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China and Copper

August 31, 2010 by · Leave a Comment 

By Richard (Rick) Mills, Ahead Of The Herd

As a general rule, the most successful man in life is the man who has the best information

In this author’s opinion, China, and to a lesser extent India and other developing nations, are responsible for the largest and longest base metals bull market the world has ever experienced. Many fear the bull market for natural resources is over when in fact nothing could be further from the truth. This seems especially true, because of the supply/demand picture, regarding copper.

Copper’s chemical and physical properties:

  • High ductility
  • Corrosion resistant
  • Malleable
  • Excellent conductor of heat and electricity
  • Alloyed with other metals – zinc to form brass, aluminum or tin to form bronzes or alloyed with nickel – it acquires new characteristics for use in highly specialized applications.

Copper is used for:

  • Conducting electricity and heat
  • Telecommunications
  • Transporting water and gas
  • Industrial machinery and equipment
  • Coins for currency
  • Roofing, gutters and downspouts
  • Protecting plants and crops
  • A feed supplement

Copper’s price hit US$3.75 per pound in May 2006 after rising from a 60 year low of US$0.60lb in June 1999. By February of 2007 it had dropped to US$2.40lb but had rebounded to US$3.50lb by April 2007.

By February 2009 copper prices were – because of weakening global demand and a steep fall in commodity prices – at US$1.51 per pound.

Copper prices started a comeback and during the summer of 2009 and again during the summer of 2010 the price of copper defied conventional market wisdom – sell in May and go away – by rallying strongly and in 2010 managed to hold close to its recent highs coming into the end of August.

Copper inventories at the London Metal Exchange (LME) and Shanghai Futures Exchange have both seen dramatic reductions.

Copper exploration/development companies looking for or trying to develop deposits already found and copper miners looking to expand their production capacity are all facing some serious challenges:

  • Falling ore grades
  • Country risk
  • Water supply
  • Labor problems, strikes
  • Shortage of skilled labor
  • Cost of capital for project finance
  • Capital cost overruns
  • Tax and sharing initiatives
  • Energy costs
  • Inadequate exploration funding – The Metals Economics Group estimates that exploration spending plummeted 42 percent to $7.7 billion in 2009.
  • A lack of new discoveries
  • Currency fluctuations

The reason why the prices are holding up so very high is that there has been only marginal increases in new copper mine development over the past five years.”  Patricia Mohr, Vice President, Economics at Scotiabank Group in Toronto.

On August 24th 2010 The International Copper Study Group (ICSG) released preliminary data which showed world copper production fell short of refined usage by 190,000 tons in the first five months of 2010.

This author believes the full ICSG report showcases an underperforming industry and tells us there is the potential for a large copper demand/supply imbalance coming in the near future.

Also consider:

The declining rate of production at the world’s largest copper mine, Escondida. BHP Billiton forecasts a 5 to 10 percent production cut at the mine this year due to lower ore grades – Bart Melek, Global Commodity Strategist with BMO Nesbitt Burns in Toronto, said this could take as much as 80,000 to 100,000 tonnes of copper out of the market.

  • U.S. copper mine production had been expected to increase by more than 200,000 tons last year, instead production declined by 120,000 tons
  • Rio Tinto and Freeport McMoRan both saw their output drop in the first six months of this year
  • A lack of investment in new mining capability because of recent low prices
  • The growth in demand from China, India and other emerging markets
  • Consistent declines in warehouse inventories are underpinning the price of copper
  • A low interest rate environment bodes well for the whole resource sector
  • The overall weakness in the U.S. dollar translates into support for dollar denominated metal prices
  • The potential for a drop in production from Australia – the world’s fifth largest copper producer – as a result of a resource tax the government might implement
  • India’s power production needs to rise by 15 to 20 percent annually which means, according to theInternational Energy Agency (IEA), India needs to invest $1.25 trillion by 2030 into its energy infrastructure.Because of this investment into new infrastructure India’s annual copper demand is expected to more than double to nearly 1.5 million tonnes by 2012 – up from a current 600,000 tonnes. India usually exports between 100 and 150,000 tonnes a year, Indian copper exports are likely to cease and indeed Indians might become large copper buyers

There is no question that the current production numbers are to some degree validating that there is an issue starting to manifest itself on the supply side.” Mark Liinamaa, vice president of market research with Morgan Stanley.

Prices are underscoring the relatively robust nature of physical conditions and from a business cycle perspective inventories remain fairly low. If economic conditions deteriorate there isn’t going to be that much destocking as manufacturers have been quite disciplined … The market is factoring in the fact that supply tightness is not going away.” Dan Brebner, analyst at Deutsche Bank

According to Barclays Commodities Research analysts copper is forecast to average $6989/t this year and $7763/t in 2011.

For 2011, BMO anticipates a global supply deficit of some 280,000 metric tons, with a price forecast of $3.70 a pound.

Investors have concerns:

  • The extent of the recovery currently underway in the US and Europe
  • A slowdown in Chinese growth

China

Copper consumption estimates for China are being revised up. Huge spending on copper-intensive power infrastructure on the state grid in ‘rural areas’ will continue through 2012 (12 bn RMB). Beijing has also renewed the ‘home appliance subsidy scheme’ and is promoting electric cars, which are twice as copper-intensive as conventional vehicles.” Patricia Mohr Scotiabank economist

Mohr also said that China’s demand for copper will grow 13% this year and by another 8-10% in 2011.

I think the global growth story is back on. China, India, and Brazil, especially, are just growing by leaps and bounds … and they need the copper for housing and infrastructure.” Michael K. Smith, president of T & K Futures and Options Inc.

The Chinese are:

  • Increasing the level of housing construction
  • Seeing strong increases in car sales, up over 50 percent yoy
  • Targeting urban population growth of 60 percent by 2020, this is up from 49 percent in 2010*
  • Currently consuming 40 percent of total global base metal production
  • Raising domestic metal prices, by stockpiling, to stave off unemployment
  • Creating and transmitting more electricity
  • Providing massive direct subsidization of export production in many key industries
  • Maintaining strict non-tariff barriers to imports
  • Keeping their currency, the yuan, at an artificially low exchange rate – the undervalued currency keeps China’s exports cheap

*Chinese urbanization

  • At the end of 2009 mainland China’s total population was 1.334 billion. 712 million people or 53.4 percent of the population were residing in rural areas while 622 million or 46.6 percent were residing in urban areas -Chinese urban dwellers are the largest such population in the world
  • City’s Blue Book: China’s Urban Development Report No. 3 said China’s urban population is twice that of the population of the United States, one quarter more than the total population of 27 countries of the European Union and that the urban economy would continue to drive domestic demand
  • The UN has forecast that China’s population will have about an equal number of people, the 50-percent point phenomenon, living in the rural and urban areas by 2015
  • China has set a goal of 65 percent of urbanization rate in 2050. Over the coming 40 years that means 20 percentage points of urban growth per year, that translates into 300 million rural residents becoming urban residents over this time period
  • By 2025 China’s urban population is expected to rise to 926 million. By 2030 that number will increase to a billion
  • China’s current urbanization rate of 46 percent is much lower than the average level of 85 percent in developed countries and is lower than the world average of 55 percent
  • In 2010 the disposable income of the urban population stood at 17,175 yuan per capita – the net income of the rural population was 5,153 yuan per person
  • Over the next two decades China will build 20,000 to 50,000 new skyscrapers
  • By 2025, 40 billion square meters of floor space will have been built
  • 221 Chinese cities will, by 2025, have one million people
  • More than 170 cities will need mass transit systems by 2025

The growth potential of the vast middle and western regions, together with the rapid development of small cities and towns, could keep the economy on the fast track for at least 15 to 20 years.” Wei Houkai, director of the center for China’s regional development at the Chinese Academy of Social Sciences (CASS)

India

“Every major industrialized country in the world has experienced a shift over time from a largely rural agrarian-dwelling population to one that lives in urban, nonagricultural centers. India will be no different. However India’s urbanization will be on a scale, that outside of China, is unprecedented.” McKinsey Global Institute’s report India’s Urban Awakening

India has 1.2 billion people and the second largest urban system in the world –  currently 340 million people.

Less than 60 percent of the households in India’s cities have sanitation facilities, and less than half have tap water on their premises.

The share of the urban population in India is expected to reach 40% by 2021, and by 2011, urban areas could contribute around 65% of GDP.

A report done by the McKinsey Global Institute called India Urban Awakening predicts that 590 million people or 40% of the population will live in cities by 2030 up from 340 million today. By that time, Asia’s third largest economy would have 68 cities with populations over 1 million, up from 42 today.

With less than 1/3 of the population India’s urban areas generate over 2/3 of the country’s GDP and account for 90% of government revenues.

Scrap Copper

People have been using copper for over 10,000 years and recycling (it can be recycled without any loss of chemical or physical properties) almost as long – it has been estimated that at least 80% of all copper ever mined is still in existence.

Unfortunately:

“Indications are that demand in Europe, the US and Japan is holding up well and scrap has become very tight.” Barclays Commodities Research analysts

“Scrap (supply) is tight.” Edward Meir, analyst with MF Global

“There is little information regarding this market (talking about the scrap market); however, it has not been a decisive factor either for the demand or supply side of the copper market.” Juan Villarzu, former head of world’s largest copper company, Codelco

Conclusion

This author believes that the US and Europe are, or are in the process of becoming, mostly irrelevant when it comes to the demand side of the copper supply equation. Increased demand for the red metal in developing nations will more than make up for decreased demand in the western world. And when western economies recover, as they eventually must, then the supply squeeze will become even tighter.

The citizens of the worlds developing nations aspire to have what we have, the ease of travel, home phones, electricity, central plumbing, heating and air conditioning, cars, toys, consumer electronics and home appliances.

When you consider the recent lack of exploration spending, increasing demand from developing countries, country risk (the Democratic Republic of the Congo, the DRC, comes to mind) declining resources/grades at the world’s largest copper mines and that a sufficient number of new deposits that have been found are not being brought on stream in a timely enough fashion – and those that are, carry, for the most part, much lower grades than those presently being mined then you might be forgiven for coming to the same conclusion that I have – growth in globalcopper demand, at the same time supply is declining, seems likely.

China alone has one fifth of the world’s population, India another 1.2 billion people, most of them want the same quality of living and level of consumerism and materialism we enjoy in the west.

Could copper come into a major demand squeeze? Is the red metal on your radar screen?

If not, maybe it should be.

Richard (Rick) Mills
rick@aheadoftheherd.com

If you’re interested in learning more about specific copper juniors and the junior resource market in general please come and visit us at www.aheadoftheherd.com.

Membership is free, no credit card or personal information is asked for.

***

Richard is host of aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 200 websites, including: Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor and Financial Sense.

***

How to Invest in Junior Gold and Silver Companies

August 31, 2010 by · Leave a Comment 

By Jordan Roy-Byrne, CMT, The Daily Gold

The various large-cap gold stock indices are readying for a major breakout. As we’ve noted, this isn’t just a breakout through 2008 highs but a breakout through highs dating back to 1980. Yes, there are some gold stock indices like the Barron’s Gold Mining Index and others, which show a 30-year base dating back to 1980. This will be a historic breakout for the gold stocks.

Yet, there are two things you should note about the large cap gold stocks. First, as a group, over time they notoriously underperform or struggle to outperform gold. Secondly, those stocks are starting to lose out to the juniors. The following chart shows our junior gold index versus the HUI Gold bugs index. As you can see, the juniors are likely to perform better than the large cap gold stocks, which themselves are on the cusp of a historic breakout.

Hence, its time most folks start learning how to invest in the juniors. It can be difficult and risky, but with the right plan in place, it can be extremely rewarding. We wanted to share some of the things we look for.

Timing

As you can see from the chart below, timing is critical. Never chase an exploration company that has already gone vertical. The same should be said for a company just going into production. The best time to buy is in the development or early production phase. Usually that coincides with a basing pattern. If the company has a successful catalyst or news, then the stock will breakout of the basing pattern and make a big move.

Share Structure

This is important for many reasons. First, it tells us how successful the company has been to date. If the company has a lot going for it and only has, say 40 or 60 million shares, then that tells you that management has done on a good job so far. However, if the company has 200 million shares and hasn’t achieved its objective yet, it is a bad sign. Moreover, how will that stock make huge gains quickly with such a large float? Hence, another reason the former scenario is highly favorable.

Financial Health

How is the company financed? Did it have to issue extra shares numerous times before adding value? Is it hugely in debt? Will it need to issue more shares again? Generally speaking, avoid those companies that have to engage in numerous financings without adding significant value. We favor the companies that can raise capital without diluting shareholders or adding significant debt.

Management

Invest in companies whose management teams have a track record. Why go with those who haven’t built a mine or developed a resource? You can perform an ongoing evaluation by looking at the company’s progress relative to the shares outstanding. Again, we want to see progress without management having to significantly dilute existing shareholders.

Political Risk

This is an obvious one. If you are going to speculate on a company with political risk inherent in its projects then make sure you are compensated for taking the risk. In fact, if it is a significant risk, then don’t take the chance unless you are compensated for that risk and the company has home run potential.

Potential

Lastly, realize that you can profitably invest in GDXJ or a great fund like the Tocqueville Gold Fund. Hence, don’t take the risk on a junior only to make 50% or 100%. You can do that with the aforementioned. Remember, that quality juniors can rise 300% or 500%. These are the ones you want to own and not those that may only rise 50% or 100%.

In our premium service, and personal investing, we’ve done quite well because we’ve strictly followed this criteria. Also, our technical acumen is a great help as far as entry and exit points. There are hundreds of junior companies, so finding a handful of outstanding prospects isn’t difficult. It only takes time. If you’d be interested in saving time and learning about some of the companies we’ve zeroed in on, then we invite you to consider a free 14-day trial to our premium service.

Jordan Roy-Byrne, CMT

Jordan@thedailygold.com

http:/www.thedailygold.com/newsletter

QE II Not Enough To Save Credit Cycle

August 31, 2010 by · Leave a Comment 

By Captain Hook, Treasure Chests

That should read widely anticipated Quantitative Easing (QE) is not enough to save the economy from a contraction in the larger credit cycle, however titles need to be catchy. And that’s basically what sparked the sell-off in stocks yesterday, reflected in a reversal of high yield bonds, which as you know we have been expecting to lead equities (hot money) lower. We were of course not disappointed in this regard, however sentiment readings still leave scope for increasing volatility (both up and down) over the next week or so, as options expiry approaches on the 20th.

Past this, it’s important to recognize the possibility the intermediate-term trend turned down yesterday (a 90% + down day), which may or may not witness follow through near term. Along these lines Cisco came out with sobering results (and forecast) last night, which could mark a distinct turn for large cap tech moving forward, possibly leading to decelerating growth prospects in the go-go sectors of the US economy, if not contraction(s). Confirmation of this would come with a break lower out of the indicated diamond found in the NASDAQ 100 / Dow Ratio pictured below. (See Figure 1)

Figure 1

This is the only chart I will show you today in recognition of its importance, as when this ratio does break to the downside, which could occur quite soon (within days), stocks will undoubtedly follow. Although impossible to tell with the possibility of flash crashes ever-present, with indicators in the above already at depressed levels, one should not be expecting a great deal of downside moving forward; however without a doubt the risk of a plunge through the large round number at 1,000 on the S&P 500 (SPX) is within the realm of reasonable expectations. In fact, if the head and shoulders pattern in the trade plays out, a move closer to 900 should be the result. The timing associated with such a move should correspond to seasonal lows, which as you may know, puts us at late September, or early October.

On to a brief word on precious metals now. Despite deferential selling associated with broad market(s) weakness yesterday, gold, silver, and their related equities held up quite well, especially considering the cartel has been price capping aggressively of late. The reason for this retention is due to the negative sentiment in the sector, due to broadly based deflation expectations, evidenced in rising open interest put / call ratios (discussed in a previous analysis) across the sector.

Thus, our view on precious metals has not changed despite yesterday’s events. Gold and silver could get squeezed higher into options expiry next week (on the ETF’s and stocks), with the former reaching as high as $1225, and then fall off (assuming sentiment does not become increasingly bearish) with the larger equity complex into the October time frame. (i.e. an April / May top often leads to an October / November bottom.)
(Clearly this view was far too pessimistic. In fact, now, a breakout to the upside in September appears likely for reasons we address in our regular commentaries.)

Unfortunately we cannot carry on past this point, as the remainder of this analysis is reserved for our subscribers. Of course if the above is the kind of analysis you are looking for this is easily remedied by visiting our web site to discover more about how our service can help you in not only this regard, but also in achieving your financial goals. As you will find, our recently reconstructed site includes such improvements as automated subscriptions, improvements to trend identifying / professionally annotated charts, to the more detailed quote pages exclusively designed for independent investors who like to stay on top of things. Here, in addition to improving our advisory service, our aim is to also provide a resource center, one where you have access to well presented ‘key’ information concerning the markets we cover.

And if you are interested in finding out more about how our advisory service would have kept you on the right side of the equity and precious metals markets these past years, please take some time to review a publicly available and extensive archive located here, where you will find our track record speaks for itself.

Naturally if you have any questions, comments, or criticisms regarding the above, please feel free to drop us a line. We very much enjoy hearing from you on these matters.

Good investing all.

Captain Hook

The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Thursday, August 12th, 2010.

Copyright © 2010 treasurechests.info Inc. All rights reserved.

Treasure Chests is a market timing service specializing in value-based position trading in the precious metals and equity markets with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested in discovering more about how the strategies described above can enhance your wealth should visit our web site at Treasure Chests.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. We are not registered brokers or advisors. Certain statements included herein may constitute “forward-looking statements” with the meaning of certain securities legislative measures. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the above mentioned companies, and / or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Do your own due diligence.

It Doesn’t Have to Be ‘Inflation vs. Deflation’

August 31, 2010 by · Leave a Comment 

By Rick Ackerman, Rick’s Picks

[Many readers have pointed out that our long-running discussion of deflation has tended to overlook the impact of price increases, or at least price stability, on essential goods and services. In the essay below, Robert Moore, a frequent contributor to the Rick’s Picks forum, explains how both type of “flations” can co-exist. That he has done so without using the words “inflation” or “deflation” is not merely clever, but persuasive. Read on to sharpen your understanding of how supply and demand interact in an economy where some debtors are being liquidated while others continue to pay their bills and debtsWe will mention up-front that although Robert is no “deflationist,” the economic outcome he predicts is exactly what we have long predicted – i.e., a drawn-out drop in the standard of living until all debts have been paid – either by creditors, or debtors. RA]

Ok, I’m going to try to make it through this entire essay only uttering the words “inflation” and “deflation” in just this one sentence. Why, you ask? Because these terms are just too ambiguous for a productive economic discussion. Each word has two unique, and distinct (some might say polar opposite) definitions when used in the context of money supply versus the context of general price levels. This degree of ambiguity makes both terms completely worthless in an analysis of cause and effect. There must, by necessity, be a dedicated term to describe the cause, and another term to describe the effect; otherwise you find yourself drawn into an analogous discussion where explosions are causing explosions, and the end effect is simultaneously identified as the root cause — a rational impossibility.

Despite a global deleveraging of credit and the worst recession in generations, the prices we pay for essentials have remained firm

So, before we go much further, let’s settle in on some fundamental ideologies that I hope we can all agree on:

1) As demand for an item increases in a limited supply scenario, the price for that item (the amount of alternative wealth it would take to procure that item in trade) would rise.

2) As supply for an item increases in a limited demand environment, the price for that item (again, in terms of transferable wealth) would decline.

3) Market supply of durable goods is formed from two sources: a) allocation of capital (time labor, raw material) to yield new production and inventory; and b) re-introduction of existing stock (via resale, recycling, or dishoarding).

4) Market Supply in non-durable goods is formed only by new production, and results only from the capital (time, raw material) required to yield this production.

Many people claim that money follows the same basic supply premise described in number 3 above. I contend that money is different. Money fails to consistently abide by these basic supply-demand arguments (may Ludwig Von Mises have mercy on my soul for making that statement). Debt makes money act differently. In a sound economy, people aspire to accumulate wealth, and to enjoy it. Demand for money is really only a demand for the opportunity to do more work in exchange for greater wealth and a higher standard of living. Only in an unhealthy economy is overall demand for money driven by debt levels, and by the need to stay ahead of rising prices. The more debt that gets introduced into the system, the more money that must, by necessity, circulate through the system in order to maintain this debt.

As Debt Increases…

In a closed system where the money supply is constant, as total debt increases over time, less and less money is left to purchase essential goods and services after whatever increasing amount is necessarily allocated toward servicing the increasing debt. The net effect of this is: a) declining prices in all consumer categories, as more and more of the money has to move toward servicing the debt, leaving less money available to purchase goods and services (both essential and non-essential). The net effect becomes a generally decreasing standard of living for all debtors; and/or b) decreased economic productivity as debtors feel the increasing desperation that they may never conquer their increasing debt, until debt defaults eventually begin releasing money from the service of debt, allowing it to once again purchase essential goods and services.

I believe this is what we saw in the early 1930’s, as the debt level peaked at the end of the Roaring 20s and tipped over into the long deleveraging. In a system where the money supply can be increased at will, increasing debt can be maintained right alongside rising prices, as the remainder money after debt servicing never feels the constraint of the increasing debt service obligations. I believe that is what we witnessed during the later Greenspan/early Bernanke years — increasing debt, offset by increasing money supplies, leading to economic distortion as rising prices provided no warning that there was anything to be worried about with total debt levels.  It was like the Roaring 20s on steroids.

The Friedman Argument

So, the argument that rising prices can only result from too much money in the system (the Friedman argument) only operates unequivocally if the system is devoid of (or maintains very little) total debt. So long as credit is easy to come by, prices can rise without there being sufficient money to offset this debt. The question we face today is: Is this really the economic equivalent of the perpetual motion machine? Can continued debt issuance stimulate continued demand for real goods and services in perpetuity?

Alternatively, as the system becomes too heavily burdened with debt, the willful reduction of total money (or credit) available to consumers has two affects:

1) reduction in demand for “non-essentials” as the available money must be used first to service existing debt and to purchase required essentials.

a. As demand for non-essentials declines, so too must prices for these items

b. prices on essentials will fluctuate based on the available remainder money after debt service, but will ultimately remain relative to demand for these essentials (which increases organically with population over time); and/or:

2) increasing debt defaults so that the money that would be used to service or pay down debt can be freed up to purchase essential goods and services.

a. As available money is de-allocated from debt service and allocated toward purchasing essential goods and services, prices in those items must surely rise.

Today’s Conditions

Both of these appear to be what is occurring to varying degrees today. People fortunate enough to have a job and a positive cash flow are prone to fall into category 1, while more desperate people (unemployed, more debt, lower cash flow) probably fall into category 2. Either way, so long as the unemployment and/or debt default rates keep rising, the number of people in both categories will also continue to rise, along with rising prices in consumer essentials; while demand and prices on consumer financed non-essentials can only continue to decline (as there is less and less money to service any new debt, particularly debt of a frivolous nature).

Also interestingly, what we are seeing today is a scenario where decreasing the consumer debt in the system is not necessarily resulting in reduced total debt, as governments have been more than willing to step up to the borrowing window on our behalf.  So the slowly declining consumer debt is allowing the increasing remainder money to stimulate rising price levels in essential goods and services (just as we would expect). This could explain the conundrum of rising prices of consumer essentials during what is clearly a debt clearing/deleveraging period, and it might also serve to explain the viewpoints of the few policymaker types who think that raising taxes would be an effective means of fighting rising prices in consumer essentials (damn the standard of living man, this is economic war!)

‘Essentials’ Will Prevail

If total money supply in the system (and therefore total debt in the system, since all fiat currency is simply denominated debt) keeps increasing as the consumer portion of that debt keeps decreasing, then the resultant price increases in essentials could become much more pronounced, until eventually the priorities themselves ultimately trade places, and the available money first finds its way into the procurement of essential goods and services, while whatever remainder money then gets allocated to the service of existing debt.

This is the only inevitability I can see for us, as either path highlighted above (paying down our debt or defaulting outright) will ultimately lead us to the same place, and that place is a lower standard of living for a very broad segment of the productive population. The only alternative is to eliminate debt-based money and replace it with money of inherent, intrinsic value — i.e., money that once again accurately serves as the amount of alternative wealth it would take to procure a given item in trade — a proposition that is not likely to go anywhere since it eradicates the ability of non-productive elitists to manipulate the total money/debt supply in the system at will (a topic for another day, I suppose).

So, I’ve managed to remain true to my promise, and I did not use any “flations” at all in this essay. Let’s see how many of you can challenge my viewpoints, or support your own opposing viewpoints, using similarly unambiguous, cause and effect style language, rather than leaning on whatever flavor of “flation” you prefer to use as your verbal crutch of choice.

(If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)

Rick’s Picks is a trading newsletter for stock, gold, silver and mini-indexes. All trades are based on the proprietaryHidden Pivot technical analysis method.
© Rick Ackerman and www.rickackerman.com, 2010.

COILS AND THROWBACKS

August 31, 2010 by · Leave a Comment 

By Toby Connor, Gold Scents
We have a potential coil forming on the gold chart. As I’ve mentioned before about 70% of the time the initial thrust out of a coil tends to be a false move soon followed by a more powerful and durable move in the opposite direction. If that holds true then it would be preferable for gold to break out of the coil to the downside.

Today will be the 24th day of this daily cycle. The cycle can last up to 30 days and not be out of the ordinary, so it is possible that the daily cycle didn’t bottom on Aug. 24th. I was expecting a push to $1240 before a pullback. We were a bit short of that target on Aug. 18th, but have now tagged it.

If the stock market continues to drop into the Friday jobs number we could see gold drop into another corrective move this week.

Last week silver broke out of a triangle consolidation. It’s not unusual to see a throwback to test the upper trend line.

If gold does have another move down into the latter part of the timing band we can probably expect silver to drop back down to at least the $18.70ish level and test the triangle breakout.
 
There are also two gaps on the GLD and SLV chart that are begging to be filled before continuing higher.
 

 
If the coil breaks down watch gold for a swing low this week as a sign of the bottom.

Toby Connor

GoldScents

A financial blog primarily focused on the analysis of the secular gold bull market.

If you would like to be added to the email list that receives notice of new posts to GoldScents, or have questions, email Toby.

Bernanke to World: We’re Going to Fiddle While Rome Burns

August 31, 2010 by · Leave a Comment 

The Daily Reckoning

In Jackson Hole, Wyoming today Fed Chairman Ben Bernanke said the risk of an “undesirable rise in inflation or of significant further disinflation seems low.” Yup, can’t argue with that.

If you are operating a bank, and you had lost your depositors’ funds by making bad real estate loans, normally you would be sweating bullets by now, or among the 14.6 million pounding the pavement looking for work. But you need not worry. You got $1.3 trillion of reserves to tide you over while your bad loans continue to deteriorate.

Uncle Ben bailed you out, and he even gave you the money to pay back your other uncle, Sam. Now that you got rid of the TARP, you can go back to paying out big bonuses, even if they are on profits facilitated by the easing of accounting rules.

So why is the spotlight on Ben now? Some employment, consumer confidence, and even national income data have weakened a little. But mainly the stock market has everyone a little scared. Big bank stocks have acted like a canary in the coal mine, failing to do much since a year ago.

Some regionals have been sliding since this spring, in sympathy with FDIC Chairman Shiela Bair’s laying to rest a growing list of institutions outside the money centers. How come? Home prices are down maybe 30% from the top, which wipes out the equity of most “conservatively” financed purchases.

Since real estate is about half of bank assets, another drop of say 15% would mean trouble. The FDIC has the barest sliver of funds. So outside of getting fresh Fed reserves into dodgy regionals, something the Fed is wont to do, the safety of your deposits rests on a thin reed.

Not to worry, a diverse group of economists, real estate experts, investment and market strategists surveyed by MacroMarkets in June 2010 project that the U.S. housing market will experience double-digit cumulative appreciation between 2010 and the end of 2014, adding some $1.7 trillion to aggregate household wealth.

Bernanke draws from the body of econometric knowledge generated by academics, which has proven beyond dispute that gold is a barbarous relic, and that the consumer price index, along with national income accounts, are the best indicators of whether we are launching into inflation or falling into a deflationary rathole.

The media is hot and bothered as to whether the Fed will print a trivial amount of money again like it did in 2009, when in reality the printing presses shut down in 2008. Before everyone was all loaned up, banks used to print money – gobs of it – every year, maybe $1.5 trillion annually. Now broad money is shrinking.

Being an economist of the Austrian school, I see why many of my brethren focus upon the explosive growth in the monetary base that has occurred under Bernanke, and why they focus upon the “true money supply,” which also rose quickly once the fix was in.

But Ludwig von Mises, the father of this strain of economists, taught that money existed in two forms: money and money substitutes (i.e. deposits). Today the two are indistinguishable, whereas in times past gold or gold-exchangeable dollars were the reserve upon which the system was pyramided. No one asks you if your check or electronic payment came from the base or the tip of the pyramid, they just want bills paid.

Bernanke and the monetarists and Keynsians are riding horses with two blinders on: no deflation on the left, no inflation on the right. But their steeds are running downhill, towards a glen filled with thorns and rocks.

With the banks insulated from the credit crisis, mainstream economists are like the patrons of Nero’s orgy, listening to the reassuring strains of Uncle Ben’s fiddle while the houses of Rome are burning. I can’t imagine a banking establishment or its titular leader more out of touch with mainstream America, clueless as to the most basic observation that it has run a fractional reserve lending system into a generational-sized ditch.

Regards,

Bill Baker,
for The Daily Reckoning

[Editor’s note: William Baker is the author of “Endless Money: The Moral Hazards of Socialism. You can get your own copy of his book here. You can also follow his commentaries on The Conservative Economist.]

Bernanke to World: We’re Going to Fiddle While Rome Burns originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

More articles from The Daily Reckoning….

Figuring out the Real Importance of Gold

August 31, 2010 by · Leave a Comment 

The Daily Reckoning

Gold remains in high demand among individual investors, hedge funds, and central banks all swapping cash for the yellow metal. This past weekend, an FT reportage looked into what the latest money flows into gold can tell us about it’s real importance.

Among others, the Financial Times spoke with Texas Republican Congressman Ron Paul:

“’We were in a financial crisis and inflation was high,’ Paul recalls. ‘But the Federal Reserve wasn’t interested. I remember Paul Volcker [then president of the Federal Reserve] walking into a room in 1980 – at the height of the financial crisis, when gold went up to more than $800 per ounce – and saying, “What’s the price of gold?”’ According to Paul, ‘Everyone knows a high gold price is a vote of no-confidence in paper. That is why governments will manipulate and try to give you an artificial price for gold.’

“In his book Gold, Peace and Prosperity, Paul decries the end of the gold standard – the practice of backing currencies with a fixed weighting in the metal, which took many forms through history. President Nixon brought an end to the gold standard in 1971, as part of his attempt to overcome the strain of funding the Vietnam war and the US’s mounting trade deficit. Paul thinks the system of fiat money facilitates ‘governments’ attempts to inflate, control the economy, run up deficits and fight senseless wars’. He worries, too, that both the supply of paper money and government debt levels are spiralling out of control.

“‘My beef is with the paper money,’ he says. ‘All the problems we’re having today were destined to happen. Gold plays an important role in the monetary system because it restrains government spending.’ Without it, Paul argues, central banks have the power to print money without pausing to consider the consequences, and more impetus to spend it.”

Also, according to the FT’s discussion with Ken Rogoff, Harvard professor and former head researcher at the IMF, “we are witnessing an international scramble for gold.” The shifts we’re beginning to see in central bank gold holdings could be one of the most clear signs of economic strength that China and India are displaying relative to the US and other developed nations.You can read more details in a Financial Times reportage on the true value of gold.

Best,

Rocky Vega,
The Daily Reckoning

Figuring out the Real Importance of Gold originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

More articles from The Daily Reckoning….

A Flat Day Trading Currencies

August 31, 2010 by · Leave a Comment 

The Daily Reckoning

Recall, last Friday, we were waiting for the second quarter GDP print to see if any of the Fed Heads at the Jackson Hole boondoggle would comment on what I expected to see, which was GDP falling to 1.5%…

Well… I should have booked a flight to Vegas on Friday, as I darn near hit the GDP downward revision bang on! The actual number, that is if you even believe that this number is really the “actual number”, was 1.6% for the second qurarter. But, I don’t gamble, except for my annual World Series bet on the Cardinals, and an occasional neighborhood, nickel, dime poker game, so… I’ll stick to writing…

The thing about GDP is that it is so backwards looking, and if we had turned the corner already with regards to the economy, then you would just write this data off, and say it was water under the bridge… Unfortunately, that’s not the case, and at this point I can’t help but think that the final revision of second quarter GDP will be revised even lower, thus leading into the third quarter, which, as far as I can see with one eye, nothing has gotten better, things have only gotten worse… UGH!

And as far as the Fed Heads commenting on the HUGE downward revision… I didn’t hear any “real sound bites”… But… I had to laugh on Friday morning when a story headline flashed across the Bloomie… The title read: Bullard says, “If Fed needs to do more stimulus, it should be disciplined.”

Hmmm… Makes you think, or at least it did me, that what the FOMC has done previously was NOT disciplined! HA!

And Big Ben did have something to say in his speech… Big Ben said on Friday that “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.”

Just two months ago he said, “the economic recovery is proceeding and that the labor market is improving gradually. The pace of economic recovery is likely to be moderate for a time.”

Yes, I don’t make this stuff up, folks… You all can read the FOMC statements just like I do; they’re all on the Internet!

And I understand that forecasting economic activity is a tough job… But if little old me here in St. Louis, Mo. can see the writing on the wall, why can’t 12 Fed Heads, or whatever the number is, and all their research “lackeys”?

So… The currency reaction to this data was interesting, for there were those that wanted to hide in the shadows of love, I mean Treasuries, and there were those that took to selling the dollar… At the end of the day, currencies had not gained nor lost ground on the day. Same for gold… I watched it pop up $5 and then lose it, and go negative $3, and then come back… It was a very volatile day, but well within a small range.

The commodity currencies faired a bit better on the day, with their moves higher not being erased with profit taking. The Aussie dollar (AUD) is closing in on 90-cents again, and kiwi (NZD) is back to 71-cents this morning.

Well… The Japanese yen (JPY) is back below 85 this morning, rally again versus the dollar, as there has been not one follow-up word or action by the Finance Ministry or Bank of Japan (BOJ) with regards to intervention to stem yen’s rise versus the dollar. The BOJ did announce that they were adding 10 trillion yen ($118 billion dollars worth) in liquidity injections…

I find this all to be like rearranging the deck chairs on the Titanic… Monetary Policy isn’t going to stop this yen strength… Even “bad” monetary policy like this!

Long time readers know all too well, that I’ve said that the US was following Japan for years now… Recall the Vapors’ song “Turning Japanese”… The reason I bring this up again, is the that you see Japan 15 years after their meltdown, and 15 years of economic doldrums, still attempting to “stimulate the economy”… Is that a glimpse into our future?

I don’t know the answer to that, all I know is that everything Japan has done for the past 15 years, is being duplicated by the US.

One thing that really caught my eye from Jackson Hole was a presentation by Carmen Reinhart of the University of Maryland. She said that in the decade after a severe financial crisis, the median employment rate was 5 percentage points higher than normal in advanced countries. Following 10 of the 15 crises she studied, unemployment never fell back to its pre-crisis level…

And ECB President, Trichet said, “the debt overhang bears the ultimate responsibility for slowing down the economic recovery”…

Think about that, folks… Japan ran their national debt to levels not seen before, and their economy never has fully recovered… The US has run their national debt to levels not seen before in this country… Will that be a drag on any economic recovery? You bet your sweet bippie it will!

Yes… Let’s see… Ahhh… Swiss francs (CHF) are back on the rally tracks, after having been derailed in May… The franc is back above 97-cents, which is the first time it has seen this lofty level since January! And wouldn’t you know it, just about the time the franc gets rolling down the rally tracks, the engineer slows it down… The engineer in the case would be the Swiss National Bank (SNB), who sent out a communiqué saying that they were following the franc’s exchange rate “closely”…

The SNB had been in the markets earlier this year to stem the franc’s rise, especially versus the euro… But then they backed off the intervention, and said they no longer were concerned with the franc’s level… So, this latest spanner in the works which was provided by the SNB, is a surprise to the markets…

HEY! The 10-year yield is 2.59%, still way to low for the risk, but about 15 BPS higher than the low of 2.45% we saw a week or so ago… Is this an indication that investors are bailing on the “flight to safety”? Sure looks like it to me, but then we’ll need to see this yield rise much more before we know for sure.

Well… Last week’s data was just plain awful, but that was last week… This week, we start off with two of my faves, Personal Income and Spending… Tomorrow we’ll see the color of the latest S&P/CaseShiller Home Price Index, and Consumer Confidence, which if it prints a gain to the index, thus signaling an increase in consumer confidence, I’ll probably jump out our 7th floor window! Well, not really, the windows don’t open! Whew! And then on Friday, before the boys and girls head to the Hamptons for the Labor Day Holiday weekend, we’ll have a Jobs Jamboree… And I don’t have a good feeling about that report, folks… The weekly initial jobless claims have been ramping higher, and it doesn’t look good for the labor picture.

Then there was this from the FT

US Federal Reserve Chairman Ben Bernanke has made it clear that the central bank’s problem isn’t explaining the economy and what the bank plans to do about it, according to The Economist. The problem is figuring out what’s going on and deciding how to respond. “The recovery has stumbled and the central bank isn’t sure why,” the magazine notes. There will be more quantitative easing when Bernanke decides it is essential, The Economist concludes.

Hmmm… I guess in the end the Fed’s problem is policy, not communication… I’m laughing out loud right now, as IF that were the Fed’s only problem!

To recap… Second quarter GDP was revised downward from 2.4% to 1.6%, with another revision due before we close the books on the second quarter. Currencies and metals went back and forth all day after the report, in a tight range. There were some interesting quotes from the Fed’s Jackson Hole boondoggle, and Japan is still attempting to stimulate the economy after 15 years… Is this our future?

Chuck Butler
for The Daily Reckoning

A Flat Day Trading Currencies originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

More articles from The Daily Reckoning….

Bullion-Buying in China and India, Part II

August 31, 2010 by · Leave a Comment 

By Jeff Nielson, Bullion Bulls Canada

In Part I, I alerted readers to the problem with using Western labels and Western analysis to analyze the gold markets of other nations – especially the two titans of the gold market: China and India. More specifically, I pointed out that breaking-down demand into the categories of “retail investment” and “jewelry” demand was both arbitrary and inaccurate.

In fact, much of the gold/silver acquired under both of those categories simply represents “savings”,  rather than “investment” or the mere purchase of a luxury good (i.e. jewelry).  Because of this inaccurate analysis, I suggested that (Western) analysts will likely consistently underestimate long-term demand, while overestimating the amount of “scrap” bullion which would/will return to the market.

While much of this analysis applies to both India and China, there are clearly important differences in these two, critical markets for precious metals. Previously, I pointed out that China had only recently removed/relaxed policies which severely restricted the ownership of precious metals. An astute reader immediately provided me with two, important observations.

On the one hand, the reader observed that Chinese citizens always had access to jewelry, and so the “ban” on bullion ownership was certainly far from a total prohibition of precious metals. This means that the “pent-up appetite” to which I referred is not quite as “voracious” as I first indicated. At the same time, I need only point out that those specifically wanting to accumulate precious metals do not (generally) head to their local jeweler to stock-up.

We want actual bullion-products (i.e. coins and/or bars) because of their purity, and also because such bullion is clearly denominated by weight, making it much more convenient for commerce. The second observation made by this reader was that on a per capita basis, China does lag most of the world in personal holdings of bullion (as a result of the previous prohibition on bullion-buying). With the recent move by China’s government to open up/expand the bullion market even further in China, this can only accelerate Chinese demand – as it looks to erase that differential in bullion ownership.

Conversely, with India’s precious metals market, we have the exact opposite dynamic: as the world’s largest precious metals market (historically), India has accumulated a vast stockpile of bullion over the decades (and centuries). This has many interesting implications for analysis. To begin with, India has (by far) the world’s most “liquid” gold (and silver) market. Indians can (and do) buy (and sell) gold and silver the way we in the West go to the store to buy eggs and milk.

With a vast, domestic stockpile of bullion, Indians can trade in gold and silver in a way that can’t be done in the West (unless one wants to resort to bullion-ETF’s), because the “premiums” charged by Indian bullion-dealers are only a tiny fraction of the hefty premiums which most Western retail buyers must pay – in our bullion-starved economies. Indeed, Indian bullion-buyers would be horrified by the premiums we must pay (especially for silver) when we buy our own bullion.

Given these parameters, gold bears (and nervous “longs”) may be concerned about two, parallel developments in the Indian market. The first concern is that the Indian people will soon/finally “have enough” precious metals, causing demand to sag. Second, with such unbelievably massive stockpiles of bullion, Indian bullion-holders might (one day) flood the market with “scrap” gold and silver.

In fact, there is one very good reason why such fears are totally unfounded. It relates to what I said before: the Indian people (like most of the world’s population) see precious metals as an instrument of savings – not a luxury good, or a mere commodity. This leads us to another fundamental truth in the precious metals market: Indians (and Asians, in general) do not use their gold and silver to acquire more banker-paper (as we do, in the West). Instead, they use their banker-paper to acquire precious metals.

Understanding this dynamic allows us to view the Indian precious metals market correctly. The Indian people will never decide they have “enough” gold and silver (and certainly will never conclude they have “too much”), much like people in the West will never say they have too much of what we mistakenly call “money”.

Because of this obvious truth, and the strong, cultural ties to precious metals, Indian precious metals demand can be viewed as (at worst) a “constant”, while the rapid rise in per capita incomes in that nation strongly suggests that Indian demand will actually trend higher with time. The dynamics are similar when we examine the Indian scrap-market.

More articles from Bullion Bulls Canada….

Financial Crises Linked to Central Bank Stupidity

August 31, 2010 by · Leave a Comment 

By The Mogambo Guru

It was an interesting psychological phenomenon when I read where Michael Kosares of USAGold.com wrote, “Private citizen, Alan Greenspan, could afford to be blunt,” but I interpreted it in my Mysterious Mogambo Mind (MMM) to mean, “Private citizen, Alan Greenspan, should be afforded a blunt instrument applied with extreme prejudice to his stupid head, over and over, as he is the moron that, as chairman of the Federal Reserve from 1987-2006, created all the money and credit to finance the now-busting booms in stocks, booms in bonds, booms in houses, booms in derivatives, and booms in the size and cost of governments, and if there is one sorry, worthless bastard who can be singled out as guilty, guilty, guilty, it is Alan Greenspan.”

Well, I am sure you can understand how I could easily make the mistake, and now we are screwed because Alan Greenspan was a lying, slimy little treacherous weasel who could not “afford to be blunt,” but who could afford to keep creating more and more money, gradually destroying the US dollar’s buying power with constant, simmering inflation in prices, so that even the lying US government is forced to admit that $1 in 1987, when Greenspan took over the Fed, had the buying power of $1.77 in 2006 when he retired, which is a compounding inflation rate of 3%! Yikes!

Long-term 3% inflation is, as you can probably tell by the expression on my face, outrageous! And it is especially outrageous because the Federal Reserve was created to prevent inflation! Their mission was to preserve the value of the dollar, and Alan Greenspan gave us a cumulative 77% inflation in the 19 years he was in office! Gaaahhh!

Well, Mr. Greenspan has apparently finally gotten some smarts from somewhere, although I don’t know where, and earlier this month he said this month “Our choices right now are not between good and better; they’re between bad and worse.”

Then, to show you that he is still a complete dolt, he said, “The problem we now face is the most extraordinary financial crisis that I have ever seen or read about,” which is so stupid that I laugh in contemptuous scorn with which to ridicule his, you know, stupidity.

The reason that I snarl in contempt is that this current recession is actually nothing –nothing! – compared to the many, many other financial crises throughout history, all of them caused when stupid bankers like him, or governments themselves, were allowed to create too much money, which distorts the whole economy and causes inflation in the cost of consumer goods, like food and energy, and nowadays those yummy little chocolate-covered donuts that we all love so much, but which cost almost 50 cents apiece now.

Apparently, there is more demand for chocolate-covered donuts than I realized, as Mr. Kosares says, “These comments echo a growing sentiment that Americans are up against something far different from the average downturn,” which is weird, because I would have thought that the rising cost of chocolate-covered donuts would not be very important compared to their other problems, such as, “according to the Pew Economic Policy Group, the financial crisis has cost the American people $3.4 trillion in lost real estate; $7.4 trillion in lost stock wealth; and 5.5 million jobs.”

Perhaps that is why the piece is titled “The Perils of Unmitigated Positive Thinking,” or perhaps it is how I think that Seneca, 2,000 years ago, anticipates Taleb’s “Black Swan” theory, when Seneca said, as Mr. Kosares quotes him, “You say: ‘I did not think it would happen.’ Do you think there is anything that will not happen, when you know that it is possible to happen, when you see that it has already happened?”

Then Mr. Kosares quotes Fed chairman, Ben Bernanke, who “made a similar point to Seneca’s in a speech before the Council on Foreign Relations in March, 2009 in the wake of Wall Street’s near collapse in late 2008.”

What Bernanke said was, “Financial crises will continue to occur, as they have around the world for literally hundreds of years,” although he should have added “that will result from the repeated stupidity of banks and countries continually increasing the money supply, which distorts the economy in weird, unpredictable booms and makes consumer prices go up, which is the Exact Wrong Thing (EWT) to do, which is a point that you would think would be crystal-clear even to a neo-Keynesian econometric halfwit like me, seeing that mere literacy is required to read the actual, written mission of the Federal Reserve, which is to maintain stable prices.

“But thanks to the incompetence of the Federal Reserve, the dollar has tragically lost almost 97% of its purchasing power since the inception of the Federal Reserve in 1913, making a complete mockery of me and the Federal Reserve, proving that I obviously have no idea what in the hell I am doing, except that I know it is wrong, but I keep doing it.”

Well, I know what he is doing, and I know what I am doing, and I am doing what needs doing because of what he is doing, and what I am doing is buying gold, silver and oil to protect myself against the laughable stupidities of the Federal Reserve continuing to create too much money, and in the process will theoretically make myself rich, rich, rich, at least in the relative sense when compared to the busted-out idiots who persisted in clinging to dollars and dollar-dependent assets.

And anyone can do what I am doing by just also buying gold, silver and oil, which makes it all so easy to do that the greedy, lazy little man inside me cries out, in heartfelt joy, “Whee! This investing stuff is easy!”

The Mogambo Guru
for The Daily Reckoning

Financial Crises Linked to Central Bank Stupidity originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

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