Felix Zulauf on Inflation vs Deflation

This week in our musings, we focus on just one interview of Felix Zulauf by Eric King (I apologize for the short article this week – I’m crook!)…

• FELIX ZULAUF SPEAKS

Once again, Eric King at King World News has achieved an astonishing coup, by scoring an interview with Felix Zulauf, of Barrons Round Table fame. Felix (almost) never gives interviews… and when this man speaks, it pays to listen carefully. You will find a full bio for Felix over at Eric’s site; suffice it to say here that he has been a member of the famed Barrons Round Table for over 20 years. Personally, I find his understanding of monetary and financial history to be particularly acute. His vision of the future that is about to unfold is both plausible and apocalyptic. I urge you to listen to the interview in full ( http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2010/5/28_Felix_Zulauf.html), however to save you some time I paraphrase the main points below, together with some observations of my own, in parentheses.

• Gold’s role in the current crises

Almost all industrialized countries have too much debt relative to the size of the economy. Greece is acting as the canary in the coalmine; it is a pointer to the disease that is afflicting the developed world.
For the last 20 years, we have been living under the delusion that we could borrow ourselves into sustainable prosperity. However, the world is realizing that we have an unmanageable problem – we cannot continue as before. Serious doubts about the validity of our currencies have arisen. A number of high wealth investors and institutions have realized that they must have an alternative store for their wealth other than the fiat currencies – hence their interest in gold, the ultimate currency.

Unlike paper money, the amount of above ground gold cannot be increased at the press of a computer key, but only by hard work getting it out of the ground. (Also the supply from mines is increasingly limited). The ongoing bull market in gold is really a bear market in all the paper currencies. The supply and demand dynamics for gold are very interesting – historically, the driving demand for gold has come from the jewelry market. (Note, however, that gold jewelry in many parts of Asia and the Middle East is viewed as a store of wealth, as we have discussed in previous editions of Weekly Wanderings (WW)). However, over the last two or three years, the driving factor on the demand side has become investment (In previous WW we have discussed the activities in the gold market of such high profile investors as John Paulson, David Einhorn, George Soros and Paul Tudor Jones, all of whom are greatly increasing their gold holdings). On the other hand the supply side for gold is decidedly inelastic. Central banks that sold a lot of gold at much lower levels in the market now appear to have been stupid, to put it mildly, and they have recently, in total, become net buyers, (as we have noted several times).  We also have declining production rates of gold from mines.

• Inflation versus Deflation

(I have been puzzled for some time about the inflation/deflation debate that continues on the Internet. I found Felix’s discussion below to be most helpful)

Will this be like the 70’s? NO – the situation is completely different. Today, our problem is not inflation but DEFLATION – due to too much debt outstanding. (As we observed last week), more and more debt means more and more income required to pay interest, or service the debt. This is a Ponzi-type scheme, and it also implies less and less discretionary income to spend on things other than debt servicing. Thus we have an increasing drag on economic growth – so we will not be able to grow enough to service our outstanding debt. (As discussed in these columns, particularly with reference to the work of Chris Martenson, we also face the headwind of developing commodity shortages. If anyone is in any doubt about the desperate lengths to which oil companies are having to go to obtain more oil, just look at the tragedy unfolding now in the Gulf of Mexico).

 WE ARE THEREFORE IN THE ENDGAME OF THE SYSTEM AS WE HAVE KNOWN IT over the past 70 years or so. Now the policy makers are trying desperately to fight the deflationary tide, by adopting highly inflationary policies, (printing money without limit, as Greenspan and Bernanke have told us they would do). So we now have an highly unstable equilibrium, which will morph into either a deflationary collapse, or hyperinflation, (as, for example, John Williams of ShadowStats thinks).

Felix believes the deflationary storm is likely to increase in intensity over the next few years, until a climactic collapse occurs with a failure of such magnitude that the banking system in Europe and the US will be bust. In this situation, governments would be unable to bail out the offending institutions, because many of those governments themselves are already perceived as bust. At that point the central banks would come in big-time – their balance sheets would expand not by a factor of 2 or 3, but by a factor of 50 or 100. Within a few weeks, the paper currencies of those countries would become essentially worthless, thus forcing an immediate currency reform that would have become inevitable. As with all financial prophecies, the timeline is uncertain; however Felix sees the above scenario as highly likely within the next 5 years, but maybe as far away as 10.

The result will be that part of outstanding debt will be destroyed, together with part of existing wealth. What is different about this scenario from any we have seen over the last 70 years is that previously such events have been contained within a relatively small part of the world economy; this time it is likely that a number of industrialized countries will enter the process virtually at the same time, because of the interconnectedness of our current global financial system. (Just imagine what NZ’s position would be. We are inextricably linked to the financial system abroad, given our enormous borrowing requirement, relative to our GDP). 

• Protecting yourself

IF YOU WANT TO PROTECT YOUR ASSETS, SOMEHOW YOU HAVE TO GET OUTSIDE THE CURRENT BANKING AND FINANCIAL SYSTEM – THAT’S WHERE THE ROT IS.

Owning gold, a farm, real estate, is probably a good thing. We are in a transition between the Old World of finance as we have known it – into the New World and we will get it, whether we like it or not.

• Whither interest rates?

The short end is likely to remain at or near stay at zero until we have the new currency. At the long end, Government bond yields are either at lows or approaching lows, and this process should terminate over the next 12 months – marking the end of the 30 year bull market in Govt bonds.

• US equities

Since 2000 we have been in a secular bear market for equities. We are probably beginning the third leg down… heading towards a low on the S&P of maybe less than 500, within the next 5 years.

• China and India

Firstly, what happens in China is vastly more important than what happens in India. The Chinese economy appears to be definitely overheated; a severe cyclical recession is likely to ensue as the credit boom over the last few years bursts.  However China does not have the internal financial decay that the West has – according to Felix, they are one generation behind – therefore they are likely to undergo a severe recession next year, which would be akin to what happened to Western economies in the 1970s. A consequence if this were to ensue would be a concomitant bear market in commodities, maybe as much as halving the price of copper and other raw materials of which China is such a voracious consumer.
(I am not so certain about this outcome – China is building new cities at a furious rate – if these cities remain empty at the moment, there is a high likelihood that they will be occupied in a year or two. One of the facts that has stuck in my mind is the requirement for China to re-house the equivalent of the population of Australia each year every for the next 15 years at least. This is being forced on the Chinese government because they are well aware of the destabilizing effect on their own position if extreme social unrest were to develop).

How Low Will the Silver Price Go?

What can we learn about where the price of silver may go in the future?  Casey Research has a very interesting graph showing the size of silver price corrections over the past decade.  Read on to learn what this might mean for the future and how to use these corrections to your advantage…

-Jeff Clark, Casey’s Gold & Resource Report

We released our 2010 Silver Buying Guide 2 weeks ago and the silver price promptly cratered. So does this change our view of gold’s shiny cousin? Hardly.

While industrial uses comprise about half (53%, according to GFMS) of silver’s demand, making it susceptible to bigger falls than gold in a weak economy, it is equally clear silver also responds well to inflation, as well as serious financial “dislocations” (to put it nicely).

There are many examples of this, perhaps the best being the late 1970s. The economy in the middle of that decade was going nowhere, so some investors dumped their silver holdings because demand would supposedly be weak. A big mistake, as we now know, because silver’s greatest advance occurred at a time industrial demand was, at best, flat. Instead, silver rose due to monetary concerns and rampant inflation, giving investors 500%+ returns in the latter part of that decade, with an easy chance for even higher gains.

So if you’re buying silver to protect yourself against inflation and out-of-control government spending, then – as Doug Casey is fond of saying – sit tight and be right.

Still, it might be useful to contemplate how far silver could fall, particularly if you don’t own enough and are looking to add to your holdings.

The following chart examines all the major corrections in the price of silver in the current bull market (2001 to present). I only included corrections greater than 10%, many of which were big and sudden, much like we’re experiencing now.

You can easily see how volatile silver has been. Yet amidst all that volatility, the price has risen 334% from its 11-21-01 low (as of May 21).

Based on this data, we can make some projections. Our recent high in silver was $19.64. Therefore…

 

These projections cast a wide net, to be sure, but there are still some conclusions we can draw:

1) The current correction in silver, as sharp as it is, is not out of the ordinary. Nothing is happening to the silver price right now that hasn’t occurred before.

Diagnosis? Normal.

2) If you agree with our analysis that says inflation is inevitable and that fiat currencies will sooner or later be taken off life support, then scary drops become great buying opportunities. Imagine if you had bought during that waterfall decline in 2008; you could’ve paid less than $9 for an ounce of silver. That would make the current correction less worrisome. By extension, buying during today’s big downdrafts will give you peace of mind tomorrow when we see another correction at higher levels.

Treatment regimen? Buy the big corrections.

3) Adjusted for inflation, silver’s peak in 1980 would exceed $100 today (and that’s based on distorted government CPI numbers).
 

Prognosis? Excellent.

Since we don’t know where the next bottom is, one effective way to handle purchases is to buy in tranches. You could place limit orders at a couple different levels.

But we might save the Big Purchase for a true fire-sale price, something greater than the average sell-off. There won’t be a big flashing light that says “Buy Now!” when the bottom forms, but the bigger the drop, the easier it will become to ease into the market.

Easy? Yes, if you have lots of cash (we currently recommend in Casey’s Gold & Resource Report that one-third of assets be in cash). That big stash is going to give you the ability to load up on the cheap.

If you don’t have a significant amount of Federal Reserve notes saved, it’s not too late to start. And I’ll bet you a six-pack on a Tahitian beach you’ll feel differently about this sell-off if you have a big pile of cash waiting to deploy.

The big SALE! may very well be on its way. I hope you’re getting ready for it.

What silver investments are we buying on the corrections? Check out our 2010 Silver Buying Guide, which includes a list of the dealers with the cheapest prices on all forms of physical silver, a brand new silver ETF recommendation, and the two best silver stocks in the world. You’ve got nothing to lose – a one-year subscription to Casey’s Gold & Resource Report is only $39, and you can try it risk-free for 3 months here.

Gold in Perspective - the 1970’s compared to today

In a similar vein to our recent article When will you know it’s time to sell gold?, David Galland of Casey Research ponders the “is gold overvalued?” question.  He has a couple of great charts comparing the 1970’s to today…

By David Galland, Managing Director, Casey Research

As the price of gold rises and the inevitable quacking begins again about the “barbaric” metal being overvalued, I thought a quick check-in with the historical perspective might prove useful.The first of two charts that follow shows the long-term picture of gold from 1970 to the present, correctly adjusted for inflation. 

In the second chart, we overlay the inflation-adjusted price of gold from the last secular gold bull market in the 1970s, with the secular bull market we’re now in.

As you can see, if the current bull ends with the sort of grand finale we saw at the end of the last big blow-off, then prices have a long way to go from here. That said, a credible case can be made that this time around, the price could go much higher.

For starters, in the 1970s, though not good by any means, the economy was in much better shape than it is today. The chart here uses long-term unemployment as a proxy for that contention.

As you can see, at the end of the 1970s, the employment picture was quite healthy.  Today, in addition to wildly out-of-control debt on both the private and public levels, we have a massive problem with unemployment and the consequences of a burst housing bubble. Thus, Paul Volcker’s somewhat simplistic solution to inflation – and the trigger for the end of the last gold bull market – seriously ratcheting up interest rates, is off the table. (Since we’re trying to gain perspective, I’ll remind you that at the beginning of the 1980s, mortgage rates topped 18%.)

But wait, I heard someone in the back shout, “There is no inflation today!” Wrong, there is unprecedented inflation – properly defined as an increase in the monetary base. What’s missing, so far, is the inevitable consequence of the inflation – steadily rising prices.

That will come, and when it does, the government will find it is going into a gunfight with a (dull) knife – because raising interest rates in the Kingdom of Debt will lead to a predictable outcome.

Unfortunately, thanks to the inflation, interest rates are going up no matter what the government would prefer to happen, a contention of ours that is now gaining traction in the mainstream.

And, yes, up to a point, history shows gold and interest rates moving upwards in concert.

Don’t go crazy about buying gold, but by all means, if you don’t own some, begin a monthly program of purchases.

While it would be perfectly natural to see the gold stocks give back some of the big gains they have offered since last year’s correction, any further corrections should be viewed as opportunities. But again, don’t go overboard. If you have an investment portfolio with 20% to 30% in a combination of precious metals bullion, large-cap and small-cap stocks, you’ll be well positioned – and protected – for what’s coming. 

To learn where to buy physical gold and where to store it… and which major gold stocks, mutual funds, and ETFs are the safest while giving you handsome upside… read Casey’s Gold & Resource Report. At $39 per year, it’s a steal for the value you get out of it. Click here for more.

Buying gold, what’s more important: Price per ounce or ounces owned?

How do you know when you have enough gold?  And should you just ignore the price you pay and simply count how many ounces you’ve accumulated instead?  Jeff Clark of Casey Research answers these important questions today.  He also touches on what form of gold you should buy….

By Jeff Clark, Casey’s Gold & Resource Report

In a recent conversation with a fellow gold analyst, he was emphatic that the price one pays for physical gold should be ignored. “What’s far more important,” he insisted, “is how many ounces I own in relation to the total value of my assets.”

Building a core position in gold bullion is a smart goal, to be sure, and a strategy Casey Research has been advising for years. However, ignoring the price you pay for gold could be seen as foolhardy; sure, it’s insurance, but isn’t price part of the consideration when you shop for insurance?

So, who’s right? 

The World Gold Council just released their 2009 annual report on gold trends. From the densely populated pages of interesting data, there’s one compelling tidbit I gleaned that may shed some light on the buying behavior of gold investors.

Overall investment in gold was 7% higher in 2009 than 2008. This is significant when you consider that demand in the fourth quarter of 2008 – during one of the worst financial meltdowns in history – was so great that shortages of physical metal abounded everywhere. And yet investors bought more gold in 2009 when investor fear about global financial uncertainty was subdued.

Further, 2009 total funds invested in all forms of gold exceeded 2008 by 20%, and the average price was 11.6% higher. In other words, investors were buying gold even though the price wasn’t necessarily “low.” To be sure, that’s a broad statement. But the fact remains that year-on-year, more gold was purchased at higher prices when the markets were less scary, than when the price was lower and Hank Paulson was on CNBC every 15 minutes pontificating on how to save America’s financial system.

This isn’t to suggest one shouldn’t pay attention to price. And the data doesn’t identify how many of those who purchased gold last year were first-time buyers, as certainly there were newcomers to the sector that contributed to higher demand.

But it begs the question, who would continue to buy gold when the price is higher?

Whoever doesn’t own enough, that’s who. The gold I bought last month was certainly higher priced than what I paid in 2008. But I’m trying to position my assets for protection from eventual dollar debasement and rising inflation. So perhaps focusing more on acquiring sufficient ounces to withstand a storm rather than stubbornly buying none, waiting for “cheaper” prices, however you define that, is a better mindset. Not owning enough gold is equivalent to holding a million-dollar mortgage and having a $10,000 life insurance policy. It won’t help much when you really need it.

Of course we should pay attention to price.

But the trick is not letting that distract you from buying what you need. You’re not buying gold bullion as a speculation (although we expect to make a bundle on our holdings), but as a sound form of cash in an environment where government has no respect for a balance sheet and sees inflation as the only way out of its black hole of debt. During periods of inflation, the government does fine; it’s the citizens that suffer from the lost purchasing power of their savings. It’s clear our currency is being debased. What’s your plan of defense?

For those diligently accumulating gold, how do you know when you have enough?

Check your anxiety quotient. If Ben continues printing money or Obama promises more goodies than he has the money to pay for, and you remain calm, then you likely have adequate gold. These are the investors who can afford to be stubborn about price as they build their holdings. In my opinion, this is where we all want to be.

What form of gold should you buy?

It depends on why you’re buying it. If you understand gold’s role in history, owning a physical form will come naturally to you. If you see the threat of inflation on the horizon, or you worry about what is being done to the dollar, you’ll own both coins and an ETF. If you’re worried about possible exchange controls someday, you’ll consider a Perth Mint Certificate. And the more gloomy your outlook about the global economy, the greater the percentage of all forms of gold you’ll buy.

That said, we maintain a bias toward physical ownership. GLD and other gold ETFs are fine and do offer protection. But the custodian isn’t going to airmail gold to you when you cash in your shares; having the “hard money” in your hand gives you the freedom an ETF cannot. In our book, owning physical gold, in the form of one-ounce coins, is where your first dollar should go.

I remember when my wife and I decided it was time to get life insurance. We just had our kids, and it was time to play grown-up. Given what 5,000 years of history has taught us about the value of gold, and given what’s happening at this moment in history to our currency, are you playing grown-up with your investments?

Is the current price of gold a good time to buy? Check out our four “clues” in the new issue of Casey’s Gold & Resource Report, risk-free here…

And for more detail on 8 different methods of buying gold, get access to our Gold Survival Guide ecourse here. 

Could NZ house values drop by 80%?

Past data shows they sure could when priced in gold.

As usual there’s plenty of discussion in the mainstream media about where house prices are going. Given New Zealanders predilection for property it’s no surprise. However the prices used are always and only the nominal NZ dollar prices. And as discussed in this previous article, The Current Stage of the New Zealand Real Estate Market, it’s important to take into account money supply inflation and its impact on the buying power of the dollars you hold, when looking at historical returns.

So we’ve gone to the trouble of plotting NZ house prices against NZ gold prices to hopefully show house prices in a new light….

The below graph depicts the commonly publicised median house price (orange line and right axis). But also the house price to gold price ratio (black line and left axis) since 1962. This is calculated by dividing the median house price by the monthly gold price in NZ dollars. We then arrive at the number of ounces of gold required to purchase the NZ median house.

As it’s difficult to get long range median house prices, the prices were calculated using RBNZ house price index data and extrapolated backwards using the current median house price. Note: the index is for detached houses only. So while not perfect it should give a general indication of the trend in NZ house prices.

We couldn’t find NZ house price data back to the 1930s and earlier like the US and UK graphs care of bullionvault below. (The accompanying articles for the US and UK graphs on bullionvault can be found here and here.)

And while the UK and US data refers to average (not median) house prices, ‎we think we can still use the data to draw some broad comparisons.  So ‎please forgive our mixing apples with oranges!  Hopefully the resulting fruit ‎salad still makes sense!

Comparing the UK (above) and US (below), notice how towards the end of the 2 biggest recessions of the previous century – one, the deflationary depression of the 1930’s and the other the inflationary 1970’s – the ratios both dipped below 100 oz to purchase the average house.

While our NZ data doesn’t go back that far, notice how similar the NZ graph is to the UK data since 1962. Both peaked around 1970 at near to 300 ounces. Both then fell to below 100 in 1980 and climbed steadily with a bit of a stumble in the 90’s, to peak in the mid 2000’s.

So we reckon it’s probably reasonable to assume that the trend was similar during the 1930’s depression era here too.

Now, referring back to the NZ graph (reproduced again below for ease of comparison), note how at the end of the 70’s the housing/gold ratio drops down to almost 50 oz of gold to buy the median house!

If history repeats and the trends in the US and UK are similar to NZ, could we in fact be heading down close to 50 ounces again by the end of the current financial crisis?

Also worth noting is that while house prices in NZD terms peaked in 2007, priced in gold they had already topped out in 2005. So, at first glance it may seem like you’ve “missed the boat” if you didn’t sell housing and buy gold in 2005 when the top was in at 500 oz. With the ratio currently standing at about 250 oz you would have been able to buy back the same house now and still have 250 ounces left over. Or put another way you could now buy 2 houses. That is, twice the buying power in real estate by holding gold for 4 years.

However if we consider that in the 70’s the ratio bottomed at 50, this is a further 80% drop in the ratio from today’s value!

Key point: It’s the proportional drop that is the key factor.

So an average house sold today would net you 250 oz of gold. If the past trends both here and in the US and UK hold true, we may see the ratio drop below 100 and here in NZ maybe even bottoming out as low as 50, by the end of this financial crisis. That would mean you could buy back the same house for 50 ounces of gold and still have 200 ounces left over. Or using the same analogy as above you could now buy 5 houses! Even if the ratio only dropped to 100 ounces you could still buy the same house back twice and have 50 oz of gold left over.

Bear in mind that this drop against gold could happen without house prices actually falling in nominal NZ dollar terms as well but merely just through expanded money supply holding house prices up – i.e. the kiwi dollar being devalued. For example, for the ratio to bottom out at 50 the median house price could remain at the current price of $360,000 and gold could rise to $7200NZ (i.e. $360,000 / 50 = $7200). Notice how in the 70’s housing actually went up for the whole decade in dollar terms (orange line) while falling for the decade in gold terms (black line).

Or you could have gold holding steady and nominal house prices dropping markedly. With NZ gold currently at $1,585, the current median house price would have to drop to $158,500 to return just to 100 ounces! Ouch!

But perhaps the more likely scenario is to have a combination of the nominal dollar price of housing falling and gold rising. For example, gold at $3000NZ and the NZ median house price dropping to $300,000 would result in a 100 oz ratio.

Anyway, if history at least rhymes a little bit, holding gold should result in improved buying power when it comes to real estate in the coming years, whichever of the above scenarios play out.

So to summarise:

1. When priced in gold the NZ median house peaked in 2005 at 500 ounces.
2. Since then it has fallen 50%
3. UK and US data shows the ratio dipped below 100 ounces after the 1930’s depression and 1970’s inflation.
4. Past NZ data shows the ratio reached a low at the end of the inflationary 1970’s of just over 50 ounces. This is a further 80% drop from today’s ratio of 250 ounces.
5. It might be hard to time exactly but when houses priced in gold are below 100 ounces it might be a good time to think about exchanging some gold for property.
6. Hint: To do step 5 you need to have some gold!

Note: We’ll be updating this data every few months and publishing the changes so if you want to stay informed about when NZ housing will again be good vaule, then sign up for our email article updates in the box at the top right of this page.

America—A Country of Serfs Ruled By Oligarchs

This week in our musings, we have some thoughts of our own – and thoughts of others that we have found interesting….

 

Some thoughts on China…

Marc Faber – If the Chinese were to develop a taste for coffee, to the extent that, on average, every adult were to drink one cup of coffee per day,  China would consume the entire world’s coffee crop….

The Chinese government has announced that it has plans to build cities at a rate that will house a population the size of Australia’s every year for the next 15 years…. Hmm, doesn’t that have some implications for ongoing demand for raw materials?

Last year, for the first time ever, Chinese bought more vehicles than Americans… More generally, last year the developing world bought more vehicles than the developed world… Doesn’t that imply a continuing increased thirst for oil?? Perhaps also, it’s part of the reason that, in an economic environment of the greatest downturn (in the Western world at least) since the 1930s, the oil price is once again approaching $80 per barrel… See also the article on peak oil below.

Chinese citizens, in total, now own more cellphones than US citizens…

James Dines – Rare earths are obscure elements that just happen to be essential materials for modern technology. Large scale modern windmills, for example, require considerable amounts. China controls over 96% of the world’s production of rare earths… Oh dear, Mr Obama – don’t you think that instead of waging expensive foreign wars and killing over 2 million Afghans since the war began, it might be better to spend the dollars you don’t have but insist on spending anyway on securing supplies of these essential materials?  Oh, I forgot, I suppose you do have the option at any time of declaring war on China…

Last but not least, Chinese citizens are being encouraged by their government to buy gold and silver. And, of course, if you are a Chinese citizen, Government “encouragement” has to be taken seriously…

Here are our subjects this week. 

·         Government debt, private sector non-lending – from “The Automatic Earth” blog

·         Defaults, by Marc Faber

·         Peak Oil reaches mainstream media

·         America—A Country of Serfs Ruled By Oligarchs

Government debt, private sector non-lending – from “The Automatic Earth” blog 

February 19 2010: A thousand miles behind

Ilargi: When on any given morning you see consecutive headlines that read

1. “US bank lending falls at the fastest rate in history”,
2. “Lending to British businesses falls at record pace”,
3. “UK mortgage lending falls to 10-year low “,
4. ”Shock as British deficit equals that of Greece” and
5. “Britain posts first deficit for January since records began”

is your first thought that the economic recovery is nicely on pace? If so, perhaps a Tiger Woods press-op is more your thing.

How about we add this one:

“Fed raises interest rate on emergency loans to banks”

Think perhaps that would switch on the light?

See, what those headlines tell us is that the spigots on the private sector are not just closed, they’re still tightening ever more. While at the same time, government debt keeps rising. There can be only one conclusion. The only thing that lets our economies continue to exude a semblance of normality is the dwindling rests of our own remaining wealth, and we are not only not adding any, we are spending what is left, and fast. Our governments, eager to stay in power and remain wealthy, keep us thinking we’re doing just fine, borrow enormous amounts of money in world markets that is not used for any sort of recovery, but instead to pay for the debts of a small group of people who gained access to our full faith and credit by buying the representatives we elect. And once the Federal Reserve starts raising interest rates, while simultaneously drawing down its purchases of Treasuries and mortgage-backed securities, we will come to understand that we have been living in a soapbubble of our own making, built at the expense of many trillions of dollars and that this bubble is about to pop. That is true in the US as it is in the UK, and all the attention presently squandered on Greece and Ireland is but a trick to make us look the other way for a little bit longer, until everything of value has been stripped from around us and we can wake up one day to find all support and stimulus measures vanished into thin air, a bad moon rising, and a cold wind blowing through the cracks of our unheated MacMansions, with no gas stations able to supply us with the fuel to get out and get away. That’s what these headlines say. With all the money thrown at the issues, everything keeps reaching record lows. And all our governments can think of is to spend more. Until they don’t. One year ago, stock markets had almost reached their then low. The amount of public funds spend since to lift those markets are truly mind-boggling, and their effect now, predictably, turns out to be short-lived. The rich have gotten richer, and the poor have gotten an awful lot poorer in that year. They just don’t know it yet, or at least not the full and true extent, but once the numbers are crunched on government and central bank purchases of lenders’ defunct mortgage loans and their own sovereign debt (how’s that for a Ponzi scheme?), you will know just how destitute you’ve become. And it’ll be too late to do anything about it. You’ll have let yourself be fooled for too long. And, to use an ancient metaphor, find yourself one too many mornings and a thousand miles behind. Or is that a thousand debt payments?  

 

Defaults, by Marc Faber 

 I Think In The Next 10 Years, We Will Have A Lot Of Defaults 

What you find in the world is an unusual situation. International reserves have grown from 1 trillion dollars in 1996 to over 8 trillion dollars at the present time. Most of these reserves are held by emerging economies like China, India, Russia, Brazil and so forth. Over 70% of international reserves are in Asia including Japan.

So, what you have is basically in emerging economies, they have relatively low debt to GDP ratios and in most emerging economies their mortgage market has hardly developed. People buy homes for cash. There is no mortgage market. Whereas in the developed world, what we have is an overleveraged consumer and governments that have liabilities that they cannot meet in the long run. So something will break. And I think in the next 10 years, we will have a lot of defaults. Now before the United States, the UK or Eurozone members default on their debt obligations, they will print money. And then we will get very high inflation rates. Marc Faber is an international investor known for his uncanny predictions of the stock market and futures markets around the world. Dr. Doom also trades currencies and commodity futures like Gold and Oil.

  

Peak Oil reaches mainstream media

On our site, we have references to the coming commodity crunch, in particular, we look at the work of Chris Martenson.  To find out in depth about the peak oil crisis, we highly recommend the web site www.theoildrum.com  What is interesting at the present time is that this idea, which has been almost entirely pooh-poohed by the mainstream media, is gradually gaining traction in that same forum. For example, from Ambrose Evans-Pritchard, of the Telegraph, comes this piece. 

 Barclays and Bank of America see looming oil crunch

For oil markets, it as if the Great Recession never happened. Surging demand in China, India and the Middle East is making up for decline in the debt-crippled West, ensuring another global crunch within three or four years.

By Ambrose Evans-Pritchard, International Business Editor Bank of America and Barclays Capital, two leading oil traders, have told clients to brace for crude above $100 (£64) a barrel by next year, before it pushes relentlessly higher over the decade. This is a stark contrast from recessions in the 1980s and 1990s, when it took years to work off excess drilling capacity built in the boom.

“Oil has the potential to flirt with $100 this year. We forecast an average price of $137 by 2015,” said Amrita Sen, an oil expert at BarCap. The price has doubled to $78 in the last year.

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“The groundwork for the next sustained step up in oil prices is now almost complete. Global spare capacity is likely to be reduced to low levels within a relatively short time. The global economic crisis has postponed, but not cancelled, a crunch which would otherwise be starting to bite now,” said Barclays.

Francisco Blanch, from Bank of America Merrill Lynch, said crude may touch $105 next year, with $150 in sight by 2014. “Approximately 1.7bn consumers in emerging markets with a per capita income of $5,000 to $20,000 are eagerly waiting to buy cars, air-conditioning units, or white goods,” he said.

China has overtaken the US as the world’s top car market. Mr Blanch expects oil demand to rise by a further 2.8m barrels per day (bpd) in China and 2.5m bpd in India by 2015, when two giants will be absorbing the lion’s share of Gulf output. Consumption in the West has already peaked and will fall each year as populations shrink and we waste less, but the West no longer sets the price. Global use will increase by 8.8m bpd to 95m bpd.

Supply is scarce. Sir Richard Branson warned this month that the world faces ‘peak oil’ within five years. “Don’t let the oil crunch catch us out in the way that the credit crunch did,” he said.

Mr Blanch said output from non-OPEC states is falling by 4.9pc each year, despite Russia’s reserves. Saudi Arabia and the Emirates can plug a quarter of the gap, but global spare capacity must soon drop to wafer-thin levels – leaving us vulnerable to the sort of “super-spike” seen in 2008. The wildcard is whether Iraq can quadruple output to Saudi levels this decade, a target dismissed by most analysts as pie-in-the-sky.

Painfully high prices are needed to unlock fresh supplies as reserves are depleted in the North Sea and the Gulf of Mexico. Deep-water rigs off Brazil are costly and require drilling far below the seabed. Canadian oil sands and US biofuels have break-even costs near $70. While the US, UK, and the Far East are turning to nuclear power, it takes a decade to build reactors. “peak uranium” lurks in any case.

The oil spike brought the global economy to a shuddering halt in 2008. This time the crunch may hit before the West has fully recovered. Whatever happens, the US, Europe and Japan will soon transfer a chunk of their wealth to the petro-powers. It is a new world order.  

 

America—A Country of Serfs Ruled By Oligarchs

By Dr Paul Craig Roberts – bio at end.

(We have featured articles by Dr Roberts in these pages before – Ed.) 

The media has headlined good economic news: fourth quarter GDP growth of 5.7 percent (”the recession is over”), Jan. retail sales up, productivity up in 4th quarter, the dollar is gaining strength. Is any of it true? What does it mean?

The 5.7 percent growth figure is a guesstimate made in advance of the release of the U.S. trade deficit statistic. It assumed that the U.S. trade deficit would show an improvement. When the trade deficit was released a few days later, it showed a deterioration, knocking the 5.7 percent growth figure down to 4.6 percent. Much of the remaining GDP growth consists of inventory accumulation.

More than a fourth of the reported gain in Jan. retail sales is due to higher gasoline and food prices. Questionable seasonal adjustments account for the rest.

Productivity was up, because labor costs fell 4.4 percent in the fourth quarter, the fourth successive decline. Initial claims for jobless benefits rose. Productivity increases that do not translate into wage gains cannot drive the consumer economy.

Housing is still under pressure, and commercial real estate is about to become a big problem.

The dollar’s gains are not due to inherent strengths. The dollar is gaining because government deficits in Greece and other EU countries are causing the dollar carry trade to unwind. America’s low interest rates made it profitable for investors and speculators to borrow dollars and use them to buy overseas bonds paying higher interest, such as Greek, Spanish and Portuguese bonds denominated in euros. The deficit troubles in these countries have caused investors and speculators to sell the bonds and convert the euros back into dollars in order to pay off their dollar loans. This unwinding temporarily raises the demand for dollars and boosts the dollar’s exchange value.

The problems of the American economy are too great to be reached by traditional policies. Large numbers of middle class American jobs have been moved offshore: manufacturing, industrial and professional service jobs. When the jobs are moved offshore, consumer incomes and U.S. GDP go with them. So many jobs have been moved abroad that there has been no growth in U.S. real incomes in the 21st century, except for the incomes of the super rich who collect multi-million dollar bonuses for moving U.S. jobs offshore.

Without growth in consumer incomes, the economy can go nowhere. Washington policymakers substituted debt growth for income growth. Instead of growing richer, consumers grew more indebted. Federal Reserve chairman Alan Greenspan accomplished this with his low interest rate policy, which drove up housing prices, producing home equity that consumers could tap and spend by refinancing their homes.

Unable to maintain their accustomed living standards with income alone, Americans spent their equity in their homes and ran up credit card debts, maxing out credit cards in anticipation that rising asset prices would cover the debts. When the bubble burst, the debts strangled consumer demand, and the economy died.

As I write about the economic hardships created for Americans by Wall Street and corporate greed and by indifferent and bribed political representatives, I get many letters from former middle class families who are being driven into penury. Here is one recently arrived:

“Thank you for your continued truthful commentary on the ‘New Economy.’ My husband and I could be its poster children. Nine years ago when we married, we were both working good paying, secure jobs in the semiconductor manufacturing sector. Our combined income topped $100,000 a year. We were living the dream. Then the nightmare began. I lost my job in the great tech bubble of 2003, and decided to leave the labor force to care for our infant son. Fine, we tightened the belt. Then we started getting squeezed. Expenses rose, we downsized, yet my husband’s job stagnated. After several years of no pay raises, he finally lost his job a year and a half ago. But he didn’t just lose a job, he lost a career. The semiconductor industry is virtually gone here in Arizona. Three months later, my husband, with a technical degree and 20-plus years of solid work experience, received one job offer for an entry level corrections officer. He had to take it, at an almost 40 percent reduction in pay. Bankruptcy followed when our savings were depleted. We lost our house, a car, and any assets we had left. His salary last year, less than $40,000, to support a family of four. A year and a half later, we are still struggling to get by. I can’t find a job that would cover the cost of daycare. We are stuck. Every jump in gas and food prices hits us hard. Without help from my family, we wouldn’t have made it. So, I could tell you just how that ‘New Economy’ has worked for us, but I’d really rather not use that kind of language.”

Policymakers who are banking on stimulus programs are thinking in terms of an economy that no longer exists. Post-war U.S. recessions and recoveries followed Federal Reserve policy. When the economy heated up and inflation became a problem, the Federal Reserve would raise interest rates and reduce the growth of money and credit. Sales would fall. Inventories would build up. Companies would lay off workers.

Inflation cooled, and unemployment became the problem. Then the Federal Reserve would reverse course. Interest rates would fall, and money and credit would expand. As the jobs were still there, the work force would be called back, and the process would continue.

It is a different situation today. Layoffs result from the jobs being moved offshore and from corporations replacing their domestic work forces with foreigners brought in on H-1B, L-1 and other work visas. The U.S. labor force is being separated from the incomes associated with the goods and services that it consumes. With the rise of offshoring, layoffs are not only due to restrictive monetary policy and inventory buildup. They are also the result of the substitution of cheaper foreign labor for U.S. labor by American corporations. Americans cannot be called back to work to jobs that have been moved abroad. In the New Economy, layoffs can continue despite low interest rates and government stimulus programs.

To the extent that monetary and fiscal policy can stimulate U.S. consumer demand, much of the demand flows to the goods and services that are produced offshore for U.S. markets. China, for example, benefits from the stimulation of U.S. consumer demand. The rise in China’s GDP is financed by a rise in the U.S. public debt burden.

Another barrier to the success of stimulus programs is the high debt levels of Americans. The banks are being criticized for a failure to lend, but much of the problem is that there are no consumers to whom to lend. Most Americans already have more debt than they can handle.

Hapless Americans, unrepresented and betrayed, are in store for a greater crisis to come. President Bush’s war deficits were financed by America’s trade deficit. China, Japan, and OPEC, with whom the U.S. runs trade deficits, used their trade surpluses to purchase U.S. Treasury debt, thus financing the U.S. government budget deficit.

The problem now is that the U.S. budget deficits have suddenly grown immensely from wars, bankster bailouts, jobs stimulus programs, and lower tax revenues as a result of the serious recession. Budget deficits are now three times the size of the trade deficit. Thus, the surpluses of China, Japan, and OPEC are insufficient to take the newly issued U.S. government debt off the market.

If the Treasury’s bonds can’t be sold to investors, pension funds, banks, and foreign governments, the Federal Reserve will have to purchase them by creating new money. When the rest of the world realizes the inflationary implications, the US dollar will lose its reserve currency role. When that happens Americans will experience a large economic shock as their living standards take another big hit.

America is on its way to becoming a country of serfs ruled by oligarchs.

 

Paul Craig Roberts [email him] was Assistant Secretary of the Treasury during President Reagan’s first term.  He was Associate Editor of the Wall Street Journal.  He has held numerous academic appointments, including the William E. Simon Chair, Center for Strategic and International Studies, Georgetown University, and Senior Research Fellow, Hoover Institution, Stanford University. He was awarded the Legion of Honor by French President Francois Mitterrand. He is the author of Supply-Side Revolution : An Insider’s Account of Policymaking in Washington;  Alienation and the Soviet Economy and Meltdown: Inside the Soviet Economy, and is the co-author with Lawrence M. Stratton of The Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the Constitution in the Name of Justice. Click here for Peter Brimelow’s Forbes Magazine interview with Roberts about the epidemic of prosecutorial misconduct. His latest book, How The Economy Was Lost , has just been published by CounterPunch/AK Press.

Jim Rickards: A tidal wave of demand for gold

This article is a summary of comments by Jim Rickards, who was interviewed recently by Eric King, over at King World News. Mr Rickards is a writer, lawyer and economist with a long and very distinguished record in the global capital markets.  He is Senior Managing Director at Omnis, Inc., a consulting firm in McLean, VA and is the leading practitioner at the intersection of global capital markets and national security.  His advice to clients from 2002 to 2006 included early warning of impending financial collapse, the rise of sovereign wealth funds, the decline of the dollar and the sharp rise in gold prices years in advance of these events.  I strongly encourage readers to listen to the whole piece, but for those who can’t spare the time, here is a record of the salient points…

Bernanke

Although Ben Bernanke has been reconfirmed as Chairman of the Fed, his position will be weakened because of the unprecedented number of votes against his re-appointment. Wall street loves Bernanke because he’s giving away free money. Notice that very big investors such as Warren Buffett lobbied hard for Bernanke’s re-election.

Greece

The group of fiscally challenged Europeans known as PIIGS (Portugal, Italy, Ireland, Greece and Spain) vary widely in the amount of gold they own – Italy has over 2000 tons, Greece over 100 tons, while Ireland owns only 5 tons.

Greece’s debt to GDP ratio is only about half that of Japan’s. Its deficit to GDP ratio is comparable to that of the US. If the ECB lets Greece default, where does the rot stop?  The crown jewel of European unification is the monetary system  - symbolised by the Euro. They will do all they can to preserve it.

IMF gold

Much has been made of India’s purchase of 200 tons of gold. India would like to buy 800 more tons. According to Jim’s best information, China would like to buy 3000 tons. Russia would like to buy another 1000 – 1500 tons. We are looking at over 5000 tons of demand from these 3 countries alone! Annual world production is about 2300 tons, but this is all spoken for. These official buyers will have to be satisfied by official sellers. Now the US has over 8000 tons; European countries collectively own over 10,000 tons, but the Europeans, the largest official sellers of gold in the world, are reducing their sales, while the US sells virtually none. There is a huge demand/supply imbalance, which implies support at some level for the price of gold.

The IMF has over 3000 tons in total, but only 200 “discretionary” tons available for sale.

Gold swaps.

 The government  paper securities market works as follows via the repo market – a kind of swap market: I’m a dealer, I can sell some govt bonds without owning them – I’m going short, in other words, or I have what’s called a reverse repo position. I borrow the bonds, sell them to my buyer, and at some later stage I have to buy replacement bonds and return them to the entity that lent them to me – I unwind the repo, as this process is called.

Now let’s consider gold. The market works exactly the same way. As a dealer, I own some gold and I lend or sell it to you, you can sell it or physically deliver it to someone, you now are short some gold, so you go into the marketplace at a later date and buy back the gold, and re-deliver it to me.

But suppose this is done as a secured lending arrangement – i.e. I am not selling you the gold – I’m lending it to you. I’ve got it on my books as a kind of secured loan; the ultimate buyer has it on his books as a physical possession. So the gold is being counted twice. Everything balances as long as the person in the middle’s short position is taken account of. The problem comes because the market is unregulated and opaque – we have no information about the short positions in the middle, or indeed much else.

Now the evidence for actual swaps between central banks is fairly limited (GATA might disagree – Ed.) – but if they do exist in any quantity, and there is any kind of call to cover the short positions, a superspike in the gold price would occur.

Central banks hate deflation.

The consumer won’t spend if he/she thinks prices are going lower. The problem feeds on itself – it’s a positive feedback loop. There is no mechanism in the tax system to handle deflation. Deflating prices, if one’s salary remains constant, mean an increase in the standard of living, but the govt can’t tax it.

At what point does the Fed stop printing money and let deflation prevail? The job of the Fed, in their minds, is to cause inflation (print money in other words. In the words of Marc Faber, Mr Bernanke is a money printer). The current deflationary forces though are very powerful – we have just had the greatest asset bubble collapse in history. It follows that the Fed is likely to be required  to engineer the greatest inflation in history.  However, the job is complicated, because all fiat currencies are fighting to be devalued at the same time.

China is refusing to adopt the mantle of the strong currency, that everyone devalues against.  However, there can be devaluation against gold. Roosevelt did it in the 30’s.

Deflationary forces are too great – they will overwhelm the efforts of the central banks which won’t be able to devalue against each other, so they will bid up the price of gold.

Inflation means transferring wealth from creditors to debtors. In deflation, the flow is in the opposite direction, from debtors to creditors. This is true, so long as the debtor does not default. If the debtor defaults, the loss is transferred – instantaneously -back to the creditor. In fact, for this reason, creditors actually prefer inflation – they’d rather get paid in cheaper dollars than not get paid at all.

The Japanese experience – US better or worse off?

The Japanese had a bad time of it through the 90’s – and they may not be out of the woods yet. The US has a lot more gold, a much bigger base of natural resources and a number of other advantages over Japan. However, the consumer is tapped out.  Prices are likely to drift lower until eventually they get so low that the consumer starts to be interested again. A great P/E compression occurred in the 30’s.

Econophysics

The characteristic behaviour of a bubble is well known across many disciplines. It is very difficult to know when a bubble will break – but the dynamics imply that a bubble will return to where they began, roughly speaking. House prices will probably go all the way back to 1995 levels.

 

Also, check out the link on Jim Rickards’ interview page at King World News to the piece – The Frog, the Scorpion and Goldman Sachs.  This is an interesting summary of the Goldman business model of data mining - gathering data from it’s customers - to determine the likely direction of the markets and making a buck from this - all the while being tax payer supported.  Very profitable!

 

Precious metals paper market correction continues

 

This week in our musings, we have some thoughts of our own – and thoughts of others that we have found interesting….

 

Last week and earlier saw the precious metals paper market correction continue.  Please note that this is the supposed paper market tail wagging the physical market dog. The physical market remains in high demand and short supply.

The banksters kept forcing the paper price of gold and silver lower, started covering their shorts, and rebuying longs as the technical funds coughed up their leveraged positions. Eventually, the price will rise, the banksters will sell into strength, and this round of the dance will end, only for another round to begin. We have seen this particular dance so many times that one might think all gold pundits would report accurately on it – but no. One would be better advised to listen to Jim Sinclair, who has stated many times that this game will continue, with a marked increase in volatility, as the gold price see-saws higher, as it assuredly will, whether we are in for a period of heavy deflation, or massive inflation.

The financial system is now inherently unstable, and one of the other of these outcomes is inevitable. The debt will either collapse, meaning massive defaults at individual, municipal, state and sovereign level, or it will be inflated away.  The powers that be know this – that’s why central banks have become net buyers of gold, and the Chinese government is encouraging its citizens to buy gold and silver.

Meanwhile, western governments are encouraging their citizens to spend any money they have and indeed to go further into debt, to buy widgets to “get the economy moving again”.  It’s also why the SEC has quietly arranged to allow money market funds to suspend redemptions. A brighter flashing pointer to continued expected financial instability, I have yet to see.  Here’s Zero Hedge’s take on the new rule…

 

Zero Hedge discussed a month ago the disastrous prospects of what would happen if the new proposal contemplated by the SEC, which would allow the suspension of redemptions from Money Market Funds, were to pass. Well, in a nearly unanimous vote, Money Market Funds now have the ability to suspend redemptions, courtesy of the SEC’s just passed 4-1 vote. This explains the negative rate on bills: at this point, should there be another meltdown, money market investors will not, repeat not, be able to withdraw their money purely on the whim of Mary Schapiro. As the SEC noted: “We understand that suspending redemptions may impose hardships on investors who rely on their ability to redeem shares.” Too bad investors’ hardships considerations ended up being completely irrelevant.

Here’s an interesting question. Is it immoral, or “un-American”,  to walk away from your mortgage debt? Of course if you’re a too big to fail bank, it is apparently quite OK. But corporations have legally become people – they can spend as much as they like endorsing their preferred candidates for Congress or Senate. It’s all very confusing. I would hazard a wager though, that as more and more folks take the “jingle mail” route, we will hear increasing calls from the banks about the dubious nature of the practice….

 

Speaking of debt, Australian economist Steve Keen, who was one of the few to presciently call the upcoming crisis in 2007, has carried out some very interesting work concerning the rate of growth of debt in an economy. What he has found, if I understand him correctly, is that for both the US and Australia, there is a very high correlation between the rate of growth of debt and the rate of growth of the economy.

Now we know that, in the US, it is taking increasingly large increases in debt to produce growth – now the figure is upwards of $5 of debt to produce a $1 increase in GDP. This means that if we go for growth, we have to accept an increasing debt burden – just at a time when the existing debt burden is becoming unconscionably large.

It is also interesting to see President Obama try to harness the groundswell of calls for fiscal responsibility by proposing certain spending freezes. Of course the fact that this is a small drop in a very large ocean seems to escape many folks attention…

 

Lastly, I just want to draw people’s attention to Eric King’s site King World News where each week, Eric posts great interviews with noted figures in both the precious metals and general business communities. The current interview with Jim Rickards is long, but one that I found particularly good for understanding the nature of the gold market.  You can download the full interview here.

UPDATE:  If you’re pushed for time to listen to this interview, we’ve now published this summary article of the main content… Jim Rickards: A tidal wave of demand for gold

 

Is Gold in a bubble?

Weekly Wanderings 24 December 2009

In the final Weekly Wanderings for 2009 we cover….

• Don Coxe on gold – courtesy of Zero Hedge‎
• Harry Schultz on Deflation
• Chris Martenson to speak at UN
• John Hathaway on whether gold is in a bubble

Don Coxe on Gold - from Zero Hedge

As the only major financial asset that never pays interest or dividends, gold’s performance could be the clearest, purest example of Zero-Based Investing:

 

With a 25% rise this year, Gold has beaten the S&P roughly 7%. As measured by the XAU, gold mining stocks’ total return is 35%.

But gold’s investment return was exceeded by the amount of publicity and debate it generated. Its late-year blow-off past $1200 briefly made it a Page One story—thereby automatically guaranteeing a sharp correction.

The media were filled with authoritative explanations:

Hyperventilating Commentators’ Explanations:

• the collapse of the dollar;
• the repudiation of Obamanomics;
• a warning of a coming financial collapse, leading to Depression;
• a signal of the runaway inflation to come;
• China has only begun to convert its dollar holdings into bullion: the best is yet to come;
• a short squeeze on gold ETFs which are misrepresenting how much bullion they hold: beware of counterparty risk: buy bullion, not paper;
• a coming Armageddon in the Mideast.

Sophisticated Explanations

• gold is the only asset that is nobody’s liability and is therefore a haven in an increasingly uncertain world;
• capitulation by hedged gold miners, notably Barrick;
• India’s purchase of 203 tonnes from the IMF, removing the overhang in bullion markets;
• China’s announcement that its gold holdings are higher than were previously revealed;
• “Peak gold” discussions, as investors ponder the failure of gold mines to maintain—let alone increase—their production despite record bullion prices. The classic expression for getting rich quick is to find a gold mine—but it takes time, experience and capital to bring on a mine. Reported gold companies’ reserves haven’t been rising, but soaring gold prices will change that: millions of tons of low-grade “resources” that haven’t been booked as ore reserves will be reclassified if gold prices remain near or above current levels;
• recognition of the longer-term implications of central banks’ astounding levels of creation of fiat money at a time they are collectively becoming net buyers of gold—after decades of sustained selling;
• respect for gold’s future because prices have managed the remarkable feat of setting new records at a time jewelry demand—traditionally the main support for gold—is slumping sharply;
• portfolio diversification by sophisticated investors who seek a haven at a time of zero returns on Cash—with no indications that central banks are about to abandon their Zero policies.

Clients can undoubtedly add other justifications and explanations to their lists.

We were in Toronto the week gold prices were setting records daily, and were asked—on TV—to explain the dramatic run-up. Various prominent commentators were falling all over themselves to issue ever-higher targets for bullion prices.

We admitted that we couldn’t explain the sudden rush and the dramatic daily leaps. When asked for our price target, we suggested….

“As an historian, I seek some historic data to assist our predicting. When gold broke through $1,000, we began considering appropriate targets. As every English schoolboy knows, 1066 was the Norman Conquest—the first gold target. The next important date was Magna Carta—1215—and gold has now managed to attain that level. The next big date is the Provisions of Oxford 1258 [when Simon de Montfort forced important constitutional changes on Henry III].

“My one-year target for gold is 1345—the onset of the Black Death.

“Apart from that, I really can’t say how high gold could ultimately go, although longer-term it should reach 1485, when Richard III fell in the Battle of Bosworth, launching the Tudor monarchy, and giving us the enduring quote, “My Kingdom for a horse!” The interviewers laughed, and changed the topic.

Next day, Goldman issued its authoritative target price for next year: 1350.

We were called for comment, and graciously accepted that prediction because it was the end of the Black Death.

The point of these musings is that no one really has any idea of the longer term price of gold that can be justified by sober analysis.

All that we can sensibly say is that gold’s price entered a 20-year Triple Waterfall collapse in 1980, falling from $825 to $250, and has risen every year in this decade. If it can maintain its strength at a time jewelry demand is shrinking, then investors and speculators are in charge; their motivations include momentum and malaise: Gold looks good because it keeps going up, and they’re scared about what the Fed and Obama and other central banks and governments are doing, and have no great confidence that there will be a sustained, noninflationary economic recovery, so gold is a good place to hide.

Gold has been the best-performing major commodity since the financial crisis began:

 

We see no big reason why that outperformance should be over. After its breathless run to $1220, it’s entitled to correct back toward $1,000—or even a bit below that chiliastic level—without ending its bull market.

Finally, gold may even be decoupling from the dollar. The sheer scale of foreign exchange reserves in China, Hong Kong, India and other countries whose currencies are pegged, directly or otherwise, to the dollar may be opening a whole new demand for gold. Just to maintain even tiny percentage exposure to gold in forex reserves means these nations must remain on the buy side. The euro was once seen as a worthwhile alternative to the dollar in Asian forex accounts, but the unfolding problems of its Eastern European and Mediterranean members are exposing the euro’s internal contradictions as a viable alternative to the dollar.

In a world in which nearly all paper money has problems, and in which the sheer supply of paper money is expanding far faster than global GDP, gold has its best claim as a constituent of foreign exchange reserves since Bretton Woods booted it out sixty-five years ago. [emphasis Zero Hedge]

Harry Shultz on Deflation

From Rick’s Picks, an excerpt from Harry Shultz’ latest newsletter…

“Deflation suddenly is looming, crowding out the prevalent global view that only higher inflation can ‎possibly be ahead. QE (Quantitative Easing) isn’t working; money pumping, once thought a flawless ‎cure for crises, now falls flat, from lack of confidence. QE is, in fact, having the opposite of the ‎intended effect as it’s obviously a ploy, & QE simply adds to debt, which now chokes the holders. ‎Gold can handle deflation nicely, but not much else can.”

 

Chris Martenson to Speak at UN…‎

Chris Martenson whose opinion we follow closely is set to speak at the U.N.  Maybe someone who understands the current state of the global economy can get the Bureaucrats to see some sense and see that tax and spend isn’t the answer!  Hope springs eternal…

After Copenhagen: Understanding the Energy Trap for Policymakers

Tuesday, February 2, 2010
1:00 to 2:45
United Nations Headquarters
760 United Nations Plaza
New York, NY

Co-sponsored by the NGO Sustainability and the Mission of Slovakia to the United Nations

This presentation will discuss the macro trends of our economy, energy structure and environment, as they will affect the decisions we make as individuals and policy-makers. Touching on the outcomes of the Copenhagen Climate Summit, Dr. Chris Martenson will explore why and how a financial system dependent on infinite growth will continue to create disastrous friction with the resources and ecosystems of a finite planet.  To enter the solution-space in confronting these timely issues, we will need to understand how these “Three E’s” are inextricably linked, and break apart the myths we tell ourselves as a society to build towards a future of sustainable prosperity.

 

John Hathaway on gold…‎

John has been featured in these pages before (see Gold and Central Banks).  He is one of the most experienced and knowledgeable ‎commentators on the gold market around. It is worth noting that Mr Gold himself, Jim Sinclair, holds ‎John’s expertise in high esteem. In another recent interview with Eric King, John expresses his views ‎on the gold market, and more. The link to the audio interview is here, and we summarize the content below.‎..

 

It is patently false that gold is in a bubble, even though Nouriel Roubini has become the cheerleader for ‎the gold bubble story. However, the gold price we have now is in the context of massive money ‎creation and provision by the Fed of money for speculation at an interest rate of effectively zero. ‎

It’s possible that the current correction in the gold price could see a dip below $1,000, but this would ‎represent a terrific buying opportunity. The sustained break that we have seen above $1, 000 marks a ‎new phase in this gold bull market, one of much increased volatility – both up and down. Jim Sinclair ‎has also expressed this view, by the way.‎

The opinion that paper currencies are deeply flawed is moving mainstream, and with it the idea of ‎investment in gold. Currently, for example, pension funds, which contain large pools of capital for ‎investment, have virtually zero exposure to precious metals. As investing in gold becomes more ‎fashionable, at least some portion of these pools will stream into the gold market, creating increased ‎buying pressure.‎

Consider the gold ETF.  Currently, it has a value of around $67 billion. Many people view this as ‎high, but John envisages it easily reaching 10 to 15 times this value! From this one perspective, gold ‎is under-owned.‎

Gold at over $1, 000 seems as undervalued today as it did in 2000 at less than $300. This is the case ‎because of the very different financial environment today, when the measures being taken to reflate ‎assets are so extraordinary, and regard for the integrity of the US dollar is so low. The financial system ‎has been ruptured, and government policies are compounding the damage. The potential pitfalls we ‎face today are demonstrably more dangerous than the ones we faced going into 2008.‎

Gold shares are currently very undervalued compared to the gold price. Gold mining has been a very ‎tough business over the last few decades, but now, with the gold price over $1, 000, well run mining ‎companies will start to generate significant profits and returns on capital.‎

Silver remains significantly undervalued, relative to gold. One cautionary note though; if we entered a ‎depression type environment where industrial demand plummeted, then silver might not do so well.‎  However, under the inflationary scenario that the Fed seems determined to engineer, silver should do ‎very well.‎

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

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