The BullionBuzz eNewsletter - May 18, 2010

"All the perplexities, confusion and distresses in America arise not from defects in the constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation."

-- John Adams, 2nd President of the United States

CHART OF THE WEEK

“The chart above shows the explosive growth of the monetary base in the US over the past few years. While it is not yet at the point where hyperinflation might become endemic it is a warning sign that debt levels being created by all levels of government are unsustainable. This is the road to destruction." -- David Chapman

VIDEO OF THE WEEK

Meltup

National Inflation Association

GOLD

The Road to Destruction

David Chapman

For years there have been predictions of a ‘great reckoning’; the premise is that every credit-led expansion in recorded history has ended in a dramatic credit crunch and economic catastrophe. While it is never pleasant to talk about troubles with the economy, the environment or on the political front, the warnings are clearly there. Chapman discusses the Greek collapse; the financial crisis of 2008; Ponzi schemes; bank failures; executive bonuses; the US real estate crisis; US federal debt levels; Eurozone problems; bankrupt US states; unfunded liabilities in the US; artificially low interest rates; explosive growth in the monetary base; the rising stock market (a fool’s paradise); and more. He notes that gold has been rising in all currencies, as well as against bonds and other commodities, and he recommends that all investors have some bullion in their portfolios. Owning gold stocks is a completely different risk than holding bullion itself; bullion is the most conservative and safest way to own gold. Currently most portfolios are underweight gold and gold stocks, but if the yellow metal continues its bull market against stocks and currencies it will become harder for individuals and portfolio managers to remain on the sidelines. Chapman believes that a Great Reckoning is due, since each bailout begets another crisis. This situation cannot be fully resolved until the debt is cleansed; this means a series of gut-wrenching recessions and even a depression. Gold is money and has been for 3000 years; when all around is failing gold becomes the last safe haven. “A pundit once said after listening to a Cassandra warn about the coming destruction that all he wanted to do was go home, draw a hot bath and slit his throat,” writes Chapman. “He would be better off just buying some gold.”

www.bmgbullion.com/document/706

Gold Soars to High Amid Crisis

Tim Shufelt

Gold surged on news that the European Central Bank is funding the Eurozone’s sovereign debt crisis to the tune of $1 trillion. The ECB plans to buy the sovereign bonds of Greece and other struggling Eurozone countries, a move that will spark inflation and push gold higher. The Bank will try to ‘sterilize’ the asset purchases by absorbing liquidity elsewhere in the system to avoid increasing the total money supply, but this effort will likely fail. The general feeling that the bailouts will not work has investors turning to gold as a safe haven. According to Nick Barisheff, president and CEO of Bullion Management Group, investors the world over are losing confidence in paper currencies. “When you look at the global situation as far as currencies are concerned, the US dollar is the best of a bad bunch”, he said. “Eventually, however, investors will forsake the greenback in favour of bullion.” Barisheff noted America’s soaring budget deficit and the dismal economic prospects in some states. “California has far worse numbers than Greece,” he said, predicting that while the US may protest, it will eventually bail out those troubled states. Barisheff predicts gold at $1,300 - $1,500 per ounce by year end, bolstered by a weak euro and continuing problems amongst the Eurozone countries. Waning confidence in currencies and sovereign debt generally will continue to attract investors to gold. And although there are myriad ways to invest in the yellow metal, Barisheff noted that gold derivatives don't sufficiently hedge against global uncertainty. “Under these conditions, you need actual bullion,” he said.

www.financialpost.com/related/topics/story.html?id=3015544

SILVER

Gold’s Ugly Sister Gets a Second Look

Myra Saefong

Silver's recent gains have significantly outpaced gold's; it has climbed around 30% since early February, compared to gold at nearly 17%. Still, some analysts think silver isn’t getting enough attention, and investors continue to view it as gold's ugly sister. The average gold:silver ratio is 52, but currently sits around 63, indicating that silver has some catching up to do. That will likely happen in coming months and when it does, the silver price will jump. Gold-oriented funds and ETFs have been the market's best performers over the past month, fueled by troubles in the Eurozone. But demand for silver is growing too; the Canadian Mint and the US Mint are experiencing high demand for silver Eagles and silver Maple Leafs, and premiums for these coins are beginning to climb. And even though silver production is rising, investment demand, alongside industrial demand, is growing quickly, eliminating the surpluses expected from waning photographic applications. It should be noted that silver is consumed and not recovered from these sources, so until newly mined silver supply grows in volume, silver demand will likely outpace production. Other drivers for the silver bull include a criminal investigation into JPMorgan Chase’s activities in the silver market. Against that backdrop, the upside for silver could be as much as $100, and certainly more than $22, its 2008 high. Silver investors need to have patience because when silver prices undergo normal corrections, it takes a few months for the bull run to resume; and when gold and silver prices correct together, silver tends to fall more than gold. While silver has more uses than gold and is more fundamentally bullish, gold has a safe haven appeal that silver does not enjoy. Nevertheless, silver is an undervalued commodity and when the valuation catches up with fundamentals, prices will soar.

www.marketwatch.com/story/golds-ugly-sister-gets-a-second-look-2010-05-14?siteid=rss&utm_source=tf

MONEY

Greek Wildfire Engulfs the Euro in Flames

Gary Dorsch

For most of this year, traders’ attention has been focused on the wildfire engulfing the Greek bond market, which became the flashpoint for the unleashing of a worldwide, Lehman Brothers-style meltdown. Problems in the Greek bond market could have led to widespread destruction throughout the European banking system; although that catastrophe was avoided, the euro was hit hard and is still struggling. Eurozone politicians underestimated the destructive power of the Greek bond market, with Athens’ ability to redeem bondholders, including major European and US banks, in question. Token bailout packages were cobbled together by France and Germany, but the amounts were insufficient to calm the firestorm. While politicians haggled over bailout details (including wage cuts and tax hikes), Greek citizens went on strike and rioted in the streets. When the contagion began spreading to the Spanish and Portuguese markets, and with the euro taking a battering in the currency markets, EU politicians were forced to devise a much larger rescue plan. “We need to make progress today because in the night, when the markets are opening, we cannot afford disappointments,” said Finance Minister Anders Borg of Sweden. “We now see herd behaviour in the markets that are really pack behaviours, wolf-pack behaviours.” If left unchecked, Borg said, “they will tear the weaker countries apart.” Facing a desperate situation - a systemic seizure of the European financial system - the ECB unleashed its nuclear option, Quantitative Easing, or the printing vast quantities of euros. In fact, the EU put up a staggering 750 billion euros in loan guarantees in an effort to contain the damage. Dorsch provides a comprehensive chronology of the Greek debt crisis, beginning with the Greek credit default swap market in early December 2009.

www.321gold.com/editorials/sirchartsalot/dorsch051410.html

ECONOMY

US Faces One of Biggest Budget Crunches in the World – IMF

Edmund Conway

“Earlier this week, the Bank of England Governor, Mervyn King, irked US authorities by pointing out that even the world’s economic superpower has a major fiscal problem – ‘even the United States, the world’s largest economy, has a very large fiscal deficit’ were his words. They were rather vague, but by happy coincidence the International Monetary Fund has chosen to flesh out the issue today… The IMF analysis is fascinating… the really interesting stuff is the detail, and what leaps out again and again is how much of a hill the US has to climb.” Conway discusses US gross debt as a percentage of GDP; the rising cost of extra healthcare and pensions; and the alarming amount of new debt it has to issue in coming years in order to keep on functioning. All in all, the US needs 12% of GDP lopped off its structural deficit. That’s $1.7 trillion, or almost all of Britain’s annual economic output. Because the dollar is the world’s reserve currency, the US has been able to keep borrowing at low levels throughout the crisis. This means the US has yet to feel the market strain, and also means the US has yet to face up to the public finance disaster that could come if it doesn’t handle the problem. While the US is not Greece, it could head in that direction if it does not start making efforts to cut the deficit. The upshot would be a dollar collapse, and a possible hyperinflation. The US has time to deal with its problems, but not forever.

http://blogs.telegraph.co.uk/finance/edmundconway/100005702/us-faces-one-of-biggest-budget-crunches-in-western-world-imf/

Morgan Stanley Fears German Exit From EMU

Ambrose Evans-Pritchard

Morgan Stanley has warned that the Greek debt crisis is setting off a chain of events that may prompt German withdrawal from the Eurozone, with grim implications for investors caught off guard. The US bank said a bailout for Greece may be necessary to avoid a crisis for Europe's financial system, but warned that it also “sows the seeds for potentially even bigger problems further down the road.” Weak states cannot easily leave EMU because they would pay a stiff penalty in higher rates, would be stuck with euro debt contracts, and might need controls to stem capital flight. It is a different for Germany, which would see lower rates and might view EMU exit as the only way to ensure monetary stability. Such a break-up scenario has clearly become more likely, and the consequences for financial markets would be severe. “Investors ignore the break-up risk at their peril,” said the head of research at Morgan Stanley. Meanwhile, the European Central Bank vowed to resist pressure to help spendthrift governments out of their troubles by resorting to easy money, noting that the global credit crisis is starting to morph into a deeper solvency threat to highly indebted states. Public debt will reach 88% of GDP next year in the Eurozone and the UK, 100% in the US and 200% in Japan, and fiscal policies are on an unsustainable path. These ECB warnings are clearly directed at Greece, Spain, Portugal, Italy and Ireland; in order to curb inflation these countries will have to carry out deep wage cuts to bring their economies back into line with North Europe, and debt costs will have to be serviced from a shrinking economic base. Critics (including some in IMF circles) think that such a policy risks pushing these states into debt-deflation spiral and may not work.

www.telegraph.co.uk/finance/financetopics/financialcrisis/7594859/Morgan-Stanley-fears-German-exit-from-EMU.html

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