You’ll Buy Gold Now and Like It!

Posted on August 27th, 2010

GoldBy Jeff Clark, Casey’s Gold & Resource Report

I get this question a lot: “Should I buy gold now, or wait for a pullback?”

It’s a valid question. For nearly two years, gold hasn’t had a serious decline. There have been pullbacks, of course, but nothing assumption-challenging. In fact, since October 2008, gold’s largest price drop is 10.6% (based on London PM fix prices), and yet the average of all declines since 2001 is 13% (of those greater than 5%). The biggest pullback we’ve seen this summer is 8.2%. Technically the summer’s not over, but I’ll admit I’m surprised we haven’t had a better buying opportunity.

So, is now the time to buy? It depends on your honest answer to another question: “Do you own enough gold?” By “enough” I mean an amount that lends meaningful protection on your assets. By ”meaningful” I mean that no matter what happens next – another financial blow-up, accelerating inflation, crushing deflation, war, a plummeting dollar, more reckless government spending – you won’t worry about your investments.

Whether you should buy now is almost irrelevant if you don’t already own a meaningful amount of gold. If you earn $50,000 a year, how is one gold Eagle coin going to protect you if the dollar plummets and sends inflation soaring? If your investable assets total $100,000, is your nest egg sufficiently protected owning two gold Maple Leafs? This is all akin to buying a $50,000 insurance policy for a $500,000 home.

Today we face the prospect of prolonged economic stagnation, and most governments are administering grossly abusive monetary policy as a remedy. While some of the consequences are already being felt, the full ramifications have not hit your wallet yet. But they will.

If you don’t have at least 10% of your investable assets in physical gold, or at least two months of living expenses, you have your answer: Buy. Don’t use leverage, don’t borrow money, and don’t buy with reckless abandon, but yes, get your asset insurance policy and tuck it away. And then start working toward 20% (we recommend a third of assets be in various forms of gold in Casey’s Gold & Resource Report).

Back to the original question: should we buy now, or wait for a pullback?

The answer comes when you look at the big picture. If you pull up a 9-year chart of gold, what sticks out is that the price is near its all-time nominal high. One could be forgiven for thinking it looks toppy or at least ripe for a pullback. But I assert that the highs for gold have yet to be charted.

What will a gold chart look like after adding five years to it?

When projecting gold’s potential price peak, there are many ways to measure it. Conservatively, gold reaching its inflation-adjusted 1980 high would have it topping around $2,400 an ounce. More radically, if the U.S. tried to cover its cumulative foreign trade deficit with its current gold holdings, gold would need to hit about $32,000/oz.

Let’s take something more middle of the road, and apply the same trough-to-peak percentage advance gold underwent in the 1970s. (I think there’s a greater than 50/50 chance it does more than that, given the precarious nature of the U.S. dollar.) Gold rose from $35 in 1970 to $850 in 1980, a factor of 24.28. Our price bottomed in 2001 at $255.95; multiply that by 24.28 and you get a gold price of $6,214 per ounce.

Sound too high? Well, would it feel high if you had to pay $12.50 for a Big Mac? At $3.39 today at my local McDonald’s, that’s about what it would cost ten years from now if we get the same rate of inflation we had in the late 1970s.

So if gold hits $6,214, what might it look like on a chart if you bought today around $1,200?

Buying at 1200 Gold The Big Picture

$1,200 doesn’t seem so pricey, does it?

I’m not saying there won’t be pullbacks or that you shouldn’t try to buy at lower prices. Just keep a big-picture perspective. Let’s say gold falls to $1,100 and you’re kicking yourself for having bought at $1,200… if gold reaches $6,200 an ounce, the profit difference between buying at $1,200 and buying at $1,100 is only 1.6%. If gold gets whacked to $1,000 (at which point I’ll be buying with both hands) the difference is still only 3.2%.

Heck, even if gold peaks at $2,400, you still get a double from current levels. (But unless government monetary policies immediately reverse course, gold isn’t stopping at $2,400.)

So there’s my answer. Yes, you have to accept my projection of gold’s ultimate price plateau. And you have to sell at some point to realize the profit. But if the final chapter of this bull market looks anything like the chart above, I don’t think you’ll be too upset having bought at $1,200.

Carpe gold.

By Jeff Clark, Casey’s Gold & Resource Report


As high as we think gold could go, it’s gold producers that will gain three and four times more, bringing us potentially life-changing profits. Check out the new issue of Casey’s Gold & Resource Report, where we’ve identified the easiest and cheapest way to buy gold stocks, even for smaller wallets. It’s only $39 per year – try it risk-free here.

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Ron Paul Calls for Audit of US Gold Reserves

Posted on August 27th, 2010

Fort Knox Gold Vault“U.S. Rep. Ron Paul , R-Tex., plans to introduce a new bill next year that will allow for an audit of US gold reserves, he told Kitco News in an exclusive interview.”

“Paul dropped the news in the interview, indicating that the bill still does not have an official name yet but will be unveiled at the start of the new U.S. Congress.”

“If there was no question about the gold being there, you think they would be anxious to prove gold is there,” he said of the Federal Reserve.

Its about time for Congress to insist on an audit of all the U.S. gold reserves, not just those at Fort Knox. In fact, the last and only audit of our gold was done about fifty years ago. Our financial leaders certainly could have depleted or emptied our reserves since then.

In his interview with Kitco News, Ron Paul added “If we ever get around to deciding we should use gold in relationship to our currency we ought to know how much is there,” said Paul. “Our Federal Reserve admits to nothing and they should prove all the gold is there. There is a reason to be suspicious and even if you are not suspicious why wouldn’t you have an audit?”

He added “The best example of manipulating the ratio of gold to paper would have been from the late 1950s to 1971, said Paul. “We printed money like currency, we printed too many dollars against the gold, so they said, ‘we will take your gold.’ …if they are capable of that they are capable of doing this as well, because they don’t want their cover blown, ” said Paul. If the markets are saying not to trust paper money, they have to do everything they can to “destroy gold.”

Read the rest of this interview at Kitco News.

The Idiots Guide to Repairing an Economy

Posted on August 26th, 2010

Credibility by Eric Allie, Caglecartoons.comBy Bill Bonner for The Daily Reckoning

Too bad Thomas Friedman has stopped writing about the economy. We could use a good laugh this morning. Chilly winds are blowing across this part of France. The children have all gone. The sun is low and cool. It’s quiet here, and a bit sad.

But Friedman has moved on to giving bad advice on other subjects.

So, this morning we turn to Bob Burnett, “retired Silicon Valley executive.” Mr. Burnett is writing on a site that we believe is part of The Huffington Post. His photo shows a man who seems affable. At least, he’s smiling. The edges of his mouth curl up, revealing the incipient insanity of the self-assured. He knows what he knows; too bad that what he knows isn’t so.

We smiled too when we read his explanation for how come the US lacks jobs. He blames “conservative economic ideology” that took hold under the Reagan administration.

What? Where has this fellow been? It was under the Reagan administration that the last trace of conservative economic ideology disappeared. Reagan supposedly proved that “deficits don’t matter” and that we can always “grow our way out of debt.” The Republicans became activists – trying to rearrange the world to suit their imperial ambitions…and pandering to the voters with lower taxes and unfunded giveaway programs. “No voter left behind” was practically their motto. What’s conservative about that?
American economic history according to Burnett:

What followed was a thirty-year period where America’s working families were abandoned in favor of the rich. Inequality rose as middle class income and wealth declined. As corporate power increased, unions were systematically undermined. As CEO salaries soared, fewer families earned living wages.

Poor Burnett misses the point of the last 30 years of US economic history. He thinks middle class families declined because they were “abandoned,” as if they were pets in need of constant care and attention.

(What really happened, in less than 25 words, was that US society became debt-soaked and zombified…thanks to the joint efforts of Fate, History, Economic Cycles, the Fed, Economists and Both Political Parties. More…eventually….)

The man has no idea how an economy functions. This you can tell by reading his suggestions to the Obama administration. Everybody without a clue has recommendations. Burnett is no exception.

America has economic cancer and radical surgery is required. First, there has to be a massive redistribution of income by increasing taxes on both the wealthy and financial institutions (particularly those that were at the heart of 2008’s economic meltdown).

Second, there has to be a second stimulus package that not only supports America’s teachers and public safety workers but also strengthens the US infrastructure, in general. It’s not logical to propose that American businesses provide better jobs without also ensuring that our schools produce workers who can meet employers’ needs.

Third, the Federal government has to be involved in economic policy. The last thirty years has demonstrated that it’s insane to assume the free market will do this. What we’ve learned is that the market follows the path of least resistance and dictates economic policy solely based on greed. Creating wealth for a handful of CEOs isn’t consistent with the national interest. What are needed now are economic policies that produce decent jobs for average Americans.

The Federal government has to intervene and create the jobs that the greedy, shortsighted private sector hasn’t provided.

What a dimwit. Who does he think was making economic policy during the bubble years? What does he think the schools were doing? What does he think the regulators were up to?

Rob the rich to give to the poor? Hey, that should work!

He should run for Congress. Maybe he is running for Congress. It would prove another of our Daily Reckoning Dicta: Anyone who wants to be in Congress is not someone you’d want in Congress. (my emphasis)

By Bill Bonner for The Daily Reckoning

Obama’s Royal Retinue

Posted on August 26th, 2010

President Obama Enters LimoBy The Daily Bell

Vacationing Obama can’t shed White House entourage … President Barack Obama had a simple task for his first morning on vacation: shoot over to a Martha’s Vineyard bookstore to fill out his daughters’ summer reading list and grab himself a novel. Easier said than done. His SUV, part of a 20-vehicle motorcade, passed through a cordon of Massachusetts State Police motorcycle officers, in a protective cocoon of Secret Service agents. Tagging along for the quick trip Friday were White House communications trucks, an ambulance and two vans full of reporters and photographers.

It was the same drill Saturday when he went to the beach for a picnic lunch with his family. This may be down time for Obama, but like all modern presidents, celebrities and some wannabes, he must move about with a not insignificant entourage. It includes security officers and their array of arms, as well as advisers, friends in and out of politics, and a cook who doubles as a golfing buddy. – AP

Dominant Social Theme: It is all necessary.

Free-Market Analysis: It is not a novel observation, but it probably bears repeating. The vacations that President Obama takes are like some sort of royal procession. It wasn’t so obvious under George Bush because he had his own “ranch” to go to. But like Bill Clinton, Obama is a wanderer when it comes to vacation destinations and thus much is made of his travels. Is there a kind of sub-dominant social theme here? We think so. “This is the most important man in the world and he travels in style that befits his position.”

Of course, we don’t think that Obama is the most important man in the world. We believe he is a kind of manufactured individual who carries the water for a shadowy power elite that evidently and obviously stands behind him. It turns out that, as with George Bush, many of his vague campaign promises degraded into business as usual when it came time for governance.

George Bush, as a titular, small-government republican, did almost everything seemingly in his power to expand government and make use of big-government levers. He went to war on two and even three fronts and maintained the wars for his entire presidency. He attempted (or succeeded) in expanding the federal government’s reach in public education, in religious affairs and most importantly when it came to US domestic spying. His efforts at removing habeas corpus, at combining a dozen or more intelligence agencies under one Homeland Security roof and his determination to rip down walls between agencies to create a unified KGB-type architecture ran counter to the small government, free-market principals he espoused on the campaign trail.

But Barack Obama’s stay in the White House has produced similar disappointments for his followers. Obama abandoned universal health care when the political costs became difficult to bear, and he has not moved aggressively on either immigration or cap-and-trade, “green” issues as his leftist base once hoped he would. He has proven an even larger disappointment as regards foreign policy, removing troops from Iraq but still keeping some 50,000 stationed there. In Afghanistan, he has actually expanded the war in hopes of “winning” it or at least making it difficult for the Taliban to impose their version of victory.

What is clear, when one examines the two most recent presidential regimes, is the remarkable amount of continuity between them. In fact, George Bush had confused Republicans everywhere by attempting to “solve” the immigration problem by in a sense legalizing South American immigrants already in the United States and then by suggesting some sort of guest worker program. His proposals, in fact, can be seen as more radical than what Obama has thus far suggested on the subject.

When it comes to overseas wars, there is almost no difference between the two presidents. Nor is there when it comes to the more shadowy “war against terror.” American intel agencies are still vastly funded; Homeland Security remains an ever larger bureaucratic bungle, sucking in resources like a black hole. Congress, generally, appropriates vast sums for the intel-industrial and military-industrial complex, and this sort of funding remains even as presidents come and go.

If one agrees therefore, at this point, that it makes little difference who is in office – as the state apparatus functions regardless – then we would suggest the outward pomp and ceremony is in a sense compensating for the president’s larger lack of power. The American president’s actual ability to forge a new a course may be limited, but the show surrounding him continually gets bigger. The idea, perhaps, is to create a sense of significance that he actually doesn’t have. He is to be presented as the Great and Powerful Oz so that no one notices the men behind the curtain.

Obama certainly does travel in style. He doesn’t drive himself anywhere. He has a helicopter that he uses even for very short trips within Washington DC. For longer trips there is Air Force One. The retinue he travels with his is extravagant and the press coverage that he receives on his trips, especially the vacations, is downright foolish. One is treated, in the mainstream media, to recitations of menus, golf scores and reading material. It is as if no detail is too minute to cover and no luxury too large to provide.

Conclusion: Like a titular head-of-state, Obama rushes from vacation to vacation with breathless coverage throughout. And while people may speculate as to why he is taking so many vacations, we think we know: There’s just not very much he can do on the job, and his power is actually fairly circumscribed, not by the office but by circumstance and sociopolitical evolution. Picking a vacation destination may be the clearest and most unencumbered decision he gets to make. (my emphasis) But then again, perhaps Michelle and the children do the choosing.

By permission The Daily Bell

It’s Funny Now…But, Sad to Think About!

Posted on August 26th, 2010

Foreign Trade Buy American by Gary McCoy, Cagle CartoonsBy John Rubino

This just hit my email box. It’s funny, as long as you don’t think too deeply about it.

Stimulus Check

Sometime this year, we taxpayers will again receive another ‘Economic Stimulus’ payment.

This is indeed a very exciting program, and I’ll explain it by using a Q & A format:

Q. What is an ‘Economic Stimulus’ payment?
A. It is money that the federal government will send to taxpayers.
Q. Where will the government get this money?
A. From taxpayers.
Q. So the government is giving me back my own money?
A. Only a smidgen of it.
Q. What is the purpose of this payment?
A. The plan is for you to use the money to purchase a high-definition TV set, thus stimulating the economy.
Q. But isn’t that stimulating the economy of China?
A. Shut up.

Below is some helpful advice on how to best help the U.S. Economy by spending your stimulus check wisely:

* If you spend the stimulus money at Wal-Mart, the money will go to China or Sri Lanka.
* If you spend it on gasoline, your money will go to the Arabs.
* If you purchase a computer, it will go to India, Taiwan or China.
* If you purchase fruit and vegetables, it will go to Mexico, Honduras and Guatemala.
* If you buy an efficient car, it will go to Japan or Korea.
* If you purchase useless stuff, it will go to Taiwan.
* If you pay your credit cards off, or buy stock, it will go to management bonuses and they will hide it offshore.

By permission John Rubino

U.S. Dollar Threatened by Fannie & Freddie

Posted on August 26th, 2010

Fannie & Freddie by Nate Beeler, The Washington ExaminerBy Axel G. Merk, Merk Investments

Social subsidies may make good politics, but all too often bad economics. When Fannie Mae was created in 1938, the seeds were planted for the biggest housing bust the world has ever seen; the going was good while the party lasted for the first 80 years, but ended in the financial crisis of 2008 – the hangover for many still remains. In 2008, many feared the dollar might collapse should Fannie Mae and its smaller cousin Freddie Mac (together here Government Sponsored Entities or GSEs) fail; little did those so fearful know that the government would embark on the largest bailout in history; the U.S. dollar rallied as the GSEs were put into conservatorship, making the previous implicit government guarantee just about as explicit as is possible.

Now, it appears the proposed “reform” of these entities only has stakeholders in the status quo; we are concerned this may ultimately open old wounds, and next time, the U.S. dollar may not be bailed out again. While the focus in recent months has been on challenges in the eurozone, investors tend to forget that the origin of the crisis was ultimately the U.S. housing market. While the rest of the world may have bought bad securities and structural deficits may be prevalent elsewhere, it is the U.S. where “Patient Zero” lives. The problem is, there are still millions of them.

While financial institutions around the world are recapitalizing and governments are addressing their structural deficits (some better than others), policy makers in the U.S. are fighting the patients’ symptoms without offering a cure. Moreover, the U.S. is not addressing its own structural deficit, increasing the risk that the deficit virus the U.S. dollar is affected with morphs into a full blown disease that includes a tumbling currency and inflation as side effects.

Don’t expect to have another 80 years to prepare for this potential crisis.

We have lived with the GSEs for such a long time that we can barely imagine a life without them. How weird for a country that has historically boasted the freest markets in the world: the mere existence of GSEs resembles more of a planned economy approach. Here’s the first problem with subsidizing housing for the masses: depending on the economic environment and perceived future income potential, rational home buyers allocate a certain percentage of their income to service a mortgage.

If the government comes in to subsidize homebuyers, all those receiving the subsidy can afford to pay more. Over time, the subsidy will translate into higher home prices, thus eroding the benefit the policy originally intended to achieve. It is not surprising that the GSEs have gradually increased the mortgage amounts they are subsidizing. The GSEs are not all that different from a government run Ponzi scheme; and all existing homeowners have a vested interest in keeping the scheme running. That doesn’t make it right.

It is important to acknowledge that GSEs are fundamentally ill conceived. Without subsidies, home prices may fall – that’s correct. But that will make homes more affordable!!! Policy makers don’t seem to be interested in affordable home prices, but in the short-sighted belief that preserving the value of overpriced homes through government interference will get them re-elected.

Some argue that eliminating the GSEs would cause havoc, as the private sector cannot support a market in secondary mortgages; they cite the crisis of 2008 as proof. We would like to point out that not only is there a market for jumbo mortgages, i.e. private sector mortgages too large to qualify for a GSE subsidy, but, when the GSEs were restricted in the amount of mortgages they were allowed to issue due to accounting irregularities last decade, the private sector was able to pick up the slack, without significant additional increases in mortgage rates.

More importantly, however, and not so surprising, is that the private sector seizes up when a Ponzi scheme comes to a halt; rather than unwinding the GSEs, the government opted to keep the scheme running. By all means, when the government competes on terms no private entity can possibly compete with, the private sector simply cannot compete.

It’s been a hallmark of the bailout era that intervention, whether through fiscal or monetary stimuli, has been able to substitute rather than encourage private sector activity. In that context, it should be noted that the banking sector (AIG, an insurance firm rather than a bank being an exception) has paid back loans from the government. General Motors has not paid back its debt. And the GSEs have cost taxpayers over $150 billion since the onset of the crisis, with at least another $150 billion in taxpayer cost in the pipeline using conservative estimates projecting positive economic growth. We are not suggesting the banking sector shares no blame for the financial crisis, but in our opinion, it makes bad economic policy to throw the baby out with the bathwater.

Eliminating the GSEs right away would indeed cause disruptions in the markets. To get the private sector more actively involved, a clear policy should be set to phase the GSEs out over, say, 10 years. The U.S. economy will be far healthier when homeowners pay a market-based price for their mortgage, rather than a price heavily influenced by bureaucrats.

In the absence of phasing out the GSEs, government obligations will pile up at an even faster pace, making it ever more difficult to address the major structural deficit challenges the U.S. is facing. Fixing the GSEs requires political leadership – apparently nowhere to be seen on either side of the political aisle. If recent history is any guide, we may get a “reform” after a lot of wrangling; one that’s thousands of pages long, creates new bureaucracies, but does not cure the ills that got us into the mess in the first place. We are also concerned that the Fed may just be all too willing to print money in an effort to keep the party going. The U.S. dollar may be the valve that breaks, suffering as a result of these policies. It’s not too late to diversify to take this scenario into account. (my emphasis)

We manage the Merk Absolute Return Currency Fund, the Merk Asian Currency Fund, and the Merk Hard Currency Fund; transparent no-load currency mutual funds that do not typically employ leverage. To learn more about the Funds, please visit

By permission Axel Merk,  Merk Investments

Axel Merk Axel Merk is Manager of the Merk Hard Currency Fund

The Merk Hard Currency Fund is a no-load mutual fund that invests in a basket of hard currencies from countries with strong monetary policies assembled to protect against the depreciation of the U.S. dollar relative to other currencies. The Fund may serve as a valuable diversification component as it seeks to protect against a decline in the dollar while potentially mitigating stock market, credit and interest risks—with the ease of investing in a mutual fund.

The Fund may be appropriate for you if you are pursuing a long-term goal with a hard currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market. For more information on the Fund and to download a prospectus, please visit
Investors should consider the investment objectives, risks and charges and expenses of the Merk Hard Currency Fund carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Fund’s website at or calling 866-MERK FUND. Please read the prospectus carefully before you invest.

The Fund primarily invests in foreign currencies and as such, changes in currency exchange rates will affect the value of what the Fund owns and the price of the Fund’s shares. Investing in foreign instruments bears a greater risk than investing in domestic instruments for reasons such as volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. The Fund is subject to interest rate risk which is the risk that debt securities in the Fund’s portfolio will decline in value because of increases in market interest rates. As a non-diversified fund, the Fund will be subject to more investment risk and potential for volatility than a diversified fund because its portfolio may, at times, focus on a limited number of issuers. The Fund may also invest in derivative securities which can be volatile and involve various types and degrees of risk. For a more complete discussion of these and other Fund risks please refer to the Fund’s prospectus. Foreside Fund Services, LLC, distributor.

Economic “Water Torture” Coming to U.S.

Posted on August 25th, 2010

Debt China by Mike Keefe, The Denver Post

Addicted to Profits Newsletter Writer David Skarica has an addiction that might just benefit you. David is addicted to making himself and his subscribers money. In this exclusive interview with The Gold Report, David predicts that the U.S. economy will decline very slowly, describing the process as “Chinese water torture.” David says any precipitous market drop will be pre-empted by further quantitative easing. And this, he says, will be bullish for gold.

The Gold Report: You said in a recent Addicted to Profits newsletter that your indicators “are not really screaming ‘bear.'” What are your indicators, and what has led you to believe that?

David Skarica: Part of it is sentiment, and part of it is the monetary outlook. And part of it is the cycle of the stock market.

On the sentiment side, I watch a few indicators: Investors Intelligence and the American Association of Individual Investors (AAII). Essentially, these are sentiment polls. Right now, Investors Intelligence levels are showing very high bearish readings, much like the AAII reading in late July showed more bears than bulls. In late June, early July, one AAII reading had the most bears since the 2008–2009 bottom. Investors Intelligence showed something similar. A few weeks ago it showed the highest number of bears since April 2009, which, of course, was the start of the bull market and rally.

To get a bear market, you need panic and people selling. But if people are already bearish, it is very difficult to get that selling pressure.

In the monetary outlook, at any point now the Fed is going to start more quantitative easing. That’s usually very positive for equities. Then what people have to remember is that everyone’s likely to get really bearish on the economy. We had a really great unwinding of leverage in 2008, and I don’t see that occurring again. I will talk about that with my third point. That is why I don’t see a huge amount of downside in stocks. Even if the S&P were to drop to 900, that is when quantitative easing would really begin, big time.

Part of my analysis in a book I have coming out in November (The Great Super Cycle: Profit from the Coming Inflation Tidal Wave and Dollar Devaluation, John Wiley & Sons), examines the last three secular bear markets: between 1900 and 1920, the start of 1929 to 1949, and 1966 to 1982. Those were all 15–20 year periods when equities went sideways. There are usually two big bear markets, and they happen in the first half of the secular bear market. The examples were 1907 and 1914, 1929 and 1937, and 1970 and 1974. In the second half of the bear market, more muted moves occur in the stock market, combined with much higher inflation. That’s where I think we are.

The rally we’re seeing in the stock market is very similar to the 1908 or 1975 rallies, and those were followed by long-term trading ranges rather than big dips. The low of 666 on the S&P that was reached last March will probably hold, but inflation adjusted, we actually could go lower. If we get a drop of another 10%–15% in current levels in the stock market, they’re going to come in with quantitative easing, which will actually probably lift stock prices, even if it doesn’t help the economy.

TGR: You’re saying that if the market starts to dramatically slide, the government is going to come in with some more money to prop up the economy again. But America doesn’t really have any money.

DS: They’re going to print it.

TGR: Won’t that just prolong the inevitable?

DS: What will happen in this cycle is very similar to what happened in the late 1940s or in the early 1980s. In those cycles when the bear market ended, the Fed and the government raised interest rates and the money supply dropped. Everything dropped in price, and that cleansed the system. But I just don’t think they’re ready to do that yet. If you look at interest rates, we’re coming off a secular low. That tightening cycle has to be the end. I don’t see that occurring for quite a while. The Brits had to do this after the Second World War when the pound ceased to be world’s reserve currency. They essentially devalued way into the early 1980s, a 35–40 year period. There’s no reason why the U.S. can’t slowly devalue over that long as well.

TGR: What’s your near-term market outlook, David?

DS: That is really difficult because if you had talked to me in late June or early July, I was really bullish because of the terrible sentiment we saw. I still have a muted bullish outlook here. One chart I have in my newsletter compares the 1907–1909 period with the current period. The 1907–1909 period saw almost a 50% drop over a two-year period followed by a very strong reaction rally, followed by consolidation like we saw recently, followed by a second move higher. If that correlation continues, it means we would be at the top of the market in the first or second quarter of next year, and the S&P would rally to about 1,300.

In the very short term, we could see one more drop in the fall before we rally, but I really think those lows of May–June are going to hold. We could see a pullback. But after that pullback, we will be headed higher because of the quantitative easing.

What people have to understand is that this is a global market. Don’t be so focused on the U.S. market. If you look at Turkey, the market there has actually broken above its 2007–2008 pre-crisis high. Brazil and India are within a few percentage points of their respective pre-crisis highs. When the U.S. market broke down to new lows in late June, all of the Asian markets essentially held their lows and some went higher.

TGR: But if the U.S. continues to print money, doesn’t it risk losing its status as the world’s reserve currency?

DS: I think that’s a question of when it’s going to happen and not if. This is why it will lose its status: about 75% of its debt is short-term oriented, meaning two to seven years in duration. That means that if you run a deficit of $1.2 trillion a year over the next five to seven years, you’re going to rack up $5–$7 trillion dollars in debt. And you’re going to have to roll over about $8–$9 trillion of the current $13 trillion in net debt. That means you’re going to need between $10 and $15 trillion to cover the debt. They’re going to do that by printing money.

TGR: Doesn’t it get to a point where they’re not going to repay their debt?

DS: I think they’ll repay it because they can just print money to repay it. It’s not like in Argentina where you have to do a partial default because some of your debt is issued in another currency. They can just print the money and repay it. I don’t think default is ever a problem.

The real risk is more in these unfunded liabilities. You’re going to see what happened in Japan happen in the U.S. They’re going to raise the taxes and the outlays on Social Security and then reduce the amount you receive. That is more where I see the risk rather than in defaulting on foreign debt.

TGR: So you don’t believe a massive crash is imminent in the U.S. economy.

DS: I think what you’re seeing today is what’s going to continue; it’s going to be more depressing, like Chinese water torture.

TGR: You mentioned earlier that some of the foreign markets continue to do quite well despite the economic problems in the U.S. What will the role of these emerging markets be in tomorrow’s economy?

DS: I think their role is consumption. We can talk about how their per-capita GDP is much, much lower, but most of these economies do not have the huge personal or federal debt load that the U.S. has. This is where the emerging consumer is going to come from. You have 3.6 billion people in Asia as opposed to 300 million in the States. If you can generate one-twelfth of the per-person buying power of the U.S, the total dollar amount is going to be equal.

I still think the U.S. is going to play a really important role in the new global economy—global finance. That’s where the U.S. can really serve; it can still be a source of capital for these markets and help these companies raise money. There’s definitely a role for U.S. corporations going ahead, and obviously technology corporations are still top-tier companies.
TGR: What does the stagnating U.S. economy mean for gold?

DS: It means there are going to be higher gold prices because you’re getting increased inflation, and gold is a hedge against that. Because the value of the dollar is going to decrease, there’s going to be more consumer demand for gold in the United States.

Also, in deflation, consumers get really worried and they hoard gold. That happened in the early 1930s before they made gold illegal to own, so deflation or inflation is really positive for the gold price because people are going to try to hedge with owning gold under those circumstances.

TGR: You’re not really a gold bug, but you’re certainly bullish on gold.

DS: Well, one thing I really believe is that the gold bull market usually ends when the Dow-to-gold ratio—the number of ounces of gold it takes to buy one share of the Dow—goes about 1.5-to-1. That’s what happened in 1932; that’s what happened in 1980. Right now we’re still 8-to-1, 9-to-1. There’s a long way to go. (my emphasis)

TGR: Do you have a price projection for gold?

DS: I am really conservative in my price prediction, but last year I was thinking we would go to $1,100–$1,200, which we did. I would say by the end of 2011, I’d be pretty happy with $1,500 gold. But because quantitative easing might start again, I wouldn’t be surprised if it was a lot higher than that.

TGR: How are you playing gold in this environment?

DS: I really like the equities, and the reason is because if you look at the ratios like the XAU-to-gold or the HUI-to-gold stocks, the XAU-to-gold usually roughly trades historically at 20% of the price of gold. So if gold is $1,000, then the XAU should be at 200. Well, right now the XAU is just over 175, and gold is $1,220. If you took away the financial crisis, this is the lowest all-time ratio of stocks to gold, lower than when they bottomed in 2000.

This tells us that if gold goes over $2,000, then the XAU should be trading at 400. Well, $2,000 in gold is about a 67% gain from $1,200, but 170 to 400 on the XAU is about a 150% gain from the current gold stock prices. I think the equities have more leverage, if they go back to their historical valuations.

TGR: Let’s talk about silver for a minute. Silver has traditionally traded at about a 15-to-1 ratio to gold. What do you see happening with silver throughout the rest of this year and through 2011?

DS: I really like silver’s chart. I would say in 6–12 months’ time it will look better than gold because it hasn’t broken out yet. Like we saw when gold finally broke $1,000, you get this kind of outperformance jackup. Right now, silver is seeing huge resistance in the $18–$21 range. It really looks like silver is building momentum to break out in the spring. When you’re in the up cycle for PMs, silver is essentially a more elaborate precious metal play. Silver outperforms on the upside and underperforms on the downside. It goes up faster, but it also falls faster.

TGR: Thanks, David. We appreciate your interesting insights.

By permission The Gold Report

At the tender age of 18, David Skarica became the youngest person on record to pass the Canadian Securities Course. Skarica, a Canadian and British citizen, is the author of Stock Market Panic! How to Prosper in the Coming Bear Market, (1998), which provided thought-provoking arguments on why this great bull market will end in the most vicious bear market of all history. He is also the author of The Contrarian Who Saved the World, which explains how markets work. His new book, The Great Super Cycle: Profit from the Coming Inflation Tidal Wave and Dollar Devaluation, will be published by John Wiley & Sons in November.

In 1998 Skarica started Addicted to Profits, a newsletter focused on technical analysis and psychology of markets. From 2001 to 2003, ranked Addicted to Profits third out of over 300 newsletters in terms of performance. He is also the editor of Gold Stock Adviser and The International Contrarian services, which focus on gold and global investing. Dave has also been a contributing editor to Canadian MoneySaver and Investor’s Digest of Canada.

Streetwise – The Gold Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved.

The GOLD Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

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After the Bond Bubble, Cash Will Be King

Posted on August 25th, 2010

Pile of CashBy Peter Atwater

It’s not likely that money will head into stocks. Instead there will be an unprecedented rush for cash — T-Bills, physical cash, you name it. Pure unadulterated, street-cred liquidity.

Yesterday, Todd Harrison raised the literally $64 trillion question, “When the money comes out of the bond bubble, where will it go?”

Todd raised the possibility of it heading into stocks, but I seriously doubt that, for a few reasons.

First, please consider that the credit markets dwarf the stock market in size, so any mass migration out of bonds is likely to be associated with a blowing out of credit spreads and absolute rates.

Those aren’t normally conducive to fund flows into stocks. Not to be flip, but if they were, wouldn’t we have seen stocks rally during the credit crisis of 2008?

I believe that tumultuous credit markets are likely to be associated with volatile stock and commodity markets as widening spreads and higher rates are “translated” into perceptions that liquidity is rapidly leaving the credit markets.

And as we’ve all seen, perceptions of liquidity are a key factor in the market’s determination asset prices.

As we saw in the dot-com bubble aftermath, few will grasp the nuance that prices got too high, until prices go far, far lower. And as the prices most likely to first move far, far lower are bond prices, any bursting of the credit bubble will almost certainly take other markets with it.

Second, and compounding the consequences, will be the fact that it’s not just a credit bubble that’s bursting, but, as I offered earlier this week (subscription required for link), a risk-aversion bubble that is bursting.

I suspect that what’s ahead will demonstrate that even on a sinking ship the price for life jackets can in fact go too high.

So where will funds go?

I believe there will be an unprecedented rush for cash — T-Bills, physical cash, you name it. Pure unadulterated, street-cred liquidity.

I know it sounds extreme, particularly as this view suggests that extreme liquidity can unintentionally create extreme illiquidity, but that’s what I see ahead.

History suggests that bubbles are bubbles are bubbles, whether it’s technology stocks, Cabbage Patch Kids, residential real estate, or bonds.

And when they burst, human nature suggests that we move to further risk aversion, not further risk taking.

And as a result, cash will be king. (my emphasis)

By Peter Atwater

By permission Minyanville

How Americans Will Build Wealth Following the Recession

Posted on August 25th, 2010

Cash - Full Frame“With a weak housing market and volatile stock prices, people will have to save money if they want to feel flush again.”

“If people can no longer count on rising home values and the stock market as a way to build nest eggs, how are the average Joes among us ever going to accumulate any wealth?”

“With little credit available, consumers have no choice but to pare back their lifestyles, cut spending, and keep larger cash reserves on hand. “The game really has changed. People are not expanding their spending, even as their incomes come back,” (my emphasis) says Geri Eisenman Pell, a private wealth adviser in New York. Other people are delaying retirement, selling second homes, or considering renting rather than owning as a way to save even more money, Pell says”

Read the rest of this interesting column from Newsweek.


Posted on August 25th, 2010

Summer Camp by Jeff Parker, Florida Today

By Gordon T. Long

The economic news has turned decidedly negative globally and a sense of ‘quiet before the storm’ permeates the financial headlines. Arcane subjects such as a Hindenburg Omen now make mainline news. The retail investor continues to flee the equity markets and in concert with the institutional players relentlessly pile into the perceived safety of yield instruments, though they are outrageously expensive by any proven measure. Like trying to buy a pump during a storm flood, people are apparently willing to pay any price.  As a sailor, it feels like the ominous period where the crew is fastening down the hatches and preparing for the squall that is clearly on the horizon. Few crew mates are talking as everyone is checking preparations for any eventuality. Are you prepared?

What if this is not a squall but a tropical storm, or even a hurricane? Unlike sailors, the financial markets do not have the forecasting technology for protection against such a possibility. Good sailors before today’s technology advancements avoided this possibility through the use of almanacs, shrewd observation of the climate and common sense. It appears to this old salt that all three are missing in today’s financial community.  Looking through the misty haze though, I can see the following clearly looming on the horizon.

Since President Nixon took the US off the Gold standard in 1971, the increase in global fiat currency has been nothing short of breath taking. It has grown unchecked and inevitably has become unhinged from world industrial production and the historical creators of real tangible wealth.

Do you believe trees grow to the sky?

Or, is it you believe you are smart enough to get out before this graph crashes?

Two Inflection Points

Apparent synthetic wealth has artificially and temporarily been created through the production of paper. Whether Federal Reserve IOU notes (the dollar) or guaranteed certificates of confiscation (treasury notes & bonds), it needs to never be forgotten that these are paper. It is not wealth. It is someone else’s obligation to deliver that wealth to the holder of the paper based on what that paper is felt to be worth when the obligation is required to be surrendered. It must never be forgotten that fiat paper is only a counter party obligation to deliver. Will they? Unfortunately, since fiat paper is no longer a store of value, it is recklessly being created to solve political problems. What you will inevitably receive will be only be a fraction of the value of what you originally surrendered.

In the chart above, we see that just when the exponential expansion seemed to have run its course during the dotcom bubble implosion, we subsequently accelerated even faster. Cheap central bank money; the unregulated, off-shore, off-balance sheet increase in securitization products; a $617T derivatives market; and the domination of the credit producing Shadow Banking system then took us to even greater levels. Bubble after bubble continues to propel us, as more recently the Bond Bubble replaced the Real Estate bubble.  Similar to trees not growing to the sky, something always happens which creates a tipping point, a moment of instability or a critical phase transition. Suddenly what worked no longer works.

I have written extensively in a series entitled “Sultans of Swap” and another series entitled “Extend & Pretend” the growing and clearly evident tipping points that are unquestionably now on the horizon. You can ignore them at your peril, but when the storm swells hit, don’t say you were never warned and no one saw this coming. 

Evolving Transition

Consolidating the trends and distortions outlined in these two series, we arrive at the following ‘large brush’ death spiral leading to a failure of fiat based currency regimes.

Consumer Lending Crisis

The above cycle is well supported by recent and still unfolding developments. These have been mapped onto the cycle.

Fiat Currency Structure Failure


Let’s now list the Tipping Points which have become abundantly evident over the last few years and which are continuously expanded on our web site Tipping Points.  We track each of these on a daily basis on the site.


We can never be sure of the sequence and time frame of any particular Tipping Point. Like a house of cards you never know which one, or what movement will precisely bring the house of cards down. What you know however, is that it will happen – you just need to be patient and prepared. Unfortunately few have the patience or think they can time it for even more profit. The greatest trader of all time, Jesse Livermore, wrote after a life time of trading, that his best gains were made when “he bought right and sat tight!”

Our current analysis on Tipping Points reflects the following:

Techtonic Shift

DETERMINING MORE GRANULARITY – We are in the 2010-2011 Transition Phase

 Evolving Transition 2

In my articles EXTEND & PRETEND: A Guide to the Road Ahead  and EXTEND & PRETEND: A Matter of National Security I outlined even more granularity to the virtuous cycle turning vicious spiral.

The Road Ahead

We can now overlay the Tipping Points onto this map. We arrive at the following.


  • Commercial Real Estate – Finally forced to account properly for mark-to market valuations.
  • Housing Real Estate – Option ARMS come due and FHA / FNM / FDE / FDIC are seen as insolvent.
  • Corporate Bankruptcies – Unfunded Pension impacts and debt loads (gearing) on reduced revenues.
  • State, City & Local Government Financial Implosion – Non Accrued Pension Obligations, falling tax revenue and years of accounting gimmicks come home to roost.
  • Central & Eastern Europe – The ‘sub-prime’ of Europe will soon erupt on the EU banking network as evidenced recently by Hungary and the Baltic States.



Significantly Increasing Interest Rates – A Major Global News Focus

A $5T Quantitative Easing (QE II) Emergency Action

It will likely be triggered by a geo-political event or false flag operation.


  • Entitlement Crisis –  The unfunded and underfunded Pension charade ends
  • Credit Contraction II – Credit Shrinks Violently
  •  Banking Crisis II – Banking Insolvency no longer able to be hidden through Extend & Pretend.
  • Reduced Rating Levels  – Falling Asset Values and Collateral Calls on $430T Interest Rate Swaps
  • Government Back-Stopped Programs –  FHA, Fannie Mae, Freddie MA, FDIC go bust


  • Lending ‘Roll-Over’ – Game Ends


A recent Zero Hedge contributing author summarized the current environment nicely:

“There is an entrenched insolvency problem in the United States, and a picture is worth a thousand words. Insolvency is not illiquidity; insolvency is about income that can’t service debt burden. Notice where things fall off the cliff: I believe we are getting close to this point. Just need a catalyst. Sequential bond auction failures here, a sovereign default there, massive liquidity drain all around, worse… whatever. The fumes running the engine (QE, or credit easing) are dwindling.”

Chasing Waterfalls

There is an old sailor’s saying:

Red sky at night, sailors delight.

Red sky in the morning, sailors take warning!

Every morning the next batch of economic numbers is released and the indications are consistently red. Of course the market initially drops, and then miraculously rises on no volume. Since 2007 we have potentially constructed the largest head and shoulders topping formation we have ever seen.

This doesn’t mean the markets are imminently headed down. What it does mean is you should be meticulously battening down your financial hatches and checking your options for every eventuality.

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” – Mark Twain

Follow daily Tipping Point developments at Tipping Points

 Sign Up for the next release in the Preserve & Protect series:  Commentary

By permission Gordon T. Long  Tipping Points

Mr. Long is a former senior group executive with IBM & Motorola, a principle in a high tech public start-up and founder of a private venture capital fund. He is presently involved in private equity placements internationally along with proprietary trading involving the development & application of Chaos Theory and Mandelbrot Generator algorithms.

Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, you are encouraged to confirm the facts on your own before making important investment commitments.

© Copyright 2010 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.

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