The BullionBuzz eNewsletter - July 6, 2010

"There is no means of avoiding the final collapse of a boom brought on by credit and fiat monetary expansion.  The only question is whether the crisis should come sooner in the form of a recession or later as a final and total catastrophe of depression as the currency systems crumble.”

-- Ludwig von Mises

CHART OF THE WEEK

www.theglobeandmail.com/report-on-business/economy/california-on-verge-of-system-failure/article1609891/

VIDEO OF THE WEEK

This two part series provides a good overview of the history of money and currency in the United States.

GOLD

How Much Bullion Would Equity Investors Need to Hold to Insure Against Inflation?

R. David Ranson

Including gold bullion in an equities portfolio has the effect of lowering the volatility of portfolio return and raising the return-risk ratio, just as the inclusion of any other asset would. But gold has a special risk-reducing property that other assets lack. It is not only a hedge against inflation, but a market leading indicator of inflation and, better still, a direct measure of the damage done by inflation to an equities portfolio. The negative impact on stock returns from a rise in the price of gold lasts for at least five years. Ranson calculates that a US equities portfolio in which 15% of the assets are diverted to gold bullion would be effectively immune from damage due to a rising gold price. “That is equivalent, we believe, to immunity from inflation,” he writes.

http://bmgbullion.com/doc_bin/Gold%20immunizing%20equities%20-%20June%202010.pdf

What’s Behind the Global Flight Into Gold? 

Gary Dorsch

In April 2004, with gold trading at $402 per ounce, NM Rothschild & Sons, which had fixed the price of gold twice a day for 85 years, suddenly announced its withdrawal from the London Gold Pool. By withdrawing from the Pool, NM Rothschild was no longer obligated to sell its gold to anyone, including central banks. Were the Rothschilds anticipating some new dynamics that would send the yellow metal soaring to new heights? Since then, gold has tripled in value to around $1,250 per ounce. Central bankers overseeing emerging economies have become net buyers of gold, and mergers and acquisitions in the gold mining industry have put more of the yellow metal’s supply into fewer hands. Also tilting the balance to gold’s favour is the biggest explosion of the global fiat money supply in history. Central bankers have monetized trillions of dollars worth of government bonds and mortgage debt in euros, British pounds, Japanese yen and US dollars. In response, investors from all corners of the globe, including central banks in China, India, Russia and Saudi Arabia, have been accumulating vast quantities of gold as a hedge to protect the purchasing power of their national reserves or savings. Dorsch discusses Tokyo gold as a hedge against government debt; Shanghai gold tracking foreign reserves and global instability; the Bank of India lingering far behind the inflation curve; and fractures in the euro lifting gold and the Swiss franc. How should investors respond to the crises ahead? Dorsch quotes George Bernard Shaw: “You have to choose between trusting the natural stability of gold and the honesty and intelligence of members of the government. With due respect for these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.”

http://financialsense.com/contributors/gary-dorsch/whats-behind-the-global-flight-into-gold

ECONOMY

25 Signs of Expectations for an Economic Collapse in 2010

Michael T. Snyder

Bad economic signs are everywhere: consumer confidence is plummeting, banks are hoarding cash, financial experts are bearish and almost everyone is buying gold. The G20 nations have all pledged to dramatically cut government spending in an effort to control debt, so worries about a double-dip recession are escalating. A full-fledged economic collapse this year is possible, but it seems more likely that we will sink into another recession that could deepen into a depression heading into 2011. A sampling of the 25 signs that tell Snyder extreme economic stress lies dead ahead: the declining Consumer Confidence Index; banks hoarding cash in preparation for the next financial crisis; the Societe Generale’s forecast of $1,430 gold; the New York Times’ prediction of a third Depression; Moody’s comment regarding an ‘uncomfortably high probability’ of the US slipping back into recession; the US Department of Agriculture’s forecast of 43 million Americans on food stamps in 2011; George Soros’ claim that a European recession in the coming months is almost inevitable; Fed Chairman Bernanke’s public announcement that the US unemployment rate is likely to remain high for some time; the National League of Cities warning that large numbers of US cities will be facing horrible economic conditions over the next couple of years; debates at the Fed about what to do in the event of a double-dip recession; sales of new homes in the US at the lowest level ever recorded; 46 US states facing a Greek-style financial crisis. What to do about all this? Start preparing for difficult times: get out of debt, reduce expenses, develop additional income streams, store food and supplies. Don’t wait until the storm hits, start preparing immediately. The signs that we are headed towards an economic nightmare are all around us.

http://seekingalpha.com/article/212785-25-signs-of-expectations-for-an-economic-collapse-in-2010?source=email

US Government Bonds – Can America Maintain Confidence in its Debt?

Cliff Küle

Massive, unsustainable government debt is everywhere, and especially in the US. At some point, the world may begin to lose confidence in America's growing debt, leading to soaring interest rates and a Greek-style crisis in US government bonds. The US could maintain the world’s confidence by becoming fiscally prudent – stop creating money and debt, and let the massive deflationary forces of credit contraction and consumer de-leveraging run their natural course. This would cleanse the system of toxic debt. It would also cause another Great Depression. Alternatively, the US could print more money in an attempt to inflate away the debt. This method has been tried countless times by many nations, always with disastrous results. The best option would be to return to the gold standard, backing the US dollar with real money and thus enforcing a responsible discipline of fiscal and monetary policy. Monetary systems on a gold standard cannot increase the money supply on a whim. Under a gold standard, paper money is backed by something of real tangible value. The total amount of gold limits the total amount of paper money that can be created. New money must be backed by additional gold. In the US, the gold standard was abandoned in 1971 and within a generation, America went from being the world’s largest creditor nation to the world’s largest debtor nation. A dollar backed by gold would restore global confidence in the greenback and in US debt; if not, a deflationary depression or a hyperinflationary depression could be in store as confidence wanes with increasing levels of public debt. Nick Barisheff of Bullion Management Group emphasizes that gold is money: “Gold is not and never has been a currency. Gold is something entirely different and far more valuable. It is money.” To maintain confidence in its debt, the US must bring back the gold standard, anchoring the dollar to real money – gold – as per Article 1 of the Constitution.

www.foundingfathersfoundation.com/page9.php

INVESTMENT

When the Market Speaks, Listen!

Chris Puplava

“There are two things that the past ten years should have made abundantly clear by now, which is that a buy and hold strategy (B&H) is a recipe for disaster in a secular bear market, and that one cannot ignore the message of the market when it is shouting at you. Knowing the investment climate is pivotal as investment approaches have different outcomes in different climates. A B&H approach is one of the best strategies to have during a secular bull market (think 1982-2000) while a trading/market timing strategy is a better approach during a secular bear market (2000-present). Given that we are still within the confines of a secular bear market where real stock prices peaked in 2000, secular bear market rules apply and risk management should become a top priority.” Puplava discusses disturbing long-term trends and risk management, and makes an investment strategy comparison of $100,000 invested from 1966 to the present day. Investors should be listening to the markets, he writes, which are shouting their high-risk position. For the market to reverse its bearish trend the S&P 500 must rally above its June high of 1130 and its 50-day and 200-day moving averages. A move above these levels would force a less bearish view on the markets. If the 1130 area is not breached to the upside, the bearish trend remains and risk management should be practiced to limit losses. A drop into the 900s and even 800s in the S&P 500 cannot be ruled out. If a bear market really begins to take hold, expect another game changer such as last year’s quantitative easing program, which helped contain the prior bear market.

http://financialsense.com/contributors/chris-puplava/when-the-market-speaks-listen

REAL ESTATE

Real Estate Will Lead Economy Into Depression

Simon Maiehofer

Investors want to believe that the worst is over. Even though the data indicates a recession or depression, the general consensus is that ‘this time is different.’ But in 2008, all asset classes – large cap, mid cap, small cap, real estate, commodities, oil, silver and gold – declined at once, something that hasn't been seen since the Great Depression. The current recession is worse than the 2000 tech collapse and the 2005 real estate bust because when the NASDAQ fell in 2000, real estate was there to fall back on, and when real estate collapsed in 2005, stocks were there to fall back on. In 2008, there was no safety net to be found. The media reports that the US, unlike Europe, is basically sound, and points to recent strong earnings reports numbers from the banks. Unfortunately, those numbers are misleading. A recent accounting change (Rule 157) allows banks with impaired financial securities to move billions of dollars in losses off of their income statements, which will benefit their regulatory capital calculations and artificially increase profits. It allows banks to dump the noncredit loss into an account that is not recognized on the banks' income statements. As such, credit losses do not show up in the earnings numbers. Therefore, earnings are grossly overstated. Falling real estate prices intensify the already bad situation. The markets are caught in a negative feedback loop, with internal signals revealing months ago that the disconnection between rising stock prices, ailing financials, and the deteriorating economy was about to culminate in a concerted decline. Unlike Wall Street, the market does not lie: what you see is what you get. Rarely in history has there been such harmony between technical indicators, valuations, fundamental measures and sentiment readings. The message is clearly bearish.

http://finance.yahoo.com/news/Real-Estate-Will-Lead-Economy-etfguide-43174185.html?x=0&.v=patrick.net

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