The Bullion Buzz eNewsletter - May 4, 2010

“The annual operating shortfall is running between $4 and $5 trillion; not $500 billion as we saw before the crisis or the $1.4 trillion that they announced for fiscal 2009.
Now to put that into perspective, if the government wanted to balance its deficit on a GAAP basis for a year, and it seized all personal income and corporate profits, taxing everything 100%, it would still be in deficit.”

--John Williams

CHART OF THE WEEK

"Even though Gold has risen nine years in a row, it is nowhere near a bubble. Just take a look at this chart courtesy of Frank Holmes. It compares Gold’s current bull market with its bull market in the 1970s."

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GOLD

Central Banks Increasing Gold Reserves

Mike Hewitt

Since achieving a peak collective holding of just over 37 thousand tonnes in 1963, central banks around the world have been divesting themselves of gold. Recent events, however, suggest this trend is reversing. Gold has been hitting new highs in recent weeks, with the US dollar weakening under loose monetary policy. Investors are betting that Asia's emerging economic powers will buy more gold in order to diversify their foreign-exchange reserves against a weakening greenback. The reserve banks of India, Sri Lanka and Mauritius have joined those of China and Russia as being net accumulators of gold, and Russia’s Gokhran repository will sell 30 tonnes of gold to the central bank in 2009. Last year China ranked as the largest producer of gold at 288 tonnes, equivalent to 12.2% of global output, and may soon overtake India as the world's largest consumer of gold. People's Bank of China announced last month that it had increased its gold reserves by 454 tonnes since 2003. This increase makes China the world's fifth-largest holder of gold, just ahead of Switzerland, and places it among the six nations plus the IMF that have reserves exceeding 1,000 metric tonnes. The last significant downward pressure on gold was when the UK began selling off its gold reserves in May 1999, a time when gold was at its lowest price per ounce in 20 years. In a period now known as the “Brown Bottom”, then-Chancellor of the Exchequer Gordon Brown sold approximately 395 tonnes of gold over 17 auctions at an average price of $275 per ounce. Central banks then agreed to limit the quantity of gold sold through the Washington Agreement on Gold. Two similar versions of this agreement were signed for five-year periods in 2004 and 2009. Currently, the world’s central banks are net buyers of gold following almost two decades of selling.

http://dollardaze.org/blog/?post_id=00746

$2,100 Target for Gold as Recognition Move Approaches

Jordan Roy-Byrne

Technical analysis shows that gold has exhibited super-bullish tendencies with a logarithmic target of about $2,100. Attaining that price will be the recognition move that awakens the masses to the gold bull market and the reality of severe inflation. Gold’s strength in the face of a strong US dollar is a big hint that this recognition move is imminent. As gold clears $1,200, some will maintain that it is in a bubble, but there is plenty of evidence to refute this baseless claim. First, a few short months ago, gold equities and ETFs accounted for only 0.7% of all managed assets in the world; imagine how high precious metals could rise if everyone in the world put just 2% of their assets in this sector. Second, at a recent conference attended by 300 big-time money managers, 76% of them said they had never owned gold. Third, superstar fund manager John Paulson has had great difficulty raising money for his gold fund; even he can’t convince people to buy gold. Finally, despite gold’s historic breakout and holding at the $1,000 level, the general public hasn’t noticed. As for the economy, policy makers are shooting blanks; there is almost nothing authorities can do to stop the coming inflation and the roaring bull market in gold and silver. Massive debt levels mean interest rates cannot rise, while continuing low rates mean speculation in hard assets will become rampant as inflation ticks up and purchasing power declines. In addition, the Fed can’t tighten the money supply since it would have to sell garbage assets, which it overpaid for, into the market. Severe inflation results from a loss of confidence in a government’s ability to meet its debts resulting in a falling bond market, rising interest rates and currency weakness. Debt crises go hand in hand with currency crises. Thus, gold will break out against numerous currencies even though the banks aren’t lending and velocity is falling. The last line of defense is the Treasury market. If interest rates rise, the authorities will effectively lose both control and power, and inflation will skyrocket. The action in gold is already hinting at that outcome.

www.resourceinvestor.com/News/2010/4/Pages/All-Aboard-the-Gold-Train-as-Recognition-Move-Approaches.aspx

MONEY

Buffett Bearish on Currencies Holding Their Value

Alistair Blair

At Berkshire Hathaway’s annual meeting last weekend, company Chairman Warren Buffett said that he's bearish about the ability of all currencies to hold their value over time because of massive deficits being run up by governments in the wake of the global financial crisis. He also warned that it is unclear how the Greek debt crisis will ultimately be resolved. The financial crisis of 2008 was stemmed by massive monetary and fiscal intervention in developed economies that has shifted a private-sector debt mountain on to governments, increasing anxiety about sovereign risks. One concern is that governments will print money to pay debts, undermining the value of currencies and triggering inflation. “Events in the world over the last few years make me more bearish on all currencies in terms of holding their value over time,” Buffett said. “How the world weans itself off huge deficit financing is going to be difficult to watch.” Still, Buffett noted that as long as the US borrows in US dollars, there's no possibility of default since “you don't default when you can print your own currency.” Sovereign debt concerns have hit Greece hardest so far because the country has one of the biggest budget deficits and debt loads of any country in the Eurozone. In addition, Greece has understated its deficit twice, shaking investor confidence. Bond yields have soared and the country's debt rating has been slashed to junk status, making it almost impossible for the country to refinance its debt mountain at realistic interest rates. Greece is promising drastic austerity measures in return for a bailout of as much as 120 billion euros over three years. Earlier doubts about Germany's commitment to helping Greece triggered a surge in sovereign bond yields that cut all but the most creditworthy countries out of the market. Buffett said that Europe's monetary union has created an interesting situation, since Greece is a sovereign country in terms of its own budget but cannot print its own currency. “You may be seeing a test case play out there,” said Buffett. “A country not using its own currency and yet it is sovereign in terms of making its own promises to its citizens. I don't know how this movie ends,” he added. “I try not to go to movies like that.”

www.marketwatch.com/story/story/print?guid=546C72C3-E14A-49C9-A6ED-ADC4E9011399

ECONOMY

US Economy Grinds to a Halt as Nation Realizes Money Just a Symbolic, Mutually Shared Illusion

The Onion

Even satirical US news website The Onion is poking fun at the world’s reserve currency. An excerpt: “The US economy ceased to function this week after unexpected existential remarks by Federal Reserve chairman Ben Bernanke shocked Americans into realizing that money is, in fact, just a meaningless and intangible social construct. Calling it “basically no more than five rectangular strips of paper,” [Bernanke] illustrates how much ‘$200’ is actually worth. What began as a routine report before the Senate Finance Committee Tuesday ended with Bernanke passionately disavowing the entire concept of currency, and negating in an instant the very foundation of the world's largest economy. “Though raising interest rates is unlikely at the moment, the Fed will of course act appropriately if we…if we…” said Bernanke, who then paused for a moment, looked down at his prepared statement, and shook his head in utter disbelief.  “You know what? It doesn't matter. None of this—this so-called 'money'—really matters at all. It's just an illusion,” a wide-eyed Bernanke added as he removed bills from his wallet and slowly spread them out before him. “Just look at it: Meaningless pieces of paper with numbers printed on them. Worthless.” According to witnesses, Finance Committee members sat in thunderstruck silence for several moments until Sen. Orrin Hatch (R-UT) finally shouted out, “Oh my God, he's right. It's all a mirage. All of it—the money, our whole economy—it's all a lie!” Screams then filled the Senate Chamber as lawmakers and members of the press ran for the exits, leaving in their wake aisles littered with the remains of torn currency. US markets closed as traders left their jobs and resolved for once to do or make something, anything of real value. As news of the nation's collectively held delusion spread, the economy ground to a halt, with dumbfounded citizens everywhere walking out on their jobs as they contemplated the little green drawings of buildings and dead white men they once used to measure their adequacy and importance as human beings.”

www.theonion.com/articles/us-economy-grinds-to-halt-as-nation-realizes-money,2912/

A Hyperinflationary Great Depression is Coming

John Williams

In an interview with The Gold Report, ShadowStats’ John Williams explains why a hyper-inflationary great depression is now unavoidable for the US, and why gold is his choice for asset conversion. Topics of discussion: whether the collapse will be unique to the US or will include other economies; how America’s decreased economic power will impact global economies; whether inflation after a recession is a good sign; whether the economic stimulus flooding the system should mean a bigger bubble; will decoupling of the US dollar and the euro precede hyper-inflation; what Williams sees that the governing bodies do not; whether there are sustainable businesses in the US; whether an influx of printed currency and green-tech job creation could offer some value; whether stimulus money could become real cash producing real goods at some point; which currencies investors should look to as investment options; physical gold and silver as preservers of purchasing power. Williams says: “For anyone living in the United States…this is the time to batten down the hatches and to look to preserve your wealth and assets. In terms of preserving the purchasing power of your assets, the best thing I can think of is physical gold. That's worked over the millennia…it's the cleanest asset around for that…Hold some silver…the US dollar is going to become effectively worthless…There's going to have to be an overhaul of the global currency system…If you can come out of this holding gold, you'll be in a position where you'll be able to take advantage of some extraordinary investment opportunities that will follow…[People say] “Oh my goodness, I bought [gold] at $200, and I can sell out at $1,100 making a good profit.” What people don't realize is that they haven't made a real profit. What they've done is retained the purchasing power of the dollars that they invested in gold, and they've lost proportionately the purchasing power of the amounts left in dollar-denominated paper assets over the same time. Gold is a long-term wealth preserver…you need to hold on for the long haul as an insurance policy, not as a quick investment.”

www.theaureport.com/pub/na/6199

Banks Closed in Puerto Rico, Mich., Mo., Wash.

Associated Press

Last Friday, regulators shut down three banks in Puerto Rico, two in Missouri and one each in Michigan and Washington, bringing the number of US bank failures this year to 64. The three failed banks in Puerto Rico together held more than one-fifth of the territory’s total bank assets; they had struggled to stay afloat during Puerto Pico’s grinding four-year recession. It was Puerto Rico’s largest bank consolidation in more than two decades, as well as one of the FDIC’s biggest resolutions of failed banks since the financial crisis of 2008. There were 140 bank failures in the US last year, the highest annual tally since 1992, at the height of the savings and loan crisis. They cost the insurance fund more than $30 billion. Twenty-five banks failed in 2008 and only three succumbed in 2007. The number of bank failures will likely peak this year and will be slightly higher than in 2009, FDIC Chairman Sheila Bair said recently. As losses have mounted on loans made for commercial property and development, the growing bank failures have sapped billions of dollars out of the deposit insurance fund. It fell into the red last year, hitting a $20.9 billion deficit as of December 31, 2009. The number of banks on the FDIC's confidential “problem” list jumped to 702 in the fourth quarter from 552 three months earlier, even as the industry managed a small profit. Still, nearly one in every three banks reported a net loss for the latest quarter. The FDIC expects the cost of resolving failed banks to grow to about $100 billion over the next four years. The agency mandated last year that banks prepay about $45 billion in premiums, for 2010 through 2012, to replenish the insurance fund. Apart from the fund, the FDIC has about $66 billion in cash and securities available in reserve to cover losses at failed banks.

http://finance.yahoo.com/news/Banks-closed-in-Puerto-Rico-apf-1507617949.html?x=0&sec=topStories&pos=main&asset=&ccode