The Canary In The Gold Mine

But Did Anyone Notice Inflation?
By Adrian Douglas
The mainstream media has been elated by early signs of economic activity picking up. In particular the Institute of Supply Management (ISM) issued their Purchasing Managers Index (PMI) on September 1:

The index was reported at 52.9. This is the highest in two years and the first reading above 50 since the credit crisis began. A reading above 50 indicates expansion in manufacturing. The media was euphoric and investors have pushed the US stock indices to post recovery highs. What did not receive any attention was the prices paid component of the index. It increased to 65 from a reading of 55 in July. This is 18% increase in a single month! In May 2009 the index was at 43.5 which represents 49% increase in prices paid over 3 months. This is absolutely stunning. This is not a government massaged index; this is based on what purchasing managers are reporting they are paying. Only 8% of managers reported paying lower prices while 38% reported receiving higher prices.

This report was followed on September 3 by the Non-Manufacturing (Services) Index.

It was reported at 48.4 and while this is still indicating contraction the index was 2 points higher than in July and 8 points higher than in March. Again the media were waxing lyrical about recovery. Again what was not mentioned was the prices paid component; it increased to 63.1 from 41.3 which is a simply shocking 52% jump in one month. It increased 34.5% from its May reading. Only 6% of managers reported paying lower prices while 23% reported paying higher prices.

On September 4 the Economic Cycle Research Institute’s (ECRI) U.S. Future
Inflation Gauge (USFIG) was released:

It was 89.6 in August compared to 84.6 in July. This is a 5.9% increase in one month. The August USFIG annualized growth rate, which smoothes out monthly fluctuations, rocketed to positive 6.5% from negative 8.8% in July! In other words the annualized indicator which smoothes out volatility went from a highly deflationary picture to one of rampant inflation in just a single month! The ECRI commented that the gauge was pushed higher by rising commodity prices. This dovetails with the picture we see from the reports of actual prices being paid as reported by the ISM.

Almost everyone has their eyes glued to the money supply data and the BLS CPI and PPI. Of course the government’s proclivity to exclude everything that is rising in price from the PPI and CPI in their special brand of hedonics means that the last place to observe the affects of monetary inflation will be in these indices. John Williams at shadowstats.com reports that his reconstructed M3 is only growing at a rate of 6% annualized. I however question the accuracy of the input data. I don’t think that all the actual monetary injections are being reported, which is probably one reason the FED does not want to be audited. Neil Barofsky, Inspector General of the TARP, recently testified before Congress that the total credit lines of the 50 or so stimulus programs totaled 23.7 Trillion dollars. A Treasury spokesman countered with a statement that only 2T$ had so far been spent. Where does that 2T$ appear in the M3 data? It doesn’t! If government officials have the capacity to access 23.7T$ of credit who will bet me that they will not spend it? Clearly money is being pumped into the system which is bypassing the reporting system.
http://walshal.wordpress.com/2009/09/07/but-did-anyone-notice-inflation/

Gold, Silver Breakout in Action
By Gene Arensberg, Got Gold Report
U.S. banks dump huge chunk of net short positioning just before surge.

Both precious metals challenge key resistance despite heavy commercial selling.

ATLANTA – Bam! Gold breaks out of its huge consolidation triangle, Wednesday, September 2. What are we going to do now? Why, for the short-term trading portion of the ammo pile, we are going to execute trading strategy and let the strategy do the trading of course. More about that below.

As the first week of September rolled in, the markets for gold and silver heated up. Why? “Tonnes” of reasons. Perhaps Adrian Day summed up one of our favorite drivers of this gold bull market in a CNBC interview with Bob Pisani Friday when he said, in essence, that gold going up now is a vote of no confidence in the world’s “leadership” and another no confidence vote in the world’s fiat currencies.

Gold is going higher primarily because the supply of paper with ink on it is seemingly inexhaustible but precious metals supply is relatively constant. Gold is going higher because more and more people are converting the former into the latter pure and simple.
http://www.midasletter.com/commentary/arensberg/090907_Got-gold-report-gold-silver-break-out.php

China alarmed by US money printing
By Ambrose Evans-Pritchard
Cheng Siwei, former vice-chairman of the Standing Committee and now head of China's green energy drive, said Beijing was dismayed by the Fed's recourse to "credit easing".

"We hope there will be a change in monetary policy as soon as they have positive growth again," he said at the Ambrosetti Workshop, a policy gathering on Lake Como.

"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.

China's reserves are more than – $2 trillion, the world's largest.

"Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets," he added.

The comments suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction.
http://www.telegraph.co.uk/finance/economics/6146957/China-alarmed-by-US-money-printing.html

Labor Day Musings 09-07 [MUST SEE VIDEO]
By karl denninger
We MUST stop the madness! TickerGuy lays more truth on the table with credit, income, asset and delinquency data.