Gold World News Flash |
- U.S. Concrete Disclosure Statement Indicates Minimal Recovery for Equity
- America at the Crossroads and the War on Gold
- David Morgan: The Latest Skinny on Silver
- Gold Bulls Bust Myths
- Why We Need Fed Transparency
- Merv's Weekly Gold and Silver Commentary - April 30, 2010
- In The News Today
- Is it 1998 all over again?
- Greek Dog Squeeze Now Accepted At ECB
- Fresh Bear Meat In Our Future
- Peter Daniels Talks On "Gold"
- Peter Daniels Talks On "Gold"
- Indias Bleak Future
- A Short History of the Gold Cartel
- PIIGS' Relative GDP - A Ballpark Risk Assessment
- Justifying a Dow 8,500 before a Dow 11,500
- A Greek Tragedy Is Not Priced In
- Rare Earths Are About to Become a Lot More Rare
- Volatility of Volatility: Can We Count on a Reversion to the Mean?
- The Best Natural Gas Stock
- Speaking of Vegas
- An African Divergence
- Gold Seeker Closing Report: Gold and Silver Gain With Stocks and Dollar
- Did Greenspan Try to Quash a Housing Bubble Debate?
- $2 Silver drop before Friday?
- War of Nerves at S&P 1176.25
- Ulterior Motive behind the Greek bailout
- Flat Earth Economics
- An Even Better Trade of the Decade
- The Silver Price Spiral, Part III: tomorrow
- Boy Scouts Uncirculated Silver Dollar Values After Sell Out
- 2010 American Silver Eagle April Sales: Robust, but Slower
- Are leading precious metals ETFs based on undisclosed conflict of interest?
- Gold Forecaster – Russian Gold Purchases up 15.55 tonnes [500,000ounces] in a month – The Implications!
- Catherine Austin Fitts - long report on GLD and SLV disclosures
- The Silver Price Spiral, Part II: paper “inventories”
- S&P-To-Gold Ratio: On Verge Of 1.00 Breakdown
- The Fed Discusses The Relevancy Of The "Invisible Hand"
- Mainstream Media Critical of the Fed?
- Federal, State and Local Debt/Deficits Keep on Growing Larger
- Silver/Gold Ratio
- Gold COT
- Gold’s future bright as ‘anti-currency’
| U.S. Concrete Disclosure Statement Indicates Minimal Recovery for Equity Posted: 03 May 2010 06:24 PM PDT Colin Peterson submits: I'm going through the bankruptcy court docket for U.S. Concrete (RMIX) to get a better sense of what is going to happen to the existing equity. Their fate is revealed (sealed) in the Chapter 11 Plan of Reorganization that was filed Monday. We knew that the Plan would involve extinguishing existing U.S. Concrete equity and issuing them warrants, but the precise terms were unclear from the press releases. Now, in the definitions section of the Plan, it says that,
Complete Story »
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| America at the Crossroads and the War on Gold Posted: 03 May 2010 06:11 PM PDT Nowhere was Ayn Rand's influence felt more than on Wall Street. The selfishness and greed that Ayn Rand exalted found a natural home among Wall Street banks, especially Goldman Sachs where Senior Partner Gus Levy succinctly summed up Goldman's strategy as long term greed. It was a mission statement Ayn Rand could be proud of.
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| David Morgan: The Latest Skinny on Silver Posted: 03 May 2010 06:09 PM PDT Source: Ellis Martin and Karen Roche of The Gold Report 05/03/2010 It's often called the "Poor Man's Gold," but according to "Silver Guru" David Morgan of The Morgan Report and Silver-Investor.com, home of The Morgan Report - Silver, Gold, Precious Metals Investment, silver is poised to outperform gold. "The amount of silver mined meets industrial and investment demand. We've reached equilibrium," Morgan explains. In this exclusive interview for The Gold Report, Mr. Morgan gives us the straight skinny on silver and highlights several silver juniors. The Gold Report: You stated last June that silver is trending gold and will outperform gold by about 30%. What will be the catalyst? David Morgan: Well, there's several. Silver is the bipolar metal, as I refer to it occasionally, because it's both an industrial metal and a monetary metal. If you look at the industrial side, it's very bullish even in these recessionary times, meaning that silver needs to be used in all ki...
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| Posted: 03 May 2010 06:09 PM PDT John Nadler at Kitco.com had a recent column with the terrific title "Who You Gonna Call? Mythbusters!" When I read that, I began to sing the song to myself! "Something strange, in the neighborhood. Who ya gonna call? Mythbusters! Something weird, and it don't look good. Who ya gonna call? Mythbusters!" Wonderful! Of course I was impressed with the cleverness of Mr. Nadler, as it is perfect that he would use a line from Ghostbusters theme song to introduce a commentary with a gold theme and about the whole stinking economic situation, and I wish I had thought of it, especially since I now can't get the theme song out of my head. "Who ya gonna call?" Hahaha! My happy mood was briefly spoiled by a moment of paranoia when I thought that he was referring to me and how I am a big fraud just because I don't know what I am talking about, and I stopped singing long enough to sarcastically think of a rebuttal, probably in the, "Where the hell have you been, Nadler? Everybody already knows th...
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| Posted: 03 May 2010 06:09 PM PDT Market Ticker - Karl Denninger View original article May 03, 2010 10:40 AM Let's face the now-documented facts: [INDENT]The Fed knew about the housing bubble, and both Alan Greenspan and BEN BERNANKE intentionally suppressed any public discussion of same by The Fed. [/INDENT]This isn't conjecture any longer, and we can no longer believe that there was any sort of mistake involved here, nor a difference of opinion. As disclosed from the Fed Minutes (the real ones, transcripts, not the abbreviated cheat sheets) and as now written about on Huffington Post, we have a problem here with credibility - and intentional misdirection: [INDENT]"We run the risk, by laying out the pros and cons of a particular argument, of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand," Greenspan said, according to the transcripts of a March 2004 meeting. [/INDENT]You mean an argument that you felt was vital to your co...
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| Merv's Weekly Gold and Silver Commentary - April 30, 2010 Posted: 03 May 2010 06:09 PM PDT http://preciousmetalscentral.com Merv’s Precious Metals Central Except for Thursday it was a pretty good week. So why am I feeling a little cautious? The action behind the latest up trend in gold just doesn’t “feel” right. With all of the world’s problems one would expect a robust advance but the strength behind this latest gold move just doesn’t compute right. Oh well, let’s see. GOLD VERY LONG TERM One look at this chart could dispel all those negative stories about “investing” in gold. Of course it’s a great advantage to know when to invest and when to get out. I am not an “investing” type. I am more of an intermediate term speculating type of guy. These intermediate term speculations could, of course, continue into very long term holdings, it all depends upon the market action. So, why am I showing a long term chart of the price of gold? It’s always good to know what the lo...
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| Posted: 03 May 2010 06:09 PM PDT View the original post at jsmineset.com... May 03, 2010 08:23 AM Thought For The Day Goldman has to settle with the SEC because if they lost to them they would be slam dunked on every other suit against them. As you approach $1224 you can expect pre-emptive selling by the market makers in gold shares. They are wrong. Jim Sinclair’s Commentary You cannot piss off your host, dig a hole in the ground and leave. There is a colonialist mindset still in place that needs adjustment to a world where the internet means instant information globally. I would prefer a one percent rise in royalties to a rise in tax rates with the application of forensic tax auditing as pending in Australia. Wherever this occurs be prepared for the damn fool Chamber of Mines to yell and scream rather than seek what is good in a bill and work with the administration. Mine our resources? Then pay the taxman Australia to impose 40% tax on resource companies’ profits by BLO...
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| Posted: 03 May 2010 06:08 PM PDT That's the question we're asking in tonight's report in light of developments in the euro-zone and, to a lesser extent, within the investment banking sector. Thursday's headline in the Wall Street Journal proclaimed, "Debt crisis hits Spain." The implication is that the recent downgrade of the sovereign debt ratings for Greece and Portugal have now spread even further into Europe and could continue to spread into a general euro-zone wide debt crisis. When I saw Thursday's WSJ headline concerning Spain, I was struck with the thought that I had seen this scenario played out sometime in the past. After a little pondering, it finally occurred to me that the variables we're seeing set up right now are, in some ways, similar to the situation we saw in the spring of 1998. Let's start with the cyclical backdrop. The similarity between '98 and today can be seen in the yearly Kress cycle configuration. In 1998 the 6-year cycle had bottomed two yea...
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| Greek Dog Squeeze Now Accepted At ECB Posted: 03 May 2010 06:08 PM PDT Market Ticker - Karl Denninger View original article May 03, 2010 05:52 AM Unbelievable: [INDENT] May 3 (Bloomberg) -- The European Central Bank joined the international rescue of Greece, saying it would indefinitely accept the country's debt as collateral regardless of its country's credit rating, underpinning gains in the bond market. [/INDENT] For the uninitiated this means that the ECB will accept DEFAULTED Greek debt instruments, should it come to that. More bluntly, if Papandreou's dog drops a deuce in a box and he presents it to the ECB claiming that it's worth $10 billion, the ECB will in fact issue $10 billion in real, honest-to-God Euros against that box - no matter how badly it smells. [INDENT] That prompted Christoph Rieger, co-head of fixed-income strategy at Commerzbank AG in Frankfurt, to say today's announcement "leaves a sour taste with regards to the ECB's long-term credibility." [/INDENT] The ECB has no credibility to lose at this point as it has now ...
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| Posted: 03 May 2010 06:08 PM PDT The following is automatically syndicated from Grandich's blog. You can view the original post here May 03, 2010 04:21 AM As secular gold bulls, we’ve been dining on bear meat for years now. While we can always count on “Tokyo Rose Jon” and Leonard “always bearish” Kaplan for a meal, we’ve also been blessed with fresh bear meat as gold treks higher and defies the “Experts”. Who could forget that “Toronto Star” columnist who wrote gold to fall to $500 at years-end or that infamous interview on BNN with the man who said gold was to fall based on the “Mr. T.” indicator. Like these folks did (and for some unknown reason still do) in the past, a fairly new bear on the scene has caused some of you to write in asking is this really the big bad wolf? Back at the beginning of the year, this man came of of the woods with the latest “bubble-bursting” prediction and a fall in gold to $800 upcoming. He has co...
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| Peter Daniels Talks On "Gold" Posted: 03 May 2010 06:00 PM PDT
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| A Short History of the Gold Cartel Posted: 03 May 2010 05:42 PM PDT
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| PIIGS' Relative GDP - A Ballpark Risk Assessment Posted: 03 May 2010 05:34 PM PDT David White submits: Currently there is a lot of debate about whether Greece will default eventually or not. There is worry that such a default could cause a credit contagion that would result in a domino effect of toppling economies. You can debate whether or not this will happen. Perhaps defaults can be avoided? The EU and IMF are trying hard to accomplish this. If they do, it will only be by means of huge cuts to sovereign budgets in order to cut budget deficits. The latest Greek cuts requested were over 10% of its GDP, and that is not even considering the precious cuts it made. Ballpark, the total cuts may come to 20% to 25% of Greece’s GDP. You simply can’t do this without shrinking the Greek GDP considerably. This means recession for Greece, if not depression. The other PIIGS have to make similar cuts, if perhaps not quite that big. Whether they default or not, the cuts to avoid default will be severe. These countries seem likely to all end in recession if not depression soon. To get a good idea of what this will mean to Europe overall, it is instructive to compare the various GDPs of the major EU players. The chart below shows the GDPs of the PIIGS, plus France and Germany. Complete Story »
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| Justifying a Dow 8,500 before a Dow 11,500 Posted: 03 May 2010 05:28 PM PDT Richard Suttmeier submits: Stocks are fundamentally overvalued. The weekly and monthly charts for the Dow Industrial Average are overbought. Major technical levels are providing resistances. Stubbornly low US Treasury yields are a “flight to quality”. The rally in gold tracks the weak euro as “currency of last resort”. Weakening copper prices questions the global economic recovery. Making a Bearish Market Call is not Very Popular Complete Story »
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| A Greek Tragedy Is Not Priced In Posted: 03 May 2010 05:12 PM PDT This is starting to get confusing. On Friday the market sold off in part because investors were concerned that, despite another claim from the Continent that there would be a resolution to the Greek crisis this weekend, no one believed them. On Monday, stocks rallied hard (+1.3%) because the plan was trumpeted as being a done deal. Complete Story »
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| Rare Earths Are About to Become a Lot More Rare Posted: 03 May 2010 04:58 PM PDT
Interest in Rare Earths is starting to heat up in a dramatic fashion, and it something you should keep on your radar. So named because they were hard to get in the 18th and 19th century, these once obscure elements have suddenly become the focus of several converging trends in the global economy, as they are the key ingredient of magnets. There are 17 in all, divided into light (cerium, Ce, lanthanum, La, and neodymium, Nd) and heavy (dysprosium, Dy, terbium, Tb, and europium, Eu). It turns out that you can’t build a hybrid or electric car, a wind turbine, thin film solar, LED’s, high performance batteries, or a cell phone without these elements. One Prius uses 25 kilograms of the stuff. You also can’t fight a modern war without rare earths, being essential for radar, missile guidance systems, navigation, and night vision goggles. That’s where things get interesting. China now produces 97% of the world’s rare earth supplies, much of it coming from small mines operating by criminal gangs where it is safe to say, concerns about environmental considerations are nil. Last year China announced that it may start restricting rare earth exports, possibly banning several, it is thought, in order to force foreigners to buy more of their downstream electronic products. Such a ban could begin as early as 2012. The world market for rare earths is tiny now, amounting to only $1.4 billion a year. But Toyota intends on doubling its production of Prius’s from one million to 2 million units in the near future, while China and South Korea want to boost their combined electric and hybrid production by 1 million units by the end of next year. Demand for wind turbines is going off the charts, thanks to massive government subsidies in Europe and the US. America was once the world’s largest producer of these elements, until it was undercut on prices by China (see chart below), and all US production ceased. The threatened Chinese export ban has prompted a group of investors to reopen Molycorp’s Mountain Pass California mine, a jackrabbit ridden, rattlesnake infested pit an hour southwest of Las Vegas. The mine was the world’s largest producer of cerium and neodymium, and provided the europium that was used to produce the first color televisions. The group has filed with the SEC for an IPO that seeks to raise $500 million to reopen the mine and a nearby refinery. Now congress wants to get involved, proposing a rare earths strategic stockpile for the military, and offering subsidized loans to fund it. Remember what that did for oil? Every peak in oil prices in the last 30 years coincided with the government topping up its strategic petroleum reserve. Rare earth prices have already started to move, with cerium doubling to $4/pound since 2007, and neodymium up 500% to $23/pound during the same period. Rare earths don’t have any futures or ETF’s to trade that I know of, so the only way to get involved is through the miners themselves, which involves an added element of risk. Take a look at the established players, which include Avalon Rare Metals (AVARF.PK), Great Western Minerals Group (GWMGF.PK), Rare Earth Metals (RAREF.PK), Lynas Corp (LYSCF), and Molycorp, after it goes public. To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on the “Today’s Radio Show” menu tab on the left on my home page.
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| Volatility of Volatility: Can We Count on a Reversion to the Mean? Posted: 03 May 2010 04:58 PM PDT Surly Trader submits: In derivatives, complexity can build upon itself quickly. It is difficult enough to understand the volatility of linear financial instruments such as stocks and bonds, but exploring the world of option volatility opens a whole new world of possible analysis. The VIX index measures the short-term implied volatility of the S&P 500 index and has become a benchmark for volatility in equity markets. Just within the past few years, individuals and institutions have been given the ability to trade directly in implied volatility through instruments such as VIX futures, VIX future options and the ETN’s VXX/VXZ. When looking at the implied and realized volatility of the VIX, we are effectively looking at the volatility of volatility. click to enlarge Complete Story »
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| Posted: 03 May 2010 04:40 PM PDT Natural gas is almost a dirty word. After hitting an all-time high almost five years ago north of $15 per MMbtu or (million British Thermal Units), natural gas prices have been confined to bear market territory. At just $3.92 per MMbtu now, many producers will either go bankrupt, become buyout targets or struggle to earn a decent profit for the next several years...unless prices rally soon. Almost no one likes natural gas. Supplies are abundant, companies' profit margins have atrophied, if not disappeared altogether, and most analysts think gas prices will remain low for a very long time. The advent of Canadian and American shale gas production has put another big dent in prices...and bullish sentiment. But one company dominates profitability in North America. Not only is this company generating piles of free-cash from shrewd forward hedging, it is also entering potentially lucrative joint-ventures to boost production. Despite these virtues, this company's stock trades 30% below its all-time high, and only slightly above book value. The company I'm talking about is Canada's EnCana Corporation (NYSE:ECA). But before delving into the bull case for EnCana, let's explore why natural gas prices have remained so depressed and what developments might lead to a reversal of fortune. There's no denying that there are good reasons for the slumping price of natural gas. Supplies are ample. Storage facilities across North America are still swelling amid rising supplies. Winter 2010 ranked among the warmest in history with March temperatures alone hitting the record books - March was the warmest in the Northeast since 1946. Unseasonal temperatures don't help gas prices. If temperatures are above-average in any given winter then households and businesses consume less natural gas. Ironically, if above average temperatures continue into that summer months, that would be bullish for natural gas. The hotter the weather, the greater the use of air conditioning - a factor that increases electricity usage and therefore, natural gas usage. Also, the Gulf of Mexico, a major hurricane corridor, has been unusually calm since Hurricane Katrina in 2005. That might change this year. Oil has been a far more consistent performer in the energy sector than natural gas. While crude oil has more than doubled off its post-credit- crisis lows, natural gas prices remain depressed. Despite their recovery off ultra-low levels last summer, natural gas prices are still more than 70% below their record highs. But the bear market in natural gas will end, simply because very few producers can produce a profit at current prices. Many producers are suffering large losses. But this condition will not last forever. In fact, it may be changing already. Several factors suggest gas prices will rise back above $6, possibly $7 over the next 12-18 months. For starters, the crude oil-to-natural gas ratio hit a multi-decade high last summer, and remains near that level. In other words, natural gas is extremely cheap relative to oil. This ratio is signaling we are at extreme lows in natural gas prices - a solid "buy" signal. Another bullish indicator is Exxon-Mobil's (NYSE:XOM) recent takeover of natural gas producer, XTO Energy (NYSE:XTO) for $41 billion dollars. Exxon-Mobil is the world's largest company by stock market- capitalization and easily the biggest in the energy sector. Exxon knows something more than nothing about natural gas. Obviously, Exxon-Mobil would not write a $41 billion check for a natural gas company if it believed natural gas prices would be languishing for the next several years. Clearly, Exxon-Mobil believes natural gas prices are at an extreme low. Finally, natural gas is the cleanest-burning fossil fuel, unlike oil or coal. As the United States, China and other countries look to shrink their environmental impact, gas has the edge over oil and coal because of its cleaner-burning properties. And coal, which remains highly popular and generates 50% of electricity in the United States, is also the culprit responsible for 81% of the carbon emissions spewing into the atmosphere. Natural gas is by far the cleanest burning fossil fuel, while also emitting half the carbon dioxide of coal. These facts alone are powerful drivers of natural gas consumption and they won't change. As natural gas prices eventually form a secular bottom in this cycle, the ensuing bull market promises to be lengthy and robust. EnCana offers a great way to participate. Based in Calgary, Alberta, EnCana is North America's largest and most profitable natural gas concern. Management is superb. President and CEO, Randy Eresman, has been the driving force behind the company with 25 years of experience at EnCana and has a first-class executive team and board to steer the gas giant. In 2009, the company spun-off its oil sands business as Cenovus Energy went public, generating about $3.5 billion dollars for EnCana. Following the spin-off, EnCana is now a pure natural gas story. The company's shale gas properties are the muscle behind EnCana's goal to become the world's dominant player. The company is actively developing these reserves, both independently and through various joint ventures. EnCana was an early pioneer in the shales. And today, the company's core business is unconventional natural gas with its main holdings in the Haynesville shale, Deep Bossier, the Rockies, Horn River Basin and the Montney shale. EnCana produced daily production volumes of approximately 3 billion cubic feet of natural gas equivalent in 2009 with 95% weighted to natural gas. The company's balance-sheet strength is considerable. Long-term debt is now being reduced, following the cash proceeds from the Cenovus spin- off. Even before the spin-off, EnCana held relatively little debt. Another plus for EnCana shareholders is that - unlike many other energy companies that continue to struggle with a decline in long-term production - EnCana has no major resource play currently on terminal decline. In fact, the company has several great properties with high revenue potential. EnCana continues to generate positive earnings in a tough environment, sports a healthy dividend of 2.5% and trades just above book value. So why not buy now and wait for the inevitable turnaround in gas prices? Eric Roseman
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| Posted: 03 May 2010 04:36 PM PDT "Hot Babes! Call 800-234-3512" This ad was on the side of a rolling billboard. In Las Vegas, they put billboards on the back of trucks and move them around town. It must pay; we saw several of them. What do you get when you call the number? Home delivery? We don't know... But what a town! We stayed in the Four Seasons. Nice hotel, right? At 4AM the phone rang: "Could you send up some condoms to room 10211?" "What?" "Who is this? Isn't this the front desk?" "I'm sorry, but I think you've misdialed." "Sorry..." Later, in a taxicab, we saw a different Las Vegas: "This town is dead. Just look around. It's nothing like it was a few years ago. "We got hit hard by this recession. Lots of cab drivers lost their homes. What are you going to do when prices go down 50% at the same time your income goes down 50%? People don't come to Las Vegas. So cab drivers spend their time at the airport waiting for a fare. So they can't make their mortgage payments. "Just look how quiet it is. I'm glad I'm retiring. I've been driving this cab for 17 years. That's enough. Before that, I was in the army. My wife and I both were in the army. "We both grew up in the same orphanage in Brooklyn. Then we got married at 16 years old. We had to change some documents from the orphanage and drive down to Elkton, Maryland. Apparently, they don't care how old you are in Elkton. So, we got married at 16... "Then, we stayed together for the next 48 years. We were getting ready to celebrate our golden wedding anniversary. And then she got pancreatic cancer. Boy I miss her. "But we had some great times together. We have 11 children. Only 2 are our natural children. We adopted the others. We grew up in an orphanage. Both of us. So we knew how important it is for kids to have a home. We gave them the best home we could. "And I'm proud of them all. They're doctors, lawyers...all of them turned out well. "But it's time for me to retire. There's no traffic. And besides I'm not retiring completely. I got offered a job, part-time as a traffic controller...an office job. A lot easier than driving a cab." And more thoughts... Here is the speech we gave in Las Vegas on Saturday, edited and improved: An Even Better Trade of the Decade On my recent trip to India, the financial press was very eager to hear what I had to say. They invited me on to their television shows. They interviewed me for magazines and newspapers. The local paper ran a full-page interview and sent out an artist to do a sketch of me. I thought they might have had me mixed up with someone else. I'm not used to people taking me so seriously. "Noted Western Economist Gloomy on World Recovery," was the headline in the paper. In all these interviews I had more or less the same message. I told them that there was no recovery...none at all...and that very soon it would be obvious that we were in a period of correction - the Great Correction, I called it. Stock prices would fall, I said. The property market in the US and the UK would sink further. There would be some spectacular bankruptcies...including some bankruptcies by whole nations. Whether the next move to the downside has begun or not, I don't know. The Dow fell 158 points on Friday, after taking a jolt earlier in the week. Gold rose over 1,180. The one thing that Indian investors seemed most interested in...and I assume you are interested in too...was my Trade of the Decade. But I'm not going to give you a typical investment analysis or a target for GDP growth or for the Dow this year. Instead, I'm going to talk to you about history and philosophy. I hope that's okay. I had great luck with my last trade of the decade. Ten years ago I suggested selling US stocks and buying gold. It worked out very well on both sides. So people wanted to know what my trade would be for the next decade. I gave it some thought and came up with something. I think this one will work out too... but I'll give you an even better Trade of the Decade. But first, let me explain how it works. Behind the Trade of the Decade is just a simple observation: that things that are very out-of-whack tend to get back into whack. Over a 10-year period you have a fair chance that they'll return to normal. This is another way of describing the phenomenon known as regression to the mean. One of the surest phenomena in the natural world is that things that are extraordinary will eventually become less extraordinary. And over a 10-year period, you have a decent chance that that's what will happen. So, what's my Trade of the Decade now? Right now, the US Treasury market is out of whack. It's been going up since 1983. And now investors lend money to the world's biggest debtor at what are historically very low interest rates. And they do this at a time when that debtor has begun the biggest borrowing and spending spree in history. This is not normal. It's downright weird. Sometime within the next 10 years, I figure that the Treasury market will get whacked hard. So on one side of the trade...I'm short US Treasuries. On the other side of the trade I had more trouble. Because I was looking for something to buy. And nothing is really cheap. Even gold...which seems to be in a bull market...and which I expect to go up much higher...is not cheap. As near as I can tell, an ounce of gold buys about as much - in terms of consumer products - as it did 700 years ago...and maybe even as much as it bought 2,000 years ago. Gold has already reverted to the mean, after being seriously undervalued in 1999. Now, most likely, it will become over-valued when the current monetary system begins to break up...but that's a different phenomenon. It's not reversion to the mean, at least, not for gold. It's a reversion to the mean of the monetary system... I'll get to that in a moment. What I needed for the buy side of the trade was something that was historically undervalued. And the best I could come up with was Japanese small cap stocks, which have been going down since 1989. There are some that sell for less than the amount of net cash and current assets that they have in their own company accounts. That is extraordinary. Of course, it could become even more extraordinary. But that's the risk we take. And over 10 years, we hope that that risk - such as it is - comes and goes. So, that's the new Trade of the Decade. Sell US Treasuries. Buy Japanese small caps. But I'm going to give you an even better Trade of the Decade. The problem for non-Japanese investors is that the small caps may actually go up...but if the yen goes down you might lose your gains. So, how about this? Instead of selling US Treasury bonds, sell Japanese government bonds. Japanese bonds are probably even more over-valued than US bonds. And with the Japanese borrowing more than ever...while the Japanese savings rate declines...it seems a fair bet that Japanese government debt will go down at least as much as US debt. Maybe more. By buying Japanese small caps while selling Japanese bonds you take out the currency risk. You have an even better Trade of the Decade. The Japanese small caps stocks are extraordinarily under-appreciated. The Japanese government debt, on the other hand, is extraordinarily over- appreciated. But the first point I want to make is that this is just an idea. It's not a substitute for a serious investment strategy. The second point I want to make is that you can only have a serious investment strategy if you're willing and able to think deeply about ideas. And if you do think about them enough, you'll have a decent chance of doing well...simply because most people - including most serious investment professionals - don't think about them very much. That's what I mean about philosophy...you have to think long and hard about how the world actually works. And history is about the only tool we have to work with. I'm going to give you 2 examples of what I mean right away. First, we celebrated an important anniversary in April. It was 2 years ago, in April 2008, that Countrywide Financial went broke. Countrywide was the second biggest subprime lender in the US. When it went down it set in motion a whole series of domino-like bankruptcies that eventually wiped out half the world's capital. But when Countrywide collapsed, reporters asked Henry Paulson what would happen next. Paulson would seem to be a good person to ask. He was Secretary of the Treasury and formerly the top man at Goldman Sachs. Nobody had more or better information than Paulson. So what did Paulson say? He said that he could imagine 'no scenario' in which the taxpayer would be called upon to bail out the financial industry. That was 2008. By the end of 2009, according to Bloomberg's calculation, the federal government had committed more than $8 trillion in taxpayer support, supposedly to prevent the end of the world. It must have worked. Here we are 2 years later, and the world still exists. But there's a gap of 8,000 billion numbers between Paulson's estimate and the eventual federal commitment. Which, at the very least, makes you wonder about the people at the top of America's financial intelligentsia...and the methods they use to figure out what is going on. What does it mean when the best informed, most sophisticated, most knowledgeable financial authorities in the country are completely wrong about what is going on? Continued tomorrow... Regards, Bill Bonner
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| Posted: 03 May 2010 04:31 PM PDT It is not every day that you can stick your finger in the eye of your largest trading partner, undermine your country's reputation as a stable place to do business, and demonstrate your fundamental ignorance of why entrepreneurs take risks...but in his high-handed small-minded way, Kevin Rudd managed to do all of that yesterday. Bravo Mr. Rudd! That's an impressive day's work for someone in the public service. But more seriously, the underlying justification for new resource rent tax, when you get right down to it, is that wealth belongs to the government, which is free to take its "fair share" from private enterprise and then spread around wisely in Solomonic fashion. We'll get to that philosophical issue shortly. But the financial issue is already quite clear: mining shares got battered. Locally-listed resource shares shed about $14 billion in market value yesterday. That's about how much the Henry review reckons would be raised by imposing a 40% "super profits tax" on Aussie miners (over and above the current corporate tax rate of 28%). Why bother raising super annuation contributions if you're going to reduce corporate profitability and the total return to shareholders generated by Aussie firms? It doesn't make much sense. Of all the issues to talk about with respect to the "super profits tax" there are three that interest us most: the reaction in China, the divergence between Aussie and African projects, and the astounding ignorance of why entrepreneurs take risks. Let's deal briefly with each. There isn't any reaction in China yet to the policy change. But you can bet there will be if Aussie firms try to pass on the higher tax by raising prices on their $42.4 billion in exports to China. Of course, because of the nature of the pricing of global commodities, Aussie firms may have less pricing power relative to China than what they think (or have just achieved with quarterly benchmarks for iron ore). That means the knock-on effect is a re-rating of Aussie companies based on where their projects are. If it is less profitable to explore and extract resources in Australia because of the 57% aggregate tax on projects, then companies will look to places with friendlier, less confiscatory tax regimes. There are plenty of them in Africa. Out in WA, The West reports that, "Expectations that the Federal Government's planned resources super tax could send investment dollars offshore saw investors pile into WA's African juniors yesterday. Defying the share market slump that wiped $8 billion from the value of Australian stocks, shares in Gryphon Minerals, DMC Mining and Ampella Mining rose between 2 and 6 per cent as analysts warned local projects may struggle to secure funding." Diggers and Drillers editor Alex Cowie was way ahead of this trend, albeit for different reasons. About a third of his recent recommendations have major projects or operations in Africa. Alex originally cited the lower operating cost as the big driver. But with this weekend's events, there may be another tailwind now. To be fair, there is a provision in the Rudd government's proposals which encourages exploration. But you wonder how many firms will take it up if the end result is the government grabbing its "fair share" of the "excess profit." That sounds a little bit like a pimp telling his girls they'll get new jewellery if they go out and drum up more business. If the new tax decreases investment - as the miners claim it will - then it will lead to less exploration of Australian for new mineral and energy projects. That results in lower capital formation and fewer jobs in the domestic mining industry (although plenty of Aussies could head overseas for work). It would be ironic - and typical of a misunderstanding of how markets work - if a policy designed to capture more of the country's mineral wealth led to a net decline in that wealth. But before we get any further into whether the government has sabotaged the prosperity of one of Australia's key industries, it may be a moot point anyway. Implicit in the "super profits tax" is that profits will remain "super!" But commodity markets are inherently cyclical. And the proposed policy may be based on assumption that's about to proven invalid. Of course that's the argument we made in our "Exit the Dragon" report this weekend. The argument, in brief, is that the pricking of China's real estate bubble by increased reserve requirements at commercial banks will put an end to the building boom that's driven Aussie resource prices. Our old friend Dr. Marc Faber thinks it - a crash in the Chinese stock market - could happen quite soon. Dr. Faber told Bloomberg TV, "The signals are all there, the symptoms of a major bubble are all there. The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months." He also cited the property bust and subsequent depression that followed the 1873 World Exhibition in Vienna, which you have to admit is doing your homework on the relationship between large fixed asset investment and later busts. You can also find a more contemporary example in the way Chinese stocks peaked and then declined before the 2008 Beijing Summer Olympics began. Take a look at the charts below.   What do the charts show? Shanghai's stock market peaked in late 2007, about the same time the S&P peaked. But its decline was more immediate and gradual, if less panicky than the S&P's performance. Shanghai also bottomed well ahead of the S&P 500. So what? The Chinese stimulus kicked in sooner and had a more visible effect on stock and real estate prices than nearly anywhere else in the world (except maybe Australia). The debut of the Expo is merely anecdotal and kind of mile marker. But like the decline in stocks before the Olympics, the markets could be telling us that China's construction boom is over. With banks liquidity tightening and industrial and material stocks struggling, all the signs are there of a market rolling over. Incidentally, the Expo sounds and looks amazing. China expects nearly 70 million visitors while it lasts, which would put the Olympics to shame. You can see how it's just the sort of project that would boost construction spending. And then? What is it with Americans and their constant predictions of an Aussie house bubble? GMO analyst Edward Chancellor - whom we quoted in our China research - says Aussie house prices are 50% of fair value. He told Katherine Jiminez at the Australian that, "My view is Australia had a private sector credit boom just like the US and the UK and it had a real estate boom." So far, so good. "Those are facts and you can't paper over them. In this environment house prices rose last year [by 20% in fact]and that seems to me to actually have exacerbated the problem. The problem is the bubble and that hasn't gone away." He added that rising interest rates "tend to generate the collapse." Many property advocates say the comparison between Australia and the U.S. is not apt. Australia didn't have a subprime lending boom (the FHOG doesn't count!), the population is growing and immigration is high (underlying demand), there is a lack of supply, credit is still plentiful, and Australians have a preference to live in their own homes. The alternative view is that Australian households are badly over-leveraged in residential housing. Debt has risen faster than incomes and when interest rates rise - they do that sometimes - the pain will follow. You could argue that the government won't allow rates to rise. But good luck with that. Incidentally, we have agreed in principle to debate one of Australia's foremost property experts in July in Sydney. We can't say anything more about it now. But details will follow. Finally, has the government fatally misunderstood the cyclicality of commodity markets and the whole notion of risk taking? One of the intriguing aspects of the debate about the resource rent tax is what the theoretical "adequate return" on a project is. The government used long-term government bond yields as the benchmark, and those are around 5.75% right now. The tax kicks in after that rate of return is reached. You could forgive a career diplomat for not understanding the nature of risk-taking. Entrepreneurs don't go into business and take tremendous risks with their time and talent to earn back what you could get in a government bond. Otherwise, why try to capture huge profits by taking risks? Profits are incentive to produce goods and services. Take away the incentive and you take away the human energy that goes into producing such a large variety of goods and services. The market regulates the returns on projects through supply and demand and transparent pricing. Resource companies make long-term decisions about what to invest based on their forecasts of commodity prices. The government has essentially butted in and distorted the economics of capital spending plans by blindly assuming resources prices are going to stay high and that it's going to capture its "fair share." That's pretty short-sighted. But more importantly, it shows how badly policy makers misunderstand why entrepreneurs take action - to create surplus value and capture profit. If the government says "every time you create surplus value we're going to take it," who's going to bother? This is the government behaving as if it is already a majority shareholder in private companies and free to do what it likes with retained earnings, like dole them out to its favorite projects. It's pretty cheeky - perhaps even immoral - for an institution that didn't have that much to do with creating the surplus value in the first place. Now, whether Australia is doing the most to make itself richer from the resource boom is certainly a fair question. But the Rudd government seems to have jumped the shark by deciding that the risks taken by the private sector are its own, but the benefits and profits belong to the public. You wouldn't blame foreign capital for finding that a disturbing and high-handed attitude. Dan Denning
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| Gold Seeker Closing Report: Gold and Silver Gain With Stocks and Dollar Posted: 03 May 2010 04:00 PM PDT Gold saw slight losses in Asia, but it then climbed back higher for most of the rest of trade in London and New York and ended with a gain of 0.22%. Silver followed a similar pattern and ended near its late session high of $18.855 with a gain of 1.13%.
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| Did Greenspan Try to Quash a Housing Bubble Debate? Posted: 03 May 2010 03:57 PM PDT Felix Salmon submits: The Huffington Post is running hard with Ryan Grim’s story about recently-released Fed minutes from 2004. “Greenspan Wanted Housing-Bubble Dissent Kept Secret” is the headline, and it’s running with a large and unflattering picture of Greenspan. The story’s being picked up all over the place: Kevin Drum, Complete Story »
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| Posted: 03 May 2010 02:40 PM PDT I heard a rumor that Silver is going to drop on us, perhaps before this Friday. Anyone here believe it? Something about Comex shorts sucker punching us.
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| War of Nerves at S&P 1176.25 Posted: 03 May 2010 01:52 PM PDT By Rick Ackerman, Rick's Picks Hunting for relative bargains yesterday morning, we waited in vain for the index futures to come down below Friday's levels. Alas, prices held relatively firm in the opening hour, eventually inducing yet another flight of fancy by the broad averages. By day's end, the Dow was up 143 points, recouping most of Friday's losses while adding further to the one-way tedium of this Mother of All Bear Rallies. To put Mama Bear in perspective, the weekly chart now reflects the possibility, if not yet the likelihood, of a 125-point upthrust in the S&P 500 mini-futures. That's 10 percent above yesterday's settlement price, and although the move would qualify as parabolic if it happens soon enough, it would actually lag the rally to 12471 that we predicted here a while back for the Dow Industrials.
The weekly chart of the E-Mini S&Ps shows why the odds of a strong blast higher have increased lately. Using our proprietary method of analysis, the key price on the chart is 1176.75. That number is a Hidden Pivot "midpoint", and it is directly correlated to an important Hidden Pivot well above these levels at 1317.25. Although the lower number was technically a resistance until recently, it became support when the June futures contract blew past it, topping last week at 1216.75. Very Cautiously Bullish Ordinarily, we would assume the higher number (i.e., 1317.25) will be reached if its lower "sibling" is exceeded as decisively as has occurred here. But we are being extra cautious in our bullishness because the market looks especially vulnerable to a sudden, even spectacular, selloff. There are a few reasons for this. For one, until last week stocks had risen for eight consecutive weeks on declining volume, implying, as our friend Chuck Cohen has noted, that investors are "supremely confident." We agree. We also think that a full-blown panic could be triggered at any time by Greece's financial problems. Under the circumstances, we'll go with the flow, which is higher, but we will also take care not to stray more than a step or two from a fire exit. With respect to the 1176.75 pivot, it will continue to hold the key to our outlook for the summer and beyond. A breach of the support this week would be warning of possible trouble, and a Friday close below 1171.00 would make us even more nervous. Alternatively, the bullish case would become irresistible if the futures rally above 1216.75, pull back, and then complete another rally leg equal to the first. We'll be closely tracking these potential scenarios, as well as myriad other possibilities, in the days ahead. If you'd like to stay closely on top of this situation as it develops, you can sign up for my newsletter and receive one of my forecasts free each day; or consider taking a risk-free trial of the full service, which includes all of my forecasts and access to my chat 24/7 room. (If you'd like to have Rick's Picks commentary delivered free each day to your e-mail box, click here.) Related posts: © Rick Ackerman and Rick's Picks, 2010. | More articles from Rick Ackerman….
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| Ulterior Motive behind the Greek bailout Posted: 03 May 2010 01:50 PM PDT By Sol Palha, Tactical Investor A mere friend will agree with you, but a real friend will argue. Before we discuss this issue lets focus on some facts. Many individuals claim that Greece has to be bailed out to maintain stability in the financial markets. This is a bogus argument, in the short term it might be true, but in the long term it just delays the day of reckoning and makes the situation infinitely worse. You do not help an alcoholic by chastising him and then allowing him free access to booze; it won't work. The current debt load is 115% of GDP and by 2011 it will be 150% of GDP. The Greek government has now stated that it will take 2 years more to meet the EU requirements; a great start and a clear sign that they will come begging for more aid down the line. Greece only has a GDP of roughly 326 billion dollars, much smaller than their Neighbour Turkey, which has a GDP of roughly 830 billion dollars, On a Per capita Basis Greece knocks turkey out with a GDP per capita of roughly $32,000 dollars but so does Greece's debt. Thus the bailout ($147 billion), alone is equal to roughly 44.5% of Greece's GDP. If the Greek economy can deal with and survive this crisis it will be one of the first to recover from a crippling debt ratio of more than 90% of GDP. If interest rates were to continue rising, and they will most likely as their debt has been rated as junk, it could spell the end. The interest rate Greece has to pay to borrow money is now on Par with emerging countries like India and Mexico; it is going to take a lot of work before the rating agencies lift Greece's rating. This effectively eliminates their ability to borrow money on the commercial markets and almost guarantees that they will be begging for more help a few years down the line. What should make investors even more sceptical is the fact that they cooked their books so one does not even know what data to trust, things could be infinitely worse than the Greek government is projecting. Roughly, 80% of this debt is foreign owned and a major portion of this debt is held by German and French citizens. For every 1% rise in interest rates, Greece needs to send an extra 1.2% of GDP abroad to bond holders. Currently, Greece has one of the highest external public debt/GDP ratios in the world. If rates surged to the 9% plus ranges, they would have to send 10.8% of GDP overseas every year. This aid package will last them roughly 3 years and when the old debt has to be rolled over, the new rates will kick in. Latin America in the 1980's made overseas payments that amounted to 3.5% of GDP and that proved to be a brutal experience to say the least. Germany was also in a very tough position during the 1925-1932 eras, but their Payments make what Greece might have to go through look like child's play. This trend is simply unsustainable. So who are they protecting, the answer is simple; the bond holders. Roughly, 80% of this debt is foreign owned and a large portion of this is held by German and French Citizens. Bottom line this rescue package is not for Greece, but it's a rescue for Greek bond holders worldwide. If Greece were to default tomorrow, it would not disappear, but its debt holders would be seriously hurt. Thus behind all this noise one must understand that the main reason for the bailout is to protect the bondholders; the exact same story unfolded in the US, the only difference being that it was a bailout of the banking industry. As the Germans and French hold a very large percentage of these bonds, it is actually a bailout of Germany and France and not really Greece. They should let Greece's default but they will not. Even though Argentina defaulted on its debt, it is still around. Yes it did pay the price initially by being shut out of the global capital markets for years, but it did not vanish and only its foreign debt holders lost. An IMF study by Eduardo Borensztein and Ugo Panizza counts as many as 257 sovereign defaults between 1824 and 2004. Between 1981 and 1990 alone, there were 74 defaults . In fact, the evidence suggests that the penalties for default are often less severe than those meted out to Argentina. Its experience of being shunned by international capital markets is not typical, for example. At least in recent years defaulters have been able to re-enter markets once debt restructuring is complete. Argentina's woes stem partly from the fact that it is only now, more than eight years since it defaulted, nearing a final deal with its creditors That said, markets appear to have short memories. Only the most recent defaults matter and the effects on spreads are short-lived. Messrs Borensztein and Panizza find that credit ratings between 1999 and 2002 were affected only by defaults since 1995. They find that defaults have no significant effect on bond spreads after the second year. This tallies with earlier research by Barry Eichengreen and Richard Portes. Studying bonds issued in the 1920s, they also found that recent defaults resulted in higher spreads but more distant ones had no effect.. Full story This clearly illustrates that a Greek default would not be the end of the world and could potentially be a positive development over the long run; we stated this in our previous article Full story It appears that the main reason behind the bailout is to placate the debt holders; these chaps should have known better. After all they did not complain when they were getting paid, now that the house might burn, they start to scream. They knew well in advance that the situation was not sustainable, but yet they continued to purchase Greek debt. When you invest you understand that you are taking on some risk and the higher the yield the more risk you take. Investors that put money into a company that declares bankruptcy are not suddenly bailed out, they have to suck up and bear the losses. The same rules should apply to bond holders. This concern over Greek debt is a simple ploy to cover up this fact; the same ploy was used by the US government to bail out the banks. If Greece defaults, we doubt the end of the world scenario that many are projecting will come to fruition. It will certainly cause some pain but will not have any lasting impact on the global markets. The best hedge in the years to come against what appears to be another massive currency crisis will be to place a portion of one's money in commodities (Oil, Natural gas, Precious metals, base metals, etc.) ETF traders have a wide range of choice when it comes to taking a position in the commodity's sector; USO, FCG, GDX, GLD, COPX, PALL, SLV, MOO, CUT, etc. Bad is never good until worse happens. Disclosure: we have no positions in the Stated investments. More articles from the Tactical Investor….
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| Posted: 03 May 2010 01:50 PM PDT The academic and investment community has intellectually bought into theories of interest rate manipulation based upon signals gleaned from the quicksand of near-term economic statistics. Although proven by the scientific methods of economics, somehow the chain of desired short-term outcomes generated through this central planning has a side effect of producing long waves of debt accumulation. While we were still in the long wave of debt accumulation relative to national income that stretched from the early 1950s to 2008, it was impossible for anyone to refute the case for such a system. Academic studies reinforced the view that inflationary money growth was beneficial and optimal, and importantly, they did not anticipate a financial meltdown. But the collapse of the stock market in September – October 2008, triggered by the fall of Lehman Brothers, would put academic theory to the test, for the media and politicians would invoke the dreaded analogy to the Great Depression. Economists will never cease to debate what forces pulled the world into that lost decade of the 1930s, what lifted it out, and what improved policy making might have done. A great deal of academic literature exists, and the tone of the discussion has shifted ever since contemporaneous commentators began the debate over the causes and remedies. A brief review follows, but in advance two areas in particular might deserve increased attention going forward, forcing accepted explanations to be revised. One is the tendency of credit to grow excessively under a regulated centralized bank that targets inflation through interest rate setting. Another is why modern day floating exchange rates were unable to prevent the buildup of destabilizing trade and capital imbalances. Economists have gained notoriety in recent decades for linking gold to the Depression's downturn and then crediting the revival of the late 1930s with the lessening of its use as a currency reserve, not necessarily by outright accusation but through its ability to transmit deflation globally. This being the case, the inability of today's floating exchange rates to block the transmission of credit contraction and the deflation of asset prices (and prospectively wages and consumer prices) is a glaring counterpoint to singling out adherence to gold as a cause of poor economic performance of certain nations during that era. The plethora of academic research published to date advocates the transmission thesis, yet upon careful examination these papers have established only a weak statistical case for it. A more convincing correlation is that the countries which experienced recovery of industrial production by 1935 had central banks which refrained from extreme efforts to violate the rules of the game necessary for the gold standard. Regards, Bill Baker, [Editor's note: This passage is reprinted from William W. Baker's book, Endless Money: The Moral Hazards of Socialism, with the permission of John Wiley & Sons, Inc (©2010). You can get your own copy here.] Flat Earth Economics 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." Check out our new special report Investing in Offshore Oil More articles from The Daily Reckoning….
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| An Even Better Trade of the Decade Posted: 03 May 2010 01:50 PM PDT From a speech given in Las Vegas on Saturday: On my recent trip to India, the financial press was very eager to hear what I had to say. They invited me on to their television shows. They interviewed me for magazines and newspapers. The local paper ran a full-page interview and sent out an artist to do a sketch of me. I thought they might have had me mixed up with someone else. I'm not used to people taking me so seriously. "Noted Western Economist Gloomy on World Recovery," was the headline in the paper. In all these interviews I had more or less the same message. I told them that there was no recovery…none at all…and that very soon it would be obvious that we were in a period of correction – the Great Correction, I called it. Stock prices would fall, I said. The property market in the US and the UK would sink further. There would be some spectacular bankruptcies…including some bankruptcies by whole nations. Whether the next move to the downside has begun or not, I don't know. The Dow fell 158 points on Friday, after taking a jolt earlier in the week. Gold rose over 1,180. The one thing that Indian investors seemed most interested in…and I assume you are interested in too…was my Trade of the Decade. But I'm not going to give you a typical investment analysis or a target for GDP growth or for the Dow this year. Instead, I'm going to talk to you about history and philosophy. I hope that's okay. I had great luck with my last trade of the decade. Ten years ago I suggested selling US stocks and buying gold. It worked out very well on both sides. So people wanted to know what my trade would be for the next decade. I gave it some thought and came up with something. I think this one will work out too… but I'll give you an even better Trade of the Decade. But first, let me explain how it works. Behind the Trade of the Decade is just a simple observation: that things that are very out-of-whack tend to get back into whack. Over a 10-year period you have a fair chance that they'll return to normal. This is another way of describing the phenomenon known as regression to the mean. One of the surest phenomena in the natural world is that things that are extraordinary will eventually become less extraordinary. And over a 10-year period, you have a decent chance that that's what will happen. So, what's my Trade of the Decade now? Right now, the US Treasury market is out of whack. It's been going up since 1983. And now investors lend money to the world's biggest debtor at what are historically very low interest rates. And they do this at a time when that debtor has begun the biggest borrowing and spending spree in history. This is not normal. It's downright weird. Sometime within the next 10 years, I figure that the Treasury market will get whacked hard. So on one side of the trade…I'm short US Treasuries. On the other side of the trade I had more trouble. Because I was looking for something to buy. And nothing is really cheap. Even gold…which seems to be in a bull market…and which I expect to go up much higher…is not cheap. As near as I can tell, an ounce of gold buys about as much – in terms of consumer products – as it did 700 years ago…and maybe even as much as it bought 2,000 years ago. Gold has already reverted to the mean, after being seriously undervalued in 1999. Now, most likely, it will become over-valued when the current monetary system begins to break up…but that's a different phenomenon. It's not reversion to the mean, at least, not for gold. It's a reversion to the mean of the monetary system… I'll get to that in a moment. What I needed for the buy side of the trade was something that was historically undervalued. And the best I could come up with was Japanese small cap stocks, which have been going down since 1989. There are some that sell for less than the amount of net cash and current assets that they have in their own company accounts. That is extraordinary. Of course, it could become even more extraordinary. But that's the risk we take. And over 10 years, we hope that that risk – such as it is – comes and goes. So, that's the new Trade of the Decade. Sell US Treasuries. Buy Japanese small caps. But I'm going to give you an even better Trade of the Decade. The problem for non-Japanese investors is that the small caps may actually go up…but if the yen goes down you might lose your gains. So, how about this? Instead of selling US Treasury bonds, sell Japanese government bonds. Japanese bonds are probably even more over-valued than US bonds. And with the Japanese borrowing more than ever…while the Japanese savings rate declines…it seems a fair bet that Japanese government debt will go down at least as much as US debt. Maybe more. By buying Japanese small caps while selling Japanese bonds you take out the currency risk. You have an even better Trade of the Decade. The Japanese small caps stocks are extraordinarily under-appreciated. The Japanese government debt, on the other hand, is extraordinarily over-appreciated. But the first point I want to make is that this is just an idea. It's not a substitute for a serious investment strategy. The second point I want to make is that you can only have a serious investment strategy if you're willing and able to think deeply about ideas. And if you do think about them enough, you'll have a decent chance of doing well…simply because most people – including most serious investment professionals – don't think about them very much. That's what I mean about philosophy…you have to think long and hard about how the world actually works. And history is about the only tool we have to work with. I'm going to give you 2 examples of what I mean right away. First, we celebrated an important anniversary in April. It was 2 years ago, in April 2008, that Countrywide Financial went broke. Countrywide was the second biggest subprime lender in the US. When it went down it set in motion a whole series of domino-like bankruptcies that eventually wiped out half the world's capital. But when Countrywide collapsed, reporters asked Henry Paulson what would happen next. Paulson would seem to be a good person to ask. He was Secretary of the Treasury and formerly the top man at Goldman Sachs. Nobody had more or better information than Paulson. So what did Paulson say? He said that he could imagine 'no scenario' in which the taxpayer would be called upon to bail out the financial industry. That was 2008. By the end of 2009, according to Bloomberg's calculation, the federal government had committed more than $8 trillion in taxpayer support, supposedly to prevent the end of the world. It must have worked. Here we are 2 years later, and the world still exists. But there's a gap of 8,000 billion numbers between Paulson's estimate and the eventual federal commitment. Which, at the very least, makes you wonder about the people at the top of America's financial intelligentsia…and the methods they use to figure out what is going on. What does it mean when the best informed, most sophisticated, most knowledgeable financial authorities in the country are completely wrong about what is going on? Continued tomorrow… Regards, Bill Bonner An Even Better Trade of the Decade 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." Check out our new special report Investing in Offshore Oil More articles from The Daily Reckoning….
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| The Silver Price Spiral, Part III: tomorrow Posted: 03 May 2010 01:48 PM PDT By Jeff Nielson, Bullion Bulls Canada In Part I of this series, I introduced readers to the idea that the price of silver could soar to levels which would even surprise most silver-bulls. In Part II of this series, I pointed out that when our "paper inventories" of silver are exposed that this, alone, sets up the silver market for an enormous price-shock. In Part III of this series, I will discuss how silver has perhaps the most-bullish demand fundamentals of any commodity in history.
As I stated at the beginning of this series, a "three-digit price" for silver is assured, while over the long term, that price could rise close to, or above the $1000/oz-mark…but I am getting ahead of myself. This series is all about studying the dynamics of the silver market, so what I will focus on is what we can expect to happen in the silver market (on the demand side) as silver rises to, and then above $100/oz.
The first general point to make about the market for any commodity (or any "goods") is that markets typically have a "self-correcting" mechanism for when supply and demand are badly out of balance. If supply greatly exceeds demand, prices typically fall until demand is stimulated enough by the falling price to equal supply. Conversely, when demand grossly exceeds supply, prices rise – until that rise in price either discourages demand, or encourages new "supplies" to come onto the market to create an equilibrium.
What has gotten me so excited about silver is that such "self-correcting mechanisms" are almost totally absent from the silver market. As I have already discussed on the supply-side, a quadrupling of the price of silver has resulted in a very muted supply-response. This suggests one of two scenarios: either we have already reached some sort of "peak silver" equation (where supply cannot be ramped-up dramatically – at any price-level), or else silver simply needs to rise to a much higher price to begin to lead to increased mine supply.
The other component of supply which we cannot ignore is the "scrap market". With silver having been mined for nearly 5,000 years (along with gold), at one time there were enormous global "stockpiles" of silver – silver that is either stored/held by governments, or hoarded by private entities. However, according to the research of noted silver authority, Ted Butler, somewhere around 90% of those stockpiles have been "consumed" over the last 50 years. Thus, no matter how high the price of silver goes, we cannot see any major growth in supply from "scrap sales", simply because that silver is already gone.
It's now time to examine demand more closely, and what we find here is that as with supply, there is no self-correcting mechanism to moderate the price of silver as it moves higher and higher. In economics, when we talk about supply or demand, we refer to the concept of "elasticity". Goods which respond dramatically to changes in price are said to be very "elastic" with respect to price. Goods where price-changes cause little change in demand are said to be very "inelastic". More articles from Bullion Bulls Canada….
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| Boy Scouts Uncirculated Silver Dollar Values After Sell Out Posted: 03 May 2010 01:47 PM PDT
Buyers still seem attuned to the proofs that have been favored by a more than 2-1 sales margin. The latest US Mint figures (as of Sunday, April 25) had 107,292 uncirculated and 223,310 proof sold. eBay auctions reveals that (…) © United States Mint for Coin News, 2010. |
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| 2010 American Silver Eagle April Sales: Robust, but Slower Posted: 03 May 2010 01:47 PM PDT
US Mint buyers scooped up 2,507,500 of the one ounce, .999 fine silver pieces during the month. However, April's demand was down from that of March, which remarkably ended with a new quarterly sales record. March 2010 sales registered at a whopping 3,381,000. (…) © CoinNews.net for Coin News, 2010. |
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| Are leading precious metals ETFs based on undisclosed conflict of interest? Posted: 03 May 2010 01:46 PM PDT 6:25p ET Monday, May 3, 2010 Dear Friend of GATA and Gold (and Silver): Do financial houses HSBC and JPMorgan Chase & Co. have a conflict of interest in serving as custodians of the metal held by the major gold and silver exchange-traded funds, GLD and SLV, even as those financial houses are themselves holding major short positions in the precious metals? And does the failure of the prospectuses of those ETFs to note the short positions of their metal custodians constitute a material omission in violation of U.S. securities law? Those questions are raised today in a compelling report written by Catherine Austin Fitts, founder and managing member of Solari Investment Advisory Services LLC, publisher of The Solari Report (http://solari.com/store/the_solari_report/), and a member of GATA's Board of Directors, along with her lawyer, Carolyn Betts. Fitts and Betts note the increasing evidence that more claims to gold and silver have been sold than there is real metal to fulfill them. Of course GATA long has expressed skepticism about the precious metals ETFs and has wondered whether they are used in part for market manpulation, to make investor-owned metal available for shorting and price suppression at strategic moments, against the interests of the ETF investors. The Fitts-Betts inquiry is titled "GLD and SLV: Disclosure in the Precious Metals Puzzle Palace" and you can find it at the Solari Internet site here: http://solari.com/archive/Precious_Metals_Puzzle_Palace/ CHRIS POWELL, Secretary/Treasurer * * * Help keep GATA going GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at: To contribute to GATA, please visit:
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| Posted: 03 May 2010 01:00 PM PDT With central banks now buyers, the significance of gold as a reserve asset has been heightened, considerably. Other investment buyers see this they realize that it is dramatic support for the gold price, far outweighing smaller factors in the market place.
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| Catherine Austin Fitts - long report on GLD and SLV disclosures Posted: 03 May 2010 12:43 PM PDT Here is the preface, the entire article is much too long to repost here. Go to http://solari.com/archive/Precious_M...Puzzle_Palace/ or here'sa link to a printable PDF http://solari.com/assets/docs/archiv...zle_Palace.pdf PREFACE This article was inspired by a conversation in January 2010 with fellow directors of the Gold Anti-Trust Action Committee: Chairman Bill Murphy, Secretary/Treasurer Chris Powell, and Directors Adrian Douglas and Ed Steer. In speaking about the growing role of the exchange traded funds in the precious metals market, it was clear that the disclosure that the precious metals ETFs described below were providing to investors was inadequate. However, was there a material omission under securities law? I found the issues complex. Understanding the commodities markets can seem daunting to someone like myself with a securities background. Meanwhile, the securities markets and related legal and regulatory issues can be unfamiliar to those with a background in commodities. I decided to ask my attorney to help me gather the relevant information into one document to make it easier for GATA supporters and other interested parties—whether from the commodities or securities markets—to examine these issues and to better understand and price these securities. - Catherine Austin Fitts
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| The Silver Price Spiral, Part II: paper “inventories” Posted: 03 May 2010 12:10 PM PDT In Part I of this series, I suggested to investors that the price of silver will explode in an upward spiral – reaching levels even unimaginable to most silver bulls. A three-digit price for silver is guaranteed, while a four-digit price cannot be completely ruled out.
This price spiral will be caused by a combination of supply and demand dynamics. In the second part of this three-part series, I will focus upon the supply-side dynamics, and point out how recent trends are reaffirming my earlier analysis in this area. To do so, I will refer to a couple of recent articles, which on their surface, seem almost contradictory.
The first of these pieces is another misguided analysis of bullion-ETF's (and in this case, SLV) by precious metals commentator, Adam Hamilton. Regular readers will recall that I have previously singled-out Hamilton, for being both outspoken and wrong about (so-called) "bullion-ETF's" ("Even Gold Experts Fooled by Bullion-ETF's").
With apologies to Mr. Hamilton, it is through pointing out the errors in his analysis that the truth becomes plain to see – since his own analysis treats the funds as totally legitimate investments. Given this mistaken assumption, here is his analysis of the "strange" occurrences in the silver market during the month of March.
Specifically, Hamilton noted that holdings in SLV have "plunged rather sharply" since the beginning of March. He then observed that contrary to this sudden liquidation, the price of silver had risen, not fallen as SLV units were liquidated. Given his assumption of legitimacy with this fraud-fund, it is only natural that Hamilton would have been surprised by this development – as supply/demand fundamentals appear to dictate that the price of silver should have fallen as a consequence of the sudden liquidation of SLV units.
In fact, according to the real supply/demand fundamentals of the silver market, the market reacted exactly as I predicted it would (see "Bullion-ETF Shrinkage GOOD For Sector") to a liquidation of SLV units. Here is how these "fundamentals" are currently operating.
First, as regular readers already know, there has been a massive fraud perpetrated with respect to "official" silver inventories (i.e. the quasi-official inventory numbers of the CPM Group). For newer readers, I will summarize the facts.
From 1990 to 2005, official silver inventories plummeted nearly 90% in just 15 years. Then, suddenly and unexpectedly, those inventories did a literal "U-turn" – and supposedly tripled in size from 2005 to 2008 (as shown in the chart below). However, a close look at the chart compiled by the CPM Group reveals precisely how those inventories supposedly tripled: every ounce of the privately-held "bullion" of the bullion-ETF's has been added to official inventories, and that ETF "silver" accounted 100% for the supposed rise in inventories.
As I have pointed out on several occasions, this is a blatant (and totally absurd) fraud which is being perpetrated in the silver market. In fact, every time a unit of SLV is purchased, this supposedly represents one ounce of silver which is being taken off of the market, and is now privately held. This point becomes obvious if we pretend that SLV represents real silver.
Suppose that instead of investors buying their bullion from "middlemen": bullion-dealers and on-line sites like Kitco.com, that we all purchased our silver directly from official inventories. Quite obviously, every time we purchased an ounce of that silver, inventories would decrease not increase. It is nothing short of mind-boggling that the bullion-banks and their accomplices would even attempt such a ludicrous charade. Trying to comprehend how the general public (and many "experts") could fail to notice such a total sham is guaranteed to drive one to insanity.
Nonetheless, these are the bogus "fundamentals" which have been incorporated into this market. We did not create these "fundamentals", but now that they exist, we can certainly predict how they will (and must) behave. We can also clear up the seeming "paradox" which has caused Adam Hamilton (and others) so much confusion.
Obviously, if official silver inventories are increased each time a unit of SLV (or any other bullion-ETF) is purchased, then the opposite must take place each time a unit of a bullion-ETF is liquidated: official silver inventories must fall. Thus, if liquidating units of SLV must cause a decrease in inventories, this directly implies that liquidating units of SLV will tend to cause the price of silver to rise – as a direct consequence of those falling inventories.
Suddenly, the "mystery" which had puzzled Hamilton is no mystery at all. In fact, the reason why we have not observed this phenomenon before is because the larger (nearly-constant) manipulations in the silver market by the bullion-banks had hidden this dynamic.
Consider this: previously, on any and every occasion where significant numbers of units of SLV were liquidated, this dynamic was hidden from the market – because it took place during one of the bullion-banks "ambushes" in the silver market (i.e. where the whole market was falling). Thus, instead of the liquidation of SLV units contributing to these declines, those liquidations were actually pushing back – but were simply concealed by the massive attacks of the bullion-banks.
This is what makes the events in March take on such huge significance. For the first time since bullion-ETF's became a major "force" in this bull-market for precious metals, we have seen a major liquidation of SLV units while the price of silver is steadily rising. Indeed, during some recent trading sessions we have seen the price of silver rising on days when the price of gold is falling – a very unusual occurrence.
It would appear that it was the massive liquidation of those units (6% of the total units in just seven weeks) which has led to silver outperforming gold in recent weeks. In Adam Hamilton's world, selling all those units of SLV represents "dumping" vast amounts of silver onto the market. However, in the real world, that large liquidation represented a sudden contraction of inventories.
This development becomes even more interesting when we look at what is happening in the "physical" silver market (i.e. real silver). As reported by Jeff Clark of Casey's Gold and Resource Report, the U.S. Mint has just announced all-time records for silver purchases in March, and for the first quarter, as a whole. When we combine the two events together, they lead to a single, obvious conclusion. Investors have not been selling "silver" during the recent liquidation of SLV units, instead, the exact opposite event is taking place: they are liquidating their SLV paper, and buying real silver in its place.
Keep in mind that there are two, entirely independent reasons for concluding that SLV is all "paper". First, there was the previously-reported fact that all the "silver" in bullion-ETF's is part of official inventories (i.e. it's "for sale"). Obviously, if anyone can walk in off the street and buy-up every ounce of SLV "silver" today – simply by anteing-up the "spot" price – then no SLV unit-holder could rationally believe that they hold a secured claim on any silver, at all.
The second reason to believe that SLV is nothing but paper-piled-on-paper comes through the revelation of Jeffrey Christian of the CPM Group, when he blurted out that the bullion-banks are leveraged in the gold and silver markets by somewhere around 100:1. Since that time, apologists for the bullion-banks have attempted to minimize the significance of Christian's "confession" – by asserting that "most of" this leverage exists in the bullion derivatives market.
Such a distinction is totally immaterial. Even if all of the bullion-banks dwindling stores of "physical" bullion are not directly leveraged 100:1, the consequences of such leverage are identical: nearly-infinite losses for the bullion-banks, should gold and silver rise dramatically in price.
As we know, the bullion-banks are currently sitting on the largest, most-concentrated short-positions in the history of commodities market. To exert additional downward pressure on the price of gold and silver, the banksters have dramatically leveraged those short positions with derivatives. Given that losses can be potentially infinite on a straight, un-leveraged short position, when such a position is leveraged 100:1, we have losses of potentially 100 "times" infinity.
The only thing standing in the way of those losses – and the instant bankruptcy of the bullion banks in this multi-trillion dollar market is the dwindling real bullion they can dump onto the market to either cover (some of) their short positions, or to simply cool-down those markets. In other words, while the derivatives/"physical" bullion distinction made by the gold-apologists may have some significance for the bullion market as a whole, for the bullion-banks (the custodians of all the ETF "bullion"), there is no distinction, at all.
They need every ounce of bullion they currently possess (plus somewhere around one hundred times more) in order to avoid being totally bankrupted by their bullion-fraud. Any ETF-holder who naively believes these banksters will honour those contracts rather than "cover their asses" simply hasn't been paying attention to the global tidal-wave of litigation which is now being directed at these career-criminals (see "Morgan Stanley pays damages for precious metals fraud").
When the silver (and gold) market 'blows-up', sham-funds like SLV and GLD will be exposed for what they are: totally "naked" long positions – or (in other words) yet more worthless, banker-paper. What we are seeing happening today is the beginning of the inevitable separation between the phony, fraudulent "paper bullion" market of the banksters from the real market for actual, "physical" bullion.
It would be premature to draw such a conclusion based upon only a single month's data. Fortunately, what we see is that, in fact, this trend has been steadily evolving since the beginning of February – and has continued through April. Over that span, holdings in SLV have been steadily falling, while silver has appreciated by roughly 20%.
Going back even further, holdings in SLV peaked in October of 2009, and have been flat or falling since that time. In short, while investor demand for silver continues to increase unabated, investor appetite for SLV paper has clearly peaked. However, of much greater significance is what the SLV sham represents when it comes to official inventories.
As I mentioned in the first part of this series, the last "official" numbers I have been able to locate with respect to silver inventories are from 2008. At that point in time, ETF-silver represented 2/3 of total inventories. Given the fundamentals which I have described above, we can only assume that more of the dwindling, real silver has been drawn-down from inventories – meaning that ETF-silver now represents more than 2/3 of official inventories. Let me repeat this: more than 2/3 of official, global inventories of silver are nothing but paper.
For those who still cling to the delusion that there could be some legitimacy to fraud-funds like SLV, keep in mind the numbers here. The same bullion-banks who claim to be "custodians" for all this ETF "bullion" (and are leveraged 100:1) also carry massive, short positions virtually identical in size. Since the banksters must cover their short positions first (to avoid being wiped-out by those short positions), all it would take is as little as 2:1 leverage to make ETF's like SLV and GLD 100% paper.
This would be an incredibly bullish dynamic in any market. In the tiny silver market, the repercussions are virtually inconceivable. As I will demonstrate in the conclusion of this series, demand fundamentals for silver are arguably more bullish than anything ever seen in the history of commodities markets. When we combine that spectacular demand-profile with the massive fraud in the silver market – a market which is pretending there is more than three times as much available silver as actually exists – it becomes much easier to see how and why $100/oz silver is the starting point for the real evolution of this market, rather than the climax.
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| S&P-To-Gold Ratio: On Verge Of 1.00 Breakdown Posted: 03 May 2010 12:07 PM PDT As the attached chart demonstrates, the S&P may soon take out the 1.00x ratio to gold price per oz. With the IMF facilitated Greek bailout, the euro is now a sideshow and nothing more than a political corpse in the hands of a few million Nordrhein-Westfalen voters next weekend. That a bailout of a country can hinge on whether the already indicated German majority (59% oppose the Greek bailout at last count) can manifest itself in the decisions of the weakest link, should be enough for even the biggest skeptics to bury their dreams of euro viability. And as we have long pointed out, what is the alternative – massively overpriced and overbought stocks, where a jittery market can wipe out 10% in flash, the dollar, which will certainly soon suffer the full wrath of its natural born killer, the Federal Reserve, or industrial commodities, where oil is trading at prices that boggle the mind when considering the record inventories lying around, not to mention that China's rapidly changing liquidity policy may soon take make the lives of copper and other longs a nightmare. We are confident that gold, which over the past two weeks has been a one way ticket higher, will continue to strengthen, and once the 1:1 parity with the S&P is broken, the next resistance level will be in the $1,300's.
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| The Fed Discusses The Relevancy Of The "Invisible Hand" Posted: 03 May 2010 12:05 PM PDT
With America on the fast-track to a centrally planned economy, courtesy of a surging budget deficit and a debt load that would make Greece blush (at the current rate of debt accumulation, US debt will surpass 100% of GDP by mid-2011) it is imperative to reassess the macroeconomic framework of America from a simplistic Econ 101 perspective, as the US economy of the past 50 years (or even of two years ago) is no longer the prevalent model. This reevaluation should necessarily consider the thoughts of Smith, Pareto, and Hayek, as to whether these are even relevant any longer, now that both the government will be running the majority of the country (at least those sectors that are Too Big To Not Be bailed Out), and a corrupt DC will be regulating the multi-trillion financial industry with the dexterity of gloved Parkinson-afflicted kickboxer. Incidentally, none other than current Fed visiting scholar Stephen LeRoy, a professor emeritus at UC Santa Barbara, has put together a coherent investigation into just how relevant the whole premise of the Adam Smith "invisible hand" (not to be confused with the FRBNY "invisible hand" appearing every night in the futures market at around 2 am) is in our day and age. While somewhat theoretical, economic purists and particularly Austrians may enjoy this brief essay. Is the “Invisible Hand” Still Relevant? By
The single most important proposition in economic theory is that, by and large, competitive markets that are relatively, but generally not completely, free of government guidance do a better job allocating resources than occurs when governments play a dominant role. This proposition was first clearly formulated by Adam Smith in his classic Wealth of Nations. Except for some extreme supporters of free markets, today the preference for private markets is not an absolute. Almost everyone acknowledges that some functions, such as contract enforcement, cannot readily be delegated to market participants. The question is when and to what extent—not whether—private markets fail and therefore must be supplanted or regulated by government. The answer to that question is something of a moving target, with views of the public and policymakers tending to ebb and flow. In much of the latter part of the 20th century, support for Smith’s pro-private-market verdict gained favor, as reflected in the partial deregulation of financial and nonfinancial markets in the 1980s and subsequent decades. The financial and economic debacle of the past few years, however, has led many to revisit this question, particularly in Europe, but also in the United States and elsewhere. To many, financial markets in the last several years appeared dysfunctional to an extent that was never imagined possible earlier. Did Adam Smith get it wrong about private markets? This Economic Letter discusses two versions of the argument in favor of private markets: that of Adam Smith in the 18th century and that formulated in the 19th century by the Italian sociologist and economist Vilfredo Pareto. The discussion in this Letter points to the key assumptions in the arguments. Differing views on the degree of applicability of those assumptions underlie a good deal of the debate over the appropriate balance between relying on markets versus government intervention. Also important are views on the effectiveness of government involvement. Competitive markets work: Adam Smith In 17th and 18th century England prior to Smith it was taken for granted that economic and political leadership came from the king, not from private citizens. If the king wanted to initiate some large economic project, such as expanding trade with the colonies, he would encourage formation of a company to conduct that project, such as the East India Company. The king would grant that company a monopoly, usually in exchange for payment. Smith thought that these monopoly grants were a bad idea, and that instead private companies should be free to compete. He called on the king to discharge himself from a duty “in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it toward the employments most suitable to the interests of the society.” (Smith 1776 Book IV, Chapter 9) Thus, Smith’s conclusion was that private markets worked better if they were free from government supervision, and for him it was just about that simple. Smith’s idea received its biggest challenge when the Soviet Union achieved world power status following World War II. In the 1960s, reported gross national product grew at much higher rates in the Soviet Union than in the United States or western Europe. Such authorities as the Central Intelligence Agency estimated that, before long, Soviet gross national product per capita would exceed that in the United States. To many, it looked as though centrally planned economies could achieve higher growth rates than market economies. Economists who saw themselves as followers of Smith took issue. To them, it was simply not possible for centrally planned economies to achieve higher standards of living than market economies. As Smith put it, government could not be expected successfully to superintend the industry of private people. Too much information was required, and it was too difficult to structure the incentives. G. Warren Nutter, an economist at the University of Virginia, conducted a detailed study of the Soviet economy, arguing that the CIA’s estimates of Soviet output were much too high (Nutter 1962). At the time, those findings were not taken seriously. But, by the 1980s, we knew that Nutter had been correct. If anything, the Soviet Union was falling further and further behind. By 1990, this process came to its logical conclusion: the Soviet empire disintegrated. Score a point for Adam Smith. Competitive markets work: Vilfredo Pareto By the 19th century, economists had largely abandoned the informal and literary style of Smith in favor of the more precise—if less engaging—style of today’s economics. Increasingly, economists came to appreciate the role of formal mathematical model-building in enforcing logical consistency and clarity of exposition, although that development did not get into high gear until the 20th century. Under the leadership of Pareto and others, Adam Smith’s argument in favor of private competitive markets underwent a major reformulation. Pareto’s version of the argument is usually taken to be a refinement of Smith’s. But, for the present purpose, it’s best to emphasize the differences rather than the similarities. First, Pareto provided a more precise definition than Smith of efficient resource allocation. An allocation is “Pareto efficient” if it is impossible to reallocate goods to make everyone better off. Or, to put it another way, you cannot make someone better off without making someone else worse off. This idea captures part of what we usually mean by “good performance,” but not all of it. For example, attaining a reasonably equal income distribution is often taken to be part of what we mean by good performance, but an equal income distribution is not an implication of Pareto efficiency. Indeed, public policies designed to reduce the degree of income inequality can involve redistribution of income, making some better off and others worse off. (See Yellen 2006 for a discussion of income inequality.) Pareto reached the remarkable conclusion that competitive markets generate Pareto-efficient allocations. In competitive markets, prices measure scarcity and desirability, so the profit motive leads market participants to make efficient use of productive resources. The English economist F.Y. Edgeworth made a similar argument at about the same time as Pareto. Economists Kenneth Arrow and Gérard Debreu presented precise formulations of the Pareto-Edgeworth result in the 1950s and 1960s. A mathematical proof that competitive allocations are Pareto efficient required a characterization of a competitive economy that is more precise than anything Smith had provided. For Pareto, unlike Smith, it was not enough that the economy be free of government intervention. The essential characteristic for Pareto was that a buyer’s payment and a seller’s receipts from any transaction be in strict proportion to the quantity transacted. In other words, individuals cannot affect prices. This assumption is satisfied, to a close approximation, by the classical competitive markets, such as those for corn, wheat, and other agricultural commodities. The assumption rules out monopoly and monopsony, in which individual sellers and buyers are large enough to be able to manipulate prices by altering quantities supplied or demanded. When monopolists and monopsonists can distort prices in this way, allocations will not be Pareto efficient. Pareto’s efficiency result was first formulated in mathematical models of economies that were static and deterministic—that is, models in which time and uncertainty were not explicitly represented. In the 20th century, economists realized that the validity of the Pareto-efficiency result does not depend on these extreme restrictions. Arrow and Debreu showed that allocations will be Pareto efficient even in economies in which time and uncertainty are explicitly represented. They showed that, in any economy, there is an irreducible minimum level of risk that somebody has to bear. In a competitive economy with well-functioning financial markets, this risk will be borne by those who are most risk tolerant and who therefore require the least compensation in terms of higher expected return for bearing the risk. This is exactly as one would expect—risk-tolerant participants use financial markets to insure the risk averse. These aspects of equilibrium are discussed in standard texts on financial economics (such as LeRoy and Werner 2001). However, demonstrating these results mathematically depends on assuming symmetric information—that is, assuming that everyone has unrestricted access to the same information. Such an assumption is less unrealistic than excluding uncertainty altogether, but it is still a strong restriction. The advent of game theory in recent decades has made it possible to relax the unattractive assumption of symmetric information. But Pareto efficiency often does not survive in settings that allow for asymmetric information. Based on mathematical economic theory, then, it appears that the argument that private markets produce good economic outcomes is open to serious question. Nonmathematical economists such as Friedrich Hayek proposed an argument for the superiority of market systems that did not depend on Pareto efficiency. In fact, Hayek’s argument was the exact opposite of that of Arrow and Debreu. For him, it was the existence of asymmetric information that provided the strongest rationale in favor of market-based economic systems. Hayek emphasized that prices incorporate valuable information about desirability and scarcity, and the profit motive induces producers and consumers to respond to this information by economizing on expensive goods. He expressed the view that economies in which prices are not used to communicate information—planned economies, such as that of the Soviet Union—could not possibly induce suppliers to produce efficiently. This is essentially the same as the argument against socialism discussed above. Reevaluating the balance between markets and the government The financial crisis that we have just experienced puts the question about the appropriate balance between reliance on markets and government intervention on center stage. Those who believe that unregulated markets generally work well express the view that misconceived interference by the government was the major cause of the crisis. In contrast, those who take a more critical view about the functioning of private markets believe that the crisis stemmed mainly from the destructive consequences of factors such as information asymmetries in financial markets and distortions to incentives that encouraged excessive risk-taking. The problem was not government involvement per se, but rather government’s failure to place checks on destructive market practices. This latter view dominates most of the recent proposals for financial reform. And, while the particulars of financial reform are still to be determined, it appears that current sentiment is less supportive of Adam Smith’s verdict on the efficiency of markets than was the case prior to the financial crisis. At the same time, it seems clear that neither extreme view of the causes of the financial crisis is accurate. Reforms based only on one of these views to the exclusion of the other will not lead to a set of changes that will guarantee improvement of the performance of financial markets and prevent recurrence of financial crisis. The problems are complex, and sweeping changes in the regulatory structure could do more harm than good. A better strategy may be to identify specific problems in the financial system and introduce regulatory changes that address these clearly defined weaknesses, such as executive compensation practices that encourage excessive risk-taking. References LeRoy, Stephen, and Jan Werner. 2001. Principles of Financial Economics. Cambridge: Cambridge University Press. Nutter, G. Warren. 1962. The Growth of Industrial Production in the Soviet Union. Princeton, NJ: Princeton University Press. Smith, Adam. 1776. An Inquiry into the Nature and Causes of the Wealth of Nations. Yellen, Janet. 2006. “Economic Inequality in the United States.”FRBSF Economic Letter 2006-33-34 (December 1)
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| Mainstream Media Critical of the Fed? Posted: 03 May 2010 12:00 PM PDT Over the weekend, we analyzed a Washington Post article describing the economic crisis in simple but powerful terms. The article maintained that the problem was caused by risky lending and the solution was regulation to impel "banks" to reduce practices that could lead to risky lending. We pointed out in our analysis that regulatory efforts will likely fail – as they always have in these situations (and in fact all such situations) – and that it would be much better to let the free market work.
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| Federal, State and Local Debt/Deficits Keep on Growing Larger Posted: 03 May 2010 11:59 AM PDT |
| Posted: 03 May 2010 11:55 AM PDT |
| Posted: 03 May 2010 11:54 AM PDT The bullish structure is degrading and the open interest is increasing but I don't think the price of gold cares just yet. Next upside target remains open. But still, CoT is just one of many tools and indicators to keep an eye on and it is not great looking.
http://biiwii.blogspot.com/2010/05/gold-cot.html
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| Gold’s future bright as ‘anti-currency’ Posted: 03 May 2010 11:44 AM PDT by Jonathan Ratner "Gold is not just viewed as an inflation hedge in the current market," said George Davis, chief technical analyst at RBC Capital Markets. "Given the euro region sovereign risk emanating from Greece, gold is also being used as a hedge against a potential financial crisis." While a 110-billion euro bailout package for Greece was approved over the weekend, investors remain skeptical about the prospects for the Eurozone. That lead to further gains for precious metals in May's first trading session. "Gold is sort of the anti-currency. A lot of people think the gold price is rising, but you could argue that many of the currencies are just declining," said Nick Barisheff, president and CEO of Bullion Management Group. He noted that while gold is only up about 5% in Canadian dollar terms in the past six months, bullion has risen 23% in euros and 19% in British pounds. "Eventually, all the currencies will go down relative to gold," Mr. Barisheff said. "The U.S. dollar will probably be the last one. Even though there are a lot of arguments about how weak it is on a fundamental basis, it could rise because it's the best of a bad bunch and also the most liquid."
Adam Kritzer of forexblog pointed out that many are betting that gold will eventually distance itself from the U.S. dollar if and when America's fiscal problems escalate to the level of a Greek-style crisis. "At this point, gold will start to trade as an alternative to the entire forex market." [source]
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Now that the United States Mint uncirculated 2010 Boy Scouts of America Centennial Silver Dollars have officially 
The United States Mint's bullion 2010 American Silver Eagles continue to move like hot cakes, posting their second best sales number ever for an April.
According to Deutsche Bank, gold has decoupled from the dollar since at least the end of March. "If the correlation re-establishes itself before July, either the dollar must continue to decline or investment into bullion-backed funds must pick up in order to avoid erosion in gold prices," analysts at the investment bank said recently.| You are subscribed to email updates from Gold World News Flash To stop receiving these emails, you may unsubscribe now. | Email delivery powered by Google |
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