The BullionBuzz eNewsletter - July 27, 2010

"We can guarantee cash benefits as far out and at whatever size you like,
but we cannot guarantee their purchasing power."

--Alan Greenspan

CHART OF THE WEEK

www.theatlantic.com/business/archive/2010/07/the-scariest-unemployment-graph-ive-seen-yet/60086/

"The median duration of unemployment is higher today than any time in the last 50 years. That's an understatement. It is more than twice as high today than any time in the last 50 years.

OK, you're saying, but what does this mean? Does it mean we must increase the duration of unemployment benefits to protect this new class of unemployed, or does it mean we need to stop subsidizing joblessness? Does it mean we need to expand federal retraining programs, or does it mean federal retraining programs aren't working? Does it mean we need more stimulus, more state aid, more infrastructure projects, more public works ... or does it mean it's time to stop everything, stand back and let business be business?” -- Derek Thompson

VIDEO OF THE WEEK

Financial Services Hearing July 22 2010

GOLD

How Much Bullion to Put in a Fixed-Income Portfolio Today?

R. David Ranson

When gold is added to an equity portfolio it greatly improves the ratio of return to risk, because equity price changes are inversely correlated with the change in the price of gold. More importantly, it reduces the vulnerability of the investment to inflation. Gold price movements are equally strongly correlated with the return from bonds. In this report, Ranson explores how much gold it takes to minimize the vulnerability to inflation of a quality fixed-income portfolio. Up for discussion: the false dichotomy between inflation and deflation; gold versus TIPS as an immunizing asset; sensitivity of a fixed-income portfolio to the gold price; and measuring the riskiness of a mix of bonds and gold. Investment conclusion: Including gold bullion in a bond 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 most other assets lack. It is not only a hedge against inflation, but a market leading indicator of inflation. Better still, it is a direct measure of the damage done by inflation to a portfolio. The negative impact on bond returns from a rise in the price of gold lasts for about two years. Ranson calculates that a Treasuries 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, he believes, to providing 100% insurance against inflation.

www.bmgbullion.com/document/725

Ten Charts, Ten Stories of the Real Gold Price

Marek Kuchta

They say the charts never lie; but a half truth is the blackest of lies. Gold charts showing the metal at constant (inflation-adjusted) prices usually support various stories: why gold is an inflation hedge; why gold is not an inflation hedge; why gold is a bubble and why gold is not a bubble. Depending on which deflator is used, the charts look optimistic or pessimistic. Of course, 90% of readers of media geared towards the general public, such as the Economist, take charted data for granted. Hence, these graphics are a good way of leading the reader into believing your story. The remaining 10% of curious readers can be discouraged from questioning the chart by not stating which deflator was used. It can be the CPI-U, CPI-W, the pre-Clinton CPI and so on. Depending on which one is used, inflation can be doubled or halved. Kuchta provides 10 examples of such charts, and dissects the story they are telling. “Given the uncritical way of media consumption, followed by far-reaching actions (investing),” he writes, “it is clear that most of the investment choices of the broad public will be suboptimal. Even worse, most of these charts and articles encourage binary thinking: ‘Should I buy gold or not?’ A more fluid mindset would reflect the nature of our world much better. If the likelihood of gold's appreciation is just 50% (gold price forecasts by most experts suggest it to be much higher), I sure want to participate in that market, especially given the tremendous upside. Just in case, even if it's a small investment. Hence, a better question would be: ‘How much gold should I own right now?’ In any case, it's good news that the variety of information is so vast that those who chose to get informed can get the big picture.”

http://seekingalpha.com/article/216269-10-charts-10-stories-of-the-real-gold-price?source=email

Is Now a Good Time to Buy Gold?

Jeff Clark

While Clark is convinced gold and gold stocks are destined for much higher levels, buying when prices are low can mean the difference between a double or triple and a ten-bagger. Everyone knows about buying low, but there are periods when prices tend to be lower than others, allowing investors to buy high-quality assets at bargain prices. The secret to getting a low-cost basis on gold is to cheat – buy only on significant price pullbacks, and the traditional “summer doldrums” is a great time to do this. In the current 9-year bull market, June and August have seen the lowest average return for gold, representing one of the best times to buy. Clark provides charts that identify possible price weakness and the opportunity to add to holdings. What are the odds of a correction in gold and gold stocks this summer?  Since 2001, almost every precious metal stock, every summer, has moved lower from its May high. The average price of all pullbacks in gold, from the May highs to the summer lows, is 8.9%, and would take the gold price to $1,126.98. Even if this low isn’t reached, the number is a tip-off that a fall to that level would not be out of the ordinary – and would be an invitation to buy. Don’t try to time the lowest price; that can result in chasing the metal higher. Silver is naturally more volatile, allowing a better opportunity to buy low. The average summer decline for silver is 16.6%, which would take the price to $16.39. However, a 10% correction from current levels would be perfectly normal and again, an invitation to buy. Investors should only be adding to current precious metals positions, not trading; the inevitable currency crisis could strike suddenly and will eventually hit the US dollar, leaving unprepared investors standing on the sidelines if gold surges higher. Being completely out of precious metals in the middle of a once-in-a-generation bull market would be a mistake. Instead, Clark advises adding to your savings every month and buying when it feels like you’re cheating.

www.gold-eagle.com/editorials_08/jclark072010.html

SILVER

The Coming Silver Supernova

Lorimer Wilson

“Few investment opportunities arise in our lifetime like silver. The stage is set for a silver price percentage gain of extraordinary magnitude! Forget the popular refrain of ‘Got Gold?’ and make some additions to your portfolio to take advantage of the coming silver supernova!” So said author Donald Poitras in an email sent to Wilson after reading Wilson’s article on the possible impact the historical gold:silver ratio could have on the price of silver if gold goes parabolic. In addition to the gold:silver ratio, there are other sound reasons why silver can expect to experience a percentage gain of extraordinary magnitude in the years to come: diminishing supply and increasing demand; a massive short position exists; in-ground silver is limited and will become much more expensive to mine. As a result, the price of silver can only increase dramatically. It is time, writes Wilson, to embrace the new refrain, ‘Got silver?’

www.gold-eagle.com/editorials_08/wilsonl072210.html

MONEY

The Death of Paper Money

Ambrose Evans-Pritchard

Ambrose Evans-Pritchard discusses how an obscure, out of print book – “Dying of Money” that discusses the lessons of the Great German and American inflations, has become popular, with copies on Ebay selling for $699.  The book’s author, Jens O. Parsson notes that each big inflation – whether the early 1920s in Germany, or the Korean and Vietnam wars in the US – starts with a passive expansion of the quantity money, which remains inert for a surprisingly long time. Asset prices may go up, but latent price inflation is disguised. The effect is like lighter fuel on a camp fire before the match is struck. People’s willingness to hold money can change suddenly for a psychological and spontaneous reason, causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks, and the shift invariably catches economists by surprise. In Britain, there has been a recent jump in inflation; in the US, the monetary base rose from $871 billion to $2,024 billion in just two years, a situation that will explode as US money velocity returns to normal. Morgan Stanley expects bond carnage as this catches up with the Fed, predicting that yields on US Treasuries will rocket to 5.5%. We should be careful, writes Evans-Pritchard, of embracing the reassuring assumption that this is a mild replay of Japan’s Lost Decade; that is to say a slow and largely benign slide into deflation as debt deleveraging exerts its discipline. Japan was the world’s biggest external creditor when the Nikkei bubble burst 20 years ago. It had a private savings rate of 15% of GDP. The Japanese have gradually cut this rate to 2%, cushioning the effects of the long slump. The US and the UK have no such cushion. There is a clear temptation for the West to extricate itself from the errors of the Greenspan asset bubble, the Brown credit bubble, and the EMU sovereign bubble by stealth default through inflation. But that is a danger for later years. First we will have the deflation shock of our lives. Then central banks will go too far and risk losing control over their printing experiment as velocity takes off.

www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7909432/The-Death-of-Paper-Money.html

Download the eBook

"Dying of Money: Lessons of the Great German and American Inflations"

FREE by clicking here

ECONOMY

“Unlimited Taxpayer Bailout” of FDIC Coming

Mike Shedlock

US bank failures this year have surpassed a bleak milestone of 100 as regulators shut down banks in Georgia, Florida, South Carolina, Kansas, Nevada, Minnesota and Oregon.  The seven bank seizures announced last week bring total failures in 2010 so far to 103. The pace of bank closures this year is well ahead of that of 2009, which saw a total of 140 banks shuttered amid the recession and mounting loan defaults. That was the highest annual tally since 1992, at the height of the savings and loan crisis. The number of banks on the FDIC's confidential problem list jumped to 775 in the first quarter, from 702 three months earlier, even as the industry as a whole had its best quarter in two years. But there are more failures coming; the FDIC is now deep in the red and the situation, which would be even messier if it were not for widespread ‘extend and pretend’ tactics that keep woefully insolvent banks in business, worsens each week. Shedlock discusses the FDIC shell game to hide bad assets; the unlimited taxpayer bailout; the ‘foot in the door’ ploy; moral hazards; and the FDIC legacy. In conclusion he writes: “As a result of the inept policy decisions by the FDIC, instead of having small bank failures widely spread out over time, we have had concentrated bank failures in a short period of time. Taxpayers will be the ones to pay the price. This is the legacy of the FDIC and its failed moral hazard policies.”

http://globaleconomicanalysis.blogspot.com/2010/07/william-black-unlimited-taxpayer.html

Please contact us if you have any questions, comments or recommendations for the BMG BullionBuzz.