The BullionBuzz eNewsletter - September 7, 2010

“It seems the Fed will stop at absolutely nothing in their fever to combat the concept of gold being legitimate money (of course, the Fed is afraid that in due time Americans will realize that gold is the ultimate money and that the garbage the Fed creates (Federal Reserve Notes that we mistakenly call dollars) is only worth anything at all because the law says that it is (it’s money by fiat).”

--Richard Russell

CHART OF THE WEEK

As in all bull markets, the majority of gold’s price appreciation will come towards the end of the advance, when the ‘manic/parabolic’ phase hits.  We feel this explosive ending is still a long way off, and that there will be lots of ups and downs along the way.

http://investmentscore.com/editorials/the-big-move-is-still-to-come.php

VIDEO OF THE WEEK

GOLD

Gold's Low Correlation to Other Asset Classes

Juan Carlos Artigas

Bottom line: Gold’s investment returns are fairly independent from stocks, bonds and even other commodities. Portfolio diversification is an important part of investment strategies and one of the cornerstones of Modern Portfolio Theory. The recent financial crisis and global recession put most common strategies to the test, however, and raised questions about the diversification properties of so-called alternative investments such as commodities, hedge funds and real estate. Amid the chaos, gold not only outperformed most of these alternative investments but also was one of the few assets, along with government-issued securities, to deliver a positive return of approximately 4% in 2008. The World Gold Council has found that changes in the price of gold do not correlate with changes in the prices of other financial assets regardless of the health of the financial sector or broader economy. Gold’s lack of correlation with other assets is underpinned by the fundamentals of demand and supply. It is primarily a luxury consumption good (68% of its five-year average annual demand comes from jewelry, mostly from India and other Asian countries), but it also has an important role as an investment vehicle (20% of average demand) and in industrial applications (the remaining 12%). In recessionary periods when consumption spending falls, gold’s role as a safe haven increases investment demand for gold, mitigating the impact on price and keeping gold’s correlation to other assets low. On the supply side, 59% of demand over the past five years has come from mine production, 28% from recycled gold and 13% from official sector sales.

http://www.forbes.com/2010/03/30/gold-dollar-correlation-intelligent-investing-asset-allocation.html?boxes=financechannelII

The Ethics of Gold
Ron Robins

Gold’s rising price indicates that the yellow metal is reverting to its historic role of imposing order on chaotic monetary and currency systems, because it is the ethical barometer of fiscal mismanagement. Governments and central banks around the world, which held out fiat currencies and fractional reserve banking as the only option, have been weakened and our trust in them eroded. Now, as developed countries sink and their economies submerge, they bail out their banking friends first. The world’s monetary and currency systems and the organizations responsible for them are failing because they lack ethical standards. They implemented policies that that would benefit them but eventually lead to great financial and economic hardship for their customers, such as encouraging debt creation that could not be sustained. This failed policy led to tens of millions of people losing their jobs, millions losing their homes and retirees losing their savings as interest rates were reduced to near zero. Unfortunately, banking is a cut-throat business; rising to the top requires subservience to the base instinctual values of status and greed. When bankers, financiers and politicians are motivated primarily by greed, unethical behaviour asserts itself. So until humans can be relied upon to heed their internal moral compass, some sort of firm control in regard to credit and debt creation has to be in place. Gold is ideally suited to act in this controlling capacity. Unfortunately, many economists today follow the thinking of John Maynard Keynes, who referred to gold as a ‘barbaric relic’. It is perceived wisdom today that we are capable of managing our monetary and currency affairs wisely, and do not need the hard discipline of a gold standard. That perceived wisdom is false; monetary conditions are increasingly calling for the kind of control that only gold can offer.

http://www.gold-eagle.com/editorials_08/robinsr082410.html

MONEY

How Hyperinflation Will Happen

Gonzalo Lira
The US is currently experiencing a deflation; the Fed and the Administration are taking extraordinary steps (massive deficits and stimulus spending) to avoid a deflationary spiral. Unfortunately, they have been unable to offset the fall in consumer spending, and the money printing has been overwhelmed by credit contraction. Yields are low, unemployment is high, CPI numbers are down – every indicator screams ‘deflation’. So the notion of an impending hyperinflation seems bizarre; and yet that is what Lira predicts. Hyperinflation is not an extension or amplification of inflation; inflation and hyperinflation are two very different things. They look the same – in both cases the currency loses its purchasing power – but they are not the same. Inflation occurs when the economy overheats, when consumables (labour and commodities) are so in-demand because of economic growth, coupled with an expansionist credit environment, that consumables rise in price. This forces all goods and services to rise in price as well, so that producers can keep up with costs. It is essentially a demand-driven phenomenon. Hyperinflation is the loss of faith in the currency. Prices rise in a hyperinflationary environment just as in an inflationary environment, but they rise not because people want more money for their labour, but because people are trying to get out of the currency. They don’t want more money – they want less of the currency, and they will pay anything for goods that are not the currency. Lira discusses why the recovery is not going to happen; why Treasuries are the new toxic asset; how hyperinflation will happen; why commodities will be king; why the US government cannot stop the runaway train; the parallels to Japan; when to expect America’s hyperinflation; and what to do about it. The current situation cannot long continue, says Lira. The Global Depression is being exacerbated by the very measures being used to fix it – stimulus is putting pressure on Treasuries, which are being shored up by the Fed. There can be no happy ending. The smart money will prepare for what is going to happen next. Lira thinks that will be hyperinflation.

http://gonzalolira.blogspot.com/2010/08/how-hyperinflation-will-happen.html

ECONOMY

Hard-Nosed Fed Sends Global Markets Reeling

Ambrose Evans-Pritchard

“The global bond markets and the twin havens of the yen and Swiss franc have been flashing warning signs for weeks, tracking leading indicators as they topple like dominoes. They always sniff trouble first.” Western markets have been ignoring signs that recovery in the US, Japan and southern Europe may be stalling, betting that central banks will inject more liquidity if needed. But equity investors learned last week they had misjudged the risk of a relapse as fiscal stimulus wears off, and misread the willingness of the US Fed to respond. Thinking Bernanke's Fed was a soft touch, they took more quantitative easing for granted. But after an acrimonious Fed meeting on August 10, Bernanke was unable to obtain a consensus for more QE. Seven members argued that Fed should not take such a drastic step until the economy was in serious trouble. They compromised – the Fed will roll over holdings of bonds as they reach maturity to avoid passive tightening, but there was no deal on further action. More ominously, some Fed officials fear the central bank does not have the means to revive the economy. This is a shock for investors used to Greenspan’s magical fixes. Market tensions erupted two weeks ago when Japan's yen smashed through resistance against all major currencies, reaching a 15-year peak against the US dollar. “We are right at the tipping point,” said Andrew Roberts, head of credit at RBS. “Yields are about to collapse even further, equities are about to turn over. The end game approaches, probably in next few weeks.” In the US, home sales are in free fall; the manufacturing index is plummeting, and bond yields are tumbling. For Japan, this has become a nightmare. Their rebound has been cut short, growth has stalled, and unemployment is rising. Their currency is strengthening at the wrong time, pushing them deeper into deflation. “The vice,” writes Evans-Pritchard, “grips ever deeper.”

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7962825/Hard-nosed-Fed-sends-global-markets-reeling.html

Dollar Plunges as Everyone Now Figures Return of Quantitative Easing is a Done Deal 

Joe Weisenthal

“Today the weak economic data is not prompting a flight-to-the-dollar. Today the weak economic data is causing dollar selling, because it's becoming crystal clear to folks, as ForexLive notes, that quantitative easing II is now a done deal. No more baby steps or holding the balance sheet steady. There's no excuse for the Fed Board of Governors to be have an unclear picture of the economy's direction anymore. And we may not have to wait for very long. Bernanke speaks this Friday at Jackson Hole [editors note: Bernanke spoke on August 27], and you can figure he'll be revising that speech now until then with every bad data point that comes across to get exactly the right message to the market.”  Weisenthal provides a chart illustrating just how dramatic the dollar’s fall has been.

http://www.businessinsider.com/dollar-plunges-as-everyone-now-figures-return-of-quantitative-easing-is-a-done-deal-2010-8

REAL ESTATE

The Trillion Dollar Bailout You Didn't Hear About

My Budget 360

More than a year ago, the US Treasury was secretly planning a commercial real estate bailout. Little was reported in the mainstream media, but today banks, specifically the Fed, are taking on commercial real estate loans in massive numbers. In other words, the bailout is already happening. As part of the bailouts of AIG and Bear Stearns, the Federal Reserve Bank of New York spent more than $70 billion to buy toxic assets the companies owned. The Fed also owns loans to Hilton hotels in Hawaii, Puerto Rico, Malaysia and Trinidad; to the Miami airport; and to Chicago’s Civic Opera House. It also owned a loan to the Crossroads Mall in Oklahoma City. When the mall owners defaulted, the Fed foreclosed, so now it owns the mall. There is little demand for commercial real estate loans in the current market; commercial real estate itself is a depressed market. But prices are continually distorted as more and more money is filtered to the banking sector of the economy, and many banks carry huge amounts of commercial real estate debt. Still, as with existing home sales, without massive subsidies the market remains overpriced. While commercial real estate values are coming down to reflect their true values, the suspension of mark-to-market and the ability of banks to roll over bad loans keeps price discovery hidden long enough to devise more ways of pushing this toxic waste onto taxpayers. Because the entire US banking system is now held up by taxpayer money, it has in effect been nationalized with none of the benefits of nationalization: all the profits go to banks while all the losses go to the taxpayer. This applies to Bank of America, JP Morgan, Wells Fargo, AIG, Goldman Sachs, Fannie Mae, Freddie Mac, FHA and every other entity that is a ward of the state in one way or another. Commercial real estate gets little attention in the media even though it is a $3 trillion market.  Perhaps Americans drive by empty condos or strip malls and don’t think about the larger implications, allowing the banks and the government to continue their shadow bailout.

http://www.mybudget360.com/the-trillion-dollar-bailout-you-didnt-hear-about-cre-real-estate/