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  • Economic Data Already Showing Signs Of Inflation
    First a brief overview of the situation:
    •  We borrowed money ( by selling U.S debt to the public and foreigners), which amounted to 12.4 trillion at the end of 2009, with further increases to come with Federal debt likely to exceed 14 trillion in 2010. 
    • Our unfunded liabilities are about to explode (Medicare, Medicaid, social security) will increase exponentially over the next 30 years, already surpassing 1 trillion in 2010. The NPV of our unfunded liabilities going out to 2080 has been estimated from anywhere between 70 trillion - 110 trillion. Even the Treasury projected 46 trillion in unfunded liabilities in the FY 2009 according to the 2009 FY GAAP financial statements. Just three years ago they estimated this number to be 35 trillion. Social Security, for the first time will be in the red for 2010 and beyond as expenditures will exceed contributions. The external audit report estimates that interest on our debt and healthcare liabilities will account for at least 92% of all government revenue by 2019.

    The Banks are Lending! 

    Yes one would conclude based on the graph above that lending in declining, but you have to take into account this is only to the private sector.

    The banks are buying up commercial paper from the treasury, which is essentially the same as a loan. In my opinion this is just a more indirect way of monetizing the debt because it is used to fund our deficit spending. 

    Inflation Indicators: The Producer Price Index - Like the CPI but instead measures production costs / input prices. This is usually a leading indicator of the CPI as producers pass along rising costs to the consumer.The PPI began creeping up in September, reaching 2.4% by October and nearly doubling just two months later.

    • PPI - October 2009 - 2.4% annualized gain
    • PPI - December 2009 - 4.2% annualized gain
    • PPI - January 2010 - 4.6% annualized gain
    • Pre-Clinton era CPU measurement - 6% for January 2009
    • CPI as measured in 1980 - 9.8% for January 2009.
    • Consumer Confidence is extremely low which could lead to loss of confidence in the dollar. 
     I would keep an eye on the PPI too see if the trend continues over the next 4-6 months. If this is the case inflation will likely begin to show in the 3rd of 4th quarter of this year. Own precious metals and commodities to retain your purchasing power, Like Marc Faber said "You need to be your own central banker"

    Disclosure: Long physical gold and Silver, Silver and Wheat Futures

    Disclosure: Disclosure: Long physical gold and Silver, Silver and Wheat Futures
    Feb 24 7:12 PM | Link | Comment!
  • A blast from the past: A fiat money nightmare

    Earlier this year, The senate passed a 1.1 trillion dollar increase in government spending, increasing the budget for healthcare, education, law enforcement and defense among others appropriations. If our mounting record budget deficits weren't enough, the proposed increase in our already dangerously large debt ceiling (13.3 Trillion) will most certainly have catastrophic consequences in the near future. The new ceiling is will be approx 14 Trillion, a number that will reached by early to mid 2011 if debt accumulation continues at the rate seen in 2009-2010. We have all but guaranteed a hyperinflationary great depression ( hyperinflation with unemployment exceeding 25%). This is becoming eerily similar to the hyperinflation in Weimar, at least as fiscal recklessness goes. As Far as money printing goes, we will most likely see QE2 announced before year end. Though this will likely differ from QE1, I think it will be many times more dangerous. This time around the FED has hinted at more asset purchases, namely U.S treasuries. Monetizing our debt is nothing short of a pure injection of inflation into the economy. If this is combined with more fiscal stimulus, QE2 could be the straw that brakes the camels back. 

    Echoes From Weimar:
    • The early stages of the hyperinflation were characterized by large influx of foreign capital. Weimar was financially and economically depleted due to the war, more specifically as a result of the treaty of Versailles. The U.S on the other hand is financially and economically depleted due to its lack of manufacturing base, lack of consumer savings which fuels capital formation ( Real economic growth and viable job creation are only possible because of this), enormous trade and budget deficits, destructive monetary policy,etc.

    Of course the U.S has been able to print and squander trillions without any immediate consequences because they maintained world reserve currency status, delaying the inevitable consequences of such actions to a later date. This will greatly exacerbated as each year passes. The NPV ( net present value of all our unfunded liabilities), is currently around *200 trillion! with these no-nothing politicians just want to spend more This is most certainly a recipe for disaster, with the only remedy being to default. This is very unlikely to happen, however, as Barrack Obama ran on the slogan "change". Not to mention he knows nothing about economics nor do his advisors. He has actually convinced himself he can create jobs by spending more and more money. It does make sense considering he exemplifies socialism to the utmost degree. Instead of being responsible and cutting social security(now in the red), Medicare, Medicaid and defense, Obama and his cronies want more spending. His slogan should be "we will spend our way to prosperity".

    By taking a brief look at the chart above, one could argue there is still time to repair this damage. But 2010-2011 will see that the deficit as a percentage of expenditures shoot up over 52%. To think that this is only the damage created through fiscal policy alone should scare most people into putting at least 10% of their assets in gold or silver or other commodities than will rise faster than inflation.
    Expect another big year for the precious metals in 2011 as the following are some catalysts to fuel continued price appreciation:
    • If the debt ceiling is raised again
    • QE2 is announced
    • Another round of bailouts - specifically the FHA
    • Increase in mortgage defaults - something to watch in 2011 as ARMS reset

    Aside from owning physical precious metals, futures are the ideal way to profit from the resumption in the commodity bull market ( which will be driven more by inflation than demand as all industrialized countries around the world have fallen prey to Keynesian doctrine, making this is a worldwide currency crisis). Other vehicles for those wishing to avoid futures include ETF's holding the physical assets ( though many have questionable auditing), such as silver (NYSEARCA:SLV) or gold (NYSEARCA:GLD). A great way to get leverage to the price of gold or silver is through mining companies or the gold miners ETF (NYSEARCA:GDX). Precious Metal royalties  have reduced mining risk but leverage to the underlying commodities, providing some middle ground between physical metals and the metal etfs vs. Futures. Some gold royalty companies are royal gold ( rgld), Franco-Nevada (, while Silver Wheaton is the only legitimate silver royalty companies. For long term investors these vehicles have the overlooked advantage of being inflation resistant as far as input costs go. Individual miners on the other hand will have rising energy ( oil) and capital equipment prices.

    Another similarity to Weimar is the massive increase not only in the money supply but the monetary base (Pictured below). This tool will keep the banks afloat and allow them to begin lending again. Remember the real definition of inflation is an unnecessary increase in the supply of money and credit. 

    *- according to the congressional budget office

    Disclosure: Long SLW, FNNVF.PK
    Dec 13 8:33 PM | Link | Comment!
  • Franco-Nevada: The War-Chest Continues To Grow
    Franco-Nevada recently made a bid for International Royalty Company(ROY), that if successful, will drastically increase their immediate and long term growth profile. This news coming on the heels of an article written a week or two ago, is potentially transformational for the premier gold royalty company. Not only is Franco a bigger free cash flow machine than its main competitor, Royal Gold, but it now sports a substantially better valuation ( dropping 7% on the news of this potential acquisition widened this margin further), has a vastly more diversified royalty stream as a percentage of total revenue and all around better growth profile from the immediate to long term. The following are some highlights about the Franco's-bid and a brief description of IRC's core assets: 

    Author: Dorothy Kosich
    Posted:  Monday , 07 Dec 2009
    RENO, NV -

    Mega mining royalty player Franco-Nevada has launched an unsolicited US$600 million all-cash takeover bid for rival upstart International Royalty. Toronto-based Franco is offering Cdn$6.75 per share, a 43% premium to the closing price of IRC shares on the TSX on December 4, 2009.IRC Chairman and CEO Doug Silver said in a statement late Sunday the IRC board will meet with its legal and financial advisors "to consider an appropriate response to Franco-Nevada's intention regarding the offer and the board will communicate further with IRC's security holders in due course."IRC holds 84 royalties including an effective NSR royalty on the Voisey's Bay mine, a sliding scale NSR on the Chilean portion of the Pascua-Lama project, a NSR on the Las Cruces project and a NSR royalty on gold in Western Australia. Its market cap on the AMEX as of December 4, 2009 was $421.4 million.

    International Royalty's "Core Assets"

    • Voisey's Bay - 2.7% NSR (Nickel) , 2.7% NSR (Copper) - NAV ( approx 125 million)*
    • Western Australia - 1.5% (Gold) - NAV (approx 14 million)
    • Inata - NAV ( approx 14 million)
    • Pascua Lama - (Starting 2013) 3.15% NSR (Gold) ( approximately 34% of ROY's current NAV)*
    • Las Cruces - 1.5% NSR (Copper) - NAV (approx 24 million)
    Current NAV of all properties (inclusive of net cash) is approximately 410-420 million. In other words, Franco was able to purchase ROY for under 1.5x current NAV ( which is likely a conservative measure to begin with). Franco gets immediate royalty revenue to the tune of 40 million in 2010 ( assuming $1100 gold, $2.50 copper and $6.50 nickel), plus another 25-30 million in Pascua - Lama ( assuming $1300 gold in 2013). This should prove to be accreditive on all measures with additional upside in Wolverine, Laverton and Avenbury.

    Brief Rundown:

    Voisey's Bay - Royalty revenue of 25-27 million
    Western Australia - 3-4 million
    Inata - 3-4 million
    Las Cruces - 6-8 million
    Pascua Lama - 28-30 million ( starting 2013)
    Advanced Stage Projects - potentially 8-10 million by 2012/2013

    With their current War Chest of flagship operations and core operating assets ramping up production/ coming online over the next 3 years, Franco will solidify their spot as the gold royalty company to own. I doubt this is the end of line as far as large acquisitions go as Franco can finance this whole deal with cash on hand ( with some to spare), leaving them with 50+ million in cash, no debt, access to revolving credit facilities, share dilution and operating cash flow to finance further growth.
    Disclosure: : Long FNNVF.PK common stock and warrants

    Disclosure: Long FNNVF.PK
    Dec 07 6:38 PM | Link | Comment!
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