27 November 2009

The wisdom of Calvin J Bear

a bit of a second coming for Gold and aussie nous and cred, imo.

The Second Coming

TURNING and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.

Surely some revelation is at hand;
Surely the Second Coming is at hand.
The Second Coming! Hardly are those words out
When a vast image out of Spiritus Mundi
Troubles my sight: somewhere in sands of the desert
A shape with lion body and the head of a man,
A gaze blank and pitiless as the sun,
Is moving its slow thighs, while all about it
Reel shadows of the indignant desert birds.
The darkness drops again; but now I know
That twenty centuries of stony sleep
Were vexed to nightmare by a rocking cradle,
And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?

William Butler Yeats

A jockey places his horse in such a bad position - or finds himself in such a bad position - that he is '10 miles off' (the pace) 'in the dark' (behind too many horses and can't see the way out), 'in a fog' (and that speaks for itself in whatever iteration of the metaphor, even the literal one.)

Analysis of the gold price movement you see widely these days is often widely off the mark.

When I post I try to be conscious of the fact that many people - intelligent and reflective people here - are involved in serious personal endeavours to make money from market investments. These efforts are more than a little difficult these days because of gross manhandling of various factors by government agencies as well as artificial market makers deriving from enforced pension and insurance funds and well-placed software infrastructure that may be somewhat unfairly advantaged against external and independent players.

My post now is aimed at enabling as clear an understanding as possible for those wondering what the record high prices for gold mean in terms of the present forward price projections that may be guessed at in an educated way.

You might look at a 40 per cent move over the last 12 months and say 'hey gee I've missed it, what a damn shame.' Or maybe you're wondering what to do next.

Although there obviously is a relationship between what interest rates do and the price of gold in the current environment, it isn't as clearcut as saying that because one shifts direction then the other will reflexively. This is because the consequences of a major trend are often not comprehended until the condition is actually obtaining and people then suddenly see what previously they did not have the perspective from which to see.

The moves in gold have not been small; they have consisted of 300+% over say twenty years.

The consequence of a 40% change is different from the consequences of a 300% shift.

Moreover, there are widespread misunderstandings about what all the Fed 'money' does or is used for. It is used to keep banks going with a guaranteed stream of income from the taxpayer - it is not used to keep the toxic assets afloat, really. In the long run worthless things will be written off and there will be lots of changes to balance sheets.

Will there be a discounted secondary market for government securities?

That is the crucial question you need to deal with before coming to a firm understanding about the price of gold.

Which comes first, the chicken or the egg.

Rampaging economy wide inflation is unlikely to bring the gold price down. Whereas real estate bubbles can - and did.

The Fed is not on the track that refloats or reinflates real estate bubbles. It is on the track of keeping banks alive and contracting the employment base until rationalisations across the entire economy develops strong holders of government securities versus the present 'everyone must have them' bank system and structure. Strong holders become NET SELLERS in order to realise cash (money) - and then and only then does it all turn into 'money.' At the moment it is all just lifesupport via interest coupons at drip-feed rates. Believe me you can't exchange a government security of a hundred billion for a real hundred billion dollars of real gold!! In spite of the government concept of legal tender the market imposes its own rules there.

All those who believe they have missed the gold price boat may do well to realise that 300% moves don't retrace overnight, and neither can they due to the relationship in this case to national currencies and trade - such as, trade between China and South Africa, or Australia, and trade between the gold market and India, and the context of the US Dollar and China trade, and so on.

The theory that if the Dollar firms, then gold will suddenly fall is the conception in the head of the jockey, back in the field, behind too many horses, running in the dark, in a fog 10 milles off the pace. This jockey has been backed by places such as Dubai, London, Washington, and teams of addicted gamblers like Goldman Sachs, and the Federal Reserve.

It is like saying that if the horse at the rear of the field suddenly picks up speed, necessarily the horse out front will falter. There is no direct connection other than which horse has more stamina and which had the worse run thus far.

If this particular horse - the Dollar - moves forward, the leader, (gold) will only move that much further ahead still.

Of course there can be short term drops. There cannot be any longer term ones at the moment and not for a very long time to come yet. I do not feel the market has reached a true overbought point yet. Which may mean there is a bias still to the upside even for short term trading.

Calvin J. Bear

Every day. EVERY day. I read articles and stuff from people - doctors lawyers philosophers and economists, not to mention politicians and tv commentators - that include phrases such as 'bad lending/bad loans' or 'derivatives' or 'leverage...'

You know, all that kind of stuff.

Well has anybody actually SEEN any of the documents that enshrined these financial instruments?

I have.

There is a certain genius in them and something about all of them I have not ever seen anyone expose.

These days I have almost completely lost the ability to speak that clearly in ordinary english, or write that well. It's something to do with the fact that yer tend to get lazy and just plain careLESS after years of being in this racket.

Anyway, the best way I can explain what I'm trying to say is say what a subprime or leveraged securitised mortgage bond document looks like.

Firstly it is about sixty pages long - the smallest I have ever seen was thirty odd pages in smallish print. It has about three or four law firms listed on it as references on the legal and finance and banking and other obscure codified regulatory ramifications. These firms are almost all New York-based.

There are contained in the body of the document quite exorbitantly wide-ranging legal opinions on the responsibilities of various parties - even down to the idea that anyone over twenty one bears a 'ought to know/ought to be responsible' role when they sign any financial obligation.

And then, there are a few rather exciting pages to do with selling the idea of 'a commitment from a bank to possess the right to receive a premium...'

Do you understand?

The whole thing goes by the idea that if you sell a bank or a bunch of banks on the idea that they can and should become a party or counterparty to a transaction in which they RECEIVE a stream of premiums over say twenty years - but without having a clear borrower yet - then what you can do next is sell the document as a legal obligation offer document to any borrower at the rate of premium attached. And then next - since it is explicitly allowed within the original document - you can float the premiums to other banks or investors as if there actually were money already having been lent out and with collateral committed in. IF there ever turns up anyone actually asking to borrow the principal sum, then, depending on the collateral (which virtually never happens for real) they are prepared to provide A BANK, some bank, any bank MIGHT, in theory or at least COULD if it had the liquidity and wished to take the risk LEND out real cash, add further premiums, invoke some weird clause forclose on the collateral, sell that and cash out hopefully at a profit.

...But if none of that happened, the documents would still go around 'the capital markets' as showing a bank on one end of a deal and therefore with the implicit - although wrong assumption - that the deal involved any kind of real and/or sound lending with real and/or sound collateral there... ...which it almost never is.

A bank late on the scene could then buy into the premium streams at a tiny additional premium... ...and get to have a sixty page document registered as a financial bond of a particular kind and look to sell it off to the next fool for a profit but meanwhile collecting the original premium streams. The premium streams are called some strange obscure term like rated, underwritten or insured mortgage premiums.

And of course within all of that nonsense ya often get a few idiots who actually lend out money and get all caught up in a real business somewhere that no one can or wants to run into a profit.

Many trillions and godzillions of dollars later we arrive at today - a place in which no one that originated this cute idea really wants to abandon the concept of buying (or as in this case) SELLING something that looks real and big for not very much and selling it that many times that they can retire to a Florida condo by August every year.

The End

Alfred Damon W. Runyon

(Cal J. Bear)

[another name completely, but then, that is the whole idea afterall; a derivative...!]

Are you kidding?? Well, okay, it's another article from a bunch of dunces.

Basically, it says - we don't want to buy gold because it pays a low rate of return/interest(?), it has low comparative liquidity, and the cost of storage is high... And this is from China's top think tank? My god, they've got the Wall Street Disease.

...Come to think of it, recently, I have heard a whole lot of crap from people supposedly in elevated places, about gold: what they think, what they think they know, and what they think is happening.

All I can say is last week on this board I said that Max Presnall was the best horse racing journalist in the world. And he was at the time being widely quoted in the global racing media as clearly tipping Shocking to win the Melbourne Cup. The fact that it subsequently did, and at 10/1, demonstrates the difference between a professional who knows his jellybeans and the salarymen and bonus junkies who get a lot of face that they certainly do not deserve.

No one in the professional league of money movers gives a hang whether China buys gold or not or for that matter if any other country buys it either.

The price of gold is going up for reasons not mentioned anywhere public that I have seen.

And if it is really true that the 'top Chinese think tank' doesn't want to buy gold then it shows what little they really know and/or how pathetically they think!! Especially if you think that Genghis Khan once rulled there and backed his paper money with gold.

Other than the fact that gold must for very ordinary reasons sometimes pull back 10/20/30/40/50 dollars in its present phase, there are no scenarios at all for a halt in the continuing upward overall year-on-year movement of the price of gold. And that includes a war with Iran which would only push the thing even higher even quicker - ALTHOUGH IT MIGHT PULL BACK UP THE USD...

Oh yes, an understanding of the reason for gold's present shine is the 6 billion dollar question, as it were. So much so I am certainly not giving it away here. But I will tell you when that upward flight is over and it ain't for a very very VERY long time to come yet. Oh but I guess these geniuses in the top think tanks want the US economy to prevail and the consumer to come back strong and buy all their slave-made junk.

Well if the MPS is down AND the MPC is down ain't no one going to be buying much of anything no matter how many shares in BOA or Citibank are shoved into the Treasury and no matter how many more 'bondlines' are er 'expanded' through so-called QE.

Marginal Propensity to Save. Marginal Propensity to Consume.

As I have said on many prior occasions, don't make the mistake of thinking the man with the official money printer has more 'money' than the financial resources of the private marketplace and its Leviathans, because he doesn't. Bernie Ecclestone has more money push and more power than the whole of Toyota and that's just a fact; if they want to play in the real F1.

Right now, Ben Bernanke is not playing in the real market and he knows it. He's just getting away with it because of the politics of propaganda, rather than the politics of real Democracy. And that's why the MPC is down and the USD down too. Of course gold has no liquidity to enable 10 trillion dollars of bailouts and exec salaries - how about that though! That's nothing to do with gold's so-called 'lack of liquidity' per se. Moreover it's not really true that 'gold pays no interest.' Gold pays no comparatively competitive interest when a sound production-based currency is well-traded and asset values have not yet over-bubbled or burst (i.e. where there is still growth possible). Growth MIGHT be possible via the fiscal measures recently taken, BUT, we have ludicrously low MPS/MPC's and not enough of the bubbles have actually completely burst - thus way too low velocity and no demand push. Clearance rates of assets are highly likely to be falsified - this is not growth, this is a false number on a piece of paper.

Calvin J. Bear

I have a report on my desk dated exactly 15/10/2007 which contains these words:

"There is only one logical outcome of the present condition of world currencies, and that is, while ever there is no official admission of a crisis..." Et cetera et cetera.

That was in October 2007 and the report went on to say: "It is even possible to calculate to what price levels a barrel of oil will reach... ...and/or gold."

Personally I have not seen ANYONE in the intervening time explain as cogently as this report does why the gold price was certain to advance. There have been gold bulls, yes, but they are very wide of the mark as to understanding what is going on. There have been bullish tekno-voodoo-chartists, yes, too. But they never guarantee anything ever anyway.

It helps me to seem a little eccentric; people have doubts that you can be so astute or so correct, thereby leaving you a free road to buy cheaply at will. Of course it doesn't help outsiders to know that the report has had hands with green and/or red inkstains over it.

I have another report coming to me soon, maybe within the next two weeks. These reports do make guarantees.

I don't know anyone from MI6 these days but I understand from listening to the BBC that they used to send notes signed at the bottom with green ink to some of their best people. I know they get copies of these reports - because the reports are essentially KGB-sort of sourced. And I guess the red ink is the best I can do as an equivalent metaphor.

I have seen a draft of the upcoming report and I can tell you that it contains positive references to the Canadian company Broadfield.

George Soros doesn't have an office next to mine anymore and maybe that is why he is so far off the money talking about Carbon schemes and all this right now. Not to worry, he's a smart guy and pretty soon he'll be back to the real stuff.

You can't go wrong following ol' Cal. He knows. He has no money because he had it all fully committed.

Oh no, wait a minute - he probably does have some money now. And that is not the same thing as saying it is time to sell gold! Calvin will now be moving liquidity around to buy more and more and more gold. And pretty soon he will be a bank. I'm seriously thinking of calling my bank "Jellystone Financial Capital."

Calvin J. Bear

My philosophy about modern investing is that it is vital to have the fullest possible grasp of the underlying mega forces. Like tectonic shifts and pressures, these are the elements of the global structure that have the greatest assurance of a clear directional movement.

Greenie's earlier quoted comments (post re a move away from currencies) discovered by Denver Dave: 'it is strictly a monetary phenomenon,' are emblematic of his obsession, or, that is ANTI-obsession, with gold.

Not only IS gold a currency, it is also legally a currency via the Basel Agreements of Banks that ALL developed nations are signatories to. It is quoted in all major financial newspapers in the currency columns, as well as in specific precious metals columns.

However, Greenspan's last idea about 'strictly monetary' is a transparently bitter, and misleading piece of propaganda.

There are about 200,000 new reasons every day that it has upward demand/price pressure. And here I will quote from one of the finest missives ever written on gold - from that well-known Reuters reporter Circa 1958 - "the population of the world is increasing at the rate of five thousand four hundred every hour of the day. A small percentage of those people become gold hoarders, people who are afraid of currencies..."

Anyway, today the world's population is increasing by around 200,000 per day. More than double the rate of increase of around fifty years ago.

The argument is often made that today's technology allows greater and better access to the world's natural gold resource in ways that have never before existed. And that would be fine if the brilliant sapphire stone under god's feet when Moses saw him was different from the brilliant crystal stone under Hermes feet when Atlantis was founded, or under Alexander's feet and buried with his crypt somewhere, or under Vyasana's feet in the cave in Shambala in the Himalaya's, and so on and so on - there is an upper limit to maths, science and technology beyond which finite resources are only repeated and re-iterated through a different set of names, times and other conditions, otherwise causing things to seem as if they are new, whereas they are only new to new-born eyes.

The reason the gold price is going up is not only monetary, but also to do with the new and rising middle class wealth of China, and the global population increase rate. It is a fundamental reason to do with supply and demand, and the COSTS of supply versus the value of demand.

I have never yet seen a new technology whose development costs were not heavily impounded into the net manufactured costing by the Hermes Ibis cult of today (the chartered and public accountants) resulting in no new additions to the shareholders paid out profits. Have you?

And thus we see the wisdom and truth in the ancient lore of the distant past - Loki and Hermes and all these kinds of fellows (and they will not censure me here if the cap fits...), are known as slightly devious and passing cunning. Today we say it like this: 'there are lies, damn lies, and statistics.' And the vendors thereof are accountants.

The Greeks say Hermes invented human writing, Prometheus taught it to Mankind, and a lot of the world's problems arose thereby.

And to extend the myth even more elasticly, I see nothing wrong in stuffing Greenspan's mouth with as much green as it can span, seeing that he loves it that much, until he chokes as did Croesus once before him.

I do not love gold. But I admire and am interested in the sea of electrons on its surface that causes it to shine brightly.

Calvin J. Bear

Bhagwan Prechter Yesterday, 08:09 PM
Post #2

Black Bear

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Joined: 1-August 09
Member No.: 5,315

Reminds me of a story a Seattle gold dealer shared. He had a female client from India who came to work at Microsoft and she would put a third of her pay into gold. After five years she went back to India. To get the gold back home, she had him get the gold made into thick arm bangles and she took them home with no issues.

Generations of uneducated Americans can barely spell gold let alone understand it. Now we gave billions of people striving for a middle class life in Asia and India who are educated about golds role.

"Where are all the customers' Rolls Royces?"

Thomas. Yesterday, 08:29 PM
Post #3

Grizzly Bear

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Of my 30 colleagues, I have maybe two who have bought gold (with many aware of my gold holdings). No signs of a mania here yet.

bearking Yesterday, 10:06 PM
Post #4

Skunk man to the rescue!

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From: Caliskunkafornia
Member No.: 4,173

investing in Ipods would have proved far more profitable.

Several hundred thousand billions of derivatives...
While my guitar, gently weeps

aussiebear Today, 04:55 AM
Post #5

Last dancer standing; Shiva

Group: Members
Posts: 1,650
Joined: 3-August 06
From: Sydney
Member No.: 4,200

Well said. Gold is part of the architecture of those universal archetypes and its mastery of electronic space is its secret message to us that it remains pertinent . I speck it as bullish, myself...

Any one who thinks, and is determined to let nothing stop him from thinking, is a philosopher . . . R. G. Collingwood

IMF warns second bailout would 'threaten democracy'

The public will not bail out the financial services sector for a second time if another global crisis blows up in four or five years time, the managing-director of the International Monetary Fund warned this morning.

Dominique Strauss-Kahn told the CBI annual conference of business leaders that another huge call on public finances by the financial services sector would not be tolerated by the “man in the street” and could even threaten democracy.

"Most advanced economies will not accept any more [bailouts]...The political reaction will be very strong, putting some democracies at risk," he told delegates.

"I do believe that the financial sector needs to contribute both to the costs of the financial crisis and to reduce recourse to public funds in the future," he said.

Mr Strauss-Kahn said that imposing high capital ratio requirements on banks was one price the financial services sector must pay to prevent the threat of further multi-billion dollar bailouts.

He pointed to the debate in the US over the Troubled Asset Relief Programme and said that in many countries, including France and Germany, he doubted that politicians would secure the mandate needed to secure any further bail-outs if banks got in to trouble again, in several years' time.

Europe is in dispute over the spiralling cost of the global economic bailout, with Germany and France calling for a reduction in state support as their economies have shown signs of an upturn.

In September, George Osborne, the Shadow Chancellor, sided with Germany and France, accusing Gordon Brown of being in "complete denial" over the mounting bill of the financial rescue packages and agreed with Britain's neighbours that it was time to look for an exit strategy. Countries are recovering from recession at different rates, with Britain lagging behind.

Mr Strauss-Kahn said that while the global economy had made "remarkable" progress in exiting recession, and was on the cusp of recovery, it remained "highly vulnerable" to shocks.

He said state support for the world's battered economies must remain in place if a smooth recovery is to be achieved.

"We recommend erring on the side of caution as exiting too early is costlier than exiting too late."

Mr Strauss-Kahn is one of a series of high-profile speakers at the CBI conference, in Central London. Gordon Brown, David Cameron and Nick Clegg will all speak at the event as they seek to sway influential business leaders before a general election next year.

In his speech, Mr Strauss-Kahn also warned that the huge amounts of capital being pumped into China could fuel a pan-Asian bubble.

His comments come after warnings from economists that the economic conditions in China and the rest of Asia are such that asset prices could rip free of their fundamental values unless the bubble threat is addressed.

The Chinese banking sector is currently the scene of an unprecedented frenzy of new lending, which could reach up to 11,000 billion yuan (£97.7 billion) by the end of this year.

Mr Strauss-Khan said that the old paradigm of growth generation based on households in the US was dead. The future sources of growth and the recovery will "depend on a new balance between the US and deficit countries on one hand and emerging markets and surplus countries on the other".

Emerging markets will provide some of the growth that the US can no longer offer, however he warned that while China and other emerging Asian economies were shifting from exports to domestic demand, they still had some way to go.


Gold & Mount St. Helens

We kept the number of predictions small here at News Kontent but we have always been gold and silver bulls and generally secular equity bears. The news out of Dubai is bad for equities and another issue for a dollar anchored by a ME dollar peg and the implied dollar/oil convertability. Jim Willie's hyperbole is starting to sound reasonable.

Not in the last few years have conditions been aligned for a truly explosive upward move in the gold & silver prices. A confluence of factors simply could not be more bullish, promising, and powerful. The psychology has also been raised in awareness on a global basis, as financial centers, media networks, and common folks have coordinated their recognition of the gold bull. They comprehend perhaps two or three of the main factors why gold is rising, out my stated list in a recent article "13 Reasons For a Major Gold Breakout" in September. The trio of fundamentals, psychology, and technical chart constitute the trifecta that will push gold & silver to extreme heights, and crush the silly shorts with their myopic half-baked tactics that are certain to make them roadkill, then someone else's lunch. The factors overlooked by most for the precious metals breakout run pertain to the broken monetary system, the Paradigm Shift away from the USDollar on both financial reserves management and commercial trade settlement, failure of the central bank franchise system, recognition of a criminal syndicate in charge of USGovt financial operations, the Black Hole of severe endless losses by firms taken under the USGovt aegis (AIG, Fannie Mae, and Wall Street firms), the hemorrhage of USGovt deficits, and lastly the dishonor of financial contract law, chronic lapses in financial market integrity, and constant intervention in those financial markets.


The investment community rejoices when the USDollar slides further, since they have learned like a shallow minded Pavlov Dog that stocks gain. One anchor asked on Monday a basic question, "Gee, what happens if the USDollar heads toward zero, but the Dow charges ahead toward 30,000? Where does that leave us?" What a good question! The financial news networks have begun to openly wonder about the Dollar-Stock relationship and its endurance, but not yet what it means. They overlook how the S&P500 has fallen by 80% in the last several years in terms of its gold value. This is a stock bear market fully disguised, made hard to notice since the value of US money is falling fast. The stock market is rising from very easy money. One usage of the free money offered is investment in the US stock indexes. Others are Gold, Crude Oil, German Govt bonds, and commodity funds. in the Dollar Carry Trade, identified by borrowing free money and buying rising assets.

Like Wiley Coyote, a realization will soon come of a position over the canyon without footing for the stock investors. They are not prepared for a Double Dip recession, nor recognition of a recession that never ended. The common consensus belief is that the sharply lower USDollar will revitalize the USEconomy, will give a huge boost to export trade, will prevent the ravages of price deflation, will encourage foreign investment, will revive the labor market, and more baseless analytic rubbish best described as propaganda. Chalk it up to creative rationalizations and fantasy entries to the latest chapter of American Economic Mythology, and endless series of wrongful notions that has gutted the nation, enabled by the big banker parasites. Credit to Darryl Schoon for the fine image of blood sucking and targets, consistent with the Matt Taibbi comparison of Goldman Sachs to a vampire squid that extends its blood funnel into anything smelling like money across the entire planet. Their reputation is finally seeing a spot of smear. Their plants like Geithner at Treasury Secy as finally suffering some disrespect as anger is shown.

Actually, this misguided belief of perking the USEconomy from a cheaper USDollar is not only horrendously incorrect, but it is backwards. The lower value of the USDollar has numerous extremely damaging effects, will cripple the United States further, and will eventually lead the nation to a place that is best described as a Third World nation. Let's examine each claim, each plank from the positive spin, then dismiss them all.

#1. A cheaper USDollar will give a huge boost to export trade. In normal times, the effect is direct and immediate, provided the USEconomy has a critical mass of an industrial base. The 1980 and 1990 decade sent almost the entire technology manufacturing factory base to Japan and the Pacific Rim. In the years 2000 to 2004, the US corporations invested heavily in China. Recall the 'Low Cost Solutions' that resulted in lost American jobs, burgeoning Chinese trade surpluses, and a climax in tension from a broadening trade war. The trade war was forecasted three years ago here. The USEconomy surely has some export businesses, but nothing to claim as broad. Moreover, the restrictions on computer and telecommunications export remain. The Chinese cannot purchase them, so they steal their designs left unprotected on the internet websites (see Sandia Labs). The above claim (#1) has no basis, as the gain in export business will show good growth, but its base will be too small to provide much significance. From an export trade standpoint, the common consensus belief is that the sharply lower USDollar will revitalize the USEconomy is nonsense.

#2. A cheaper USDollar will prevent the ravages of price deflation. Such a belief requires a shallow broad view with no distinction of various markets at all from a price perspective. The effect so far from the lower US$ has been higher crude oil price, higher industrial metal price, higher sugar price, and high prices for many other commodities. The effect shows up as a higher entire cost structure, enough to cause great strain. The scourge of the USDollar powerful relentless ongoing decline is the effect of commodity costs, something the investment community and bank leadership prefers to avoid in discussions. The above claim (#2) has no basis, as the entire cost structure of the USEconomy is in the process of rising. Notice higher costs with lower wages and shrinking corporate profit margins. These are hallmarks of an inflationary recession, hardly a positive development, and surely not a recovery. From prevented price deflation standpoint, the common consensus belief is that the sharply lower USDollar will revitalize the USEconomy is nonsense.

#3. A cheaper USDollar will encourage foreign investment. In normal times, the effect is direct and immediate, provided the USGovt and state governments create the right environment, and provided foreign corporations trust the skill level of American workers. Neither condition exists. Business regulations and taxes prohibit foreign firms from even considering much investment and expansion onto US shores. The United States continually ranks near the bottom in attractive for business environment in which to invest. As for their observation on American workers, they regard them as hard working but not blessed with sufficient skills or education. Asians have a big advantage on math and science skills. Increasingly, Americans are finding themselves unemployable, or else skilled in areas that serve as extensions to bubble economy businesses like home construction and mortgage finance. A nasty red herring exists on the foreign investment notion. The foreign corporate chieftains sense a looming risk of martial law, growing social chaos, and widening grassroot movements in opposition to the government and bankers. The above claim (#3) has no basis, as almost every single aspect gives off big warning signals or delivers roadblocks. From a foreign investment standpoint, the common consensus belief is that the sharply lower USDollar will revitalize the USEconomy is nonsense.

#4. A cheaper USDollar will revive the labor market. The USGovt and Wall Street each claim that interest rates must remain down since all the excess capacity in the system provides too much slack, thus a dampened price effect. Nowhere is that more clear that with wages, as workers continue to be shed in massive numbers. The ravages of price deflation has a continued effect on the labor market, keep wages down. Thus, the parade of continued home foreclosures. Furthermore, the shrinking profit margins inhibit expansion by US corporations. Just the opposite. They respond by reducing the workforce for the firms. The lack of incremental foreign investment, for reasons described above, also results in less revival of the US labor market. Please show me some big news items of foreign firms setting up shop in the Untied States, with a couple thousand new jobs that provide a nice shot in the arm for the labor market. The above claim (#4) has no basis, as the labor market will stick out as the grand contradiction to any claimed USEconomic recovery. The so-called Jobless Recovery is more like a Job-Loss Recovery. From a revived labor standpoint, the common consensus belief is that the sharply lower USDollar will revitalize the USEconomy is nonsense.


The USGovt executive branch, the UDept Treasury ministry, and the USFed central bank are all desperate. The USEconomy has deteriorated to a great extent, and will degrade more. The incoming revenues to the USGovt are way down, another contradiction to recovery claims. Credit growth has gone into reverse. Foreign dependence for credit supply has turned acute. The federal debt limit is soon to be breached. The Obama Admin seems on a mission to force a USTreasury debt explosion and default. Integrity of the Wall Street capital market system had been extremely downgraded. Now comes the reports (none denied by ranking sources) of tungsten gold bars, the climax of national fraud by US bankers. The response on the official government and banker side has been more monetization. Also, no interest rate hike for as far as the eye can see. Today JPMorgan announced a new 162 Euro currency target, and stated its belief of no USFed rate hike until 2012. They should know, since they are the USFed, at least their administrative side for following through on market actions. They openly recognize the Dollar Carry Trade, a surprise even to my eyes.

The USTreasury auctions receive some of the least scrutiny and investigation in memory. The rapid move to Permanent Open Market Action that buys all the official bond dealer inventory renders the process to be indirect delayed monetization. The printing pre$$ payouts for foreign USAgency Mortgage Bonds enables foreign central banks to purchase USTreasurys at auction also renders the process to be indirect immediate monetization. Before long, the entire official auction process will be an exercise in direct recognized open monetization, deemed necessary due to abandonment by foreign creditors and disgust. That will be the turning point for a rapid shocking USDollar decline and the introduction to hyper-inflation within the US shores.


The most recent development is clearly the exposure of the tungsten gold bars. Some extremely naive analysts and editors alike will be the last to know what is happening, as they deny the story. One editor has a military intelligence background, which accounts for myopia. He also shows only disrespect for the Gold Anti-Trust Action committee (GATA). Their charges of USGovt conspiracy to fix and suppress the gold price have been admitted by Greenspan himself. Cannot the naysayers see the pattern of fraudulent money, fraudulent coins (ok, so pre-1964 silver was copper core -- my bad), fraudulent Fannie Mae bonds, fraudulent mortgage backed bonds, fraudulent municipal bonds, counterfeited USTreasury Bonds, naked shorting of bank stocks, flash trading (the Goldman Sachs front running of NYSE), and constant Plunge Protection Team interventions? The natural climax is tungsten bars given a gold plating. Leave following the trails to others, but one could guess they match the narco pathways.

Anyone who steps forward with actual data, evidence, documents, and hard facts worthy of investigation and high level prosecution is subject to being murdered. So the way this plays out is more likely to be a cratering, a dismantling, a breakdown in the gold metals exchange. The weak link, as claimed by both GATA and hard charging analysts like Jim Sinclair with Dan Norcini, is the lack of physical gold. The metals exchanges have been running a criminal shell game for years. They do not require collateral properly placed, like 80% on short sales. In London they are digging from the 50 and 60 year old barrels to produce gold bars for delivery. In London they are hastily seeking gold bars from the Bank of England and European Union central banks in order to avert delivery defaults. The strain was evident last spring when Deutsche Bank was caught without sufficient gold, rescued by the Euro Central Bank in the nick of time. The strain was repeated in early October when London borrowed central bank gold bullion in the nick of time. Word has it that all delivery demands were met, and all were from Asia, predominantly from China. The strain will repeat by the end of this November month. The strain will again reach critical levels in March, and if the system holds together after the upcoming demands for gold delivery are handled, or not managed, whatever, we will see events reaching climax next March and the spring months heading into June.

Review some indirect evidence serving as confirmation of the tungsten gold bar story. This is inductive reasoning, at the basic level. The London and New York metals exchanges cannot complete delivery of any order over one metric tonne without fresh assay reports. Trust has been shattered. This was never required before, but is now. Why is that? Could it be that Hong Kong's revelation of 5600 tungsten bars (fake gold) was true, verified, and spread via a global alert? Yes, clearly! Assayers the world over are unavailable. They are all tied up as bullion bankers, sovereign wealth fund managers, lesser central banks, and individual billionaires are scrambling to verify their gold holdings. The assayers were entirely available two months ago, but not now. Why is that? Could it be that Hong Kong's revelation of 5600 tungsten bars (fake gold) were true, verified, and spread via a global alert? Yes, clearly!

The Canadian Mint has released information that admits to 17.5 thousand troy ounces of gold and other precious metals missing, whose estimated value is $15.3 million. No credible explanation has been offered for the missing inventory. These are not lamps, boxes of paper, crates of machine tools, floor tile, stereo sets, or power tools sitting in inventory. These are gold bars. Or were they tungsten bars? Permit the Jackass to surmise that the Canadian Mint were interrupted in their coin production process. They poured what they thought were gold bars into a cauldron, but since tungsten melts at 8000 degrees, and gold melts at 2200 degrees, the cauldron soup was lumpy with tungsten cheese. Instead of admitting they held and discovered 17.5 thousand ounces of tungsten, sure to rile the Wall Street boys, sure to turn the gold market upside down more than already, sure to invite severe scrutiny to many bankers who already face criticism (but not prosecution) over mortgage bond fraud, THEY JUST SAY IT IS MISSING !!! Just where did it go, Ottawa? Did some high level bankers (surely not Goldman Sachs) borrow it or steal it? Maybe it went to an industrial supplier that specializes in zinc, tin, copper, lead, and tungsten!!! See the National Post article (CLICK HERE). It seems the B.S. story of lost gold invites the least criticism, scrutiny, and follow through, amazingly. Theft and fraud is rampant, and the name of the game. Of course, incompetence, and clumsiness are more acceptable than corruption and collusion.

The end result of all the extra authentication processes, the absence of available assayers. the missing gold at mints, and the scattered reports of tungsten gold that have this week extended to at least on European bank location in addition to Hong Kong, is less actual verifiable gold bullion in the hands of people that trade it. In other words, THE GOLD SHORTAGE IS MORE REVEALED AND EXPOSED. Notice lastly, the no Hong Kong banker denied the story of discovering tungsten bars with gold plating. Instead, the story proliferated to a global examining of gold inventory. Notice also that no Depositor bullion bank invited investigators inside for a closer look at inventory, after doubt and lost confidence within the system occurred. These are all tell-tale coincident signs, indirect evidence in support of the tungsten salted bars and the entire story. One has to be with a military intelligence background not to see it.


Gold continues to log new highs. The market forces are powerful. The corrupt cords are being severed. The bottom of the barrels are being scoured for physical gold. Investors and investment firms want some real assets instead of mountains of paper assets. Paper piles are burning. A gold price explosion is coming. They cannot stop the gold locomotive. Monday this week was gold futures options expiration. The expiry was met the previous Thursday and Friday last week with gold closing at the highs for the day, and on Monday with a 12-15 point upward thrust. Pain is being felt in a big way with the gold cartel from their suppression game that backfires. Those two days ending last week formed daily bullish hammers, very bullish signals, identified by a high open, intraday prices much lower, but with a strong high close. Hey London, Hey New York: Open vise, insert nether stones, squeeze, and invite the dogs to feed off the floor. The pressure is on. The lack of real gold is palpable. the price rises. Heads will soon roll.

Exchange officials of middle rank will be the first led away in handcuffs, not by the FBI, not by the CFTC, but by state authorities and perhaps federal marshalls. The federales are part of the syndicate (lack of) law enforcement. Why middle level guys? Because they will offer evidence and testimony against the targeted higher level officials. Many people like myself wish for a much broader exposure of criminal behavior, some prosecutions, some justice, and an end to the Age of Impunity in the Untied States that comes with the Fascist Business Model. We will find little satisfaction, except for the breakdown of the Gold-Dollar balance beam in progress. The gold & silver prices might be the main satisfaction felt. The USDollar decline might be another satisfaction. Look for strange and misleading inaccurate stories to come from the metals exchanges as they break down. Also look for something to pop up with all those guys from last August who appealed for asylum in Europe, bearing boxes of Wall Street fraud evidence. That is saved for the Hat Trick Letter reports.

Predicting the gold price at this point accurately is difficult. The Powerz are losing control. The price advances are actually occurring in a welcome manner to the Chinese. They are the primary parties in accumulation. They will push the price higher only when gold supply at the current price is no longer available, their new Modus Operandi. A gradual rise in gold price actually works the best to crush the nether stones of the corrupted metals exchanges. Few big corrections are likely to come. The price rise is being managed in much the same way as the suppression was managed. The risk is for an accident that releases control of the gold price. In that case we will see a repeat of the Mt St Helens. A 1300 price is the next target, but it is just a target. It could be easily passed. When it is passed, the next target will be something like 1500 or 2000. The shorts will be crushed, of all types, who get in the way. We are in global redesign and restructure that removes the US & UK players from the helm. They are only left with viruses to distribute after bond fraud and gold counterfeit. The USDollar is slowly suffering a death. Few in the Untied States can recognize it, since they reside inside the Dome of Perception.

Copyright © 2009 Jim Willie, CB
Editorial Archive

Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a Ph.D. in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials.

Jim Willie CB is the editor of the “HAT TRICK LETTER” Use the below link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise like a cantilever during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by heretical central bankers and charlatan economic advisors, whose interference has irreversibly altered and damaged the world financial system. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy. A tad of relevant geopolitics is covered as well. Articles in this series are promotional, an unabashed gesture to induce readers to subscribe.


25 November 2009

Blowing the Whistle on Cheap Oil

IEA credibility under fire
by Tony Allison

Is the Peak Oil clock ticking closer to midnight than generally believed? The credibility and integrity of the International Energy Agency (IEA) took a hit this month after two whistle-blowers from the IEA claimed the agency has been deliberately underplaying a looming oil shortage under pressure from the US government. The striking allegations appeared in the British newspaper The Guardian, and not surprisingly, were largely ignored by the mainstream US media.

The allegations raise serious questions about the accuracy of the organization’s latest World Energy Outlook publication on global oil supply and demand. In the Guardian article, an unnamed senior IEA official claims the US played an influential role in encouraging the agency to underplay the rate of decline from existing oil fields while overplaying the chances of finding new reserves.

Future oil supply questioned

“The IEA in 2005 was predicting oil supplies could rise as high as 120 million barrels per day by 2030, although it was forced to reduce this gradually to 116 million and then 105 million last year,” said the IEA source in the Guardian article, who was unwilling to be identified for fear of reprisals inside the industry. “The 120 million bpd figure always was nonsense but even today’s number is much higher than can be justified and the IEA knows this. Many inside the organization believe that maintaining oil supplies at even 90 million to 95 million bpd would be impossible but there are fears that panic could spread on the financial markets if the figures were brought down further. And the Americans fear the end of oil supremacy because it would threaten their power over access to oil resources,” added the source.

A second senior IEA whistleblower who has left the agency (but also remained anonymous) said that an unwritten rule at the IEA was never to anger the Americans, and that there was not as much oil in the world as the agency claimed. “We have (already) entered the peak oil zone,” the source told The Guardian. “I think that the situation is really bad.” The Guardian article significantly noted that the British government, among others, uses the IEA statistics rather than any of its own to argue that there is little threat to long term oil supplies.

John Hemming, the MP who chairs the all-party parliamentary group on peak oil and gas, said the revelations confirmed his suspicions that the IEA underplayed how quickly the world was running out of oil and this had profound implications for British government energy policy.

“Reliance on IEA reports has been used to justify claims that oil and gas supplies will not peak before 2030. It is clear now that this will not be the case and the IEA figures cannot be relied on,” said Hemming.

World Energy Outlook a “political document”?

After the release of the IEA’s annual World Energy Outlook this month, Uppsala University in Sweden published its own assessment, blasting the findings of the IEA. According to a follow-up article in The Guardian, Kjell Aleklett, a professor of physics at Uppsala University and co-author of a new report titled “The Peak of the Oil Age” claims oil production is more likely to be 75 million barrels per day by 2030 than the “unrealistic” 105 million bpd used by the IEA in its newly published World Energy Outlook 2009.

Aleklett, who runs a Global Energy unit at Uppsala, described the IEA’s latest report as a “political document” developed for consuming countries with a vested interest in low prices. The IEA dismissed the suggestions of political influence on its analysis as “groundless”. It said the annual document was reviewed by 200 different and independent experts.

“I am a scientist, not an economist or a politician”, added Aleklett. “I believe in facts, and if someone can prove me wrong I will happily change my mind.”

Colin Campbell weighs in

Colin Campbell, a geologist and prominent proponent of the theory of peak oil, wrote a letter to The Guardian, responding to their article on the IEA whistleblowers. The following is an excerpt from a more extensive letter.

“A debate rages as to the precise date of overall peak but rather misses the point when what matters is the vision of long decline on the other side of it.

Given the central role of oil in the modern economy, the peak of production promises to be a turning point of historical magnitude. It seems that banks have been lending more than they had on deposit, confident that Tomorrow’s Economic Growth was collateral for Today’s Debt, without recognizing that the expansion was fuelled by cheap oil-based energy. The governments are now printing yet more money under Keynesian principles in the hope of restoring past prosperity, which may meet with a brief success. But if it does, it would stimulate the demand for oil that would again soon breach the supply limits, leading to another price shock and an even worse consequent economic depression. In fact, today 28 billion barrels a year support a world population of 6.7 billion people, but by 2050 the supply will have fallen to a level able to support less than half that number in their present way of life. (emphasis added)

There is a great deal that can be done to reduce waste and bring in renewable energies. Coal and nuclear power can also ease the transition although they are themselves also subject to depletion. The challenges are however great, and it is clear that governments must move urgently to prepare for what unfolds.”

The “present way of life” that Campbell refers to is likely to change for millions of people, for better or worse. By 2050 China and India’s per capita oil consumption should grow considerably.

Annual Per Capita Oil Consumption – 2009

United States – 25 barrels
Japan – 16 barrels
Korea –15 barrels
China – 2 barrels
India – 0.9 barrels

Growing oil demand from Asia

This is the crux of the demand problem. In future decades, China and India (approximately 40% of the world’s population) will likely use much more oil per capita (per person) as they continue to industrialize and develop their economies. China is already the world’s largest automobile market in annual sales numbers and is just scratching the surface of potential auto demand.

This means the world is likely to face a growing demand for a depleting resource in the decades ahead. This is a sure-fire recipe for both higher prices and rationing unless the world switches over to alternative fuels very rapidly. The big issue for the US is that 95% of our transportation fleet runs on oil. As Matt Simmons has noted many times, this situation is a “disaster in the making”.

A weaker dollar means higher prices

To make matters even more challenging for US consumers, oil is still traded and priced globally in US dollars. Since the US unfortunately now imports 65-70% of its energy, the price of imported energy will get more costly if the US dollar continues to weaken. And given the long-term weak fundamentals of the dollar, that scenario is certainly a strong possibility. This means that even if supplies are sufficient to meet demand, the price of oil may continue to rise based on the dollar falling in value.

The total lack of a coherent domestic energy policy makes higher prices nearly inevitable. Since many prospective areas within our boarders are currently off-limits to energy exploration, our level of energy independence is not likely to improve anytime soon. This alarming situation should be grounds for a national wake-up call, but unfortunately our political leadership rarely sees or plans beyond the next election cycle.

The low-hanging fruit disappearing

For more than a century, the availability of cheap energy offered the prospect of prosperity without limit. Future generations will hopefully create new paths to prosperity, but they will never enjoy the natural endowment of inexpensive energy we have experienced since the oil age began 150 years ago. Peak oil does not mean the end of oil, only the end of cheap oil. Most of the world’s low-hanging fruit has been picked and consumed. The bulk of future oil lies miles beneath the sea or in the dense tar sands. This is fruit that will not be easily picked. And when finally brought to market, (after great effort, cost and energy expended) this oil will carry a price reflecting those factors.

Learning the hard way

It is unfortunate that organizations such as the IEA have not been more transparent and less political. Perhaps the world would be father along in developing alternative energy sources. But political expediency seems to always trump common sense. When the cheap oil stops flowing, the political landscape will turn on a dime and energy policies will abruptly change, but unfortunately not a minute before. Using history as a guide, civilizations tend to learn critical lessons in only one manner: the hard way.

As to the investment implications, it seems clear that well-run energy companies should do very well if energy prices are indeed on a rising long-term trend. The problem for many investors is holding good companies in a currency that is losing value. It would seem prudent looking forward to hold a portion of one’s portfolio in quality energy stocks denominated in foreign currencies, if one has access to that service.

Today’s Markets

Investors halted a three-day losing streak on the stock market Monday, sending prices broadly higher on a weaker dollar and better-than-expected home sales numbers.

Major stock indexes soared more than 1 percent, including the Dow Jones industrials, which rose 133 points to a 13-month high. The Dow rose 132.79, or 1.3 percent, to 10,450.95, after losing 120 points over the previous three days. The Standard & Poor's 500 index rose 14.86, or 1.4 percent, to 1,106.24, while the Nasdaq composite index rose 29.97, or 1.4 percent, to 2,176.01.
Crude oil for January delivery, the new front-month contract, gained 11 cents, or 0.1%, to end at $77.56 a barrel on the New York Mercantile Exchange. It earlier rose to $79.97.

Gold futures rallied Monday for a seventh session, hitting a new high above $1,170 an ounce as the dollar fell and war games in Iran boosted global tensions, increasing gold's appeal as a safe-haven investment. Gold futures have already seen a seven-day winning streak ended on Nov. 11. The metal has only recorded one losing session this month.

Wishing you a good evening,

Tony Allison
Registered Representative

Copyright © 2009 All rights reserved.

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22 November 2009

Banks drift toward being part of the problem and not the solution

Repudiating the architects of the faux boom is a necessary but not sufficient condition for world economic recovery.

From Liberal Krugman, "Government officials, perhaps influenced by spending too much time with bankers, forgot that if you want to govern effectively you have retain the trust of the people. And by treating the financial industry — which got us into this mess in the first place — with kid gloves, they have squandered that trust."


To conservative Wolf, FT, "Over the past half century, UK bank capital has remained at between 3 per cent and 5 per cent of assets, these assets have risen tenfold, relative to GDP, and returns on equity have averaged 20 per cent. Such high returns, in an established industry, must mean either high barriers to entry or excessive risk-taking. The former are undesirable and the latter terrifying, particularly in view of the huge rise in the state’s exposure to the risks."


Buiter, FT, proposing auditing the ECB,

"A comprehensive independent audit of the Fed’s use of what is, in the final analysis, public money and therefore tax payers’ money is long overdue. This is a major victory for democracy and the public’s right to know what those to whom certain public functions have been delegated and entrusted have been doing with the taxpayers’ money.

What’s good for the Fed and for American democracy is equally important for the European Central Bank and European democracy or for the Bank of England and British democracy. It is time for a detailed and comprehensive independent audit of the ECB’s financial transactions since the beginning of the crisis. This should include a close examination of the precise terms and conditions, including valuations of illiquid collateral, on which liquidity support, including enhanced (credit) liquidity support has been made available to the Euro Area banks by the NCBs of the Eurosystem."


It isn't over until its over and it isn't over yet

This is an interesting item but it misses so much. Extremely unbalanced economies resolve by way of painful adjustments. We have dodged nothing but the new methods and tools have transferred risk to the dollar system and our ability to sustain capital inflows. We are not out of the woods yet by any means and even our denial at this point is part of the pattern.


What would be surprising is the misplaced confidence and complacency when you consider the US and UK are still in the ICU on full life support but this is just as it was then, hope springs eternal.

Market wrap: Leading stocks made further progress on the rally. Bulls encouraged by optimism from steel industry and Farm Board, by more foreign buying, and by market ability to resist bad news. Major industrials including US Steel, American Can, and GE, staged good gains in first 4 hours. Reactionary tendencies developed in late afternoon on profit taking, but sales were well absorbed on moderate price recessions, with the setback appearing technical. Bond market more active; US govts. and high grade corp. strong; speculative corp. irregular; foreign govts. mixed.

Broad Street Gossip: The head of one prominent Exchange firm has been seeking opinions among his 1,200 customers; finds that experienced traders are now optimistic, having “been through numerous panics” in the past only to see the country recover and become “more prosperous than ever before”. On the other hand, the young trader with less than 10 years experience “can see nothing but black clouds ahead ... and just cannot see how industry can get back on its feet again.”

In past few weeks, fire insurance company funds have been increasingly invested in common stocks of leading companies with safe dividends; viewed as significant since these investments “are directed by shrewd and conservative observers.”

S. Strawn, Montgomery Ward chair., says recovery depends on business men not politicians; warns against “drift toward Bolshevism”; says great problem now is gearing production down so that it will “synchronize with consumption”; implies some wage cuts may be needed.

Market ability to resist bad news is in contrast with a short time ago, when it “ignored any favorable development.” In past week, market has dealt with failure of an Exchange house, wheat irregularity, decline in rail car loadings, bank failures, etc., with little more than a hesitation in the upward trend.

See what I mean? The focus is already on why it was all so easy to fix.


The mild recession we've experienced bears no comparison with the much-mentioned Great Depression. But the difference is more the result of hard lessons learnt than better luck.

This week, Dr David Gruen of Treasury gave a lecture about what economists have learnt from the Depression and how the two events compare.

In Australia, the lead-ups to the two crises were quite different. In the present episode, we'd experienced 17 years of uninterrupted growth, falling unemployment and, in the past five years, booming export prices, leading to hugely improved terms of trade.

By contrast, in the lead-up to the Depression we experienced no real growth for five years, with the unemployment rate rising to 7 per cent. After the Depression began, real GDP fell by almost 10 per cent in 1930-31. The unemployment rate peaked at just under 20 per cent in 1930 (but had fallen to 9 per cent by 1937).

This time, of course, the economy hasn't contracted and is forecast to grow reasonably strongly next year, with the total rise in the unemployment rate expected to be just under 3 percentage points.

And this time we have a standard of living five times what it was then (even for the unemployed) and unemployment benefits which, despite their miserliness, are way better than ''the susso'' of the Depression era.

Gruen says the Depression in Australia had three main causes. First, the extremely unfavourable conditions in the world economy, particularly a large and prolonged deterioration in our terms of trade caused by a fall in the price of wool. This deterioration started in the mid-1920s, well before the Depression began.

By contrast, the deterioration in the terms of trade this time has been much smaller, with the latest level still more than 50 per cent above the average of the 1990s.

The second cause of our Depression was our adherence to the ''gold standard''. (Actually, many Depression scholars have concluded that the decision of most countries to return to the gold standard after World War I was the primary cause of the Depression around the world. So much for Wall Street's crash in October 1929.)

The value of the Australian pound was fixed to a certain amount of gold (the same amount as for the British pound) and anyone could demand that their pound note be exchanged for gold.

Without the gold standard, countries have ''fiat money'', where the value of a $5 note comes simply from the issuing government's command that it be accepted as legal tender in payment of five dollars of debt.

For a long time people disapproved of fiat money, fearing that governments could erode the value of money by permitting inflation or by deciding to ''devalue'' their currency against other countries' currencies.

The hyperinflation in Germany's Weimar Republic in the early 1920s convinced central bankers of the need to return to the gold standard. (In those days, the Commonwealth Bank was a government-owned trading bank and the central bank.)

Trouble is, a country that suffers a major fall in the value of its exports - a deterioration in its terms of trade - needs to respond by devaluing its currency. So sticking with the gold standard ensured the avoidance of inflation, but did so by crunching the economy.

Despite pressure from our deteriorating balance of payments to devalue our currency, we held the line until March 1931, when we left the gold standard and devalued by 25 per cent against the British pound. By then, however, our foreign exchange reserves were run down.

Subsequent research has shown that the sooner a country left the gold standard, the sooner it recovered from the Depression. Big Mistake No.1.

By contrast, in the present crisis our dollar was floating. It acted as a shock absorber for our economy, first by depreciating by 25 per cent in the four months to November last year, then by recovering almost as rapidly.

The third cause of our Depression, according to Gruen, was our inability to borrow abroad from early 1929. Australian governments had borrowed heavily from the London capital market during the 1920s to fund a string of large infrastructure investments, rapidly increasing our foreign debt.

London banks pressed Australian governments for repayments. Our banks restricted their loans to businesses, which put pressure on the economy.

By contrast, although the latest crisis would have shut our banks out of world capital markets, our Government used the strength of its own balance sheet to guarantee the banks' overseas borrowings, for a fee.

Turning to monetary (interest-rate) policy, it was ''tragically tight'' in the run up to the Depression because of the defence of the gold standard, and even after the devaluation the banks delayed cutting interest rates for two years. Big Mistake No.2.

By contrast, this time the official interest rate was slashed late last year and early this year, even while our exchange rate was depreciating rapidly. That we got away with this without adverse reaction from the market or fears of high inflation is a testament to the credibility of the inflation-targeting framework we installed in the early 1990s.

Turning to fiscal (budgetary) policy, the low level of foreign exchange reserves caused by the delay in devaluing the pound prevented fiscal policy from being used to stimulate activity and actually forced governments to curtail their spending.

Then, under the Premiers' Plan of 1931, government spending was cut by 20 per cent and federal and state taxes were increased to finance repayments to the British banks. So fiscal policy was managed in a way that made the economy worse rather than better. Big Mistake No.3.

By contrast, this time the Federal Government's financial position was strong and the Rudd Government quickly lashed out with big stimulus spending.

Now, you can conclude that this time we were lucky to have the economy in good shape when the crisis struck. But we weren't in better shape by accident. Economists have been studying the mistakes of the Depression for decades and have been taking steps for just as long to ensure they aren't repeated.

One lesson was to steer clear of the gold standard and (later) to move to floating exchange rates. Another was that fiscal and monetary policies should be used to stimulate private demand during downturns, but also (and more recently) that they should be ''reloaded'' during the good times to be ready for the next recession.

And don't forget that the better shape of our external environment this time is thanks largely to other countries - including China - having learnt the same lessons.

Ross Gittins is the Herald's economics editor.


19 November 2009

Gold at $5,000 an ounce? Don't disgard it

Gold is different from other commodities in many ways. Still, the price of the yellow metal depends on the same three factors as oil or wheat: supply, demand and financial conditions. Put them together, and the 20pc increase since August might only be the beginning.

Start with supply. Production from mines totalled 2,414 tonnes in 2008, worth $88bn at the November 16 price. There will be more this year, but less from 2010 onwards. It will take years for new mines to come on stream. Recycling from scrap jewellery and official gold sales were worth $40bn in 2008, but those sources aren’t likely to cough up much more.

One central bank has even become a buyer. India recently purchased 200 tonnes of gold from the International Monetary Fund. If China decided to put 10% of its $2.3 trillion of official reserves into gold, it would need to buy up almost three years’ worth of production, at the current price.

Such a big move isn’t likely, but smaller shifts from central banks – selling less – could be enough to move the price, as long as other demand keeps up. That’s likely. The long period of ultra-easy money may not be undermining the monetary system, but many people fear it might. Some of them will buy some more gold, just in case. With yields on government bonds so low, gold looks like cheap insurance.

Indeed, financial conditions favour all commodities, gold included. Interest rates are low and banks are more willing to support investors and speculators than to lend to businesses and consumers. Besides, commodities look like a good store of value in the midst of unprecedented fiscal and monetary stimulus in a world of still significant imbalances.

When money is easy and demand moves much faster than supply, prices can explode. In 18 months from July 1978, gold went from $185 per ounce to $850. That’s $2,400 in today’s dollars. And interest rates then were much higher than now. A similar price rise from here would bring gold to more than $5,000 per ounce.


18 November 2009

Silver Prices to Hit New Highs in 2010


Silver may yet outshine gold in 2010 as spot prices for the white metal respond to the prospect of a surge in industrial demand. With a little additional help from investment demand, silver may even rally into the $25 an ounce range.

So says Chintan Parikh, a commodity analyst at the CPM Group - a leading New York-based commodities research, consulting, asset management and investment banking organization.

"Prices may spike as high as $25," he says. At the very least, it should breach its most recent high, which was set at $20.79 in the spring of 2008, he adds.

Parikh says much of this impetus for higher prices is being driven by the fact that traditional industrial end users of silver, such as the ever-burgeoning global electronics industry, have in recent weeks begun to replenish severely depleted inventories.

In fact, silver inventories became so run-down during the financial crisis that it may take up to six months to fully rebuild them to normal levels. Parikh also notes that demand from the industrial sector tends to be quite price inelastic, meaning that buyers have few options other than to pay prevailing prices.

Another key driver for 2010 will be the advent of new market places for silver, including pent-up demand for silver-zinc batteries in ‘smart' automobiles and an array of portable electronic devices, Parikh says.

In fact, the widespread adoption of silver-zinc batteries is going to be "one of the major drivers behind a rise in prices because it may absorb a lot of silver," he adds. Though this important new application for silver might not necessarily become a major factor in demand for silver as early as next year, it promises to become a very sizeable marketplace, he suggests - especially for automobiles.

Notably, China is forecast to become a huge adopter of electric cars to curtail its rising dependence on foreign oil and to reduce its air pollution. In fact, electric cars and hybrid plug-ins will account for more than half the auto market in China by 2020, according to Dr. Wolfgang Bernhart, an auto industry expert with the international think tank, Roland Berger.

Furthermore, silver-zinc batteries are destined to generate major market share as they are said to be much safer, more environmentally-friendly and far more energy-efficient than lithium-ion batteries (which currently dominate the markets for smart cars and portable electronics).

Also, the ever-expanding industrial sector for silver now includes LCD/plasma television screens, solar panels, water purification and even medical and superconductivity applications. It is also finding a critical new use in biocides (which use silver in chemical agents to kill dangerous bacteria, including superbugs).

GFMS, a renowned London precious-metals consulting firm, concurs that overall fabrication demand (which also includes the photography, jewelry silverware sectors) is expected to rebound to "normal levels" in 2010. And the emergence of key new markets for silver is sure to help power this recovery, according to Neil Meader, research director at GFMS.

"It is becoming an increasingly industrial metal and novel new uses will also likely assist the recovery in silver's demand," he says.

However, the restocking of inventories for more of silver's traditional uses will likely be the most powerful demand driver in the near-term, Meader suggests. It may even help propel silver prices into new territory to the extent that "a peak (in prices) could occur late this year or early next year."

The revitalization of industrial demand is an inevitable consequence of silver's growing importance as a high tech metal. In fact, this has grown year on year since 2001 to the onset of the financial crisis. And it only dipped a meager 1.4% to 447 million ounces in 2008.

This long-term growth trend is set against a backdrop of a multi-year rally in silver prices during this time frame, with gold's poorer cousin refusing to be upstaged. It actually tripled in value to average US $15 in 2008 (in spite of its short-lived collapse to around $9). And it is continuing to trend higher this year now that supply/demand dynamics are beginning to reflect a return to a normal economy. All of this clearly demonstrates the price inelasticity of industrial demand.

Ironically, investment demand is also mostly shrugging off higher prices. Not only is there strong physical demand for silver bullion coins and bars, but the recent emergence of silver exchange-traded funds like the iShares Silver Trust is also creating strong additional demand.

Parikh notes that silver offers a safe haven in times of economic upheaval, while it also has the potential for significant investment returns.

"Silver is a unique metal that wins whether the economy is going well or is in bad shape," he says. "In the latter, the investor buys it as a hedge against the downturn in the economy and the markets. And if the economy improves, then the industrial demand increases."

All of this is music to the ears of silver miners, who are already ramping up production to satisfy newly resurgent industrial demand for silver.

Great Panther Resources President Bob Archer, for example, says that he believes that higher silver prices next year will significantly boost the company's bottom line from its Guanajuato and Topia mines in Mexico. Great Panther became cash flow positive earlier this year after producing 1.8 million silver equivalent ounces (silver plus by-product metals, including gold, lead and zinc) in 2008.

"In fact, we're quite bullish on silver prices for 2010. I believe that investment demand will be the biggest driver for higher silver prices next year. That said, I'm sure there will also be an increase in industrial demand going forward."

Marc Davies is the editor of Business News Wire BNWNews.ca


Recession Will Return ~ Meredith Whitney

Stocks are overvalued and the US economy is likely to fall back into a recession next year, well-known analyst Meredith Whitney told CNBC.

"I haven't been this bearish in a year," she said in a live interview. "I look at the board and every single stock from Tiffany to Bank of America to Caterpillar is up. But there is no fundamental rooting as to why these names are up—particularly in the consumer space."
Click Here to Watch Interview

In a wide-ranging interview, Whitney, CEO of the Meredith Whitney Advisory Group, also said:
She was disappointed that Fed Chairman Ben Bernanke didn't spell out how the Federal Reserve planned to exit "the biggest Fed program to date, which is the mortgage-backed purchase program." In a speech earlier Thursday, Bernanke said the central bank was watching the dollar's decline but is likely to keep interest rates low.
The US consumer was going through the biggest credit contraction ever—even bigger than that during the Great Depression. "That credit contraction is accelerating," she said. "There's nowhere to hide at this point."

The banking sector is not adequately capitalized and will need to raise more capital in the coming year.

The residential real estate market is likely to worsen and remains a much bigger threat than the commercial property market. The government's mortgage modification program won't result in any major improvement in homeowners' ability to stay above water, she added.

"I don't know what's going on in the market right now because it makes no sense to me," she said.

"The scariest thing about the Fed's program is that the money on the sidelines isn't going to support that asset class," she added. "So the trillion dollars of Fannie (Mae), Freddie (Mac) and mortgage-backed securities that the Fed is holding—there's no substitute buyer there."
© 2009 CNBC.com

URL: http://www.cnbc.com/id/33972133/

China Unstoppable ~ Saxena

by Puru Saxena
Editor, Money Matters
November 13, 2009

The 19th century belonged to Britain, the 20th century belonged to America and in the 21st century, China will rule the business world. Whether you like it or not, this transition is already underway and it will intensify over the coming decades.

It is our observation that throughout history, no empire has managed to rule forever. If you look back in time, you will realise that various empires rose to power, they prospered and spread their influence. Thereafter, they over-extended themselves and then decayed. In fact, all the glorious empires had one thing in common – the spectacular collapse.

Now, there can be no doubt that America ruled the economic world for the better part of the previous century, however it has now entered a terminal decline. The recent credit crisis and the failure of some of the largest American financial corporations is proof that the world’s largest economy is well past its prime. Today, America finds itself heavily in debt and to make matters worse, its demographics are also worsening. Unfortunately, the American leaders are attempting to postpone the day of reckoning by taking on even more debt! It is noteworthy that over the past year alone, America’s federal debt increased by approximately US$2.1 trillion and its projected budget deficit over the next decade is now slated to be almost US$9 trillion! If this does not shock you, then consider Figure 1 which shows the total obligations of the US government.

Figure 1: US Government Obligations (trillions of US dollars)

Source: Sprott Asset Management

As you can observe from Figure 1, over the past six years, American unfunded obligations increased by almost 50% from US$79 trillion to US$114.7 trillion! Alarmingly, over the same period, American government revenue rose by only 12%! Now, you do not have to be a genius to figure out that no entity can continue to increase its liabilities by more than four times the rate of its revenue. If this spending frenzy continues, commonsense dictates that at some point in the future, the solvency of the American government will come into question. When that happens, foreign capital will flee America, interest-rates will sky-rocket and we will witness an epic currency crisis.

Furthermore, it is worth noting that apart from the American government, the Federal Deposit Insurance Corporation (FDIC) is also in serious trouble. In an ironic twist of fate, the FDIC’s Deposit Insurance Fund has spent so much money covering bank failures over the past three months that it has completely run out of money! This implies that there is no capital available now to insure bank deposits held at American banks.

Given the horrendous deficits and ugly debt obligations, the American government is now left with the following options:
Raise taxes (not sufficient to meet obligations)
Cut back on spending (highly unlikely)
Default (unimaginable)
Print money (only viable option)

Remember, America is the largest debtor nation the world has ever seen and the only way it can repay its obligations is through a process known as quantitative easing (euphemism for printing money). In fact, this stealth confiscation of savings is already well underway. A recent report published by the Federal Reserve revealed that the American central bank purchased half of the newly issued US Treasuries in the second quarter of this year. Needless to say, the Federal Reserve financed these purchases by creating dollars out of thin air – a short-term fix but a long-term disaster.

Let us put it bluntly; the days of American hegemony are drawing to a close and within the next two decades, China will become the world’s most dominant economy.

If you are sceptical about our claim, you may want to note that twenty years ago, China’s economy was worth only US$342 billion and as of last year, its GDP had grown to US$4.4 trillion; representing an annual growth rate of 13.62%. Now, if China succeeds in growing its economy by roughly 8% per annum over the next two decades, its GDP will grow to US$20.5 trillion by 2029. At that point, China may well replace America as the world’s largest economy.

It is worth keeping in mind that whereas American households are up to their eyeballs in debt, their Chinese counterparts have a savings rate of almost 40%! Furthermore, at a time when America and other nations in the West are struggling to stay afloat, China’s foreign exchange reserves have surged to US$2.27 trillion!

Now, we are aware that many commentators are criticising China for the sheer size of the stimulus unleashed by its leaders. In our view, this ridicule is baseless because instead of spending printed or borrowed money, at least the Chinese are spending their savings.

In any event, the stimulus applied by the Chinese policymakers seems to be working. Over the past seven months, money-supply growth in China has risen by 26% and loans have surged by 32%. In turn, this inflationary orgy is creating a residential construction boom (Figure 2). All this economic activity is in stark contrast to America, where despite all the policy-actions, private-sector credit is contracting.

Figure 2: China’s stimulus is working

Source: China National Bureau of Statistics

Look. China is the future and you can be rest assured that over the following years, the Chinese will raise their standard of living and domestic consumption will explode. Already, roughly 900,000 cars are sold each month in China and by the end of this year, the Asian powerhouse will replace America as the world’s largest market for automobiles. Interestingly, similar trends of rising consumption can be observed in various household items such as refrigerators, motorbikes, mobile phones and so forth.

So, as an investor, you have a choice. Either you can continue to listen to the ‘China bashers’ or you can hop on the Orient Express and make a small fortune. It goes without saying, we have allocated capital to superb businesses in China and the ongoing correction in Chinese stocks is a great opportunity to accumulate more positions in this exciting economy. Apart from China, we have also allocated capital to India and Vietnam. It seems to us that in this low-growth world, investors will flock to these fast-growing economies; thereby pushing up asset prices. In fact, we will be bold enough to state that the next asset bubble will probably form in the developing nations of Asia and we have every intention of participating in the festivities. In summary, if you have not done so already, we suggest that you take advantage of the ongoing market correction by investing in China, India and Vietnam.


14 November 2009

Debt Dynamics Will Hold Back Economy

We believe that U.S. government and private debt levels will diverge over the next four or five years as the authorities attempt to use government debt to replace the private debt that is almost certain to decline substantially. U.S. total debt is presently just under $55 trillion, comprised of public (government) debt of about $15 trillion and private debt (U.S. corporations and individuals) of about $40 trillion. The similarities to Japan at its 1989 economic and market peak leads us to believe that we are close to the same road map that Japan was on starting at that time and continuing until today. With that said, we expect current U.S. government debt of $15 trillion to double to about $30 trillion and private debt to drop in half to about $20 trillion over the next 4-5 years.

We wrote about this in the "special report" titled "Deleveraging of the U.S. Economy" in August of this year when we made what some would call outrageous predictions. In fact, the report received much attention in the press (including Abelson's Up & Down Wall Street article in Barron's) as well as the internet and internet blogs. What probably surprised us most was that there wasn't much attention given to the outrageous predictions mentioned above that we still live by today. In the report we stated, "We expect the private debt to continue declining in the future as the deleveraging of America unfolds, while the government debt will very likely explode to the upside as the government tries to keep the economy afloat while the private deleveraging weighs it down."

We went on in the August report to show the similarities and differences between the U.S. now, the Great Depression following 1929 and Japan in 1989, when their bubble burst, leading to two lost decades. Later we quantified the explosion of government debt and the decline of private debt. We essentially predicted the true government debt of $7 trillion (government debt ex the debt to fund the short-fall of Social Security and State and Local Debt) to triple to $21 trillion and private debt to decline from $39 trillion to about $20 trillion.

In this report we will attempt to make it easier to follow the prediction by rounding the numbers and explaining the different numbers used when discussing government debt. Let's just round the total U.S. debt number to $55 trillion since it is close enough. Keep in mind that if we include the shortfall of Medicare, Medicaid, Social Security, the costs of two major wars, and obligations of the latest bailouts, the $55 trillion level would more than double.

Using the $55 trillion as an approximate total debt figure, let's now subtract the government debt. As stated in the August report the true government debt is about $7 trillion (or 50% of GDP - the same % of GDP as Japan in 1989). But that $7 trillion figure doesn't include $4 trillion of U.S. government bonds we use to fund the social security shortfall and $4 trillion of state and local debt. If you add that $8 trillion to the $7 trillion of official government debt you come to the $15 trillion of total government debt.

Subtracting the $15 trillion of government debt from the $55 trillion total debt gives us $40 trillion of private debt. Now we will make a similar prediction as to where these debt levels will eventually reach before we can say the private sector balance sheet is finally repaired. And as we stated in the August report we are using the Japanese road map to make these predictions. We expect the government debt of $15 trillion to double to about $30 trillion. Remember, we stated previously the $7 trillion of actual U.S. government debt will rise to $21 trillion. Since state and local debt will also rise, $30 trillion seems like a reasonable estimate. On the other hand, we expect total private debt to be cut in half to about $20 trillion in order to return to reasonably healthy private sector balance sheets. (This includes major debt declines for credit cards, mortgages, auto loans, commercial real estate and corporate debt).

We expect private debt, particularly that of households, to decline sharply, correlating to patterns following the Great Depression and Japan in 1989. The consumer won't soon go back to the old ways of borrowing and spending that led to the internet bubble and the housing and stock market bubble of a few years ago.

Only after the private sector rebuilds its balance sheet can we expect them to resume normal levels of spending and saving. However, we still won't be out of the woods since the government's balance sheet will be the next dilemma for the country. The government will have to rebuild its balance sheet just as the private sector is doing now. The government expansion of debt will more than likely drive their debt to over 200% of GDP. This is where Japan's debt is now, and just this week Fitch warned that they may have to lower the ratings on Japanese sovereign debt. Hopefully, Japan and the U.S., after the government debt build- up, will both be able to unwind the debt without inflation becoming a major problem (Granted, that is a big assumption). As you can see this is a very precarious situation that every country will experience after going on a speculative binge where they wind up borrowing more than $5 of debt to generate $1 of GDP.

The bottom line of all this is that we expect the government debt to explode to $30 trillion from $15 trillion presently and the private debt to contract to about $20 trillion from the present $40 trillion. This process we expect will be associated with a weak economy and the continuance of the secular bear market in stocks which started in 2000.

Debt Dynamics Will Hold Back Economy