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….

 

• 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.Oil Pool by aclintonb.
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.

Unemployment protest - Fed's volte face sends the dollar tumbling

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.

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

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