Friday, April 20, 2012

Doug Casey on the Coming Meltdown

Mr. Casey has a dark outlook for the next one to two years. Some might call it doom and gloom, and I believe he may under-estimate the ability of central banks to keep the world markets together but he does provide some excellent food for thought and he touches on some important themes. The italics are my emphasis.

The Gold Report: You told us about two ticking time bombs last September, Doug—the trillions of dollars owned outside the U.S. that could be dumped if the holders lose confidence, and the trillions of dollars in the U.S. created to paper over the 2008 liquidity crisis. It's been six months since then. Have we averted the disaster or are we closer than ever?
Doug Casey: Things are worse now. The way I see it, what's going to happen is inevitable; it's just a question of when. We're rapidly approaching that moment. I suspect it will start in Europe, because so many European governments are bankrupt; Greece isn't an exception, it's the norm. So we have bankrupt governments trying to bail out the European banks, which are bankrupt because they've loaned money to the bankrupt governments. It's actually rather funny, in a perverse way.
If it were just the banks and the governments, I wouldn't care; they're just getting what they deserve. The problem is that many prudent middle class people are going to be wiped out. These folks have tried to produce more than they consume for their whole lives and save the difference. But their savings are almost all in government currencies, and those currencies are held in banks. However, the banks are unable to give back all the euros that these people have entrusted to them. It's a very serious thing. So European governments are trying to solve this by creating more euros. Eventually the euro is going to reach its intrinsic value—which is nothing. It's the same in the U.S. The banks are bankrupt, the government's bankrupt and creating more dollars so the banks don't go bust and depositors don't lose their money.
I'm of the opinion that if it doesn't blow up this year, the situation is certainly going to blow up next year. We're very close to the edge of the precipice.
TGR: Is the problem the debt, or all of the currency that has been pumped in?
DC: It's both. We have to really consider what debt is. It's the opposite of savings because savings means that you've produced more than you've consumed and put the difference aside. That's how you build capital. That's how you grow in wealth. On the other side of the balance sheet is debt, which means you've consumed more than you've produced. You've mortgaged the future or you're living out of past capital that somebody else produced. The existence of debt is a very bad thing.
In a classical banking system, loans are made only against 100% security and only on a short-term basis. And only from savings accounts that earn interest, not from money in checking accounts or demand deposits, where the depositor (at least theoretically) pays the banker for safe storage of his funds. These are very important distinctions, but they've been completely lost. The entire banking system today is totally corrupt. It's worse than that. Central banking has taken what was an occasional local problem, a bank failing from fraud or mismanagement, and elevated it to a national level by allowing fractional banking reserves and by creating currency for bailouts. Debt—at least consumer debt—is a bad thing; it's typically a sign that you're living above your means. But inflation of the currency is even worse in its consequences, because it can overturn the whole basis of society and destroy the middle class.
TGR: What happens when these time bombs go off?
DC: There are two possibilities. One is that the central banks and the governments stop creating enough currency units to bail out their banks. That could lead to a catastrophic deflation and banks going bankrupt wholesale. When consumer and business loans can't be repaid, the bank goes bust. The money created by those banks out of nothing, through fractional reserve banking, literally disappears. The dollars die and go to money heaven; the deposits that people put in there can't be redeemed.
The other possibility is an eventual hyperinflation. Here the central bank steps in and gives the banks new currency units to pay off depositors. It's just a question of which one happens. Or we can have both in sequence. If there's a catastrophic deflation, the government will get scared, and feel the need to "do something." And it will need money, because tax revenues will collapse at exactly the time its expenditures are skyrocketing—so it prints up more, which brings on a hyperinflation.
We could also see deflation in some areas of the economy and inflation in others. For example, the price of beans and rice may fall, relatively speaking, during a boom because everybody's eating steak and caviar. Then during a subsequent depression, people need more calories for fewer dollars, so prices for caviar and steak drop but beans and rice become more expensive because everybody is eating more of them.
Inflation creates all kinds of distortions in the economy and misallocations of capital. When there's a real demand for filet mignon, there's a lot of investment in the filet mignon industry and not enough in the beans and rice industry because nobody is eating them. And vice-versa. And it happens all over the economy, in every area.
TGR: But inflation rates don't seem to reflect the vast amounts of currency that central banks have injected into the U.S., European and other economies. The U.S. inflation rate was 2.93% in January and 2.87% in February. We haven't seen signs yet either of a hyperinflation or a serious deflation that we were warned would come with quantitative easing (QE). Does that mean QE is working after all?
DC: No. It's not just the immediate and direct consequences of what they do—everybody loves it when trillions of dollars are created. It feels good to have lots more purchasing media. The problem arises with the indirect and delayed consequences. All these dollars and euros—and Chinese yuan and Japanese yen—that have been created have basically gone into the banks, but the banks are not lending them out. The banks are afraid to lend and a lot of people don't want to borrow because they're afraid of taking on more debt. So the dollars that have been created, mostly invested in government paper, sit on the banks' balance sheets. They are not circulating in the economy at the moment. That's why prices aren't skyrocketing right now.
That's point number two, though. Point number one is that I wouldn't trust those inflation figures in the first place. The governments of Western Europe and the U.S. fudge inflation figures as certainly as the Argentine government fudges them, just less overtly and outrageously. They do that because they want to keep the perception of inflation down; they don't want people panicking, which is a pity, because the public should urgently do something to protect their capital. They also don't want to see Social Security payments and other payments that are tied to the consumer price index go up. They don't have the tax revenues to pay for them and will have to print even more money, which just exacerbates the problem. Official inflation numbers are unreliable; only somebody very naïve—like a TV anchorperson—could possibly believe them.
If you think of inflation as an increase in the money supply above the increase in real wealth—which is actually what the word means—the inflation rate is actually quite high at the moment. Real wealth is being created at lower rates than it historically has been, while the money supply is increasing tremendously. It's just a question of when that inflation rate manifests itself on a retail level. You've got to think like a real economist, not a political hack like Joseph Stiglitz or Paul Krugman. You have to see not just the immediate and direct consequences of something, but the indirect and delayed ones.
TGR: Given that this is an election year in the U.S., won't the government do everything possible to maintain a stable market and stop inflation?
DC: Sure, the government wants things stable. I have no doubt it is trying to keep the stock market up. It wants the stock market to stay high because pension funds and insurance companies and the public at large are invested in the stock market. It wants interest rates low, although artificially low interest rates are an economic disaster in that they encourage people to borrow more and save less. It would prefer to see precious metals, and all other commodities, at low levels. The argument is made that the governments of the world, especially the U.S. government, are manipulating the prices of gold and silver to keep them down, because when they increase, it's like financial alarm bells going off.
But they can't control the prices of the precious metals. In the real world, cause has effect. When you create trillions of currency units, eventually the price of those currency units relative to other things will go down. That's called inflation. Whether he's lying or he really believes it, Fed Chairman Ben Bernanke said he can control the levels of inflation. When it gets too high, he thinks he can rein it in somehow.
The current world monetary system is going to come undone. That's my prediction, and I'm betting on it massively, personally.
TGR: You've talked about the possibility of abandoning paper currency altogether and going to a digital system.
DC: The most important thing is to get the government out of money. There should be a high wall between the state and religion and an equally high wall between the state and the economy. I don't even like to talk about what governments "should" do as far as money is concerned because the governments shouldn't be involved in money—period. Money is a medium of exchange and a store of value. It shouldn't be a political football, nor should it be used as an indirect form of taxation, which is what inflation is. It should be a pure, 100% market phenomenon. Central banks should, therefore, be abolished. Paper currency should cease to exist—except as a receipt for money held on deposit. Historically, that's how it originated.
You could use any kind of commodity as money, but gold has proven since the dawn of civilization to be uniquely well suited for use as money. It's a market, which is to say a voluntary, phenomenon. Whether you represent that gold with bank notes printed by individual banks or by digital currency—which I'm sure the world is going to—makes no difference. But having the state in charge of currency is idiotic.
TGR: You've written about China moving away from the dollar. Do you see that happening gradually or all of a sudden? And would it be in favor of its own currency or more investment in gold? What impact would that have on gold prices?
DC: First of all, I think the nation-state as a form of organization is on its way out, and that a 100 years from now people will look back at countries like China and the U.S. the way we look back at medieval kingdoms today. In the meantime, the dollar is important because it's the numéraire for trade all over the world. At the same time, fewer and fewer people trust it, and they increasingly realize that it's the unbacked liability of a bankrupt government.
Eventually, it's going to be replaced by something else. India and Iran are trading between each other using gold and oil. Why use a piece of paper issued by a hostile and unreliable third party? The Russians and the Chinese can see how crazy it is to trade between each other using dollars, which all have to clear in New York. But people are still accustomed to using currencies issued by nation-states, and the U.S. dollar is everywhere and is therefore convenient. But it's a hot potato. People no longer trust it. I suspect the Chinese yuan will replace the dollar gradually—assuming the Chinese don't destroy the yuan as well. They're also creating trillions of the things to keep the economic bubble in China from imploding.
Before the Chinese yuan can replace the dollar, people must have confidence in it. The best way they can gain confidence in it is if the volume of yuan is limited and redeemable by the issuer in something real, something tangible. That's going to be gold. So I expect China will continue buying large amounts of gold to back its currency. China is already the world's largest gold producer. Considering that only about 6–7 billion ounces of gold have ever been mined in all the world's history, China alone could drive the price of gold much higher.
TGR: At your Recovery Reality Check summit in Florida April 27–29, you'll be talking about how business cycles have been turned on their heads. Is this the time for investors to sit tight, making only small adjustments to portfolios, or must they take more drastic action to protect their wealth or, better yet, profit from volatility?
DC: I think volatility is going to go way up in the future as the titanic forces of inflation and deflation fight with each other. This is a very poor time to make big bets in almost any conventional market because it's impossible to tell how things will finally settle, where the next major war will be and so forth. Stock markets around the world are not cheap now and bond markets are fantastically overpriced. Currencies are no more than floating abstractions. Commodities have been in a long bull market, so they're no longer a low-risk bet. Real estate—the most obvious thing for bankrupt governments to tax—is dangerous. In the developed world—especially in the U.S.—it floats on a sea of debt, which has driven it to artificially high levels. It's coming down as we speak, but it's nowhere near a bottom.
So there are very few places where people can still attempt to preserve capital. Everybody is going to be almost forced to be a speculator to try to stay in the same place. Speculating means capitalizing on politically caused distortions in the marketplace. That's the proper definition of the word.
TGR: What can people speculate on?
DC: Unfortunately, they have to second-guess where the money will go. I've always liked resource stocks, especially resource exploration stocks. It's a tiny market. If a fire gets lit under gold and silver, and I think it will, companies in this nanosector could explode 10, 20 or 50 times upward in price. It's happened many times in the past. Right now, these stocks are relatively cheap, so I like that as a speculative vehicle.
TGR: Rick Rule has cautioned against generalizing about the entire junior mining sector as a whole, because so many of these companies don't find anything. How do you decide which resource investments are worth looking into? Are there criteria? Is there some kind of a litmus test that you use?
DC: Rick is absolutely correct about that. Although the sector is capable of going upwards 10 or 20 times as a whole, most of the stocks in it are total garbage. The only gold, uranium, silver or whatever appears on their stock certificates, not in the ground they control. There are thousands of these little stocks, and yes, we have criteria we use to evaluate them. We use a tried-and-true due diligence process we call The Eight Ps of Resource Stock Evaluation to separate the wheat from the chaff among speculative investment opportunities.
TGR: Would you share that with us?
DC: Sure. This is a guide to help investors ask the right questions about every individual company they're considering. This list comprehends the essential, but you could write a book about each of these eight points.
  • People: Who are the key players in the company and what are the track records of the companies they've managed? This is by far the most important criteria.
  • Property: What resources are in hand, and what (if any) are the additional resources they expect to find? How well proven are they? Assessing this takes geological and engineering expertise.
  • Phinancing: Does the company have enough cash to meet its next-phase objectives or have the ability to finance the cost of reaching those objectives? It's no longer a case of grubstaking a prospector and his mule.
  • Paper: Capital is almost always raised from the issuance of new shares. Is there a lot of cheap paper out there that will keep the share price down? Will new or existing warrants or new shares dilute your own shares? Who owns most of the paper?
  • Promotion: How and when is the company going to get itself (and its stock) noticed?
  • Politics: Is the country or region mine friendly and stable? Are foreign investors welcome? Is there environmental resistance?
  • Push: What's going to move this stock? Drill results, merger or acquisition, increase in the price of the underlying commodity, resolution of a legal issue?
  • Price: What are the potential price moves of the underlying commodity that could have either a positive or negative impact on the value of the company?
TGR: How hard is it to find a company that passes muster on all eight counts?
DC: It's very hard. It's hard enough to look at the basic statistics of thousands of companies. Then you look at the people behind them. Generally, we try to find the people first. We stay away from those who have no history of success and have established that they have questionable characters. We look for people with long histories of success or appear to be about to embark on a lifetime of success. The most important piece is people. That's what we really look for most of all.
TGR: Based on all the calamities that could occur, how will you adjust your investing philosophy?
DC: Let me put it this way. We're going into something that I call The Greater Depression, much worse and much different than what happened in the 1930s. I think my friend Richard Russell said it best: "In a depression, everybody loses. The winner is the guy who loses the least." It's very tough to keep capital together today, much less make it grow in the years to come.
But I think it's possible. The thing to remember is that most of the world's real wealth will remain in existence regardless of what happens. The key is to position yourself so that more of it falls into your hands as opposed to falling out of your hands. That's what we're trying to do, to increase our relative share of the wealth in the world. We're not looking at boom times. What's coming will be the opposite of what we experienced during the artificial inflationary boom of the 1990s, where everything was going up—stocks, real estate and so forth. This is a time when, in real terms, most things will lose value. Most people will experience a real decline in their standard of living.
TGR: As we've discussed, at its root, paper currency is a substitute for something of value. Energy, similar to gold, has intrinsic value. It's always in demand. In the past, you've expressed optimism about uranium, natural gas and oil. As the dollar becomes suspect, do you foresee sources of energy becoming more valuable?
DC: Absolutely. I'm very bullish on oil. The world runs on fossil fuels today because they're ideal sources of highly concentrated energy. Unfortunately, all of the easily available, cheap fossil fuels have basically been found. The low-hanging fruit is gone. This is what the peak oil theory is about. Plenty of oil remains, but it's going to be more expensive to get it. To find oil now requires going to exotic places without infrastructure and with big political problems. It requires going much deeper into the ground, exploring under the ocean, using new technologies, and so forth.
Gas is secondary to oil when it comes to concentrated sources of energy. Of course, with the development of new technologies, primarily horizontal drilling and new fracking techniques, a huge amount of natural gas has become available all over the world. But it takes tremendous capital to retrieve it, and it also faces political problems.
But in summary, I'm bullish on energy of all types. There is plenty of fuel out there. It's just a question of the price level, so it becomes economic to retrieve it.
TGR: So how do you invest in finding the rest of what's out there?
DC: You look for companies that are exploring for it. One of the important things that makes me very bullish on oil is that most of the oil in the world today—something like 80%—is not owned and produced by BP Plc (BP:NYSE; BP:LSE), Exxon Mobil Corp. (XOM:NYSE), Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE) and companies like that. It's mostly owned and produced by national oil companies such as those in Mexico, Iran, Saudi Arabia and Venezuela. These state oil companies are universally corrupt and inefficient. The profits from the oil are generally used as piggybanks by those governments, not to build capital and find more oil. Furthermore, where governments allow private exploration, such as Iraq, they take about 80–90% of the potential profits from oil, which of course discourages exploration and exploitation of the resource. The problems are almost entirely political, but they're big problems.
TGR: Speaking of the politics of energy, are you still bullish on uranium in light of the politics of what's gone on since the Fukushima meltdown?
DC: Yes. I've said it before and continue to say it. There's no question that nuclear power is by far the safest, cleanest and cheapest type of mass power generation available. Fukushima survived one of the most severe earthquakes in recorded history with no problem; it's just a pity they didn't adequately plan for a 45-foot tidal wave on top of it. In addition, those plants basically were 50-year-old technology. If it weren't for political obstructions, we'd be using vastly improved technology. But it's not just uranium. Thorium is actually a much better fuel from many points of view and probably would have been used as a fuel instead of uranium except that the governments of the world found uranium useful for nuclear weapons as well as nuclear power.
Nuclear power is definitely the answer, but as you point out, it's a question of political problems. Across the resource industry, in fact, it's all politics. When you find a gigantic resource of some type, you can count on lawsuits, not-in-my-backyard opposition and political theft. Those are among the reasons that I don't see the resource industry as a place to make investments. It's only a place where you can speculate.
TGR: So what should long-term investors do to protect themselves?
DC: Because the big problems in the world today all are political, the critical thing is to diversify politically and internationally. You can't have all your assets under the control of one government or in one country. Then, of course, you have to find the right place to put the money within that framework.
TGR: How do you do that?
DC: I can write a book on that.
TGR: Or stage a summit? You have quite a faculty lined up.
DC: It is an impressive group. Actually, this summit has dual overarching purposes. As we've discussed, the massive amounts of money the world's governments have unleashed in their economies have lit a small fire of recovery. We're going to talk a lot about whether the world is truly on a path to recovery or whether investors wouldn't be wise to develop and implement Plan B now, given that the extreme levels of debt that were such a major factor in creating the current crisis have not been reduced. To me, that strongly suggests that this so-called recovery is unsustainable and calls for moving into Plan B. Part of Plan B involves identifying optimal investment strategies for the markets ahead.
TGR: What sorts of takeaways are in store for people who attend?
DC: Let's have David Galland, who's been instrumental in preparing for this summit, respond to that. (A senior market strategist, Galland is managing director of Casey Research LLC, managing editor of The Casey Report, International Speculator, Casey Investment Alert author of Casey's Daily Dispatch.)
David Galland: We expect the takeaways will be good answers to many burning questions. As Doug has suggested, the government says the recovery is real and your broker will tell you it is, yet the underlying data suggests that it may be a paper tiger. So, what's the hard truth? Should you be moving aggressively into rebounding equities? Or is the recovery a mirage that will dissipate in a second crushing leg down for the economy and traditional investment markets? What are the road signs you need to pay close attention to? How can you position your portfolio to do well in either scenario and, most importantly, to hedge against the worst case? Should you worry about inflation or deflation? Neither? Or both? Will the gold and silver you've been holding turn to lead and pull your portfolio down? Or is loading up on corrections still the right thing to do?

TGR: These summits are always sold-out affairs. Is this one full already?
DG: Just a few spots remain as we speak.

Thursday, April 19, 2012

Biderman & Sprott talk Gold

Frequent visitors here know that I enjoy Biderman's commentary on markets. Another favorite is Eric Sprott who runs a silver exchange traded trust (slightly different from an ETF). Sprott moved the market when he created his silver trust. He's a legend in the metal's world and its a treat to see these two in an interview.

Tuesday, April 17, 2012

John Embry on China & Gold

First, if you haven't read my post earlier today on the Gold Wars, please read it first then come back to read this post as it directly relates to this post.

John Embry  comments today on China and Gold:

With gold near the $1,650 level and silver firmly above $31, today King World News interviewed John Embry, Chief Investment Strategist of the $10 billion strong Sprott Asset Management.  Embry told KWN the financial system is built on an unsustainable mountain of debt, and over time this will create a more significant shift from paper markets to hard assets.  He also stated that what is taking place in China right now is wildly bullish for gold.  But first, here is what Embry had to say about what is happening with the gold and silver markets:  The gold and silver situation is under control of the paper manipulators at this time.  I think they have an agenda to keep the gold and silver space as quiet as possible, in order to keep people away from it.

“They have a vested interest in making sure people are buying stocks and bonds.  In the fullness of time this will be overcome, but in the meantime we have to put up with this.  To me, gold is the antithesis of the financial system as we know it.  It’s real money.

The problem with the financial system is that it’s built on an unsustainable mountain of debt.  The idea that we are going to be able to cure the current problem by creating more debt isn’t going to work.  We can’t support the existing debt....

“As this sinks in with a lot of people, and it will as time goes on, gold is going to be seen as a major alternative, if not the major alternative.  It won’t take much of that money that’s currently tied up in paper, moving into the gold space, to have an outsized impact on the price.

The Chinese, over the weekend, stated their intention they wanted to make the yuan a much more internationally traded currency.  Up to now it’s been so restricted that you couldn’t really deal in it.  If this is their intent, and I believe it is, this is a huge step.

This is spectacularly bullish for gold because I think the Chinese will ultimately want to back their money with gold.  The Chinese are huge players in the gold market.  That’s their agenda, to be seen as a major play in the international currency market.

What the US dollar doesn’t need these days is serious competition in terms of being the reserve currency.  If the US dollar starts to move off center stage as time goes on, this will be wildly bullish for gold.  One of the things that would destabilize the whole financial system is if people figured out how vulnerable the US dollar is.”

John seems to believe, as I do, that China's long term goal is for the Yuan/Reminmbi to become the new world reserve currency and will do this by backing their currency with gold. I previously noted this back in January. Remember that being the world's reserve currency comes with huge privileges, one of which is lower than normal interest rates on the government's debt. If the US loses this status, what do you think the interest rate will be on our $15.5 Trillion (and soon to be $20 Trillion) debt?

The Gold Wars

There is a war going on right now between the US Fed, gold investors and Asian central banks. As I've pointed out previously, The US Fed is actively selling gold to keep the price low on a relative basis even as central banks in India and Asia are buying by the ton. In the previous story, linked above, I noted that China was strategically buying gold for their long term goals as the US Fed sells gold for its short term goals.

King World News often reports on the gold market and recently posted an interview with a London gold trader had this to say:

With many global investors still rattled by the price action of gold and silver, today King World News interviewed the “London Trader” to get his take on these markets.  Here is what the source had to say:  “Gold was trashed on Monday, while the Fed minutes essentially said nothing.  When a central bank coordinates that kind of attack, it’s war, of course it’s war.  This type of action is coordinated by Bernanke and the Fed and executed by the bullion banks.  It’s actually laughable if anyone thinks that was a legitimate selloff, on what was, in reality, no news.”
“No legitimate market participants were really selling.  Sure there were some stops that were taken out, but it was the bullion banks that came in with their selling and this was what suddenly created the air pockets.

There is massive sovereign physical buying going on right now.  Interestingly, the sovereign buying is being swamped by paper selling.  Sovereign buyers are aggressively buying tonnage every day at these levels.  You have to remember their goal is to pick up physical and get rid of dollars.  Nothing has changed.  

Interestingly, the Asian buyers have figured out the algorithms, like breaking an enemy’s code in war, and they are using the algorithmic trading to get the best prices each day for physical gold at these levels. The trading is just taking place at lower levels because these bullion banks and the Fed, which manage the price of gold, get overzealous in their price fixing.

But there will be a huge price to pay for their activity.  An incredible amount of physical gold has been promised for delivery and the amount of promised gold is increasing every day.  

Meanwhile, back in the casino, the bullion banks don’t know whether it’s day or night.  But out back there are trucks carting off some of the remaining Western gold to vaults in the East. 

There is very little low hanging fruit left for the paper guys to cover into.  Meanwhile, you have the sovereign buyers who are saying, ‘You know what, this elephant herd has kind of stopped now,’ and they want more physical gold at these levels.  

Every day at the fix, regardless of price, sovereign entities are buying physical gold.  They are averaging in at the fixes, as well as during the declines.  On top of that, there are bids for hundreds of tons of physical gold starting at the $1,610 level and below.  This is why the recent decline in gold halted $2 above that level.  

Regardless, these physical buyers will be purchasing at the fix going forward, even if the price of gold rises.  This is why the smart money, the few individuals and entities that are in the know, continue to accumulate physical gold.  These well financed individuals and entities are buying because they know they will be in profit.  

After ten days of the price being pummeled, after seeing these relentless sell orders come in, day after day, I can understand how smaller players can get demoralized.  Many of these smaller players have been in the mining shares, and while gold has risen $1,000 to $1,500, many of the smaller companies are the same price.  

It’s the same bullion banks doing this to the mining shares.  The same players that are manipulating the price of gold and silver.  The bullion banks are naked short these mining shares in an effort to keep the prices capped.

This is why when you look at the OTC Reports, in the latest quarterly report, there are $150 billion dollars worth of certain derivatives.  These are not futures, options or even swaps.  JP Morgan and HSBC control over 97% of all of the gold derivatives.  When you think about it, this is a mind-blowing number.
So this is a war.  This is actual warfare where the central banks and their agents are targeting sentiment.  You think the Fed and the bullion banks don’t monitor King World News?  Of course they do.  There is a war going on here.  This is a war against gold and holders of gold and the gold shares.  They are being targeted.

The bullion banks are so naked short both gold and silver, and they owe so much physical metal to market participants, that this has become like hell for them.  They are starting to prey on each other.  We are now at the point where these bullion banks are forced to fight a day trading battle each day, sometimes against each other.

We are now to the end game.  The bullion banks are so naked short gold and silver it’s unimaginable.  They owe so much physical metal to market participants and more physical purchases are being scaled in every day.  The sovereign buyers are taking down huge size, we’re talking serious tonnage.  

The bottom line here is the leverage by the bullion banks is extraordinarily massive, and players have to remember, eventually it has to get unwound.  Jim Sinclair recently stated, ‘Overvaluation in the gold market will be something to behold.’  I can promise you, his statement will be proven correct.”
 After this interview was posted on King World News, the site was attacked. GATA reports:

Dear Friend of GATA and Gold:
The King World News Internet site was attacked this week in ways that seemed aimed particularly at the network's revelatory interview April 5 with its London metals market trader source.

The major Internet hosting company that maintains the King World News site reported to the network: "The servers you are hosted on are what we call 'under guard' due to external attack. Sometimes there are millions of these attacks. Without these 'guards' in place, the servers would effectively become flooded and would be unable to display your website."

Eric King told GATA today: "The attacks started when the London trader interview piece was released April 5. The attacks continued and intensified when our interview with Jim Sinclair's futures market analyst, Dan Norcini, was published on April 11. A very powerful entity did not want this information out there."
  King World News experienced a similar "distributed denial of service" attack in March 2010 immediately after it carried an interview with three GATA board members.

According to Wikipedia, a distributed denial-of-service attack "is an attempt to make a computer resource unavailable to its intended users. Although the means to carry out, motives for, and targets of a DDoS attack may vary, it generally consists of the concerted efforts of a person or people to prevent an Internet site or service from functioning efficiently or at all, temporarily or indefinitely."

This week's attack blocked access to the King World News site for some of its readers around the world. After many hours of work by the site's staff, access has been restored.

In a way, these attacks are a tribute to the work done by King World News and the sensitivity of the observations made by the people interviewed there.

There seemed to be a similar denial of service attack on the day of the Leap Year Massacre at which is a blog where gold traders discuss the market in gold.

It would seem that not only is the Fed trying to suppress the price of gold but someone is actively using internet attacks to suppress the free flow of information on the gold markets. I have pointed out before that the media, especially CNBC, seems to be following some directive to discourage gold investment while promoting stock investment. This would be exactly what the Fed is trying to promote through quantitative easing, the artificial increase in the stock market while simultaneously discouraging gold investment. Once again, the Fed believes that a higher stock market increases consumer confidence and encourages people to go out and spend more money.

So the war is on. The question that an investor may ask is: "If both the stock and gold markets are manipulated, which market should I invest? Stocks? Gold? Both? Neither? I would say that if your time horizon is long, ten plus years, you probably want to keep at least some money in stocks, despite the risk that Fed support for stocks may end and cause a crash. Sitting in cash for a long period just means you are slowly losing money every year. Investing in gold will protect you from inflation and may have a huge upside if Fed intervention were to end, allowing the market to move it higher. For investors who are focused more on wealth preservation, a larger position in gold than stocks is probably more appropriate.

The gold wars will rage over the next several years, replacing currency wars (which have gone on for centuries). The Fed is fighting  a short term battle in an attempt to keep the economy afloat during a massive deleveraging in the western world. China, India and other Asian central banks are buying with an eye on the long term. If your goal is to preserve wealth, you should too.

Sunday, April 15, 2012

Tim Geithner and the Princess Bride

Timothy Geithner April 2011: “Is there a risk that the United States could lose its AAA credit rating? Yes or no?”

Geithner: "No risk of that"

August 5, 2011 - Standard & Poor's announced Friday night that it has downgraded the U.S. credit rating for the first time, dealing a symbolic blow to the world’s economic superpower in what was a sharply worded critique of the American political system.

 Geithner April 2012:  “If we don't deal with these debt problems we are going to be Greece in two years”?

 Geithner: "No risk of that"

Wow! Don't you feel better now?

Geithner sort of reminds me of this guy:

Wednesday, April 4, 2012

Is Gold Still a Good Investment?

Days like today can be frustrating. With gold dropping $45 in a single day not too long after the Leap Year Massacre, its fair to ask: Has something changed in gold? And when will it be time to sell?

Back in January I discussed real vs. nominal interest rates. Its an important concept to understand because the dollar is not a constant. Rather, it is a deteriorating asset. Casey Research recently tackles the above questions and shows that negative real interest rates are gold's best friend. If you haven't read the January post I would suggest you read it first then read Casey Research in the post below.

Gold's Critical Metric
There are many reasons why gold is still our favorite investment – from inflation fears and sovereign debt concerns to deeper, systemic economic problems. But let's be honest: It's been rising for over 11 years now, and only the imprudent would fail to think about when the run might end.
Is it time to start eyeing the exit? In a word, no. Here's why.
There's one indicator that clearly signals we're still in the bull market – and further, that we can expect prices to continue to rise. That indicator is negative real interest rates.
The real interest rate is simply the nominal rate minus inflation. For example, if you earn 4% on an interest-bearing investment and inflation is 2%, your real return is +2%. Conversely, if your investment earns 1% but inflation is 3%, your real rate is -2%.
This calculation is the same regardless of how high either rate may be: a 15% interest rate and 13% inflation still nets you 2%. This is why high interest rates are not necessarily negative for gold; it's the real rate that impacts what gold will ultimately do.
What History Tells Us
The chart below calculates the real interest rate by extracting annualized inflation from the 10-year Treasury nominal rate. Gray highlighted areas are the periods when the real interest rate was below zero, and as you can see, this is when gold has performed well.

(Click on image to enlarge)
Gold climbs when real interest rates are low or falling, while high or rising real rates negatively impact it. This pattern was true in the 1970s and it's true today.
A closer study of this chart tells us there's actually a critical number for real rates that seem to have the most impact on gold. Take a look at how gold performs when real rates are at 2% or below.

(Click on image to enlarge)
The reason for this phenomenon is straightforward. When real interest rates are at or below zero, cash or debt instruments (like bonds) cease being effective because the return is lower than inflation. In these cases, the investment is actually losing purchasing power – regardless of what the investment pays. An investor's interest thus shifts to assets that offer returns above inflation… or at least a vehicle where money doesn't lose value. Gold is one of the most reliable and proven tools in this scenario.
Politicians in the US, EU, and a range of other countries are keeping interest rates low, which, in spite of a low CPI, pushes real rates below zero. This makes cash and Treasuries guaranteed losers right now. Not only are investors maintaining purchasing power with gold, they're outpacing most interest-bearing investments due to the rising price of the metal.
Here's another way to verify this trend. As the following chart shows, from January 1970 through January 1980 gold returned a total of 1,832.6%. This is much higher than inflation during that decade, which totaled 105.8%.

(Click on image to enlarge)
In the current bull market, gold has gained 556.3% since 2001, while inflation has thus far totaled 30%.

(Click on image to enlarge)
Further supporting this thesis is the fact that when real rates are positive, gold has not performed well. You can see this in the following chart of when real interest rates were higher than inflation.

(Click on image to enlarge)
The gold price fluctuated between $300 and $500 for the twenty-year period when rates were positive. This is a strong reminder that bull markets don't last forever – even golden ones – and that at some point we'll need to sell to lock in a profit.
So if history demonstrates that gold does well during a negative-rate environment and poorly during positive periods, the natural question becomes…
How Much Longer Will Negative Real Rates Last?
US Federal Reserve Chairman Ben Bernanke stated in January that he expects to keep short-term interest rates close to zero "at least through late 2014." This low-rate, loose-money policy is intended to "support a stronger economic recovery and reduce unemployment." While his strategy is debatable, this implies that almost any inflation at all will continue to keep the real rate negative and thus gold will stay in a bull market.
What if the economy improves? After all, there are economic data showing the economy may be finding its footing, making some believe interest rates could be raised earlier, as soon as next year. Based on the data above, the answer to the question is, "What does inflation do?" In other words, interest-rate fluctuations alone aren't important; it's how the rate interacts with the inflation rate. If inflation simultaneously rises and keeps the real rate negative, we should expect gold to remain in a bull market.
With the obscene amount of money that's already been printed, high inflation seems almost certain at some point, even if there isn't any more money creation. This is why we think the end to the gold bull market is not yet in sight.
One more point. You'll notice in the above charts that this trend doesn't reverse on a dime. It takes anywhere from months to years for investors to shift from interest-bearing investments to metals – and vice versa. And the longer the trend, the slower the change. Real rates have been negative for a decade now, and with broad institutional investment in gold largely still in absentia, it seems reasonable to expect that the trend in gold won't shift anytime soon.
Implications for Investors
Armed with these data, there are definite steps you can take with your investments at this point, as well as reasonable expectations you can have going forward:
  1. You can buy gold today. As long as real interest rates are negative, gold will remain in a bull market. If you already own some gold, you can and should ask yourself if it's enough at a time when money in the bank is a losing proposition.
  2. Don't get flummoxed when you hear talk about rising rates. Watch the real rate instead.
  3. In our opinion, real rates will be negative for some time for the simple reason that we think inflation will be rising for some time. Ask yourself: Will the Fed and other central banks raise rates aggressively enough to catch up to inflation? Someday, sure… but not anytime soon.
  4. When real rates turn positive, especially above 2%, it may be time to sell. We'll have to see what's going on in the world at that time; if there's financial chaos, the fear factor could cause gold to depart from this historic pattern. But even if not, keep in mind that while the price of gold fluctuates every day, the shift out of gold-based investments won't occur overnight. There should be time to gain clarity.
There are a lot of reasons to own gold today, and there will likely be more before it's time to say goodbye. In the meantime, we take comfort in the fact that the strongest historical indicator of all tells us the gold bull market is alive and well and has years to play out.

Monday, April 2, 2012

Sell in May and Go Away?

An old say in the investment business is "Sell in May and go away". The reason is that the first quarter of the year tends to be bullish in stocks and often times less so for the rest of the year. What I like about Biderman's business over at TrimTabs in Marin, CA is that he follows cash flows into and out of investments. This is important because at any one time there's essentially a generally fixed supply of investments so studying the demand side can give important insights into where the market is headed. Biderman has previously pointed out that insider buying (generally CEO's and shareholder with greater than 5% ownership in companies) has been high the last several months but have been dropping off. These insiders must report intended sales to the SEC which is made public, giving us a window to what the insiders are thinking about the prospects of their own companies.

The following video is from 3/22/2012. The entire 3 minutes 35 seconds is worth listening to but pay especial attention around  2:40.

I especially love Biderman's exasperation with what he sees out there. The guy cracks me up and I'd love to meet him one day.

Now take a look at his most recent video keeping the equity outlook in mind:

So what's the point? Well, most of us hold stocks either as part of our 401k's, IRA's or other type of retirement plan. Since most of us do not have access to gold through these funds we have little choice but to invest in equities given that neither cash nor bonds are likely to protect us from inflation. Equities (stocks) in a normal environment do provide some inflation protection but what percent to invest has been muddied by Fed intervention that has juiced the market.

The point is, we simply cannot know how long the Fed will support the equity markets and without their support the Dow may very well revisit the February 2009 lows around 7,000 (Its at 13,264 today). Given that this is an election year the Fed (Which has a strong aversion to being considered a negative in politics since it was accused of losing the election for Bush Sr in 1994) is likely to continue to support the market in its belief that strong markets are needed to support the consumer confidence needed to get the economy moving again on a path to a sustainable recovery.

As a result, we are unlikely to see a large, sharp correction in the market but be watchful. It may make sense to reduce your equity holdings in the stock market after this month. You may very well have an opportunity to buy again at a lower price.

I hope readers find this useful. I realize that this blog has been very gold oriented and I'm wanting to broaden out a bit rather than constantly hammering the same theme.

Best of luck! Happy investing.

Sunday, April 1, 2012

What is the End Game?

So if I and all the experts I link to are correct, what is the end game? What do you do if you have stacked your gold and silver, watched the dollar lose its place as the world's reserve currency and generally become worthless? Brian Rogers answers the question in this post on Zero Hedge. You can read the entire thing but her's the punchline:
  Gold will be the surviving currency that will rise dramatically in value until a new global currency regime can be established and agreed upon.  Most likely years.  Bretton Woods was a relatively quick process, but remember, the US won the war so we made the rules with very little debate.  Things certainly won't work that way next time.
So while the coming deflation via rising rates will ravage the value of dollar-based assets (the aforementioned bonds, stocks, commercial real estate, residential real estate, auto prices, factories, etc...) gold will at a minimum hold your purchasing power and could very will rise many times from current levels. 
Then, in the heat of the deflation, when everyone you know is selling everything they own to simply stay afloat, you buy.  Sell your gold and buy.  With both hands.  Aggressively.  Greedily.  And if a bank will extend you credit based on your gold holdings, take it and buy with leverage.  You will be creating generational wealth.
Good luck and think long and hard about what you own and what's happening around us.