The Bullion Buzz eNewsletter – February 16, 2010

“You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold.”

--George Bernard Shaw

CHART OF THE WEEK

www.zerohedge.com/article/albert-edwards-500-net-liabilities-gdp-it-too-late-prevent-collapse-g-7-greece-irrelevant-we

“And here is the topic that will dominate over all pundit round table discussions in the next weeks: the entire world is insolvent, although some are more insolvent than others. Greek total net liabilities (on and off balance sheet) to GDP are 800%!   EU: at 470%, the US, at over 500%. There is no way out but default.” -- Tyler Durden

GOLD

The Allure of Gold: Now and Through the Ages

Ron Robins

The declining confidence in developed countries’ paper currencies is clearly evidenced by higher gold prices. The yellow metal has enjoyed substantial gains in all currencies while outperforming every other major asset class, and is clearly resuming its historical monetary role. This is can be attributed to three things: massive global debt, the ticking time bomb of derivatives, and the world’s aging population. Robins discusses gold through the ages; growing practical uses of gold today; how fears of inflation/hyperinflation/ deflation increase gold’s attraction; gold’s new role; and the downside of gold production. In the next few years the probability of currency and economic turmoil due to debt, derivatives and the demographics of the developed world will be greater than at any time since the 1930s. Similar turmoil has occurred innumerable times over countless millennia, and can be seen from the ancient civilizations of Egypt, India and China to modern Europe. As turmoil occurs, gold becomes the store of wealth and assumes its role as the currency of choice. However, gold is not only rising due to currency and economic instabilities, writes Robins. It is also rising because of its many fast-growing commercial applications and particularly because of the allure of its age-old spiritual, cultural and healing characteristics. The future, he says, is golden.

www.gold-eagle.com/editorials_08/robinsr020910.html

The Last Man Standing

Richard Russell

A hundred years ago gold and silver were the only items accepted as money. Paper money was used because it was convenient as opposed to gold and silver, which are heavy. If you had any doubt about the paper, you could exchange it at any national bank for gold. And the dollar was backed by one of the strongest and most prosperous nations on earth. Today the dollar is backed only by the full faith and credit of the US, the greatest debtor the world has ever seen. Questions are now arising about the credit-worthiness of sovereign debt. Many analysts believe that the US will never be able to pay off its debt, which is not only rising but compounding. The Obama administration is putting off the solution of the debt and deficit problems to future administrations, a dangerous procedure that ensure future generations won’t have the fun and easy life this one has enjoyed. Today’s unsustainable debt is destroying the world, and the end will involve both deflation and monetary inflation through the production of fiat money. The survivor, the last man standing, will be gold. Ironically, most North Americans have forgotten, or never knew, the meaning of gold, which is why only a handful own any. And consider the profusion of ads in newspapers and on television that have sprung up, offering to buy gold in exchange for paper money. The sad part is that people are doing it. Currently, gold is trading around $1,100 per ounce; Russell thinks that gold below $1,200 is a bargain. Buy it while 95% of Americans have never seen or held a gold coin.

www.321gold.com/editorials/russell/russell021510.html

ECONOMY

Just How Ugly is the Sovereign Debt Default Truth? How Self Delusions Prevent Recognition of Reality

Tyler Durden

“When psychologists evaluate human behavior, one of the most prevalent observations regarding any activity is the all-too-often flawed basis of perceived versus realistic outcomes that dictates our every action. As imperfect creatures, we tend to construct theories that conform to our worldview, which are subsequently reinforced by our confidence (or lack thereof) in the future. This is true in any discipline: finance, politics, gambling, mating, etc. There is hardly a better example of this than the very basis of modern economic theory where assumptions about the validity of fiat currencies determine the actions of central banks, which in turn spill over into every aspect of modern society. Yet what if the very basis of core assumptions is wrong? What if every activity exhibited by humans in the post gold-standard world has a flawed assumption at its core? Austrian economists have, of course, claimed this for ages, usually seeing their efforts conclude with a dead-end as the attempt to change the status quo hits the brick wall of quadrillions of (arguably worthless) pieces of paper which dictate the status quo. However, with the recent turn for the worse, courtesy of sovereign bail outs (as confused as they may be) could the day of reckoning be fast approaching? With each passing the day an affirmative answer seems closer at hand… SocGen’s Dylan Grice shares his perspectives on popular delusions, and why these may soon be coming to an abrupt end.” More and more fissures in the smooth and fake facade of sovereign debt will soon appear, not somewhere out of sight and out of mind like Greece, but in America’s own back yard. At that point the financial oligarchy will wish the medicine had been administered sooner; but it will be far too late, and decades of self-delusion will finally come to an end.

www.zerohedge.com/print/74446

This Time is Different, it’s Global!

Greg Hunter

The current financial crisis has the same basic elements as every other financial crisis, and people continue to think that a big debt buildup does not have to end badly. But what if this time really is different? Former Fed Chairman Paul Volker called this financial meltdown the “mother of all crises” for several reasons: the pool of unregulated over-the-counter derivatives is enormous and there are $600 trillions’ worth of derivative contracts worldwide, for a start. Derivatives are debt bets that are hard to collect on; most have no standards, no regulation and no guarantee. They are popular because bankers make huge profits selling them. Today, the entire world is financially interconnected like never before because of derivatives. Then there are the record deficits being set in the US. The debt load currently stands at $12 trillion, not including more than $6.2 trillion in liabilities with failed mortgage giants Fannie and Freddie. The situation is worsened by the fact that almost every industrialized country in the world is in the same situation. The biggest housing boom in history was a global phenomenon; now, the biggest housing meltdown in history is a global phenomenon. In the US, commercial real estate is about to implode, public pensions are a record $2 trillion in debt, and nearly every state is facing record budget shortfalls. Economist Dr. Mark Faber said, “…I am not interested in government or sovereign debt because all governments will eventually default, including the US.” Faber thinks governments will print money to pay for their liabilities and debt, meaning inflation on a global level, and he thinks gold will continue to outperform stocks. The causes of this financial crisis are no different than the causes of previous financial meltdowns. What is different is the size of the debt buildup. Debt is overwhelming individuals, corporations and countries, and will likely set off the mother of all financial crises.

http://usawatchdog.com/this-time-is-different-it%E2%80%99s-global/

A Greek Crisis is Coming to America

Niall Ferguson

It is a mistake to assume that the unfolding sovereign debt crisis will remain confined to the weaker Eurozone economies. In fact, this fiscal crisis – too much debt – extends to the entire Western world, with ramifications more profound than most investors appreciate. For the US, the world’s biggest economy, the day of reckoning still seems remote, because the worse things get in the Eurozone, the more the US dollar rallies as nervous investors turn to the “safe haven” of US Treasuries. Yet even a brief look at the fiscal position of the US government, not to mention the states, reveals that its debt is no safe haven. The IMF recently published estimates of the fiscal adjustments economies would need to make to restore fiscal stability over the decade ahead. Worst were Japan and the UK (a tightening of 13%), followed by Ireland, Spain, Greece (9%) and then the US (8.8%). Massive public debt raises fears of default and currency depreciation ahead of actual inflation; it pushes up real interest rates that, in turn, slow down growth. For now, Treasury purchases by the Fed and China are all that stand between the US and higher bond yields. The Fed, however, is phasing out such purchases, and the Chinese have sharply reduced their buying, leading to speculation that bond yields will rise to 5.5% this year. That could mean up to $300 billion of extra interest payments for the US government. If rising real rates have a negative impact on expected GDP growth, interest payments could soar as a share of federal revenue. America’s triple-A credit rating could be in danger and, as Larry Summers once asked, “How long can the world’s biggest borrower remain the world’s biggest power?”

www.gata.org/node/8317

REAL ESTATE

A Year in Foreclosures

NY Times.com

The median price of single-family homes in the US continued to decline in 2009. Foreclosure filings rose by 15% in January compared with a year ago. Most ominous about the latest numbers is that nearly 88,000 people had their homes repossessed in January, a 31% increase from a year ago. The big jump indicates that many foreclosures that were in process in 2009 are now beginning to move to repossession and, eventually, auction. With more than four million homes in that pipeline, the foreclosure crisis shows no sign of abating. And the US government’s anti-foreclosure plan (which pays cash incentives to mortgage companies that lower monthly payments for troubled borrowers) may be doing more harm than good for some borrowers. Successful modifications would reduce the amount of the borrower’s loan balance, rather than merely reducing the monthly payment, lowering the payment while restoring equity and giving borrowers both the means and the incentive to keep up with their payments. That approach is being called too expensive. Lenders, too, are unwilling to take losses by reducing principal unless the owners of the second mortgage on a home also take a hit. For banks that own the second mortgages, such losses would be huge. Banks’ unwillingness to take losses on second mortgages may also be holding up so-called short sales, in which a lender agrees to retire a first-mortgage debt by taking the proceeds from the sale of the home, even when the amount is less than the mortgage balance. Last April, the Treasury detailed a plan to get second-mortgage owners to write down their debt once the first mortgage is modified. But until recently, when Bank of America signed on, no banks had cooperated. Unless the banks get on board – allowing principal reductions to become the norm – the anti-foreclosure effort may have more success in letting banks postpone their losses than in helping Americans keep their homes.

www.nytimes.com/2010/02/15/opinion/15mon2.html