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The Bullion Buzz - August 18, 2009

The Bullion Buzz - August 18, 2009

“Money out of nothing is money that is eventually worth nothing.”

Lew Rockwell




The above chart shows a clear correlation between the money supply and true inflation. The M3 money supply has been reconstructed by John Williams as has the CPI-U + corrections The longer term inflation picture is clear, although M2 shows a pause and likely temporary disinflation as of 2008.


The Gold/Silver Ratio

David Morgan

Morgan describes the gold:silver ratio, where it is going and why it is important to investors. For one thing, the ratio is a good indicator for the overall direction of the market. When silver leads gold, there is more momentum in the metals than when gold leads. Since 2003 until recently, silver has outperformed gold, and Morgan believes that silver is still undervalued compared to gold.  In an all-out deflation, history suggests that gold performs better; the record is mixed as to how well silver does. In general, however, silver has performed well and has held its purchasing power, so even in a deflationary scenario it could be useful to hold in a portfolio. A broader perspective can be gained by asking how well silver is doing against all other financial assets, including gold. The answer is that gold has done best against all other financial assets, general equities, mining stocks, the housing sector, bonds; and silver has done better than the base metals and most other sectors. In summary, Morgan believes that the main problem ahead is a currency crisis with the US dollar. Under such a scenario, silver will outshine everything else. Unfortunately, most only consider the short term, not realizing that once everyone understands that the death of the dollar is imminent, there will be a mad rush for precious metals, both gold and silver.


The Commodity World is Growing in Strength
Mary Anne & Pamela Aden

Commodities are moving up on signs that the global recession is easing. This is boosting demand, especially in China and Asia, which is pushing prices up. The Chinese are buying lots of hard assets and commodities for infrastructure, and using their dollar reserves to buy these goods. China’s economy is showing impressive strength, boosting raw materials consumption even more. Top Chinese officials have been commenting about this; a research chief said China should buy gold and US real estate instead of Treasuries. Another top economic official said China’s 2% gold reserve is too small, even though it has increased by about 75% over the last five years. The more it seems that the financial crisis and global recession is over, the more commodities, stocks and currencies rise. This is understandable, but not normal. Commodities and the stock market don’t usually move together and at some point they will go their separate ways. It is impossible to know when this will happen, but it is important to understand why each market is rising in the first place. For commodities, it is demand coupled with a weak dollar. For stocks, it is optimism for a better economy, but inflation may kill the rise. For currencies, it is the weak dollar. For bonds, it is the financial health of the global economy and inflation. As for gold, its main purpose is as money. Gold is the ultimate currency, a safe haven, and it thrives during economic uncertainty.  China’s plans to add more gold to its reserves is very bullish for the yellow metal. Technical analysis also shows gold’s big picture is bullish; the mega trend is up. Current prices are at good levels for buying new positions, because the Adens expect gold to climb in the fourth quarter.  Since November 2008, gold has been posting higher lows that are positive action. For now, if gold stays clearly above the July 8 low of $909, it will be reinforcing its strong 9-month uptrend.



Balancing Act
Chris Puplava

The rally up from March lows has been breathtaking, with the S&P 500 up more than 45%. The market has climbed a wall of worry as many financial pundits looked for a market top indicating the bear trend would continue, or a significant pullback to at least offer them a chance to reenter the market. However, after a brief correction in June the market jumped higher once again with the S&P 500 breaching 1,000 for the first time since October 2008. Puplava discusses what has fueled this rally and whether or not it is sustainable. Can the short-term supports for the market offset the longer-term headwinds facing the economy? The struggle between the two means maintaining a balancing act between risk and reward, and this balancing act is likely to be with us for the foreseeable future. He believes that animal spirits are alive and well as households and professional money managers move funds from cash into riskier assets. This trend is likely to remain until valuations become lofty and until the markets begin to discount what lies ahead in 2010. Given the dramatic overhang of employment and the remote chance for consumers to increase leverage ahead, investors may be in for a rude awakening as they begin to discount 2010 economic reality rather than 2010 forecasts. If the current “green shoots” do not continue to advance, the market may be in store for the “less good” to replace the “less bad” so pervasive in the financial media today. Investors will have a difficult task ahead, balancing the current money flow out of cash and into riskier assets with the risk that 2010 may be a 2002 repeat. A deterioration in market breadth and a failure of risky assets to make new highs will foreshadow such an occurrence.


May You Live in Interesting Times 
Richard Karn

This is the third in our series of five chapters from Credit and Credibility, a book by Emerging Trends Report. These chapters deal with the ‘Big Picture’ assessment of the five most pressing issues facing the US and global economy. An excerpt from Chapter 3: “The global financial crisis has wrought such extensive damage that it has polarized market perspectives like nothing in our experience. The two prevailing camps may be categorized as those subscribing to variations on either the ‘green shoots’ or the ‘Dawning of the Asian Century’ themes and those believing the lull that has existed since early March is but the calm during the eye of the storm and global markets are in for a fresh, possibly more severe battering. Those who were sped financial relief by their buddies in the Treasury equivalent of FEMA have progressed in short order from picking through the economic rubble for bargains to seeing rainbows at every turn, while those still traumatized by the storm are surveying the damage and salvaging what they can while attempting to ascertain whether what they are seeing in their secretive neighbors’ behavior is really fresh building or just prudent restocking of their pantry. We have strived to make it clear that we are now firmly in the latter camp… As explored in the rest of this report, there will be an upside to the financial crisis, albeit one with a rocky ride. The collapse of the financial services industry is forcing long overdue adjustments in the lopsided US economy and will mean for example that there is a good chance the electrical grid will be returned to the capable hands of engineers; that infrastructure projects will stop being sloughed off on the next municipal, county, state or federal administration, that capital will again be allocated to projects that promise long term growth for the real economy instead of short term nominal profits qualifying corporate officers for fabulous bonuses… We believe this will be welcomed not only by Americans looking for meaningful change but also by the rest of the world that expects us to provide it.”

Debt and the Fog of Numbers
James Kunstler

America has a foolish obsession with econometrics – viewing the world solely through the lens of mathematical models – perhaps hoping that measuring will lead to understanding. Given this preoccupation, it is ironic that we have reached a point where the numbers themselves can’t be comprehended any more. This week, outstanding world derivatives were declared to have reached the one quadrillion mark. Of course, you might as well say “infinity”. The number problems America faces are hopeless; it will never be able to cover its current outstanding debt. It is effectively finished at all three levels: household, corporate, and government. Americans must prepare for a much lower standard of living and much different daily living arrangements, a reality they are unwilling to face. But now that Newsweek and other cheerleading media have declared the “recession” officially over, it is almost certain that the danger zone lies dead ahead. Kunstler paints a vivid picture: “Some foul odor rides the late summer wind, as of a rough beast slouching toward the US Treasury. The stock markets have gathered in the critical mass of suckers needed to flush all remaining hope out of the system. The foreign holders of US promissory notes are sharpening their long knives in the humid darkness. The suburban householders are watching sharks swim in their driveways. The REIT executives are getting ready to gargle with Gillette blue blades. The Goldman Sachs bonus babies are trying to imagine the good life in Paraguay or the archipelago of Tristan da Cunha.” He wonders about Internet chatter referring to an upcoming bank holiday – meaning that the US government might find itself forced to shut down the banking system for a period of time to deal with a rapidly developing emergency that might prompt the public to make a run on reserves. God knows, he writes, there are enough black swans crowding the skies these days to blot out the sun.


There’s no Quick Fix to the Global Economy’s Excess Capacity
Ambrose Evans-Pritchard

Excess capacity in industry has reached levels not seen since the Great Depression; there are too many mills, plants, ships, houses. They have outstripped the spending power of those who are supposed to buy the products. This is more or less what happened in the 1920s, but today we seem to have avoided an implosion of the money supply. The elemental causes of the credit crisis, however, have not been addressed. Excess plant will remain until cleared by liquidation, or incomes catch up. Until then, there will be no real recovery. Half-empty factories could set off a deflationary spiral, since mass lay-offs and drastic falls in investment lie ahead while firms retrench. Two-thirds of the global economy is already entering a deflationary phase, even countries such as France and Germany that have recently reported a slight improvement in GDP. The sugar rush of financial stimulus will abate within a few months, and nothing will have changed. Global prices will rebound later this year as commodity prices feed through, though that may not last once China pricks its credit bubble after the revolution’s 60th anniversary in October. Evans-Pritchard fears that we are being boiled slowly, like frogs, complacent until it is too late to jump out of the deflation pot.  

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