“I keep my money in cash in my trousers pocket and my savings in silver dollars in a sock.”

~ Stephen Leacock

CHART OF THE WEEK

www.gold-eagle.com/editorials_08/sutton052710pv.html

“We are clearly out of control in terms of our debts, both internal and external, and don't seem the least bit concerned about real generational or fiscal reform beyond traditional Washington lip service.”

VIDEO OF THE WEEK

ABC Four Corners Peak Oil Documentary

GOLD

Billionaire Kaplan Bets Most Of His Wealth On Gold 

Julie Crawshaw

Unlike most fund managers, who allocate a small percentage of the portfolios they manage to gold, billionaire commodities magnate and Tigris Financial Group head Thomas Kaplan reportedly has gone all in on gold. “I've reached a point where I feel the only asset I have confidence in is gold,” Kaplan says. Reflecting his conviction that global economic instability could bring rising demand for gold, Kaplan has gone further than perhaps any other major investor, betting the majority of his wealth on gold and other precious metals. “You've got a perfect storm with no apparent solution,” he said. “If the world does well, gold will be fine. If the world doesn't do well, gold will also do fine … but a lot of other things could collapse.” Though he won't disclose how much physical gold he owns, Kaplan controls up to 30% of the shares in some junior miners, and his total holdings amount to a nearly $2-billion bet on gold. Tigris subsidiaries have taken stakes in mining companies, including tiny firms that have yet to produce an ounce. Kaplan has not only loaded up on bullion, but bought up properties in 17 countries on five continents where geologists are searching for gold. However, if investors want to stock up on gold in a hurry, Kaplan notes, it will be hard to produce enough gold to satisfy demand. Gold hit an exchange record of $1,242.70 per ounce on May 12 before experiencing a correction to $1,180 as investors opted for cash amid global uncertainty, options expiration and a struggling equity market.

www.moneynews.com/StreetTalk/Thomas-Kaplan-Gold-billionaire/2010/05/24/id/359924

Gold Being Bought Faster Than It Can Be Produced

Bloomberg News

Speculators are buying gold faster than the world’s producers can mine it, while analysts forecast a 26% rally for the longest run of annual gains since at least 1920. Bullion ETFs added 42.5 tonnes in the week to May 14; last year, the world’s 18 largest mining nations averaged weekly output of only 42.3 tonnes. Even though the gold price corrected last week, many traders, analysts and investors believe it will reach $1,500 by year end. Buying accelerated as stock markets around the world tumbled in May. Holders of exchange-traded products, including George Soros and John Paulson, accumulated a record 1,921 tonnes by May 14, eclipsing all but four of the biggest central-bank holdings. “You could see gold go up another $1,000,” said Evan Smith of US Global Investors Inc., who in 2006 correctly predicted that gold would reach $700 within two years. “All of the turmoil and problems we’ve seen in Europe is just another reminder that there’s a lot of value in gold as a safe haven.” While gold is favored by investors when the dollar weakens and inflation gains, the metal can also advance at other times, as it is today. “People are afraid of the debasement of all the currencies,” said Peter Schiff, president of Euro Pacific Capital, whose clients have more than $2 billion in assets. “What’s surprising is that gold is still as low as it is,” he said, predicting $5,000 to $10,000 an ounce in the next five to 10 years. Gold is still at half the peak set in 1980, after adjusting for inflation. Then, prices rose to $850, equal to $2,266 today.

www.thestar.com/business/article/813834--gold-being-bought-faster-than-it-can-be-produced

CURRENCY

Euro Crisis; The Hidden Agenda

Sol Palha

Top EU members knew they would bail out Greece (and any other member that needs help) but initially pretended they would not. They feigned reluctance because the bailout was not to protect Greece, but to save the bond holders, most of whom are foreigners. This is also why the US banks were bailed out: to protect the large shareholders. In fact, the euro crisis was required; it allowed for a deflation of the currency. We are in the era of competitive currency devaluation; nations must do whatever it takes to keep their products competitive in the global market. China has replaced Germany as the world’s largest exporter; a painful demotion. But by allowing the Greek crisis to progress, the EU was able to devalue the euro without actually issuing new currency. When things started to look really bad, they could pretend to help by approving a huge package, thus devaluing the euro even more. In effect, they killed two birds with one stone. If they had approved a bailout package immediately, the euro would not have shed as much value as it did. In a matter of months the Eurozone currency dropped a whopping 24%. Another factor is that no government wants to pay its debts in a strong currency; governments borrow money so they can pay it back with cheap currency. Thus while one currency might appear to be appreciating against another, in truth they are all shrinking, some faster than others. In contrast, almost all commodities are enjoying up trends, regardless of the currency in which they are priced. This is certainly the case for gold. For fiat currencies, the race to the bottom has picked up speed. Palha would not be surprised if some sort of crisis hits Asia; that would complete the circle perfectly. He recommends owning precious metals as a hedge/insurance against another potential crisis.

http://financialsense.com/fsu/editorials/ti/2010/0528.html

The Path To Hyperinflation

Jordan Roy-Byrne

Current deflationary forces do not mean a repeat of Japan’s 1990s or America’s 1930s. Instead, because of governments’ inability to finance their current and future debt burden (there is a dearth of domestic savings and global capital), deflationary forces will ultimately lead to severe inflation or hyperinflation. This will happen in various stages, the first of which have already occurred. Currently, the market senses that Europe’s debt burden is too high as its economies struggle to recover under the weight of excessive debt, and there is a rising probability of default. Precious metals are soaring against the euro, the pound and the Swiss franc. Meanwhile, with money moving back into US Treasuries, America will be able to attempt another stimulus and announce further quantitative easing.  Europe is ahead of the US on its track to currency depreciation, rising inflation expectations and rising CPI/PPI. The US still has time before the market begins to worry about its debt burden. The next stage will be a transition from the initial outbreak of price inflation to severe inflation. Finally, inflation is exacerbated as supply shortages emerge. Tight credit restricts new production and consumers begin to hoard. During such a period, precious metals and commodities will continue to perform well but the agriculture sector will be the real leader. In order for investors to maximize returns, they must have the courage of their convictions and adapt to the changes in the coming cycle of inflation. Currently, precious metals are obviously the best play. While more and more investors are waking up to gold, they are not embracing it. If it is clear that gold is a safe haven, why devote only 5-10% of a portfolio to it

http://financialsense.com/fsu/editorials/trendsman/2010/0527.html

The Consequences Of M3

Anthony Sutton

M3 growth has collapsed despite a prevalent view that the printing press always wins the battle with the deflationary black hole. To date, the black hole is winning hands down. Shrinking M3, the broadest monetary measure, does not bode well for future economic prospects. Monetarists the world over are frightened about the trend, and with good reason. Even rock-bottom interest rates and massive monetary and fiscal stimulus have not been able to prevent the current deflationary spiral. For decades the US economy relied on credit for its survival and now, like a drug addict in rehab, that credit is being limited. Given the massive debts in the system, there are two obvious choices. First, hyper-inflate away the debt, which would mean destruction of the US dollar and the end of the current fiat age. Secondly, there could be a default through deflation/devaluation in an effort to reset the system as in the 1930s. Sutton votes for the latter, for two reasons: The collapse of M3 growth; and history. The US has a rich experience in fiat money, as well as a rich history of defaults thanks to the over-issuance of fiat money. The defaults consisted of ceasing to redeem paper money for gold and silver, but a default is a default, he writes. Today, debt is out of control and there is little concern about real reform. The Fed has been ineffective at doing anything but fattening bank cash flows by squeezing savers and allowing banks to collect generous margins on the performing consumer loans they have. The bailout money sits in bank coffers, withheld from an economy that now depends on loans for its survival. Congress has been asked to ‘grit its teeth’ and approve a fresh fiscal boost of $200 billion to keep growth on track; the stimulus is never-ending. Given the facts, it is difficult to imagine any kind of broad, well-grounded economic recovery. The bottom line: Where M3 goes, so goes America. Such is the way of things in a fiat money system.

www.gold-eagle.com/editorials_08/sutton052710.html

ECONOMY

Uncertainty Reigns Supreme

John Browne

Until recently the US economy seemed to be stabilizing, but uncertainty has returned with a vengeance and the markets are skittish. Recent rallies have been quashed for five fundamental reasons. First, the euro: it is under extreme pressure and may not survive. Greece’s bailout is only a Band-Aid solution; the world is looking to major nations to backstop future funding obligations of other bankrupt states, but these major nations have little or no money themselves. The only real chance for the euro is China, but it said last week it is “reviewing” its euro holdings in light of the spreading debt crisis. Second, investors are deeply concerned that a burgeoning socialism may fundamentally change Western economies. Income from direct government payments has risen sharply in the US and is at an all-time high; the welfare state is growing, therefore taxes must increase. Third, rates at which banks and other financial institutions lend to each other are rising. Although short-term rates are low, stoking ever more consumer borrowing, businesses are starved for credit. Fourth, America’s political class is targeting the financial industry. It is almost universally blamed for the economic crisis, despite the fact that the Fed injected trillions of dollars into the economy to rescue Washington from the last recession it created. Fifth, in order to mitigate the exposure of its banks to problems in Portugal, Italy, Greece and Spain, Germany unexpectedly instituted a variety of protectionist measures. In the US this sort of action fuelled suspicion that the government was worried about the prospects of the firms it selected for special protection; it may backfire for Germany, too. In combination, these five factors explain why investor confidence is falling and the volatility index is rising. Unfortunately, as the Western world comes apart at the seams, no government is making a serious effort to repair the damage.

http://financialsense.com/fsu/editorials/schiff/2010/0528.html