The Bullion Buzz - October 13, 2009
“The Obama-Bernanke-Geithner team wrings its hands as the economy refuses to respond to the trillions of dollars in spending. What’s the solution? The solution is obvious – spend more – and more. It’s madness – they’re bankrupting the USA with spending and debt.”
CHART OF THE WEEK
While the official Consumer Price Index is shown as a negative 2.5% the alternative CPI Index as compiled by John Williams is still above 5%. John Williams uses the pre-Clinton era formula for calculating the CPI without the substitutions and hedonic adjustments used in the official CPI index. The real inflation rate is of critical importance to investors. While 10 year bonds are currently yielding about 3% they are actually experiencing real losses of purchasing power of 2%.
The Questions are Endless
Unintended consequences are emerging from the Fed’s excessive money printing. The stock market is rising in a liquidity bubble and gold is climbing to all-time highs, telling the world that the dollar is failing and something is terribly wrong. Worst of all, housing prices remain weak and commercial real estate is sinking. The Fed is talking of exit strategies, hoping to undo some of the damage it has inflicted. But there are too many unanswered questions: What if the world decides to exit the dollar? Oil is priced and sold in dollars. What if the oil producers decide they want a different currency? The world can’t be saved with paper money. When too much of it is created, knowledgeable people turn to real money – gold. This is why central bankers, whose power comes from the ability to create money out of thin air, fear and hate gold. We are in the midst of a great bull market in gold, one that mirrors the demise of the dollar. Gold is priced in dollars, and as the dollar weakens, it takes an increasing amount of fiat dollars to buy an ounce of gold. Beginning in 1999, gold started a primary bull market that is destined to be one of the greatest bull markets in history. It will be built on two powerful human emotions: greed and fear. Slowly but surely, the US public will realize that their government is bankrupt both morally and monetarily. People will buy gold to save whatever they have left from the inflationary policies of the US government. Aside from the Chinese and Indians, the majority of the world’s population owns no gold. But as the planet realizes that fiat currency is worthless, there will be a world panic to buy gold, setting off one of the wildest and most explosive bull markets in history. Silver, undervalued in comparison to the yellow metal, will benefit too.
Put 10% of Your Assets Into Gold… And Hope it Doesn’t Work!
“If you doubt that gold is the most important money, let me ask you: What does the US military pack in the emergency kit of fighter pilots in case they need to buy their survival?” The answer: gold coins, because at all times and in all circumstances, gold is money. The economy imploded a year ago; it was traumatic and devastating to many, but it wasn’t a surprise to serious gold investors. The media did an abysmal job of reporting what was happening in financial circles, and even now neglect to mention that debt cannot be papered over; inflated currency is no substitute for gold; a personal portfolio should be diversified beyond stocks; consumer confidence cannot be manipulated indefinitely; and politicians can’t ensure prosperity for this generation by bankrupting the next. We’ve gone through four cycles of media coverage: gloom (economy implosion), glam (the Obama inauguration), doom (continuing economic decline) and “Damn, the economy is still awful”, which is the media’s present attitude. For countless investors, the feeling is “Damn, I wish I had diversified my portfolio to include gold.” Many investors feel it is too late to buy gold, but this economic crisis is far from over and investors still need to diversify. There is still profit to be made from investing in gold. Airasian discusses the three Rs of gold: reality, reasoning and recommendations. This is the time to act, when few are aware of how the economic and political fundamentals have created a perfect storm for gold. At this time, gold is the investment opportunity of a lifetime. We live in uncertain times but, like brave fighter pilots, we have a choice about what to pack in our emergency kits.
Bet on Stuff
In 2008, the prices of gold, silver, oil and most other commodities reached multi-year, and in some cases multi-decade, highs. Another peak is coming, and it will be far higher, especially for oil. The price run-up came as a debt-induced economic acceleration in the developed countries sucked in imports from the emerging economies of Asia. Virtually all the world was gobbling up commodities, but supplies were choked by decades of underinvestment the industrial infrastructure needed for producing and transporting raw materials. Faster consumption and static production capacity led to higher prices, and in the later stages of the commodity price boom, investors, especially hedge funds, joined the bidding as a way to bet on a growing world economy. When the credit bubble that had been overstimulating just about every industry became unsustainable and financial markets everywhere collapsed, commodity prices collapsed too. The recent bout of low commodity prices and the continuing weakness of the financial system are setting the stage for another, even bigger commodity boom. For a short while, high commodity prices had been drawing capital into commodity production, but that stopped when prices fell. Now, while government bureaucrats are bailing out banks, insurance companies, automakers and the politically well connected, the capital needed for new mines, pipelines, drilling projects, refineries and crops has dried up. There will be consequences. When the economy crawls out of the current recession, the lack of investment in commodity infrastructure will mean meager supplies and roaring prices. Quinn discusses peak oil; the Green extremists, for whom only certain energy alternatives are acceptable; neglect of infrastructure; and growing demand for oil.
Your Dollars are Just Monopoly Money
Hedge fund manager John Paulson recently summed up how he will protect himself in the current financial climate: “What I'm looking at is not where gold is going to be tomorrow, one week from now, one month from now, three months from now. What I'm looking at is where is gold going to be vis-à-vis the dollar one year from now, three years from now, five years from now. And I think, with a high probability at each of those points, gold will be higher than it is relative to the dollar today. That probability increases the further out you go. So when I look at what the risk is, the risk to me is far more staying in dollars than it is in gold at this point.” There is trouble ahead for the US dollar. Money printing by the Federal Reserve in the past year – to create its own bailout and to finance other government bailouts – is the equivalent of bringing out the Monopoly game, grabbing all the colored pieces of paper, putting three or four zeros on the end of each bill then going out and spending it. However, the way this game has been played, some folks got multiple sets of Monopoly money, some financial institutions got thousands of them, and others got no Monopoly money whatsoever. But the outcome is the same: the value of the money in circulation is worth less once this turbocharged Monopoly money is introduced into the system. That means inflation. It may not happen immediately, but what will happen to the purchasing power of the US dollar is a foregone conclusion when you think about the Monopoly money example. When Main Street psychology turns against the faith-based US dollar, it will be nearly impossible to get that genie back in the bottle. This is part and parcel of the funding crisis, though the dollar's meltdown could start before it dawns on Main Street, as it appears to be dawning on America's creditors. Americans who are not thinking about the effects of US dollar depreciation are like frogs in a pot, slowly being brought to a boil. At some point they will face a similar demise, financially.
Death of Petro-Dollar, Told ya so
As reported last week by Robert Fisk in his article entitled The Demise of the Dollar, Arab Gulf states are planning – along with China, Russia, Japan and France – to stop paying for oil with US dollars, moving instead to a basket of currencies and gold. He mentions Germany as being one of the participants, the “important transition design brain trust in the background.” The IMF’s role in this plan would have seemed unlikely a year ago, but the push by Russia, China, India, Brazil and others has resulted in more credibility for the IMF basket of currencies. The wrinkle here is that such a basket would include a gold component, and the IMF is short gold. It could, therefore, become a large-scale gold purchaser. Notice that there will be almost zero follow-up for this story in the US press. A new alliance is forming, one that does not include the US or the UK. The most visible changes will be in the prices of gold and silver, and the demoted US dollar exchange rate. Willie discusses the financial system implications for the US; threats that will arise from the end of the petro-dollar; and geopolitical implications. The Americans are blind to the fact that the Gulf nations have had a property bubble, and many of their projects and banks are in ruins. A string of bank failures is expected, and the ripples could extend to London and New York, perhaps even Germany and Switzerland. In the US, domestic producers and banks are being squeezed, as the production supply capacity shrinks. The big story arising from the falling US dollar is soaring costs throughout the US, where incomes continue to fall. The only way out, writes Willie, is a return to real money – gold – and real notes used as legal tender.
Despite talk of a recovery, the US is still struggling through a recession. The authorities, used to fooling most of the people most of the time, think the populace can be duped with bailouts and boondoggles. But real demand has vanished as households try to pay down debt, and that won’t change while the federal government is sabotaging a genuine recovery. The US economy needs savings – capital. There is no capital because the feds take it. Supplying cash for incentives and bailouts is an expensive proposition, especially when tax receipts are falling. The money has to come from somewhere, so the feds borrow it from the people who are trying to rebuild their personal balance sheets. Of the $1.6 trillion the US government will borrow this year, the biggest single lender is the private sector, chipping in $700 billion. But instead of using that money to stimulate a real recovery by providing credit for small business and consumers, it is simply frittered away. The banks are happy to play the government's game. They borrow overnight money from the Fed at one-quarter of 1%. They don’t lend to small businesses; that’s risky, and too much hard work when the US Treasury will pay them 4% for lending back to the government, long term. The bankers and politicians end up ahead, with a bigger piece of the economy under their control. Meanwhile, the real economy staggers. The US needs to create 1.5 million new jobs each year just to keep up with population growth. Currently there are 15 million people without jobs, and about 200,000 more unemployed every month. If this recovery continues long enough there won't be a single person left in the US who still has a job. Even if the economy could be stabilized, it will leave millions without jobs more or less permanently. Add the people working reduced hours and those who have been looking for work so long they are no longer counted, and it leaves a quarter of the population without money to spend. The US may have to live with this depression for decades.