You’ll Buy Gold Now and Like It!

Just how much gold is enough?  It’s a question we often hear and is difficult to answer in general terms, but Jeff Clark of Casey Research offers some decent guidance as a starting point below.  He also provides some gold price projections that might help if you are trying to decide whether to buy now or wait for a further pullback.  As subscribers ourselves to Casey Research we can say they have been on the money in calling the progression of the financial crisis so far.  As vindication of this and further proof of their ongoing success, they have just been named to the Inc. 5000 list of fastest-growing private companies in America.  To celebrate they are offering a 50% discount to their flagship newsletter The Casey Report until August 31.  To learn more about this special one time offer click here.

By Jeff Clark, Casey’s Gold & Resource Report

I get this question a lot: “Should I buy gold now, or wait for a pullback?” 

It’s a valid question. For nearly two years, gold hasn’t had a serious decline. There have been pullbacks, of course, but nothing assumption-challenging. In fact, since October 2008, gold’s largest price drop is 10.6% (based on London PM fix prices), and yet the average of all declines since 2001 is 13% (of those greater than 5%). The biggest pullback we’ve seen this summer is 8.2%. Technically the summer’s not over, but I’ll admit I’m surprised we haven’t had a better buying opportunity. 

So, is now the time to buy? It depends on your honest answer to another question: “Do you own enough gold?” By “enough” I mean an amount that lends meaningful protection on your assets. By ”meaningful” I mean that no matter what happens next – another financial blow-up, accelerating inflation, crushing deflation, war, a plummeting dollar, more reckless government spending – you won’t worry about your investments.

Whether you should buy now is almost irrelevant if you don’t already own a meaningful amount of gold. If you earn $50,000 a year, how is one gold Eagle coin going to protect you if the dollar plummets and sends inflation soaring? If your investable assets total $100,000, is your nest egg sufficiently protected owning two gold Maple Leafs? This is all akin to buying a $50,000 insurance policy for a $500,000 home.

Today we face the prospect of prolonged economic stagnation, and most governments are administering grossly abusive monetary policy as a remedy. While some of the consequences are already being felt, the full ramifications have not hit your wallet yet. But they will.

If you don’t have at least 10% of your investable assets in physical gold, or at least two months of living expenses, you have your answer: Buy. Don’t use leverage, don’t borrow money, and don’t buy with reckless abandon, but yes, get your asset insurance policy and tuck it away. And then start working toward 20% (we recommend a third of assets be in various forms of gold in Casey’s Gold & Resource Report).

Back to the original question: should we buy now, or wait for a pullback?

The answer comes when you look at the big picture. If you pull up a 9-year chart of gold, what sticks out is that the price is near its all-time nominal high. One could be forgiven for thinking it looks toppy or at least ripe for a pullback. But I assert that the highs for gold have yet to be charted.

What will a gold chart look like after adding five years to it?

When projecting gold’s potential price peak, there are many ways to measure it. Conservatively, gold reaching its inflation-adjusted 1980 high would have it topping around $2,400 an ounce. More radically, if the U.S. tried to cover its cumulative foreign trade deficit with its current gold holdings, gold would need to hit about $32,000/oz.

Let’s take something more middle of the road, and apply the same trough-to-peak percentage advance gold underwent in the 1970s. (I think there’s a greater than 50/50 chance it does more than that, given the precarious nature of the U.S. dollar.) Gold rose from $35 in 1970 to $850 in 1980, a factor of 24.28. Our price bottomed in 2001 at $255.95; multiply that by 24.28 and you get a gold price of $6,214 per ounce.

Sound too high? Well, would it feel high if you had to pay $12.50 for a Big Mac? At $3.39 today at my local McDonald’s, that’s about what it would cost ten years from now if we get the same rate of inflation we had in the late 1970s.

So if gold hits $6,214, what might it look like on a chart if you bought today around $1,200?

$1,200 doesn’t seem so pricey, does it?

I’m not saying there won’t be pullbacks or that you shouldn’t try to buy at lower prices. Just keep a big-picture perspective. Let’s say gold falls to $1,100 and you’re kicking yourself for having bought at $1,200… if gold reaches $6,200 an ounce, the profit difference between buying at $1,200 and buying at $1,100 is only 1.6%. If gold gets whacked to $1,000 (at which point I’ll be buying with both hands) the difference is still only 3.2%.

Heck, even if gold peaks at $2,400, you still get a double from current levels. (But unless government monetary policies immediately reverse course, gold isn’t stopping at $2,400.)

So there’s my answer. Yes, you have to accept my projection of gold’s ultimate price plateau. And you have to sell at some point to realize the profit. But if the final chapter of this bull market looks anything like the chart above, I don’t think you’ll be too upset having bought at $1,200.

Carpe gold.

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The Best Gold Interview of 2010

This week we feature an interesting interview with a well connected insider in the U.S. precious metals community and some surprising revelations on just how few people are selling gold and silver and what he thinks supply will look like down the road…

Jeff Clark, Casey’s Gold & Resource Report

Much of what passes for “insider” information these days is often conspiracy-edged or largely conjecture. True inside information is actually hard to come by. So what follows is the refreshingly candid and uncut version of my talk with a first-hand participant in the murky and little-understood world of gold bullion, mints, and bullion dealers.

Customarily, when considering a company for a potential recommendation, I hold a series of discussions with management. It was during one of these vetting procedures that I spoke with Andy Schectman of Miles Franklin – and heard some disturbing reports about supply that every investor should know. Andy is a bullion seller, so you’re welcome to take his comments with a grain of salt. On the other hand, what he sees week after week and what he hears from his high-level industry contacts might just make you pull back on that salt shaker and re-inventory the number of ounces you own…

Jeff Clark: Andy, tell us about the kinds of contacts you have in the industry and where you get your information.

Andy: I’m associated with two of the six primary mint distributors in the United States. There are only six primary precious metal distributors here because the qualifications are very difficult to meet. Aside from having $100 million in annual sales, you have to extend a $50 million line of credit to the U.S. Mint, and very few companies can do that. So in working with these companies, I’m privy to information that many others aren’t.

Jeff: So, what have you been hearing from them about supply for physical gold and silver?

Andy: I think in order to properly characterize what’s happening in the industry, it’s important to start from a big-picture perspective, which is that by and large the masses in this country are not involved in precious metals. In my experience, the move we’ve seen in gold over the last decade has primarily been from international investment – sovereign wealth funds in the Orient, petrodollars in the Middle East, India buying from the IMF, Russia and Japan accumulating, etc.

Most U.S. investors have lived through nothing but prosperity and good times, where they perhaps didn’t think they needed to own gold – but I think the rest of the world isn’t as optimistic about the future. So when you talk about supply, it’s important to acknowledge that most people in this country don’t own any gold and silver. To me, that’s what should really alarm people. 

Jeff:  Tell us how you would characterize supply right now.

Andy: Fragile. Availability of product changes almost weekly.

But it’s worse than that. When the market plunged 1,000 points in one day last month, two German banks bought about 35,000 or 40,000 one-ounce coins and cleaned out the Royal Canadian Mint overnight. Think about that: two banks cleaned out one of the world’s preeminent mints in one day.

Then you have the Austrian Mint recently announcing they were running into supply issues. And the U.S. Mint has been the model of inefficiency for the last several years. They have been either reluctant or unable to meet demand when it comes to Gold Buffalos, Platinum Eagles, and fractional Gold Eagles. They issue dribs and drabs of them, but certainly not enough to meet demand. 

Jeff:  And they frequently run out.

Andy:  They frequently run out, they frequently have delivery delays, and it’s a situation where very quickly we could see major disruption in the supply chain.

Jeff: We saw supply constraint in 2008, where dealers were running out of product. Do you think we’re headed there again?

Andy: I do. In 2008, when gold dropped from $1,000 to $700 very quickly, all product worldwide disappeared. Within weeks the U.S. Mint was shut down. The Canadian, Austrian, and Australian Mints were all eight to 12 weeks back-ordered or shut down. The Australian Mint stopped taking any new orders in July or August for the rest of the year. The Rand Mint, for the first time ever, sold out of all its product. One wealthy Swiss businessman flew his own 747 there and cleaned them out. 

So product was impossible to get, but not just from the primary mints; even the refiners that made 100-ounce silver bars couldn’t get them. No one could get anything, and it was a very scary time if you owned a gold company. There were many days I sat at my desk wondering how I was going to get product tomorrow, and there were times we couldn’t take orders whatsoever. And that comes from a company that’s done over $100 million in sales, is a member of the certified exchange, and that has contacts that run very deep in the industry – and I couldn’t get anything.

A friend of mine who owns a very prominent gold and silver company in Colorado has a store front, and back then he told me, “I want to put a sign on my window that says, ‘All we do is buy, we don’t sell,’ because one person will come in there and clean me out and there’s nothing to be had.”

So what I think is ahead comes from that experience. If you factor in that very, very few people in this country have even held a gold coin – let alone own any gold, or understand the reasons to own it, or will even accept the arguments for owning it – I think the primary distinguishing characteristic of this market will be that people won’t be able to get product when they want it. The rising price in and of itself will not be the main hurdle. For the most part, people will overcome price, because they’ll want to own it. The real issue will be getting product in a timely fashion, and that will become difficult for the average American. 

Jeff: What about supply from those selling coins and bars who bought at lower levels? Doesn’t that increase the available supply?

Andy: This is what I believe is a distinguishing feature of this market: there is a total absence of a secondary market. There isn’t one. Period. In years past, we used to do a lot of business with people wanting to sell. Today, virtually no one is selling their coins back to us. In fact, for every 100 transactions we have, maybe one is a seller – the other 99 are buyers. Our largest supplier, who provides over 60% of all bullion to the U.S. market, told me earlier this month they have days without one single buy back. And this is from the largest supplier in the U.S.

Jeff: Why do you think no one’s selling?

Andy: People are afraid. They’re afraid of what’s happening geopolitically, economically, fiscally, and want to hold on to their gold. As they should, because this is exactly the kind of circumstance gold is for.

So I would argue that as gold and silver creep higher, there will be more and more buying and less and less selling. And less selling means less product for buyers.

When you look at the fact that there is no secondary market, and then you throw into the mix that the mints are already running into production problems, and then add the troubles in Europe, which could easily spread, I think it’s easy to see how demand could outstrip supply. I assure you, there’s an awful lot of gold acquisition going on in other countries – the Swiss and Germans, for example, see the handwriting on the wall. They were buying everything up when the European crisis broke. It was bedlam for awhile.

And if all of a sudden people here wake up and feel they really need to own gold but can’t get it, we’ll be right back where we were in 2008.

But to your point, yes, nobody is selling anything right now and almost anything you buy will be dated 2010. That’s because there are no backdatedcoins to be had virtually anywhere. Maybe 20 here or 50 there, but nothing on a meaningful basis.

Jeff:  It sounds like regardless of what’s going on in America, global supply could be in jeopardy if this trend continues.

Andy: Absolutely, especially with the fact that there is no secondary market. Really, the people who enter the game late are going to be at the mercy of the mints. And if the mints run out of supply, or just stopped selling for whatever reason, it’s “game over” for those who want to accumulate. Right now there’s as good a supply as I’ve seen in a couple years, and that’s at a time when we’ve already witnessed the Royal Canadian Mint running out of gold for a week or so, the Austrian Mint also running out of product, and the U.S. Mint rationing Silver Eagles for a short time.

Jeff: And you’re calling this a good supply market?

Andy: Yes. It’s as good as we’ve seen in a couple years. 

Jeff: That’s scary.

Andy: I don’t think you’re exaggerating by saying that. And the message is, “Buy now while it’s still available.” I know it may sound like I’m trying to sensationalize it, but I’m really not. Based on what I know, it’s my opinion that if 5% of this country put 5% of their money into gold, there would be nothing left tomorrow morning. Supply is that small compared to the tremendous amount of money that’s out there.

Here’s another example. I had a meeting with a money management company here in Minneapolis that manages some of the oldest money in the entire country, literally billions of dollars. And when I spoke with them, I discovered the principals of the firm had never held a gold coin. They asked me questions that were as rudimentary as what I would get from a complete novice. By the end of the conversation, they said they would start with a $5 million order. I later learned this was a small order for just one of their clients. It was just dipping a toe in the water for these people.

Well, it won’t take too many of these kinds of people waking up to gold to drain the supply chain. Most of the wealth in this country is driven through money managers, and at some point these people will tell their managers, “I don’t care what the price or premium is, get me gold.” When they come knocking in large numbers like that, the supply chain will dry up overnight. I know this to be true. If we see an event that drives money managers to buy physical gold, the supply will be gone.

Jeff: Some of that money is already going into the ETFs.

Andy: Yes, but not when you consider the total capital that’s available. And keep in mind that the prospectus for GLD and SLV state that, more or less, you can’t take possession of the metal. So, do you “own” gold if you have shares in GLD or SLV, or any ETF, for that matter? If you can’t put the coin or bar in the palm of your hand, the answer is no.

Jeff: Are you seeing any difference between gold and silver? Is one more difficult to come by than the other?

Andy: We’ve seen a lot of demand for silver, probably more so than gold, and the U.S. Mint has already rationed Silver Eagles once this year. Junk silver bags are becoming much harder to get. And I think the higher gold goes, the faster silver will disappear. At some point the American public will realize they should have some gold and silver, and we could see a situation where the gold price could get out of reach for some investors. Those people will turn to silver and, as a result, it will probably be tougher to get than gold.

Jeff: If supply gets scarce, do you expect premiums to shoot up?

Andy: Absolutely. In 2008 the premiums were astronomical. Silver Eagles were $5.50 to $6 over spot. Gold Eagles were $100 to $150 over spot. The premiums went parabolic. That could easily happen again.

Jeff: And that was due to constrained supply.

Andy: Yes. When the price fell off the table, everything disappeared quickly. That’s counterintuitive, I know, because logic would dictate that as the price of something falls, demand is waning. But as the price fell, I think it became more attractive to large interests around the world, and everything got gobbled up fast.

Looking ahead, I can tell you that the only way you’ll see premiums stay where they are is if the mints are able to keep up with demand, and based on what I see I would argue there is no way they can. They can’t even keep up now. On top of that, as I stated, people aren’t going to sell their gold this time unless they absolutely have to, so there won’t be any supply coming from sales.

Jeff: So your message to someone who owns little or no physical metal now is what?

Andy: Acquire as many gold and silver ounces as you can. In the end it’s not about price paid, it’s about number of ounces. View the supply issue as critically as you would the price, because I believe that more than anything else, the lack of available supply will mark this industry.

Jeff: Excellent advice, Andy. Thanks for your input.

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If Deflation Wins, What Will Gold Stocks Do?

Jeff Clark of Casey Research takes a look at the Great Depression to see what this might tell us about how gold and gold stocks or shares may perform in a deflationary environment….

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

The talk of a possible double dip is now common banter on TV investment programs. And indeed, deflationary forces seem to have the stronger grip right now than inflationary ones. So if deflation is the next reality we have to face, what happens to our favorite stock investments?

There’s lots of data about what gold does during periods of high inflation, but less so with deflation, partly because we don’t see a true deflation all that often. But of course we’ve got the biggie we can look at, and the seriousness of the Great Depression can give us a big clue as to how gold stocks behave in a true deflationary environment.

First, we know what happened to the stock market in 1929, and in that initial shock, gold stocks crashed too. A rally ensued in most equities until the following April, including gold stocks. Then the Dow took a one-way elevator ride down for the next two and a half years.

What did gold stocks do?

From 1929 until January 1933, the stock of Homestake Mining, the largest gold producer in the U.S., rose 474%. Dome Mines, the largest Canadian producer, advanced 558%. In spite of the gold price being fixed at the time, gold stocks rose dramatically.

At the same time, the DJIA lost 73% of its value.

And the chart doesn’t show that you could have bought both stocks at half their 1929 price five years earlier, which would have led to gains of around 1,000%. That’s not all: both companies paid healthy and rising dividends as the depression wore on; Homestake’s dividend went from $7 to $15 per share, and Dome’s from $1 to $1.80.

Yes, volatility was high in the gold stocks throughout the depression, with occasional wild price swings. But after the 1929 crash, much of the volatility was to the upside.

The bottom line is that the two largest gold producers – during a time of soup lines and falling standards of living – handed investors five and six times their money in four years.

What about gold itself? On April 5, 1933, President Roosevelt issued an executive order forcing delivery (i.e., confiscation) of gold owned by private citizens to the government in exchange for compensation at the fixed price of $20.67/oz (you can read the original order here). And less than nine months later, he raised the gold price to $35, effectively diluting every dollar 41% overnight and swindling everyone who had turned in his gold.

We don’t know exactly what an untethered gold price would have done during the depression, but given its distinction in history as a store of value, we believe it would retain its purchasing power in a deflationary setting regardless of its nominal price. In other words, while the price of gold might not rise, or could even fall, your best protection is still gold.

But with all this said, the overriding concern isn’t deflation. Yes, economic growth will likely be flat for years, and many Americans will see some hard times ahead. But deflation won’t win; in a fiat money system, any deflation will be met with an inflationary overreaction (as we’ve seen). And the worse the deflation, the more extreme the overreaction will be.

In fact, I think there’s another round of money printing before this year is over. And sooner or later, that extra money is going to dilute every dollar you own, giving us an inflationary hit as bad as the deflationary one we got during the Great Depression.

It’s for this reason that I continue to urge you to own physical gold, in your possession and under your control, given its reliability as a store of value in both inflationary and deflationary environments. If you don’t have a meaningful portion of your investments in physical gold, I think you’re playing with fire. And those who play with fire eventually get burnt.

Want an easy way to start buying physical gold? I arranged for some seriously discounted bullion in the current issue of Casey’s Gold & Resource Report, which you can check out risk-free here…

Gold Meltdown or Mania - Batten Down the Hatches

We’ve had a few questions lately about investing in gold and silver mining shares.  Louis James of Casey Research shares his thoughts on what the possible impact of another downdraft in world financial markets will have on not only gold and silver but also on precious metals shares…

by Louis James, Senior Editor, Casey’s International Speculator

As Doug Casey said recently, we expect things to come unglued soon. With the ongoing madness in Europe, it seems to me that things are starting to look visibly less well glued already.

In contemplating the possibility of another stock market meltdown, it seems important to me that in spite of the exuberance with which investors rushed back into the market over the last year, the memory of 2008 remains vivid, tempering enthusiasm with caution. For example, the market still has relatively little appetite for early-stage, grassroots exploration projects; by our latest estimates, Mr. Market is willing to pay on the order of ten times more for Proven & Probable ounces in the ground than for less certain resource categories. With this evidence of caution in mind, and the great unwinding of the broader credit markets well underway, it seems likely that our sector is less leveraged than it was before the crash of 2008.

If a panic in the broader markets put liquidity-crunch-induced pressure on the gold price, the meltdown should be less severe than in 2008 and the eventual rebound could be dramatic, possibly triggering the mania we’ve been calling for. Remember: the market crash drove gold almost down to $700 in October ’08, but the same fear drove it almost back to $1,000 by February ’09. Silver topped that with a 60% rebound over the same period.

As the debt-glue holding everything together continues to lose its grip, the ride will only get rougher. As bad as 2008 was, if the Crisis Creature appears to be coming back when everyone on Main Street thought it was dead, the fear should be much worse – and that should drive gold way, way north. It’s possible the fear, coupled with the lack of any safer alternatives, could prevent gold from melting down at all, sending it instead straight through the roof into the clear blue Mania Phase sky.

With its industrial metal aspect, however, another big economic meltdown could hit silver harder than gold, and it might take longer to recover, especially if base metals don’t rebound the way they did in 2009. That said, silver has always tracked gold, so when gold heads for the moon, we expect silver will as well. It could reach even higher, if supply is cut by reduced base metal demand, as most silver production is as a by-product of base metal mines.

Either way, I don’t care if gold drops in the weeks and months ahead; the overall trend is for widespread economic fear and uncertainty to continue, holding gold prices up and eventually driving them higher. That makes the current retreat look like a great buying opportunity. In fact, putting my money where my mouth is, I picked up some more gold buffaloes just yesterday, when gold dropped to $1158. As I type, it has rebounded to $1181. I plan to buy more every time I see a sharp drop like this over the summer.
So, in addition to our multiple recent calls to take profits and go to cash, I want to reiterate that gold is cash. And it’s a whole lot more attractive than the dollar, the euro, or any paper money at present – not just as a speculation but for security as well.

What about the stocks?

Unfortunately, the stampede to safety that drives investors to gold is not likely to drive them immediately to junior exploration stocks. “The most volatile stocks on earth” is not what fearful people will be looking for – not until the panic sufficiently recedes and greed joins fear in equal measure in the marketplace…or in greater measure, come the Mania Phase.

If I’m right about fear being the driving force in the markets in 2010, whereas greed drove them in 2009, gold will have to deliver a serious wake-up call – perhaps holding over $1,500 – to really get the show on the road again for the gold stocks. If that happens while fear of a global economic slowdown continues to push oil prices lower, gold producers should be able to report extraordinary profit increases, even as other industries are tanking, and finally penetrate deeply into the awareness of broader pools of investors.

Cashed-up majors won’t have to wait for that to benefit; they may seize the opportunity created by market weakness to buy successful explorers, with significant discoveries in hand, while they are on sale. Well, some of the more nimble ones, like Kinross or Agnico-Eagle, might. The bigger companies, like Newmont and Barrick, didn’t lift a finger to pick up any bargains after the crash of 2008 and may be too cautious to act the next time around as well.

Be that as it may, acquisitions will increase the demand for quality exploration projects – the pipeline from exploration to development must be kept full – and good prospectors should at last get their day in the sun.

Punctuating this sequence will be the occasional big win on a new discovery. There haven’t been that many this cycle – not enough to replace all the gold the majors are depleting every year – but there have been some, and the market always loves a discovery.

After the first quarter of ‘09, greed outpaced fear and great development stories did phenomenally well; we saw better gains on large and growing gold stories than we did on the big producers. If fear retakes predominance in 2010, it’s profitable production that should do best, and I’d expect the biggest winners overall to be new, emerging, and highly profitable precious metals production stories. Spectacular discoveries should also do spectacularly well, but those are harder to predict. New and rapidly expanding production should be the sweet spots.

Generally, I think we’ll see our markets trading largely sideways over the next few months, with great volatility, until the debt-fueled “growth” in the global economy is exposed for the sugar high that it is. We’ve been forecasting that scenario for long enough here at Casey Research.

I expect this to play out by the end of this year, or 2011 at the latest, depending on how fast fear returns to the broader markets.

What to do

If I’m right about this, the strategy called for is a more cash-focused version of our “Buy only the Best of the Best” program. Buy nothing new unless you’re offered a great bargain in a solid company that can deliver significant new or expanding production. Nothing less than 50,000 ounces gold-equivalent per year in production will get much notice, and anything less than 100,000 ounces per year AuEq will have to struggle for respect. A solid company, of course, has great people, lots of cash, and the goods in hand.

If you want to speculate on a discovery, make sure you have very good reason to believe the project has much better than average odds of delivering a discovery – and it has to have world-class potential. That’s not hundreds of thousands of ounces but millions of ounces of gold, or equivalent.

If things do come truly unglued this year, we may well see 2008-style bargains on great companies with the staying power to recover and go on to new highs. Watch for it. Prepare for it.

Buy Low, Sell High – it’s a formula that requires patience but is the only way to go.

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Louis James has been guiding his subscribers through the ups and downs of the market with a steady hand. It’s no coincidence that every single one of his 2009 picks was a winner. Learn more about Louis’ hands-on approach and the profit opportunities Casey’s International Speculator offers – details here.

Hedging chaos with gold

…what if history is not cyclical and slow-moving but arhythmic, at times almost stationary, but also capable of accelerating suddenly, like a sports car? What if collapse does not arrive over a number of centuries but comes suddenly, like a thief in the night… dramas lie ahead as the nasty fiscal arithmetic of imperial decline drives yet another great power over the edge of chaos.
     Niall Ferguson, July 28, 2010

The nasty fiscal arithmetic of imperial decline that Harvard professor Niall Ferguson refers to is America’s unsustainable debt. Growing levels of debt according to Ferguson are now about to drive the US, like other great powers before it, over the edge of chaos; an event Ferguson believes will come sooner rather than later.

  

…most imperial falls are associated with fiscal crises…empires behave like all complex adaptive systems. They function in apparent equilibrium for some unknowable period. And then, quite abruptly, they collapse.

IN 2010 THE U.S. GOVERNMENT IS EXPECTED TO ISSUE ALMOST AS MUCH NEW DEBT AS ALL OTHER GOVERNMENTS, AROUND THE WORLD, COMBINED

The resemblance between the above chart and the following is obvious—except, of course, to those in denial.

The US borrows 45 % of all moneys borrowed by all governments and spends virtually that same percentage of global military spending. Beginning in 1980, President Reagan started the US on the road to financial collapse, borrowing heavily in order to fund the US military buildup, an act of fiscal irresponsibility that would later prove fatal. In his two terms, Reagan increased the US national debt by 258 %, the cost of which would be the loss of America’s economic power-base.

 

After WWII, both the USSR and the US spent vast amounts of their respective GDPs on military expenditures. Bankrupted, the USSR collapsed in 1992. Three decades later, the US now faces the same fate.

America’s pending bankruptcy reflects America’s shift from the world’s creditor to its largest debtor. Prior to Reagan’s military buildup, the US did not need to borrow to support the global deployment of its military; instead, in order to do so the US spent its entire hoard of gold—21,775 tons.

The only gold the US now possesses is there because in 1971 the US refused to convert its remaining gold for dollars as required under Bretton-Woods; and by the time Reagan was elected, the US could pay for its global military force only by indebting itself to others

When Reagan took office, total US debt was $980 billion. Today, the budget deficit for this fiscal year alone is projected to be $1.4 trillion. After the Reagan presidency, the US accelerated its spending until sovereign default or currency debasement are its only options.

SOVEREIGN DEBT SOVEREIGN DEFAULT SOVEREIGN DENIAL
The Emperor has no clothes, i.e. the empire has no money

The publication of Rogoff and Reinhart’s seminal work on sovereign debt in 2008 predated the sovereign debt crisis by two years; and if Rogoff and Reinhart were not surprised, they would be surprised that it would be industrialized nations that would find themselves under the scrutiny of global debt collectors.

In 2010, sovereign default concerns unexpectedly shifted from developing nations, i.e. Rogoff and Reinhart’s sovereign rite of passage, to industrialized nations—Greece, Spain, Italy, the UK, the US, and Japan etc.

The shift in sovereign debt concerns was accompanied by another extraordinary shift. Between 2000 and 2010, China became America’s creditor as well as its sweatshop; and China knows that the US owes so much money that only by borrowing more can it pay what it owes, a condition economist Hyman Minsky called ponzi-financing, the last stage prior to debtor default.

In truth, the US is not the default virgin described in Rogoff and Reinhart’s study. The US default on its gold obligations was perhaps the most important monetary default in history, plunging the entire world into a regimen of fiat money against its will

Sovereign default, however, is not the only strategy available to the US regarding its unpayable debt. The US could alternatively pay down its massive obligations by debasing its currency, a strategy wherein the US would pay its creditors with increasingly worthless US dollars—to the US, a far more convenient solution.

This is why China is worried—and the rest of the world (including Americans) should be worried too.

BORROW BORROW BORROW SPEND SPEND SPEND

No one will be surprised when the US again tries to borrow its way back to economic growth. This has been the default strategy of the US ever since Ronald Reagan’s Treasury Secretary, Donald Regan said, “Deficits don’t matter”, a financial heresy that would eventually undermine the American economy.

Capitalism is an uneasy balance between credit and debt. However, in the 1980s, far more credit was created and far more debt resulted. Combined with the removal of gold as a constraint on monetary growth, it would be only a matter of time until capitalism’s accrued debt would overwhelm the capacity of credit to contain and service it. That time has now arrived.

Bankers have unleashed a beast they cannot contain. The beast is of their own making although they are careful to deny their patrimony. The bankers’ deflationary black hole of defaulting debt is now destroying capital faster than bankers can create it.

This is why Fed Chairman Ben Bernanke is contemplating flooding the US economy with even more printed dollars, the so-called helicopter drop of money (Milton Friedman’s term), the proscribed solution of Milton Friedman to the Great Depression.

Because Friedman observed that the money supply had contracted during the Great Depression, Friedman erroneously believed sufficient monetary expansion would prevent another depression in the future. This is why Bernanke flooded the US with money and credit in 2009 hoping Friedman was right.

But Friedman was wrong. Bernanke’s palliative was temporary, producing only a short boost instead of a sustained recovery. Despite trillions of dollars spent and interest rates lowered to zero, the US money supply is still contracting—and the US economy is again slowing.

 
http://sirchartsalot.com/article.php?id=139

Despite Friedman’s failed theory, Bernanke still believes more injections of credit and debt can do what previous injections didn’t. This is akin to an alcoholic believing more alcohol will dispel the hangover that previous drinks did not. Friedman and Bernanke’s helicopters are coming. Get ready.

 

Can you hear the helicopters coming
Sounds of choppers fill the sky
Whirling birds of destruction
This is how currencies die

Printing money is easy
The problem is the debt
Money’s source is credit
You ain’t seen nuthin’ yet

Bernanke’s dream is our nightmare
His solution is our demise
Helicopters filled with money
Dropping from the skies

THE GOLDEN HEDGE AGAINST CHAOS

 

In The Critical Path (St Martin’s Press 1981) Buckminster Fuller predicted the world’s power structures would fall, plunging the world into an unprecedented crisis. Communism collapsed in 1992. Now, capitalism is about to do the same. Bucky’s predicted crisis comes next.

In The Great Wave (Oxford University Press 1996), Professor David Hackett Fisher observed we are at the end of a great wave—a phenomena that separates historical epochs, a phenomena which always end in the complete economic collapse of the existing order. Great Waves last 80 to120 years. The current wave is 114 years old.

At the 2010 Aspen Ideas Festival last month, Harvard Professor Niall Ferguson warned the collapse of the American empire could be imminent.

      I think this is a problem that is going to go live really soon,” Ferguson said. “In
that sense, I mean within the next two years. Because the whole thing, fiscally and
other ways, is very near the edge of chaos..

When America’s empire does collapse and, like all empires, it will, chaos will reign. Today, the US is the world’s super power, its dollar is the world’s reserve currency. The collapse of the US will change all this and more.

This is why the price of gold has quintupled in only ten years. America’s failing grasp on power has been mirrored by gold’s rise during that same time. In 2000, America’s credit-driven prosperity began to falter with the collapse of the dot.com bubble. Ten years later, America has still not recovered. Indeed, as Niall Ferguson predicts, its demise is imminent.

Since the 1980s, the US has conspired with others to suppress the price of gold as it is an indicator of the failings of the fiat financial system upon which its power is based. This is akin to doctors icing the thermometer to convince others that the patient is not in danger; and while they have been successful in so doing, the patient is now about to expire.

When the US empire implodes, the global geopolitical matrix will collapse as will much of the world’s financial underpinnings. It will be a time of chaos; and gold—history’s hedge against chaos—will again perform its time-honored role.

RESPONSIBILITY AND RENEWAL

In an extraordinary mea culpa published July 31st in the New York Times, President Reagan’s Director of the Office of Management and Budget, David Stockman, a Republican, blamed his own party for four critical errors that contributed to America’s decline: 

The errors are as follows:

The first of these started when the Nixon administration defaulted on American obligations under the 1944 Bretton Woods agreement to balance our accounts with the world. It is.. an outcome that Milton Friedman said could never happen when, in 1971, he persuaded President Nixon to unleash on the world paper dollars no longer redeemable in gold or other fixed monetary reserves. Just let the free market set currency exchange rates, he said, and trade deficits will self-correct. [But] relieved of the discipline of defending a fixed value for their currencies, politicians the world over were free to cheapen their money and disregard their neighbors…

The second unhappy change in the American economy has been the extraordinary growth of our public debt…This debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party’s embrace, about three decades ago, of the insidious doctrine that deficits don’t matter if they result from tax cuts…

The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector…the trillion-dollar conglomerates that inhabit this new financial world are not free enterprises. They are rather wards of the state, extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives. They could never have survived, much less thrived, if their deposits had not been government-guaranteed and if they hadn’t been able to obtain virtually free money from the Fed’s discount window to cover their bad bets.

The fourth destructive change has been the hollowing out of the larger American economy…It is not surprising, then, that during the last bubble (from 2002 to 2006) the top 1 percent of Americans — paid mainly from the Wall Street casino — received two-thirds of the gain in national income, while the bottom 90 percent — mainly dependent on Main Street’s shrinking economy — got only 12 percent. This growing wealth gap is not the market’s fault. It’s the decaying fruit of bad economic policy.
http://www.nytimes.com/2010/08/01/opinion/01stockman.html?pagewanted=1&_r=2&ref=opinion

Stockman’s mea culpa is an unexpected admission of political responsibility especially at a time when Americans are searching for someone to blame. But there’s no one to blame except America itself. The Russians aren’t responsible, the Muslims aren’t responsible and guess what, illegal immigrants aren’t responsible either—America, and America alone, is responsible for its own demise.

America was born out of the desire for freedom and a better life for all (apologies, however, are due to the Native Americans and the African slaves who suffered in the process). But, along the way, America chose to instead pursue power, not freedom; and, today, the considerable bill for America’s fatal choice is coming due—and more paper money won’t pay it.

God save America from itself.

Buy gold, buy silver, have faith.

Darryl Robert Schoon
www.survivethecrisis.com
www.drschoon.com
Blog www.posdev.net/pdn/index.php?option=com_myblog&blogger=drs&Itemid=81

Avoid worrying about the NZD/USD exchange rate when buying gold

An article on Stuff.co.nz this week was headlined “Bullion bullish but beware the bears”.

The excerpt below is taken from the beginning of the article (emphasis added is ours):

The price of gold, now near nominal highs at more than US$1180 an ounce, is expected to climb further, analysts say.

However, they warn New Zealand investors should be wary of exchange rate fluctuations.

Fund manager Liontamer, a specialist in capital protected funds, said the price could rise more than 15 per cent to over US$1400 an ounce by December 31, and continue rising well into 2011.
Investment manager Sean Butler said there was fundamental support for the gold price at current levels. “Central banks in China, India and Russia continue to buy gold, and investors are building up their gold exposures in the wake of global market uncertainty and the risk of higher inflation.

“In the meantime, the supply of gold is tightening. A combination of reduced supply and the large set-up costs associated with setting up new mines is helping to set a new floor under the price of the precious metal,” Butler said.

OM Financial senior dealer Kevin Morgan said the price “could be comfortably above US$2000 an ounce within 18 months”, but saw a possible dip to US$1050 in the next two months.

“I would view that as a buying opportunity,” Morgan said, but cautioned anyone investing in gold to remember that it is priced in US dollars and subject to currency fluctuations.

“A New Zealand investor who purchased gold in early 2009 at US$900 an ounce would actually be losing money despite gold being 25 per cent higher at US$1200 an ounce today.

“The reason for this is that back in early 2009 the NZD [New Zealand dollar] was trading at about 0.5 to the USD [United States dollar] and today we are trading closer to 0.72,” he said.

No counter party risk:

Talk about over complicating things!  Firstly, Liontamer’s new fund - as also discussed in this Otago Daily Times article - uses derivatives to track the gold price.  It doesn’t actually hold bullion.  While it does offer capital protection -  i.e. you will get back at least 100% of your money at the end of the 6 year investment period – this is also achieved using derivitivisation.

The reason we choose physical gold is because it has no counterparty risk.  This simply means we are not relying upon another party to remain solvent to get our funds back one day.  If we buy physical gold and take possession it is ours and ours alone.  Our only risk is keeping it safe from prying eyes and thieving hands.

The price of gold in any currency is volatile!

Secondly is the point that as per the Otago Daily Times article “the Liontamer index follows the movements in the international gold price and is not affected by currency [movements] between the New Zealand and US dollars.”

The stuff.co.nz article also mentions how Kiwi investors should be careful as gold “is priced in US dollars and subject to currency fluctuations”.

The thing is you don’t need to invest in a fund tracking the international/US dollar gold price using derivatives to handle currency fluctuations!  All you have to do is track the NZ dollar gold price yourself (simply the USD gold price converted to NZ dollars by the current USD/NZD exchange rate) and ignore what the media says about the US dollar gold price!  We live in New Zealand not the USA!  (As a bonus, you’ll also avoid paying fund managers fees!)

Best time to buy gold

If you believe gold remains in a bull market (or rather that paper currencies are still in a bear market), then the time to buy is when the NZD price of gold has fallen not when it is soaring.  This can be an emotionally difficult thing to do but this gets you the most bang for your buck – or rather the most ounces for your dollars.  You don’t actually need complex financial instruments and hedging with futures contracts to achieve this.  Just buy when the price has fallen as this is likely to be when the NZ dollar is strong.

NZD Gold 3 Year Chart - Buy the price dips

Do this on a regular basis and the average buy price will be at a good low level and allow for maximum upside and you should hopefully avoid the heavy feeling of watching the price drop sharply just after you’ve bought.

In the above 3 year chart you can see that the NZ dollar price of gold has just dipped down to the 200 day moving average (the red line).  Over the past 3 years this has generally been a good time to buy, with June last year being the only time the price fell substantially further below the moving average.

Our website has gold price graphs from 1 day all the way to 40 years – all in NZ Dollars.  (See Gold Survival Guide Gold and Silver Price Charts.)  The 1 year, 2 year and 5 year charts are particularly useful in seeing where the current price is compared to the past and can help identify when the price dips.

Anyway, that’s just our opinion and as always we offer it freely - but with no guarantees!

Eric Sprott, Jim Puplava and Associated Thoughts

Wild Bill’s Weekly Wanderings 26 July 2010

Following on from last week this week we feature more from people whose opinion we respect.

Among the best is Eric King.  Eric operates with conviction - as does Eric Sprott. Last week, Eric K interviewed Eric S and I urge readers to check out the audio at
http://kingworldnews.com/kingworldnews/Broadcast/Entries/2010/7/20_Eric_Sprott.html

For those of us that prefer to read, I provide a summary of the main points of the interview here.

Eric Sprott with Eric King

The busted “Bailout and Stimulate” formula

The net impact of the stimulus contributions and promises made since 2008 have resulted in a combined budget deficit of close to $2.5 trillion dollars and an incremental net increase in GDP of $200 billion. A $200 billion return for a $2.5 trillion increase in debt represents a terrible return on investment. It implies that the net impact of the stimulus on GDP since 2008 has been a mere 9 cents for every deficit dollar spent. Buying dimes with dollars is bad business, government-funded or not.

(Quoted from the May issue of “Markets at a Glance”.)

It’s the DEBT, stupid! After the stimulus program has been applied and then terminated, the debt has markedly increased, there’s no growth to speak of, and no one has any idea how this debt can be repaid…

Most large banks around the world are operating with way too much leverage. The risk in the system is “unbelievably immense relative to the amount of capital in the system”.

Quantitative Easing II (QE 2) – may be beginning already… Apart from the direct stimulus provided by TARP etc., there has been effectively a ZIRP (zero interest rate policy) in place now for quite some time. The banks can borrow at 0%, lend out at something above 0%, lever that up, and do quite nicely - thank you very much. Pretty soon, they can start reporting favorable earnings…

[Aside: while the above is happening, the banks are quietly starting to write off some of the toxic assets still on their books – which they have been allowed to mark to wishful model, rather than marking to market.
Damn – I wish I could persuade my bank to treat my overdraft as virtual in this way. I can just imagine the look on the face of my so-called “personal banker” if I said “Hey listen – everything’s cool – My overdraft of $10,000 dollars is really only $1, 000 according to my model – so I can borrow another $9,000 right?” What a sick joke.]

From “green shoots” to cliff diving

The current set of economic data points for the US is just horrible – and the trend indicates even worse to come. Printing money is losing its effectiveness as more and more is printed.

[Aside: It’s just like drug addiction, and for a very good reason – the processes are analogous. As a drug addict increases consumption of whatever it is, the body becomes habituated to the dose – which means that the dose has to be increased to produce the same kick. In the same way, as a society becomes addicted to the availability of cheap credit in order to function, the greater the increase in credit required to maintain the same level of economic activity.]

At all levels, national, state, corporate an individual, we have to reach rock bottom, i.e., we have to either renege on our debts or come forward with a credible plan for debt reduction. The Keynesian approach of continually increasing debt to pay off debt definitely cannot work in an environment where economic growth is anaemic at best.

[Aside: In China, on the other hand, where there is currently a supposed 10% annual growth, it just might work… Oh wait – they just happen to have N trillion US dollars in reserves, right? Seems like the Chinese might not need life support after all. Note to Mr Geithner: maybe, just maybe, it’s not such a good idea to keep lecturing your banker. And please don’t keep telling us you support a strong US dollar policy – that’s another really sick joke.]

Gold

Eric agrees with Ted Butler that there has been extensive manipulation of both the gold and silver paper markets by the bankers.

[Aside: The powers that be might prefer to say that the precious metals paper market prices were “regulated” or “governed” – sounds so much more reassuring, eh?]

Just imagine what would happen if the price of gold were $250 per ounce today. The worldwide demand for gold would be extraordinary… The continuing financial shenanigans are almost certain to ensure an inevitably rising gold price (probably with hiccups though) over time.  The price of gold is the canary in the coalmine – which is why there have been and are so many public pronouncements about it from such luminaries as Alan Greenspan and Paul Volcker.

Social breakdown coming to the US?

If jobs cannot be produced, some people are going to get desperate….

US dollar outlook?

All fiat currencies eventually assume their intrinsic value – zero!   Owning these currencies or storing your assets in them is unsafe!  Now your usual investment advisor might – if push came to shove –recommend that say 5% -10% of your net worth be in precious metals – Eric stated candidly that WAY BEYOND 50% of his assets were in gold and silver – and that he slept very well at night!

He advised us listeners to “go and do thou likewise”. Pretty powerful stuff.

Jim Puplava and Financial Sense

Why did I make the association of Eric King with Financial Sense?  Well, for one thing, Eric and Jim are good friends. I have listened to Financial Sense religiously since it’s inception on the Internet.  I never cease to be amazed and grateful that such a high quality program is available for free. After all, one can pay a lot of money for vastly inferior offerings – on mainstream media, for example…

Thank you for the fantastic public service you provide, Jim.

What I like most about Financial Sense is the quality of debate on the show. I perceive Jim as being ultimately fair-minded – he always presents both sides of an argument, and asks listeners to think for themselves and make up their own minds. In an age which is characterized by communication using slogans or political soundbites – like swarms of locusts, in the words of Leonard Cohen – see below - this is truly a rare and valuable gem.

On a more personal note than usual, throughout my life, I have experienced bouts of intense depression. Curiously, I always know when the depression is lifting – some piece of music grabs me by the gut and won’t let me go. I am moved so intensely that I am lifted out of that terrible state of intense self-absorption. One time it was the haunting slow movement of Beethoven’s Ninth. Most recently the catalyst for rebirth for me has been Leonard Cohen’s Anthem.

Such power and passion! Mr Cohen, I imagine us sitting down together and sharing a bottle of wine, and then I would say this to you: “ Thank you for cracking open my hardened heart and letting the light into my life. In the words of Jacob Boehme, the great Christian mystic, “What kind of spiritual triumph it was I can neither write nor speak; it can only be compared with that where life is born in the midst of death, and is like the resurrection of the dead”.

Sadly for me, I don’t imagine we will ever meet, one reason being that you and I are both getting older…  Good luck with the remainder of Act III, my friend….

Is Now a Good Time to Buy Gold?

While the stats below from Casey Research are based upon the US Dollar price of gold, a glance at the 3 year gold chart in NZ dollars also show that the New Zealand winter has also been the preferable time to buy in recent times, so their thoughts are still worth considering for a New Zealander.  And if you have an interest in precious metals stocks then it’s especially worth a read….

Is Now a Good Time to Buy Gold?

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

While we’re convinced gold and gold stocks are destined for much higher levels, buying when prices are low can mean the difference between a double or triple and a ten-bagger… a week in Malibu vs. a week in Milan.

There’s no secret formula to buying low, and we aren’t holding the right hand of Midas, but there are periods when prices tend to be lower than others. And if those tendencies play out, it can give us the opportunity to snag a high-quality asset at a bargain price.

So, how do you get a bargain price? You cheat.

I think the secret to getting a low-cost basis on all your gold and gold stocks is this: only buy on significant price pullbacks.

And this can be done without trading or using technical analysis.

I think there’s a good chance we can cheat this summer. For example, here are the average monthly increases in gold since our bull market began in 2001.

In our current 9-year bull market, June and August have seen the lowest average return for gold, representing one of the best times to buy.

You’ll see that in the bull market of the 1970s, summer was also a good time to buy gold.

What about gold stocks? Since 2001, June and July have been among the weakest months and thus one of the best times to buy.

Obviously, these are price tendencies and not certainties. There were Junes when gold was up, and some Julys when gold stocks were up. Meaning, we’d avoid using these charts for trading purposes or in anticipation of an immediate gain. Instead, use these “trendencies” to look for possible price weakness. And if it arrives, use the opportunity to add to your holdings and position yourself for the next leg up in the bull market.

What are the odds of a correction in gold and gold stocks this summer?

►Since 2001, almost every precious metal stock, in every summer, has moved lower from its May high. This includes gold and silver. There’s no guarantee this won’t be the summer of galloping unicorn herds, but the record is hard to argue with.

Here are the buy zones I identified for gold and silver, based on a tally of how far they’ve corrected from their May high to their summer low, in each year of the current bull market.

You’ll see that the average price of all pullbacks in gold, from the May highs to the summer lows, is 8.9%, and would take the price to $1,126.98. That’s not to say this price will be hit, but it tips you off that a fall to that level would not be out of the ordinary – and would also be an invitation to buy. You can also see the smallest summer decline, which we’ve already exceeded. We wouldn’t wait for the largest drop to materialize; there’s a good chance you’d be left empty-handed and chasing the stock higher.

Silver is naturally more volatile, allowing us perhaps a better opportunity to buy low. The average summer decline for silver is 16.6%, which would take the price to $16.39. However, the furthest its fallen so far this summer is $17.36, meaning strictly on a historical price basis, a 10% correction from current levels would be perfectly normal. And again, an invitation to buy.

Whatever price (or prices) you select, I’d only use the charts to add to current positions, not for trading. The currency crisis Casey Research believes is inevitable could strike suddenly again and will eventually hit the U.S. dollar, and the last thing you want is to be left standing on the sidelines if gold and gold stocks surge higher. In our opinion, being completely out of precious metals in the middle of a once-in-a-generation bull market would be a mistake. Instead, keep adding to your savings every month and buy when it feels like you’re cheating.

See you in Milan?

—-

Want to see the buy zones for all our recommended gold and silver stocks? Our Summer Buying Guide is an invaluable resource for buying low. And check out our just-released July issue, where a respected bullion seller tells you why in the near future you may not be able to buy gold, at ANY price. Try a risk-free subscription for only $39 per year. Details here.

A Convergence of Crises?

Wild Bill’s Weekly Wanderings 20 July 2010

This week, we are going to take a look out of our window on the world from down under - here in Auckland, New Zealand - and try to put a few things in perspective, adding some input from respected sources as we go.

Everywhere we look, from geopolitics, to the environment, to the financial world, and, of particular concern to us here – to the micro-world of the precious metals markets, we see the same fragility developing….

Storm clouds gathering in many sectors?  Rain already falling in others.

 

• GeoPolitics

There are at least two flashpoints developing in the geopolitical arena – Iran, and North Korea. It’s hard to know whether confrontations between the US and these two countries are inevitable – what we do know for certain is that when countries are on the verge of falling apart internally, they often resort to war against an external enemy – real or manufactured. Chris Martenson, whom we trust, believes that an impending war with Iran is inevitable.

We also know that increasing numbers of US warships are heading towards the South China sea, at the same time as tension is building over the sinking of a South Korean ship, ostensibly by an alleged North Korean torpedo. Is it an accidental coincidence that the Japanese government has recently announced that it would like to shut down the huge US base in Okinawa? Inquiring minds would really like to know…

 

• Environment: The Catastrophe in the Gulf of Mexico

This week, in King World News, Eric King interviewed Matt Simmons, one of the most respected figures in the oil industry. He has had a long career as an energy investment banker, and what he has to say about the disaster in the Gulf is truly alarming. From Day 1 of the crisis the American public appears to have been subjected to propaganda and lies from BP and the Obama Administration – and is still being fed this crap. Now, even if the well riser has been successfully capped, THE PROBLEM IS STILL THERE.

Fact 1:   There is a colossal lake of decomposing oil on the ocean floor, which contains large amounts of methane –which is a deadly toxic gas.
Fact 2:  As crude oil decomposes, one of the byproducts is hydrogen sulphide – another deadly toxic gas.
Fact 3:  The hurricane season is now officially under way. This year, an above average number of severe storms are forecast.
Fact 4:  The physics of water movement tells us that, in the event of a hurricane, deep water is drawn up to the surface from the layers above the sea floor – only, this time, it won’t be water, it will be a highly toxic mix of crude oil, gases and chemicals.
Fact 5:  If the mix described above gets into the air, it is very likely to be blown ashore, and if so, there WILL be large numbers of fatalities.

There seems almost no escape from the conclusion that an environmental and human disaster of unimaginable ferocity is around the corner. I wonder how US citizens will react when they discover that the nightly media tissue of lies that they have been fed, is just that – a tissue of lies.  Ask the people of America to clap their hands, Mr Obama, if they only believe… The new Messiah not only has not delivered – he has refused to do what was necessary, at every turn.

Perhaps some of you do not know that the Obama administration - and BP – have repeatedly been offered international assistance, which has been turned down every time.  The Norwegians in particular have extensive experience in operating in deep ocean oil environments – but that counts for nothing, apparently. I understand from listening to Matt Simmons that Taiwan have a skimmer that can suck up TEN TIMES the amount of oil that any of the equipment available in the US can handle. I also understand that there are some strange laws apparently not permitting foreign shipping in that area. OBAMA IS THE PRESIDENT, FOR GOD’S SAKE! If that is indeed the case, he could have gone on TV and made a passionate speech about how he was going to rescind those laws in the interests of national security – after all, isn’t that what he’s good at - the passionate speeches?

God help the United States. My heart goes out to all in the US – especially to my many wonderful friends there who have done nothing to deserve this fate – except to let themselves be governed by a bunch of mercenary morons – most of whom just happen to be millionaires. The founding fathers of this once great nation, now an empire in terminal decline, must be weeping in their graves.

As never before I truly appreciate the wise words of Lord Acton:  Power corrupts – and absolute power corrupts absolutely.

 

• Economy and Finance

There are so many red flags appearing now that a double dip recession is inevitable – unless QE2 is administered as a huge stimulus to jolt the flailing zombie that is the US economy back into some sort of semblance of life – albeit this will provide only a temporary respite from terminal collapse.  Please read the section below by Ambrose Evans-Pritchard of the UK Daily Telegraph, who sums it all up pretty nicely, if bleakly.

Fed’s volte face sends the dollar tumbling

Rarely before have a few coded words in the minutes of the US Federal Reserve caused such an upheaval in the global currency system, or such a sudden flight from the dollar.

The US workforce has shrunk by a 1m over the past two months as discouraged jobless give up the hunt Photo: AP

The euro rocketed to a two-month high of $1.29 and sterling jumped two cents to almost $1.54 after the Fed confessed that the US economy may not recover for five or six years. Far from winding down emergency stimulus, the bank may need a fresh blast of bond purchases or quantitative easing.

Usually the dollar serves as a safe haven whenever the world takes fright, and there was plenty of sobering news from China and other quarters on Thursday. Not this time. The US itself has become the problem.

“The worm is turning,” said David Bloom, currency chief at HSBC. “We’re in a world of rotating sovereign crises. The market seems to become obsessed with one idea at a time, then violently swings towards another. People thought the euro would break-up. Now we’re moving into a new phase because we’re hearing alarm bells of a US double dip.”

Mr Bloom said a deep change is under way in investor psychology as funds and central banks respond to the blizzard of shocking US data and again focus on the fragility of an economy where public debt is surging towards 100pc of GDP, not helped by the malaise enveloping the Obama White House. “The Europeans have aired their dirty debt in public and taken some measures to address it, whilst the US has not,” he said.

The Fed minutes warned of “significant downside risks” and a possible slide into deflation, an admission that zero interest rates, $1.75 trillion of QE, and a fiscal deficit above 10pc of GDP have so far failed to lift the economy out of a structural slump.

“The Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably,” it said. The economy might not regain its “longer-run path” until 2016.

“The Fed is throwing in the towel,” said Gabriel Stein, of Lombard Street Research. “They are preparing to start QE again. This was predictable because the M3 broad money supply has been contracting for months.”

The Fed minutes amount to a policy thunderbolt, evidence of how quickly the recovery has lost steam. Just weeks ago the Fed was mapping out withdrawal of stimulus.

Goldman Sachs said it expects the euro to rise to $1.35 by the end of the year. The yen will appreciate to ¥83, through the pain barrier for most of Japan’s big exporters. The new twist is that SAFE, China’s $2.4 trillion fund, has begun buying record amounts of Japanese bonds, a shift in reserve allocation away from the dollar.

The signs of a deep and sudden slowdown in the US are becoming ever clearer as the “sugar rush” from the Obama fiscal stimulus wears off and the inventory boost fades. California, Illinois and other states are cutting spending, tightening US fiscal policy by 0.8pc of GDP.

Thursday’s plunge in the Philadelphia Fed’s July index of new manufacturing orders to –4.3 suggests that the economy may have buckled abruptly, as it did in mid-2008. The Economic Cycle Research Institute’s ECRI leading indicator has tumbled, reaching –8.3pc last week. This points to a sharp slowdown or recession within three months.

While US port data looked buoyant in June, the details were troubling. Outbound traffic from Long Beach fell from 139,000 containers in May to 116,000 in June. Shipments from Los Angeles fell from 161,000 to 155,000. This drop in exports is worsening the US trade deficit, eroding the dollar.

The US workforce has shrunk by a 1m over the past two months as discouraged jobless give up the hunt. Retail sales have fallen for the past two months. New homes sales crashed to 300,000 in May after tax credits ran out, the lowest since records began in 1963. Mortgage applications have fallen by 42pc to 13-year low since April. Paul Dales at Capital Economics said the “shadow inventory” of unsold properties has risen to 7.8m. “The double dip in housing has begun,” he said.

Alcoa, CSX, Intel, and JP Morgan have reported good earnings, but they mostly did so in July 2008 just before their shares collapsed. Such earnings rarely catch turning points and can be a lagging indicator. Profits have been boosted in this cycle by cost-cutting, which is self-defeating for the economy as a whole.

The minutes confirm the Fed is split down the middle over QE. Fed watchers say the Board in Washington wants to be ready to launch another round of bond purchases if necessary, pushing the banks balance sheet from $2.4 trillion towards $5 trillion, but hawks at the regional banks are highly sceptical.

A study by the San Francisco Fed said the interest rates need to be –4.5pc to stabilise the economy under the Fed’s “rule of thumb”. Since this is impossible, massive QE needs to make up the difference.

Tim Congdon from International Monetary Research said the US authorities have botched policy response. “They are forcing banks to contract lending by raising their capital asset ratios. They have let M3 shrink by 1pc a month, as in the early 1930s. The solution is simple. The Fed must raise the level of deposits by purchasing bonds from the non-banking system as the Bank of England has done. They refuse to do it,” he said.

 

• Precious Metals

Remember Andy Maguire, the courageous whistleblower who exposed to the world – and the CFTC – the manipulation of the precious metals metals paper market a few months ago?  I am lucky and proud to call him friend. Since that revelation of criminal activity by the banksters, the CFTC has maintained a deafening silence.  Curious isn’t it? Surely this could not be connected to the fact that its chairman, Gary Gensler, is an ex Goldman-Sachs boy? Or could his hands be tied? One thing I am sure of; if the police had such detailed information about a crime you or I had committed, we would be behind bars – that is, unless we had powerful friends in high places….

Each week, Eric King, over at King World News, has fantastic interviews with highly respected figures in the financial and economic world, with an emphasis on precious metals. If I had to choose just one source of information on precious metals investment, this site would be my pick. Eric cares passionately about the fiscal and economic disaster that is the enveloping the United States. He chooses guests who are as courageous and committed as he is – it is very clear from the interviews that they like and respect Eric, in their turn. I was speaking to Rick Rule about this when he was last in Auckland, and he told me that he had really enjoyed being interviewed by Eric.

Probably my other favorite source of precious metals information would be Ed Steer of Casey Research, together with the rest of the Casey team, including Bud Conrad and Doug Casey himself, both of whom I have also had the pleasure of meeting.

Ed Steer has recently written this personal comment on the implications of the latest COT (Commitment of Traders) report for silver….

“This new Physical Silver Trust that Sprott just announced, will certainly hasten the end of this price management scheme.  One can’t know for sure when the end will come, but when it does, it will be with a bang… not a whimper.  Stories like this make me want to run out and buy more physical silver… which is exactly what I’m going to do when I get up this morning.  And, if you have a few dollars laying around, I might suggest you do the same.

As you know, I’m ‘all in’… and that means that I have 100% of my net worth invested in the precious metals in one form or another… physical metal and the shares.  I certainly don’t suggest that you do the same dear reader, as everyone has their own particular comfort level when it comes to this sort of thing.  Besides which, I’m not an investment advisor.  I just want to survive [and hopefully prosper greatly] when all is said and done… and this is the path I’ve chosen”.

Ed writes a newsletter more or less daily and you can have it emailed to you – the service is free. Again, if you are interested in precious metals investment, I consider it to be a vital subscription.  You can get it for free here.

Next, from Harvey Organ, at his Daily Gold Blog, comes this comment on the latest COT figures…

“Notes:  there was a massive 923,430 0z of silver removed from the customer inventory in silver
again no silver was added or withdrawn from dealer inventory…
 
…In gold:

In alarming fashion no gold has entered the gold comex vaults. A measly 127 oz of gold was withdrawn.  ( I understand 100 of those oz
but have a hard time understanding the 27 oz…..the  minimum bar is 100 oz ,so it is very difficult to explain the remaining 27 oz).

Yesterday saw another 31 contracts exercised for gold metal or 3,100 oz of gold.

The total amount of gold exercised in this non-delivery month of July totals 694 contracts or 69400 oz of gold or 2.16 tonnes of gold.
 
In conclusion, we continue to see a massive exit of silver from the customer vaults.

I want to emphasize the small number of silver contracts that were served upon yesterday, ie 8 contracts.  It seems to me that word is getting around to the ultimate silver owners at the comex to vacate the mother ship.  It is also surprising that the bankers cannot get any other silver holders to lease their silver.

That will explain the massive exodus out of the comex.  A default at the silver comex looks imminent.  Silver will default first.”

 

 And lastly, we include a piece by Bill Bonner of the Daily Reckoning, as quoted by Peter Cooper (ArabianMoney.net)

Why Bill Bonner continues to hold gold

Agora Financial founder and highly respected market commentator Bill Bonner is not tempted to sell his gold, despite the worry that deflation might persuade a few investors to sell.

‘If we were speculators, we might consider selling our gold,’ he says, ‘in tune with our deflation now, inflation later forecast. But we’re not gamblers. We hold gold because it represents real wealth, not because we think it will go up in price.

Gold is money

‘We don’t really know what direction it is going. But that’s why we hold it. We don’t know what direction anything is going. The nice thing about gold is that it doesn’t matter. Gold doesn’t go anywhere. It just sits there.

‘If you buy a bond, for example, you have to worry about the credit quality of the issuer. If things get bad enough, he won’t be able to pay up. Your bond could be worthless.

‘Same for stocks. A stock is a share of a company. If the company goes out of business, your stock certificates (assuming you have them) are only good for decorations. Real estate is more reliable. But there are taxes and upkeep to pay. Gold is a better way to store wealth. You don’t pay property taxes on it. And the roof never leaks.

‘Besides, gold is especially valuable when other forms of money lose their appeal. The trend of debt destruction will probably not end soon. And the feds will probably sooner or later follow Paul Krugman’s advice to raise [the Fed's] long-term inflation target, to help convince the private sector that borrowing is a good idea and hoarding cash is a mistake.’

Investment case

Mr Bonner will no doubt reinforce this message in his keynote conference speech to his annual investment conference, which convenes in Vancouver next week with ArabianMoney also participating for the first time.

Gold is a store of wealth. You also never quite know when its price will surge. An unexpected geopolitical or natural disaster would always send the price spiralling upwards.

But then an economic catastrophe is more predictable with the scale of US debt only having grown since the financial crisis caused by, well, too much US debt.

I have written this piece while feeling very low about what is happening. I have talked to many of my friends in the US who share at least some of the sentiments above, and I want you all to know that there are those of us internationally who feel for you and want to help in any way they can. My only realistic way to help is to write – I have done so as best I can.

If you share these sentiments, please circulate this letter as widely as possible….

This is Wild Bill, signing off from GoldSurvivalGuide.co.nz

Darryl Schoon: The Real Bubble is Government Debt, Not Gold

A simple graphic and a not quite so simple chart show why it is government debt that is the bubble rather than gold itself…

THE END-GAME AND
THE ILLUSORY GOLD BUBBLE

When the end-game began, gold was $35 per ounce. Today, gold is $1200. When the end-game is over, gold will be far higher.

Midway through 2010 we are approaching the end of the end-game, the resolution of the monetary imbalances that began in 1971. For more than 2500 years, gold was money: but, in 1971 that changed. After 1971, money was no longer connected to gold. For the first time in history, money had no intrinsic value

After the Bretton Woods Agreement in 1945 until 1971, the world’s currencies were anchored to the US dollar which was convertible to gold. Thus, directly or indirectly, all currencies could be exchanged for gold; but on August 15, 1971 the US cut the ties between the US dollar and gold; and all currencies became fiat.

It was as if someone removed a pin from the axle of international commerce when the US dollar was no longer convertible to gold. Previously, the US dollar was linked to gold, and other currencies were linked to the dollar. Everything was stable. It is no longer so. Once the pin connecting gold and paper money was removed, everything changed. The axle of international commerce began to vibrate and lately it’s been getting much worse. The fear is that the wheels are now about to come off.
Page 9, How to Survive the Crisis and Prosper in the Process

THE BEGINNING OF THE END-GAME

The cutting of ties between money and gold set in motion the extreme monetary instability that was to characterize the 1970s. In 1960, the US prime rate was 5 %. At the end of the decade, the rate was 6.75 %. But when money became fiat in 1971, US rates became extremely volatile, vacillating between 4.50 % and 21.50 % during the next ten years.

In my article America at the Crossroads and the War on Gold, I pointed out the role of former Fed chairman Paul Volker in destabilizing the monetary system. Believed by most to be a “hard-money hero”, Volker was, in fact, the very opposite.

Volker, as under-secretary of the Treasury in 1971, played a critical—and largely unknown role—in the removal of gold from the international monetary system and is therefore responsible for much of the monetary chaos which has since ensued:

From 1969 to 1974 Mr. Volcker served as under-secretary of the Treasury for international monetary affairs. He played an important role in the decisions leading to the U.S. suspension of gold convertibility in 1971, which resulted in the collapse of the Bretton Woods system.
http://en.wikipedia.org/wiki/Paul_Volcker

Appointed as Chairman of the Federal Reserve by President Carter in 1979, Volker was at the helm when inflationary forces he had earlier unleashed almost destroyed the US economy in 1979-1981.

Volker’s draconian raising of interests rates in 1980 was necessary to quell the inflationary fires he had lit in 1971; and although successful, Volker’s role is not dissimilar from others who put out fires they themselves start.

THE END-GAME ACCELERATES

While it was Paul Volker who set the end-game in motion, it was Alan Greenspan, his successor at the Fed, who would greatly accelerate the process by putting US financial markets beyond the reach of government regulators.

Volker was replaced by Greenspan as Fed Chairman because Volker wouldn’t dismantle existing financial regulations as desired by the Reagan White House and Wall Street investment banks. As Nobel Prize winner Joseph Stiglitz later explained:

Paul Volcker, the previous Fed Chairman known for keeping inflation under control, was fired because the Reagan administration didn’t believe he was an adequate de-regulator.

In Alan Greenspan, Wall Street got the Fed chairman they wanted, someone who would provide them with an unending flow of central bank credit and who would turn a blind eye as to what they would do with it. Alan Greenspan was Wall Street’s wet dream come true.

During his 19 year tenure as Fed Chairman, Alan Greenspan ushered in an era of loose credit producing massive profits for Wall Street along with two of the largest bubbles in history, the US dot.com and US real estate bubbles.

Greenspan with consummate political timing resigned as Fed Chairman just before his extraordinary credit bubble collapsed. However, a third, even larger bubble which Greenspan nurtured, still has yet to burst. This is the government bond bubble, by far now the largest bubble in history

The enormous government bond bubble was “Fed” by the excessive issuance of credit made possible by the removal of gold from the monetary system, thereby allowing governments to freely borrow what they had just printed.

Once Volker controlled the fires of runaway inflation in 1980/1981, the issuance of government credit and debt exploded upwards under Greenspan’s tenured aegis at the Federal Reserve.

This soon-to-be fatal rise in US debt would not have been possible had the US dollar been tied to gold. This is why both bankers and governments who profit and live by debt oppose a return to the gold standard or any attempt to again tie their currencies to gold.

…a gold standard and a redeemable currency…enables a people to keep the government and banks in check. It prevents currency expansion from getting ever farther out of bounds until it becomes worthless…
Professor Walter E. Spahr, Chairman of the Department of Economics, NYU, 1927-1956

Banker John Exter, present when Volker cut the ties between the US dollar and gold, later commented on the consequences of Volker’s historic decision: The final link between the dollar and gold was broken. The dollar became nothing more than a fiat currency and the Fed [and especially the banks] were then free to continue monetary expansion at will. The result..was a massive explosion of debt

Today, the debt is due and owing and repayment is increasingly in doubt. Economics isn’t rocket science. It’s cause and effect and since the introduction of debt-based money, the primary cause of economic expansion has been credit.

The consequence of credit is its deadly effluvia, debt; and when the issuance of credit can no longer service or roll-over constantly compounding debt, parcus nex, economic death, otherwise known as the end game, ensues.

The enormous amount of government debt—total sovereign debt now totals $34 trillion dollars—can never be repaid. The end of the end-game will come when investors collectively realize this is so. That realization has not yet happened. When it does, for most it will be too late.

THE ILLUSORY GOLD BUBBLE

Some believe gold is a bubble. It is not. The price of gold, however, tracks a bubble and that is why it is mistaken for one.

WHICH ONE’S THE BUBBLE?
THE RULER OR THE BUBBLE?

The real bubble is government debt, not gold. Government debt is a bubble that hasn’t yet burst; one that has grown even more rapidly in the last two years as almost all nations went far deeper into debt after the 2007/2008 global collapse.

..sovereign debts grew by almost 30% in just two years. Sovereigns became the majority of worldwide debt. Several countries doubled their debts from 2007 to 2009 (BIS data)
http://www.calculatedriskblog.com/2010/07/how-large-is-outstanding-value-of.html

This recent meteoric rise in government debt has been matched by a corresponding rise in the price of gold. When government borrowing rose after 2007, the price of gold also rose, from $700 to $1200 per ounce, almost precisely tracking the rise in government debt.

…the ballooning size of the US Treasury’s debt, which hit a record $12.8-trillion last month, has been a steady linchpin supporting the historic rally in the gold market over the past decade. As a general rule of thumb, every $1- trillion of fresh debt issued by the Treasury equates with a $125 /ounce increase in the price of gold. As long as the Fed and G-20 central banks continue to peg ultra-low interest rates, - and G-20 governments continue to flood the debt markets with huge quantities of IOU’s, - it translates into monetization, and the trajectory for the gold market would stay bullish. http://www.sirchartsalot.com/

When the government debt bubble bursts—and it will—gold will not collapse as will bonds and other paper IOUs. When it happens, the collateral damage to the US dollar and fiat currencies may well be fatal and the price of gold—the only safe haven in such times—will explode upwards.

The recently revealed Bank of International Settlement 382 ton gold swap is evidence of gold’s value in such times. Hinted at by Julian D.W. Phillips in his insightful article, Gold Is Back As Money, Michael J. Kosares connected the dots in his post, BIS Swap Signifies A Threat To Europe, Not To Gold, by pointing out that the swap was probably conducted with Portugal..

Portugal, whose gold reserves equal ( or rather equaled) 382 tons, badly needs to refinance its debt and when investors no longer trust sovereign bonds, gold is far more preferable as collateral than a government’s promise to repay.

Note: In the swap, the BIS most likely used commercial banks as intermediaries in order to disguise central bank use of gold as financial collateral.

The European debt crisis marks the beginning of the end of the government debt bubble. Only a false sense of confidence is now supporting sovereign bond markets. In the spring of 2010 that confidence was shaken; and, someday, it will disappear entirely.

We live in interesting times. We are in the end-game.

Buy gold, buy silver, have faith.

Darryl Robert Schoon
www.survivethecrisis.com
www.drschoon.com
Blog www.posdev.net/pdn/index.php?option=com_myblog&blogger=drs&Itemid=81

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