By Trace Mayer, GoldSeek
The ‘gold bugs’ assert that at all times and in all circumstances gold remains money. For some irrational reason the ‘paper bugs’ cling to their increasingly worthless colored coupons asserting their importance as currency.
The Great Credit Contraction has begun and in the macro sense there is no practical solution to the end of the current worldwide monetary system. But in the micro sense the individuals and companies that will survive, thrive and prosper will be those that are liquid. It will be those who can make payroll.
GOLD IS MONEY AND CURRENCY
On May 20, 1999, Alan Greenspan testified before Congress, “Gold is always accepted and is the ultimate means of payment and is perceived to be an element of stability in the currency and in the ultimate value of the currency and that historically has always been the reason why governments hold gold.”
For these reasons gold, silver and platinum belong in the cash portion of the balance sheet. The precious metals are the ultimate form of currency. Unlike their comptition, the colored coupons, the precious metals can never become worthless, are always accepted and are the ultimate means of payment.
The ‘gold bugs’ will always be able to purchase something while the ‘paper bugs’, if they have physical notes and not mere digits in a database, are eventually left with an instrument that only has a single use after defecation. What intrinsic value!
GOLD ANTI-TRUST ACTION COMMITTEE
During the 1990’s Mr. Rubin had devised the gold leasing scheme with the intent being elucidated by Dr. Greenspan’s testimony in 1998, “Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready tolease gold in increasing quantities should the price rise.”
GATA’s alleged central bank gold price suppression scheme may include the COMEX’s participation. Mr. Robert Landis, a graduate of Princeton University, Harvard Law School and member of the New York Bar, has asserted that “Any rational person who continues to dispute the existence of the rig after exposure to the evidence is either in denial or is complicit.”
GATA alleges that the central banks have less than half the physical gold claimed. The central banks carry gold in the vault and gold out on loan as the same line item. In effect, they report cash and accounts receivables as the same thing. Ever tried making payroll with an accounts receivable?
By Bob Chapman, GoldSeek
The following information may be the most important we have ever published. One of our Intel sources, highly placed in banking circles, tells us that on 1/1/10 all banks that have received TARP funds have been informed by the Federal Reserve that they must further restrict any commercial lending. Loans have to be 75% collateralized, 50% of which has to be in cash, which is a compensating balance.
The Fed has to do one of two things: They either have to pull $1.5 trillion out of the system by June, which would collapse the economy, or face hyperinflation. This is why the Fed has instructed banks to inform them when and how much of the TARP funds they can return. At best they can expect $300 to $400 billion plus the $200 billion the Fed already has in hand.
We believe the Fed will opt for letting the system run into hyperinflation. All signs tell us they cannot risk allowing the undertow of deflation to take over the economy. The system cannot stand such a withdrawal of funds. They also must depend on assistance from Congress in supplying a second stimulus plan. That would probably be $400 to $800 billion. A lack of such funding would send the economy and the stock market into a tailspin. Even with such funding the economy cannot expect any growth to speak of and at best a sideways movement for perhaps a year.
We have been told that the FDIC not only is $8.2 billion in the hole, but they have secretly borrowed an additional $80 billion from the Treasury. We have also been told that the FDIC is lying about the banks in trouble. The number in eminent danger are not 552, but a massive 2,035. The cost of bailing these banks out would be $800 billion to $1 trillion. That means 2,500 could be closed in 2010. Now get this, the FDIC is going to be collapsed before the end of 2010, which means no more deposit insurance. This follows the 9/18/09 end of government guarantees on money market funds. Both will force deposits into US government bonds and agency bonds in an attempt to save the system.
This will strip small and medium-sized banks and force them into shutting down or being absorbed. This means you have to get your money out of banks, especially CDs. We repeat get your cash values out of life insurance policies and annuities. They are invested 80% in stocks and 20% in bonds. Keep only enough money in banks for three months of operating expenses, six months for businesses.
By Adrian Ash, GoldSeek
London Gold Market Report
THE PRICE OF GOLD traded in a wide 1.5% range early Monday in London, bouncing fast from a dip to $1165 as world stock markets reversed last week’s gains and crude oil slipped below $76 per barrel.
The “safe haven” US Dollar rose on the forex market, alongside the Japanese Yen.
French and German investors looking to buy gold saw the price retreat to a four-session low by the AM Fix in London, down 1.1% from last week’s all-time record Fix of €787.24 per ounce.
Gold priced in British Pounds traded at £710 an ounce by lunchtime, some 2.3% below Friday’s new record intra-day peak.
“This has once again presented a [gold] buying opportunity,” says one Londondealer in a note today.
“Even when gold succumbs to cashing out, it faces renewed demand on dips,” agrees a Tokyo analyst, speaking to Reuters.
“We expect a certain amount of consolidation at these levels,” cautions the latest technical analysis from Scotia Mocatta.
“Signals are that the Dollar is due for something of a recovery soon,” says Phil Smith in his Reuters Gold Technical Analysis, “[and] the Dollar does influence the Gold Price to a large extent.”
By Howard S. Katz, GoldSeek
My first financial newsletter was called “The Speculator.” My dictionary defines speculate as:
- “to engage in thought or reflection;”
- “to buy and sell commodities, stocks, etc. in the expectation of a profit through a change in their market value.”
- from Latin, speculatus, observed, examined:
I have always liked the word “speculate.” I enjoy the expectation of a profit made by buying and selling commodities and stocks. And I understand that such profit can only be made by thought or reflection.
In this I am a minority. You ask 99 out of 100 people who buy and sell commodities, and they will tell you that speculation is evil. They do not speculate, they will tell you. They are investors. However, to invest is “to put (money) to use.” An investor puts his money to use by placing it somewhere it can earn a return. That is, the investor is trying to avoid risk and so contents himself with the more modest returns he can get from such instruments as savings, accounts or blue chip stocks. The speculator is tempted by profit and hence is willing to engage in the thought or reflection necessary to discover whether stocks and commodities are going up or down. His profit is his reward for doing the intellectual work of discovering the truth.
Unfortunately, most people in the markets want the profits of the speculator, but they are not willing to do the work of searching out the truth. They call themselves investors, but they act like speculators. They act like speculators (buying and selling commodities and stocks in expectation of a profit), but they do not want to admit that they are speculators.
Poor fools! How can you succeed at something when you will not admit to yourself that you are doing it?
We are now coming up to the end of the first decade of the 21st century. Ten years ago I challenged all the stock mutual funds in the country to a race – the race of the century. My current financial letter, the One-handed Economist, keeps a Model Conservative Portfolio. We started out on Jan. 1, 2000 with a theoretical $100,000 (suitable for a person who wanted his money to grow for retirement). In each issue of the One-handed Economist, I report on the Model Conservative Portfolio and make my recommendations on what to buy, sell or hold. A subscriber who followed these recommendations faithfully from Jan. 1, 2000 to the present has seen his money grow from $100,000 to $180,000 (or a proportional amount if he started with a different amount of money).
By Adam Brochert, GoldSeek
Mining is a tough business and profits are rarely easy to come by. I learned the concept of the “real” price of Gold from Bob Hoye at Institutional Advisors. This concept ignores the nominal price of Gold (i.e. ignores the currency effect, which is difficult for paperbugs but easy for long term Gold bulls) and focuses on the price of Gold relative to the price of other commodities as a ratio. Mr. Hoye has his own proprietary index, but as we all stand on the shoulders of giants before us, I use my own proxy of this ratio by dividing the Gold price by other commodities indices (I typically use the Continuous Commodities Index [$CCI]).
When the ratio of the Gold price divided by a basket of commodities is rising, the “real” price is rising. This is irrespective of the nominal price. In other words, the price of Gold in U.S. Dollars could be falling while the “real” price is rising. The concept is a valid and important concept for two reasons.
First, wealth is relative. If Gold goes to $2000/oz but oil goes to $10,000 per barrel, then Gold investors are poorer if they need to use energy/in energy terms. Deflation in Gold terms has been here for a decade – it is only when paper currency is introduced into the equation that things get confusing. Let’s say Gold starts today at around $1175/oz and a house in your neighborhood costs $200,000 today. In a year, if Gold falls to $800/oz (not saying it will) and the house in your neighborhood costs $100,000 at that time are you richer or poorer? Well, both! In nominal terms, you are poorer. In other words, if your main goal in life is to accumulate as many pieces of paper issued by the unconstitutional, non-federal, for-profit federal reserve corporation, you are poorer. However, if your main goal is to buy a house some day, you are wealthier in this scenario.
As a strong believer in Gold during the Kondratieff Winter cycle that we have entered (it ain’t over yet, trust me), I believe paper currencies will also deflate relative to Gold rather than gain value relative to Gold as people like Bob Prechter think. It’s a subtle but important investing concept when one looks over the longer term horizon and tries to protect wealth. Because I believe the deflationary forces in the economy are strong, I believe it is possible that U.S. Dollars can be significantly devalued and yet gain in value relative to real estate and general stocks. But holders of any of these asset classes I believe will lose wealth in Gold terms.
Front and center on the currencies this morning, we have the fears of a default in Dubai, fading, and that brings the risk takers back out… So, we had one day of bloodletting on Friday, and come Monday, the tourniquet had been applied, and things are back on track. The Big Dog, euro (EUR) is off the porch, chasing the dollar down the street once again, and is trading at 1.5050, as I begin to write this morning.
I had a long time customer send me a note on Friday, asking me about the selling going on in the currencies and commodities because of the news that Dubai World was asking for help with their loans… I replied that the research I had read led me to believe that this would fade, in that the ruling families of Dubai and Abu Dhabi have bloodlines, and even though they had feuded in the past, blood would run thick, and the country would step in to help with the loans, which would mean a return to dollar selling once it all got straightened out… WOW!
This morning, there is news that the UAE will back the banks and the loans, so… It’s a “risk on” day once again!
After the Treasury auctions of last week, and a supposed “good covering,” the end result is that we have this pile of debt, and Treasury yields very reminiscent of something right out of the time warp of Eisenhower! But! Here’s the thing that US Treasury Secretary Geithner is hanging is hat on… These low yields reduce the interest expense for the US. Yes, Timothy, that my be true… But when you are issuing the amount of debt that’s on your plate to issue, then the “net” reduction to interest expense is a fallacy. Go ahead, do the math, Timothy… I dare you!
Can you believe that tomorrow is December 1st? WOW! Let the Holidays begin! But what comes to us on December 1st? That’s right, it’s the Reserve Bank of Australia (RBA) meeting. I’ve pinned my colors to the mast of another rate hike by the RBA tomorrow, and by the looks of it, Traders are beginning to pin their colors to that same mast! The reason I say that is the performance of the Aussie dollar (AUD) overnight. The Aussie dollar has a 91-cent handle this morning, which is far better than that 0.8998 figure that Mike reported on Friday morning!
Before I headed home on Wednesday last week, gold had pushed to a $25 gain in one day! WOW! I thought, “Can’t wait to see what the price looks like on Monday when I return!” But the Dubai loan problems took the wind out of gold’s sails, and the shiny metal lost $25 on Friday! UGH! Oh well, it gives buyers the opportunity to buy more at a cheaper level, I thought to myself… Then I thought… You should go check out what your good friend Addison Wiggin has to say about gold… So I did!
Addison Wiggin in the Friday issue of The Daily Reckoning wrote, “Gold is on track for its best monthly performance in a decade. The money metal reached $1,180 earlier this week, another all-time high.
“There’s buzz that India, which bought 200 metric tons of gold from the International Monetary Fund earlier this month, might well buy the rest of the 203.3 metric tons the IMF has put up for sale.”
Then we had gold aficionado, James Turk, talking about gold… “Don’t be misled by what you may hear or read in the mainstream media, and even much of the alternative media.
“After all, how many commentators have correctly identified gold’s bull market, now a decade old?” Or for that matter, how many correctly identified the tech bubble in the ’90s or the housing bubble this decade?
“Gold has moved from apathy and neglect – stage-one characteristics – to growing attention. But importantly, instead of embracing gold and analyzing it to determine relative value, today’s attention is one of widespread disbelief and skepticism that gold can climb higher. These are exactly the responses one should expect to emanate from stage two.”
Great stuff from Addison Wiggin and James Turk, eh? I mean, gold continues to be in strong demand… And why not?
I was sent a note by a reader last week regarding Brazil and the real (BRL)… The sender asked me if the government’s plans to keep the real above 1.70 would hurt the real’s chances of getting stronger versus the dollar? Well… I guess it depends on how badly the government wants to fight to keep the real above 1.70… I mean it wasn’t that long ago, that the government and central bank said that they would do everything they could to keep the real above 2! (Real is a European style currency which means as the number gets smaller, the stronger the currency gets versus the dollar.)
So… Given the government’s and central bank’s performance in their failed attempt to keep the real above 2… One would have to think that this announcement would only be good for a few days, and when nothing comes of it (like intervention), traders will get back to the business at hand, which is marking the real stronger versus the dollar! Now… That’s my opinion, but it’s based on facts of the previous statement by the government and central bank!
The Brazilian government did try a 2% tax on capital flows… But, that did little to stop the real’s rise versus the dollar… So now we wait-n-see what the government has in store for the markets and traders next…
So… I hear that European Central Bankers, Trichet and Junker, tried their best to persuade Chinese officials to allow greater flexibility in their currency, the renminbi (CNY)… But… Their efforts fell on deaf ears, much like the efforts of US lawmakers, Treasury Secretaries, and the President. These guys must like to travel to China, because they never get anywhere with their efforts to get the renminbi to float.
I saw/read a story on the Bloomie this morning regarding Swiss francs (CHF) following the lead of the Aussie dollar and outperforming the rest of G-10 currencies. Francs this morning are so close to parity they can tell parity what flavor gum they are chewing! HA!
For years, when people thought of safe havens, they thought of Swiss francs. Through the years, especially since the euro came to be, the franc’s safe haven status has faded… But apparently not by much! For instance, Iran announced this past weekend that they would start 10 new uranium enrichment locations. (Which is sort of like them rubbing the global community’s nose in it, right?) And… The franc bumps up higher versus the dollar… So… Apparently, francs haven’t lost all of their power of providing a safe haven, when things in the world look scary.
Gold is also a “safe haven” destination for many investors… And as I tell people when I’m out on the road… With all the nutcakes out there, shooting missiles, ramping up nuclear capabilities, attacking ships, running up deficits, and so on, there hasn’t been a better time to seek a safe haven, like gold…
Well… The Bloomie is reporting this morning, that while there were tons of “shoppers” out in force this past weekend to start the Christmas shopping season, there wasn’t a lot of “sales”… Hmmm… That doesn’t bode well for retailers, but, hey! They’ve still got time to cut prices even more!
OK… The data cupboard gets restocked to the brim this week, and among the data prints we’ll see the ISM (Manufacturing Index), Pending Home Sales, The Fed Beige Book, and others… But the real meat in this burger comes to us on Friday, when not only will we be moving our offices to our new digs next door, but… It will be a Jobs Jamboree Friday, when we get a look at the latest sex, lies and videotape by the Bureau of Labor Statistics (BLS)!
Canada will print their third quarter GDP this morning… And while there are boatloads of naysayers about Canada’s ability to exit their recession, I’m not one of them. I believe that Canada will join the club of countries that have exited their respective recessions…
To recap… The Dubai loan problems of Friday have not gone away, but seem to have been more of an “overreaction” by the markets, due to the UAE’s Central Bank announcing that they would provide liquidity at 50bp above the local three-month benchmark rate and that it “stands behind” local and foreign banks. Let’s hope that’s the case, eh? And the non-dollar currencies have rebounded from Friday’s sell off.
Currencies Recover from Friday Sell Off originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a “uniquely refreshing” perspective on the global economy, investing, and today’s markets.
The U.S. propaganda-machine has been steadily ratcheting-up expectations for the 2009 holiday-shopping season. This is not surprising. As a consumer economy, the health of the retail sector is critical to the overall health of the U.S. economy, and the retail sector itself is totally dependent on the Christmas shopping season.
Clearly the U.S. government cannot pretend the U.S. (consumer) economy is “growing” if, in fact, retail sales are declining. Officially, the preliminary reading for “Black Friday” sales (the day after U.S. Thanksgiving) showed a tiny 0.5% increase. However, that figure is not adjusted for inflation.
John Williams, of Shadowstats.com has pointed out that while official inflation showed the largest decline (i.e. deflation) since 1950, that if the same methods of measurement were used today as in 1950 that it “did not drop below 5%, at worst, in the current cycle”. Thus, while Americans might have spent a tiny bit more money this year, they purchased less goods.
With profit margins for U.S. retailers severely squeezed due to a Wal-Mart-led “price war”, selling less goods for less profit obviously means a worse holiday shopping season than last year – which was already billed as “the worst in 40 years”.
This “surprising” weakness in the U.S. retail sector cannot be over-emphasized. Last year, holiday shoppers were shell-shocked by the combination of a stock market crash, an economic collapse, the disintegration of the U.S. housing market, and the most-rapid rate of job losses in more than 70 years.
All of those factors are now supposedly behind U.S. shoppers, with the economy supposedly growing, the stock market pumped-up to recover most of the 2008 losses, and job losses have supposedly slowed to a modest rate – yet they still bought less.
The fact that all these supposed improvements in the U.S. economy have had zero positive impact on the U.S. retail sector illustrates two points which I have made on several occasions. First of all, it confirms my previous assertions that the U.S. economy is not growing (see “The U.S. Economy is NOT Growing”), there has been little improvement in U.S. unemployment (see “Wall Street Invents New Jobs Propaganda”), and the U.S. housing market is not even close to a “bottom” (“Housing Sector Mirage”).
More specifically, it confirms my previous analysis of the U.S. retail sector (see “Death of the U.S. Consumer”). This is not “rocket science”, nor even complex economics. It’s all just simple arithmetic. With falling employment income, dramatically reduced wealth, and no access to additional credit, it’s obvious that U.S. consumers can’t spend more.
This is why I keep pointing out how totally irrelevant U.S. “consumer confidence” reports have become. It doesn’t matter how “confident” consumers are if they have no money and no credit. Indeed, the U.S. economy would be in much better shape if it had a population full of gloomy-but-rich consumers, rather than the “confident” but broke consumers which must (try to) support this sector.
The next 3 foreign lenders to abandon the Dollar keep barely 1% of their reserves in gold…
It’s ONE OF THOSE numbers that’s so unbelievable you have to actually think about it for a while, writes Porter Stansberry in his S&A Digest.
Within the next 12 months, the US Treasury will have to refinance $2 trillion in short-term debt. And that’s not counting any additional deficit spending, which is estimated to be around $1.5 trillion. Put the two numbers together…then ask yourself:
How in the world can the Treasury borrow $3.5 trillion in only one year?
That’s an amount equal to nearly 30% of our entire GDP. And we’re the world’s biggest economy. Where will the money come from?
How did we end up with so much short-term debt? Like most entities that have far too much debt – whether subprime borrowers, GM, Fannie, or GE – the United States Treasury has tried to minimize its interest burden by borrowing for short durations and then "rolling over" the loans when they come due.
Because, as they say on Wall Street, "a rolling debt collects no moss." And what they mean is that, for as long as you can extend the debt, you have no problem.
Unfortunately, that leads folks to take on ever greater amounts of debt…at ever shorter durations…at ever lower interest rates. Sooner or later, the creditors wake up and ask themselves: What are the chances I will ever actually be repaid? And that’s when the trouble starts. Interest rates go up dramatically. Funding costs soar. The party is over. Bankruptcy is next.
When governments go bankrupt it’s called "a default". Currency speculators figured out how to accurately predict when a country would default. Two well-known economists – Alan Greenspan and Pablo Guidotti – published the secret formula in a 1999 academic paper. That’s why the formula is called the Greenspan-Guidotti rule.
The rule states:
To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities.
The world’s largest money management firm, PIMCO, explains the rule this way:
"The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support."
The principle behind the rule is simple. If you can’t pay off all of your foreign debts in the next 12 months, you’re a terrible credit risk. Speculators are going to target your bonds and your currency, making it impossible to refinance your debts. A default is assured.
So how does America rank on the Greenspan-Guidotti scale? It’s a guaranteed default.
The United States currently holds gold, oil, and foreign currency in reserve. The US has 8,133.5 metric tonnes of gold (it is the world’s largest holder). At current Dollar values, the gold’s worth around $300 billion. The US strategic petroleum reserve shows a current total position of 725 million barrels. At current dollar prices, that’s roughly $58 billion worth of oil. And according to the IMF, the US has $136 billion in foreign currency reserves. So altogether…that’s around $500 billion of reserves.
Our short-term foreign debts are far bigger.
According to the US Treasury, $2 trillion worth of debt will mature in the next 12 months. So looking only at short-term debt, we know the Treasury will have to finance at least $2 trillion worth of maturing debt in the next 12 months. That might not cause a crisis if we were still funding our national debt internally. But since 1985, we’ve been a net debtor to the world. Today, foreigners own 44% of all our debts, which means we owe foreign creditors at least $880 billion in the next 12 months –
an amount far larger than our reserves.
Keep in mind, this only covers our existing debts. The Office of Management and Budget is predicting a $1.5 trillion budget deficit over the next year. That puts our total funding requirements on the order of $3.5 trillion over the next 12 months.
So, where will the money come from? Total domestic savings in the US are only around $600 billion annually. Even if we all put every penny of our savings into US Treasury debt, we’re still going to come up nearly $3 trillion short. That’s an annual funding requirement equal to roughly 40% of GDP.
Where is the money going to come from? From our foreign creditors? Not according to Greenspan-Guidotti. And not according to the Indian or the Russian central banks, which have stopped buying Treasury bills and begun to buy enormous amounts of Gold Bullion. The Indians bought 200 metric tonnes last month from the International Monetary Fund. Sources in Russia say the central bank there is looking to double its gold reserves.
So where will the money come from? The printing press perhaps? The Federal Reserve has already monetized nearly $2 trillion worth of Treasury debt and mortgage debt, creating bank reserves to purchase T-bonds and other government-backed debt. This weakens the value of the Dollar and devalues our existing Treasury bonds. Sooner or later, our creditors will face a stark choice: Hold our bonds and continue to see the value diminish slowly, or try to escape to gold and see the value of their US bonds plummet.
One thing they’re not going to do is buy more of our debt.
And which central banks will abandon the dollar next? Brazil, Korea, and Chile. These are the three largest central banks that own the least amount of gold. None own even 1% of their total reserves in gold.
Why the Dubai "debt freeze" gives early warning to investors everywhere…
The DUBAI DEBT STORY is more like Bear Stearns than Lehman Brothers, writes Dan Denning in Melbourne for the Daily Reckoning Australia.
Meaning the news from Dubai could be the catalyst for fund managers and traders to take profits on all of their 2009 winners. This could lead to steep falls in emerging market stocks, including Australia.
But first things first. Dubai World is not nearly as large, leveraged, or systemically important as either Bear Stearns or Lehman Brothers were when those firms failed. For those reasons, it’s unlikely that the failure of Dubai World (and we’re not saying it will fail) would, by itself, cause a global deleveraging.
Dubai World has $59 billion in debt. That makes up the majority of the $80 billion in debt of Dubai itself. According to Reuters, international banks are exposed to $12 billion in debt. Incidentally, the Commonwealth Bank of Australia said it has exposure to Dubai but doesn’t expect to make a loss.
There is some risk to CBA, no doubt, just as there is risk Dubai’s other lenders. But it’s nothing like the risk posed to the entire financial industry by Bear Stearns and Lehman Brothers.
For starters, the Bear Stearns High-Grade Structured Credit, and High-Grade Structured Credit Strategies Enhanced Leverage Fund were both massively leveraged. The first fund began with $600 million in assets but quickly borrowed on that to increase its asset portfolio to over $6 billion.
The trouble with that is Bear geared up to buy collateralized debt obligations (CDOs). It may not have known it at the time, but the CDO quality sucked. The CDOs were chock-full of subprime mortgages. In 2006 alone, $503 billion worth of CDOs were issued. It was a $2 trillion market by 2008. A fall in the value of Bear’s assets – a big chunk of which were CDOs – was enough to wipe it out.
Dubai World is likely to be backstopped – at some point – by Abu Dhabi. And although we’re sure it has its fair sure of property assets falling in value, Dubai World owns assets all over the world which it can sell. And, importantly, Dubai world is probably not a counterparty to many other financial arrangements in the same way Lehman Brothers was, at least as far as we know.
But still, you wouldn’t be alone if you had an odd sense of déjà vu this morning. We’d say the Dubai affair is more like Bear and less like Lehman because it’s a warning. Dubai may not be as systemically important as Lehman, but it is a reminder to all the world’s investors that global financial markets remain highly leveraged. And we know what can happen next.
There are other, much bigger, and much more leveraged markets that pose far bigger risks to the global economy. For example, in the US, there is over $3.4 trillion in debt backed by commercial real estate owned by US banks. A presentation by a Federal Reserve analyst in late September suggests that the US banks have failed to set aside adequate capital to cover losses in commercial real estate. It’s safe to say the US banking system – and by extension Australia’s – would not survive another real estate collapse without major casualties.
And that is just one debt bubble. The other large debt bubbles are in China – which hedge fund manager Jim Chanos calls "Dubai times 1,000" – and in government debt worldwide. The China bubble and the US Treasury bond bubble are systemically important. And that’s what we should be worried about now. But what’s happening in the short-term is not quite what you’d expect.
Emerging market stocks are selling off. In fact, don’t be surprised if Dubai is just the excuse fund managers use to take profits on a lot of 2009 positions. It will make this year’s performance statistics look great by crystallizing a profit now. And who can blame a manager for being cautious?
Already the cost of insuring sovereign debt from default – as measured by credit default swap rates – is rising. Yes, it does seem a bit absurd that debt crisis in emerging markets is driving investors into US Treasury debt. But that’s what’s happening in the short-term. You may get a Dollar rally and lower short-term US rates.
How will Australian share markets fair, then? Good question. It depends on how the rest of the world views Australia. If it’s viewed as essentially an emerging-market, commodity-related, high-yield risk asset play, stocks are going to get sold off. The Aussie Dollar will give some ground against the greenback. And the market will wait to see how exposed Aussie banks are to any of the bourgeoning debt bubbles.
The bigger issue is the exposure of the Australian economy to the Chinese economy. According to the government and the media, that is the difference maker for the Aussie economy. It’s what guarantees future surpluses, growth, and prosperity. But if the Aussie economy is hitched to China on the upside, surely it’s hitched to China on the downside too.
Not that any of this potentially catastrophic news should stop Aussie houses from getting bigger or more expensive! CommSec released a report yesterday showing Aussie houses are now the biggest in the world. The floor area of the average Aussie home is now 215 square meters. That’s a 10% increase in the last ten years. Maybe Australians just need more living room!
The world’s growth is built on a debt bubble. The bubble is popping. Dubai is a tiny bubble by comparison. The bigger pops are coming.
Trading above $1000 an ounce, how high will gold go from here…?
MONEY THAT HAS been sat on the sidelines is driving the market, says TraderTracks editor Roger Wiegand in this exclusive interview with The Gold Report.
Devoted intensive research time to the precious metals, currency, energy and financial markets for more than 17 years, "TraderRog" is a regular essay contributor to popular websites addressing the commodities markets, and he is frequently interviewed on radio in the United States and Canada.
Roger Wiegand now see the makings of some "pretty exciting" action in precious metals, forecasting that the Gold Price could go beyond $2,960 with the next big drop in the stock market…
The Gold Report: Roger, when we last spoke, at the end of August, you expected the stock market to have a pretty good fall after Labor Day. So, the market didn’t collapse. What’s your view on why it keeps appreciating?
Roger Wiegand: Well, part of it has to do with manipulation and part of it has to do with an awful lot of money that has been on the sidelines. A couple of months ago I heard there was around $8.5 trillion in cash that was not invested. I couldn’t believe it. A lot of the money is starting to come back because investors are persuaded things are going to really pick up.
Typically, what happens in the cycles is November 1st is the time to buy, after the September-October event sell-off is over. And, if you buy on November 1st forward, you usually do pretty well. This year it was delayed a little bit, and some of those charts look a little bit sloppy and choppy, and that’s what got everybody confused, including me. As of November 24, 2009, the news is reporting smaller investors are running to the bear funds for security. If the correction is now imminent, it is off-cycle and late by at least three to four weeks.
TGR: Are you saying that you’re expecting the markets to go up now that it’s late November?
Roger Wiegand: We could go either way. I really believe that. We’ve got some interesting charts. There’s the S&P chart, which has a double top on it right now, indicative of a selling point, obviously. I don’t think there’s going to be that much of a selling event. I think it’s going to stay propped-up. Last week we saw a gravitational pull from the smaller cap stocks into the larger ones. Usually, when they go into the S&P 100 and they get out of the trading 500, it’s because they’re looking for security and safety, and they’re looking to buy those consumer cyclical stocks, like household goods and toothpaste. There’s a heavy load in that regard right now in the market, but I think they’re going to get out – the people in the funds are going to get their bonuses, and they’re going to get out of town with some pretty big money. But I don’t think there’s going to be very much selling right now. I really don’t. The selling is coming but it is delayed until the funds exit and close the books for bonuses at year end next week.
A big part of this has to do with inflation, too. I know a lot of people say, "Well, there’s no inflation now; it’s all deflation." We disagree; we say that the inflation is now 7% and rising more quickly.
Unemployment is a lot higher than people are discussing, and others are saying, "Well, this is a jobless recovery." Well, it may be a jobless situation, but it’s certainly no recovery. What’s happened here is a lot of corporations have laid-off so many people and run down their inventory so much that their overhead was cut back tremendously and they’re showing profits, at least where we are right now. And those profits are going to be a one-off deal, I think. They’re going to last for maybe a few months but come spring again, we’re back to the same old problems. We’re overloaded on debt. The bond market in Japan is looking absolutely horrifying right now; it’s really scary. The government is selling bonds to pay pensioners and I don’t think they’ve ever been in that position before. The amount of paper that is out there in Japan relative to GDP and the currency is way beyond where it is in the US. And I thought ours was bad!
So, in all likelihood, something is going to snap here pretty soon; it’s got to. But it’s confusing a lot of people because several good reports continue to be reported.
TGR: If you go back a year ago, everyone was looking at the balance sheets of the gold juniors, looking for those who weren’t overloaded with debt who could survive the downturn in the capital markets. And so we’ve had a shake-out, and we’re back to having free markets determine and who’s going to make it…
Roger Wiegand: Absolutely. I think your example with the Gold Mining juniors is perfect. A lot of the ones who shouldn’t have been in the business anyway are shaken out and gone because they didn’t have capital; they didn’t have the proper reserves; they didn’t have any good partnerships. A lot of those projected mines were located in spots where they shouldn’t have been politically. So, what have we got now? I don’t know how many there were – I heard numbers like there were 5,000 of them (I don’t think there were that many), and I hear now that there’s something like 1,500. I have watched the charts and trading activity of these juniors that we like and those we dislike. We’ve thrown out the dislikes.
The experience we’ve been through is going to helps us with what’s coming next. The thing that’s really interesting is that a lot of these stock buyers who focus on the juniors are not really educated in the industry – they don’t understand, especially in America; as they do in Canada – how much further we’ve got to go on this thing. I just wrote in my letter this morning that some of the people that are involved in silver are thinking that because we are up to $22 and fell back to $9 that that’s the end of the game. I think if you look at where we are in gold and silver right now we’re basically on page two of a ten-page story. I believe that’s how much longer we’ve got to go.
TGR: You’ve previously mentioned all currencies are devaluing almost simultaneously. Other than currency devaluation, what’s driving the price of gold and silver?
Roger Wiegand: Well, a lot of it is fear; gold is now basically considered to be money in many of the foreign countries, partially in the US, more overseas. I think a perfect example is Vietnam. It looked like they were going to have some things that would work out in their economy, and unfortunately for them, a lot of it’s coming apart. And they know from experience that if they can get into gold and hang on, they’re going to be a lot better off.
And, China is the number-two gold producer now, we’ve been told. They’re not selling any and not only that, they’re buying it. Further, they’re encouraging gold sales to consumers. And Japan has been doing the same thing. The supply of gold is not going to be able to meet what people are after here, and that’s the reason for this breakout we’re looking at right now. We felt gold shares would separate from the regular stock market. I saw early glimmers of that this fall, a little bit of that in late summer. And now I am more convinced than ever that with the next big drop in the stock market, the gold and silver shares could really depart from the rest of the mainstream market, especially with the Dollar being so weak.
TGR: You’ve said that you see a lot of money moving from the smaller cap stocks to the larger cap stocks. Is the smart money moving to the seniors in the Gold Mining equity plays?
Roger Wiegand: Well, two things happen when you get into a market where the gold really starts to take off. Before, the Gold Price was in a long, slow climb from $200 up to $850 – that was one marker. And then we got up to a $1000 and hung around there for quite awhile, and it looked like it was going to sell-off, and did, and then came right back. But we are now in the next price range, which is beyond $1000, and Mark Faber of the Gloom, Boom & Doom Report says if gold will stay above $1000, it’s never going under $1000 again. I agree with him; I really don’t think it’s going to.
Again, getting back to the senior versus junior, keep in mind when these markets get so crazy and convoluted like they are there’s so much money looking for a place to go, that when a sector like gold takes off, where does the money go? It’s going to go to NYSE gold companies.
TGR: So, as an investor, are you through shifting your funds to the seniors or are you still investing in the juniors?
Roger Wiegand: I don’t trade shares personally; I trade the futures because they’re faster and that’s the business I started in. That’s my preference – futures and commodity trading. I can’t buy a stock and then go promote it. That’s not fair. So, it’s easier for me if I don’t buy the stocks for me, but there’s a lot of people who read our newsletter and that’s all they do. They prefer shares, and they’ve made a lot of money on it.
TGR: Roger, can we wrap up with your thoughts on where you think the price of gold is headed? Or investing in precious metals?
Roger Wiegand: I forecast that gold is going to go beyond $2,960, which is my highest number right now. You’re getting to the point in the gold market where some of the really strong, big players – by that, I’m saying commodity funds with hundreds of millions of Dollars – are saying gold is should easily be rising to $2,000.
And as far as investing, I think people are going to have to take more of a trading stance, rather than buy and hold. After what happened at Lehman; and what happened this year with prices mushing around, I suspect people understand they’re going to have goals; they’re going to have to trade a minimum of two times a year with these shares, and use other available trading vehicles, too. Volatility is increasing and is demanding more trade management than ever before. Opportunities are wider and larger than ever.