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Tuesday, May 31, 2011

Horrible economic reports offset by easing of "perceived risk of immediate Greek debt restructuring"

Consumer confidence for May: 60.8 VS 66
Case Shiller housing index for May: -3.61 %
Chicago Purchasing Managers report for May: 56.6 VS 67.6

These statistics show an economy that is clearly stalling - and from an extraordinarily low level of activity.

Yet the markets rallied heartily today on news that "the perceived risk of immediate Greek debt restructuring has eased."

Why eased? Because Germany announced it may consider lending Greece more money.

Is this really why markets rallied? Do the guys at Goldman Sachs not see that Greece will eventually default? Are they stupid?

No, they're really smart. They know Greece will default. They're betting on it. So why did the market rally?

Because it's not a market at all. It's a rigged casino. That's very different from a market. And if you don't understand that, eventually all your money will be Goldman Sachs' money. Even if you think you're really smart, and your doing well gambling against their gamblers.

The one market they can't control over any period of time is the Gold market.

Why? Because they're playing against the world's central banks. And even Goldman Sachs are real little guys compared to the Chinese Central Bank, and the Brazilian Central Bank, and the Russian Central Bank. And all those banks are just waiting for Goldman Sachs to knock down the gold market so they can step in an buy cheaper gold.

They can afford to wait. You can't.

Buy steadily and systematically. It will protect you from the inevitable results of the rigged casino.

Monday, May 30, 2011

Would you buy a used apartment from this man?

Would you buy a used apartment from this guy? Would you be pretty damned sure to have it checked out thoroughly before you did? Would you have a lawyer go over any contract he offered you - thoroughly - before signing? Even then would you wonder if there weren't something in the fine print, something in the mechanicals, something in the very structure meant to screw you over?

And when this guy runs for president - and a bunch of other guys just like him - do you ever believe a word any of them say on the campaign trail?

And do you think the guys over at Goldman Sachs etc. are any less intent at screwing over their customers, counterparties, clients, competitors, with every fiber of their being on every single transaction? And when they swear that's not true - even in front of congress and under oath - do you believe them?

And when Bernanke swears that this or that crisis is well contained do you believe a word he says? And when Geithner swears the same, and swears we have a strong dollar policy, or swears that mechanisms are in place to unwind the Fed's balance sheet - do you believe him?

And when your own broker puts you into a "very safe, almost foolproof" structured product that's guaranteed to protect you against the downside while giving you participation in the uspside - do you believe him?

Our entire financial system is built on trust. If any part of that system tries to take advantage of that trust for personal gain the entire system is compromised. But when it becomes a matter of business custom to take advantage of that trust - to laugh at and mock the morons who come to the system in a trusting matter - to consider them fools who deserve to lose their money - well, then the system has a problem.

It is this problem that has allowed the banks and the investment houses that literally (yes I mean literally) own the Fed and run the government to run up QUADRILLIONS in unregulated dollar denominated (mostly debt) derivatives pitted against a 60 trillion dollar world economy.

Do you trust that this derivative time bomb will be fairly and orderly unwound? Do you have any idea what it actually is? Yes, it's a massive rigged casino. But what is being gambled in this casino and in what manner? Do you know?

If not, buy the only globally accepted currency asset that resides outside this financial complex.

Buy gold.

Saturday, May 28, 2011

So what's the problem?

Look, it's all well and good to reference a lot of economic theory and extrapolate problems that may or may not occur in the future. Sure, the world economy is absolutely drowning in debt. Sure the financial system is still producing trillions of dollars of debt, and quadrillions - yes quadrillions - of dollars of debt derivatives on a yearly basis. Yes, nobody knows exactly how many of these debt derivatives exists, who the couterparties are and what happens if and when the need to be settled. Yes, if you have money in a bond fund there are probably no - that's zero - underlying bonds. Most are comprised of bond derivatives - simply bets on the direction of the value of certain forms of debt.

Fine. All that may be true. Yet who's to say that this complex financial system can't continue on - if not forever - then at least until we're all dead and it's somebody else's problem?

So what then is the problem?

All this debt, all these derivatives are not the problem. They're symptoms.

They're symptoms of an extreme and progressive illness that's metastasizing through the financial and cultural body. The illness is as old as humanity. It's called: "Get as much as you can for yourself by screwing over as many people as possible, and as long as you don't get caught and wind up in jail: you win."

This is the ethos of a generation.

Look at the dope in the picture above. This man is feted and lauded as a symbol of American success. Rappers write songs about him. When he declared his run for president he immediately became the Republican front runner. Talk show hosts extol his virtues. But who is he?

He inherited a real estate empire that he proceeded to load up with debt. When it went bankrupt most of his backers lost everything while he negotiated settlements with the banks that allowed him to maintain his lifestyle. Universally loathed in his own industry he became a reality TV star in a show where other TV personalities compete to screw and cheat each other out of the prize of a few dollars. Which pretty well describes every television game show, reality show, as well as much of the financial, industrial, health care and government industries.

So, what's the problem? That's just life on earth, right?

Right, but consider this: an entire financial system based on paper contracts - is an entire financial system based on trust.

Whom can you trust?

Friday, May 27, 2011


Yes, Consumer Sentiment scored a walloping 74, only 62 % off the highs of 2008, while pending home sales scored a terrific negative 11.6 percent for the month, only 65% off the 2005 highs. Of course, markets are shooting higher at this tremendously good news.

Meanwhile, sourpuss John Williams of Shadowstats sums up yesterday's GDP report thusly: (remember though, this guy's a major league Frownie Freddy! So don't read this if you want to smile, smile, smile.)

"Though Aggregate Growth Appeared Unchanged, Underlying First-Quarter GDP Trends Shifted to the Negative in Revision. The first-quarter 2011 GDP revision was minimal, with annualized 1.8% real growth unchanged at the first decimal point. The updated reporting to this most worthless of major economic series, however, reflected weaker personal consumption than initially estimated, offset by a greater, involuntary build-up in inventories. Net of the increased nonfarm inventories, growth was a revised annualized 0.56% (previously 0.75%); on a straight quarter-to-quarter basis that was a non-annualized quarterly gain of 0.14%. Further, the sharp deterioration reported in the inflation-adjusted first-quarter 2011 trade deficit still did not surface in the first-quarter GDP estimate. Nonetheless the growth pattern likely is being set for the “broadest” measure of U.S. economic activity to slip slowly into double-dip recession status. That pattern should be exacerbated in the months ahead as key underlying series continue to slow, and as the July 29th annual GDP revisions show recent economic history to have been weaker than currently assumed by the markets."

Thursday, May 26, 2011


Overall, the data left the first quarter looking weaker as higher oil prices and severe weather (you know that can't last forever!) sapped the strength seen in the fourth quarter.

Final sales, which exclude inventory behavior, were revised down to a 0.6% gain in the first quarter from the initial estimate of a 0.8% increase.

The report also included revised labor-compensation data that were much weaker than first estimated.

Real disposable personal incomes increased at a revised 0.8% annual rate in the first quarter, compared with the initial 2.9% estimate. Income in the fourth quarter was also revised lower.

So why was the GDP number not revised lower? Because business inventories (stuff they've made but haven't sold) was revised upward! And of course you know they'll sell it all, and make lots of money and hire lots of people in the FUTURE!

And anyway, the economy is growing - not shrinking. You know there's lots of starving countries in Africa that would love to have a 1.8 percent growth rate. Lots of countries that go to bed hungry every night with no GDP at all!

And a survey of Leading Economists assures us that next quarter our GDP will grow by 3.4%. So there, all you Frownie Freddies!

So what if we were forced to account for our GDP the way the IMF makes those African countries account for their GDP ours would be negative too. The IMF can't tell us what to do. We're the United States of America, the Best of All Possible Countries, in the best of all possible worlds. So smile. Don't frown. And buy lots of stocks!

Or, if you're crazy, buy gold. Dennis Gartman, a long time critic of gold has now converted fully to the gold camp and writes today: "This then brings us to our daily discussion of gold of which we remain steadfastly bullish in dollar terms and in terms of other currencies. Gold, as we wish to say and as others are coming to believe and understand, is now a currency rather than a commodity. Silver, platinum and palladium are the precious commodities; gold is the precious currency.

Wednesday, May 25, 2011

Market rises on great news: U.S. Durable Goods Orders Fell 3.6%, and Home prices delined 5.5 % in April

Orders for U.S. durable goods dropped more than forecast in April, reflecting a slump in aircraft demand and disruptions in supplies of auto parts stemming from the earthquake in Japan.

The 3.6 percent decrease in bookings for goods meant to last at least three years was the biggest since October and followed a 4.4 percent surge in March that was larger than previously estimated, a Commerce Department report showed today in Washington. Economists projected a 2.5 percent April decline, according to the median forecast in a Bloomberg News survey.

“Manufacturing is likely to moderate from the explosive pace of growth in the past few months,” said Stephen Stanley chief economist at Pierpont Securities LLC. At the same time, “consumer demand and investment demand are both doing well right now,” he said.

The great news about the massive explosion of manufacturing growth here and all around the world is matched only by the tremendously good news in the housing industry:

U.S. home prices dropped 5.5 percent in the first quarter from a year earlier, the biggest decline in almost two years, as sales of discounted foreclosures undermined real estate values.

Prices fell 2.5 percent from the fourth quarter, the Washington-based Federal Housing Finance Agency said today in a report. Economists projected a 1.2 percent drop from the previous three months, according to the median of five estimates in a Bloomberg survey.

This great news was celebrated by the National Association of Realtors that noted: Home sales are expected to stay on an uptrend through 2012, although the performance will be uneven with mortgage constraints weighing on the market, according to experts at a residential real estate forum today at the Realtors® Midyear Legislative Meetings & Trade Expo here.

Hard to imagine how things could get any better. Hopefully tomorrow's GDP revisions will show a huge decline further indicating the current economic boom is accelerating.

Also MORE GOOD NEWS FROM THE EEC - There's no debt Crisis! As EU debt markets come under renewed pressure amid a broadening in the scope of downgrades to sovereign credit ratings, and ratings outlooks, we note commentary from the Union's Economic and Monetary Affairs Commissioner Olli Rehn :

... "We have contained the crisis to the three countries now in the EU-IMF programs. It is not correct to speak of a crisis of the euro or monetary union."

And GREECE is doing even better than we are! Our manufacturing only managed a 3./5 % decline, in Greece they scored with a double-digit decline in the year-year rate of Manufacturing Output, which plunged by (-) 10.3% during March, sliding from a (-) 6.8% yr-yr contraction in February, and the (-) 4.5% yr-yr decline seen in January. So if we're having a boom - they must be having a manufacturing explosion! Good for them.

If things go well enough maybe soon we'll be right up there with Greece. Things just keep getting better and better.

Tuesday, May 24, 2011



If ever two charts told the story of an entire economy - make that a World Economy these two chart do so. The first is "high powered money" the Fed is pumping into the system, or QE2, or the "Adjusted Monetary Base" or, better known as the FED'S BALANCE SHEET.

This is money the Fed has been pumping into the banks, as it acquires more and more debt. It is both a measure of the money that has been pumped into the risk markets by the banks, and a measure of new debt accumulated by the Fed. Look at that graph. Read it and weep.

The second is a measure of the MONEY MULTIPLIER. This measures healthy lending and borrowing that leads to plant creation, job creation, goods and service creation. The hoped for result of the first graph is a doubled explosion on the second graph. In a healthy economy every dollar pumped in by the Fed should create 2, 3 4 times the economic activity.

In our economy, as you can clearly see, no matter how much the Fed pumps in, there is no real economic activity.

Why then are corporate profits so fantastic? Because small firms are disappearing into giant Global Mega Corporations which function as global oligopolies, creating wherever labor is cheapest, and selling where goods are most expensive. And as world governments print more and more money to cover greater and greater debts the beneficiaries are those closest to the printing presses, which are the financial conglomerates that get the money for free - and the Global Mega Corporations with close ties to the financial conglomerates.

But they have to sell to somebody, right? Yeah - that's the rub. We're still at the tail end of a 40 year boom built on debt. People still have money. So things seem okay. But look at the two graphs above you'll see exactly where we're headed.

Monday, May 23, 2011

What is Quantitative Easing, and why should you care when it ends?

Quantitative Easing is this: The US Treasury issues DEBT to raise money to pay its DEBT. It gives this DEBT to the BANKS to sell. The BANKS sell the DEBT to the FEDERAL RESERVE BANK. The FED gives DOLLARS to the BANKS. The BANKS buy RISK ASSETS like STOCKS and MORTGAGES.

This accomplishes the following:
1) It keeps the cost of DEBT: INTEREST RATES low.
2) It keeps a liquid market for our DEBT so we can keep borrowing to finance our GOVERNMENT.
3) It props up RISK MARKETS like the STOCK MARKET and the Secondary Market for RISKY DEBT like Mortgages.

The only casualty is the value of the DOLLAR which declines because more and more are created to buy the DEBT.

Consequently all real goods get more and more expensive.

Here then is the FED's DILLEMA.

CHOICE ONE: END QUANTITATIVE EASING: Then even if we were to balance the budget this year, we still need to issue 14 Trillion dollars of new debt. If the Fed doesn't buy this debt, Interest Rates will go sky high - in order to attract Real Buyers. And the cost of Financing our 100 Trillion Dollar Real Debt becomes impossible. Meanwhile the Banks have no more money to prop up the Stock Market. In fact, they will be functionally bankrupt. And Trillions in wealth will be destroyed as the stock market and risky debt markets crash. We have a real depression.

CHOICE TWO: Keep printing money to buy our own debt, and prop up the risk markets. Meanwhile destroying the value of the dollar and sending commodity prices sky high.

That's it folks. There are no other choices. Sorry.

Oh, yeah, I forgot, choice 3: cut funding to PBS and make sure those darned public school teachers don't keep sucking us dry. That will fix everything. Oh, and kill Osama Bin Laden. And find Obama's birth certificate (I mean the real one that the mountain trolls stole and are hiding in the dragon's lair). And spend lots of time arguing about whether the earth is getting colder or warmer. And call everyone who disagrees with you a Nazi. And blame the Muslims for everything. Or blame Israel for everything. Or the Jews in general, you know they're behind this somehow. Or blame the Mexicans. Or blame the French, after all, they're all socialist rapists. See, I guess I was wrong, there's lots of things we can do.

Sunday, May 22, 2011

History's greatest socialists:

In October of 2008 the team of George W Bush and Dick Cheney engineered the greatest socialist coup in the history of the world as nearly 5 trillion dollars of tax payer money was transferred unencumbered to a select number of banks, investment banks and insurance companies, without rule, without restriction, without oversight and with no requirement for any sort of accounting or restitution. This 5 trillion dollars was gifted within the course of a few short months.

Today, the Real Economy Project of the Center for Media and Democracy (CMD) released an assessment of the total cost to taxpayers of the Wall Street bailout. CMD concludes that multiple federal agencies have disbursed $4.6 trillion dollars in supporting the financial sector since the meltdown in 2007-2008. Of that, $2 trillion is still outstanding. Our tally shows that theFederal Reserve is the real source of the bailout funds.

CMD’s assessment demonstrates that while the press has focused its attention on the $700 billion TARP bill passed by Congress, the Federal Reserve has provided by far the bulk of the funding for the bailout in the form of loans amounting to $3.8 trillion. Little information has been disclosed about what collateral taxpayers have received in return for these loans, sparking theBloomberg news lawsuit covered earlier. CMD also concludes that the bailout is far from over, as the government has active programs authorized to cost up to $2.9 trillion and still has $2 trillion in outstanding investments and loans.

Learn more about the 35 programs included in the CMD tally by visiting our Total Wall Street Bailout Cost Table, which contains links to pages on each bailout program with details including the current balance sheet for each program.

Compare this with Obamacare, whose cost over the next 50 years is estimated at 2 trillion dollars. My Goodness,the arch socialist Obama has a lot to learn from his Republican Masters, if he's ever to approach their talent for Arbitrary Transfer of Wealth.

Even Arch Socialist Ronald Reagan when he transferred wealth to his buddies at the Savings and Loans was only able to muster a paltry 500 billion. Of course, in 1980's dollars that's worth over a trillion of 2011 dollars. So Obama is every bit the socialist equal of Reagan. But you can lump them both together, throw in the Marshall Plan, the Korean War, the Viet Nam War, and the Iraqi War (also courtesy of GW Bush) and you still wouldn't reach the cost of Bush and Cheney's experiment with Socialist Engineering for the Banks.

Of course, to state the obvious, the US has had a CENTRAL BANK - the primary engine of SOCIALIST ENGINEERING - since 1919. This Central Bank engages in CENTRAL PLANNING of the creation, distribution, and flow of MONEY. How is it that it hasn't occurred to everyone that this makes us a socialist republic?

And again, what does this have to do with Gold?

Well, if you have to ask, consider that the people in government currently screaming loudest about socialism and the debt problem are looking to the big spending, social engineering model of Bush Cheney and Reagan as some sort cure.

Maybe you should buy some gold.

Saturday, May 21, 2011

Chronically Short Horizons

There seems to be a pack of very dim bulbs out there who are convinced that today is the end of the world. And if not today then maybe next tuesday or whenever.

In the same way, a bunch of bulbs with middling wattage are convinced that whatever economic report comes out next Tuesday will show that everything is basically fine with the economy and that there's essentially nothing to worry about. Our system (whatever that means to them) is still the best and strongest in the history of God's Green Earth. And they are armed with charts and graphs and statistics that prove their case. Meanwhile they laugh at and mock the other dim bulbs who claim the world ends today.

And in exactly the same way another bunch of dim bulbs are consulting focus groups and very recent polls to figure out what to say today to all the other dim bulbs in order to remain in public office. It doesn't matter to them at all whether they claim the world is about to end, or everything's just fine, as long as it gets them re-elected.

The problem that these low-wattage types all share is that their Horizon is very tiny. Anything beyond this moment, this weak, this year, this decade, the post-war period, or at best, this century, is completely outside their perspective.

Unfortunately, in the real world economic cycles, shifts of political power, evolution of knowledge and spiritual awakenings play out over very long periods of time. And the force of these cycles is irresistible.

How this simple fact of life has escaped the consciousness of our culture is a fascinating question, and beyond the scope of this blurb. But certainly there are two points to keep in mind with regards to this mass personality disorder.

Point 1: The two cultures with whom we are currently at odds - the Chinese and the Arab Nations - whatever their political and economic shortcomings - they look at events, culturally, in terms of generations. This puts them at a very real advantage in terms of how they will influence events that play out over generations.

Point 2: Over the course of human history - but for a few brief blinks of the eyes - Gold has always been money. We are currently residing within an eyeblink. The question of how long that blink will last is irrelevant. What should concern everyone who cares about expanding their tiny horizons, is what happens when the blink is over.

Friday, May 20, 2011

World Gold Council Q1: ETF speculation dwindles. Central Bank, bullion demand continues to drive growth

  • Global gold demand in the first quarter of 2011 totalled 981.3 tonnes, up 11% year-on-year from 881.0 tonnes in the first quarter of 2010. In value terms, this translated to US$43.7bn, compared with US$31.4bn in the first quarter of 2010, an increase of almost 40%. This was largely attributable to a widespread rise in demand for bars and coins, supported by an improvement in jewellery demand in key markets.

  • During the first quarter of the year, investment demand grew by 26% to 310.5 tonnes from 245.6 tonnes in the first quarter of 2010. In value terms, investment demand was US$13.8bn. The main growth came from bar and coin demand which increased by 52% year-on-year, to 366.4 tonnes. In value terms, this represented a near-doubling of demand to US$16.3bn from US$8.6bn in Q1 2010.

  • ETFs and similar products witnessed net outflows of 56 tonnes ($2.5bn). Redemptions were concentrated in January. Despite the outflows, the collective volume of gold held by global ETFs by the end of the quarter was in excess of 2,100 tonnes equating to more than $95bn.

  • Jewellery demand in the first quarter of 2011 registered a gain of 7% from year earlier levels of 521.3 tonnes to reach 556.9 tonnes. This equated to a record quarterly value of US$24.8bn. India and China, the two largest markets for gold jewellery, together accounted for 349.1 tonnes or 63% of the total, a value of US$16bn. China’s jewellery demand reached a new quarterly record of 142.9 tonnes ($6.4bn) up 21% from 118.2 tonnes in the first quarter of 2010.

  • In Q1 2011, gold supply declined by 4% year-on-year to 872.2 tonnes from 912.1 tonnes in the first quarter of 2010. This decline was due to a sharp increase in net purchasing by the official sector and a fall in the supply of recycled gold, which was down 6% on year-earlier levels to 347.5 tonnes from 369.3 tonnes in the first quarter of 2010. Mine production increased by 44 tonnes year-on-year, a growth rate of 7% from year earlier levels, with negligible net producer de-hedging.

  • Central bank purchases jumped to 129 tonnes in the quarter, exceeding the combined total of net purchases during the first three quarters of 2010.

Thursday, May 19, 2011

The Dollar Inflation and Gold

Above you see a partial list of real things that real people need on a daily basis. Prices having been going ballistic. This list does not include oil. We all know where the price of oil is. This list does not include education, health care, housing. We all know where the price of those things are.

None of those things are included in Government CPI data - which indicates there is no inflation at all. As Fed Governor William Dudley explained: The cost of your IPAD is going down. Awesome. Especially if your kid is an anorexic ADD techno-addict who miraculously never gets sick. And you are too. And your wife too. Though, then i don't know how you make money to buy your IPAD. I guess you can always borrow it.

For everyone else - not just in America but the whole world - the problem of expensive food and oil is serious enough to cause famine, death, riots and revolution. Look at Africa and the Middle East. If you don't think that is what the unrest is all about, you're not paying attention.

What does this have to do with a weak dollar? Everything. As all of these goods a priced in dollars. As the dollar weakens - by massive printing - more dollars keep chasing the same basket of food and oil. So the price rises. That simple.

If the dollar's so weak, how come in a crisis everyone wants dollars? They don't. The dollar rises during a crisis for the same reason the Yen rises. It's not because it's a haven of safety. It's because these currencies can be borrowed for free (no interest) and used to purchase interest bearing investments. In a crisis these Risk Trades mus be unwound, so the dollars and yens are repurchased and their value rises temporarily - vis a vis other currencies - not commodities.

What about gold? Gold is both a commodity and a currency. It rises as the dollar weakens. But it also rises as more dollars are printed - which means it can rise even if the dollar strengthens for technical reasons - for example during a crisis.

We are in a prolonged and worsening CRISIS. It is a debt crisis, and so far NO STEPS have been taken anywhere in the world to solve it. Spectacularly we are collectively trying to solve it be issuing more and more debt. Good luck with that.

Buy Gold.

Wednesday, May 18, 2011

A NEW GOLD STANDARD: Are Allen Greenspan, Steve Forbes, Ron Paul, Jim Grant, Robert Zoellick crazy fringe end-of-worlders?

We all know that the idea of the modern world returning to a Gold Standard is crazy, fringe, end-of-worlder, sit-in-your-bunker-with-guns-and-tinned-goods kind of stuff.

Here are some of the lunatic fringe who are advocating just such world policy:

Allan Greenspan 2011:
"We have at this particular stage a fiat money which is essentially money printed by a government and it's usually a central bank which is authorized to do so. Some mechanism has got to be in place that restricts the amount of money which is produced, either a gold standard or a currency board, because unless you do that all of history suggest that inflation will take hold with very deleterious effects on economic activity. There are numbers of us, myself included, who strongly believe that we did very well in the 1870 to 1914 period with an international gold standard.

Steve Forbes 2011:

A return to the gold standard by the United States within the next five years now seems likely, because that move would help the nation solve a variety of economic, fiscal, and monetary ills."

“What seems astonishing today could become conventional wisdom in a short period of time. Such a move would help to stabilize the value of the dollar, restore confidence among foreign investors in U.S. government bonds, and discourage reckless federal spending."

Ron Paul 2010:
Money comes out with real value. So over the many, many centuries, literally thousands of years, gold and silver has been used. And the founders understood this. They had runaway inflation. They explicitly said, "You can't emit bills of credit." And you want to restrain the authorities. So if you want to restrain government, you restrain the power to create money. And that's what gold does. A lot of people think, "Well, that means you're going to have to carry all that gold around in your pocket." No. There's nothing wrong with gold certificates. And it can be electronic gold. It's just that it restrains the power of individuals, especially secret individuals that have no oversight from Congress to create this money.

Jim Grant 2010:
“Well, in my mind (US) it will resolve them (our debt problems) necessarily by undertaking the step of restoring the dollar to convertibility into gold.

Robert Zoellick 2011:

Leading economies should consider adopting a modified global gold standard to guide currency rates, World Bank president Robert Zoellick said on Monday in a surprise proposal before a potentially acrimonious G20 summit.

Writing in the Financial Times, Zoellick called for a "Bretton Woods II" system of floating currencies as a successor to the Bretton Woods fixed-exchange rate regime that broke down in the early 1970s.

ALSO from ABC NEWS 2011:

In a move that reflects growing anxiety over rising inflation and a weak economy, South Carolina became the newest state to propose a bill that would make gold and silver coins a form of legal tender in the state.

Utah started the trend, becoming the first state on May 9 to recognize gold and silver coins minted by the U.S. government as legal tender. More than a dozen other states are considering similar moves.


You can be sure that any type of gold standard - no matter how partial, how convertible, would require a price of gold several times what it is now.

Tuesday, May 17, 2011

Read John Williams Shadow stats

This is quoted directly from Shadowstats, a site that gives straight up interpretation to the government economic releases. No spin. Subscription prices are reasonable. Check out today's commentary and see if you want to subscribe. (I get nothing by plugging this site. I just think everyone should know about it.)

"The U.S. economy is not in recovery, and what ever upside bouncing there was in retail sales and industrial production increasingly appears to have been transient in nature. In this morning’s (May 17th) reporting, April 2011 housing starts continued their broad downtrend, bouncing downhill in renewed deterioration. More important than the statistically-insignificant monthly decline of 10.6%, the annual decline of 23.9% was significant, and the six-month moving-average has declined for the last three months, pushing the historic low level seen in April 2009.

Along with meaningful downside revisions to prior reporting (all post-benchmark), the Fed reported April 2011 industrial production to have been flat for the month, with the manufacturing component down by 0.4%. Without economic weakness being shifted in revision to earlier periods, the aggregate production index would have fallen by 0.5% for the month in April, with manufacturing production down by 1.1%.

In tandem with last week’s reporting of retail sales activity gaining less than 0.1%, net of higher prices (see Commentary No. 368), production activity appears to have stalled, with housing and consumer liquidity issues leading general economic activity into what eventually should be recognized as a double-dip recession.

Monday, May 16, 2011

SP and Gold

As you can see from the chart above even if the S and P declines another 50 points in the next few days the market is hardly in trouble. Yet...

It doesn't take a genius to understand that it's been floating higher on a sea of liquidity courtesy of the Federal Reserve Bank of the United States of America.

On top of which 70 percent of the very low volume can be attributed to high speed trading. What's that? Well, every time you place a trade through your Merril Lynch broker, the Merril Lynch trading desk front runs your trade, by buying the stock then selling to you at a profit. But, that's not all, folks. Every time Merril Lynch trading desk places a trade, the Goldman Sachs trading desk's super computer front runs the Merril Lynch computer, buys the stock, sells it to Merril at a profit and Merrill sells it to you.

Everyone's a winner. Right? Right, as long as the market floats higher.

But what happens June 30th when the Fed wraps up its mega-liquidity program through which it gives money to the banks to invest in risk assets (by pretending to buy treasuries which they are actually selling to themself through the banks)?

It doesn't take a genius to see that without liquidity of the banks, who are pretty much the only players in the market, the market will have trouble floating anywhere but down.

So then, what happens to gold - and silver?

Over the past two years gold and silver have moved pretty well in tandem with the markets. So they'll decline, right?

Maybe. In fact, probably, at first. But all correlations work until they don't work anymore. This correlation has been working because gold and silver have been lumped in with risk assets and all risk assets rise on a sea of liquidity.

But Gold must be distinguished from other risk assets. Because in an environment where debt poses the ultimate risk to the stability of the entire financial system, gold is the ultimate safety play.

Silver- not so much. But over time gold always drags silver with it. And make no mistake, whatever happens in the very short run when the market collapses, gold will decouple from the risk asset basket, and head ever higher until the debt problem is resolved.

So take any short term drop as a god send and load up for the next leg up.

Friday, May 13, 2011

Heraclites: The art of Dialectic

The coin pictured above is generally considered one of the great masterpieces of classical Greek art. Engraved and signed in about 400 BCE by Heraclites, it depicts a young vibrant Apollo - an eternal immutable God who routinely engages in momentary earthly passions. The image itself is engraved with an immortal skill and beauty worthy of the God it depicts, yet it is intended to be routinely exchanged in mundane transactions for earthly goods and services.

This dialectic - ideas that can be read in two seemingly opposing ways - is central to classical Greek thought. It forms the basis if Syllogism (see the last post). It informs the idea of Polemos or Struggle which is the essence of Life; it informs the very idea of Democracy, which is the process of solving societal problems through dialectic rather than by force of arms.

What a shame that Dialectic has come down to us as some arcane, incomprehensible process, known only to Elite Eggheads in their Ivory Towers. Just as every process involving the reconciling of two seemingly opposing views or situations have come to be viewed in a horribly negative light: Dilemma, which is a choice between seemingly opposing paths is now viewed as a insoluble situation. And Diabolos (diabolic, the Devil): two choices of the way a situation or attribute can be cast, is now feared as the essence of Evil.

And what does this have to do with Money? Well, money unfortunately, is very complicated. And in trying to solve the problems of our economy - to balance the problems of debt, with the problems of entitlement, defense, law, order, taxation, trade we are faced with many Dilemmas.

But we have few rhetorical skills left to sort through the complexity. Instead, we resort to casting every point of view that seems foreign, or contradictory to our own limited view as Diabolic. And we fasten on to quick easy fixes.

So, it's easy for me to criticize, right? But what's my solution?

That's easy. Buy as much gold as you can, because it will protect you when those who prefer to cast aspersions rather than find solutions have seized control of our government and our economy. And hope, meanwhile, that our children look to the past as well as the future for solutions.

Wednesday, May 11, 2011

Heracleites: The river is the same

Just for the record:

The Heraclites who designed and signed the coin above may or may not have been the same Heraclites who penned immortal verse. We know him by the famous misquote of his work: "You can never step in the same river twice."

He did not say that. He said: "The River is the same when you step in it and when you do not step in it. Just as you are and your are not."

Infinitely more interesting as a dialectic, no?

It's interesting too that now we simplify his work down to a bite sized, meaningless slogan: "Everything is in flux." This misunderstanding strips it of the dignity of reflection it required - and was routinely accorded - back when it was written.

It is the same simplification, the same undignified disdain, we accord to every complexity. Especially those having to do with money. Everyone these days is either a Socialist or a Free Market Guy. Everybody is for Personal Responsibility or for Social Compassion. Everyone is against excessive Debt and for Healthy Leverage. Everyone is a Conservative or a Liberal. And in the absence of dialectic, none of those things have any meaning at all. Which makes solving complex problems all but impossible.

All of which is to say, if you think our economic problems will be solved any time soon. you might want to reconsider.

And trade those paper bills in your wallet for some real money.

Tuesday, May 10, 2011

The First Gold Inscription: PHANES: APPEARANCE: REASON

Above we see the first inscribed gold coin. The image is of a stag, the symbol of Ephesos (Present day Black Sea area of Turkey). The inscription (PHANES or EIMI PHANES). Phanes is Greek for that which APPEARS. Eimi is Greek for I am.

The Greeks invented coinage, and the first inscribed coin says PHANES.

Let's think about this.

The Greek word for coin is NOMOS. Nomos comes from NOMIZO which means to Think - in the sense of to Reason. The Greeks had many words for Thinking. Before the Greeks Thinking was Thinking. For the Greeks, thinking was Reasoning, Perceiving, Knowing, Understanding, and most important Syllogizing (Conceptualizing - latin form).

Concept: Syl-Logos (reasoning together) had a very specific meaning. It was the art of examining an idea from four specific perspectives. What is it? What is it not? What does it APPEAR (PHANES) to be? What does it not APPEAR to be.

Appearance for the Greeks was the essence of Change, which defines the human experience. Being was the Unchanging that lies beneath all appearance. The dialectic between Being and Appearing, between the Changing and the Unchanging defines Greek thought.

So the word APPEAR, appears on the first Greek Gold coin. It was as if they understood the role this little piece of metal would now assume on the Human Stage. It is as if they understood that exchange and change were intimately related. Yet they chose a medium of exchange that they considered to be most permanent: gold.

On Gold, the symbol of the unchanging, lies the word "Appear:" the essence of change.

What is terribly interesting about all this is how the process of Syllogism so thoroughly informed not just Greek thought, but also the processes and the structure of Greek political economy.

By contrast, how critical is Syllogism to Modern American thought and process? Does syllogism even exist for modern day Americans?

When we think about the meaning of CONCEPT, do we apply the process of syllogism? In politics, economy and art do we go through the rigorous process of syllogistic thought, or do we settle for slogans and sound bites?

When we use terminology like Conceptual Art, for example, do we apply a rigorous analysis based on syllogistic principles? Think of poor simple Jenny Holzer (not to pick on anyone in particular) and her "When I hear the word art I take out my pocketbook." Is this really a concept? Or is it a slogan? Or what might be called in a Chinese restaurant, "a fortune?"

When we hear one politician call another a Socialist, are we hearing the use of a concept? Or are we hearing a meaningless slogan?

When we hear Tim Geithner say we have a Strong Dollar Policy, are we hearing rigorously applied conceptual analysis - or are we hearing a slogan?

When we use the word dollar, or money do we even take the time to think of what the words mean? Do they even have a meaning?

I know, this all sounds naive, and probably very boring. But consider one more Greek idea (Via Ludwig Wittgenstien): With the loss of meaning comes the loss of use.

The PHANES coin above has survived for 2500 years and is still an object of value, fascination, and contemplation. How much longer do you think the dollar will survive?

Monday, May 9, 2011

Gold fundamentals

Now that gold is in correction mode - though it could easily test and surpass the highs (nobody knows) - it is always good to try to get a little historical perspective on Gold Fundamentals.

For some that means looking at a weekly or monthly chart (see the posts below.) However, that gives technical perspective. Technicals only help traders. Fundamental perspective is why you invest. Fundamentally, I could go on about the debt problems, the unfettered issuance of paper money, the impending end to QE2, the depression that will follow, and then the ramping up of QE 3,4,5 etc. But everyone should know all about that by now.

Instead let me offer some true fundamental historical perspective.

Above we see pictured a Distater (double stater) issued by Alexander the Great in about 334 BCE which would have been used to pay the monthly salary of a military captain. I've chosen this coin because it is in what is called GOOD VF Condition - a decent collectible grade with little of the premium associated with a top grade coin. This coin sold for about US$20,000 a few months ago in New York. Top mint state versions now sell for around US$100,000. But for our purposes this well preserved - but unexceptional specimen - serves a better purpose.

What does this coin tell us about gold?

First, a military captain would have been paid a half ounce of gold a month.

This is a reminder that in 334 BCE gold was money, and a half ounce served as ample payment for the most prestigious job of the era. Second it's a reminder that this payment was only double that of the average soldier.

In other words, gold fulfilled its function not only as a medium of exchange, but also as a guarantee of a store of value. Since it could not be printed at will, those at the top of the governmental/banking structure could not simply print unlimited quantities to award to themselves, thus destroying the value for everybody else.

In the US the average CEO pay last year was NINE MILLION DOLLARS (excluding bonuses and options). This is more than 350 times the pay of the average US worker. There are more than a 1000 billionaires now worldwide.

Whatever reason you might use to justify this, the salient fact is that as paper money becomes amassed in increasingly greater amounts in increasingly fewer hands the value of paper money is destroyed for everybody else.

This very simple historical lesson shows why gold is now assuming its historical function as real money.

Finally, as an interesting note, I would simply point out that as gold assumes its role as real money there is an increasing fascination with real historical gold money. The coin above would have sold for about 5000 dollars back when bullion was at 400 dollars. This coin and bullion have increased at roughly the same rate.

Yet in mint state back then this coin was only worth about 7500. Now in top condition this coin has outpaced bullion by about 3:1.

This again shows the power of the concentration of paper money, as those with the greatest access to it are now those most aggressively seeking to diversify out of it. And as they do, the prices of all valuable commodities will get bid up to fantastic levels in paper money terms - thus accelerating the destruction of the value of paper money for everybody else.

And thus hastening the return of gold as real money.

Saturday, May 7, 2011

Week in Review: Labor, gold, silver

The Above chart (courtesy of Shadow Stats) puts the tremendous joy over the jobs recovery as experienced over yesterday's BLS job survey in perspective: the August 2009 annual decline remains the worst since the Great Depression, and the current level of employment is far from any recovery.

The BLS Birth/Death guestimate of how many new jobs were probably created and not reported accounted for 175000 of the 244000 jobs new jobs reported in the BLS labor survey:

For April 2011, there was a positive monthly bias used of 175,000 jobs, up from the revised estimate of 141,000 used in April 2010. In March, the net bias was a boost of 119,000 jobs. These upside biases reflect an ongoing assumption of a net positive jobs creation by new companies versus those going out business.

Further, Shadow Stats reports that: "Again, what has happened here is largely a distortion created by the extreme severity of the economic downturn, which disrupted regular seasonal patterns and calculations of related seasonal adjustments. The big issue remains that the month-to-month seasonally-adjusted payroll data have become increasingly worthless, with errors likely now well beyond the 95% confidence interval of +/- 129,000 jobs in the reported monthly payroll change."


If you scour the gold and silver sites it will be tough to find any article by any Metals Guru not patting themselves on the back for presciently warning everybody about the impending drop in metals prices. Gee. In retrospect everyone's a genius.

The game works like this, as silver hits 35, you issue a warning. It hits 40 you issue a warning. It hits 45 you issue a warning. It hits 50 you issue a warning. It crashes, you point to your latest warning. You're a genius.\

Look, there's no real traders issuing warnings, or I told you so's. Real traders trade. Gurus and analysts blab.

Here's the deal. Silver is a very difficult market, because Central Banks don't buy silver. So you lack the underpinning that makes gold a much steadier, surer one way bet over time. Without the Central Bank underpinning silver is much more at the mercy of Large Hedge Funds and Banks that can push the price around at will. So watch out.

Over time if you're amassing bullion, don't worry, silver will always be the poor man's gold. And as such it will piggy back on gold's relentless return as real money.

But don't try to trade silver. It's tough.

As for gold see the charts on the posts below. It feels like it's had a big drop. But really, on the monthly chart, it's barely budged. If you think the unemployment blip might cut into gold's strength, think again, and look at the analysis above. If you think killing Bin Laden will have an effect on Gold then please don't try to gamble your money in the financial markets. Hide it in a hole in your back yard, or you'll lose all of it.

As i stated below, gold's correction could easily carry into the 1360-1390 range just to test the break out on the monthly chart signaling the beginning of Phase 2 of the gold bull.

This is the phase where Institutions (Central Banks, large Hedge Funds, Sophisticated Investment Funds) finally get involved, driving the price relentlessly higher.

Phase 3 is where Merrily Lynch and those type of Financial Advisors finally get involved dragging the public into the mix. This will come in a few years. This is when the price explodes.

Have your position set before that happens.

Friday, May 6, 2011

Getting Closer!

You can see from the Monthly Gold chart above that we've fallen halfway down to the breakout line signalling Phase 2 of the Gold Bull. We've fallen about 100 dollars from the highs. We could easily fall another 100 to test the breakout.

We are SO LUCKY. If and when we get there that would be the trading opportunity of a lifetime.

We may not get there, which is why we're already in a wonderful place for those needing to build up their CORE positions.

What's the difference? Your core position should be in bullion. Why? Because bullion is real money. You will need real money if the paper monetary system suffers any type of break down. Yes, I know "End of times nonsense... why not buy guns and water... sit in your bunker.... blah blah blah..."

Look, Monetary Breakdown does not mean that the sun turns black, the skies fill with locusts and God will take the first born male child of every family. It means that what has already happened in Greece, Portugal, Ireland and Japan will happen in Spain, Italy, France and the United States of America. The idea that it can't, is part of some sort of Mystical Positivist Religion. If you happen to be a Believer, well, good for you. Maybe you'll end up being rewarded in the Afterlife with 1000 Virgins or whatever else you believe. For the rest of us, it's better to buy bullion.

So what about Corrections, like this? Don't value your bullion in dollars. Dollars are extremely volatile. Value your bullion in ounces. This is a great opportunity to get more cheaper.

So what about those of us crazy enough to trade gold?

Well, that's me too. Personally, I follow the advice I give here. I keep my trading positions manageable. I sell to be careful at points it seems a correction could be likely. Like two days ago when i suggested this one might be happening. In other worlds, I follow my own advice. Now I'm sitting tight with my TRADING position which is ZERO.

I'm waiting patiently for the test down into the high 1300's. There's sure to be a number of false starts between now and then. Maybe a bomb goes off somewhere and the correction is cut short. Assess that if and when. Maybe some Banks go under provoking another crisis. Assess that if and when. If you want to trade you have to stay on top of every possible occurrence that could affect your trade. But Occurrences may not effect gold at all. What's needed here is TIME.

As a rule, gold corrections are, sharp, volatile, frightening, and they provoke all the financial world's dimwits into pronouncing that the gold bull is over. That should be music to your ears. It usually takes a bit of time before you hear that. Of course, super dim wits like Larry Kudlow and Rick Edelman will probably pronounce the gold bull dead today - if they haven't already. It will take most of the dull normals a few weeks. Think early June. That's not so long in the scheme of things.

Meanwhile, look at the chart above. Does that look like a sick bull? So sit tight and enjoy this correction. And remember to get more ounces. They're on sale.

Thursday, May 5, 2011

Gold Correction continues

You can plainly see from the monthly gold chart posted above that gold is heading towards the breakout point marking Phase 2 of the gold bull. It is right, and usual and healthy for it to test this breakout. How far down does this support lie? Somewhere around 136-139 in the GLD tracking stock, which translates to around `1360 in the price of spot bullion.

Wow, that's a long way down, right? Not really. Does it have to get that far? It doesn't have to do anything at all. The key is time.

I know many analysts are calling for a short sharp correction. It's possible. Most likely is that it plunges, reverses up sharply some time next week. Then plunges again, sticking a dagger into the hearts of late comers and those trying to play the plunge. Then it stabilizes early next month somewhere right around the support from the breakout line drawn above.

If you're foolhardy enough to trade, (like me) you'll wait patiently for the obvious support.
(But if it's so obvious won't everybody play it , thus erasing its effectiveness? No. It's obvious to me, but everybody draws these charts somewhat differently, and most people use much more complicated reversal schemes involving Fibonacci numbers, exponential moving averages, and Relative Strength Indicators.)

If you're smart you'll just keep buying bullion systematically all the way down, and thank God for this opportunity.

Because, remember, Gold is a play on Monetary Instability. Monetary instability is increasing. This is just a technical correction, prompted by nothing other than the need to move the gold from weak to strong hands.

Wednesday, May 4, 2011

Gold Correction: The Silly Season

Gold has sold off now from $1555 all the way down to $1530! Woah. It would be very surprising after months of steady rise if it did not back off for a period of 6-8 weeks. It's not possible to call a price at which you should begin to accumulate. You can see on the Daily Chart of GLD above that there are any number of reasonable targets to which the price of gold could fall.

And you can see on the Monthly Chart above that, that gold can fall a long way before it retests the breakout signalling phase 2 of the bull.

But generally speaking time is more important than price in a bull market correction.

It should go on just long enough (6-8 weeks) and deep enough to hear very low-IQ cases who analyze markets make all sorts of inane and bizarre argumnets as to why the gold bull is essentially dead,

After a couple of days sell off I heard a great one last night on the radio between Larry Kudlow and some dude at the Wall Street Journal who were guests on the clueless John Bachelor Show:

The WSJ guy announces that George Soros is selling gold because the Deflation Threat has passed and the economy is now mending. (First off, George Soros - if he says anything at all about his trading - it's to mislead everybody as to what he's doing and thinking. Second the idea that he was accumulating a huge gold position solely as a Deflation Hedge is absurd. Third, the idea the economy is mending is totally unsubstantiated)

But then Larry Kudlow chirps in that he has to agree with George Soros this once, because now that Osama is Dead and the dollar is rallying it should definitely bring down the Inflation Threat thus accelerating the new economic boom. (There's so little sense in this comment it's not worth dissecting - except to point out that he thinks he's agreeing with his co-analyst while not seeming to realize he just contradicted him.)

It's like listening to a bunch of first graders explain the seasons by talking about how the sun moves closer and then farther from the earth as it zig zags across the sky.

Anyway, know this: The more stupid talk, the better for gold. It keeps weak hands and minds out of the market. And a correction here, no matter what form it takes, is long overdue and very healthy. It will wrest gold from the weak hands of latecomers. It allows the rise to maintain a steady sustainable flow. It will give the rest of us a wonderful chance to load up at a (hopefully) cheaper prices.

If you bought late, don't panic. This is a healthy, natural part of any bull market. It's a gift. Buy more lower, systematically.

And, meanwhile, try to enjoy the barrage of senseless chatter that's sure to flood print and the airwaves.

But wait! How do you know the gold bull isn't over?

Because gold is a Monetary instability Hedge. And global monetary instability is accelerating. You really need to make an effort to understand what that means if you're going to be able to ride out this bull market. I've explained it many times in past posts. For much more complicated analysis read the Fofoa blog.

Tuesday, May 3, 2011

How do I buy thee?

Now that Gold may have begun a short/intermediate term correction (we'll see) there is an entire class of bullion gold coins that will not move 1 cent during the entire correction, no matter how deep, quick, or frightening the correction may be. It is a category I would term "Bullion Plus," since the coins do have a substantial bullion value, but they trade at a premium because of collector interest.

The most sought after, at the moment are Chinese gold coins issued by the Chinese Government mint. The coin offered above is a 1997 Chinese mint, standard issue bullion one ounce coin being offered on ebay (quite reasonably) at $2500, or aproximately $1000 over the spot price of bullion. If the spot price drops the offering price on this coin will not. Demand might temporarily cool, but supply is limited and the seller will wait patiently. And with good reason. Or a billion plus good reasons, as that's the population of China which is being encouraged by its Government to collect its own gold.

However, there are also many US collectors who are collecting these coins. The catch? To understand this market you have to carefully study the marketing info supplied in the text above. This includes The grade, the grading service, and the mintage for the year, and the tiny mint variations within the year. Collectors of this issue must be familiar with all these factors for each and every year. If not, you will get scalped in this market. However, if you make the effort, the premium on these coins over bullion is likely to expand faster than the general market as well as resist declines in the general market.

Other popular issues of collectible low mintage bullion coins include:

The South African Natura Series, with images of African Wildlife trade at a very small premium to regular bullion gold despite the tiny mintages and the quality images.

French 100 Franc Gold Angel coins (of close to one ounce) of the late 19th C. in high grade tend to trade around $2200 for MS 63, and $2800 for MS 64.

Peruvian Seated Liberty coins from the 1950-60's: These large coins (approx 1.33 ounces of pure gold) have very low mintages for certain years, yet trade at only about 200-300 dollars an ounce over bullion.

Russian Bears and Dancers have low mintages and trade at approx 2x bullion. Most of the appreciation occurred over two years ago, and since then they've retained a steady premium.

Brazilian gold of the 19th Century used to trade at very close to bullion and now have become genuine collector coins in high grade with the rise of the Brazilian economy.

South American 8 escudo pieces of the 19th century in lower grades trade very close to the bullion price.

Turkish Ataturk 500 kurush coins from the early 20th Century of over one ounce trade around $2000 despite very low mintages and the fact that Turkey is likely, over time to become a major power in the Middle East.

Now, I fully realize there is a large number of investors for whom the idea of collecting anything at all is anathema. This, in spite of the fact that they too probably have some collection (artwork, porcelains, cookie jars, first edition books, golf clubs, musical instruments, baseball cards, etc. ect.) And their own collection makes sense to them, while all others seem foolish.

But as long as the gold bull persists, and it will persist for a very long time yet. bullion will be an increasing object of collection. It's fun. It's interesting - (I know, if you're a nerd, right?) and it's profitable.

Monday, May 2, 2011

Don't trade the gold bull Phase 2

Above is a monthly chart of the 10 year old gold bull. It is a perfect illustration of why it is terribly difficult to trade a fundamental bull reflective of a fundamental paradigm shift. Over the last month gold has broken above the long term upper band which is likely to become support for this second phase of the Bull market. Will we test this support line? Yes. When? Maybe tomorrow, but maybe at some point in the future when it is already much higher than it is here.

The second phase is when institutional money begins to catch on to the "Smart Money" that dominated the first phase, which lasted, in this case about 10 years. The second phase is now being dominated by the World's Central Banks, and a few top Hedge Fund managers. This is a powerful phase because it signals a paradigm shift back from easy paper money to hard money. It signals a time when the bizarre radical conversations of "Gold Bugs" and "End of the Worlders" about return to a gold standard and the dubious sustainability of debt, become the conversations of Central bankers and entrenched politicians.

Meanwhile 98 percent of Investment Advisors at places like Merril Lynch are advising their clients to stay out of this "speculative market." Radio Shill Rick Edelman announced last week that when clients ask about gold, he laughs at their stupidity. During the third and final phase of a bull, these Investment advisors will be leading the charge. This is when the price will go parabolic. We're a long way off from there.

So what is smart money doing now that we've entered the Second Phase?

Smart money is shifting into bullion. Smart money understands that the paradigm shift signaled by the Second Phase is indicative of tremendous volatility, uncertainty and danger in the world markets. Smart money has already made plenty on the leveraged paper gold play.

Those late to the bull and entering only now will advise of many wonderful ways to leverage the Gold Bull through options, gold stocks, and any variety of margin trades. The time for that was the last ten years. Not now.

Now is the time to move to the safety of bullion. And those who do will discover an unanticipated leverage play, when the premium of bullion over paper explodes.

Sunday, May 1, 2011

Got Bullion?

Gold has now been in a bull market for 10 years. Everyone, but the most dim witted of "asset-allocation" advocates can see that gold deserves a place in every portfolio.

Still, only 2 percent of registered financial advisors recommend gold. The reason for this is twofold. A) asset-allocation models presuppose that all financial advisors and all of their clients are complete morons and can not possibly have any point of view on the markets - other than that over time they will rise - and the rise of gold suggests that even this is wrong, and that financial markets may well fall again. And b) Financial Advisors don't get kick-backs from bullion dealers or Gold ETF's.

Everyone but these dim wits can also see that when the investing public finally start to think for themselves they will want some gold. Therefor, the big rise in gold is still somewhere off in the future when the investing public gets involved.

However, what is most difficult to accept, even for many long time gold bulls, is that gold will eventually reassert its historical position as the world's reserve currency.

This point of view still appears radical.

Most people - even most gold bulls - tend to think that though the current problems are severe, they will get worked out (somehow - nobody knows how) and then the gold bull will be over. So for them it's just a question of when to get out of this very profitable (paper) trade.

There are three reasons people cling to to justify this position.

First, they say, we've had severe problems in the past and we've always worked them out.
This position is clearly illogical and hope-based. You could argue against it citing every historical example of paper money returning to its intrinsic value (zero) but why bother? It's like arguing against a religious conviction.

Second, they say, the United States may be having problems but we still have the deepest, safest financial markets in the world.
This is partially true. It is true for Apple, and Google, and Facebook, and Exxon, and 3M, and Alcoa. But it is not true for our, inefficient, lazy, corrupt bankrupt banking system. And to the extant that it's true, it is an argument as to why the United States won't dissolve, not why the dollar won't be replaced by a more stable currency.

Third, they say, there's just not enough gold to back the world's currencies.
To this, the simple answer is that there is plenty of gold - at the appropriate price.

Is it really so hard to imagine that the IMF, the ECB, the Fed, The Chinese, Russian, and Brazilian Central banks, OPEC (Or some strong armed combination thereof), getting together and agreeing to some gradual shift to gold-backed currency?

Would it be hard to imagine that day arriving, sooner rather than later, on the back of world wide food riots (already happening), sky-rocketing oil prices, and yet another global banking crisis?

The only thing preventing this from happening today is Confidence in the stability of the dollar. Is it so hard to imagine that confidence wavering?

You'd better try real hard to imagine this. Because if the shift is not gradual - for any number of reasons - and you're not prepared, you'll go broke.

Let's assume, for a second, that his far-out scenario comes to pass. What would happen to dollar denominated assets, including gold stocks and gold ETF's? This is a terribly complex question, and to answer it properly one must account for the settlement of hundreds of trillions of dollar denominated debt.

It's possible to envision many scenarios. But under every possible scenario you will see a decoupling of the Bullion Price of gold from all paper forms of gold. In other words the PREMIUM charged to buy an ounce of gold will go through the roof, as demand for the Bullion rises.

Whether or not your paper gold will go to Zero is debatable. But if you think this through, it should become clear that you want your gold in bullion form. And to have a prayer of getting it that way you should start right now.