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CURRENT OUTLOOK ON GOLD
Predictions for the rest of 2010 - The Gold Bull Market
May 19, 2010 Stand Your Ground - By Jim Sinclair
August 27, 2009 Financial Crisis Called Off - The Daily Reckoning
July 22, 2010 Golden Shell Games - The Daily Reckoning
Quotes from:
Richard Russell's
Dow Theory Letters
P.O. Box 1759
La Jolla, CA 92038
www.dowtheoryletters.com
Richard's Remarks:
August 31, 2010
"But let's not forget, current budgetary trends are capable of destroying the country. As Bowles pointed out, according to a Washington Post report, we can't just grow our way out of this. We can't just tax our way out of this. We need to do what governors do -- cut spending and increase revenues in some combination that will begin to pull us back from the cliff.
"Obama must know that if he doesn't address this, he will be the president who drove us towards a debt crisis. And so too must Congress, for both have now participated in the most fiscally irresponsible government in American history." From the current editorial by owner Mort B. Zuckerman, also Editor-in-Chief of US News and World Report.
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One of the greatest bull markets in history continues to be ignored or actually scorned. This is a bull market that has hit new highs year after year for longer than most of today's economists and investment advisors have been in the business -- and still they seem unable or unwilling to focus on the fabulous gold bull market.
And I ask myself, "Why?" The answer is that the great American public, including most of Wall Street's "experts," have been brain-washed by the US government and the Federal Reserve. Where gold and silver were once treated with respect, treated as the only real money, the Fed and the Government have sought to substitute intrinsic money with their own brand of junk fiat paper (actually, it's not paper, it's linen and cotton). In their greed and desire for power, a sinister and secretive small group of men sold the American congress in 1913 on the idea that they would take over management and issue of America's money. And in so doing, eliminate booms and busts.
In installing their plan, they were depending on the ignorance and stupidity of Congress and the public. Sadly, nothing has changed since 1913. It's probable that politicians and the voting public know less about money than about any other area. Thus, the fraud of the Federal Reserve took over the creation and management of America's money.
Now, in this great bear market, the dirty water is seeping out from under the locked closet. And the dirtiest secret of all, fiat money, is being exposed. It's being exposed as gold rises inexorably toward new record highs. Gold's rise equates with the downfall of the Fed and its fiat money. Why, why, is gold climbing? Why does it require more and more fiat money to buy an ounce of gold? That's the question that the Fed does not want answered.
In the meantime, the fabulous bull market in gold continues on its relentless upward path. The truth of the great fiat money fraud batters against the cracking wall of secrecy as gold rises toward new record highs.
Have you ever seen a ten-year bull market so ignored, so misunderstood and so hated? The word I hear is that "gold is in a bubble." The unspoken word is that Federal Reserve notes (dollars) are in trouble.
The era of the great brain-washing is coming to an end. Know the truth, and the truth will make you free.
Maybe that's why I'm writing these reports at the tender age of 86. America has been held hostage by a bunch of monetary bandits. I love this country. At one time I put my life on the line for this country. I go for fundamentals. One of any nation's fundamentals is its money. I want to see honest money come back to the US. I believe slowly, very slowly, it's happening. Excelsior!
GLD UPDATE -- I'm using GLD as a proxy for gold because gold is not shown in updated real time on Stock Charts, which is the service I use for constructing charts. GLD is shown in real time and GOLD is only up-dated at the end of the day.
At any rate, below you see a chart of GLD. This is an exciting chart since it shows GLD riding up an ascending trendline to very near its all-time high. The record high is identified as the horizontal blue line at the top of the chart. As you can see, GLD is very close to equalling its record high of June 18. That high close was 122.83
IMPORTANT -- Referring to December gold (the active contract), the record high of 1262.40 was recorded on June 18, 2010. The monthly high close for Dec. gold was recorded in June at 1245.90. Dec. gold is selling above its June monthly high AS I WRITE! This is extremely bullish.
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A number of major banks have switched to renminbi (yuan) payments in trade with China. In fact, many of China's Asia friends are now using renminbi in trade with China. Thus China is bringing more and more nations into the fold of the Chinese money. My own take on this is that China is preparing to make the renminbi convertible. They will also, when they are ready, back the renminbi with gold. In doing so, the Chinese yuan will be the most wanted and trusted money in the world.
Back to stocks -- Charts don't lie. Below we see a daily chart of the NYSE composite, which includes every stock on the NYSE. The long descending trendline shows us that we've got declining tops, in itself a bearish pattern. Worse, the second, lower top has taken the form of a head-and-shoulders distribution pattern. Worse still, the H&S pattern has broken below its support and fallen to the 6600 level before bouncing higher.
I see all the action since October 2007 as part of one huge top.
Finally, I believe that China wants to make the yuan a reserve currency, and in so doing, compete with the US dollar. Then it will be a matter of which reserve currency the world prefers -- a Federal Reserve note backed by nothing -- or a Chinese yuan backed by gold.
If China is thinking of backing the yuan with gold, they will want to increase their gold holdings tremendously. Look for China to be a major buyer of gold over coming months and years. What will China buy gold with? China will buy gold with some of the dollars they have accumulated in trade with the US. China is now the world's leading producer of gold.
At the same time, China is spanning the world in their search for intrinsic assets such as oil, metal ores, rare earths and coal. To put it another way, China with its huge reserves is buying up the world's assets.
August 30, 2010
Yesterday I read Saturday's front page headline in the LA Times and my blood boiled. The headline read, "Fed Stands Ready to 'Do all that it can.' With Growth slowing, Bernanke Says the Central Bank is Willing to Act to Keep the US Out of Recession." The nerve of these bastards; Fed Chairman Greenspan kept interest rates too low for too long, setting off the greatest housing bubble in US history. The bubble burst, as all bubbles do, sending the US into recession and near-deflation. And now our new Fed Chairman, Ben Bernanke, has the nerve to tell us that the Fed is going to save us. What kind of pure BS is that? First the Fed kills us and then it steps forward and says it's going to be our savior. Yuck.
I say get rid of the Fed, let the US create its own money, and spare us the curse of the Federal Reserve with its bubble-booms and recessions and its fiat, man-made, phoney money.
Inflation or Deflation and Gold. The current debate that seems to be raging on Wall Street and in Washington is whether we are facing inflation or deflation (or deflation first and then inflation)?
Most of my subscribers, I believe, have some sort of a position in gold or gold mining stocks. And the question I'm asked is -- how does gold do in inflation and how does it do in deflation?
The correct answer is that gold should do relatively better than most other investments in either case. And here's the reason. During both inflation and deflation, people's purchasing power is eroded. In price inflation, the price of almost everything heads higher (we're seeing that in food and college fees and medical costs now) and our purchasing power is impaired. During deflation, dollars become scarcer and more valuable, and our incomes usually decline (or we may be fired), and thus our purchasing power is again impaired.
As for gold, the real correlation is seen between gold and the US dollar. During inflation and quantitative easing, other nations tend to distrust the dollar and the dollar declines in relation to other currencies. A declining dollar tends to send the price of gold higher (it takes more weak dollars to buy an ounce of gold). During deflation, the stability and health of the US comes into question. This drives the dollar down in relation to other currencies, and with a lower dollar, gold holds its own or moves higher.
In the big picture, we've had a huge bust in the housing bubble. America's consumers have turned pessimistic and bearish following the tech stock disaster, again following the stock market crash of 2008, following the housing bust and during the present brutal unemployment phase. Such disasters are usually followed by deflation. Ben Bernanke actually spoke the dreaded word "deflation" in his speech on Friday. He literally promised, "The Fed will save you." And I ask, save us from what? The answer is that the Fed will supposedly save us from deflation and a "double-dip" recession. Yeah, right. Just as they have, up to now.
The stock market surged on Bernanke's promise, but gold stood still. Meanwhile, I thought the KEY in the market action in response to Bernanke's speech was the brutal sell-off in Treasuries. Why did the Treasuries sell off?
They sold off because the bond market was first convinced that we were headed for deflation, but Bernanke's promise implies Fed-created inflation ahead, and maybe higher interest rates in our future. With interest rates on Treasuries at or near record lows, the very thought of rising rates sent holders of Treasuries into a panic (which I warned could happen).
Thus with bonds "on the edge," with equities in a quandary, with nothing in the "safe-haven" category providing income, gold remains the only holding that I don't worry about.
We've already seen gold hold up in the face of a stock market crash (2008), we've seen gold hold up in the face of chronic unemployment and the worst recession since the 1930s. What further test could we demand of gold? Of course, the situation that could put real pressure on gold would be a surging dollar. What could cause the dollar to surge? The only thing I can think of would be higher interest rates, and if this occurred the Treasury market would be in such a chaotic state that gold would look good on a relative basis.
In closing this section on gold, let me say that what I like best about gold is that it is beholden to no central bank or sovereign nation. Gold is intrinsic wealth on its own, and therefore it cannot go bankrupt, even during the throes of the worst depression imaginable. In other words, if you own enough gold you will always be wealthy and always possess purchasing power, no matter how ghastly the circumstances.
Gold has certain properties that nothing else can boast of. Gold, unlike every other metal, is not "used up" in manufacturing or daily wear.. Gold is beautiful and does not tarnish. Gold can be stretched so thin that a sheet of it is translucent. Gold can be pulled until a strand of it is narrower than a human hair. Gold taken out of ancient Egyptian tombs is as good and as valuable today as it was thousands of years ago. Gold brought up from ships that were sunk hundreds of years ago, is as beautiful and undamaged as it was the day the ship went down.
Gold is the time-honored universal gauge of wealth. At any time you can ask of an item (including the Dow), "What's it worth in terms of gold?" And the answer will be a straight answer, minus all the BS and lies. Of course, that's the question no Fed Chairman ever wants to face -- "What's a Federal Reserve note (the dollar) worth over the years in terms of gold?"
Question -- Russell, what's the real reason the Fed hates and fears gold?
Answer -- The real reason is that gold correlates with the dollar, and not with commodities. Therefore, gold is, itself, a currency. When gold rises, it tells the world that the dollar is weakening. Rising gold is a tell-tale sign, telling us that the Fed's phoney money is losing purchasing power.
If the Fed could outlaw gold, it would do so in a second. But gold is international and is traded ever hour of every day in dozens of countries. Thus, the Fed is helpless to halt rising gold prices. The Fed can only bad-mouth the metal and work with the IRS in taxing the hell out of gold profits. The Fed doesn't want anyone making money on a rising price of gold. Disgusting, deceitful and immoral. Ultimately, the truth will out, and the Fed will cease to exist.
On another subject, I just got off the phone after a half hour conversation with my old friend, John Mauldin. We talked about blood pressure and stress, and I told him, "John, you and I are in a difficult business. It's difficult because we're always dealing with the future, and we can never be certain about what the future holds."
Here's what I do. Every time I write anything, I ask myself one question, "What if I'm wrong?" The truth is that being wrong is part of the investment business. If I'm wrong, I hope to be the first one to know it. If so, I want to write a retraction, tell my subscribers that I'm wrong, and then tell them why I've been wrong.
Question -- Is there anything in the investment world that you trust and feel certain about?
Answer: -- Yes, I am certain that gold is the universal, timeless standard of wealth. If man made it or if man controls it, the item can go wrong, it can disappear or go bankrupt. Gold stands alone. Gold is undisputed, timeless wealth. If you can't understand that, it you can't take that in, you should not be an investor or an investment advisor.
In every thing I do from psychology to medicine to business to marriage, I insist on starting with the fundamentals. The crowning fundamental in investing is that GOLD IS THE TRUE STANDARD AGAINST WHICH EVERYTHING ELSE SHOULD BE MEASURED.
August 27, 2010
Bear markets exist for the purpose of exposing and eliminating the greed, the corruption and the fraud that thrived in the preceding primary bull market.
To my mind, the biggest fraud of the last fifty years has been the rise and acceptance of fiat "money." For that reason, I expect fiat money to meet its end before this bear market breathes its last. Judging by the size of the top, this could be the biggest bear market since the '30s. I believe this bear market means to take us back to basics and truth. That alone implies the end of central bank-created money and the rise of gold and probably silver. It may also end that immoral inflation machine, the Federal Reserve. Wall Street and its bankers now run the nation. That too will end.
As for Obama and his cohorts, they'll be caste out of office as they should be. Obama is anti-capitalist from his head to his toes. This nation was founded on free enterprise. Obama doesn't know the meaning of the word. As for Congress, they're clueless. They're going along with Obama the way they went along with Bush Jr. as they turned over to Bush the capability of starting a war on his own.
I was disgusted with Congress then (and I said so), and I'm disgusted with Congress now.
Here's a question I've asked myself. Back in 1971 when France wanted gold to settle its account with the US, why did Nixon shut the gold window? Why did Nixon want to keep our gold? If the Fed can manufacture junk and call it money, why didn't Nixon insist that France accept dollars? Why did Nixon want to hang on to our gold, if the dollar was considered (at the time) "as good as gold?"
The history of money in the US is a legend of lies, manipulation, immorality and greed. I think this bear market will end those lies, one way or another.
Incredible statistics -- In the nine bull market years for gold starting in 2002, gold hit its high for the year six times out of nine during the month of December. The years when gold hit its high for the year in December were -- 2004, 2005, 2006, 2007, 2008 and 2009. But wait, gold hit its LOW for the year in January three times. Gold hit its low for the year in January in the years of 2002, 2006 and 2007.
These dates suggest that gold action could be very wild during December through January with December being a good month for gold and January being a bearish month for gold. Gold hit its low for the year during February 2005 and February 2001. It hit its low for the year twice in April -- the years were 2003 and 2009.
This only suggests that gold could be rather wild between the months of December through April.
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Silver joins gold. This morning silver broke above out of a huge triangle. This is bullish for the whole precious metal spectrum.
August 25, 2010
I'm going to deal with a huge market on today's site -- it's the wildly popular Treasury bonds. What's the most obvious bubble today? It's easily the bond market. Many Treasury bonds are at record low-interest rates. Bond investors evidently believe that the chances of inflation is next to zero, and that if anything lies ahead, it's lower inflation figures or even dreaded deflation. Further, frightened investors believe that the single safest place to be is in US Treasury paper. Since T-bills yield almost nothing, investment money has flooded in vast quantities into Treasuries and high-grade bonds. The long 30 year T-bond now yields 3.77%. The bellwether 10 year T-bond yields a ridiculously low 2.63%.
Treasury bonds are denominated it US dollars. Despite this, investors continue to pour money into Treasuries. Is there any danger in holding dollar-denominated items like US Treasuries?
Let me explain. Much of the investment world believes that Europe and the euro are sick-situations, and for that reason the euro has been sinking against the dollar. Since the euro is the dollar's chief competitor, as the euro sinks the dollar rises. In other words, the weak euro is making the dollar look stronger -- ironically stronger in the face of all America's flat economy and multiplying troubles.
It's unusual but gold has been rising in the face of the "strong" dollar. Why? A small group of investors believe that the US is heading for slow business or worse -- a "double dip" recession, and this group is convinced that this will set the Fed going back to quantitative easing (printing).
Russell comment -- I agree that the US is heading for lousy business. Why do I say that? I say it because that's what the stock market's dismal action if telling me.
Dennis Gartman is an experienced commodity trader. Dennis has been very cautious about gold; he "sort of" likes gold, so he calls himself a "gold agnostic." For this reason its most interesting to read what Dennis says about gold in today's report.
"Turning, then to gold and other metals, prices turned sharply for the better yesterday as the world rushed out of equities and looked for any safe harbors that were available. Certainly the rush to the Swiss franc was obvious, as noted above, and so too the rush into sovereign debt securities. But frankly, the rush was on to gold once again. We remain long what we have referred to as an 'insurance' position in gold, but we own it in terms of EUROs and /or of British pounds sterling, otherwise we remain an agnostic. To assuage our friends who are gold-bug-leaners, we shall not be short of gold. Nothing likely shall ever turn us manifestly bearish of it. But for the moment we are simply hard upon the sidelines, owning only this small 'insurance' position and comfortably in that position.
Might we be enticed back to the bullish side of the market eventually? Of course we might. If the situation in the global equities markets became dire, we might move from agnosticism to 'faith." If we were to see the monetary authorities throwing caution to the wind and massively explode their balance sheets, we might be enticed away from our agnosticism to 'faith.' If the political situation were to become untoward,and patently uncomfortable, we'll throw our agnosticism in to a heap and join the gold market faithful. But until then, agnosticism works for us."
Russell response -- I can understand Gartman's caution. Dennis is an old-time trader, and he's seen a lot of traders get killed by taking huge and wrong positions.
My own position is that gold is in a clear and obvious primary bull market. These situations come along maybe two or three times in a lifetime. I was convinced back in 1999 that the bear market in gold had ended with gold selling at 256. In the year 2000 they were literally giving gold mining shares away. At that time gold shares were so ridiculously cheap that I told subscribers that they should buy these stocks (many selling for just a few dollars a share) and hold them as perpetual warrants.
At the same time I told my subscribers to start buying bullion once-ounce coins and "put 'em away." I've suggested that my subscribers do the same thing ever since.
I know bull markets, and I've never seen or experienced a primary bull market that didn't end with a third speculative phase -- this is the time when a bull market "blows its top". I feel certain that the current huge bull market in gold will do the same.
But I have other reasons for being bullish about gold. Gold is the only real Constitutional money. The fiat paper that we've been using as money is only money because our government says "it's money." If the US government told you that printed paper was real money and legal for the payments of all debts, would you believe them. Well, you already have believed your government.
But I maintain that the truth will out, and that fiat paper is a fraud that will be found out. When that happens and people realize that they have been hoodwinked by their government, there will be such a rush (including both fear and greed) for gold that it will make the recent tech mania look like conservative investing.
As I write at midday, Dec. gold is up over nine dollars. Gold has been up 8 out of the last 10 days. As the months go by, we are pressing ever-closer to the speculative phase of the gold bull market. That will be something and even terrifying to see.
I am pleased to say that many of my older subscribers are now in the process of getting rich on their gold holdings. I've said over and over that one of the most difficult things to do in investing is to get in early on a primary bull market and ride the bull through to the latter part of its final speculative third phase.
The market seldom gives you the chance to get rich. This gold market has defied the odds and allowed its early followers and believers to get rich.
Anyway, that's my take on gold and why you should own it and why you should follow my advice.
August 19, 2010
The chart below shows three months of gold action. Through August, gold has marched up a shallow channel. As you can see, gold has been higher on 12 of the last 14 trading days or 85% of the time. This is quite a technical feat, and frankly, I'll be surprised if gold can keep it up without some kind of a correction. The rest of the gold items were down today, so tomorrow may be a gold correction. Well, maybe.
I've mentioned before that gold "seems" to have an invisible net under it -- every time it sells off, something or some one stops the sell-off dead in its tracks. Faye and I have wondered if there's an "Asian Put" under gold. There's no doubt that China, Russia, and many Asian nations want gold to represent a larger percentage of their reserves. At any rate, steep channels like the one we see in gold above are rare and are indicative of persistent and systematic buying. Nevertheless, steep channels, like everything else, do correct.
I still can't get over the IRS classifying gold as a "collectible." Who told them to do that? What's next, classifying gold as "a dangerous foreign substance?" Will the Fed and the IRS stop at nothing?
Remember, the Fed's real power is its power to create fiat currency. As Baron Rothschild put it, "Give me control over a nation's money, and I care not who writes the laws."
Thus a private cartel (not mentioned in the US Constitution) is the most powerful organization in the United States. We're a nation controlled by bankers, and run by bankers for the benefit of bankers. I say -- get rid of the Fed and let the US issue its own money. It's an idea whose time has come.
You can't fool all of the people all of the time. But that's just what the Fed has done. I predict that within ten years the Fed will cease to exist. It will cease to exist when America's voters realize how they have been cheated and hoodwinked.
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The bear market giveth and the bear market taketh away. The chart below is well worth studying (it's the Dow up-to-date). First, note that the we have declining tops -- bearish. Then on the second top, which is the August formation, we have what appears to be a head-and-shoulders formation. The red arrow points to today's sudden drop. Today's swoon takes the Dow below both its 50-day MA and its 200-day MA -- bearish.
On top of everything else, RSI is negative, and MACD has turned down -- bearish. So that's the story of the market today, as Richard Russell sees it. My advice -- be out of stocks, let the smart boys try to beat this bear market. Russell's subscribers aren't that smart, we just stay out of bear markets.
Gold -- continues in what I call its "stealth creep northward." Will December gold ever make it to the 1300s and a new high? My answer -- yes it will. But it will do it on its own good time.
August 4, 2010
"As my readers know from earlier report, it would be difficult to find anyone more negative than I am-- I truly think we are all toast." From the August report by Marc Faber, editor of the Gloom, Boom & Doom Reports.
I think Marc really means what he says. Marc is no late-coming dummy. He's been around a long time, and he's on the Barron's prestigious Round Table. But are we all really "toast?"
I honestly don't know. With the US building outrageous debt and not yet addressing those debts (leave 'em for the next president and Congress) I have the sinking feeling that time is running out on our great Republic. The longer any solution is put off, the worse the problem becomes through the simple process of compounding. Remember, our nation's debts have the advantage of zero short interest rates now. But what happens to the compounding process when rates head higher?
Frankly, it's all too much for me. I'm just happy that I'm not President. As for President Obama, my main concern with him is that I don't believe he has any deep-seated convictions. As far as Obama is concerned, "The answer is blowin' in the wind" or in the majority of the latest committee he has appointed.
Gold -- The daily chart below shows gold pushing out of, and above, its declining trendline. The near-term object for August gold -- to rally into the 1300s.
In the much larger picture for gold, I turn to the monthly chart over a long span. Here we see monthly gold going back to 1900 along with 50-month and 200-month moving averages. I consider this my acid test of the primary trend for gold. Note the "golden cross" (red arrow) which took place in March of 2005.
Since the cross, the shorter 50-month MA has risen steadily and smoothly away from the longer-term 200-day MA. This is obviously bullish behavior, and it should continue until gold finally moves into its third speculative phase.
As I see it, our job is to assume as large a position in gold as we are comfortable with -- and then sit, while ignoring all the anti-gold propaganda (and the anti-gold element will grow louder, the higher gold climbs). One ounce gold coins are still available (American Eagles, Maple Leafs and Krugerrands), and with August gold below 1500 I believe they are bargains.
You know, it's strange, when I first advocated buying gold and gold shares in the early 1960s, I never have dreamed that I would still be telling my subscribers to buy gold in the year 2010. But that's what I'm doing. Great bull markets are few and far between. When one is in progress (particularly one that is ignored and hated by many in authority), it's time to get aboard.
At this point the average American can't tell you within a hundred dollars where the price of gold is. Ask any American why he doesn't own any gold, and the answer will be confusion, and "duh" or "What do I know about gold" or "I hear gold is too speculative." And your answer, "Isn't holding dollars a speculation?" and here you draw a total blank.
Is it a paradox that as the dollar turns weaker, the Dow (which is denominated in dollars) holds up as well as it has? Yes, the Dow is holding up, but against the standard, gold, has been steadily losing value.
Below, I have included a chart of the Dow adjusted to the price of gold. In terms of gold, the Dow has lost 70% of its value. At some juncture ahead, many believe that gold and the Dow will meet at the same price. This last occurred around 1980 when both gold and Dow milled around the 800 level.
The headline of the Financial Times today runs as follows -- "FEARS OVER US OUTLOOK SPARK FALL IN DOLLAR. Investors bet on further Fed easing." To my mind, this is the leading drama of the day. Will the dollar continue to sink and will the Fed just stand and watch? Or will the Fed have the guts to raise interest rates? My guess, the Fed will stand and watch.
I am writing this at 3 AM in the morning, and I see that December gold in the after-market is up 11.10. I can literally feel the power of the primary bull trend as it forces gold higher, penny by penny, dime by dime. It's an amazing process. Happily, I live a five minute walk from the Pacific Ocean. I can see the action of the tide. People sit on benches and watched waves of the ocean rumble into shore. There's something soothing and hypnotic about sitting on a wall and watching the ocean. It's relaxing and an excellent lesson in the power and relentless movement of the tide.
Dollar Index was up, Treasuries were lower and Dec. gold was up 8.40 to 1195.90, although it was trimmed during the session, at its high intra-day it was 1205.50. I sense a real battle in the gold market with the primary bull trend pushing gold higher and the powerful anti-gold elements doing all they can to keep the price of gold down. Obviously, the next round in the gold battle is to move Dec. gold into the 1300s.
Remember the struggle to get gold over 1000? That battle is forgotten now. It's been one long brutal war for and against gold. But I have faith in the primary trend. The primary bull trend of gold is more powerful than all of the world's central banks taken together. Fiat money is doomed. The dim-wits at the central banks just don't know it yet. Of course, these poor saps don't want to know it -- we're talking about their jobs.
Question -- What does a central bank employee do when he's out of work?
Answer -- I don't know, ask Alan Greenspan. Maybe the answer is that he writes self-justifying letters to the Wall Street Journal. He can always give speeches or it all else fails, he can write a book.
August 2, 2010
The US national debt is now $13.237 trillion. The US's unfunded liabilities are over $50 trillion. All the stock market's recent bullish activity has taken place with the near-term in mind. The frightening long-term problems have been ignored. The question I ask myself is "When will the stock market start dealing with the longer-term issues, specifically our enormous US debts?
Actually, I believe the stock and bond markets have one eye cocked on the forthcoming US debt problems. The debt problems of the US are so huge, so intractable, that I definitely must keep them in mind in my investment strategy.
First, I'm convinced that the US has absolutely no choice but to default on its "impossible" mountain of debts. The US is not going to face its creditors and boldly announce, "Sorry, we can't pay our debts. So we're going to renege on them. It's over, we can't pay and we can't envision a time when we'll ever be in a position to pay off our debt." Frankly, I can't envision this kind of blunt US default.
Wait, there is another way to default. You default by depreciating your currency, by printing so damn much of your money (inflating or "Quantitative easing") that your debts become insignificant over time.
Hard to understand? I demonstrated the "inflation cop-out" in my own case with my GI insurance policy. When I took out my GI insurance policy in 1945, I treated that policy (until I paid it off) as a debt. I struggled to pay the required $20 a month until I had paid off the policy. By the way, paying $20 a month was a real hardship for me back in the 1940s.
Now its 2010 and I've lived through 65 years of Fed-sponsored systematic inflation. Today I look back on those $20 monthly payments and they seem like small change. In fact, today I could pay off my entire insurance policy debt overnight and not give it a second thought.
That's the way inflation works. It's a creditor's worst enemy and a debtor's best friend. Let me inflate (devalue) the currency through enough years, and I can make any debt feel like "chump change."
And, that, I believe, is the way (and the only way) that the US is going to deal with its enormous debts. This is great for a government like the US that is deep in debt, and it's a gift to people who are personally in debt. Devalue my money enough and I can deal with any debt. So maybe inflating is not a true default, but in a way it is a legal version of defaulting.
Investors who are capable of thinking ahead and envisioning the way the world will be heading in the years and decades ahead, are thinking -- "If inflation is the trend of the future, how can I protect myself?"
One way is to invest in something that may advance during the years ahead. These people are thinking of stocks, either domestic or foreign. Here's an idea, "If I put my money into top-grade dividend-paying US blue chips or outstanding foreign stocks I may be able to keep up with inflation, simply by watching my stocks rise in lock-step with inflation."
Russell Response -- I don't like it. Stocks are too expensive now, and money in stocks is made in the buying, and I mean in "buying when they are cheap." Stocks today are not priced to produce future profits.
Another idea "If I buy US Treasuries, I can probably keep up with inflation. The Fed will be buying Treasury bonds, thus driving their prices up, to levels to where their yields are at unheard of new lows."
Russell response -- China and other creditors own huge quantities of Treasuries. What will they do as the price of Treasuries get knocked down? Nah, I don't like this idea of buying Treasuries -- the strategy of buying Treasuries depends on the Fed's actions. As you know, I am always suspicious of what the Fed may do next. And it's usually the wrong thing.
The strategy I choose is gold and cash. By cash I mean US Federal Reserve Notes, which we mistakenly call dollars. I certainly don't consider dollars as a store of value, dollars lose purchasing power year after year.
Our defense against the sinking purchasing power of dollars is gold. As dollars sink in purchasing power, the dollar cost of gold rises. I think those who are convinced that the dollar is heading down are now buying gold, and this includes central banks who hold dollars as a large part of their reserves. It also includes wealthy investors who have been searching for the ultimate "safe haven."
With taxes rising and with unemployment stuck in "high gear," I'm thinking that we in the US and the western developed nations will be facing hard times. All investments will be hit hard. Profits will be difficult to produce. The US government will be paralyzed (as it is now) as to which way to turn. The government will be making any number of stupid mistakes, most of which will hurt the economy.
For these reasons we will want to own the money that can not go "down the drain in a hard rain." That money is gold. Those who deny the value of gold, fail to understand that gold is intrinsic wealth on its own. Gold is beholden to no government. In fact, gold represented wealth in the death of the Great Depression. Gold will always represent wealth.
Gold comes into its own when people distrust everything. Which, I believe, is where we are now. Wall Street is distrusted. The US government is distrusted. China and Russia and the Muslim countries are distrusted. The solvency of the company you work for is distrusted. The Obama administration is distrusted. Congress and the Senate are distrusted. So who or what can we trust. The answer can be expressed in one word -- gold.
Dollar -- As subscribers must know by now, I'm keeping a sharp eye on the US dollar. This chart is a day late (dollar was lower today), but you can see that the US dollar has now sunk into what I term the support zone. The bottom of the support zone comes in at 80. As I write, the dollar is selling at 80.90. The dollar better hold above 80 -- or else.
July 26, 2010
My usual position (probably 90% of the time) is to be out of stocks and on the sidelines. This leaves me freer to deal with the market without emotions or prejudice. It's true that I own a large gold position, but this is not a speculation; it is one that I intend to keep no matter what. I also own a goodly cash position, and this is one that I keep because in today's mad world, it seems to me that cash is a good thing to have, at least temporarily.
At this point, I have all the assets I believe I will ever need. I don't have any urge to augment my economic position. What I'm trying to do now is to hold on to my position in terms of purchasing power. Honestly, I'm afraid that the dollar is fated to lose purchasing power over the years. In fact, with the Fed's stated objective of 1.7 to 2% inflation every year, the dollar is guaranteed to lose purchasing power over the years. My hope is that gold may make up for any loss in the purchasing power of the dollar.
This is no time for greed. It's a time for level-headedness and patience. My philosophy, let my neighbors make a killing in the stock market, I'm perfectly happy to stand aside and watch the fun. I value my sleep.
Dollar Index was down, bonds were a bit higher and August gold closed down 4.70 to 1183.10. Not a bad close and still above 1100. The gold-haters continue to call for a top, a top that seemingly never materializes.
Gold -- As for gold, I really don't give a damn what the dollar price of gold is at any given time. If gold declines to 700 US dollars an ounce, that would be a clear indication of deflation. If that's the case, my dollars will increase in purchasing power. And gold would still represent a measure of eternal wealth.
If gold advances to 2000 US dollars an ounce, that would be an indication that the dollar was rapidly losing purchasing power. In that case, I might even get rid of US dollars by buying something of intrinsic value, such as more gold or a rentable house within walking distance of the beach. But the odds are that I would do nothing -- probably continue writing Dow Theory Letters and playing with my standard poodles.
Not you, Alan Abelson, not you! In the latest issue of Barron's, Alan heads his weekly column as follows: "A Contrarian's View of Gold." Clearly, it's not Abelson's view, it's some contrarian. And who's the contrarian? It's Peter Berizen, who works for my old friends at the Bank Credit Analyst. I've been trading services with the Bank Credit Analyst for about 50 years, and I know that they have never been openly enthusiastic about gold. Peter obtains his anti-gold arguments from Barclay's Capital's latest commodity forecasts. Peter lists six arguments suggesting that gold has made most of its move to the upside.
And what do I think? I think it's pure baloney. Gold has been in a sensational but secret and subtle bull market for the last ten years. In my experience, I've never seen a long-term primary bull market end without a highly speculative third phase. So far, although gold has enjoyed a spectacular percentage rise over the last decade, gold has never produced a third, speculative phase. In fact, figuring from gold's peak of 850 an ounce in 1980, gold hasn't even kept up with inflation. Adjusting gold for 30 years of inflation, gold today would have to be over $2,000 an ounce. Thus, gold can hardly have been in a speculative bull market phase so far.
My own thinking is that somewhere ahead we will indeed see gold go into its speculative third phase. So that's my answer to Peter Berizen's anti-gold stance.
Alan Abelson, I know you like to be controversial, but how could you do it? Pretty soon I'll have to rank you with Alan Greenspan, who sold out on his intensely pro-gold stance when he became Fed Chairman.
July 23, 2010
Gold -- The intra-day high for August gold today was 1202.60. But August gold, probably reacting to deflationary pressures, closed down 7.80 to 1187.60. However, GDX and GDXJ both closed higher, which I thought was pretty good all-around action. I'd like to see August gold closed above 1200, but maybe it's too early for that kind of action. There appears to be support for August gold at 1100. Gold usually slumps during the summer months, and over the years, the best time to buy gold has been during the summer season.
Here's a daily chart of gold going back six months. You can see that gold has formed a potential head-and-shoulders top, but so far the support off the right shoulder has not broken down. In the meantime, the red arrows point to elements of potential strength in gold. The slow stochastics at the bottom of the chart suggest a sold out situation, and a reason for gold to rise. Gold is trading well above its (red) 200 day moving average, which stands at 1143.
July 12, 2010
"The Golden Rule": "Who has the gold, makes the rules". And China is on a headlong path to accumulate as much gold as it can. China is now the world's largest producer (miner) of gold, and all the gold mined in China must be sold to the government. What in the world could the Chinese be planning? Here's what I'm thinking. The yuan will become the world's most wanted currency, heavily backed by gold and a stable government plus the planet's biggest military. In due time, China will be the new owner of the world's reserve currency.
On my July 7 site, I explained why I am convinced that the Bernanke Fed is on its way to devaluing (cheapening) their Federal Reserve Notes (we mistakenly call them "dollars"). Why am I convinced of Bernanke's plans? Because it is the only painless and politically acceptable way. It's the Fed way. In effect, it's the old "frog in a pot of slowly heating water on the stove". The frog never notices the rising heat. By the time he does, he's frog soup.
Back in 1945 I bought a $10,000 GI Life Insurance Policy. Paying off that policy was a real pain in the ass. I had to send Uncle Sam $20 every month, and that was a lot of money (remember, prior to the Air Force I was lucky to have a job loading trucks for $18.75 a week (that was a union job, and it included half a day on Saturdays). So that $20 a month to carry my insurance policy was hard. As a matter of fact, most GIs who took out this insurance dropped out of it. They couldn't afford it. After a number of years, I paid off that damn GI Insurance policy (deep breath).
Now let's return to the present. After 65 years of systematic inflation, I could pay off my old insurance policy in a day, and I wouldn't miss the money. And that's the way it works for government created inflation. Let the government gradually inflate, and give them enough years, and even the trillions of dollars of debt we owe will seem "manageable."
As I write, inflation in the US is "dangerously thin." Home prices are weak, autos sales are slowing, consumers are cutting back and corporations are hoarding money. Could the next step be actual deflation? This is Bernanke's worst nightmare. Prior to his election as Fed chief, Bernanke stated that under a fiat money system deflation could not happen.
You remember Benny's famous words, "The US government has a technology called a printing press (or today its electronic equivalent) that allows it to produce as many US dollars as it wishes at essentially no cost." Thus Bernanke reasoned that the Fed could create so much money that the dollar would lose its value, and a devaluating dollars is in itself inflationary. With the "cheap" dollar everything would cost MORE in dollar terms. So that's Bernanke's thinking, flood the system with enough Fed Notes and the price of everything rises -- and presto, deflation backs off, and inflation is back again.
As for America's $50 trillion national debt, inflation might go a long way towards solving that problem too.
What's the downside of the Bernanke's "perpetual inflation" strategy? The downside is that his plan of perpetual inflation will gradually undercut all faith in the US dollar. At some point, even though the US can print endless Fed Notes, the rest of the world will refuse to accept these Notes. At that point, the US dollar will be in a collapsing mode. You know the drill -- produce too much of anything and people don't want it (this does not include drugs).
Right now I see the US dollar as the world's biggest bubble. It's a supposed "safe haven" but it's an over-loved and doomed currency. It's held for trading purposes and safe-keeping by almost every nation. Amazing because the US's debt will be 90% of GDP in the coming fiscal year -- a "banana republic" type balance sheet.
Back in the 1960s former Fed Chief Alan Greenspan was an honest man and a firm believer in the gold standard. The following is from a paper Greenspan wrote in 1967. He later forgot what he wrote and became an advocate of fiat currency. I never trusted him after that, and I believe it led to this ego-driven, ambitious twerp's downfall.
"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."
by Alan Greenspan
Confession -- A successful and sophisticate investor of mine bought more bullion coins yesterday, bought 'em during the correction. He told me, "I'll never sell them, I consider them part of my estate. I don't give a damn what the price of gold is tomorrow, next week or next year. I count my gold holdings not in dollar-value but in the number of ounces I hold."
He continued,"Let me own 10,000 ounces of bullion gold, and I don't care what the stock or bond markets are doing, and I don't give a damn what the dollar price or the euro price of gold is. If I own 10,000 ounces of gold (and I intend to), I'll always be wealthy. And I don't have to worry about inflation, devaluation or the solvency of any counter-parties.
Warming up to the subject, he added, "Because only gold is not subject to a counter-party. Gold is pure wealth on its own. The only way gold's value can be destroyed is if a new monster hoard of gold is discovered and distributed. In other words, "too much gold in the world" would drive down the value of gold. But you know something -- they'll never be "too much gold in the world," this despite the desperate attempts of the ancient alchemists to turn lead into gold. Gold is retrieved by high risk, large investments of capital, know-how, daring, danger, and the sweat of thousands of men. No central bank has ever produced so much as a single ounce of gold. Talk to any central banker and he'll tell you," "We don't need no stinkin' gold. We create our own money, as much of it as we want and when we want it. And we don't have to sweat or lift a finger to produce it."
Question -- OK, Russell, then if one never sells his gold, what in the world do you do with it?
Answer -- You leave it to your wife or your kids or your sweetie. And you tell them never to sell it. It's as simple as that.
July 2, 2010
President Obama thought he could "pull an FDR" and spend this nation out of recession. In this process, the Fed has financed his spending and stimuli plans to the tune of trillions of Fed-created "dollars."
Finally, the US public has realized that the Obama strategy is not working, and that it was literally bankrupting the nation. The public screamed "Stop ... enough ... it's not working, and you're wrecking the country, throw out the Congressional bums." And that's where we are now.
Question -- Russell, how do your studies of the primary trend affect gold?
Answer -- The gold bull market will be no exception to my studies of the primary trend. Gold is indisputably in a great primary bull market. Gold moved into its second phase, the longest phase, and the one that starts to interest the crowd. But we haven't seen the crazy third phase of the gold bull market yet. The third phase is the manic phase where everyone wants in and speculation grows to insane proportions. I believe the third phase of the gold bull market lies ahead, maybe six months to a few years ahead. There's no way to time it.
Understand this -- every item you buy, every trade you make, has a counter-party. I talked to a friend last night who was thrilled because he was heavily short the market. I asked him "Who's your counter-party for all these shorts?" He answered, "What are you talking about?" I replied, "If you make a killing on the short side, who's the counter-party, who's going to pay you your profits?" My friend turned white, "Gad, I see what you mean. I don't know who my counter-party is or whether they'll even be solvent if the market collapses."
And that's where gold comes in. Gold is pure wealth. It hasn't been produced by any bank or corporation, Thus gold doesn't have a counter-party, nor does it need one. Gold can't be devalued or thrust into bankruptcy. This is the fact that gold-haters seem incapable of understanding.
In a crushing deflation, most counter-parties are smashed. But gold stands alone it's the "last man standing." This, in a nutshell, is why sophisticated wealthy investors own gold. It's the item that can't be crushed in a deflationary depression.
Question -- Russell, I give up. I concede that we're in a bear market. But c'mon, how bad can it get?
Answer -- According to Dow Theory, neither the depth nor the duration of a bear market can be predicted in advance. In this bear market, the Dow could fall to 4,000 or 400. I honestly don't know the answer. In my experience, primary trend tend to carry further than anyone expects.
I do know this -- yesterday the following broke below their June lows -- the Dow, the Transports, the NYSE Composite (which includes ALL NYSE stocks), the S&P Composite, the NASDAQ and the Russell 2000. Any way you look at it, that's bad action.
Maybe just as bad, new lows on the NYSE surged to 164. Hundreds of stocks are breaking down, and even more are hovering just above their 52-week lows. The lower depths of this market are opening up like a giant graveyard. It is said that in a big bear market, stocks return to their original homes -- Wall Street.
Headline in the July 1 San Diego Union (article from the Washington Post) .... Most Americans Seeing Austerity as way of Life. The recession has directly hit more than half of the nation's working adults, pushing them into unemployment, pay cuts, reduced work hours or part-time jobs, according to a new Pew Research Center survey."
Russell Comment -- As I said it would, the bear market is beginning to bite. And it will get worse as the stock market continues to probe the lower depths.
What to do. Stay as liquid as you can, get out of the stock market, get rid of all the debt you can, and own some gold. Don't put your faith in the US dollar. The US dollar is the world's biggest bubble. The dollar is only a convenience with which to buy what you need or to pay off dollar-denominated debts.
Sooner or later the US government will attempt to pay off some of its insane debts with dollars of its own (Fed's) creation. That's when the dollar bubble will burst. The world will no longer accept dollars, it will want gold.
One solution -- the US Treasury holds a vast amount of gold which it values at $42.22 an ounce. Raise the price of gold to $5,000 and pay off our debts with gold. Can we get away with it, is it feasible? Do you have a better idea, like reneging on our debt? Or declaring sovereign bankruptcy? We'll go the easiest and least painful route.
June 30, 2010
The end of Keynesianism? Yes, I think we're seeing it now. Fed Chief Bernanke in his writing blamed the Great Depression on the Fed for shrinking the money supply. In fact, Bernanke even apologized on the part of the Fed for "causing the Great Depression." Bernanke, wrote a famous piece explaining to "us know-nothings" that the Fed has a magic instrument, it was the ability to print money, and, if necessary, to drop this Fed-created money to the American people from helicopters. With his magic power, concluded Ben, there was no way the US could slide into another Great Depression.
It was great and comforting concept, but it didn't work. After leaving rates at zero, printing over two trillion "dollars" and backing billions of dollars in stimulus plans, unemployment remains high, housing stays in the dumps and the national debt has sky-rocketed beyond all reckoning.
The spending plans of the Obama administration and the expansion of money by the Fed has left the US in worse shape than ever. Unemployment is still high, and the US has taken its place along with Greece and Portugal as another "half-broke banana republic."
How did this horror story befall the once "greatest nation on earth" and the one-time "Arsenal of Democracy?" If a house is built on sandstone and with rotten timber it's not a question of whether that house will fall apart -- it's a question of WHEN. Ever since the end of World War II, Americans have been enjoying the greatest standard of living the world has ever seen. How did we do it? Was it hard work, sweat, original thinking, risk-taking or pure luck? Hardly any of those, it was through borrowing and creating a gigantic house-of-cards. The cards were the newly-created bits of paper that we call dollars (actually, they are Federal Reserve notes backed by nothing).
Without its abilities to create fiat money, the US could never have built its "house-of-cards economy." Without the insidious Fed, the US would never have had the ability to create trillions of unbacked Fed notes.
I've insisted all along that the US should have allowed the primary bear forces to fully express themselves, as they inevitably will do anyway. But in its arrogance and ignorance, the administration decided that they could halt or sidestep a recession by printing us out of trouble. It's been a terrible and expensive mistake. Finally, with debts now pushing above 90% of GDP, the American people have shouted "Stop, it's not working, we can't find jobs, and you people in Washington are pushing us and our children into a state of bankruptcy. If you don't know what you're doing -- stop it!"
When the voters are "mad as hell," the politicians take notice. What's happened is that 65 years of over-spending and borrowing has never been corrected in a major way. But the gods of the market have finally warned, "You nations of the world have crossed a line in the sand. Now it's "pay-back or correction time." Now is the time to pay for 65 years of unearned prosperity. You wouldn't build up your economies through hard work, sweat and tears. Like children you've demanded, "I want it, and I want it now."
What's next? I think Washington will continue trying to spend us out of recession. This did not work in the past, and it's not going to work now. The primary bear market will not allow it to work. But what if the Administration gives up and allows the forces of deflation and correction to express themselves?
Here's where my crystal ball gets very cloudy. I don't see Washington accepting another long, drawn-out recession or another Great Depression. The temptation will be too strong to try to print us out of the recession or to create enough government-sponsored jobs to drag us out of the recession. That's what I see happening.
What would I have done? I would have done exactly the opposite of what has been done by Obama. Instead of promising prosperity and "back to normal," I would have told the nation the truth. You've lived the great and unearned life for 65 years, all created by credit and borrowing, fun's over. You must now pay for it with SACRIFICE. Americans must cut back to the bone. Children may have to move back with their parents, Americans may have to build "victory gardens" as we did during World War II. We'll have to learn to save and crimp. If you want to buy a house or a car or a washing machine, you'll have to wait until you earn enough to pay for those items.
The difficult choice is to sacrifice or America shrinks to a has-been power -- this is the "hard rain" I've been warning about.
Question -- Russell, the story now is sacrifice or lose our freedom and become a second or even third class power. Is that your scary story?
Answer -- That's right. My generation is called "the greatest generation." Why? Because we had to sacrifice, first through the Great Depression and then through World War II. But we did survive. At the end of the War, America was accepted as the greatest and most powerful nation on earth. Every man and woman in the world wanted to come to America, where the streets "were paved with gold" and people were free. That's about over now. America is losing engineers and scientists and its best minds to other nations where it is thought that opportunities are better. It's hard to believe, but it's the bitter truth.
Obama -- My thought is that Obama has no deep convictions. He is a highly-intelligent man, and he knows it, and the voters know it. Obama thought that once president, he could listen to all sides and come up with the correct answers. We now know that he has failed with that strategy. I think that Obama's master plan up to now has been to follow the path of FDR. Let the government take over and regulate the nation in every area from medicine to energy to Wall Street to agriculture. The government will do it right. Thus, as America weakens, it approaches the socialistic (we'll take care of you") states of Europe.
Again what would Richard Russell do? If I were president, I'd tell the people the truth. "You've got to earn what you buy, scrimp and save, roll up your sleeves, we're going to enter hard times. But we've had hard time before, and we've emerged stronger than ever. We're ending the free lunch era, and we're taking away the bubbly punch bowl. As in World War II, we're going to sacrifice whatever it takes in order to remain free and once again be the arsenal of democracy for the world.
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Gold -- Most people don't understand the meaning of gold. People who buy gold today are thinking of climbing on the band-wagon and ending up with fabulous profits. Forget it, that isn't why you buy and own gold. Besides, the government won't let you show a profit in gold. The IRS will tax your ass off if you try to sell your gold mining stocks or your gold-related ETFs or gold funds.
The reason rich men accumulate gold is as follows. Gold is eternal wealth. Own three thousand ounces of gold, and you'll always be wealthy. Holding gold entails no risk. Gold owes its value to its indisputable intrinsic value. You want to ensure eternal wealth? Pretend you have to make that decision, and it's the year 1990. You load up on three blue chips, GE, GM and C. If you loaded up on these three, by now you'd be broke.
You want to feel wealthy in any kind of market or in any kind of political system? One way is to own physical gold. A great inflation materializes and your gold will probably rise with inflation. A great deflationary depression arrives. The price of everything crashes. And worst of all, that bubble that we call the dollar crashes as well. The dollar won't buy a damn thing. Nobody will part with food or land or merchandise for dollars. All things denominated in dollars (stocks, bonds, real estate) collapse with the dollar.
Holding gold itself is a standard of wealth. You never sell your bullion gold. But when you buy gold mining shares, you are speculating on making a profit. If I own enough gold, I don't care what the dollar the price of gold is. I'm a wealthy man as long as I hold my gold. If I own five Picassos I'm a wealthy man. If I own 20 acres on the Southern California coast I'm a wealthy man. But Picassos can go out of style. And land on the California coast can be confiscated. Not so with gold. Gold can be hidden, it can be accumulated, and it exists outside the system. By the way, I'm wondering whether great diamonds will soon be in that same category. I note that the price of great, high-quality diamonds is surging.
What man makes, man can destroy. The value or purchasing power of the dollar (fiat currency) can collapse. But gold cannot be devalued, because it's not beholden to any man or any sovereign government. Gold's value is based on 6,000 years of history, and its value lies outside the system. The US Treasury now values its gold as $42.20 an ounce. The world doesn't give a damn what the US Treasury values its gold at. The world is saying that an ounce of gold is worth $1250 dollars, and the hell with the gold-haters.
Deflation -- The stock market is now starting on its long journey to deflation. When stocks go down, as they have been, that's deflation. Stocks discount the future. Today's sick stock market is warning, "Deflation lies ahead, pay attention." Today's sick stock market is not telling us that the employment situation is sick or that consumer buying is fading. We know that; it's old news and the stock market is not interested in old news. The stock market is telling a story that nobody wants to accept -- fun's over, and hard times are coming. The greatest inflationary bubble in history is bursting. The very worth of the dollar is coming into question.
Question -- Russell, if the worth of the dollar is in question, how come smart investors are rushing headlong into dollars or US Treasury bonds as "safe havens?"
Answer -- Today's "dollar bugs" don't realize that the dollar is the biggest bubble of all. We've created too many of them. The dollar is a bubble today, and ultimately, all bubbles burst. The dollar will be no exception.
Question -- Then why own any dollars?
Answer -- Convenience. Hold 'em as long as people accept them for items like meals, rent, medical or college tuition. Dollars are just a convenience today -- but unlike gold, they are NOT a store of value.
When gold rises in terms of dollars, it means that the dollar is losing value or purchasing power against the standard -- gold. This scares hell out of the Fed because the Fed's power lies in ACCEPTANCE of the dollar. Rising gold means the Federal Reserve system is losing power. And the system's reason for existence is to wield monetary power over the nation. The bankers want the good life, and they have the formula -- control the nation's money.
Below, one of the greatest tops in stock market history is nearing completion. The critical level of Dow 10,000 has been breeched again, as I write. The critical numbers are now Dow 9980 and Transports at 4040.
Gold technicals -- Gold is holding above its blue 50-day MA, which in turn is holding above it red 200-day MA. That''s a bullish conformation.
Russell advice -- Once more -- gold bullion if possible and cash.
Late Notes - The Dow has been down 5 days in a row which should have made it oversold. Frankly I expected a rally today but selling pressure is too insistent and we're down 93 points at the close. As for gold, I think the action continues good. Friday's site will explain why the primary bull market in gold has a lot further to go.
June 28, 2010
My investment strategy is now being voiced or followed by too many major hedge funds. The thinking is that as vanishing stimuli and de-leveraging takes over, the economies of the world pressured by central bank conservatism will force the US and western nations into a double-dip deflationary recession. The response will be to keep rates at zero and open the money spigots wide, wide, wide. This is where ownership of gold "was supposed to" come in.
Then, I ask myself, is this scenario too pat? Is it too popular? There's always a fooler. Where's the fooler this time? I think the fooler will be the stock market. The stock market will be considerably worse than the smart boys are figuring on. Deflationary pressures will be severe and the need to re-inflate will be more pressing than ever.
Gold will be needed - not as a safe haven against inflation, but as a safe haven against crushing deflation. Deflation will flatten everything in sight including base metals, commodities, housing, job creation. The single island of preserving wealth will be gold. Unlike junk fiat currencies, gold cannot be devalued.
As I look ahead, the area that the experts do not understand is the stock market. Almost all the current opinions revolve around stocks remaining in a high-level trading range. This will prove to be an horrendous miscalculation.
Why do I think the stock market will be so rotten? Here's why. Look at the chart of the Dow in the current issue of Barron's. Or study the chart of the Dow below. If this isn't the mother of all head-and-shoulder top-formations, I've never seen one. If this formation falls apart, I expect the break to signal a the start of a brutal decline in stocks. The first area of support is Dow 10,000. The base of the entire formation comes in at Dow 9800. If the formation breaks down, I think all previous plans, scenarios and strategies will hit a stone wall. Wall Street and public sentiment will turn black-bearish. Consumers will head for the storm cellars and once in, they'll shut the door above them and lock it.
Question -- Russell, you keep talking about institutional selling. But from every corner, we hear how rapidly the economy is improving. I don't get it, if the economy is improving, why in hell would the smart money be selling stocks?
Answer -- First, you must understand that Wall Street is interested in only one thing -- MONEY. Wall Street feels no shame, no sorrow, no guilt, no remorse. Wall Street only has feelings for money. If the Street is truly bearish, if the institutions are negative, then their best strategy is to try to stir up optimism. And that's exactly what they're doing. Every plus in the economy, every improving statistic is blown up and fed to the media. You need an optimistic retail crowd to sell in to.
So shameless Wall Street creates the ideal background for selling stocks. Here look at the tell-tale evidence. "Distribution days" are days when volume expands on down markets. The profusion of distribution days is one of the studies that turned me bearish.
Here are the latest distribution figures covering the action of the last two weeks -- 3 for the S&P 500, 2 for the Dow and 2 for the NYSE Composite, and 1 for the NASDAQ.
So what's going on? Simple, the big money is unloading stocks all the while telling the public that the economy is improving. In the meantime, read Barron's, read Smart Money Magazine, read Fortune or Forbes. And what are they writing about? Stocks, stocks, stocks to buy. This is clearly against my advice which all along has been -- "Get the hell out of all stocks (except gold mining shares).
My position -- Own gold and gold items and cash. Write this on your blackboard ten times.
Late Notes - Another Dow failure day with the Dow up almost all day but selling off and closing slightly lower. I guess the story of the day was gold correcting sharply. That was its initial reaction to the world wide deflation threat. The gold story is far from over.
June 25, 2010
I just finished Gregory Zuckerman's book ,The Greatest Trader Ever. It's the story of John Paulson and the $45 billion he made on the housing collapse, with $4 billion personally. Here's an interesting except from the last part of the book:
What's Paulson doing now?
Paulson made a simple calculation. A supply of dollars has expanded by 120% over several months. That surely would lead to a drop in its value and an eventual surge in inflation.
" 'With all this spending, we're going to have massive inflation,' " Paulson told Hoine, arguing that all the major currencies were at risk other than the Chinese yuan.
" 'What's the only asset that will hold value? It's got to be gold.' "
Paulson acknowledged that his was a straightforward argument, but he paid the critics little heed and proceeded to buy more than $1 billion of shares of gold miners, or 12% of his largest fund. He also purchased billions of dollars of gold investments to back new classes of his funds denominated in gold, and chose these classes for his own money. Betting against the dollar would be his new trade.
" 'I couldn't be more confident,' Paulson said in the summer of 2009. 'Three or four years from now people will ask why they didn't buy gold earlier. Over time our currency will lose value and inflation will rise - that's our future.' "
The powerful gold action is just short of sensational. Rising gold is driving gold stocks higher. Up to now the gold mining stocks moved with the general market. Finally they are now moving with gold. The whole gold universe is firming and has an irresistible feel. There's no fever like gold fever.
June 21, 2010
Here I am, dictating today's letter to wife Faye from the Intensive Care Unit at Scripps Memorial Hospital in La Jolla. They did a keyhole appendectomy on me - three little holes in my belly and the badly infected, near-ruptured appendix was out. Then I'm up to the fourth floor surgical recovery wing, where nurses Doug and Oliver gave me outstanding care. Unfortunately, the next stop on my rounds through Scripps Memorial was a visit to the Intensive Care Unit. Tonight there's only me and two others in the unit -- a quiet evening. I'm being tested every 10 minutes or so - new pin-pricks, X-rays, ultrasounds, MRIs and appraisals. God willing, I should be out soon.
While in the hospital, flat on my back day after day, I've had lots of time to think. And I had an epiphany. An ah-hah moment.
We're now in the process of building one of the largest tops in stock market history. The result, I think, will be the most disastrous bear market since the '30s, and maybe worse.
Question: "What could possibly be behind such a bear market?" you ask. "The stock market is stirring up optimism on a weekly, if not daily basis, by not falling apart."
Answer: This is the "rest" or "dead zone" I was talking about. Bear markets don't conclude in a day, a week or a month. Months will go by, often adding to the bulls' optimism.
I think the key element behind this great bear market will be the complete destruction of all fiat currencies. This has been a long time coming. Fiat currencies are "wealth" created by man. They are created without sacrifice, without labor, without risk, and without sweat. Basically they are an immoral device, created by secretive bankers.
If you watch the figures carefully, you'll note the subtle deterioration. For instance, the advance-decline ratio, although up slightly for the week, had a relatively weak performance with the Dow up several hundred points over the course of the week. And we broke the trendline in May (see the chart below showing the cumulative advance-decline line for NYSE Common Stock only, which is what we publish in our figures (courtesy of DecisionPoint -- www.decisionpoint.com). The vertical lines are Jan 2008, Jan 2009 and Jan 2010 as you move to the right on the chart.
My old friend, Bob Prechter, is talking about Dow 400. I used to think this was an absurd joke. I no longer think it's a joke. The ultimate result will be a primary bear market shocking in duration and extent.
Gold: As for gold, its stellar performance goes on. This in the face of ominous warnings of various worried experts. On Friday, August gold rose to a new record high. The next step will be into the 1300s -- point&figure upside objective is now 1310.
Gold shares are lagging bullion in this last move, not yet showing the break-out seen in the yellow metal.
The world (minus the US) is loading up with the yellow metal with banks running out of vault space. The great 10-year primary bull market is moving into its 11th year. The bull market in gold attests to the systematic decline in the value of the dollar compared with real money - gold.
One of the greatest modern traders, John Paulson, who made billions on the housing collapse, has, I understand, all his personal money in gold-related items. Many of my subscribers have now built gold profits beyond anything they have ever achieved before. I know at this point one could get itchy fingers thinking of the profits achievable by switching gold for fiat currency. I warn subscribers, stay on the yellow brick road. The big profits, the astounding profits, will accrue when gold finally bursts loose of its prejudices and freely expresses itself.
My advice now is to put as much of your money as you're comfortable with in bullion coins. Remember the simple phrase that's been around through years of history - "There's no fever like gold fever." Fiat money is doomed. Act on it.
Until I'm back on my feet, I'll be dictating the site to my wife Faye and it'll be shorter than usual. And as I've said so many times before, Faye is smarter than I am. Also, note that I'm on Twitter now and it's been much easier to get something sent via Twitter while I've been in the hospital. It's only 140 letters long for each post but you'll see my latest thinking on the market action, which we'll expand in each day's site.
June 14, 2010
Interesting and informative article from the New York Times --
Uncertainty Restores Glitter to an Old Refuge, Gold
June 14, 2010, 2:25 am
It is the resurgent passion of the doomsday crowd, a bet that everything will go wrong. No matter what has you worried, they say, the answer is gold, Nelson D. Schwartz reports in The New York Times.
Inflation, deflation, government borrowing or the plunging euro — you name it — the specter of these concerns has set off a dash to gold, driving the precious metal to new highs and illustrating how fears of economic turmoil have moved from the fringe to the mainstream.
And gold bugs, often dismissed as crackpots who hoard gold bars in the basement, are finally having their day.
“I just think you’re in a world where a lot of chickens are coming home to roost,” said John Hathaway, manager of the Tocqueville Gold fund. “Gold is an escape hatch.”
The most visible new gold enthusiasts range from the Fox News commentator Glenn Beck on the right to the financier George Soros on the left, with even some sober-minded Wall Street types developing a case of gold fever. While their language may differ, they share a fundamental view that the age-old refuge of gold is relevant again, especially as other assets like stocks and national currencies show signs of weakness.
Now, individual investors are following their example around the world. The United States Mint is running short of gold coins, and the South African mint increased Krugerrand production by 50 percent late last month, to its highest level in 25 years, on brisk European demand.
The debt crisis in Europe and the ensuing drop in the value of the euro are the most recent catalysts for gold’s spike last week to $1,254 an ounce, a record before adjusting for inflation, but the deeper concern is that even in the United States, government borrowing is unsustainable and the day of reckoning is at hand. Sales of American Eagle one-ounce gold coins tripled in May from the month before.
If governments print more money to pay off their debts, the logic goes, inflation will destroy the value of the dollar, the euro and other paper currencies — thus enhancing the value of gold. What is more, with tax increases unlikely and with Europe on the brink, the unthinkable — a sovereign debt default or the collapse of the credit system — has suddenly become thinkable.
To be sure, gold buyers have always been motivated by fear. What has changed is that some of the most respected investors on Wall Street are now among the fearful.
“In recent years, we have gone from one bubble and bailout to the next,” David Einhorn, a New York money manager who was among the first to foretell the failure of Lehman Brothers, said in a speech last month. “Our gold position reflects our concern that our fiscal and monetary policies are not sufficiently geared toward heading off a possible crisis.”
Since ancient times, gold has been deemed intrinsically valuable, holding its worth even as governments fell and currencies collapsed, while seemingly casting a spell on its owners.
Still, gold can go down — sometimes sharply. After peaking in 1980 at more than $800 an ounce, gold sank over the next two decades, bottoming out at just over $250 an ounce in 1999. But unlike paper assets that can become worthless, gold always retains at least some value.
These days, gold is also something of a political Rorschach test. On conservative talk radio, opposition to the Obama administration’s economic policies and warnings that huge budget deficits will set off runaway inflation have made gold a hot topic of on-air discussion — and lured gold companies as advertisers.
Tongue only half in cheek, Glenn Beck advised his audience to consider “Gold, God and Guns,” while laying out three possible scenarios for the economy: recession, depression or collapse.
One major advertiser on Mr. Beck’s show is Goldline, a huge California marketer of gold coins and bars that is also a sponsor of programs hosted by other prominent conservative commentators like Laura Ingraham and Mike Huckabee. Mr. Beck has said he “was a client of Goldline long before they were a client of mine,” adding: “I personally don’t buy gold as an investment. I buy it for protection.”
Of course, the right hardly has a monopoly on gold. Mr. Soros, a prominent donor to liberal causes and candidates, holds more than $600 million in bullion and gold mining shares.
Even as worries about the global economy have intensified, gold has become easier to buy.
Although some people still regard bars of gold in a vault as the ultimate insurance policy, exchange-traded funds, or E.T.F.’s, that hold gold have exploded in popularity in recent years. Gold E.T.F.’s, which trade like stocks but track the price of physical gold, account for 1,856 tons of gold, up from less than 500 tons in 2005, according to Credit Suisse.
Besides luring individual investors, these funds have also made gold more appealing to hedge funds and other institutions, allowing them to own vast amounts of gold without the burden of having to store it.
John A. Paulson, a top New York hedge fund manager who earned billions betting against subprime mortgages, holds $3 billion worth of gold E.T.F.’s, making gold the largest single position in his $35 billion portfolio.
Daniel J. Arbess, who manages more than $2 billion in Perella Weinberg’s Xerion fund, is another new gold lover. A few years ago, he said, he would not have taken a second look at gold as an investment. But now Mr. Arbess, a Harvard Law graduate and a generally conservative investor, is very serious about gold.
Spiraling deficits in the United States, Japan and Britain are unsustainable, he said, and could eventually hurt confidence in what are called “fiat currencies” — paper money not backed by gold, including the United States dollar.
“Indebted countries may soon be forced to choose among three politically difficult alternatives: sharp cuts in expenditures, debt default or printing money to pay off debt,” he said, with the last option the most likely outcome. Gold, he said, is a logical hedge against this risk, because firing up the printing presses ignites inflation.
True believers note that gold has risen in each of the last nine years, and that while the Standard & Poor’s 500-stock index is down 13 percent since 2001, gold is now worth nearly five times what it was then.
For all its newfound respectability, gold still manages to bring out the inner survivalist in its adherents. Gold bugs like Peter Schiff of the investment firm Euro Pacific Capital in Westport, Conn., envision a black market arising in the United States, with merchants refusing paper money and insisting on gold instead, while Mr. Hathaway, the gold fund manager, says the credit system has entered “the end game.”
“People probably still think I’m nuts,” Mr. Hathaway said. “But I’m not talking to myself in an isolation chamber anymore. We’ve got company."
The Gold Bull Market...
[Excerpted from the Casey Research newsletter]
Q. At what price do the gold stocks catch fire?
A. Some years ago, we had someone spend the better part of a week in a musty storeroom full of old Canadian newspapers, paging through past issues and recording the price and volumes of the gold stocks during the last big run-up, in the 1970s. We then compared that data to the gold price in inflation-adjusted dollars in order to determine the price that the broader investment public began piling into the gold. The number worked out to about $1,250 per ounce in today's dollars. In other words, when gold decisively takes out $1,250 an ounce and holds above that level, if history is a guide, we may start seeing the average guy on the street - and the institutions - start to pile into the stocks.
Of course, while interesting from an historical perspective, that analysis has no scientific basis. The key point, therefore, is that during the last big gold bull market the public wasn't involved in the gold stocks when they should have been - in the run-up phase - but rather only piled in after the price of gold bullion soared, relatively late in the bull market. So far, the average Joe and Jill are just not in this market. But, they will be.
Q. How high do you think gold will rise?
A. We were recently asked how high we thought the dollar price of gold would reach in this bull market.
My response was that there really is no way of actually forecasting that number, for the simple reason that, in a fiat currency regime, the underlying unit of valuation is so intangible. Let's say you lived in Zimbabwe some years ago, and owned an ounce of gold. One day your ounce might be worth 1,000 of the local currency units. A year later, it might be 1,000,000. Or, even 10,000,000,000.
While the U.S. is no Zimbabwe - at least not yet - its currency is just as intangible, for the simple reason that the government can print the stuff pretty much at will. To say that gold will go to $5,000 in the current crisis is really just another way of saying that the dollar currency unit will fall by some significant degree. But, given the uncertainty in the economy, and unknown of what actions the government and the Fed might take next, we really can't know how much purchasing power the currency unit will lose in the months and years just ahead. To date, the government has been extraordinarily - breathtakingly - willing to abuse the dollar. They have largely gotten away with it so far, but that certainly doesn't mean they have gotten away with it. When the time comes for the piper to be paid, we suspect he'll be paid pennies on the dollar... which could easily result in gold trading for $3,000, $5,000, $10,000 per ounce - but, who knows, maybe even $10,000,000,000.
The point is, given the choice between dollars and gold, you are far more likely to preserve your wealth over the duration of this crisis better with gold.
Q. Is the gold bull market getting old? How much longer can it last?
A. Having been around and actively involved in hard assets - as the editor of "Gold Newsletter" and the conference director of the New Orleans Conference - during the last big gold bull, I hope I can provide some useful perspective.
For instance, I can well recall in late 1979 when all of the many gurus of the day were predicting gold would keep going higher and higher still. Well, as we all know, it didn't.
What's interesting about this time around is that there is almost no scenario we can envisage that is going to kick the legs out from under the gold market - at least any time soon. In contrast, in the late 1970s, the gold bulls coulda/shoulda seen that the Fed had a lot of room to act - i.e. by pushing up interest rates - in order to tackle the price inflation that was the key driving force in the soaring gold prices of the time.
Today, the situation is profoundly different. Starting with the fact that this is, at the core, a debt crisis. And the one thing you can't do in a debt crisis is to encourage interest rates to rise. Look no further than Greece for that lesson.
So, we have an unprecedented monetary inflation, truly out-of-control sovereign spending and debt, unprecedented levels of private debt, unprecedented trade deficits, a massively overbuilt and overpriced post-bubble real estate market and, importantly, near historically low interest rates.
So, we have to ask ourselves - other than continuing to exercise its powers of fiat money creation - what ammunition does the government have at its disposal to address the structural problems of today's economy? And, of course, actually creating more money and more debt isn't addressing the structural problems, it is compounding them.
Of course, the government can default on their sovereign obligations - an option I think we'll see Greece and others of the PIIGS take, and probably fairly soon.
They can also continue to inflate, which we expect them all to do.
And they can... no, actually, I think that about sums it up: default or inflate. In either scenario, gold is going to be seen as the ultimate safe harbor.
Q. Won't the government see gold as a threat to its fiat currency and try to do something about it?
A. Of course, governments might try any number of stunts that could affect gold. For example, raising margin requirements to curb playing the markets with leverage, or even attempting outright confiscation.
All we can do is to monitor the situation closely and try to anticipate their next moves in order to get out of the way. A number of people I know have opened safety-deposit accounts in other countries as one way to hedge their bets against confiscation. Others have bought numismatics - but be careful on that front, because that can increase illiquidity.
It is not out of the question, in my view, that before this is over we could see a revaluation of gold in order to relink the U.S. dollar to it - because sooner or later, as the crisis reaches its climax, something is going to replace the fiat currencies - but at this stage it's impossible to guess what that will look like. If we did see a return to a gold standard, then the government could actually be responsible for sending gold up by many multiples.
Back to the present, at this point I can't see anything that is going to derail this bull market - but I do see a whole lot of things with the potential to send it into the stratosphere.
Dear Comrades In Golden Arms,
We live in market run by hedge funds like all other markets.
When momentum of gold appreciation slows the selling starts. When an uptrend line breaks, the slower computers come on with selling.
Fundamentally there is no change from the intact Western world economic downward spiral.
Technical damage has been done to gold which will work itself out. The reverse is that when the decline's momentum contracts then the shorts are covered and the computers turn bullish.
This is the drama you have seen a million times.
Gold is the only insurance that can be purchased that will carry us whole to the other side of this economic madness.
Gold is going to $1650 and beyond. Dig a hole and pull a rock over top once again. Look out once a day until you see the downside momentum decelerate or a major bullish formation starting.
Stay the course.
Respectfully,
Jim
Jim Sinclair is the Chairman and CEO of Tanzanian Royalty Exploration Corporation
JSMineset on Facebook
Financial Crisis Called Off
by James Howard Kunstler
Saratoga Springs, New York
Whew, what a relief! Everybody from Ben Bernanke and a Who's Who of banking poobahs schmoozing it up in the heady vapors of Jackson Hole, Wyoming, to the dull scribes at The New York Times, toiling in their MC Escher hall of mirrors, to poor dim James Surowiecki over at The New Yorker, to - wonder of wonders! - the Green Shoots claque at the cable networks, to the assorted quants, grinds, nerds, pimps, factotums, catamites, and cretins in every office from the Bureau of Labor Statistics to the International Monetary Fund - every man-Jack and woman-Jill around the levers of power and opinion weighed in last week with glad tidings that the world's capital finance system survived what turned out to be a mere protracted bout of heartburn and has been reborn as the Miracle Bull economy. Our worries over. If you believe the claptrap. Which I don't.
All this goes to show is how completely the people in charge of things in the United States have lost their minds. They seem to think this mass exercise in pretend will resurrect the great march to the Wal- Marts, to the new car showrooms, and the cul-de-sac model houses, reignite another round of furious sprawl-building, salad-shooter importing, and no-doc liar-lending, not to mention the pawning off of innovative, securitized stinking-carp debt paper onto credulous pension funds in foreign lands where due diligence has never been heard of, renew the leveraged buying-out of zippy-looking businesses by smoothies who have no idea how to run them (and no real intention of doing it, anyway), resuscitate the construction of additional strip malls, new office park "capacity" and Big Box "power centers," restart the trade in granite countertops and home theaters, and pack the turnstiles of Walt Disney world - all this while turning Afghanistan into a neighborhood that Beaver Cleaver would be proud to call home.
"The key to the current madness, of course, is this expectation that all the rackets, games, dodges, scams, and workarounds that American banking, business, and government devised over the past thirty years will just magically return to full throttle, like a machine that has spent a few weeks in the repair shop."
America loves the word "recovery" as only a catastrophically sick society can. "In recovery" is the new universal mantra of loser individuals and loser nations. Everybody in the USA is in recovery. Even Michael Jackson (he may have given up on somatic activity but, on the plus side, as the Rotarians love to say, he's quit using drugs for once and for all, and the magazines have stopped publishing photos of him taken after 1990, when he turned himself into something out of the Hammer Films catalog).
To sum it all up, the US economy is in recovery. Paul Krugman says that we'll soon realize that Gross Domestic Product (GDP) is growing. He actually said that on the Sunday TV chat circuit. Not to put too fine a point on it, but I would really like to know what you mean by that Paul? Do you mean that the Atlanta homebuilders are going to open up a new suburban frontier down in Twiggs County so that commuters can enjoy driving Chrysler Crossfires a hundred and sixty miles a day to new jobs as flash traders in the Peachtree Plaza? Do you mean that the Home Equity Fairy is going to wade into the sea of foreclosure and save twenty million mortgage holders currently sojourning in the fathomless depths with the anglerfish? Do you mean that all the bales of deliquescing, toxic "assets" hidden in the vaults of Citibank, JP Morgan, Bank of America, et al, (not to mention on the books of every pension fund in the USA, and not a few elsewhere) will magically turn into Little Debbie Snack Cakes on Labor Day weekend? Do you mean that American Express and Master Card are about to declare a jubilee on accounts in default everywhere? Do you mean that General Motors will produce a car that a.) anyone really wants to buy and b.) that the company can sell at a profit? Are you saying we get a do-over, going back to, say, 1981? Did we win some cosmic lottery that hasn't been announced yet? What's growing in this country besides unemployment, bankruptcy, repossession, liquidation, gun ownership, and suicidal despair? In short, are you out of your mind, Paul Krugman?
The key to the current madness, of course, is this expectation, this wish, really, that all the rackets, games, dodges, scams, and workarounds that American banking, business, and government devised over the past thirty years - to cover up the dismal fact that we produce so little of real value these days - will just magically return to full throttle, like a machine that has spent a few weeks in the repair shop.
This is not going to happen, of course. It is permanently and irredeemably broken - this Rube Goldberg contraption of swindles all based on the idea that it's possible to get something for nothing. And more to the point, we're really doing nothing to reconstruct our economy along lines that are consistent with the realities of energy, geopolitics, or resource scarcity. So far, our notions about a "green" economy amount to little more than blowing green smoke up our collective behind. We think we're going to build "green" skyscrapers! We're too dumb to see what a contradiction in terms this is. The architects are completely uninterested in the one thing that really is "green" - traditional urban design - and most particularly the walkable neighborhood. That's just too conventional, not special enough, lacking in star power, not enough of a statement, boring, tedious, so not cutting edge! We blather about high-speed rail, but you can't even get from Cleveland to Cincinnati on a regular train - and what's more amazing, nobody is really interested in making this happen. All we really care about is finding some miracle method to keep all the cars running.
What we've been seeing is nothing more than a massive pump-and-dump operation in the stock markets, most of it executed by programmed robot traders, with the trading nut provided by taxpayers current and future. These shenanigans add up to new risks and fragilities so extreme that the next time a grain of sand catches in the exquisite machinery they will sink the USA as a viable enterprise. We will end up discrediting not just capitalism, but also the idea of capital per se, that is, of deployable acquired wealth. As this occurs, of course, events on the ground will give new meaning to the term "reality television."
Regards,
James Howard Kunstler
for The Daily Reckoning
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| Golden Shell Games | ||
Hey, Wall Street can take a $250 million sewer project in Alabama and turn it into an insurmountable debt 20 times as big. So it can find a way to pervert the Midas metal, too. And the evidence is piling up: You don't have to be partial to conspiracy theories about the "manipulation" of gold to conclude something just doesn't look right. That means you need to be very careful about how you hold any gold outside your physical possession - especially in a retirement account. Of course, it's always important to ask oneself, how much is there to these conspiracy theories, really? Well, ever since the publication of his book, Lewis has been scrutinizing them. And this year, they've reached a fever pitch.
Marc Faber, editor of The Gloom Boom & Doom Report stated it well in April, so well we quoted it in The 5 Min. Forecast: "If you have manipulation to keep the price down, it eventually goes ballistic. So all the people that are bitching about the manipulation of silver and gold should be happy that it is manipulated, because it still gives them an opportunity to buy it at a depressed price." Exactly. Manipulation stories are a source of entertainment, outrage or both. They underscore the perils of the Wall Street Fandango. But their truth or falsehood makes little difference if you hold gold in your physical possession. Or in an allocated account (the gold has your name on it) in an independent, insured depository. Or if you use a reputable electronic gold purveyor. (We like GoldMoney.com and BullionVault.com.) But it makes a lot of difference if you hold "paper gold" in the form of an exchange-traded fund. Many people buy vehicles like GLD and IAU with the comforting illusion that what they're buying is "good as gold." And it's an incredibly convenient way to get metals exposure in a retirement account. Which brings us to the revelations of Janet Tavakoli. Tavakoli is not a gold bug. She's an expert in structured finance and credit derivatives who runs her own consulting firm in Chicago. Recently, she published a client report that took the format of "advice" she would give to Wall Street sharpies trying to corner the gold market. Not that they'd ever try that, of course. Pump up the gold story. Get your friends to tell retail investors to buy some gold every month. Get your buddies in the financial business to offer exchange-traded gold funds (ETFs) that claim to buy physical gold. This will sound safe to retail investors, but in fact, the ETFs are very risky. This will serve your purpose when you are ready to start a panic. These particular ETFs will allow the "gold" to be commingled with the custodian's gold, and the custodian can lease out the gold. Moreover, the "gold" custodian can give it to a subcustodian that the manager doesn't know. The subcustodian can give it to yet another subcustodian unknown to the original custodian. The manager will never audit the gold, and the gold is not "allocated" to a particular investor. Since this is an "exchange traded" gold fund, investors will probably assume the gold is regulated by the Commodities Futures Trading Commission (CFTC), but it isn't. By the time investors wake up to the probability that there is very little actual gold backing their investment, your plan will be ready to execute. The "plan" involves buying huge futures contracts and expecting physical delivery. If this sounds familiar, it's pretty much what the Hunt brothers did when they tried to corner the silver market in 1980. Silver shot up to $50, however briefly. It's never seen that territory again. But the consequences this time around would be far more serious. It could collapse banks holding huge short positions in the futures market, accustomed to settling contracts cash only. More to our point, it would crater the ETFs: Their complex network of custodians and subcustodians would be laid bare. ETF investors would realize they have a claim on the same chunk of gold as, say, Goldman Sachs. But Goldman would have the actual metal. The ETF investor would have to settle for pennies on the dollar. Far-fetched? Maybe. Just remember that ETFs are ultimately, like a complicated mortgage derivative, subject to counterparty risk. If the day comes when trust evaporates from the system, value will evaporate from the ETFs. If you want to play gold's short-term ups and downs, the ETFs are an ideal instrument. Otherwise, stay away. Addison Wiggin, for The Daily Reckoning |
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