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ECONOMICS AND ESOTERICA FOR A NEW PARADIGM

Economic, Financial & Gold: Random Articles 2007 – 2009

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gold5eaglemed

Fiscal ruin of the Western world beckons

By Ambrose Evans-Pritchard
Originally published: 18 Jul 2009

For a glimpse of what awaits Britain, Europe, and America as budget deficits spiral to war-time levels, look at what is happening to the Irish welfare state. Events have already forced Premier Brian Cowen to carry out the harshest assault yet seen on the public services of a modern Western state. He has passed two emergency budgets to stop the deficit soaring to 15pc of GDP. They have not been enough. The expert An Bord Snip report said last week that Dublin must cut deeper, or risk a disastrous debt compound trap.

A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12pc and heading for 16pc next year.

Education must be cut 8pc. Scores of rural schools must close, and 6,900 teachers must go. “The attacks outlined in this report would represent an education disaster and light a short fuse on a social timebomb”, said the Teachers Union of Ireland.

Nobody is spared. Social welfare payments must be cut 5pc, child benefit by 20pc. The Garda (police), already smarting from a 7pc pay cut, may have to buy their own uniforms. Hospital visits could cost £107 a day, etc, etc.

“Something has to give,” said Professor Colm McCarthy, the report’s author. “We’re borrowing €400m (£345m) a week at a penalty interest.”

No doubt Ireland has been the victim of a savagely tight monetary policy – given its specific needs. But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.

As the International Monetary Fund made clear last week, Britain is lucky that markets have not yet imposed a “penalty interest” on British Gilts, given the trajectory of UK national debt – now vaulting towards 100pc of GDP – and the scandalous refusal of this Government to map out any path back to solvency.

“The UK has been getting the benefit of the doubt, both in the Government bond market and also the foreign exchange market. This benefit of the doubt is not going to last forever,” said the Fund.

France and Italy have been less abject, but they began with higher borrowing needs. Italy’s debt is expected to reach the danger level of 120pc next year, according to leaked Treasury documents. France’s debt will near 90pc next year if President Nicolas Sarkozy goes ahead with his “Grand Emprunt”, a fiscal blitz masquerading as investment.

There was a case for an emergency boost last winter to cushion the blow as global industry crashed. That moment has passed. While I agree with Nomura’s Richard Koo that the US, Britain, and Europe risk a deflationary slump along the lines of Japan’s Lost Decade (two decades really), I am ever more wary of his calls for Keynesian spending a l’outrance.

Such policies have crippled Japan. A string of make-work stimulus plans – famously building bridges to nowhere in Hokkaido – has ensured that the day of reckoning will be worse, when it comes. The IMF says Japan’s gross public debt will reach 240pc of GDP by 2014 – beyond the point of recovery for a nation with a contracting workforce. Sooner or later, Japan’s bond market will blow up.

Error One was to permit a bubble in the 1980s. Error Two was to wait a decade before opting for monetary “shock and awe” through quantitative easing.

The US Federal Reserve has moved faster but already seems to think the job is done. “Quantitative tightening” has begun. Its balance sheet has contracted by almost $200bn (£122bn) from the peak. The M2 money supply has stagnated since January. The Fed is talking of “exit strategies”.

Is this a replay of mid-2008 when the Fed lost its nerve, bristling over criticism that it had cut rates too low (then 2pc)? Remember what happened. Fed hawks in Dallas, St Louis, and Atlanta talked of rate rises. That had consequences. Markets tightened in anticipation, and arguably triggered the collapse of Lehman Brothers, AIG, Fannie and Freddie that Autumn.

The Fed’s doctrine – New Keynesian Synthesis – has let it down time and again in this long saga, and there is scant evidence that Fed officials recognise the fact. As for the European Central Bank, it has let private loan growth contract this summer.

The imperative for the debt-bloated West is to cut spending systematically for year after year, off-setting the deflationary effect with monetary stimulus. This is the only mix that can save us.

My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn, to which we will respond with yet further spending. This is the road to ruin

gold5eaglemed

Why Gold Will Rise to at Least $6,000 per Ounce

by Dr. Murray Sabrin May 26 2009  www.politickernj.com

In November 2003, a month before the 90th anniversary of the creation of the Federal Reserve, I spoke to a group of money managers and bond traders in south Florida about the Federal Reserve’s nine decade legacy. At that time the price of gold was approximately $380 per ounce. I informed the attendees that gold was the most undervalued asset on the planet. Nearly six years later, gold has nearly tripled in price and may have been the best performing asset class in the world since then, and one of the best investments in this decade.

Hopefully, the money managers who heard my remarks about the evolution of our monetary system took my advice for their clients’ sake and added gold to their personal portfolios as well. But then again, gold was so out of favor as an asset class by Wall Street a few years ago, it would not be surprising that the attendees ignored my advice and did not add the yellow metal to their portfolios.

With gold currently trading at $950 per ounce, where will the price of gold be six years from now?  Conceivably, much higher than any current forecast. How high? Later in this essay, I will explain how returning to a “hard money” dollar and a sound banking system will require a gold price of at least $6,000 per ounce and possibly much higher.

Before we hypothesize a future price of gold, it is imperative we understand the current financial crisis and the need to abolish fractional reserve banking, paper money and central banking.  In other words, for the American economy—and the global economy– to enjoy sustainable prosperity we need to inject a heavy dose of free enterprise in our money and banking systems.

This is easier said than done. The political and financial elites of America want to maintain the status quo, namely, the creation of money out-of-thin air, artificially low interest rates, and massive bailouts engineered by the FED and the U.S. Treasury.

Nevertheless, the financial meltdown of the 21st century has been well documented in two outstanding books of the past year, William Fleckenstein’s Greenspan Bubbles and Thomas Woods’ Meltdown.  If you have not read them both, they should be on the top on your summer reading list.  Both authors place the blame for the back-to-back bubbles, the dotcom bust and the housing collapse, squarely on the Federal Reserve’s easy money polices under Fed chairman Alan Greenspan.

In a nutshell, easy money drives down interest rates, which in turn set into motion feverish activity and speculation in sector or sectors of the economy that benefit from the flow of new money from the FED.  The excess credit propels prices higher for common stocks, real estate, commodities, etc. When the FED “tightens” credit to rein in the overheated economy, the inevitable correction sets in.  Bankruptcies soar, unemployment rises, stock prices drop precipitously, and state and local governments face huge revenue shortfalls as income and sales tax revenues drop. In other words, the unsustainable boom appears to create a perpetual “party” in the economy, only to be exposed as a period of “false” prosperity.

The booms and busts of the past two decades are textbook examples of the financial and economic crises caused by central banking. Of all the schools of thought, only the Austrian School of Economics explains how waves of boom and bust are inevitable if central bankers try to substitute credit created out-of-thin air for genuine savings. Working in the same tradition, economist Jesus Huerta de Soto in his monumental survey of world economic history (Money, Bank Credit and Economic Cycles), explains how economic fluctuations are the result of bank credit expansion prior to the establishment of central banking and how business cycles have unfolded since the creation of the first central bank in England (1692).

To prevent further boom-bust cycles, the following changes in the U.S. monetary/banking system should be implemented ASAP.  These would require banks to restructure along the following guidelines:

• All demand deposits would be backed by 100% reserves.  In other words, fractional reserve banking would be prohibited as a violation of property rights.  This would eliminate the bank run, because banks would have all the money in reserves to meet depositors’ requests for cash.  This reform would be potentially deflationary since the banking system would have to contract the amount of money and credit in the current inflationary system to restore 100% reserve banking.

• Banks would offer time deposits from one day to 30 years or more.  This would provide a pool of real savings for banks so they could perform their role as financial intermediaries without government protection and intervention.

• FDIC insurance would be eliminated.  Banks and depositors would operate in a free market.  Savers would determine how much risk they want to incur and lend their funds to banks based on their time horizons.

• Permanent bank capital—preferred and common stockholders—would be the foundation of a free enterprise banking system.  Risk of default would be allocated among shareholders and savers.

• The Federal Reserve would be abolished and would no longer manipulate short-term interest rates and be the lender of last resort. The FED’s track record of the past century should convince any objective observer and analyst that it has been a failure. The dollar’s purchasing power has fallen by more than 95% since the FED was created and the business cycle is still with us.

• The dollar will once again be defined as a weight of gold. What should the ratio be between the supply of dollars and the 260,000,000 ounces of gold held by the Federal Reserve?

There are several ways to revalue the dollar in terms of gold and make the U.S. dollar a hard money once again. This would create a 100% gold dollar. Americans as well as foreigners are used to conducting their exchanges dollars so the goal is to regain the confidence of dollar holders by ending the devaluation of the dollar.

1. All currency and demand deposits and other forms of money would be convertible into gold. That would mean all forms of money that people are familiar with would “backed” by gold. Inasmuch as there about $1.6 trillion of this form of money outstanding that would be backed by about 260,000,000 million ounces of gold held by the Federal Reserve, the price of gold or more accurately the value of the dollar would be 1/6,153 of an ounce of gold. In other words, the price of gold would be $6,153 per ounce.

2. According the Rothbard/Salerno definition of the “True Money Supply,” the current amount of dollars in the economy that functions as the general medium of exchange is about $5.5 trillion. Based on this approach, the FED’s 260,000,000 ounces of gold would have a dollar/ratio of 1/21,153, or the price of gold would be$21,153 per ounce. Before you mortgage the house and sell the kids to make more than twenty times your money, another economist challenges the Rothbard/Salerno definition of the true money supply.

3. Economist Frank Shostak in his essay on the money supply, argues that savings deposits should be removed from the definition of money because they are a credit deposit rather than a demand deposit.  Based on the Shostak approach, investment manager Mike Shedlock calculates M’, (M Prime), as approximately $2.2 trillion. The gold/dollar ratio would be 1/8.461 or a gold price of $8,461 per ounce under this definition of the money supply.

Clearly, no matter what definition of money is used to restore a gold backed dollar, the price of gold will have to be adjusted upward by a factor of at least six or more from today to reflect the enormous deprecation of the dollar since the FED was created nearly a hundred years ago.

The revaluation of the dollar will not happen because Ben Bernanke, chairman of the Federal Reserve and Timothy Geithner, U.S. Treasury Secretary embrace hard money principles and realize 100% reserves are necessary for the banking system to function as a reliable financial intermediary. The restoration of a gold backed dollar will occur when dollar holders lose confidence in the purchasing power of the greenback. The sooner the next great money and banking reforms are implemented, the less chance there will be for a global monetary debacle, given the trillions of dollars the FED and other central banks have created in the past six months. In the meantime, load up on the yellow metal.  It is your best insurance policy against Obama, Congress, Bernanke, and Geithner.

gold5eaglemed

Inflation or deflation – Gold Will Be King….
By Clive Maund   May 18 2009 2:01PM
From August 2007 when the world passed the tipping point it has been in the grip of massive deflationary forces that have already ravaged portfolios and pension plans and resulted in millions losing their jobs. This deflationary implosion had become structurally inevitable and it was only ever a question of when, rather than if, it occurred. It had to happen because debt and debt financed activities had ballooned to unsustainable levels. The wilful obstruction of the necessary corrective forces of recession over many years and the continued expansion of this huge debt bubble to unprecedented extremes via what is called financial engineering, in particular derivatives, led to it becoming critically unstable, so that when it burst a disastrous cascading deleveraging process set in. As we know, the event or crisis which burst the bubble was the sub-prime mortgage debacle.
Instead of accepting the deflationary implosion as the necessary price to be paid for years of excess, and something essential for eventual renewed growth from a firm foundation in the future, politicians and governments around the world, unable or unwilling to face up to the economic pain and probable political instability that would result, have been and are trying to obstruct the contraction through enormous ramping of the money supply in many countries and propping up defunct entities that according to the laws of economics and capitalism itself should be allowed to fall by the wayside. This is creating a highly anomalous situation where massive and ultimately unstoppable deflationary forces are colliding with an outright and reckless attempt to block them through means of massive reliquification. Because of the enormity of the debts and the scale of deleveraging necessary to purge the system, they can only delay or temporarily mitigate the forces of contraction, and that is probably all they are trying to do with the intention of further lining their pockets before they head for the hills. However, their continued efforts to obstruct these forces by means of the very profligacy and fiscal abuse that created the monstrous bubble in the first place, will lead to an even more catastrophic collapse later on. Their immediate solution to the crisis is to create blizzards of new money out of nowhere to throw at it and to drop interest rates to zero, in a desperate effort to stir up economic activity and to retard the compounding of already hopelessly out-of-control levels of debt. Many individuals and companies and even states and countries are in no fit state to take up the offer of cheap money, and have no reason to with demand having fallen off a cliff. Thus we face a situation where many asset values are likely to continue to collapse even while the air is filled with clouds of confetti money – you could call it super stagflation. The value of most debt must collapse towards zero, only in this way can individuals and companies be rid of its suffocating and paralysing influence, which is inhibiting their ability to generate demand within the economy. This means that the holders of debt instruments across the board are going to see the value of these investments shrivel towards zero over time. This will, of course, include the holders of US Treasuries and the holders of US dollar denominated assets in general.
Over the past two months we have witnessed a big recovery in world stockmarkets, that has been fuelled by the widespread perception that the global economy has “hit bottom” or is close to doing so, and that world governments have essentially bought their way out of trouble and beaten back deflationary forces by means of their massive money creation – politely referred to as quantitative easing. This fantasy has been played up by the media, who are in most instances an arm of government, but as we have just stated, the deflationary forces can only be exhausted once the imbalances giving rise to them have been corrected – and this will only be achieved once the massive debt overhang has been unwound, and this doesn’t mean marking debt to model, it means being realistic and marking it to market, which in the case of most debt means marking it to a big round 0. The crisis will end when we have arrived at this point and we are clearly a long way from it yet.
Thus, it looks likely that we will witness another downblast of deleveraging before before much longer, and it will probably take several such downwaves perhaps over the space of years to finally purge the system, just as in the time of The Great Depression, and the recent buffoonery of massive money creation will only exacerbate the crisis. As we witnessed last year, the collateral damage that is inflicted during a phase of rapid deleveraging can be very heavy as forced sellers indiscriminately dump everything over the side, regardless of its intrinsic merits. Therefore we should not rationalize that because something has sound fundamentals it will be immune. We are well aware of this risk and expect the oil sector to get taken down hard should another wave of heavy selling in the broad stockmarket develop as expected, which is why we dumped the oil sector at the peak a week ago . Precious Metals stocks may well suffer too, and we will mechanically exit most PM stock positions, which we scaled back a week ago, in the event of the current uptrends in the PM stock indices failing. However, this time around we cannot be so sure, for gold, which held up remarkably well during last year’s carnage, could rise as it continues in the direction of being “the only game in town”, and is given added impetus by the watering down of currencies worldwide. For a while we could see gold going up and gold stocks dropping at the same time during an acute selloff phase, before rebounding strongly. The US government has good reason to want to see another wave of deleveraging as it would serve to channel funds into the dollar again to buy Treasuries, like last year, although not to the extent that they would hope for, as this time round the rally in both the dollar and Treasuries is likely to be much more muted as more players realize that both are living on borrowed time, especially as the growing risk of holding Treasuries has in the recent past been highlighted by the Fed stepping in to monetize them to plug a threatening shortfall in demand, a sign of growing desperation. Once this late flight into the dollar and Treasuries has run its course, they are very likely to collapse. At this point gold and silver, the physical supply of which is already acutely thin, will go through the roof.
It is because of this risk of another wave of deleveraging setting in that we have been rather circumspect in recommending Precious Metals stocks in the recent past, especially the big index driven stocks. Certainly the fundamentals for the sector are very positive with the outlook for gold getting better and better with each passing month – the massive increases in the global money supply not only to finance bailouts etc but also to support burgeoning deficits guarantees strong inflation in the future, and the supply of physical gold and silver is getting ever tighter, creating the conditions that are at some point are likely to lead to an explosive advance. In addition, mining costs have dropped considerably, especially as a result of last year’s big drop in the price of oil. However, if the expected inflation is preceded by another bout of deleveraging, as looks likely, then Precious Metals stocks could be taken down temporarily along with most everything else, although this time gold is likely to hold up better and perhaps even rise. This is why we have been lightening positions as the PM stock indices approached the top of their current intermediate uptrend channel and stand ready to take evasive action or protect positions with options should this uptrend fail. If it does and we see another plunge it will be viewed as an outstanding opportunity to take positions across the sector for what promises to be an exceptionally powerful recovery and uptrend. Selected strong juniors have been recommended in the recent past on the site that have the capacity to make strong gains over a short time horizon.
In conclusion, this is a very tricky time for investors with the battle on between the forces of inflation and deflation. Because of the highly unusual combination of enormous debt that must unwind with rapid expansion of the money supply, we are likely to see extreme stagflation involving economic contraction, sometimes involving heavy and destructive bouts of deleveraging, accompanied by eventual high inflation that could morph into hyperinflation. With Treasuries and other government paper becoming less and less attractive and more and more dangerous, investors seeking to preserve their capital will turn increasingly to gold. Gold will be king.

Inflation or deflation – Gold Will Be King….

By Clive Maund
Originally posted May 18 2009

Inflation or deflation – Gold Will Be King….
By Clive Maund   May 18 2009 2:01PM
From August 2007 when the world passed the tipping point it has been in the grip of massive deflationary forces that have already ravaged portfolios and pension plans and resulted in millions losing their jobs. This deflationary implosion had become structurally inevitable and it was only ever a question of when, rather than if, it occurred. It had to happen because debt and debt financed activities had ballooned to unsustainable levels. The wilful obstruction of the necessary corrective forces of recession over many years and the continued expansion of this huge debt bubble to unprecedented extremes via what is called financial engineering, in particular derivatives, led to it becoming critically unstable, so that when it burst a disastrous cascading deleveraging process set in. As we know, the event or crisis which burst the bubble was the sub-prime mortgage debacle.
Instead of accepting the deflationary implosion as the necessary price to be paid for years of excess, and something essential for eventual renewed growth from a firm foundation in the future, politicians and governments around the world, unable or unwilling to face up to the economic pain and probable political instability that would result, have been and are trying to obstruct the contraction through enormous ramping of the money supply in many countries and propping up defunct entities that according to the laws of economics and capitalism itself should be allowed to fall by the wayside. This is creating a highly anomalous situation where massive and ultimately unstoppable deflationary forces are colliding with an outright and reckless attempt to block them through means of massive reliquification. Because of the enormity of the debts and the scale of deleveraging necessary to purge the system, they can only delay or temporarily mitigate the forces of contraction, and that is probably all they are trying to do with the intention of further lining their pockets before they head for the hills. However, their continued efforts to obstruct these forces by means of the very profligacy and fiscal abuse that created the monstrous bubble in the first place, will lead to an even more catastrophic collapse later on. Their immediate solution to the crisis is to create blizzards of new money out of nowhere to throw at it and to drop interest rates to zero, in a desperate effort to stir up economic activity and to retard the compounding of already hopelessly out-of-control levels of debt. Many individuals and companies and even states and countries are in no fit state to take up the offer of cheap money, and have no reason to with demand having fallen off a cliff. Thus we face a situation where many asset values are likely to continue to collapse even while the air is filled with clouds of confetti money – you could call it super stagflation. The value of most debt must collapse towards zero, only in this way can individuals and companies be rid of its suffocating and paralysing influence, which is inhibiting their ability to generate demand within the economy. This means that the holders of debt instruments across the board are going to see the value of these investments shrivel towards zero over time. This will, of course, include the holders of US Treasuries and the holders of US dollar denominated assets in general.
Over the past two months we have witnessed a big recovery in world stockmarkets, that has been fuelled by the widespread perception that the global economy has “hit bottom” or is close to doing so, and that world governments have essentially bought their way out of trouble and beaten back deflationary forces by means of their massive money creation – politely referred to as quantitative easing. This fantasy has been played up by the media, who are in most instances an arm of government, but as we have just stated, the deflationary forces can only be exhausted once the imbalances giving rise to them have been corrected – and this will only be achieved once the massive debt overhang has been unwound, and this doesn’t mean marking debt to model, it means being realistic and marking it to market, which in the case of most debt means marking it to a big round 0. The crisis will end when we have arrived at this point and we are clearly a long way from it yet.
Thus, it looks likely that we will witness another downblast of deleveraging before before much longer, and it will probably take several such downwaves perhaps over the space of years to finally purge the system, just as in the time of The Great Depression, and the recent buffoonery of massive money creation will only exacerbate the crisis. As we witnessed last year, the collateral damage that is inflicted during a phase of rapid deleveraging can be very heavy as forced sellers indiscriminately dump everything over the side, regardless of its intrinsic merits. Therefore we should not rationalize that because something has sound fundamentals it will be immune. We are well aware of this risk and expect the oil sector to get taken down hard should another wave of heavy selling in the broad stockmarket develop as expected, which is why we dumped the oil sector at the peak a week ago . Precious Metals stocks may well suffer too, and we will mechanically exit most PM stock positions, which we scaled back a week ago, in the event of the current uptrends in the PM stock indices failing. However, this time around we cannot be so sure, for gold, which held up remarkably well during last year’s carnage, could rise as it continues in the direction of being “the only game in town”, and is given added impetus by the watering down of currencies worldwide. For a while we could see gold going up and gold stocks dropping at the same time during an acute selloff phase, before rebounding strongly. The US government has good reason to want to see another wave of deleveraging as it would serve to channel funds into the dollar again to buy Treasuries, like last year, although not to the extent that they would hope for, as this time round the rally in both the dollar and Treasuries is likely to be much more muted as more players realize that both are living on borrowed time, especially as the growing risk of holding Treasuries has in the recent past been highlighted by the Fed stepping in to monetize them to plug a threatening shortfall in demand, a sign of growing desperation. Once this late flight into the dollar and Treasuries has run its course, they are very likely to collapse. At this point gold and silver, the physical supply of which is already acutely thin, will go through the roof.
It is because of this risk of another wave of deleveraging setting in that we have been rather circumspect in recommending Precious Metals stocks in the recent past, especially the big index driven stocks. Certainly the fundamentals for the sector are very positive with the outlook for gold getting better and better with each passing month – the massive increases in the global money supply not only to finance bailouts etc but also to support burgeoning deficits guarantees strong inflation in the future, and the supply of physical gold and silver is getting ever tighter, creating the conditions that are at some point are likely to lead to an explosive advance. In addition, mining costs have dropped considerably, especially as a result of last year’s big drop in the price of oil. However, if the expected inflation is preceded by another bout of deleveraging, as looks likely, then Precious Metals stocks could be taken down temporarily along with most everything else, although this time gold is likely to hold up better and perhaps even rise. This is why we have been lightening positions as the PM stock indices approached the top of their current intermediate uptrend channel and stand ready to take evasive action or protect positions with options should this uptrend fail. If it does and we see another plunge it will be viewed as an outstanding opportunity to take positions across the sector for what promises to be an exceptionally powerful recovery and uptrend. Selected strong juniors have been recommended in the recent past on the site that have the capacity to make strong gains over a short time horizon.
In conclusion, this is a very tricky time for investors with the battle on between the forces of inflation and deflation. Because of the highly unusual combination of enormous debt that must unwind with rapid expansion of the money supply, we are likely to see extreme stagflation involving economic contraction, sometimes involving heavy and destructive bouts of deleveraging, accompanied by eventual high inflation that could morph into hyperinflation. With Treasuries and other government paper becoming less and less attractive and more and more dangerous, investors seeking to preserve their capital will turn increasingly to gold. Gold will be king. Inflation or deflation – Gold will be King….By Clive Maund May 18 2009    www.clivemaund.comFrom August 2007 when the world passed the tipping point it has been in the grip of massive deflationary forces that have already ravaged portfolios and pension plans and resulted in millions losing their jobs. This deflationary implosion had become structurally inevitable and it was only ever a question of when, rather than if, it occurred. It had to happen because debt and debt financed activities had ballooned to unsustainable levels. The wilful obstruction of the necessary corrective forces of recession over many years and the continued expansion of this huge debt bubble to unprecedented extremes via what is called financial engineering, in particular derivatives, led to it becoming critically unstable, so that when it burst a disastrous cascading deleveraging process set in. As we know, the event or crisis which burst the bubble was the sub-prime mortgage debacle.

Instead of accepting the deflationary implosion as the necessary price to be paid for years of excess, and something essential for eventual renewed growth from a firm foundation in the future, politicians and governments around the world, unable or unwilling to face up to the economic pain and probable political instability that would result, have been and are trying to obstruct the contraction through enormous ramping of the money supply in many countries and propping up defunct entities that according to the laws of economics and capitalism itself should be allowed to fall by the wayside. This is creating a highly anomalous situation where massive and ultimately unstoppable deflationary forces are colliding with an outright and reckless attempt to block them through means of massive reliquification.

Because of the enormity of the debts and the scale of deleveraging necessary to purge the system, they can only delay or temporarily mitigate the forces of contraction, and that is probably all they are trying to do with the intention of further lining their pockets before they head for the hills. However, their continued efforts to obstruct these forces by means of the very profligacy and fiscal abuse that created the monstrous bubble in the first place, will lead to an even more catastrophic collapse later on. Their immediate solution to the crisis is to create blizzards of new money out of nowhere to throw at it and to drop interest rates to zero, in a desperate effort to stir up economic activity and to retard the compounding of already hopelessly out-of-control levels of debt.

Many individuals and companies and even states and countries are in no fit state to take up the offer of cheap money, and have no reason to with demand having fallen off a cliff. Thus we face a situation where many asset values are likely to continue to collapse even while the air is filled with clouds of confetti money – you could call it super stagflation. The value of most debt must collapse towards zero, only in this way can individuals and companies be rid of its suffocating and paralysing influence, which is inhibiting their ability to generate demand within the economy. This means that the holders of debt instruments across the board are going to see the value of these investments shrivel towards zero over time. This will, of course, include the holders of US Treasuries and the holders of US dollar denominated assets in general.

Over the past two months we have witnessed a big recovery in world stockmarkets, that has been fuelled by the widespread perception that the global economy has “hit bottom” or is close to doing so, and that world governments have essentially bought their way out of trouble and beaten back deflationary forces by means of their massive money creation – politely referred to as quantitative easing. This fantasy has been played up by the media, who are in most instances an arm of government, but as we have just stated, the deflationary forces can only be exhausted once the imbalances giving rise to them have been corrected – and this will only be achieved once the massive debt overhang has been unwound, and this doesn’t mean marking debt to model, it means being realistic and marking it to market, which in the case of most debt means marking it to a big round 0. The crisis will end when we have arrived at this point and we are clearly a long way from it yet.

Thus, it looks likely that we will witness another downblast of deleveraging before before much longer, and it will probably take several such downwaves perhaps over the space of years to finally purge the system, just as in the time of The Great Depression, and the recent buffoonery of massive money creation will only exacerbate the crisis. As we witnessed last year, the collateral damage that is inflicted during a phase of rapid deleveraging can be very heavy as forced sellers indiscriminately dump everything over the side, regardless of its intrinsic merits.

Therefore we should not rationalize that because something has sound fundamentals it will be immune. We are well aware of this risk and expect the oil sector to get taken down hard should another wave of heavy selling in the broad stockmarket develop as expected, which is why we dumped the oil sector at the peak a week ago . Precious Metals stocks may well suffer too, and we will mechanically exit most PM stock positions, which we scaled back a week ago, in the event of the current uptrends in the PM stock indices failing. However, this time around we cannot be so sure, for gold, which held up remarkably well during last year’s carnage, could rise as it continues in the direction of being “the only game in town”, and is given added impetus by the watering down of currencies worldwide. For a while we could see gold going up and gold stocks dropping at the same time during an acute selloff phase, before rebounding strongly.

The US government has good reason to want to see another wave of deleveraging as it would serve to channel funds into the dollar again to buy Treasuries, like last year, although not to the extent that they would hope for, as this time round the rally in both the dollar and Treasuries is likely to be much more muted as more players realize that both are living on borrowed time, especially as the growing risk of holding Treasuries has in the recent past been highlighted by the Fed stepping in to monetize them to plug a threatening shortfall in demand, a sign of growing desperation. Once this late flight into the dollar and Treasuries has run its course, they are very likely to collapse. At this point gold and silver, the physical supply of which is already acutely thin, will go through the roof.

It is because of this risk of another wave of deleveraging setting in that we have been rather circumspect in recommending Precious Metals stocks in the recent past, especially the big index driven stocks. Certainly the fundamentals for the sector are very positive with the outlook for gold getting better and better with each passing month – the massive increases in the global money supply not only to finance bailouts etc but also to support burgeoning deficits guarantees strong inflation in the future, and the supply of physical gold and silver is getting ever tighter, creating the conditions that are at some point are likely to lead to an explosive advance. In addition, mining costs have dropped considerably, especially as a result of last year’s big drop in the price of oil.

However, if the expected inflation is preceded by another bout of deleveraging, as looks likely, then Precious Metals stocks could be taken down temporarily along with most everything else, although this time gold is likely to hold up better and perhaps even rise. This is why we have been lightening positions as the PM stock indices approached the top of their current intermediate uptrend channel and stand ready to take evasive action or protect positions with options should this uptrend fail. If it does and we see another plunge it will be viewed as an outstanding opportunity to take positions across the sector for what promises to be an exceptionally powerful recovery and uptrend. Selected strong juniors have been recommended in the recent past on the site that have the capacity to make strong gains over a short time horizon.

In conclusion, this is a very tricky time for investors with the battle on between the forces of inflation and deflation. Because of the highly unusual combination of enormous debt that must unwind with rapid expansion of the money supply, we are likely to see extreme stagflation involving economic contraction, sometimes involving heavy and destructive bouts of deleveraging, accompanied by eventual high inflation that could morph into hyperinflation. With Treasuries and other government paper becoming less and less attractive and more and more dangerous, investors seeking to preserve their capital will turn increasingly to gold. Gold will be king.


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Gold & The Panic Phase

By Jim Willie CB Mar 6 2009

www.GoldenJackass.com

Use the above link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.

A couple of bright friends reported to me some overriding themes at the PDAC gathering in Toronto last weekend. Apparently, some surprise came to them. They mentioned that more than a few analysts, writers, and speakers still do not get it. They actually believe the situation with the USEconomy and US banking system has begun to stabilize. That is like saying a college basketball player has Michael Jordan under control, or a farmer has his Clydesdale horse under control, or a misguided King can call back the ocean tide, or a man has a hurricane under control as he clings to a roof rafter. The USEconomy has entered an accelerated phase of disintegration, while the populace has entered a new panic phase. The US stock market is under the microscope, and it just broke a key multi-year critical support level. This article is intended to be constructive, with a list of perceived meters and conditions, followed by a four-step foundation for a recovery. When finished reading the four planks, one should easily conclude that no solution, let alone attempt, is on the correct path or is in the works.

Therefore the plan for individuals, who have been betrayed on a colossal scale, must defend themselves by exiting all assets and hunkering into cash. The betrayal lies at the feet of bankers, politicians, military brass, and corporate chiefs. By the way, cash is prescribed in that perfectly crafted document called the US Constitution. Gold & silver are the only forms of money that can legally satisfy debts public and private. That near perfect document has also been betrayed, with even the last president calling it a ‘mere piece of paper’ incredibly. The financial problems of the nation took deep root with the Vietnam War and the subsequent abrogation of the Bretton Woods Accord that had forged the US$-Gold linkage. The analysts, pundits, bankers, and politicos seem to have totally lost sight of this basic fact. Their deep error, along with profound corruption, will be centerpieces in the next chapters written in history. My rational and considered belief is that gold, as well as crude oil, will be anchors to the next global reserve currencies. What better route to stabilize both financial and commercial price systems? Those who believe that the USDollar will prevail and survive this turmoil as the global reserve currency are precisely as incorrect as those who believed the US banking system could survive the mortgage debacle as it unfolded. We are witnessing a long slow drawn-out death experience for the USDollar, liquidation of the USEconomy, to be followed by a default by the USTreasury Bonds. During the panic phase, the response in the gold & silver prices will be profound, with advances to date only a prelude to a march to $2000 gold and $50 silver.

CRESCENDO AFTER ETHICS ORIGINAL SIN
The topic of fraud has clearly been in the news often in the last two years. The mortgage fraud was for a while covered up by its framing as a subprime problem, but no longer. The counterfeit of Fannie Mae mortgage bonds, estimated at well over $1 trillion, has been essentially kicked under the rug on USGovt hallways following its nationalization. The insider trading by Goldman Sachs is an example of outstanding and impressive executions, perpetrated with complete impunity. The maze of unscrupulous, devious, and insidious fraudulent business units of JPMorgan is worthy of a 500-page chapter in the US financial history treatise, someday to be written. See the complete distortion of usury costs (interest rates kept low) by JPM, with such a volume of Interest Rate Swaps that was sufficient to run the Bond Vigilantes out of town. Skewed cost of money is the foundation for speculative bubbles. See the management of USTreasury Bonds by JPM on behalf of the Federal Reserve, along with the $2.2 trillion that they sold above and beyond the officially stated USGovt issuance of USTreasury Bonds. That is called counterfeit evidence, the records for which were lost in the third building at the World Trade Center. See the management by JPM of the Bank of Baghdad. Twice as much money is missing from the Iraq Reconstruction Fund than was stolen by Bernie Madoff, up to $100 billion being estimated. And never overlook the financial tentacles that extend from Afghan operations on the contraband side, to the Bank of Baghdad as the clearinghouse.

The quiet climaxes of fraud are seen with the Madoff Ponzi Scheme and other minor cases. If you think that authorities are still looking for where Madoff hid the stolen money, then you must believe that the Wall Street mission is to assist in the capitalization process for US industry. The majority of the Madoff funds are safely placed in the same location as much of the Wall Street ill-gotten gains. My sources report that location to be banks within the tiny ally coastal nation north of Egypt and south of Syria, which with the urging of the last Administration, removed all extradition laws in recent years. Trace back to find the original sin of the ethics violations, and you should find your feet squarely at the abrogation of the Bretton Woods Accord that cut the linkage between the USDollar and gold. This is an ethics violation climax of historical proportions.
The pathogenesis of breakdown must join with fraud during the advance of foreign debt ownership, which resulted in lost sovereignty. The hidden placation of foreign creditors results in hidden policy that does not cater to national interests of the United States anymore. The breakdown that comes will enable foreign creditors to gather a wide swath of US properties (residential homes, commercial property, factories, etc) from USTreasury Bond and USAgency Mortgage Bond conversion to hard assets. The teamwork, synergy, and innovation at the core financial engineering had been concentrated in what can be described at best as a national Ponzi enterprise of clean industry for the next millennium, and at worst on a grand network of fraudulent financial enterprise that includes fraudulent bonds, counterfeit bonds, narcotics, and arms dealing. The response in the gold & silver prices to recognized official and private fraud will be profound, with advances to date only a prelude to a march to $2000 gold and $50 silver.

STOCKS ARE THERMOMETER
The major indexes of the US stock market are in the news daily, and viewed by the public as perhaps the most important concurrent signal of the crisis. Technical chart analysts warn that the breakdown below the 2002-2003 support levels sounds an extremely loud alarm, paints a large billboard warning, and should be taken seriously as a dire development. Novices might not recognize the pattern below in the S&P500 index, but experienced analysts surely do. It is a long-term DoubleTop Head & Shoulders reversal pattern. It is a Mother of Reversal Patterns. Its base is roughly at 775, its top at 1550, which indicates a target of nearly zero. Not only are private wealth accounts being cut down but pension funds as well. Individuals invest much more in stocks than pension funds, which are diversified into bonds and commercial property. All asset groups are suffering. The public has begun to respond in minor panic to the stock market declines, as private telephone calls testify. Expect another decline of 25% to 35% on both the S&P index and Dow Jones Industrial Index. With each passing month comes more specific evidence of economic deterioration or disintegration, coupled with mammoth additional bank losses. They push stocks down. The key drivers seem to be job loss and big financial firm loss. See the history making $100 billion AIG annual loss, the ongoing hemorrhage at Citigroup and Bank of America, the gigantic extensions of cash from the USGovt to big banks.

The claptrap propaganda coming from Wall Street centers on price multiples against earnings. The problem is that earnings are evaporating, and the PE ratio argument is empty. The response in the gold & silver prices to the deep stock declines, cratered pensions, and loss of life savings will be profound, with advances to date only a prelude to a march to $2000 gold and $50 silver.

RETAIL IS THE BAROMETER
Over 80 thousand retail stores closed in 2008. The forecast from expert corners is for another 120 thousand retail shutdowns in 2009. Numerous retail chains have gone out of business, with the list expected to more than double in 2009 and 2010. Recall retail consumption had been the boasted foundation of the USEconomy, the engine of growth to the global economy, by inept clueless hack economists for at least a decade. The national guidance from the economic counsel staffs continues to utter heresy that spending is healthy, when sound economic reason dictates that investment in productive enterprise is the key to any solution. This blight is very difficult to hide from the American public, as they pass the partially and completely shutdown malls, mini-malls, and small office strip malls during their daily lives. The feedback loops are indeed vicious, as reduced spending means job cuts, even though they are low-paid jobs. Bear in mind that the construction and operation of retail shopping malls does not constitute investment in an economy toward its productive capacity, but rather creation of a pathway to liquidate and spend home equity on the path to foreclosure and bankruptcy. In my view, retail serves as a barometer on what to expect in the near term future. The crisis collapse in the car industry echoes loudly the retail woes, as annual sales decline range from 40% to 50% per brand. The response in the gold & silver prices to the blight in shopping malls, retail crash, and car collapse will be profound, with advances to date only a prelude to a march to $2000 gold and $50 silver.

FORECLOSURES ARE THE LEADING INDICATOR
In 4Q2008, the rate of foreclosures rose by 53%. No stability whatsoever is evident. The only good news is that the rate of FC is no longer 100% on an annual basis. So a deceleration is in progress. Maybe in one year’s time, the FC annual growth rate will only be 30% to 35%, with some luck. The Mortgage Bankers Assn reported today that the mortgage delinquency rate rose by two percentage points to 7.88% by year end 2008, and the foreclosure rate rose to 3.3% also. The total in DQ or FC rose from 10.1% in 3Q2008 to 11.2% in 4Q2008. So one home loan in nine is late or dead. Also, an estimated 20% of American homes are in negative equity situations, with loan balances in excess of their home values. As the delinquencies convert to foreclosures, the bloated home inventory for sale will remain at elevated levels. In fact, they are grossly under-stated, since banks are rotating foreclosed properties on their books in order to avoid a further flood on the bloated condition. REO properties by banks are a hot topic.

To be sure, a few dozen or a few hundred or perhaps even a thousand home loans might receive actual aid by the USGovt. The number of home loans to receive some form of official aid is proposed to benefit one in nine, coincidentally. Time will tell to what extent any new legislation on so-called ‘cramdowns’ takes root. Bankruptcy judges might soon have the power to dictate to a bank that it reduce home loan balances, seeking a level of affordability relative to proved income. The home loan aid process is incredibly slow, while the pace of economic decline is accelerating. Be sure to know that households in foreclosure, or in delinquency, or even in chronic insolvency from an under-water home loan do not spend money, and generally cut back on expenses, even enter a bunker mentality under siege. The response in the gold & silver prices to the household insolvency and foreclosure process will be profound, with advances to date only a prelude to a march to $2000 gold and $50 silver.

JOBS ARE THE LIGHTNING ROD
Nothing captures the attention of the public like the reports on job loss. Sudden income loss is often devastating. The continuing claims for jobless in the official aggregate records eclipsed the 5 million mark in late February. When the USGovt announces back-to-back months of over 500 thousand (half a million) job losses, the public will surely notice and scream from rooftops. Of course, the number is probably worse, since official agencies are urged to put the best face of their tilted figures. In the coming months, expect the number of monthly job losses to surpass the one million mark. As that occurs, the national level of concern will surely morph into some form of panic, with disorder to follow, and civil disobedience rampant. Calls for extreme action by the USGovt will be made, as though they control any solutions at all. In fact, look for their collective actions to greatly aggravate the national economic ills, with time release to occur down the road. After all, they sell hope. The response in the gold & silver prices to horrendous job loss will be profound, with advances to date only a prelude to a march to $2000 gold and $50 silver.

POLITICIANS REPEAT HISTORICAL ERRORS
The honeymoon is almost over for the new president. His cabinet staff comes from the same crowd within the establishment responsible for the financial collapse. They just wear different colored jackets, coming from the Clinton Camp instead of the Bush Camp. In my view, they are almost all turncoats to the nation. The federal budget for next year has centerpieces of tax increases (up 33% on income, up 100% on capital in the form of dividends), removal of some tax deductions for home mortgages, and a $20.4 billion defense budget increase. Obama even mentions measures that harken protectionism. Some of these main items are in a state of flux, as the errors of their ways are being re-evaluated. One should not increase taxes during a recession. One should not tax capital during a capital liquidation. One should not tax energy production during price instability. One should not discourage home purchase during a housing bear market. One should not increase military spending, when money is desperately needed for domestic purposes. These are classic political errors that will render additional harm to the current economic and financial crisis. The Glass-Steagal Law to prevent collapse of the financial system was removed late in the 1990 decade. Dominos can now fall, as it is joined at the hips from banking, stock brokerage, and insurance. Its scrap was a Pet Project of former Treasury Secretary Robert Rubin, again the Poster Boy of financial failure and fraud (see his gold leasing multi-year project). His was the stolen 1990 decade of prosperity. The damage is therefore certain to run across the primary financial sectors for a long painful sequence in time. The insurance firms are next to fall. Watch Prudential, MetLife, Hartford, and Lincoln.

History is being actively ignored. “What experience and history teach is this: that people and governments never have learned anything from history, or acted on principles deduced from it.” These words were spoken by Georg Wilhelm Friedrich Hegel (19th century German philosopher). Few observers seem to realize that on the spectrum, the distance between Fascism (battle cry of last eight years) and Socialism (battle cry since inauguration) is remarkable short. Socialism shares the misery, as the successful are forced to pay for the failures, the corrupt, and the lazy. To construe that nationalization and absence of profit motive represent movement in the direction of communism seems very much correct. The Politburo at the US Federal Reserve has done its job since irrational exuberance took root. The response in the gold & silver prices to USGovt policies that amplify the damage to the national condition will be profound, with advances to date only a prelude to a march to $2000 gold and $50 silver.

BANKERS FUND FAILURE & FRAUD
For over a year, a clear trend has been set in stone. The USFed and USCongress (aid & abet) have been on course to redeem fraudulent bonds, to fund almost exclusively the largest banks, and to deny credit supply to the mainstream. Unwritten orders were given by the USFed and Goldman Sachs henchmen who dominate the Treasury Dept for banks receiving TARP funds not to lend, but rather to acquire smaller banks in distress. All this while the regulators have been obviously given orders to sit on their hands or to aid the acquisitions and mergers (see the FDIC and Bair efforts). By the way, the FDIC fund is almost empty. The inescapable conclusion is that proper credit supply to profitable and promising enterprise is being obstructed, thus strangling the USEconomy. The nationalization of AIG and Fannie Mae was more designed to hide credit derivative explosions, to bury a mountain of counterfeit bonds, and to prevent a shutdown of perhaps over one hundred thousand businesses. The AIG conglomerate insures 70k individuals, over 100k businesses, and has 74 million customers. Without insurance or bonded coverage, many businesses would have been forced to close operations. The response in the gold & silver prices to misdirection of credit toward failure and fraud, and to exclude the healthy promise of private enterprise will be profound, with advances to date only a prelude to a march to $2000 gold and $50 silver.

A GENERATION OF LOST WEALTH
Much talk has come of a lost decade of wealth. A hint has come in the last few days of a lost generation of wealth, a cry which will reverberate very soon. This is real. This is accurate. This is a legitimate claim. My forecast is for housing prices to fall at least to those seen in 1988-1990, maybe lower. The stock market indexes could easily fall to the same levels they showed during those years, based upon powerful momentum and soured psychology. One should really examine the root causes and likely consequences from diverse liquidation amidst economic deterioration. The USEconomy can easily be described, as a result of unchecked credit growth combined with financial engineering hidden by a shadow banking system, to have been little more than a phony expansion of a national bubble for a full generation since that important 1971 year, when the USDollar broke ties with gold. The palpable risk is for much of the accumulated wealth for perhaps over 30 years to gradually be lost. If so, then a failure of state is assured. If so, then the national debt in the form of USTreasury Bonds cannot possible remain viable.

The two best single indicators in my view, among numerous, for judging the prospect of such calamities are these. 1) The USTBond credit default swap has risen from a mere one basis point a few years ago to a full 1.0% now. That is a 100-fold rise, and ranks among the worst in the world, along with the United Kingdom. 2) The BKX bank stock index has broken down in repeated fashion, the most recent being a month ago, fully forecasted by the Jackass. Today the Citigroup stock fell below $1 per share. The bank sector leads the stock market lower, and confirms the breakdown below critical support. The response in the gold & silver prices to perceived decades of lost wealth will be profound, with advances to date only a prelude to a march to $2000 gold and $50 silver.

1ST STEP IN RECOVERY – REMOVAL OF WALL STREET
The elite power center is still in charge from Wall Street. Their primary objectives are to avert a credit derivative meltdown, to prevent exposure of a bankrupt dead banking system from proper accounting, and to raid the public till (more bailouts for fraud) as much as is possible. The USFed still refuses to reveal usage of the TARP funds from last autumn, in full defiance. That Goldman Sachs executives continue to appear during official US Dept Treasury announcements on policy is a travesty. TARP fund disbursement, along with control of surly Congressional members, was the job of Goldman Sachs henchmen employed as underlings at Treasury. The travesty continues. The Wall Street syndicate remains in firm control of Treasury. They should be prosecuted, imprisoned, and ordered to give restitution to fraud victims. Instead, they remain in control. The official Stress Tests for big banks constitute yet another charade to endorse the channel of public funds into private banks. The response in the gold & silver prices to continued syndicate control of public funds will be profound, with advances to date only a prelude to a march to $2000 gold and $50 silver.

2ND STEP – END FOREIGN WARS
War costs generally are horrific and serve as principal cause for massive indebtedness to the United States. This has been the case since the Vietnam War. Hundreds of billion$ are annually allocated without question to military budgets, war costs, foreign aid in support of military objectives, and elsewhere, all in crippling fashion. Such chronic spending and industrial diversion has come for a generation without debate. The next annual budget includes yet another sizeable increase for the defense budget. The war in Afghanistan can be best described as Waterloo with a turban headdress. The emphasis at the national level for construction and destruction has been centered on war initiatives, with shockingly little awareness of the ultimate millstone placed around the national neck for the United States. Iraq Reconstruction Funds have recently been reported to be the object of between $50 and $100 billion in missing funds! Yet this news item was buried on back pages. This has been a wellspring of corrupt slush funds that even touched Henry Kissinger’s hands. The reconstruction should be focused within the US. The response in the gold & silver prices to misallocation of priorities and funds toward war will be profound, with advances to date only a prelude to a march to $2000 gold and $50 silver.

3RD STEP – TRUE INFRASTRUCTURE PROJECTS
Much talk has come for infrastructure projects that would fortify the USEconomy enough to provide traction toward recovery and sustenance. Jobs would come on such projects. To date, the projects are something of a joke. Some actual measures on alternative energy seem like a trifling trickle. Look to the Obama Stimulus package to see out of every $1 in funds, we have 14 cents of pork and 11 cents of stimulus, with a lot of political garbage typical of the last twenty years. No change in makeup and mix. In my view, a high-speed railway from Orange County California to Las Vegas Nevada does not qualify as manifested commitment to infrastructure. What? The USGovt subsidizes shuttles to and from Disneyland and the Vegas casinos!!! Thousands of bridges and tunnels and port facilities are in dire need of repair. In my former hometown of Pittsburgh alone, several bridges are shut down as ancient and a hazard. Pipelines for water, sewer, and energy supply are needed nationwide. Expansion of airport facilities is sorely needed, like concourses, jetways, and air traffic control centers, not security rat mazes. The infrastructure should include farms to harness the wind and sun, even to produce hydrogen gas from ocean water. Such initiatives are nowhere to be seen, as the same old same old junk pork and garbage and home earmarks continue to prevail. The response in the gold & silver prices to infrastructure waste and propaganda will be profound, with advances to date only a prelude to a march to $2000 gold and $50 silver.

4TH STEP – FACTORY RESTORATION
Any attempt to revive the nation with job creation and reconstruction would quickly expose the majority of observers (except those who continue to sleep) that the United States has an industrial base that is missing in action against a backdrop of a war economy. The better description is abandoned, dispatched, and forfeited industrial base. Unless and until the USEconomy reinstalls its factory foundation, returns significant portions of it from Asia (especially China), and ensures adequate training to professional staffs, the nation cannot conceivable recover. It is that simple, mainly because the challenge is not to put chunks of money in people’s hands to spend. The challenge is to enable people to earn legitimate chunks of money to spend from viable jobs. For a decade, the nation depended too much upon raiding home equity, upon jobs centered on the housing and mortgage industry, and upon extracting cash to spend on whatever they wished, whether productive, necessary, frivolous, or wasteful. The monumental and highly visible destruction, dismantling, and deterioration of the US car industry highlights the damage done better than any words or graph.

The USGovt must encourage job creation on the Homeland soil, for factories, reconstruction, and alternative energy pursuits. The Dept of Homeland Security seems much more intent on fencing the zones soon to morph into wasteland. The industrial base is the most important structure to a national economy, not its financial sector. The US has had its priorities backwards for almost two decades, putting financial engineering and its clean industry ahead of factories and their dirty effluent. The smokestacks of Wall Street have poured out noxious gases that finally have rendered crippling damage. The response in the gold & silver prices to continued factory ruin will be profound, with advances to date only a prelude to a march to $2000 gold and $50 silver.

Let’s bring back recycling initiatives, which are so productive. Here is a factoid worth thinking about. One metric tonne of recycled paper usage saves an average of 5 large trees, saves 30 thousand liters (~7100 gallons) of water, and requires 60% less energy for pulp processing. Conservative is a great element to fit into the industrial revitalization of America.

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Welcome to Miles Franklin

Weekly Gold and Silver Update             26 Feb 2009

Greetings!
Now the global economy is balanced on a razor’s edge and could quickly topple over into deflation or hyper-inflation. Things are far, far worse than the media is reporting. Here is our weekly update featuring a discussion on precious metals and the economy. We will not pull any punches in analyzing what is occurring or where the blame lies.

David Schectman CEO, Editor in Chief, Miles Franklin

Click on either the first of these (Word) or the second (PDF)

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The Great Deception as gold hits all time highs

By: Richard J. Greene
Posted Thursday, 20 November 2008

AMAZINGLY, while gold and other commodity related stocks continued to be sold off to levels that are at deep discounts to their intrinsic value in October, gold continued to break to new all time highs in most major currencies.  On October 9th and 10th gold recorded new all time highs in many currencies including the Euro, the Australian Dollar, British Sterling, the Indian Rupee, the Russian Ruble, the South African Rand and many others.  The Dow Jones Industrial Average Stock also recorded a multi decade low in terms of gold.  Investors are getting a very much skewed view of gold’s performance if they are viewing it in terms of the US Dollar or Yen.  These are the two main currencies that have been used as cheap funding sources allowing speculators to take on incredible degrees of leverage to invest in higher yielding assets with much better fundamentals.  The excessive debt is being unwound causing a very unnatural rise in the dollar as overleveraged investors raise dollars to pay down their excessive debt.  This has caused an unlikely gift from heaven for foreigners holding dollars to sell their dollars which are being printed like at no other time in history while at the same time they are rising in value due to the even bigger buying by debtors selling other assets to pay down debt.  The same is happening to the yen which is why in these two currencies gold has not yet recorded another new high like it has in the majority of other currencies.

The manipulative attacks on gold and silver are getting more and more desperate and obvious to the masses. You could say the action on October 10th went just a little too far to the point where even the mainstream press and media are commenting on the price discrepancies between paper silver and gold trading on the Comex and physical silver and gold which is ever more difficult to find available at any price. While the stock market was melting down on that day, gold went from up $40 to down $75 in a matter of hours.  Silver went from a high of $12.32 to a low of $9.42 as well.  Meanwhile in the physical markets for silver the best price I could find for silver was $16.50 per ounce, a whopping $7+ over the “market” price on the Comex.  That is an incredible 75% premium!  One ounce silver coins go for more than double the spot price on eBay.  The manipulation has become so obvious we are seeing a steady decline in the weekly Commitment of Trader’s Report open interest figures for gold and silver.  Could it be that investors are finally realizing that market is a total scam?

The manipulators have been so outrageous, they are precipitating their own downfall as Comex longs are increasingly demanding delivery rather than rolling forward. After all, you can take delivery and now sell it for as much as a 75% premium in the physical markets on eBay, for instance.  At this rate they are in huge danger of having their scam market revealed since there isn’t more than a fraction of the silver available for all of the demand which has been growing rapidly in recent times. This should soon result in a reemergence of demand for gold and silver equities as the convenience of the futures market and very probably the gold and silver ETFs are called into question.  When the fraud is removed, be prepared for the biggest gold and silver stock rally of all-time.  Right now the stocks are being sold with no attention to the underlying attributes of individual shares.  While many gold and silver stock investors have had enough and want out at any price, those buying in this selloff are picking up stocks of companies trading at less than ONE! times earnings or cash flow and as little as 30% of the cash companies have in the bank.  I don’t know if there has ever been a time in history where a group of stocks has traded so cheaply while their operations have performed so strongly and that is despite tremendous manipulation and suppression in their underlying products which are priced way below what they will be in a free market.

How could this have happened?  This is what we have heard from insiders that witnessed some of the actions which engineered the selloff in the commodities sector.

Back in July, days before Fannie Mae and Freddie Mac were to be rescued, Bernanke and Paulsen were faced with a horrendous Consumer Price Index release of +5.4% which had already been deceptively massaged lower through various methods such as substitution, hedonic pricing, and geometric averaging, generating a number so low it bears no relationship to reality.  Even with all the massaging lower of the CPI it was felt it had reached a level that would be most worrisome to the masses, particularly since gold and silver were working their way toward new highs recorded in March right around the time Bear Stearns blew up.  Incidentally, it has recently been discovered that Bear was likely attacked by other financial firms since it was long $12 billion in gold derivatives and was not doing its part in the gold suppression scheme. Bear was no more bankrupt than all the other major banks and brokers, however, with the incredible leverage these organizations have taken, (most all are leveraged over 30 to one), a rumor about such a firm’s liquidity will soon become a self-fulfilling prophecy since there is constant refinancing going on.

Paulsen knew that top performing hedge funds had been making a killing riding up the long term wave of higher commodities and shorting financials.  He was already validated in 2006 by his successful efforts to drop energy prices by getting his ex-employees at Goldman to change the weighting in the widely followed Goldman Commodity index overnight. This caused a cascade of selling by indexers when the surprise change hit the press.  The scrambling resulted in the failure of Amaranth, a large hedge fund specializing in energy which caused more selling.

This time it has been reported that in July, Paulsen went to big institutional investors such as CALPERS which had big exposure to the well positioned commodity sector and after relaying the seriousness of the condition of the financial system, persuaded them to sell their commodity related investments “for the good of the nation”.  He wanted to turn the inflation scare suddenly to a deflation scare.  With a few big institutional investors leading the way combined with rampant naked short selling of gold and silver equities by the likes of Goldman reported by Canadian brokers, a wave of selling in this area was put in motion that snowballed.  The illogical selling resulted in broken technical patterns of stocks resulting in more selling.  This has resulted in a high level of redemptions in gold funds that forces managers to sell even when the stocks trade lower than the cash the company has in the bank.  A way to check if this is what happened is to analyze individual companies and see how they have performed.  For the most part there is nothing that should result in a selloff, as these businesses are among the strongest in the world today despite suppressed prices for gold and silver that would be much higher at this time.

It is truly a disgrace that the modus operandi of our financial leaders is to send false signals to the marketplace and cause cascading selling and buying after having those in the know positioned to take advantage of the effect. That could have another name – robbery.  The bifurcation between the price of the physical gold and silver market and the “market price” as represented by the Comex is an indication that a vast number of participants in these markets have come to the realization, finally, that the market price on the Comex is a total sham. It is most unfortunate that those that have invested in gold and silver to protect precisely against the financial dislocations that have accelerated since Bear Stearns was driven to insolvency, are putting in for redemptions or selling personally because “something is wrong”.  Physical gold and silver in your own possession cannot be ruined although its perception can be tainted by those that believe the fraudulent pricing from the Comex actually means something.

Gold and silver are the mortal enemies of fiat money since fiat is always eventually abused to the point of worthlessness. Since the very banks which have an interest in seeing gold and silver discredited have access to unlimited borrowings from the Fed and have no restrictions whatsoever from driving the price of the metals and the stocks down, you cannot rely on any message that lower prices of these invaluable assets is bringing.  There are huge numbers of investors that are currently paying 70-100% over Comex prices for silver and 15-20% over for gold.  These people are clearly not paying attention to what the Comex “market” reflects.  Gold and silver serve a very special function in the protection of one’s assets and in a fiat money system gone totally out of control that is even more true. Investors need an appropriate weighting in precious metals that should not be sold because a line has been broken on a technical analysis chart.  Even though it does not seem to be working while it is apparent that it should, it is the type of asset that will probably work all at once, when the constant manipulation is suddenly overcome by natural forces.  Central bankers and the money powers are masters of all things paper.  They very cleverly found a vulnerable area to exploit when they noticed hedge funds were very long in this area and that they were using excessive leverage.  With a little cooperation from a handful of very large institutional investors they were able to initiate a domino effect of selling making this traditional safe haven look totally ineffective while in reality the selling is a result of holders using leverage and self defeating stop losses that takes them out of the sector when it is most needed.  Those that were overexposed or leveraged in this area should bring their weightings down to an appropriate level but to abandon the sector completely at this time is very foolish.

Gold and silver should protect assets from either inflation or deflation; however, a very rocky period before that protection becomes apparent should not be totally unexpected and reflects no understanding of what the recent manic money creation will bring about.  The huge losses being experienced now are more due to not understanding this than anything else.  Stocks can protect somewhat in a period of inflation but bonds would be lethal and unrecoverable.  Deflation would make highest quality bonds acceptable but stocks would suffer.  Cash would only protect in the case of deflation or in the initial stage of inflation coinciding with the period before that inflation rolls into the real economy.  That is probably what is occurring now and you should be protected in t-bills until it is apparent that inflation is going to be so high that your purchasing power will be wiped out rapidly.  In an era when most all major banks are recklessly leveraged at 30-40 times their equity it is clearly not safe to have much cash vulnerable to likely bank failures.  To do a check on these statements look at the evidence from the Bank of International Settlements.  Despite the belief that banks and financial companies are deleveraging there is almost triple the amount of derivatives as there was over a year ago at $1.4 quadrillion!  The money powers are less in control every day and that is why the attack on gold and silver has been so vicious. They have been unsuccessful from stopping other countries and investors from pulling all the available gold and silver off the market and these are the holders that will have the economic power down the road.

You can bet when all the leverage unwinding ends, the financial companies that were successful in engineering the selloff will be the new big owners of the stocks and metals that are being thrown away for less money than the companies have in the bank. Firms such as Goldman have vital information since they are among the largest prime brokers.  They know how leveraged specific investors are and can use that info against them. One major prime broker raised their in-house margin requirements on mining stocks from 50% to 100% “because they are so volatile”.  Obviously this resulted in more forced selling.  They always pull out every trick in their bag to make sellers for what they want to buy. With the information they have in hand is it any wonder that the market can go up 900 points one day and then down 800 the next?  They are gaming positions that should be privileged information.  Ex-Goldman employees entrenched in key Government positions in many countries help the money powers influence policies such as continually attacking the gold and silver markets. In July, two US banks sold paper silver in a very short period of time equal to 1/4th of an entire year’s production driving the silver price from over $19 to around $12 in a few weeks time.

The Government and their agents have spent the last decade propping up zombie companies such as GM and the banks, and suppressing free market movements in gold and silver. They continue to add to the problem with the massive bailouts and money creation that is the key factor driving gold and silver up which is what they so foolishly are trying to stop.  As derivatives positions blow up, the dollar gets a boost as failing counterparties try to raise dollars to pay off their failed bets.  A very huge portion of the $1.4 quadrillion in derivatives is positioned directly against what the natural pull of a free market that would cause asset prices to move to.  More specifically, interest rates on bonds would be very much higher, gold and silver would be very much higher, debt of most major corporations would be unsalable except at dramatically higher interest rates, etc. etc.

The key problem of the financial system is too much debt and leverage.  All solutions so far to the key problem involve more debt and leverage.  That is why derivatives have almost tripled since this crisis began over a year ago and we are no closer to a solution.  Gold and silver are even better values now than ever.   The $700 billion bailout which we were vehemently opposed to went to the banks and to furthering the goals of the financial powers which is not in your interest.  Not a nickel of it has gone toward extending more credit to consumers, nor will be, you have been lied to.  Guaranteed, some of it has gone to holding back the gold and silver price and from exposing the reality of the situation. Write your Congressman and complain, let them know you see what is going on. We do.

There are many money managers that clearly see what is going on and they have taken the appropriate steps to address the current scene. Managers such as Jim Puplava, Eric Sprott, John Embry, John Hathaway and many others have taken the correct steps. Their performance has not reflected that they are the correct steps but that will come in time unless we let the financial powers take from our very hands the investments that will protect us from their actions.  No leverage whatsoever should be used in this environment.  The only way you can have these stocks taken from you is if you are using borrowed money.  Gold stocks, silver stocks, and uranium stocks have fundamentals so strong that they cannot be hidden despite the unprecedented attempts to make them look bad.This is why silver trades as much as 100% above the phony paper markets.  You should be increasing your exposure to these assets, not withdrawing from them.  The upside is absolutely unprecedented.  Gold and silver stocks have never been cheaper relative to gold and silver than they are right now.  If you are overexposed, cut back, do not withdraw completely.

Do you own physical gold and silver?  It is absolutely essential and can still be sold at close to all time highs despite the bogus paper markets. In this investment climate gold and silver should not only be a permanent part of your portfolio no matter how the investments respond in the turmoil, it should be an increasing portion. Physical metal is very difficult to acquire if you have waited to this point so do not give up on your gold and silver stocks. They have direct possession even if it is still safely below the ground.  Put the vast majority of your portfolio in cash generating gold and silver companies, there are many which trade below three times cash flow and even one times cash flow. Many, if not most, have more money in the bank than their entire market capitalization. Panic selling initiated by the Paulsen and Bernanke whitewash did little to calm the nerves of the market place.  It did shut off the escape hatch of gold and silver that will benefit like no other area when the money printing accelerates and escapes into the real economy.  At that point, and we believe it is very soon, those that have sheltered themselves in cash and bonds will be annihilated and will be too afraid to move to the safety of gold and silver after what was just perpetrated.  This is truly criminal activity, be aware of it and stay sheltered with an appropriate percentage of your assets.

The capital that has been cut off from mining will most definitely create an upward explosion in the price of gold and silver like nothing we have ever witnessed. Demand for gold and silver continues to mount, particularly on the investment side while supply is in the early stages of absolutely plummeting. Gold production was down 6% in the first half of the year and will be much worse in the second half. Some companies we spoke to are moving to slow their production because they feel the Comex prices are just ridiculous. We agree and are glad to hear they hesitate to throw away scarce product for an inadequate price. Silver production will likely skid sharply if the situation continues. The zinc price has dropped all the way back to .48 while industry breakeven is closer to the $1 mark.  32% of silver production comes to market as a byproduct of zinc and another huge portion over 25% comes as a byproduct of copper. The stage has been set for the most remarkable and likely rapid rebound of all time.The bull market in gold and silver and all commodities was catalyzed by a very long period of underinvestment and lack of capital. That situation is clearly being exacerbated by the events of the past five months which will cause an even more explosive upside than before. The supply side will be affected much quicker and deeper than any falloff in demand due to weak world economies. One cannot just decide they all of a sudden would like to go find a new gold or silver mine or uranium field. Physical commodities must be priced above their production cost or the supply will simply dry up which is exactly what we are seeing in the gold and silver markets. Intervention can last for quite awhile but eventually the artificial prices result in ever bigger shortages and upward pressure on prices. People know that gold and silver should really be doing better now with all we have seen transpire this year so some people are using that as a justification not to buy it. As John Embry has said, “that is exactly the mindset the guys driving the price down are trying to create.” You can be sure when they can no longer drive it down they will be the big owners when it all bottoms.

Stocks in these sectors are trading at ridiculously low valuations based on earnings, cash flow, reserve values, and even just cash alone in the bank. This is clearly not a time to sell these companies yet investors have continued to do so forcing fund managers to sell stocks trading at a fraction of their real value to raise cash. As overleveraged hedge funds and investors sell investments and buy back dollars to pay off debt, the artificial strength of the dollar will persist until the debt is retired. Yes, believe it or not, there is global demand for the US dollar at a time when the country is fundamentally bankrupt which few yet understand in the US. This has all been set in motion by Paulsen and Bernanke with their scheme in July to twist the arms of big institutional investors to sell their commodity investments. The companies continue to report good earnings results even with the unnaturally low gold and silver prices.

It is impossible to know exactly when the selling will stop since investors want out of the strongest performing industries remaining in the US. If they would only take a hard look at what they are selling the selling will stop but all things must run their course. The sad part is just as investors run to cash we are ever closer to seeing just how unsafe cash is. We have been wary of banks all year to the point ofnot allowing much cash to sit in them. Our worst fears regarding how unsound banks are has proven out.  So far damage to depositors has been minimal as bigger banks that are in even worse shape have rescued bankrupt banks like Washington Mutual and Wachovia. Gold and silver continue to improve fundamentally with: wars on two fronts; huge, unprecedented and growing budget and trade deficits; ongoing financial crises with many more banks to go under; a recession that will uncover more financial problems; a flawed national energy policy; and improving supply and demand fundamentals. In addition, the monetary base is up over 50% over the past few months while other money printing to fund bailouts has even exceeded that. The Fed has kept its word that it is ready, willing, and able to print money in any quantity necessary to back these bailouts of the financial powers.

The uranium price moved down in October as hedge funds and financial players that were hoarding uranium metal were forced to sell in the deleveraging process. I was never a big fan of hoarding metal that already is experiencing shortages for its basic applications. Good for the electric utilities that got some material at a bargain price that they will find ever harder to acquire in the years ahead.  The price has started to move back up over the past few weeks.

When you look at the actions of our Treasury Secretary and the Fed you have to question either their sanity or honesty, it is one or the other. The Government’s borrowing needs for next year are already expected to double to over $2 trillion.Contrast the recent bailout plan initiated by China with ours. The China plan is focused on infrastructure with such things as railways and public housing that will require ongoing demand for commodities with a real, lasting product that can be used many years into the future. The US plan is focused on funneling $100’s of billions of dollars and eventually trillions to failed financial firms as well as uncompetitive industries, the most glaring of which is the US auto industry. These are the companies that caused the problems we have now.

The Administrators running the bailout were complicit in this entire mess. AIG was just handed another $40 billion now raising that bailout for one firm to over $150 billion. AIG has been rumored to be the biggest short seller of gold and silver.  Does that seem like a worthy bailout to you?  Contact your Congressman!  There should be no more bailout money funneled to the bankrupt Wall Street banks and brokers. American Express was just converted to a bank so it could too get on the gravy train. Enough! Let the chips fall where they may so we can start over. The current plan is just taking more from you and me in favor of the financial elites in power. The sooner it stops the better.  Make no mistake, the market and the media can be moved at will with all of the financial weapons we have handed over.Congressmen were threatened with Martial Law if they did not cede all the requested powers along with the $700 billion.  Protect yourself with t-bills and gold to the greatest extent possible. Be very wary of cash held by banks or any counterparty.

If you were a businessman and you bought a company that was generating cash equal to what you paid for the whole company or even 1/3 of what you paid for the whole company would you be upset and want to sell it?  That is, in effect, what you are doing if you sell these companies that are trading at these very low valuations.  It makes no sense but it is happening.

gold5eaglemed

Inflation or deflation – Gold Will Be King….
By Clive Maund   May 18 2009 2:01PM
From August 2007 when the world passed the tipping point it has been in the grip of massive deflationary forces that have already ravaged portfolios and pension plans and resulted in millions losing their jobs. This deflationary implosion had become structurally inevitable and it was only ever a question of when, rather than if, it occurred. It had to happen because debt and debt financed activities had ballooned to unsustainable levels. The wilful obstruction of the necessary corrective forces of recession over many years and the continued expansion of this huge debt bubble to unprecedented extremes via what is called financial engineering, in particular derivatives, led to it becoming critically unstable, so that when it burst a disastrous cascading deleveraging process set in. As we know, the event or crisis which burst the bubble was the sub-prime mortgage debacle.
Instead of accepting the deflationary implosion as the necessary price to be paid for years of excess, and something essential for eventual renewed growth from a firm foundation in the future, politicians and governments around the world, unable or unwilling to face up to the economic pain and probable political instability that would result, have been and are trying to obstruct the contraction through enormous ramping of the money supply in many countries and propping up defunct entities that according to the laws of economics and capitalism itself should be allowed to fall by the wayside. This is creating a highly anomalous situation where massive and ultimately unstoppable deflationary forces are colliding with an outright and reckless attempt to block them through means of massive reliquification. Because of the enormity of the debts and the scale of deleveraging necessary to purge the system, they can only delay or temporarily mitigate the forces of contraction, and that is probably all they are trying to do with the intention of further lining their pockets before they head for the hills. However, their continued efforts to obstruct these forces by means of the very profligacy and fiscal abuse that created the monstrous bubble in the first place, will lead to an even more catastrophic collapse later on. Their immediate solution to the crisis is to create blizzards of new money out of nowhere to throw at it and to drop interest rates to zero, in a desperate effort to stir up economic activity and to retard the compounding of already hopelessly out-of-control levels of debt. Many individuals and companies and even states and countries are in no fit state to take up the offer of cheap money, and have no reason to with demand having fallen off a cliff. Thus we face a situation where many asset values are likely to continue to collapse even while the air is filled with clouds of confetti money – you could call it super stagflation. The value of most debt must collapse towards zero, only in this way can individuals and companies be rid of its suffocating and paralysing influence, which is inhibiting their ability to generate demand within the economy. This means that the holders of debt instruments across the board are going to see the value of these investments shrivel towards zero over time. This will, of course, include the holders of US Treasuries and the holders of US dollar denominated assets in general.
Over the past two months we have witnessed a big recovery in world stockmarkets, that has been fuelled by the widespread perception that the global economy has “hit bottom” or is close to doing so, and that world governments have essentially bought their way out of trouble and beaten back deflationary forces by means of their massive money creation – politely referred to as quantitative easing. This fantasy has been played up by the media, who are in most instances an arm of government, but as we have just stated, the deflationary forces can only be exhausted once the imbalances giving rise to them have been corrected – and this will only be achieved once the massive debt overhang has been unwound, and this doesn’t mean marking debt to model, it means being realistic and marking it to market, which in the case of most debt means marking it to a big round 0. The crisis will end when we have arrived at this point and we are clearly a long way from it yet.
Thus, it looks likely that we will witness another downblast of deleveraging before before much longer, and it will probably take several such downwaves perhaps over the space of years to finally purge the system, just as in the time of The Great Depression, and the recent buffoonery of massive money creation will only exacerbate the crisis. As we witnessed last year, the collateral damage that is inflicted during a phase of rapid deleveraging can be very heavy as forced sellers indiscriminately dump everything over the side, regardless of its intrinsic merits. Therefore we should not rationalize that because something has sound fundamentals it will be immune. We are well aware of this risk and expect the oil sector to get taken down hard should another wave of heavy selling in the broad stockmarket develop as expected, which is why we dumped the oil sector at the peak a week ago . Precious Metals stocks may well suffer too, and we will mechanically exit most PM stock positions, which we scaled back a week ago, in the event of the current uptrends in the PM stock indices failing. However, this time around we cannot be so sure, for gold, which held up remarkably well during last year’s carnage, could rise as it continues in the direction of being “the only game in town”, and is given added impetus by the watering down of currencies worldwide. For a while we could see gold going up and gold stocks dropping at the same time during an acute selloff phase, before rebounding strongly. The US government has good reason to want to see another wave of deleveraging as it would serve to channel funds into the dollar again to buy Treasuries, like last year, although not to the extent that they would hope for, as this time round the rally in both the dollar and Treasuries is likely to be much more muted as more players realize that both are living on borrowed time, especially as the growing risk of holding Treasuries has in the recent past been highlighted by the Fed stepping in to monetize them to plug a threatening shortfall in demand, a sign of growing desperation. Once this late flight into the dollar and Treasuries has run its course, they are very likely to collapse. At this point gold and silver, the physical supply of which is already acutely thin, will go through the roof.
It is because of this risk of another wave of deleveraging setting in that we have been rather circumspect in recommending Precious Metals stocks in the recent past, especially the big index driven stocks. Certainly the fundamentals for the sector are very positive with the outlook for gold getting better and better with each passing month – the massive increases in the global money supply not only to finance bailouts etc but also to support burgeoning deficits guarantees strong inflation in the future, and the supply of physical gold and silver is getting ever tighter, creating the conditions that are at some point are likely to lead to an explosive advance. In addition, mining costs have dropped considerably, especially as a result of last year’s big drop in the price of oil. However, if the expected inflation is preceded by another bout of deleveraging, as looks likely, then Precious Metals stocks could be taken down temporarily along with most everything else, although this time gold is likely to hold up better and perhaps even rise. This is why we have been lightening positions as the PM stock indices approached the top of their current intermediate uptrend channel and stand ready to take evasive action or protect positions with options should this uptrend fail. If it does and we see another plunge it will be viewed as an outstanding opportunity to take positions across the sector for what promises to be an exceptionally powerful recovery and uptrend. Selected strong juniors have been recommended in the recent past on the site that have the capacity to make strong gains over a short time horizon.
In conclusion, this is a very tricky time for investors with the battle on between the forces of inflation and deflation. Because of the highly unusual combination of enormous debt that must unwind with rapid expansion of the money supply, we are likely to see extreme stagflation involving economic contraction, sometimes involving heavy and destructive bouts of deleveraging, accompanied by eventual high inflation that could morph into hyperinflation. With Treasuries and other government paper becoming less and less attractive and more and more dangerous, investors seeking to preserve their capital will turn increasingly to gold. Gold will be king.

Gold & Mortgage Failure Avalanche

By Jim Willie CB Posted originally 12 Dec 2007

http://www.goldenjackass.com/

AN AVALANCHE COMES in 2008. Its wreckage will hit both the US Economy and banking world. The greatest deception in the bank sector this year has been the misrepresentation of the mortgage debacle as a subprime problem. That is akin to calling an iceberg only a problem for what one can see, when 90% of its mass lies below water. Ice is lighter than water. Most mortgage bonds are like acidic stones weighing down bank and investor balance sheets. Wall Street and the US Govt con artists, using tools like fraud and distortion, prefer the public and investment community to think of the ‘Subprime Problem’ as the source of distress. On mortgage bonds, collateralized debt obligation derivatives, structured investment vehicles, all dominant in the news, reports constantly stress how the problem is traced to subprime mortgages to all those unworthy home loan borrowers who never should have been given such loans, even at higher mortgage rates. The systemic threat, both to the US banking system and US Economy, has entered a new stage. The remedy addressed is sure to force the US Dollar lower and the gold price higher, to occur in the next gear. Breakouts are coming which will seem to lose control, like what was seen in September and October.

Of desperation & fire trucks

Official policy in reaction to the US Economic threat of recession will spill money into every corner and crevice. Gold and mining stocks will benefit. My forecast stated all summer long is that the US Govt maestros will gradually introduce increasingly broader rescue elements, since everything they try at early stages will fail. The US Fed remains badly behind the curve, as yesterday they cut the official Fed Funds target rate, but did not sufficiently cut the Discount Window rate that imposes a Stigma Tax. Today, the US Fed announced a much broader bank liquidity policy, focused upon more auctions at set rates and a swap line with the Euro Central Bank. They have announced more coordination with the Bank of England, the Bank of Canada, the Swiss National Bank, and the US Federal Reserve. This is part of my forecast. They must have been working all night long.

By summertime 2008, the requirements for a grandiose Resolution Trust platform will be etched more clearly. The key to the gold price lies in two spots: 1) massive monetary inflation to treat the banking problems and prevent recession, 2) realized price inflation in a manner lacking disguise. John Mauldin uses the metaphor of fire trucks being called to the scene. The US Fed has been amazingly shamefully slow in recognizing the problems. Stuck in their stupid “inflation versus growth” framework mindset, they miss both the interbank system seizures and home mortgage avalanche coming outside the prime mortgage corral.

The threat to the banking system will be staggering. The threat to the economic system will be broad and deep. The avalanche will expose the combined system as insolvent, broken, in need to total rescue. The damage will necessitate rescue platforms to undermine the entire US$-based monetary system, certainly sufficient to lift gold well past the $1000 level. By the time 2009 approaches, the system will be recognized as totally broken. The new question will be whether that system can indeed be repaired. As measures put in place and debated for consensus approval, the urgently demanded movement should be the particulars on the new Resolution Trust Corporation. The desperation no longer hidden (like on Bernanke’s face) will lift gold well past the $1000 mark. The impetus behind the gold price will turn to inflation much more than the US$ counter-lever. All major currencies will be inflating heavily, as seen in recent central bank decisions either to cut official interest rates or to hold steady. Major currencies will begin to be compared in a manner to judge which ones are weaker as they are undermined during stimulus to discourage economic recession and credit flow interruptions.

The new 2008 year will smash that notion, as an absolute avalanche of failed mortgages will slam the bank system and financial sector in general, the majority being prime mortgages. SHOCK & AWE IS RIGHT AROUND THE CORNER ON PRIME MORTGAGES, A FACT THE BANKERS ARE KEENLY AWARE OF!!! The villainous failed mortgages have a few traits in common. These primes are adjustable rate mortgages (ARMs) with harsh resets. They contain destructive features certain to cause as much pain as laughter for their insanity. Recall they are prime mortgages with lax features resembling subprime loans without the higher rates. A reaction to the incredibly flimsy inadequate Subprime Mortgage Freeze Plan, with dire descriptions of the prime mortgage avalanche can be found in the December special report to the Hat Trick Letter, entitled ” National Bailout & Looming Mortgage Disaster. ”

Only 150 to 225 thousand subprime mortgages will be addressed by this flimsy HOPE NOW freeze plan, and nothing among the looming prime mortgages heading for certain default. The innovative mortgage products face ruin. Large cross sections of newer mortgages, written since year 2000, are under-water badly. Their loan balances are much greater than their home values. THE NEW PHENOMENON IN 2008 IS RECOGNITION OF ZOMBIE LOANS, ZOMBIE HOMEOWNERS, ZOMBIE CONSUMERS, AND ZOMBIE BANKS. They are bankrupt without declaration; they are walking dead. An added footnote is needed to this auxiliary HTL special report, tied to accusations of fraud by large mortgage bond investors, both in the United States and foreign institutions.

Motive: avoid lawsuits & forced bond buybacks

The threat of court-ordered forced contractual bond buyback by Wall Street con artists is nearing a reality. If investors engage the Wall Street banker broker dealers in the renegotiation, refinances, and workouts, then those institutional investors will lose the right to sue Wall Street firms, and lose the opportunity to force fraudulent bonds to be bought back at perhaps ten times their current traded prices. Wall Street, given its Fascist Business Model connection with the US Govt, has enlisted Congressional help to place ‘Safe Harbour’ obstructions to lawsuits, thus absolving the criminal activities perpetrated by Wall Street. The gaggle of Wall Street firms engaged in packaging mortgage bonds, ensuring they contained a ‘AAA’ false label, colluding with key agencies to misrepresent the sale of securities, has made a bold move to freeze troubled mortgages, and to dupe/lure investors into the process. If they take the bait, they lose the opportunity for remedy on hundreds of billion$ in fraud-ridden bond losses. My contention made for over two years is that the US Govt and Dept Treasury and Wall Street and numerous major icons in the United States embody institutionalized dishonesty. That perception is much more clear in 2007. Legal address and remedy of that institutionalized dishonesty might come in 2008.

Wall Street and other major bankers continue to soil their pants. They realize several looming tragedies:

•  Prime ‘AAA’ mortgage bonds have lost roughly 20% of value

•  Innovative flexible adjustable mortgages are due to default in droves

•  Enormous growing list of under-water mortgages are beyond rescue

•  Big banks are facing dire insolvency threats, as new defaults approach

•  Enormous bond writedowns have only begun for big banks

•  Insolvency can turn to bankruptcy with more debt rating agency downgrades

•  Mortgage bond investors contemplate lawsuits, accusing Wall Street fraud

•  Wall Street banks face the prospect of over $1 trillion in mortgage bond buybacks

•  Rescue & remedy will trash the US Dollar and catapult the gold price

As a preface, one should know that politicians did not advance this plan. The key initiators of the HOPE NOW project were three banks. It was an alliance led by the Federal Deposit Insurance Corp (insurer of banks), along with big banks and their lobbyists from Citigroup, JP Morgan, and Wells Fargo. These banks in my opinion are insolvent, soon to be forced into bankruptcy as the next round of the mortgage debacle unfolds from the ‘innovative’ adjustable and option laden mortgages. They all face bankruptcy, insured by the FDIC. If lawsuits are filed and that road is traveled, declared bankruptcy is assured. The rescues to save the Ruling Elite will lift gold and trash the US Dollar, as much from a new unprecedented round of monetary inflation, as from destroyed image of the US financial system. Freezes never work. When in college, my memory is vivid of the lunatic Nixon Wage Price Freeze. When it lifted, the price inflation rampage was the worst in modern history. My suspicion is that when any mortgage freeze is lifted, both mortgage rates will rise sharply and mortgage bonds will fall sharply in value.

Few have bothered to think about the infectious disease of moral hazard, to consumer and household reactions. Many economic participants will feel left out with the current rescue, against a backdrop of watching colossal fraud go unpunished. They will possibly act destructively, an intentional effort to destroy their credit rating so they can participate in national bailouts. Many live in homes with negative home equity. They might feel above the rules, immune to impact of their actions, engrained in destructive habits, feel powerful from a reprieve, want to be included, or just not care. They will feel they have nothing to lose. The likelihood that property taxes will be paid, water & sewer fees paid, lawns mowed, hedges & trees pruned, garbage removed, broken windows repaired, holes in walls filled, driveway cracks filled, shingles straightened, liens on the property resolved, these are all in doubt in my book. Pride in ownership will turn ugly, into a free ride game. Practicalities are strained to the extreme. A zombie comes to learn to act with disregard, disrespect, and disobedience. Henry David Thoreau wrote ‘Civil Disobedience’ almost two centuries ago in response to the Spanish Civil War, yet another false flag self-inflicted attack. That was done to the USS Maine vessel off the Cuban coastline. Expect such disobedience to be practiced widely in reaction.

Not a subprime problem anymore

If ‘AAA’ rated mortgage bonds have lost 20% already, this is not a subprime problem anymore. My contention is that many ‘AAA’ bonds are likely to lose over 50% of their value, as home collateral value drops another 10%. Wells Fargo announced a whopping $1.2 billion loss from prime second mortgages recently. Remember how people could borrow their entire down payment with an immediate 20% second mortgage out of the gate? Well, they are failing, with Moodys estimating 15% of them to fail. That is on par with the horrendous subprime default rate. The E*Trade bond loss writedowns were not subprime. After taxes and cash infusion is removed from Citadel Investments, the E*Trade fire sale salvaged only 11 cents per dollar on their $3.1 billion prime mortgage bond portfolio. The liquidation damaged the entire market by exposing its low value. This is not a subprime mortgage problem anymore. The debt ratings agencies writedowns have entered a second gear, with some acceleration. They are not only downgrading massive bank portfolios, they are threatening to downgrade the bond insurers such as ACA Capital and MBIA, as well as others. What is a house or business worth when it cannot be insured due to faulty structures? NOT MUCH!!!

Fascist business model entrenched

However, here is where the real damage comes, as an extension of the Fascist Business Model.

The sickest and often most fraud-ridden banking entities will receive fresh new money, possible US Govt handout infusions. The failures will be rewarded, leaving the successful, honest, competent to struggle or to go begging. Banks will issue fewer prime mortgages. The plan will force extreme focus on subprimes, ignoring primes. Banks will be forced to hold back on funding new loans since old loans must be addressed. In the process, their plan will very possibly accelerate the downside for housing prices. Home inventory levels will continue to rise. Sellers will not find willing buyers so easily capable to make final their loans. The lending institutions in general will be rendered less inefficient. The most glaring example of this principle will be the capital funding of Freddie Mac and Fannie Mae. F&F are failed institutions with broken apparatuses, having operated for years without disclosure, but will dominate the national program if our current leaders have their way. Instead, new financial entities should be created, not revival of broken entities. Inefficient capital usage will be the main feature of this plan.

In my opinion, THE FINANCIAL SYSTEM HAS OFFICIALLY ENTERED CHAOS, with that chaos more widely recognized in year 2008. To be sure, it is an early stage. Massive housing losses have occurred. Even more massive mortgage bond and related credit derivative losses will occur. Rewards are being prepared for the most reckless of participants. Encouraged destruction of credit and credit ratings is possibly around the corner, so that marginal households can participate in freezes, bailouts, or whatever is handed out. Subprime loan failures are the tip of the iceberg. In 2008, the breakdown of numerous other types of mortgages will occur, already in their initial phase. They are NOT subprime mortgages. The mortgage finance sequence of boom, bubble, bust is entering the third stage. Prices for housing properties will revert at least to where they were in 2001 when the insanity began, which was actively encouraged by Greenspan. History tells us that. His fingerprints are everywhere. All subprime mortgage bonds will go to zero in value. All CDO bonds containing subprimes will go to zero in value. All prime mortgage bonds will lose at least half their value. If the national decline in home prices falls over 10% to 15% more, then almost all recently issued prime mortgage bonds might possibly head to zero in value. Few talk about the next destructive factor for mortgage bonds.

Ultimately, a minimum of a $2 trillion bailout is necessary, as mortgage bond losses will be at least that high, especially when considering the leveraged CDO bond losses. The new bigger broader Resolution Trust Corporation must be created as soon as possible without delay. Urgency is here and now. The system is in the process of degradation, sure to lead to some increased disorder. The changes will be similar in England and possibly to some degree Spain, because they went overboard on real estate speculation. England built an economic dependence upon an inflated housing sector. Spain permitted uncontrollable vacation property speculation. Be sure to know that Wall Street firms are in charge of the solution to a disaster that they themselves perpetrated. Wall Street firms will want to be in charge of the bailouts, even the Resolution Trust Corp. Wall Street firms will want to be involved in the grotesque bailouts, since so much corruption and opportunity will be presented.Like the parasites they are, they sense gain. Think Halliburton and the Iraq & Afghan Wars, with profits abounding to insiders on cozy contracts. Think contractors in New Orleans and Hurricane Katrina relief. Think the next RTC administrators, with more huge profits. To even consider the fraud-ridden Freddie Mac and Fannie Mae for serving as the foundation financial agency for secondary market reinvigoration is a travesty. It is a blatant endorsement of the entrenched Fascist Business Model.

Failed innovation in mortgages

Anyone who believes the mortgage debacle is limited to subprime loans and bonds has bought hook, line and sinker the story trumpeted by Wall Street and the larger banking community. The risk pricing model has broken, with authorities determined not to have the story properly. Instead, it is framed in friendly terminology, distorted to the public and the investment community.

The world of bizarre reckless adjustable rate mortgages (ARM) is soon to suffer a publicly visible and horrible implosion. The aftermath of irresponsible 0% down payment mortgages is soon to suffer implosion.
The innovative creative flexible mortgages are soon to suffer implosion.
No documentation, no income mortgages, unimaginable in normal cultures, are soon to suffer implosion.
A vast world of under-water mortgages exists in the United States, soon to suffer implosion.
The abuse of second mortgages and home equity loans is soon to suffer implosion.

The main focus of attention will be on California, the center of innovation and creativity. Think the American Home Dream turning to a Ball & Chain toward serfdom, the New American Nightmare.

The key theme with innovative adjustable mortgages is their zombie nature. Resale is hindered, as is refinance, since the property is vastly under-water, loan balance greatly exceeding the home value. A return to similar mortgage loans is impossible, since they no longer exist. A loan rate freeze is a certified prescription for another zombie loan and zombie home title owner.

Negative amortization mortgage implosion. This type loan has permitted home title owners to pay less than the appropriate interest amount, thus adding to the loan balance. When the loans hit their maximum negative potential allowance, a huge increase is forced which could result in required monthly payments not 20% to 35% higher, but 100% to 200% higher. The full interest requirement kicks in, based upon the full loan balance, having risen. Imagine a $1400 monthly payment shooting to $2800 or $4000!

Prime second mortgages implosion. This type of loan enabled a huge number of home title owners to effectively invest 0% down payment in their original purchase. Many lending institutions have cut off further withdrawals from the home equity source, in a lockdown much like applying a tourniquet to a bleeding limb. Wells Fargo once boasted this spring not to be involved in subprime mortgages, but they possess $84 billion of these worthless loans. Expect Wells Fargo to go bankrupt. The bankrupt banks will not just have Wall Street addresses.

Pay option adjustable rate mortgage implosion. Called ‘Option ARMs’ in the finance industry, this category will make national news for their insanity in negative amortization features. In volume, they will greatly eclipse the subprime story, since the loan type involves all risk levels of borrowers and all sizes of properties. Again, this feature enabled many people to buy far too large a property. Shocking statistics are cited in the special report, pertaining to these truly reckless loans. Bear in mind that homes have fallen in value, so underwater percentages in extreme cases of these loans might be more than 25%!!! Analysts estimate that on many of these Option ARM loans, home title owners are underwater by 15% to 20%. Many of these loans have seen their balances rise by 7% per year for at least three years. These loans are more disguised subprimes. The negative amortization features act like a timeduse to explode, in a situation offering no hope of refinance, no qualification for other loans, and no equity. They will go bust.

Hybrid interest only adjustable rate mortgage implosion. The hybrids attracted borrowers by offering a fixed low introductory teaser rate for a fixed three, five, or seven years. After that period, they adjust annually. Again, this feature enabled many people to buy far too large a property. The 3/1 (3-year fixed, adjust every 1 year later) began to reset in 2006, with many more in 2007. The 5/1 will begin to reset in 2008, causing a nightmare. Many lenders offered Hybrid ARMs to lower quality borrowers. Plenty such loans did not require income verification. Like the Option ARM, the low teaser rate caused the loan balance to rise during the introductory period, thus leading to vast number of loans being under-water. Again, refinance or new mortgage loans will not be approved. They will go bust.

Conclusion

The downtrend in housing prices generally might actually motivate banks and other lending institutions not to make more home loans. A tidal wave of foreclosures comes soon, not related to subprime in any way, with California at the epicenter. Mortgage bond holders of above described abusive INSANE mortgage loans packaged into bonds will suffer massive losses. For some, like Option ARMs, no bond market exists anymore. The banks on the other hand will suffer from the tidal wave of loan losses, much of which is deserved. My only hope is that Wall Street banks suffer their fair share of the pain. Home property values in some metropolitan areas are likely to fall by 30% to 50% from peak, taking them back to 2000 and 2001 levels. THE ONLY SOLUTION IS UNTHINKABLE, A NATIONAL BAILOUT OF THE MAJORITY OF HOME MORTGAGES AND MORTGAGE BONDS, SINCE THE ENTIRE SYSTEM IS BROKEN IRREPARABLY.

The effect on the US Dollar and gold price is uncertain, but surely negative for the clownbuck and positive for gold. As Persian Gulf oil producers watch in horror, they will be increasingly motivated to cut their US$ formal currency pegs. The upcoming US mortgage debacle will kill the USDollar as the recognized practiced endorsed world reserve currency, with the abolition of the defacto PetroDollar standard certain. The gold price will rise amidst the absolute hurricane of low pressure asset deflation and colossal monetary inflation to fight it. THE GOLD PRICE IS CONSOLIDATING NEAR AND ABOVE 800, A DISPLAY OF STRENGTH AND RESILIENCE.

My dire forecast for 2008 is that the US Dollar DX index will find its way to 65 and the gold price will find its way to $1200 per ounce. A 10% to 15% decline in the US Dollar comes. A 30% to 50% rise in gold comes. The positive rub to investors is that as the national emergency becomes more widely recognized, the need to flood the bank & bond arenas, as well as the corporate credit & household arenas, will become broadly understood as desperate. Without that flood, the system will enter a deeper economic recession than already is in progress. Without that flood, the system will see the banking system actually fail.


Written by aurick

03/03/2009 at 10:06 am

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