Monday, August 23, 2010

Waiting For The Dam To Burst

Anonymous said...
"I've never believed gold is a hedge against inflation (or any kind of 'flation for that matter.) It's a hedge against corruption and bad judgment."

As seen in the Wall Street Journal...
"Demand for U.S. government debt is so strong lately that not even an apparent slowdown in China's appetite for it can stop the rally in bonds."

What are they smoking over at The Journal? Pumpkin seeds? What a bunch of pumpkin heads! Bonds are rallying because the "issuers" are buying them. The greater fool theory is working overtime in the US Treasury markets. You've got to be a fool to be buying into this Mother Of All Bubbles.

It is abundantly amusing how a rally in America's debt is being painted by the US financial media as positive for the economy.

"Houston, what problem? This debt is selling like Chinese hand fans on a hot humid day along the Gulf Coast."

Looking further through The Journal, we find a couple of reporters that have skipped a dip in the punch bowl:

The Great American Bond Bubble
If 10-year interest rates, which are now 2.8%, rise to 4% as they did last spring, bondholders will suffer a capital loss more than three times the current yield.
Ten years ago we experienced the biggest bubble in U.S. stock market history—the Internet and technology mania that saw high-flying tech stocks selling at an excess of 100 times earnings. The aftermath was predictable: Most of these highfliers declined 80% or more, and the Nasdaq today sells at less than half the peak it reached a decade ago.

A similar bubble is expanding today that may have far more serious consequences for investors. It is in bonds, particularly U.S. Treasury bonds. Investors, disenchanted with the stock market, have been pouring money into bond funds, and Treasury bonds have been among their favorites. The Investment Company Institute reports that from January 2008 through June 2010, outflows from equity funds totaled $232 billion while bond funds have seen a massive $559 billion of inflows.

We believe what is happening today is the flip side of what happened in 2000. Just as investors were too enthusiastic then about the growth prospects in the economy, many investors today are far too pessimistic.

The rush into bonds has been so strong that last week the yield on 10-year Treasury Inflation-Protected Securities (TIPS) fell below 1%, where it remains today. This means that this bond, like its tech counterparts a decade ago, is currently selling at more than 100 times its projected payout.

Certainly investors are right to be pessimistic, but this "rush to safety" in the bond markets appears to be more about desperation in a dire economy than about being overly pessimistic. Investors seem to be grateful for an opportunity to "limit losses" on their capital in the bond market, than see them waterfall in the equity markets.

When inflation rears it's monstrous head here in the USA, the run to the exits in the Treasury markets will be akin to screaming fire in a packed movie theater. Previous losses in the stock market will look acceptable when this bubble finally bursts.

Were it not for the constant disinformation spewed by the financial media and money managers about Gold, investors would know exactly where they should be running for cover when they are scared.

"Gold is a hedge against Inflation, but there is no Inflation, you don't need to own Gold."

"Gold prices will fall with everything else if there is Deflation, you don't want to own Gold."


And look here, another story in The Journal. Wow, the Journal is full of contradictions...a certain sign of uncertainty in the economy.

Rethinking Gold: What if It Isn't a Commodity After All?
For a long time, we've all heard that gold is a commodity—no different, really, from silver or wheat or pork bellies. Its price ebbs and flows (supposedly) with inflation, which historically drives commodity prices.

Odd, then, that gold's elevated price hasn't fallen in response to tepid U.S. inflation numbers. The Consumer Price Index as of July pegged inflation at just 1.2% for the previous 12 months, not counting seasonal adjustments. Nor has gold reacted to what Mohamed El-Erian, Pimco's chief executive, recently called "the road to deflation" on which he sees the U.S. traveling.

Data show that gold closely mirrors the movement of the U.S. dollar. The conventional wisdom holds that neither of those scenarios—low inflation or deflation—should be good for gold. And yet it refuses to abandon record highs in the $1,200-an-ounce range. Something seems amiss.

The implication is that gold isn't a commodity—at least not one that hews to the definition of something that people and industry consume.

Instead, "gold is a currency" whose daily price is a gauge of the market's concern about the "potential diminishment" of the purchasing power of the dollar and other paper currencies, says Paul Brodsky, a principal at New York's QB Asset Management.

If he is correct, it is the potential longer-term weakening of the dollar that is the real issue for the gold market, not inflation or deflation.

Some will note rightly that gold's record spike came amid the last great inflation surge. Those folks might be misreading the tea leaves.

Gold's four-year rally beginning in summer 1976 happened amid a four-year dollar decline. When the dollar bucked up at the end of 1980, gold prices retreated. Inflation was more of a sideshow than a driving force.

The question, with gold hanging around the $1,200 level, isn't "Is gold in a bubble?" as so many are asking. It's "What next for the dollar?"

What is next for the US Dollar. Perhaps the #1 man in charge of manufacturing those Dollars over at the US Federal Reserve can shed some light on the US Dollar's future. Unfortunately, any comment he might have of the Dollar's future will most likely be a bad guess as "Often Wrong" Bernanke proves here with a montage of comments on the US Economy.

Bernanke: Why are we still listening to this guy?[if you need a great laugh today]
This video should make people think twice about listening to anything that Chairmen of the Fed Ben Bernanke says. It's a compilation of statements he's made from 2005-2007 that will have you 100% certain America is doomed if we continue to value what this moron says.

Instead, they indict Roger Clemens for lying to Congress? Who has he hurt?

November is coming...

What Problems Lie Ahead for the U.S. Dollar?
By: Julian D. W. Phillips, Gold/Silver Forecaster - Global Watch -
Quantitative Easing is a technique the Fed used to fill the holes that the credit crisis created. Writing down of assets is essentially a reduction of money in the system. The consequences of this in the banking system meant that money disappeared off bank balance sheets and reduced their lending capabilities. The actions of the Fed allowed the money that disappeared to reappear again. It works nicely if the banks keep on lending. But if they don’t the exercise is fruitless as they protect themselves by not lending, but investing back in government bonds instead.

That’s happening today, because instead of lending money, banks are investing in Treasury and Agency securities. Their holdings of such assets increased to $1.57 trillion at the end of July, up 40% from $1.12 trillion in mid-2008. The government is borrowing in a rush, to shore up its deficit, growing fast at the moment. The projected 2010 deficit of $1.47 trillion will be a record, and equivalent to 10% of the economy. China and most other people expect such a growing deficit will lead to a significantly weaker Dollar.

At worst, such a prospect has the potential to deter foreign investment in the U.S., shoving up interest rates. If the U.S. Dollar Index falls below 80 [this Index measures the Dollar against a basket consisting of the Euro, Yen, the Pound Sterling, the Canadian Dollar, the Swedish Krona and Swiss Franc], the Dollar will fall quickly and heavily and further discourage investment in Dollar assets.

The longer the government delays in stimulating the U.S. economy again, the bigger the amount of new money needed to reflate the economy. As an economy deflates, money velocity slows and consumer attitudes become more and more thrifty. This makes efforts to return the economy to growth harder and harder. A fair analogy would be to compare the situation to retrenching an employee. To bring confidence and hope back to previous levels, two employees must be hired. The longer it takes to fire up the economy, the greater the stimuli needed to do so. Experienced investors are expecting new stimuli to lead to explosive inflation because the change from deflation to recovery becomes more and more mercurially uncontrollable the longer it is delayed.

Bust It! The Legend of George Soros
Warren Bevan
While researching the GLD perspective some time ago I found that what’s
termed a “basket” can in fact be redeemed for physical bullion. A basket
consists of 100,000 shares.

That only equals $12 million as of Friday. So the new investor, Eton Park,
could in theory redeem 66 baskets. Each basket would remove 10,000 oz of
physical gold from the markets.

Now here is where my thinking takes a twist.

George Soros is smart. In fact much smarter than he lets on when talking
about his investments. He usually talks on the first level, and thinks much

He’s busted currencies before, namely the pound in the Black Wednesday
ordeal in 1992.

What’s Gold?

Gold is the ultimate and only enduring currency.

He knows what GATA, and my readers know. Gold is traded on a
fractional basis which means real physical supply is much less than the amount
of paper Gold traded.

If he were to, or even threaten to, cash in his 52 baskets (5.2 million
shares) it would spark other large GLD investors to do the same.

That amount of gold redemption simply could not be handled. Prices
would shoot markedly higher in a nano-second and he would have effectively
busted the central bankers of the world along with gold depositories and Gold
futures exchanges.

It would be the stuff of legends and be told for many generations to
come. He would have left one of the more enviable marks in the books of
history. He is not getting any younger and I am sure he ponders what his
legacy will be.

Could this be his final sensational act?,%202010%20pdf.pdf

The World Won't Flock to Paper
The National Inflation Association
On July 28th, NIA released an article entitled, "Gold and Silver Capitulation is Near". In this article NIA said, "The sentiment on gold and silver has abruptly changed to the negative like nothing we have ever seen before and to us this means the big move to the upside is right around the corner." It turns out that July 28th was the exact bottom for gold and silver prices. Since then, gold prices have risen 12 out of 15 days for a gain of 5.8% and silver prices have risen 11 out of 15 days for a gain of 5.2%.

It was just announced that China cut their long-term U.S. treasury holdings by $21.2 billion in June to $839.7 billion, their largest cut in U.S. treasury holdings in history. China's holdings of U.S. debt are now at their lowest level in a year. Meanwhile, China has more than doubled their holdings of South Korean debt. It speaks volumes that things have gotten so bad in the U.S. that China sees the need to diversify out of U.S. debt to buy the debt of a third-world nation.

China just surpassed Japan as the second biggest economy in the world and is now stepping up its efforts to internationalize the yuan by allowing foreign financial institutions to participate in their interbank bond market. This is being done as the Federal Reserve begins to once again monetize our debt with the purchasing of $2.551 billion in U.S. treasuries. At this time last year, mainstream economists thought that the Federal Reserve would be exiting its low interest rate policy by now. The truth is, it will be impossible for the Federal Reserve to ever raise interest rates to a level that is higher than the real rate of price inflation.

It is unbelievable to us that most mainstream economists believe that deflation is the biggest threat facing the U.S. economy. In order to believe that U.S. deflation is possible, you need to believe that the U.S. government will default on its national debt and Social Security obligations and that the U.S. dollar will rally in the process. In our opinion, there is zero chance of the U.S. government formally defaulting on its debts and Social Security obligations when it has a printing press. But for conversation's sake let's say the U.S. outright defaults and refuses to pay its debt. Why on earth would the U.S. dollar rally in the process? Why do deflationists believe the world will flock to the safety of paper? Look outside, unless you live in a desert, you will see plenty of trees.

During the Great Depression, the U.S. experienced deflation because the U.S. dollar was backed by gold. As the rest of the world defaulted on their debts, they flocked to the dollar as a safe haven because the dollar was gold, not paper. The deflationists like to point to the financial crisis of 2008 when the U.S. dollar rallied as asset prices collapsed, as an indication that the world believes paper is a safer asset than gold. Clearly in 2008, the markets acted irrationally. There is very little chance of the markets acting irrationally in this same way again, especially when the financial crisis of 2008 is still fresh in investors' minds and most people on Wall Street mistakenly believe the dollar will rally.

The markets usually act in the exact opposite of the way most people think. Just like we knew gold and silver were at or near a bottom on July 28th because everybody had become negative, we know that precious metals will be the safe haven during the upcoming fiscal crisis, because most people today feel that U.S. treasuries are the safest asset. The U.S. is currently experiencing the greatest bubble in world history, the U.S. bond/dollar bubble. When this bubble bursts, real unemployment will rise back to Great Depression levels of 35% because our nation's number one employer, the U.S. government, will no longer have the resources to pay its employees.

The Precious Metals continue to maintain a stealthy position of strength as the summer doldrums drag on. Friday appears to have been pure profit taking on the recent run-ups off the July lows. The failure of Israel to bomb Iran's nuclear power plant off the map also may have lead to a small lightening of Precious Metals positions ahead of the weekend. With options expiration just ahead, we can surely expect more volatility in already these already volatile Precious Metals markets. Continue to sit tight, and be right. Price weakness is a gift, and should be rewarded with physical purchases for your portfolio.

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