By John Mauldin, GoldSeek
|The Statistical Recovery has Arrived|
|This Time Is Different|
|A Crisis of Confidence|
|Greeks Bearing Gifts|
|Biotech, Conversations and Babies|
|“Our immersion in the details of crises that have arisen over the past eight centuries and in data on them has led us to conclude that the most commonly repeated and most expensive investment advice ever given in the boom just before a financial crisis stems from the perception that ‘this time is different.’ That advice, that the old rules of valuation no longer apply, is usually followed up with vigor. Financial professionals and, all too often, government leaders explain that we are doing things better than before, we are smarter, and we have learned from past mistakes. Each time, society convinces itself that the current boom, unlike the many booms that preceded catastrophic collapses in the past, is built on sound fundamentals, structural reforms, technological innovation, and good policy.”
- This Time is Different (Carmen M. Reinhart and Kenneth Rogoff)
When does a potential crisis become an actual crisis, and how and why does it happen? Why did most everyone believe there were no problems in the US (or Japanese or European or British) economies in 2006? Yet now we are mired in a very difficult situation. “The subprime problem will be contained,” said now controversially confirmed Fed Chairman Bernanke, just months before the implosion and significant Fed intervention. I have just returned from Europe, and the discussion often turned to the potential of a crisis in the Eurozone if Greece defaults. Plus, we take a look at the very positive US GDP numbers released this morning. Are we finally back to the Old Normal? There’s just so much to talk about.
Louis James & Andrey Dashkov, GoldSeek
At any given time, there’s a single international spot price for an ounce of refined gold. Gold is priced in U.S. dollars: $1,076.50 per ounce as we go to press. But what about the gold an exploration or mining company has in the ground – how do we value that?
Given sufficient data, you can estimate a reasonable net present value (NPV) for a project and deduce what each of the company’s ounces should be worth. To do this, you need to know annual output of the proposed mine, proposed capital expenditures, energy and other costs, and many more things. For most deposits held by the junior companies we tend to follow, there’s just not enough data available.
Another approach is to compare the value the market is giving a company per ounce of gold in hand against the average value the market gives companies with similar ounces.
The most obvious way to define “similar” ounces in the ground is to use the three resource and two mining reserve categories defined by Canada’s National Instrument NI43-101 regulations – the industry standard. We combine these into three broad groups, as we believe the market tends to do as well:
- Inferred: the lowest-confidence category, based on just enough drilling to outline the mineralization.
- Measured & Indicated (M&I): these higher-confidence categories have been drilled enough to establish their geometry and continuity reasonably well.
- Proven & Probable (P&P): These are bankable mining reserves – basically Measure and Indicated resources with established value.
By Ron Hera, GoldSeek
Among the many opinions expressed by billionaire investor George Soros over the course of the 2010 World Economic Forum in Davos, Switzerland was his statement on January 28 in an interview with Maria Bartiromo, host of CNBC’s Closing Bell, that “When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment. The ultimate asset bubble is gold.” New York spot gold closed at $1085.40 down $1.80, but the price of gold is not as much about gold as it is about the value of currencies, particularly the US dollar.
Since new currency is created through lending activity, very low or 0% US interest rates and government deficit spending are fueling a US dollar carry trade and monetary inflation in the US dollar resulting in rising asset prices and global speculation. According to Zhu Min, deputy governor of the People’s Bank of China, “[The US dollar carry trade] is a massive issue; estimates are that it is $1.5 trillion, which is much bigger thanJapan’s carry trade.” The close relationship of global commodity prices, particularly the gold price, to the value of the US dollar can be seen by comparing the changing value of the US Dollar Index to an inverted US dollar spot gold price chart.
By Julian D. W. Phillips, GoldSeek
Claude Trichet, head of the European Central Bank dismissed talk of Greece exiting the Euro as their national currency. The fact that he felt it necessary to issue such a statement meant that the prospect was being discussed outside the E.C.B. Instead, the EU is considering sanctions against the country to bring it into line with the E.U. The stress is high in the Eurozone!
The short-term traders in the gold market, particularly those in the U.S. [COMEX most of all] have traded on the back of the $:€ ratio moving the gold price up when the $ fell and down when it rose. If there is a danger of any part of the Eurozone splintering off from the €, then the € could weaken heavily. It may well occur when the $ is weakening too, softening the fall against the $. With both currencies weakening at the same time, the market rates would give a semblance of stability and so persuade the short-term traders not to move the gold price. So this relationship would belie the dangers to the currency world. Which way would you jump with your gold investments?
Like the perceived ‘link’ between the oil price and gold, a relationship that was abandoned by short-term traders when the oil price spiked then fell heavily, the inverse relationship between the $ and gold likewise is based on poor fundamentals and is due to head the same way. When it breaks and gold “de-couples” from the € gold will rise with the $ and throw Traders into a near-panic. Will you be ready when this happens?
What is the € really?
In 1999 the € arrived in the global monetary system with great fanfare. The Deutschemark disappeared; the French Franc disappeared alongside many other European national currencies, including the Greek Drachma. In their place, came the €.
What happened in reality was that the days of fixed exchange rates returned without the hassle of different currencies. Diverse economies in the Eurozone were joined together without national boundaries, allowing trade funds and capital to flow unfettered by European borders. As a result, the strong got stronger and the weaker more vulnerable to these flows. But many benefits have come with the system as employment opportunities abounded and a pool of cheap labor were able to access jobs all over Europe and capital flowed to where it was used most efficiently. In addition the strength of the zone has grown enormously as it became an economic bloc bigger than the U.S. in population and hopes to equal and outrank the States in the future, economically.
As China’s economic juggernaut resumes its course, after little more than a brief pause, the world’s former economic juggernaut lurches from one mini-crisis to another, completely bereft of any long-term planning.
A cynic would argue that any long-term economic planning for the U.S. economy is simply a waste of time, given the pending and inevitable default on its massive debts – which rapidly approaches. Indeed, the U.S. government spends half its time lying about the magnitudes of its debts (see “Treasury Department Stalls Budget Report”), and the other half of its time pilfering the tiny nest eggs of U.S. government “trust funds” (see “U.S. Government Squanders Trust Funds”). The more than $4 trillion stolen from those trust funds would have been enough to postpone bankruptcy for a decade or so if that money was currently invested and appreciating in value rather than simply being spent.
The reckless spending of the U.S. government is bad enough, but the ridiculous manner in which the U.S. government is throwing away trillions of taxpayer dollars is truly nothing less than criminal. Two successive U.S. governments have promised to “fix” the U.S. housing collapse. The Bush regime did nothing, while the Obama regime has done much worse than nothing.
Unwilling to make his banker-benefactors take the “hit” for housing losses (given that they created this multi-trillion mortgage scam), Obama’s “solution” to the bursting of the (first) U.S. housing bubble is to create a second bubble. With U.S. interest rates being (artificially) kept at extremely low levels (through the U.S. government “buying” most/all of its own bonds), no U.S. bank is willing to finance home purchases through offering long-term rates several percent lower than what they can sustain over the long term.
This has resulted in the Obama regime effectively nationalizing the entire U.S. mortgage market – originating/guaranteeing well over 90% of all new mortgages, with U.S. taxpayers now directly guaranteeing trillions of dollars worth of highly-stressed mortgages. If that isn’t bad enough, when the home-buyers’ credit is factored in, more than half of all U.S. homes purchased last year effectively had zero down-payments (see “The U.S. Government’s Zero Down-payment Mortgages”).
The only differences between the first housing bubble and the second housing bubble is that a) 100% of the losses will be borne by U.S. taxpayers; and b) American families are much less able to absorb the pain of the second collapse in U.S. housing than they were with the first. Meanwhile, the flimsy “mortgage rescue” plan for those already trapped in hopelessly underwater mortgages has helped virtually no one.
It isn’t rocket surgery. Gold appeals – and thus rises – when the better alternatives don’t…
DURING THE 1980s and ’90s, when US consumer prices rose at what would have been a record rate of inflation if it hadn’t been for the 1970s, the Gold Price fell by three-quarters, writes Adrian Ash at BullionVault.
Peering back at the recent past therefore, analysts and economists all agree:
When looking for a sure-fire "inflation hedge", you surely won’t find it in gold.
Thing is, however, US investors and savers didn’t need an inflation hedge back in the 1980s and ’90s. Not in Gold, at least. Because the better alternatives – productive assets such as real estate and stocks…or the "risk-free" assets of cash, Treasuries and investment-grade bonds – all paid way more than inflation anyway.
Who needs a lump of dumb metal if just holding cash pays 4.5% real returns each year on average, as it did in the ’80s?
Why bury your savings in a rare, deeply liquid but unyielding asset when stocks keep rising by one-fifth per year – and paying a 2.4% yield each year on top – as they did in the ’90s…?
And why buy and hold anything else when stocks, cash, bonds and property all fail together, as they have so far this century…?
It isn’t rocket surgery. In two of the last four decades, people have twice turned to Buying Gold…pushing the price higher…when alternative stores of wealth failed at the task.
Whereas during the two intervening decades, gold wasn’t required. Because you don’t need an "inflation hedge" if cash-in-the-bank is paying 4.5% per year over and above the race of increase in consumer prices. And nor do you need a "safe haven" when stocks keep rising by 20% per annum.
Whereas today? Decide your outlook for the major alternatives – meaning cash and stocks, but also real estate and, perhaps most critically in our world of record government debt issuance, bonds – and you might just work out whether you need reliably rare, indestructible gold in 2010 and beyond.
By Ambrose Evans-Pritchard, The Telegraph
Germany faces a terrible dilemma. Either Europe’s paymaster agrees to underwrite a Greek bailout and drops its vehement opposition to a de facto EU economic government, treasury, and debt union, or the euro will start to unravel, and with it Germany’s strategic investment in the post-war order.
The spike in yields on 10-year Greek bonds to 400 basis points above German Bunds has been shockingly swift — a warning to Britain too that markets can suddenly strike any country that takes creditors for granted.
We can argue over whether Greece, Portugal, or Spain are at risk of being forced out of the euro. But there is another nagging question: whether events will cause Germany and its satellites to withdraw, bequeathing the legal carcass of EMU to the Club Med bloc.
This is the only breakup scenario that makes much sense. A German exit would allow Club Med to uphold contracts in euros and devalue with least havoc to internal debt markets. The German bloc would enjoy a windfall gain. The D-Mark II would be stronger. Borrowing costs would fall. The North-South gap in competitiveness could be bridged with less disruption for both sides.
To be sure, Germany is happily placed in the current EMU system. By compressing wages for a decade it has stolen a march on EMU. Critics unfairly call this a beggar-thy-neighbour policy. It is simply the way Lutheran society operates, in deep contrast to the way Latin society operates — a cultural clash that should have given pause for thought before Europe’s elites launched headlong into their adventure.
German goods are flooding the South. In the 12 months to November, Germany-Benelux had a current account surplus of $211 billion: Spain had a deficit of $82 billion, Italy $74 billion, France $57 billion, and Greece $37 billion. German industry will not give up this edge lightly. However, the matter will in the end be decided by democracy. German citizens were given a pledge by their leaders in the 1990s that loss of the D-Mark would not lead to monetary disorder, or leave them liable for Club Med debt. That is the sacred contract of EMU.
“Politically,” said Bundesbank chief Axel Weber, “it’s not possible to tell voters that they are bailing out another country so that it can avoid painful austerity measures that they themselves have gone through. Such aid, whether conditional, or — even worse — unconditional, is counterproductive.”
Dr Weber is right on both counts. Fresh loans for Greece can achieve nothing useful at this stage. Greece already has a public debt hurtling towards 138 percent of GDP by 2012 (Standard & Poor’s). It is already in a debt compound spiral. The EU elites have yet to acknowledge that Greece and much of Club Med need gifts — not loans — akin to transfers paid to East Germany after unification, or North Italian perma-subsidies to the Mezzogiorno.
3p ET Sunday, January 31, 2010
Dear Friend of GATA and Gold:
The anonymous blogger FOFOA — Friend of Friend of Another, a name referring to the famous “Another” postings at the old USAGold.com Forum (http://www.usagold.com/goldtrail/archives/another1.html) — yesterday posted a wonderful account of the London Gold Pool of the 1960s.
t shows how gold dishoarding by central banks used to be frankly acknowledged as currency market manipulation.
It shows how those holding a short position in a rising market can still make vast amounts when they know in advance the moments of government intervention, circumstances that apply today to the London bullion market and the gold futures market at the New York Commodity Exchange.
It credits GATA for documenting the more recent developments in Western central banking’s war on gold.
And it may prompt a little amazement that some supposed market analysts still disparage suggestions that the gold market does not trade freely but rather is the playground of large official forces that are actually terrified that it someday might trade freely, terrified even that the market someday might simply be talked and reported about candidly.
Phil Davis submits:
Another week another 100 points lower.
Yep, that’s all it was, we lost all of 100 points more than last week, when we fell from 10,725 to 10,172 (553 points) and this week we dropped from Friday’s Dow close of 10,172 all the way down to 10,067. Yet you would think the world had come to an end to hear the media and the traders freaking out. I’m not going to try to explain it, I can’t. Maybe it’s because going into last week we were very bearish but, starting on the 22nd, we let ourselves finally get a little more bullish AND THE MARKET BETRAYED US!