The Bullion Buzz eNewsletter - April 27, 2010

"Those entrapped by the herd instinct are drowned in the deluges of history. But there are always the few who observe, reason, and take precautions, and thus escape the flood. For those few gold has been the asset of last resort."

-- Antony Sutton – Author

CHART OF THE WEEK

http://dollardaze.org/blog/

"Gold has been in a ten-year bull market beginning at a low of $251.70 per ounce in August of 1999 to over $1200 an ounce in December 2009. What is of great interest is that this near five-fold increase in the price of gold has failed to significantly change the ratio of values between the U.S. monetary base and the gold reserves!" 
-- Mike Hewitt 

GOLD

Hyperinflation Around the Globe

Mike Hewitt

Hewitt tells the story of hyperinflations around the globe, from Angola to Zimbabwe. In all, there are some 40 tales of woe here, many of them occurring in the past 20 years. In the case of Zimbabwe, inflation began in 1999 and is still going strong: The Rhodesian dollar, adopted in 1970, following decimalization and the replacement of the pound as the currency, was set at a rate of 2 Rhodesian dollars = 1 pound. At the time of independence in 1980, one Zimbabwean dollar (100 cents) was worth US$1.50.  Since then, rampant inflation and the collapse of the economy have severely devalued the currency, with many organizations using the US dollar instead. On February 16 2006, the governor of the Reserve Bank of Zimbabwe, announced that the government had printed ZW$21 trillion in order to buy foreign currency to pay off IMF arrears. In early May 2006, Zimbabwe's government began rolling the printing presses (once again) to produce about ZW$60 trillion. The additional currency was required to finance the recent 300% increase in salaries for soldiers and policemen and 200% for other civil servants. In August 2006, the Zimbabwean government issued new currency and asked citizens to turn in old notes; the new currency (issued by the central bank of Zimbabwe) had three zeroes slashed from it. In February 2007, the central bank of Zimbabwe declared inflation “illegal” and outlawed any raise in prices on certain commodities between March 1 and June 30, 2007. Officials have arrested executives of some Zimbabwean companies for increasing prices on their products.

http://dollardaze.org/blog/?post_id=00107

Explaining Gold Price Fluctuations

Steve Saville

Most mainstream financial journalists try to link the daily market action with the daily news, as if the markets simply react to the news. Generally, they assume that if a market fluctuation coincided with or followed a news event, that event must have caused the market fluctuation. It is not uncommon for journalists to cite the same event when attempting to explain a price rise one day and a price decline the next. For example, if the stock market rises one day and falls the next, and at the same time there is news of a Greek bailout, the press might link both the rise and the fall to the bailout news. These linkages are usually banal and uninteresting, but occasionally they are laugh-out-loud funny. The explanation for last Friday’s decline in gold, for example: “Gold prices Friday were dropping steeply as investors traded out of riskier assets like gold and into the US dollar…The news that the SEC charged Goldman Sachs with fraud was killing gold prices as investors rotated out of riskier commodities and into safer assets like the US dollar…The gold price had been finding support around $1,150 an ounce after better-than-expected earnings from big US companies.” This told the reader/viewer that: Gold, a safe haven for thousands of years, had been boosted by good US corporate earnings news, but was then dumped in favour of the dollar (a liability of the US banking system) in response to news that America’s most important financial institution could be in trouble with the regulators. This shows that much of what passes for investigative reporting is really just ignorance. The majority of daily market moves cannot be explained by the news of the day, and markets don’t always rise in response to bullish news and fall in response to bearish news; it is not that simple. Saville discusses why declining assets prices can prompt dollar strength and weaker gold, and why developments that should eventually put irresistible upward pressure on the gold price can initially result in a lower gold price.

www.24hgold.com/english/news-gold-silver-explaining-gold-price-fluctuations.aspx?article=2829818468G10020&redirect=false&contributor=Steve+Saville

Will Gold be Bolstered by the Goldman Sachs Fraud Case?

Julian Phillips

The gold price fell on news that the SEC was bringing a civil fraud charge against Goldman Sachs; the general consensus was that both they and Paulson’s hedge fund would have to sell their gold holdings. This reaction was based on emotion, not thought; but if money can be made by inciting investors in this manner, why not? Emotion, along with technical analysis, drives short-term prices. Longer-term investors apply more thought to their investments. That reality needs to be examined in depth in order to understand how the Goldman Sachs story could influence future gold and silver prices. Phillips discusses morality; clashing principles; the issue of size; regulatory reaction; and how Goldman Sachs will fare against the SEC. That question has a direct bearing on the long-term price price of gold. If the bank doesn’t fight or settles out of court, it will have lost, because of the residual uncertainty as to whose interests they favour: theirs and selected clients, or do they really have integrity? After all, it is not a matter of showing they obeyed the rules (which were clearly inadequate), but proving their integrity. As things stand, it will take many years for Goldman Sachs to inspire trust and confidence again. The banking system overall will be tarred with the same brush, and if damage in the CDO market extends to mishandling sovereign states such as Greece, then the global banking system becomes almost cancerous. The global monetary system will limp along because it’s the only current option, but prudent investors will look for alternative investments with which to bolster their portfolios. With a fraud charge against the most prominent US investment bank, red-hot anger against banks bailed out by the taxpayer, and bailed-out bankers with little interest in helping out the taxpayer, banks could not have done much more to invigorate the gold price. It will take the full course of the court case to press that point home, but the journey can’t be stopped now. So yes, the Goldman Sachs case will bolster the gold price.

www.financialsense.com/editorials/phillips/2010/0423.html

PLATINUM

Impressive Platinum Price Performance Leaves Gold Behind

Reuters

Platinum prices are recovering from multi-year lows and approaching levels not seen since the start of the economic crisis. Recent price action is impressive, showing that platinum has climbed 17% so far this year versus gold's 4%. Fundamental supports include new investment products and signs of recovery for the global car sector. The gold:platinum ratio (how much platinum is needed to buy an ounce of gold) hit its lowest since October 2008 in April at 0.66. While some of this rise is due to climbing investment demand, the ratio movement suggests consumer appetite is now in platinum's favour. Platinum prices hit parity with gold in late 2008 as demand for raw materials fell and investors turned to bullion as a safe haven, but that changed this year as increasing car sales, particularly in China, lifted platinum demand. While this is an indicator that industrial demand for the metals is set to rise, some analysts question how far real platinum usage is increasing. The European car market has lagged growth seen elsewhere, although Daimler recently reported healthy demand for its vehicles. Headwinds still remain for global economic growth, with high debt levels in the US, UK, Japan and some Eurozone countries still worrying investors; in the US, the unemployment numbers are dismal. Given this, the metal's rally and the widening platinum:gold ratio may be somewhat premature. Still, gold has rebounded as concerns over fraud charges laid against Goldman Sachs and Greek debt drive demand for a safe haven from volatile markets. If gold is hurt by rising interest rates or further IMF sales, however, it could mean a widening differential between the yellow metal and platinum. The question is whether it will be platinum's gains or gold's losses that drives it, with the former more likely. “If the ratio were to return to pre-crisis levels of about 0.5, either gold would have to fall to about $850-900, or platinum would have to rise to $2,000,” said VM Group analyst Matthew Turner, noting that the latter seemed more likely.

www.mineweb.co.za/mineweb/view/mineweb/en/page35?oid=103135&sn=Detail&pid=102055

ECONOMY

Us Debt to Hit $20 Trillion in Ten Years

Newsmax

While the world waits to see if Greece and other European nations default over their massive debts, the real threat is whether the credit standing and currency stability of the world’s biggest borrower, the US, will be jeopardized by its own overwhelming debts and deficits. That’s the fear raised in a devastating op-ed on the Financial Times website written by Roger Altman, a former deputy US Treasury secretary who is now chairman of a leading global advisory and investment firm. “America’s fiscal picture is even worse than it looks,” Altman writes. The CBO projects the size of the federal debt to increase by nearly 250% over 10 years, from $7.5 trillion to a whopping $20 trillion. The only remote comparison to such a debt load occurred during World War II, but there is no real comparison for such a rise in indebtedness – nothing remotely like it has occurred since record keeping began in 1792. It is so rapid that, by 2020, Treasury may have to borrow about $5 trillion per year to refinance maturing debt and raise new money; annual interest payments on those borrowings could exceed all domestic discretionary spending and rival the defense budget. Unfortunately, the healthcare bill isn’t helping the situation. The mess is not entirely President Obama’s doing, but the massive spending programs his administration has put forward have taken a catastrophe in the making and made it much worse. The solution: the deficit/GDP ratio must be reduced by at least 2% ($300 billion in annual spending); there must be large spending cuts; new revenue; higher taxes on income, capital gains and dividends; and possibly a value-added tax. If nothing is done, expect government paralysis and 10 years of fiscal erosion; debt at 90% of GDP; and soaring interest rates. History suggests the outcome will be one imposed by global markets. “To avoid an imposed and ugly solution,” writes Altman, “Obama will have to invest all his political capital in a budget agreement next year. He will be advised that cutting spending and raising taxes is too risky for his 2012 re-election. But the alternative could be much worse.”

http://newsmax.com/Newsfront/debt-20-trillion-obama/2010/04/21/id/356486

REAL ESTATE

Anatomy of a Housing Crisis

Sol Palha

“Freddie and Fannie certainly had a large role to play in the housing crisis and many may claim that they were the main contributors of the housing crisis which eventually resulted in a market meltdown. Before we proceed, let’s get some background info on these two chaps.” Palha takes a look at the two government-sponsored entities and weighs in on their involvement in the housing crisis. In conclusion, he finds that individuals were to blame as well; they wanted to have their cake and eat it too; they thought they could take part in the housing market without taking on any risk. Unfortunately, however, if something appears too good to be true, it usually is. Meanwhile the US government is bent on pouring good money after bad with respect to these two completely useless companies, while finding it easy to turn down individuals that really need a helping hand. To make matters worse, it creates money out of thin air to pay for Fannie and Freddie, thereby further devaluing the dollar and indirectly imposing a silent tax on the population - inflation. Taxpayers have pumped more than $125 billion into the failed firms, and are on the hook for much more. Treasury Secretary Tim Geithner has said they will do everything necessary to ensure these institutions have the capital they need to meet their commitments. Geithner acknowledged that taxpayers are likely to face “very substantial” losses on the government's takeover of Fannie and Freddie. The best way to protect against inflation is with hard assets – things that cannot be mass produced and are in finite supply. The easiest way to protect against the harmful effects of inflation is by purchasing gold and silver bullion.

www.financialsense.com/fsu/editorials/ti/2010/0416.html