The Bullion Buzz eNewsletter - April 6, 2010

"All previous attempts to base money solely on intangibles such as credit or government edict or fiat have ended in inflationary panic and disaster."

--Winston Churchill

CHART OF THE WEEK

www.shadowstats.com/

While the media reports that inflation is very low and of no concern the real numbers tell a different story.  According to John Williams, that uses the Pre-Clinton formula based on a fixed basket of goods and services, inflation is actually at 5.5% and not 2% as reported. As the effects of rising commodity prices, particularly rising oil prices, make their way through the system inflation is sure to rise.  Taxes, which are not part of the inflation calculation, are likely to rise the most as the bailouts and deficits will increase the tax burden for decades into the future.

GOLD

Gold Prices Set to Soar as Demand Outpaces Supply

Hou Qingyang

China’s gold consumption is likely to double over the next decade, boosting prices as demand outpaces supply. Aram Shishmanian, CEO of the World Gold Council, expects demand to stay bullish over the next five years. With GDP set to grow at over 9% this year, China, the world's second-largest gold consumer after India, has the potential to double its gold consumption from the 2009 level of 500 tonnes a year. Shishmanian said gold demand will remain bullish because investors consider it a safe haven amid uncertain recovery trends and inflation expectations. “The only way for the Western countries to resolve the economic crisis is to slowly repay their debts and print more money, which devaluates the currency and results in inflation, for a number of years before recovering. In such a scenario gold prices would continue to remain robust,” he said. During the past five years, demand for gold increased at an average annual rate of 13% in China. Most of this demand has been met through domestic supplies. During the last decade, Chinese gold miners have boosted output by 84%, but the nation's known reserves account for just 4% of the total global gold reserves. China could exhaust its known gold mining reserves in six years, unless it attracts more capital for exploration. Further momentum could come from central bank purchases. If China bought a significant portion of gold in the open market, for instance, prices would rise. In the past, China has added to its reserves through off-market purchases. “China has always been very responsible in its monetary policy and in particular on gold. We are delighted that the People's Bank of China and State Administration of Foreign Exchange are taking prudent measures to curb volatility in the gold market,” says Yi Gang, vice-governor of PBOC and chief of SAFE. China currently holds 1,000 tonnes of gold, approximately 2% of its total foreign exchange reserves.

www.chinadaily.com.cn/bizchina/2010-03/30/content_9660854.htm

Where to Next for Gold?

Dominic Frisby

Frisby had a spring target of $1,400 per ounce for gold. However, gold in 2010 has been lackluster and in January’s correction gold and gold shares were hit harder than the market. In the long term, however, Frisby remains a believer. The credit-based, fiat monetary system under which we operate is going to end badly; there is too much debt at almost every level of society, from government to the individual. The simplest way out of this mess is some kind of currency devaluation, either gradual or sudden, with the former being more likely. That, after all, has been the pattern of the last 100 years. And with interest rates for bank accounts generally below the rate of inflation, saving any sort of currency is not particularly attractive. That leaves gold. As for his target of $1,400 gold by spring 2010, Frisby thinks it may have been a little optimistic, but the lagging gold price could turn out to be a positive. He doesn’t like to see gold going too far too fast, as it did in 2006 and 2008. The subsequent corrections are too violent and the consolidations take longer. If we are indeed now in a period of consolidation, it's not likely to last for that long, as the previous up-move was comparatively small. What's more, it looks as though gold has found its low somewhere in the $1,060 to $1,080 area. Technical analysis shows similarities in the chart between now and the 2002-2003 up-move, which eventually became a fantastic run. To sum up, in the short term, Frisby is bullish on gold and gold shares. The spring is often a good season for gold and there seems to be plenty of support just below $1,100. And in the long term he is convinced that everyone should own some. It's essential.

www.moneyweek.com/investments/precious-metals-and-gems/where-to-next-for-the-gold-price-01306.aspx

The Gold Price will be Affected by the Oil Price in Future – How?

Julian Phillips

For years, it was thought that the oil price had a direct impact on the gold price, but since the credit crunch the oil price has been treated as irrelevant to the gold price. Phillips believes it only had an indirect influence on the gold price in the first place. He discusses growing oil supplies; the fact that the US is no longer Saudi Arabia’s biggest client; the eastward flow of oil; the potential growth of Chinese demand; the next oil crisis; the relevance of America’s guarantee of security in the Middle East; and the potential end of oil being priced in US dollars. What do these changes Phillips documents have to do with the gold market and its price? In oil terms, the US is in economic decline and China is on the rise, while India and the rest of Asia are following behind. The East buys gold believing still that it is the money of last resort, and that a massive oil crisis is just over the horizon. The markets won’t wait until that crisis arrives; they will discount the changes well ahead of time. The picture of a swing in wealth and power to the East from the West is shown by the changing shape of oil demand and supply. Add to that the crises that always attend such power swings and oil market changes are pointing to the time when gold will hit peak demand and the gold price will rise to levels never previously seen. Then the oil price will influence the gold price as a joint measure of the state of the global monetary scene.

http://financialsense.com/editorials/phillips/2010/0326.html

SILVER

The Silver Boom is Coming

The Mogambo Guru

Mogambo never stops warning about the price inflation that will result from the Fed’s inflation of the money supply. Buy gold, silver and oil, he says, in order to protect yourself from just such an outcome. Of course, it’s not only the Fed creating too much paper money; central banks the world over are doing the same thing, while governments the world over are engaging in insane levels of deficit spending.  In the case of silver as a must-have investment, he discusses an article by Jeff Nielson, which notes that because silver kills the bacteria that causes body odour, “the use of silver in sportswear has exploded into one of the largest single applications of silver. This one usage already consumes more than 1,200 TONS of silver per year.” From virtually nothing a few years ago to being one of the largest single applications of silver – that has Mogambo believing the silver boom is just beginning. Expect soaring silver prices as demand surges, and increasing money supply meets falling silver supply. Nielson notes that the Gold Award for Healthcare Fabrics was recently given to a company that produced the first silver-impregnated upholstery for the healthcare industry. Meanwhile, the Fed is creating so much money that, writes Mogambo, “you will not want to live through the suffering of a future where prices are so impossibly high that you cannot afford to eat…you will wail and wish, wish, wish that you had listened when I told you to buy gold, silver and oil to protect yourself against the raging inflation in consumer prices that necessarily must – must! – follow such massive inflation in the money supply.” The potential usage in this one category of silver consumption is nothing short of mind-boggling. Analysts now forecast an additional 350 million ounces of annual silver demand by 2020 as a result of increased use of RFID tags, ID cards, solar panels and wood preservatives. In addition, because silver inhibits bacteria, there will be an increase of silver used in wound care, other medical uses and food hygiene, not to mention phenomenal growth in the aforementioned anti-odour/ anti-germ textiles. "Silver!" says Mogambo. "I mean, it just doesn’t get easier to invest than that! Whee!"

http://dailyreckoning.com/the-silver-boom-is-coming/

INVESTMENT

Doubt and Uncertainty are Commonplace

Mary Anne & Pamela Aden

The markets have been correcting, and the Adens have been fielding questions about when to buy or sell metals or gold stocks. Trading stocks, however, is different from investing. The facts show that sooner or later, most traders end up losing money. The majority of investors should invest based on the major trends, those that last at least a year. That's where the big moves take place and where investors make the most money over the long haul. This requires patience, and the understanding that there will be corrections along the way. Gold is an excellent example of this phenomenon. It began moving up in 2001 after bottoming near $250; today it's around $1,100 and the best investment of the decade, whether you bought at $350, $800 or $1,000. The point is that the major trend is up, meaning gold will likely trade higher for many years to come. Markets are always looking ahead; they're not interested in what happened today or yesterday. Investment decisions should be made on market action, and not what appears in the mainstream media. Currently the US is widely reported to be in a recovery and this view is supported by the rising stock market. Unfortunately, it is a recovery based on unsound fundamentals, including a massive amount of debt. The situation is unhealthy and unsustainable. Nevertheless, for the moment at least, the economy is recovering and that is what investors have to deal with. Sooner or later the negative economic fundamentals will catch up with reality and there will be consequences. For now, the markets will provide plenty of insight that is preferable to the dozens of expert opinions out there. As for gold, its major trend has been up for nine consecutive years, yet the public has barely begun to invest. This gold bull market is still almost invisible; a bullish signal in itself because it means the 375% gain over the last decade will pale in comparison to what the second phase of the bull market could achieve.

www.gold-eagle.com/editorials_08/aden033110.html

ECONOMY

Looting Main Street

Matt Taibbi

Taibbi tells the shocking story of how America’s biggest banks are ripping off US cities with the same type of predatory deals that crippled Greece. In particular, he chronicles how Birmingham, Alabama has been brought to its knees through the building of an elaborate new sewer system financed by financial wizards like JPMorgan Chase, Goldman Sachs, Lehman Brothers and Bear Stearns. In essence, a mob of corrupt local officials and morally absent financiers got together to build the “Taj Mahal of sewer-treatment plants”, a monstrosity that resulted in billions of dollars of profit for Wall Street and misery for the people of Alabama. “The destruction of Jefferson County reveals the basic battle plan of these modern barbarians, the way that banks like JPMorgan and Goldman Sachs have systematically set out to pillage towns and cities from Pittsburgh to Athens”, writes Taibbi. “These guys aren’t number crunching whizzes making smart investments; what they do is find suckers in some municipal-finance depart, corner them in complex lose-lose deals and flay them alive. In a complete subversion of free-market principles, they take no rise, score deals based on political influence rather than competition, keep consumers in the dark – and walk away with big money.” It’s not high finance; it’s low finance. And even if the regulators manage to catch up with them billions of dollars later, the banks just pay a small fine and move on to the next scam. This isn’t capitalism, says Taibbi; it’s nomadic thievery.

www.rollingstone.com/politics/story/32906678/looting_main_street/print