend.

Had you bought gold, say, four years ago, when it was around $450/oz, you’d be sitting on a nearly 130% gain. But you could have made up to three times as much with even the most conservative precious metals investments – large- and medium-cap gold and silver producers. It’s not too late to jump on the bandwagon. Click here to find out more.

 

Expert Gold Miner’s opinion on the Dow/Gold Ratio

Weekly Wanderings 10 November 2009

As usual in these weekly musings we present you with interesting items we’ve come across during the week…

·        India buys gold

The big news this week was the purchase of 200 tons of gold by the Central Bank of India…John Maynard Keynes must be turning in his grave at the resurrection of “that barbarous relic”.

·        Cost of the Financial Sector Bailout

Max Keiser made an interesting point this week; he suggests that the US Government could have paid off the entire mortgage debt and credit card debt in the US for about 11 trillion dollars – which is considerably less than has been paid out into the financial sector… Compare the stimulating effect of that policy compared to the effect of what has actually been done…

·         The Dollar Carry Trade

Last week we talked about the burgeoning US dollar carry trade. The Financial Times has produced a useful little video explaining how this trade works. The link is here. 

·         Bring Back Bill Black

Professor William Black was the regulator at the heart of the Savings and Loan Crisis of the 80s. He managed to orchestrate the incarceration of hundreds of crooks involved in that fraud – we say that probably the single best thing the Administration could do at this point would be to give Black the authority and the resources to put these modern day Wall St crooks behind bars.

Geithner “Burned Billions,” Shafted Taxpayers on CIT Loan, Prof. Bill Black Says

 Another one of the nation’s largest lenders has filed for bankruptcy.  On the brink for months, CIT filed for Chapter 11 protection on Sunday.

The prepackaged plan allows CIT to restructure its debt while trying to keep badly needed loans flowing to thousands of mid-sized and small businesses. The plan keeps CIT’s operations alive and makes it possible for the company to exit bankruptcy by year’s end.

But here’s the bad news:  While senior debt holders will only lose 30% of their investment, we, the U.S. taxpayer, will lose the entire $2.3 billion we lent the company this summer.

William Black, professor at the University of Missouri-Kansas City School of Law is dumbfounded.  “We put ourselves on the hook in a completely inept way where we lose first. We lose entirely as the taxpayers.”

Black, a former top federal banking regulator, blames Treasury Secretary Timothy Geithner for negotiating such a bad deal on behalf of the American public.

His argument goes as follows: 

The government was in no way obligated to lend the struggling CIT money and, in fact, initially refused to provide it bailout funds.  More importantly, being the lender of last resort, the government should have guaranteed we’d be the first to get paid if CIT eventually filed Chapter 11. By failing to do so,  “it’s like he [Geithner] burned billions of dollars again in government money, our money, gratuitously,” says Black.

Black believes the problem stems from regulators’ fears that if the banks recognize a loss on the bad assets it will create a domino effect that will wipe out the entire financial system.

“If that’s true we’ve got to get rid of capitalism,” he warns, “because if we can’t recognize losses in a capitalist system we have no future.” 

• Interview with Pierre Lassonde - (ex-President of one of the world’s largest gold miners)

Philanthropist and talented businessman, Pierre Lassonde is recognized as one of Canada’s foremost experts in the area of mining and precious metals. In 1980, Pierre began ten years as President of the gold division of Beutel, Goodman & Company, directing its highly successful gold investment fund.

Pierre co-founded Franco-Nevada Mining Corporation with Seymour Schulich in 1982 and over a 20 year period, provided shareholders with a 36% annualized rate of return. He became post-merger President of Newmont Mining Corporation in 2002 – the world’s largest gold producer. From January to November 2007, Pierre was Vice Chairman of Newmont Mining Corporation.

In 2008, Pierre led a group of investors in bringing back Franco-Nevada to the public market and became its chairman. This week on King World News (link www.KingWorldNews.com ), Eric interviews this colossus of the mining and resource world. Now, over the years, Pierre has made a number of astonishingly prescient calls on the gold market. When a person of his stature offers us his viewpoints on gold and silver investment, it pays to listen carefully. I would urge that everyone interested in precious metals investment check out the complete interview; however we present a summary of the contents below. 

Paraphrased summary of the interview:

The purchase of 100 tons of IMF gold by the central bank of India this week is a seminal event in the gold market. This event is reminiscent of the 60s and 70s when gold was a financial instrument and central banks were big buyers of gold. In fact in 1980, central banks bought 2/3 of the entire world’s production of gold. This year, for the first time since 1980, the gold jewelry market will be smaller than the gold financial market. Along with this, for the first time in 20 years, central banks are becoming net buyers of gold rather than net sellers.

To consider the relationship of the gold market to financial markets in general, the single best tool is the Dow/Gold ratio. The vertical scale on the charts below is a log scale.

This ratio indicates the periods of time when it was best to be invested in financial instruments or hard assets.

Notice that between 1980 and 2000 the ratio went from 1 to over 42. This was a fantastic period of time to be invested in financial assets. Notice also that the low value of this ratio was 1.

The Dow/Gold Ratio chart shows the ratio of the price of the Dow to the price of gold. Another way to look at it is the number of ounces of gold it takes to buy one share of the Dow. For example, with the Dow at 10,000 and gold at 500, it requires 20 ounces of gold to buy one share of the Dow, so the ratio is 20. The reason for using gold to measure the value of the Dow is that gold is the most unbiased form of money in existence. Fake government paper money comes and goes, but gold has been money for thousands of years. It is the ultimate store of wealth.

Notice on the second chart that the ratio has been declining steadily since around 2000 down to a value now less than 10.  In previous hard asset cycles, the ratio reached as low as 1. Pierre is of the firm belief that this current hard asset cycle – due to last another 5-10 years - will also see a value of about 1 for the Dow/Gold ratio.  The US, EU and GB governments are all printing money and thereby devaluing their currencies against gold.

The trend for the next few years is for the price of gold to go up – certainly with hiccups now and then, but the overall trend will be up.

We are now in phase 2 of a normally three phase bull market in gold (and commodities in general). Will there be a manic phase 3 this time around?  One thing we know for sure; the Chinese citizenry are being encouraged by their government to buy gold and silver. The Chinese government is sitting on over two trillion US dollars in reserves, and the last thing they want is for their citizens to buy more of the same. In fact Chinese consumption of gold is up 16% this year. Given the predilection for the Chinese to gamble, and the casino quality of the Shanghai exchange, it is highly likely that a mania will develop in gold trading there as the price moves higher.

Now let’s turn our attention to gold mining shares. Quality gold mining stocks are currently undervalued with respect to $1100 gold. Most portfolio managers are underinvested in gold and commodities in general. Many are reluctant to move into the market because of the four-fold run-up already.

On the supply side of the industry, there is consistently less gold being produced year by year. One of the reasons is that funding for junior exploration companies has dried up almost entirely as a consequence of the financial crisis. The situation now is that new supply can’t emerge in any significant quantity over the next 5 years.

Large companies are being forced to bring marginal properties into production. At some stage, likely soon, larger companies will start acquiring smaller ones. Eventually the intermediate sector will be hollowed out.

If you want to get into this market, a good approach is to dollar cost average – don’t try to pick the lows – just assign capital by degrees over time to quality companies. Pierre feels that the seniors are at present the most undervalued.

Royalty companies, like Royal Gold and Pierre’s own Franco-Nevada, look particularly interesting plays.

The bottom line is that we are in a hard asset cycle now – don’t be invested in paper assets; you are likely to get smashed.

Now let’s consider the energy market.

The production of conventional oil (light sweet crude) peaked in 2005. From now on, incremental demand must be met with sour crude and more expensive unconventional sources.

In China, from 2010 onward, every new gas station must be equipped with a natural gas refueling port. The Chinese see the writing on the oil wall – they are preparing for a transport fleet to run on natural gas.

From now on world oil demand will be curtailed by higher prices. Pierre agrees with James Dines and others that this marks the end of the cheap fossil fuel age.

 

 

 

Why Gold Has a LONG Way to Go

By Jeff Clark, Casey’s Gold & Resource Report

A couple weeks ago, I had my TV tuned to a business show that loves to give predictions ‎on the markets and the economy. On that day, one of the program’s regular guests ‎declared it was time to “short” gold, that it had reached its top, and that the precious ‎metals bull market was over. I’ll try to be nice in my rebuttal.‎

So, what was his reasoning: technical analysis of wave counts? falling demand? a telling ‎ratio? sun spots? No, he noted that upscale department store Harrods in London began ‎selling gold bullion and coins “over the counter,” ergo, the top was in. Nice try, “Bert,” ‎but this is amateurish. You really shouldn’t be playing with the big boys if that’s the basis ‎of your call.‎

Yes, gold will someday put in a top, and since the gold price is largely determined by ‎psychology, the end of the bull run will be marked by behavioral types of signals. But ‎calling a top in gold now is like declaring that WWII was over because the Allies won a ‎small skirmish in early 1942. To have made such a statement, based on a small, isolated ‎event, ignored the greater forces that had yet to play out and would have made any ‎journalist or military strategist look foolish indeed. ‎

And here’s why Bert looks equally silly today…‎

If the top were in, we’d be in the midst of an all-out Mania. Are we? Do you get the ‎impression there’s a rush into gold by the greater public right now? Are headlines blazing ‎the covers of major magazines pronouncing gold as the new investment king? Has Wall ‎Street gone gaga over gold and silver? I ask because these are the true signs that a trend ‎has entered its final blow-off top and would signal it’s time to get out. ‎

I decided to put Bert’s prognostication to the test, and I invite you to play along.‎

First, I struck up casual conversations with my friends, neighbors, relatives, ‎acquaintances, my wife’s co-workers – heck, even my seatmates on airplanes – angling to ‎learn how much gold they were hoarding, about the killing they were making in gold ‎stocks, and how they were getting rich from all their precious metal investments. (In ‎fairness, I had to exclude my dad, who is an award-winning gold panner, but he’s the ‎only one.)‎

I found no one – not one person – who is actively investing in anything gold or silver, let ‎alone rushing to buy or hoard the stuff. I had two people who confided that they did own ‎gold, but in both cases it was inherited. A few were curious how they would go about ‎doing such a thing, and fewer asked if I thought they should. Most everyone looked at me ‎blankly when I asked; they didn’t seem to know what I was talking about. When I got a ‎reaction like that, it was pointless to ask about gold stocks. Of the handful I did ask, most ‎had never heard of Barrick Gold, the world’s largest gold producer. ‎

Now ask yourself the same thing: how many of your family, friends, neighbors, and co-‎workers are buying gold and silver coins? Are any of them giving you hot stock tips ‎about a fantastic gold producer, or telling you about the latest gold discovery made by a ‎company in China? Have any fellow investors told you they’re dumping their brokers ‎because they can select gold stocks better on their own? Anyone telling you they’re going ‎to night school to learn the gold mining business?‎

Next, I surveyed a large sampling of print media looking for some of these signals that ‎Bert surely had spotted. Over the past couple weeks, not one of the major business ‎magazines I reviewed had anything on the cover about gold or silver. Further, there were ‎no articles on precious metals, such as the best ways to buy or store all this gold everyone ‎is buying. ‎

One magazine ran an article about ways to prepare for inflation, and gold wasn’t even ‎mentioned! I did see an ad from the U.S. Mint in another, along with a couple small ads ‎in the back that said they had the best prices on bullion (right beside the teasers for ‎buying a Russian wife), but that was it. Even the portfolio allocation models ‎recommended in the articles I read made no specific mention of precious metals (one ‎recommended a “resource” fund, but their discussion of it was centered around energy ‎investments). ‎

Other than the articles you seek out, how many mainstream magazines do you see ‎extolling the virtues of gold and silver on their cover? How many bestsellers are ‎prominently displayed at your nearest bookstore that scream at you to buy gold stocks? ‎Are you getting fed up with all the junk mail you get about gold and silver?‎

Last, I went out of my way to look for stories on gold and silver on TV and radio. About ‎all I could find were the same ads that popped up after last year’s Super Bowl ‎commercial by Cash4Gold. A couple programs quote metals prices, and I was able to find ‎another that actually used the word “gold” in a sentence. It might just be me, Bert, but I ‎can’t find any news anchors talking about the latest gold discovery or that “must own” ‎gold stock. No in-depth special reports from investigative journalists on the hot Canadian ‎junior mining sector. Nothing on my radio about the best ways to store all the silver every ‎smart investor has been buying.‎

How about you – are you feeling bombarded by TV and radio ads and segments on ‎precious metals? Do you have the clear impression gold and silver are the hot new ‎investing trend around the world? Are you Tivo-ing certain TV shows because of all the ‎great info they provide about picking the next great gold stock? ‎

If we were in a Mania, Bert, all of this would be happening. But it’s not. Those who buy ‎gold coins in the U.S. are still largely viewed as members of a fringe group. There is no ‎public discussion on gold, no insider tips on the latest hot gold stock, no special reports ‎on how to store all the bullion you’ve collected. The psychology isn’t on our side yet. ‎One signal does not a Mania make.‎
Last and perhaps most important, Bert, are you sure the dollar is done falling? You’re ‎absolutely convinced we won’t see price inflation? Our current debt load won’t pose any ‎future problems? No more worries about foreigners buying all that debt? Obama and ‎Bernanke really have saved the day?  ‎

Bert, send me your shorted gold positions, I’ll buy them from you. And although the gold ‎price could see a correction in the near term, and several more along its journey to “the ‎top,” remember that battle in early1942 and all that had yet to occur before the war was ‎over. ‎

And one more thing: when you finally become breathless to buy gold stocks, I just might ‎be ready to sell them to you.‎

Paul Tudor Jones goes for gold

Weekly Wanderings 3 November 2009

This weeks musings feature…

• King World News interview with Rick Rule summarized.‎

• Paul Tudor Jones goes for gold.‎

• Nouriel Roubini and the carry trade bubble

‎(a)  Rick Rule‎

This week among the wealth of material at King World News (www.KingWorldNews.com), Eric has ‎an interview with Rick Rule, who is the founder and owner of Global Resource Investments LP, and ‎affiliated entities, which are involved in securities brokerage, investment management and corporate ‎finance, focused on natural resources and basic industries. Mr. Rule and his firm are successfully ‎involved in agriculture, alternative energy, conventional energy, forestry, infrastructure, mining and ‎water resources investing on a worldwide basis. Mr Rule is well known as an extremely astute ‎resources investor He is intending to visit Auckland this coming January, and I for one will be very ‎intent on what he has to say. In this week’s column, I summarize the contents of this interview. ‎

‎(a)‎ At present, the US dollar may be somewhat oversold, and gold somewhat overbought, ‎suggesting that the dollar may undergo some sort of rebound in the near-term. Gold could fall ‎back once again below $1000/oz, possibly down as far as $850/oz. ‎

‎(b)‎ If the gold bull market, which appears to be entering its Phase 2  (out of 3) up-leg, continues ‎to develop, then the silver market, which is much smaller, “could get goofy” to the upside. ‎Rick pointed out that the silver market is difficult to analyze, because of the opacity of supply ‎and demand factors in South Asia, where gold and silver have always been traditional stores ‎of wealth.‎

‎(c)‎ As we have pointed out in other articles also, the Chinese government is actively encouraging ‎its citizens to purchase gold and silver. The implication here is that, if a 3rd manic phase were ‎to develop in the precious metals markets, then there are millions more potential buyers out ‎there than there were the last time around.‎

‎(d)‎ With regard to precious metals stocks, there are a few quality junior companies that are ‎currently substantially undervalued, suggesting that there may be a number of takeovers ‎arising at some stage.‎

‎(e)‎ Gold and silver mining stocks are still stocks. Hence if there were to be a stock market sell-‎off, these stocks would likely sell off as well, as a panic sell-off causes a rush to liquidity as ‎margin calls have to be met….‎

‎(f)‎ With regard to the markets in general, Rick sees a number of factors that suggest that it is far ‎too early to be talking of green shoots. One of the more ominous things on the horizon is the ‎massive amount of commercial real estate debt that has to be refinanced over the next 2 – 3 ‎years.‎

‎(g)‎ The gold market is cyclical in nature….there will come a time to get out and into other ‎resource markets, such as the market in water and water rights…..BUT that time is not yet. ‎

 

‎(b) Paul Tudor Jones‎

Paul Tudor Jones is arguably the most successful hedge fund manager of all time. When he joins David ‎Einhorn and John Paulson in going for gold, it pays to prick up an ear and listen….‎

The following material is paraphrased from the appendix of the third quarter letter of the Tudor BVI ‎Global Fund, in which he outlines his rationale for investing in gold.‎

He begins by pointing out the dynamics of the gold market are very different from other commodity ‎markets. Gold is not consumed; it is accumulated. Also, in times of (hyper)inflation, or at  times when ‎the financial system appears unstable, gold becomes a more reliable store of value than fiat currencies, ‎which have intrinsically have no value, being based on faith.‎

How do we determine, at any given moment, whether gold is cheap or expensive? ‎
A number of charts, presented below, enable us to obtain at least a partial answer to this question. One ‎measure is to look at total market capitalization of gold compared to the amount of global (G-20) and ‎US base money, as measured by M2. The important point to note is that gold’s value should increase as ‎its scarcity relative to printed currencies increases. We concur with this view, as B52 Ben has declared ‎himself as a money printer par excellence. ‎

Source: the Tudor Group.‎

This is but one measure that the Tudor group examines to determine the value of gold at the present ‎time. Their proprietary model suggests that gold is currently, and likely to remain so over the next 2 ‎years, 20% undervalued. They also observe that the base of M2 growth is likely to quicken over the ‎next 2 years.‎

Also of note is that the inflation adjusted all time high of the gold price was $2422 on 21st January, ‎‎1980.‎

It is also important to consider supply and demand factors.‎

Below is a chart (Chart G) of annual world gold production. The rate of increase in production is ‎declining.‎

On the demand side, we have a number of factors leading to increased demand. There is continued ‎strong investment demand for physical gold in the face of heightened global uncertainty and ‎unprecedented global monetary stimuli. Secondly, the advent of physically backed gold (and silver) ‎ETFs has increased demand from a new investor class. Chart J below indicates the rate of increase in ‎Gold ETF holdings.‎

Another fundamental change in the demand for gold is the shift of the official sector from being a net ‎seller to a net buyer.‎

The Tudor Group state that, in their opinion, the scope for increased investment demand over the ‎coming years is much greater than the potential for lower demand resulting from new supply. As a ‎result, incremental demand must be supplied from current holders – many of whom will not wish to ‎transfer their gold at or near current prices. ‎

 

c) Nouriel Roubini

The following column was carried by the Financial Times. Professor Roubini discusses the ‎development of the dollar carry trade that we have talked about previously, and points out the ‎obvious, really, namely that when this bubble bursts, the carnage will be terrible to behold. ‎

Mother of all carry trades faces an inevitable bust

By Nouriel Roubini
Published: November 1 2009 18:44 | Last updated: November 1 2009 18:44‎

Since March there has been a massive rally in all sorts of risky assets – equities, oil, energy and ‎commodity prices – a narrowing of high-yield and high-grade credit spreads, and an even bigger rally ‎in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has ‎weakened sharply , while government bond yields have gently increased but stayed low and stable. ‎
This recovery in risky assets is in part driven by better economic fundamentals. We avoided a near ‎depression and financial sector meltdown with a massive monetary, fiscal stimulus and bank bail-outs. ‎Whether the recovery is V-shaped, as consensus believes, or U-shaped and anaemic as I have argued, ‎asset prices should be moving gradually higher. ‎

But while the US and global economy have begun a modest recovery, asset prices have gone through ‎the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, ‎when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. ‎Risky asset prices have risen too much, too soon and too fast compared with macroeconomic ‎fundamentals. ‎

So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero ‎interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the ‎weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the ‎major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do ‎so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-‎yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they ‎are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the ‎fall in the US dollar leads to massive capital gains on short dollar positions. ‎

Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis ‎on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry ‎trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge ‎bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per ‎cent range since March. ‎

People’s sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been ‎increasing due to a rising correlation of the risks between different asset classes, all of which are driven ‎by this common monetary policy and the carry trade. In effect, it has become one big common trade – ‎you short the dollar to buy any global risky assets. ‎

Yet, at the same time, the perceived riskiness of individual asset classes is declining as volatility is ‎diminished due to the Fed’s policy of buying everything in sight – witness its proposed $1,800bn ‎‎(£1,000bn, €1,200bn) purchase of Treasuries, mortgage-backed securities (bonds guaranteed by a ‎government-sponsored enterprise such as Fannie Mae) and agency debt. By effectively reducing the ‎volatility of individual asset classes, making them behave the same way, there is now little ‎diversification across markets – the VAR again looks low. ‎

So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive ‎purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother ‎of all carry trades and mother of all highly leveraged global asset bubbles.‎

While this policy feeds the global asset bubble it is also feeding a new US asset bubble. Easy money, ‎quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of ‎forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity ‎and credit bubble. Finally, a weak dollar is good for US equities as it may lead to higher growth and ‎makes the foreign currency profits of US corporations abroad greater in dollar terms.‎

The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy ‎monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, ‎eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global ‎monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness ‎and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term ‎rates lower than is desirable. Central banks may also be forced to lower interest rates through domestic ‎open market operations. Some central banks, concerned about the hot money driving up their ‎currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble ‎will get worse: if there is no forex intervention and foreign currencies appreciate, the negative ‎borrowing cost of the carry trade becomes more negative. If intervention or open market operations ‎control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these ‎economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day.‎

But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead ‎the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-‎funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their ‎dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset ‎classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, ‎commodities, emerging market asset classes and credit instruments. ‎

Why will these carry trades unravel? First, the dollar cannot fall to zero and at some point it will ‎stabilise; when that happens the cost of borrowing in dollars will suddenly become zero, rather than ‎highly negative, and the riskiness of a reversal of dollar movements would induce many to cover their ‎shorts. Second, the Fed cannot suppress volatility forever – its $1,800bn purchase plan will be over by ‎next spring. Third, if US growth surprises on the upside in the third and fourth quarters, markets may ‎start to expect a Fed tightening to come sooner, not later. Fourth, there could be a flight from risk ‎prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation ‎between the US/Israel and Iran. As in 2008, when such a rise in risk aversion was associated with a ‎sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk ‎aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed. ‎

This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset ‎prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the ‎bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the ‎monster bubble they are creating. The longer they remain blind, the harder the markets will fall.‎
The writer is a professor at New York University’s Stern School of Business and chairman of Roubini ‎Global Economics

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