Monday, April 20, 2009

The Gold Bug Delicacy Called Inflation

As a child, I was often told by my parents, "If you don't have something nice to say, then say nothing at all." Thus I have remained quiet, and ignored the Gold Market and the economy the past few days. Ahh, ignorance is bliss. America is a blissful nation.

Recently I have espoused "patience" with the Precious Metals Markets. Patience is a virtue. As a culture, we are a nation of people that want everything "right now". Our society of "instant gratification" has been instrumental in the debt bust we are experiencing now. I was also often told by my parents that "good things come to those who wait."

At times, it feels like I've been waiting forever for the Gold Market to lift off and soar. In fact though, the Gold Market has been soaring for the past eight years. It just hasn't been soaring for the reasons I thought it would, yet.

I began investing in the Gold and Silver Markets in 2003 as a play on rising inflation and rising commodity prices. The Gold Bull Market began in 2001 following the events of 9/11. Low interest rates and easy money fueled the early stages of the Gold Bull. Gold rose steadily on the back of a weak US Dollar thru 2005 and then shot to a peak near $750 in April 2006 on the back of a speculative fury despite a rising US Dollar in the second half of 2005.

A correction and consolidation in the price of Gold though out 2006 and into 2007 followed despite a falling US Dollar. Then in the summer of 2007 news broke of the failure of two sub-prime hedge funds at Bear Stearns. The spark that would ignite a global financial calamity began to smolder under the radar. Gold Bugs smelled smoke, and began to bid up the price of Gold again. Soon, new highs in Gold were seen as the two smoldering hedge funds at Bear Stearns became a five-alarm fire.

In September of 2007 Gold launched. Like the Space Shuttle leaving Cape Canaveral, Gold quickly and furiously rose on the back of rising fears of systemic financial infection due to the possible collapse of Bear Stearns and the potential repercussions the collapse could have on the "entire" financial system". Gold became, and was, the go to safe-haven as the fear of financial Armageddon spread around the globe.

The weekend of March 17, 2008, Gold's trip to the Moon was halted in it's tracks by the first of many bank bailouts to come was announced. Bear Stearns was married to JPMorgan by the Fed in a shotgun wedding. The Fed declared financial calamity averted, and the safe-haven of Gold was tossed to the wind. The price of Gold collapsed as the US Government began an unending series of bank bailouts and interest rate cuts at the Federal Reserve. The US Dollar soared as demand for it to cover debts around the globe exploded. US Treasury notes became the new "safe-haven".

Gold plunged for weeks on end finally bottoming in October 2008 as the realization spread that the US Government was losing it's battle against the failing banks, and the tumbling stock markets. Renewed fears of financial calamity began to surface, and Gold Bugs once again sought Gold as a safe-haven in the face of Global Financial Armageddon.

Coincidentally, Gold's collapse in the Summer and Fall of 2008 took it back to the point at which it had broken out the previous year when the five-alarm fire at Bear Stearns had sent Gold soaring. Gold again quickly roared towards $1000 on the very real fears that global governments would be unable to control the unraveling of the World's Financial System. Renewed fears that Citibank was about to fail, and Bank of America was teetering on collapse, had the financial community in a panic, and Gold Bugs smelled blood. But low and behold! Another huge bank bailout by the Fed in February 2009, and all was miraculously under control again. Toss in another huge "loan" to the floundering group at AIG, and everything was fixed [yeah, right]. And Gold's usefulness as a "safe-haven" was once again kicked to the curb.

As Spring began to unfold on Wall Street, news of "green shoots of growth" began to swirl in the financial press despite the growing ranks of unemployed across all sectors of the economy. Job loses in excess of 650k per month failed to dim the hopes of economic recovery and revival. New accounting rules that favor bank loss deception are passed after the FASB is blackmailed by the US Congress. Investor euphoria erupts, "Screw Gold, Buy Stocks!" Happy days are here again!

Not so fast. Only a fool would believe that the worst is behind us and clear sailing on the financial seas is in front of us. A financial crisis the scope of which we are enduring can not, and will not "end overnight". As I type this a headline comes across my screen on Yahoo Finance:

Stocks slide as investors dump financials
Stocks fall as investors worried about trouble spots on balance sheets dump financials

Wall Street fell sharply early Monday as investors sold financial stocks and looked to lock in profits after a six-week rally. Investors are having doubts about banks' profit reports and are wondering whether their better-than-expected performance masks larger problems with bad debt.

What? Investors are having doubts about banks profit reports? What happened to the investor euphoria following the announcement that banks could lie about their books on their financial statements? I tell you what happened to it, there never was any. The investor euphoria was all concocted by the financial press. The six week Bear Market Rally is coming to a fitting end, and is being revealed for what it has been...a short squeeze.

Traders, Not Investors, Fueling This Stock Rally: NYSE Chief
Wall Street's stunning six-week rally has been fed more by traders looking to take advantage of quick swings in the market than investors with a long-term view, NYSE Euronext (NYSE:NYX - News) CEO Duncan Niederauer told CNBC.

Because of that, the rally likely is to run out of steam as low volume eventually comes back to the bite the market, he said.

"It feels to me we're in a trader's market and not an investor's market," Niederauer said in a live interview from the exchange floor.

"The volume in March hasn't convinced me that it's the kind of volume that you need to see to believe it was the real beginning of a turnaround," he said. "Instincts tell me we're going to retrace one more time and the rally I believe is the summer rally."

Market rallies on low or falling volume are often signs of a short squeeze in the market. Considering the FASB mark-to-market rule change and the recent revelation that the SEC is looking to reinstate the "uptick rule", shorts were wise to cover their positions. In order for shorts to cover, they must "buy" stocks. The financial news media only focusing on rising stock prices and creating headlines interprets the markets moves for the financially challenged as "a sign of a bottom" and "green shoots of growth". "Buy stocks now!" "Don't miss the beginning of the 'next' Bull Market". On and on they go about "the bottom" in stocks when nothing could be further from the truth.

I've said it before, and I'll say it again. There is still too much "hope" in the equity markets for them to make a bottom. A bottom will be reached when ALL hope for stocks is lost, and nobody wants to own them. See the Dow circa 1982 for a "hopeless bottom" in the stock market.

Gold's reaction today is not unexpected. Financial calamity is still in the sights of investors. Gold as a safe-have is still viable. Financial calamity brings with it market volatility. Market volatility over the past year has been unprecedented in ALL market sectors. Expect it to continue.

Gold as an inflation hedge. This is the number one reason I invest in the Gold and Silver markets. It should be the number one reason why you invest in the Precious Metals markets. Inflation is baked into the cake so to speak. The US Federal Reserve has seen to that. By spending or pledging to spend over $12 TRILLION of money conjured up out of thin air the Fed has sown the seeds of rampant inflation. Some suggest, and rightfully so, that "hyperinflation" may be the end result of all the government printing and spending of $12 TRILLION. $12 TRILLION is almost the equivalent of one year of US GDP. How can it not be inflationary?

The Fed is sowing the seeds of inflation with each bank bailout, with each multi BILLION dollar US Treasury debt purchase, with each handout to GM, AIG, or "debt swap". Like a farmer sowing his seeds in Spring, great patience is taken during the "growing season" before the farmer can harvest his crops, and cash in on the investment of his sown seeds. As the Fed sows its seeds of inflation, the Gold Bug, like a grasshopper, must wait for the crops to break the surface and grow before he can feast on the new crops. Inflation has yet to rear it's ugly head, but it will. And Gold bugs will feast in fine fashion once it does.

Corn crops in the Midwest begin to grow in earnest once they are "knee high by the Fourth of July". Expect the same for inflation this year. The "green shoots of growth" so often fawned over by the financial press of late could be better described as the "green shoots of inflation". For once true signs of growth come back to the economy, if they ever do, inflation will be sure to quickly follow. And this crop of inflation is sure to shock even its farmers, the US Federal Reserve. A bumper crop of inflation is certain, the Fed is counting on it. Buy Gold now while it's on sale, and reserve your place at the dinner table to feast on this fine crop of Gold Bug delicacy called inflation. Be patient, the crops will be in soon enough.

U.S. Global Hegemony – The Beginning … And the End[exceptional read]
By Andy Hoffman
President Obama’s “economic plan” is built on sand. Or worse, as there does not appear to be any “plan” at all.

It is just a series of such band-aids created by Wall Street and spearheaded by his head economic advisor, Larry Summers, and Treasury Secretary Geithner. Two of Obama’s top three campaign contributors were JP Morgan and Goldman Sachs, as was the case for most (if not all) of the Congressional figures involved in engineering the bailouts.

Larry Summers, as Treasury Secretary back in the Clinton Era, actually penned the “Gibson’s Paradox” essay that describes how keeping interest rates low fosters low inflation expectations, and the best way to keep interest rates low is to hold down the gold price. Meanwhile, Geithner, in his previous post as head of the NY Federal Reserve, was a key point man in the actions of the PPT and gold Cartel, a disciple of none other than Alan Greenspan. Fed Chairman Bernanke, by the way, has been so discredited by his ineptitude that he is hardly worth mentioning.

Right now, the only plan I see is a series of lies, frauds, and manipulations of financial markets and the public’s perception. “Operation Confidence Con”, as I have heard it described, is nothing more than an acceleration of the bastardized economic policies of the past three decades, aided and abetted by massive corruption from the Wall Street masters than now run Washington, and an exponential increase in the 24/7 activities of the PPT/Gold Cartel to try and fool the masses into believing that Obama’s “plan” is working, which it is not and which logically cannot work, EVER.

Regarding gold and silver, I have been watching these markets trade every day for the past seven years. Each day the manipulation in these markets has gotten worse, but nothing like what I’ve seen in the past month, particularly around the Fed’s “quantitative easing” announcement last month and the conclusion of the “G-20” meeting two weeks ago. Can you believe that, following these massively gold-bulliish announcements, that gold and silver are actually lower?

For those reading this missive; if you believe that the economy has turned, banks are now profitable, inflation is not a concern, jobs are about to become plentiful, and the dollar is a smart place to be, continue as you were.

But if not, which I suspect represents 99% of you, continue to PROTECT YOURSELF. Gold and silver are a gift at these levels, as are foodstuffs and other necessary consumables before accelerating (or god forbid) hyperinflation hits in the not so distant future. And continue to participate in “tea parties” or anything that enables you to assert your rights, while you still have them.

U.S. hegemony was significant. And real. But alas, for just a very brief period in the annals of history. It is nearly gone, and when it is, you will wish you have protected yourself. Life will go one, just not in the same way we have been accustomed to.

Thin Ice From Here to the Horizon[honest and insightful read]
On any rational assessment the popular new president is skating on thin ice. Pollyanna bulletins about the economy puff up from the White House and Federal Reserve, like auguries of a new Pope through the Vatican chimney. “Habemus spem.” We have hope. We’ve just heard it from President Obama: "We are starting to see glimmers of hope across the economy." From Fed Chairman Ben Bernanke, who’s so far unleashed $12 trillion in booster money, we get the always sinister reassurance, like Death giving the Appointee in Samarra a friendly tap on the shoulder, "the foundations of our economy are strong".

The economic news in the near and medium term is ghastly, as Mike Whitney outlined on this site last Thursday. Retail sales crashed again in March, nowhere worse than in the car market, though electronics and building materials were way off too. They now reckon there’ll be just over two million housing foreclosures in 2009, up 400,000 from 2008. Industrial output is going through the floor at an annual rate of 20 per cent, the biggest quarterly drop since the end of the Second World War. US industry is now running at only 70 per cent of capacity, the worst number since they started tracking this stat in 1967. Job losses are currently running at 650,000 a month.

Round the next corner is credit card delinquency and the long-heralded slump in commercial real estate, where vacancy rates are already running at 15 per cent,. Capital One, a huge issuer of Visa and Mastercard, just said the annualized net charge-off rate for U.S. credit cards -- debts the company reckons will never be paid -- rose to 9.33 percent in March from 8.06 percent in February. In other words, Capital One – whose credit card promotions take up hefty space in the mailbag of every US postman – is in big trouble, and under one in ten of these credit card holders will have a messed up credit rating for several years to come.

Wall Street and its boosters are trying to pretend that indeed the worst is over. The Dow and S&P Index have been rallying for five weeks. Wells Fargo, the huge San Francisco-based bank, second biggest home lender, announced that first quarter net income rose 50 per cent to $3 billion. No one seriously believes the bank is in anything other than continuing huge trouble, and will soon need – so Blomberg News surmises - $50 billion to settle near-term commitments. The profit figure stems from newly relaxed rules about the valuation of Wells Fargo’s assets.

In other words it’s thin economic ice from here to the horizon.

Fed Using Currency Swaps to Boost the U.S. Dollar[must read]
By: Eric_deCarbonnel
The news that the fed has secured more of currency swaps has some very disturbing implications:

1) There would be no need to secure these new agreements if the fed hadn’t already used most of its existing $308.8 billion in central bank liquidity swaps.

2) This implies that unwinding the Federal Reserves existing swaps would leave the US with close to 300 billion in foreign denominated debt.

3) This development also implies that much of the dollar’s recent rally has been artificially created by the Federal Reserve’s 300 billion currency swap intervention.

4) To date, the fed’s currency swaps have been presented as motivated by shortfalls in USD funding in foreign institutions. While this might have been true initially, it is now obviously false.

5) Considering that the fed is planning 15-fold increase in us monetary base, 300 billion in foreign debt could quickly turn into 3 trillion or more.

Conclusion: The fed’s use of currency swaps to boost the dollar shouldn’t surprise anyone. After all, this is the same fed which has let US Banks operate without reserve requirements, caused the housing bubble with low interest rates, and failed to regulate subprime mortgages. Opening credit lines which could help American banks finance a foreign capital flight falls right into place with the fed’s other actions undermining the US financial system.

The dollar bubble is reaching its final stages

Soon food prices will begin rising, as the world is headed for a Catastrophic Fall in 2009 Global Food Production. Weather and credit conditions are causing falling production around the globe, and the world’s three biggest grain producers are all headed for big shortfalls. In India, torrential rains have devastated wheat crops, while in the US drought and freeze have damaged winter wheat. Meanwhile, Northern China was hit by worst drought in 50 years, and Chinese authorities have ordered three-month, nationwide audit of grain stocks as they are obviously very worried about whether China’s grain reserves actually exist.

Inflation in food commodities will push up gold demand cause manipulation efforts to break down. Already, the NYSE has runs out of 1 kg gold bars, and default on COMEX gold contracts is a month or two away. The collapse of paper gold (futures, unallocated gold, GLD, etc…) would destroy what is left of confidence in the US financial system, starting a panic out of the dollar.

Lesson learned from the financial crisis

The truth of this world is that those, who, through stupidity, greed, and fraud, dig themselves into a hole, will keep digging deeper until they hit bedrock and run out of options. This is what happened with Bernard Madoff: he must have known for years his ponzi scheme was doomed to collapse, but he kept it going until he was down to his last 140 million. The United States, like Bernard Madoff, has for years been digging itself into a hole, and the fed's use of currency swaps to boost the dollar is the final part of this process. Unfortunately, the US, like Madoff, is about to hit bedrock.

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