Gold World News Flash

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• Should the Gold Price Fall now?
• International Forecaster May 2010 (#9) - Gold, Silver, Economy + More
• Six Impossible Things
• Carmel Daniele: Gold Will Rise and Sky Won't Fall
• The U.S. Government Bond Bubble
• A Primer: Sovereign Debt Defaults = Social Unrest + Much Higher Gold Prices
• In The News Today
• The Same Big Fat Greek Problems are Coming to America
• Listen To The Hucksters, Lose Your Ass
• Europe's Debt Solutions May Be Superior
• Sound Money Article Sure to Be Ignored by the Fed
• Another Financial Regulations Failure
• Trend Trading Gold, Silver, Oil and SP500
• NY Fed: Ratings Agencies Rubber-Stamped Mortgage Backed Securities
• The U.S. Economic Collapse Top 20 Countdown
• 10 Reasons Why the Recovery Continues to Be Tepid
• Israel Deploys Three Nuclear Cruise Missile-Armed Subs Along Iranian Coastline
• Feds Get the Wrong Man
• Mr. Market Beats the Bailouts
• The Pain in Spain
• The Shift Toward De-globalization is Bullish for Gold
• Two replies to Brett Arends' disparaging of gold in The Wall Street Journal
• Two replies to Brett Arends' disparaging of gold in The Wall Street Journal
• Erik Nielsen On Europe Past And (Immediate And Rosy) Future
• Trend Trading Gold, Silver, Oil & SP500
• Ancient Roman coins with sex scenes - sprintia
• Guest Post: Goodbye Keynes - Hello Ricardo!
• 'Pieces of Eight': The Constitution and the Dollar
• Beyond Market Turbulence
• A U.S. Government Bond Bubble
• Germany’s MMNews interviews GATA’s secretary
• Funds seek Midas touch with miners
• Still Clueless About Gold and Paper Money
• David Einhorn’s ‘Good News for the Grandchildren’
• U.S. Mint News
• Mr. Denninger and Gold or Why the Dollar-Deflationists Are Wrong
• Why It's Likely a Correction and Not Another Train Crash
• Panic Its Over: War, Gulf Catastrophe, Economy Collapse, Europe Collapse, Rioting Ahead
• Dylan Grice Finds Value Within The Printing Orgy
• Canada's Banks: 3rd Worst Of The G7 Countries
• Russell Napier On When To Expect The Treasury Bubble Crash
• India Markets Saturday Round-Up: Spain Looms Large
• Germany's MMNews interviews GATA's secretary
• Germany's MMNews interviews GATA's secretary
• Guest Post: Preparing For What's Next
• Guest Post: The Path To Hyperinflation

Should the Gold Price Fall now? Posted: 31 May 2010 01:00 PM PDT The Gold market is holding and building a base at just above $1,200. We have been e-mailed by some people saying that the gold price should soon plunge, possibly to as low as $850. The gold market doesn't agree, that's why it's not falling. Perhaps it would be appropriate to look at the main factors why gold should fall and why it should rise.

International Forecaster May 2010 (#9) - Gold, Silver, Economy + More Posted: 31 May 2010 05:38 AM PDT Part of the deflationary mode is borrowers are paying down debt and saving at a 3.4% rate. It could be the elitists, as we speculated months ago, want to take down the entire world financial system in the next 1-1/2 to 2 years. Hi Ho stimulus. The fiat Ponzi scheme is collapsing.

Six Impossible Things Posted: 31 May 2010 04:52 AM PDT Economists and policy makers seem to want to believe impossible things in regards to the current debt crisis percolating throughout the world. And believing in them, they are adopting policies that will result in, well, tragedy. Today we address what passes for wisdom among the political crowd and see where we are headed, especially in Europe.

Carmel Daniele: Gold Will Rise and Sky Won't Fall Posted: 31 May 2010 04:39 AM PDT London-based CD Capital Founder Carmel Daniele has seen these sorts of market jitters before, and insists there is little to worry about in this exclusive interview with The Gold Report. "Most people sell in May and go away. It happens every year," she says.

The U.S. Government Bond Bubble Posted: 31 May 2010 04:28 AM PDT What follows will read like an indictment on our entire economic system. But underlying my (relatively mild) harangue is an observation that people are ignoring the most obvious bubble out there; that is, the bubble in U.S. government bonds. The following is my attempt to figure out why.

A Primer: Sovereign Debt Defaults = Social Unrest + Much Higher Gold Prices Posted: 31 May 2010 04:05 AM PDT The magnitude of current private and government debt, coupled with massive unfunded contingent liabilities for promises of future services to their citizens, will prove to be impossible for many nations to fund. Massive inflation in the money supply will become the preferred vehicle to deflect the default monster and will result in vastly devalued currencies and price inflation as a prelude to default.

In The News Today Posted: 30 May 2010 07:12 PM PDT View the original post at jsmineset.com... May 30, 2010 09:02 AM Jim Sinclair's Commentary Not exactly a bad idea except for the fact that the drachma would be blasted to oblivion. This is a typical not-practical academic solution that would fail. Greece urged to give up euro Robert Watts May 30, 2010 THE Greek government has been advised by British economists to leave the euro and default on its €300 billion (£255 billion) debt to save its economy. The Centre for Economics and Business Research (CEBR), a London-based consultancy, has warned Greek ministers they will be unable to escape their debt trap without devaluing their own currency to boost exports. The only way this can happen is if Greece returns to its own currency. Greek politicians have played down the prospect of abandoning the euro, which could lead to the break-up of the single currency. Speaking from Athens yesterday, Doug McWilliams, chief executive of the CEBR, said: "Leaving the euro would me...

The Same Big Fat Greek Problems are Coming to America Posted: 30 May 2010 07:12 PM PDT View the original post at jsmineset.com... May 30, 2010 08:57 PM Dear CIGAs, We would all like to think the U.S. will not suffer the same problems as Greece.  I am talking about drastic spending cuts to just about everything.  Teachers, police pensions and social programs are all going to take big cuts whether the Greeks like it or not.  It is not just the Greeks in financial trouble, but all of Europe.  You know it is bad when former Fed Chief Paul Volcker says, "You have the great problem of a potential disintegration of the euro."  (Click here to see the full Reuters story.)  There is no way a pro like Volcker would say that if it was not already a distinct possibility.   The fact is we already are dealing with too much debt and not enough money here in America.  Recent stories show the cracks in our economy getting bigger, not smaller, as the "recovery" camp would have you believe.  There are now 40 million U.S. citizens on fo...

Listen To The Hucksters, Lose Your Ass Posted: 30 May 2010 07:12 PM PDT Market Ticker - Karl Denninger View original article May 30, 2010 02:55 PM Especially those who don't sign their real names: [INDENT]Those who know Mr. Denninger know that he, well, for lack of a better word, hates Gold. [/INDENT]Bah.  One cannot hate an inanimate object. [INDENT]It only goes to show the level of disinformation and ignorance prevalent in our society when even smart people like Karl fail to get it. From what I hear anybody even mentioning the word Gold runs the risk of being permanently banned from one of his "forums". [/INDENT]"From what I hear" is what someone says when they're incapable of actually bothering to read the simple topic headers on a forum.  Specifically, I got tired (fast) of the incessant and mentally-deficient spamming of my forum with goldbug crap and thus have deemed it off-topic everywhere except in.... surprise.... the metals forum. That's right, I have a specific place for all such discussions where they're perfectly welcome -...

Europe's Debt Solutions May Be Superior Posted: 30 May 2010 06:45 PM PDT Tom Lindmark submits: From Reuters (link and link) here is some happy talk from Europe about how they’re going to surmount their fiscal problems. France Complete Story »

Sound Money Article Sure to Be Ignored by the Fed Posted: 30 May 2010 05:44 PM PDT

Another Financial Regulations Failure Posted: 30 May 2010 05:33 PM PDT Bruce Krasting submits: The following graph is derived from data in Fannie Mae’s (FNM) most recent monthly report. It compares the default rate experienced by Fannie on its book of conforming loans to the default rate on “enhanced” loans. The enhanced default rate is 4Xs higher than the regular default rate. Enhanced loans have performed very poorly over time. Click to enlarge all images Complete Story »

Trend Trading Gold, Silver, Oil and SP500 Posted: 30 May 2010 05:32 PM PDT

NY Fed: Ratings Agencies Rubber-Stamped Mortgage Backed Securities Posted: 30 May 2010 05:05 PM PDT Wall Street Cheat Sheet submits: The Federal Reserve Bank of New York is out with a report which shows the credit ratings agencies did in fact rubber stamp “shitty” mortgage backed securities (MBS). This report is going to hurt firms like Moody’s (NYSE: MCO) which are already under investigation by the Securities and Exchange Commission. S&P (NYSE: MHP) and Fitch will be shaking too. If you’re not interested in academic reading on this nice holiday weekend, here is your Cheat Sheet to the NY Feds findings: Complete Story »

The U.S. Economic Collapse Top 20 Countdown Posted: 30 May 2010 04:52 PM PDT So just how bad is the U.S. economy?  Well, the truth is that sometimes it is hard to put into words.  We have squandered the great wealth left to us by our forefathers, we have almost totally dismantled the world's greatest manufacturing base, we have shipped millions of good jobs overseas and we have piled up the biggest mountain of debt in the history of mankind.  We have taken the greatest free enterprise economy that was ever created and have turned it into a gigantic house of cards delicately balanced on a never-ending spiral of paper money and debt.  For decades, all of this paper money and debt has enabled us to enjoy the greatest party in the history of the world, but now the bills are coming due and the party is nearly over.  In fact, things are already so bad that you can pick almost every number and find a corresponding statistic that shows just how bad the economy is getting.  You doubt it? Well, check this out....           20 - Gallup's measure of underemployment hit 20.0% on March 15th.  That was up from 19.7% two weeks earlier and 19.5% at the start of the year. 19 - According to RealtyTrac, foreclosure filings were reported on 367,056 properties in the month of March.  This was an increase of almost 19 percent from February, and it was the highest monthly total since RealtyTrac began issuing its report back in January 2005. 18 - According to the Bureau of Labor Statistics, in March the national rate of unemployment in the United States was 9.7%, but for Americans younger than 25 it was well above 18 percent. 17 - The FDIC's list of problem banks recently hit a 17-year high. 16 - During the first quarter of 2010, the total number of loans that are at least three months past due in the United States increased for the 16th consecutive quarter. 15 - The Spanish government has just approved a 15 billion euro austerity plan. 14 - The U.S. Congress recently approved an increase in the debt cap of the U.S. government to over 14 trillion dollars.  13 - The FDIC is backing 8,000 banks that have a total of $13 trillion in assets with a deposit insurance fund that is basically flat broke.  In fact, the FDIC's deposit insurance fund now has negative 20.7 billion dollars in it, which actually represents a slight improvement from the end of 2009. 12 - The U.S. national debt soared from the $12 trillion mark to the $13 trillion mark in a frighteningly short period of time. 11- It is being reported that a massive network of big banks and financial institutions have been involved in blatant bid-rigging fraud that cost taxpayers across the U.S. billions of dollars.  The U.S. Justice Department is charging that financial advisers to municipalities colluded with Bank of America, Citigroup, JPMorgan Chase, Lehman Brothers, Wachovia and 11 other banks in a conspiracy to rig bids on municipal financial instruments. 10 - The Mortgage Bankers Association recently announced that more than 10 percent of all U.S. homeowners with a mortgage had missed at least one payment during the January-March time period.  That was a record high and up from 9.1 percent a year ago. 9 - The official U.S. unemployment number is 9.9%, although the truth is that many economists consider the true unemployment rate to be much, much higher than that.  8 - The French government says that its deficit will increase to 8 percent of GDP in 2010, but by implementing substantial budget cuts they hope that they can get it to within the European Union's 3 percent limit by the year 2013. 7 - The biggest banks in the U.S. cut their collective small business lending balance by another $1 billion in November.  That drop was the seventh monthly decline in a row. 6 - The six biggest banks in the United States now possess assets equivalent to 60 percent of America's gross national product. 5 - That is the number of U.S. banks that federal regulators closed on Friday.  That brings that total number of banks that have been shut down this year in the United States to a total of 78. 4 - According to a study published by Texas A&M University Press, the four biggest industries in the Gulf of Mexico region are oil, tourism, fishing and shipping.  Together, those four industries account for approximately $234 billion in economic activity each year.  Now those four industries have been absolutely decimated by the Gulf of Mexico oil spill and will probably not fully recover for years, if not decades. 3 - Decent three bedroom homes in the city of Detroit can be bought for $10,000, but no one wants to buy them. 2 - A massive "second wave" of adjustable rate mortgages is scheduled to reset over the next two to three years.  If this second wave is anything like the first wave, the U.S. housing market is about to be absolutely crushed. 1 - The bottom 40 percent of all income earners in the United States now collectively own less than 1 percent of the nation's wealth.  But of course many on Wall Street and in the government would argue that there is nothing wrong with an economy where nearly half the people are dividing up 1 percent of the benefits.

10 Reasons Why the Recovery Continues to Be Tepid Posted: 30 May 2010 04:37 PM PDT Bret Jensen submits: Another turbulent week in the markets comes to a close. Equities had a roller-coaster of a week to end the month down 8.2% on the S&P, the worst May since 1962. The craziness started Tuesday when the market dropped 300 points during the first half of the session only to recover to almost even by the close. The only real news that drove this was an improvement in consumer confidence. Wednesday saw another 200 plus point swing when a solid rally reversed in the last hour to post significant losses by the end of the day. The market moving event was a rumor that the Chinese were paring back their purchases of the Euro and eurozone debt. The market then embarked on a massive 3% plus rally on Thursday after the Chinese denied these rumors and the euro climbed almost two cents. The market seemed to overlook the news that China continue to take additional measures to slow the lending to its overheating property market, disappointing weekly jobless claim numbers, and a surprise downward revision of 1st quarter GDP growth. On Friday the market meandered before dropping another 1%. Retail investors continued to get out of the market as confirmed by the equity fund flow figures, leaving the traders with their massive computing power accounting for the most of the volume as they fight it out among each other for a penny a share. This seems to me to be a very tired market at this point and probably range bound until we get clarification on what kind of growth we can count on for the second half of 2010. Obviously this depends on the resolution of numerous key issues. Among these being the sovereign debt crisis and related Euro turbulence, the Sino property bubble and attempt to apply brakes to speculation in China, job growth in the U.S., etc. Complete Story »

Israel Deploys Three Nuclear Cruise Missile-Armed Subs Along Iranian Coastline Posted: 30 May 2010 04:05 PM PDT Even as futures are feeling buoyant as a result of the JPY drop following the collapse of the Japanese ruling coalition (which in itself will likely spell serious JGB troubles in the days ahead), Middle-east geopolitical issues have once resurfaced... or technically submerged as the case may be. The Sunday Times reports that "three German-built Israeli submarines equipped with nuclear cruise missiles are to be deployed in the Gulf near the Iranian coastline." Presumably, this a defensive move: "The first has been sent in response to Israeli fears that ballistic missiles developed by Iran, Syria and Hezbollah, a political and military organisation in Lebanon, could hit sites in Israel, including air bases and missile launchers. The submarines of Flotilla 7 — Dolphin, Tekuma and Leviathan — have visited the Gulf before. But the decision has now been taken to ensure a permanent presence of at least one of the vessels." We are not sure Iran will take the news with the required dose of stoic acceptance. But at least we now have confirmation that Israeli subs are not being used by the Obama administration as a means of delivering nuclear armaments to the continental shelf (unless this too, is another Criss Angelesque Emmanuel Rahm masterpiece). More from the Times: The flotilla’s commander, identified only as “Colonel O”, told an Israeli newspaper: “We are an underwater assault force. We’re operating deep and far, very far, from our borders.” Each of the submarines has a crew of 35 to 50, commanded by a colonel capable of launching a nuclear cruise missile. The vessels can remain at sea for about 50 days and stay submerged up to 1,150ft below the surface for at least a week. Some of the cruise missiles are equipped with the most advanced nuclear warheads in the Israeli arsenal. The deployment is designed to act as a deterrent, gather intelligence and potentially to land Mossad agents. “We’re a solid base for collecting sensitive information, as we can stay for a long time in one place,” said a flotilla officer. The submarines could be used if Iran continues its programme to produce a nuclear bomb. “The 1,500km range of the submarines’ cruise missiles can reach any target in Iran,” said a navy officer. It now seems that the Middle East is dead set on repeating the recent submarine-centric Korean festivites pretty much verbatim.  Iran's reaction is not all that surprising: Apparently responding to the Israeli activity, an Iranian admiral said: “Anyone who wishes to do an evil act in the Persian Gulf will receive a forceful response from us.” The most troubling thing is that events in the Persian Gulf are moving much faster and politicians risk to lose all control imminently: precisely the stuff market melt ups are not made of. Israel’s urgent need to deter the Iran-Syria-Hezbollah alliance was demonstrated last month. Ehud Barak, the defence minister, was said to have shown President Barack Obama classified satellite images of a convoy of ballistic missiles leaving Syria on the way to Hezbollah in Lebanon. Binyamin Netanyahu, the prime minister, will emphasise the danger to Obama in Washington this week. Tel Aviv, Israel’s business and defence centre, remains the most threatened city in the world, said one expert. “There are more missiles per square foot targeting Tel Aviv than any other city,” he said. If that is indeed the case, one wonders what the logic of an act such as this one reported by Wire Update is: "Reports say Israeli ships attack Gaza aid flotilla. At least several people were killed and scores of others were left injured after Israeli ships clashed with six ships carrying pro-Palestinian activists and aid for Gaza, according to news reports on early Monday." A livestream of the attack on Turkish aid ships in international water via CNN Turkey can be seen here. Is Israel now actively seeking not only to wage war, but a two-fronted one at that? (did not work out too well last time this was attempted). We don't know, although with bizarro futures, where the ES reacts inversely to what fundamentals suggest, look for another 100 points S&P move higher even with US markets close, as the world inches one step closer to nuclear war.

Feds Get the Wrong Man Posted: 30 May 2010 03:30 PM PDT Have the Federal Government targeted the wrong man with its controversial resources super profit tax? While the proposed tax endeavours to ensure that the mining industry is paying its fair share of tax, the same Government has provided unprecedented assistance to another very profitable sector and I particular, one company - Macquarie Bank. Not only has Macquarie Group been an extremely profitable business in recent years, but the rate of tax it pays is far lower than Australia's much maligned mining companies. The RSPT was predicated largely on two bases. Firstly, that the mining sector has been able to generate 'super' profits and don't pay enough tax. Second, that those profits were earned through the exploitation of resources which are the property of all Australians. While there are other aspects to the proposed tax (including replacing the inefficient state-based royalty regime and high levels of foreign ownership of mining companies) they are of less relevance. Addressing the second point first - while it is true to claim that mining companies extract non-renewable resources, it can also be argued that miners need to outlay billions of dollars to create the infrastructure which allows those minerals to be exploited. Therefore, not only do mining companies give Australia's natural assets like coal and iron ore a real value, but those minerals are then sold to other businesses and ultimately consumers. Effectively, the mining companies are being targeted because they happen to be the first (and most visible) link in a long chain of production. Now consider the first point - do mining companies really generate 'super' profits and are they taxed fairly? The best way to determine the profitability of a company is to determine its return on equity - this is the percentage return which a shareholder receives for investing in an asset. (The amount of tax a company pays can be found in its annual financial statements). An insight can be found by comparing the return-on-equity of Australia's two largest mining companies (and the companies which would provide the bulk of the revenue collected from the proposed RSPT) BHP Billiton and Rio Tinto, with that of Australia's largest investment bank, Macquarie Group. Between 2004 and 2009, BHP generated a return on equity of 33 percent and Rio a return of 28 percent. Over that same period, Macquarie generated a return of 23 percent on shareholders' funds. However, while BHP and RIO out-performed, they were largely boosted by record commodities prices - in 2009, as commodities prices retreated, their returns dropped sharply to 16 and 12 percent respectively. More importantly, the relative tax rates paid by BHP and Rio far exceeded the tax paid by Macquarie. Between 2004 and 2009, BHP paid taxes and royalties of US$23.7 billion based on earnings of US$80.5 billion, this means BHP's effective tax rate was 30 percent. RIO was similar, earning profits of US$48 billion and paying more than $11 billion in tax (equating to a tax rate of just over 23 percent). However, the tax rate paid by Macquarie was far lower. Despite earning profits of $8.2 billion between 2004 and 2009, Macquarie paid a mere $1.4 billion in tax - meaning that Macquarie's effective tax rate, courtesy of some smart tax practices, was a mere 18 percent. This was a little more than half the tax rate paid by BHP and less than a third of the rate of tax which mining companies would be required to pay if the RSPT is introduced. However, not only did Macquarie Group pay an extraordinarily low rate of tax, it also benefited from a range of favourable government policies. As the global financial crisis was causing turmoil in September 2008, Macquarie CEO, Nicholas Moore is understood to have met with Financial Services Minister, Nick Sherry and spoken with Federal Treasurer, Wayne Swan. Within weeks, the Federal Government would introduce a wholesale funding guarantee, in which banks like Macquarie were able to rely on Australia's AAA credit rating and obtain tens of billions of dollars in foreign funding. In addition, the Federal Government agreed to an unlimited guarantee on bank retail deposits. Meanwhile, other Macquarie executives, including the head of its Markets Division, had extensive contact with ASIC. Within days of Macquarie's lobbying, ASIC took the unprecedented step of banning short selling of publicly listed financial companies - a move which led to a 9 percent surge in Macquarie's share price. By contrast, throughout the global financial crisis, Australian mining companies, including Rio Tinto and Oz Minerals, which faced near collapse, were left to fend for themselves, forced to raise equity at a substantially discounted prices from Chinese investors and receiving no Government assistance. Now, as the commodities boom temporarily re-occurs, the Federal Government is relying on mining companies to ensure that is able to transform its budget to surplus. It appears that the Federal Government has one rule for taxpaying miners, and another rule for the hard lobbying Martin Place bankers. Adam Schwab for The Daily Reckoning Australia Similar Posts: Were the Government's Stress Tests a Bogus Exercise in Deception? Is the Macquarie Model Dead? Live from China Macquarie Group (ASX:MQG) Profits Fall By 43% One of the Biggest Humbugs in Capitalism is Private Equity

Mr. Market Beats the Bailouts Posted: 30 May 2010 03:26 PM PDT Well, the fans are getting their money's worth. After staggering through the last four or five rounds, the Dow suddenly came back to life yesterday. It got up off the mat. Straightened its shorts. Did a little dance. And then wham... By the time the bell sounded, it was up 284 points. Gold ended the session almost unchanged. So what do you think? Who's gonna win this match? Mr. Market? Or the fixers? We'll tell you: Mr. Market. We don't know how. We don't know when. But we know two important things: First, the fixers don't know what they're doing. Second, what MUST happen WILL happen. Bernanke and Geithner tried to fix this fight. But the fix wouldn't stay fixed. Each time they proclaimed victory, along came new evidence that Mr. Market wasn't giving up. And for the last couple of weeks, Mr. Market seemed to have the fixers on the ropes. The fixers tried all the usual tricks - cheap money, bailouts, and boondoggles. In fact, they used more tricks and fancy footwork than anyone ever had before. Still, the economy barely responded. And now, the latest figures show that the 'recovery' isn't developing as it was supposed to. Trillions of dollars' worth of stimulus and there are still 11 million unemployed and 40 million people on food stamps. An IMF economist says he thinks real estate prices are headed lower. Inventories of unsold houses remain extremely high. Foreclosure rates are at record levels. The job picture is disappointing too. With the government spending so much money, you'd think we would see a big improvement. But, by and large, people who lost their jobs in the crisis of '07-'09 are still out of work. Many of their jobs were not merely put on hold - they were eliminated forever. And the economy is not creating many new ones. Economists believed that a falling dollar would help US exports...increasing employment in the US. But when Europe got into trouble, the dollar went up! Americans felt the warm glow of schadenfreude. But the falling euro is great for Europe and a disaster for the US. Germany was already one of the top exporters in the world. Now, Germany is exporting even more. And US employment is still sinking. Consumers are ready to spend. They're willing. But they don't have any money. We reported yesterday that people are earning less of their money from the private sector than ever before. The rest of their spending money comes from the government. They're called 'transfer payments' - money that is transferred from one person to another. You see the trouble right there. If you have to transfer the money from one citizen to another, there is no net gain. In fact, there is a net loss. Anytime you take money away from people who've earned it...and give it to people who didn't...you are asking for trouble. Don't believe it? Try it in your neighborhood. Let us know how it works out. Of course, the fixers have no idea what they are doing. All they have is a crackpot theory about the way an economy works. They stick with it despite the fact that it makes no sense in theory...and has never actually worked in practice. In the real world, Mr. Market always wins. He always wins because he IS the real world. You can't fix fights in the real world of economics. You're wasting your time trying. ******************** Probably the most important news this week comes from the Telegraph in London, relying on figures from John William's Shadow Stats: US money supply plunges at 1930s pace as Obama eyes fresh stimulus The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history. The M3 figures - which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance - began shrinking last summer. The pace has since quickened. The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of institutional money market funds fell at a 37pc rate, the sharpest drop ever. "It's frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said. The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015. Larry Summers, President Barack Obama's top economic adviser, has asked Congress to "grit its teeth" and approve a fresh fiscal boost of $200bn to keep growth on track. "We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on," he said. David Rosenberg from Gluskin Sheff said the White House appears to have reversed course just weeks after Mr. Obama vowed to rein in a budget deficit of $1.5 trillion (9.4pc of GDP) this year and set up a commission to target cuts. "You truly cannot make this stuff up. The US government is freaked out about the prospect of a double-dip," he said. Mr. Bernanke no longer pays attention to the M3 data. The bank stopped publishing the data five years ago, deeming it too erratic to be of much use. This may have been a serious error since double-digit growth of M3 during the US housing bubble gave clear warnings that the boom was out of control. The sudden slowdown in M3 in early to mid-2008 - just as the Fed talked of raising rates - gave a second warning that the economy was about to go into a nosedive. Mr. Bernanke built his academic reputation on the study of the credit mechanism. This model offers a radically different theory for how the financial system works. While so-called "creditism" has become the new orthodoxy in US central banking, it has not yet been tested over time and may yet prove to be a misadventure. - President Obama banned drilling in the Gulf. Poor Obama. The pundits are practically blaming him for the oil spill. They say the oil slick is his "Katrina moment." Or that his response to the disaster calls his competence into question... The underground gusher may or may not be coming under control. The news this morning is contradictory. But it seems unfair to pin the problem on America's chief executive. What does he know about drilling for oil? Or about plugging holes under the ocean? Nothing. He's a bright fellow...but he's spent his entire life in academia and politics. What do you expect? He doesn't understand how the natural world works...or how an economy works. All he has are plenty of experts around him to give him a bum steer. Until next time, Bill Bonner for The Daily Reckoning Australia Similar Posts: Mr. Market Never Gets a Say on Government Jobs Unemployment Still Rising Because Feds are Trying to 'Do Something About It' Bond Market Could Crash Any Time How Mr Market Influences a Stock Price Obama Plans to Raise Taxes on the Rich and Businesses

The Pain in Spain Posted: 30 May 2010 03:19 PM PDT Forget the downgrading of Spanish sovereign debt by S&P in Friday's U.S. session. And forget the generally downbeat day stocks in America and Europe had to close out last week. The big factor on Aussie shares today took place late Friday afternoon right here in Australia when the Federal government escalated its media war against the mining companies. How will that play with investors in Australian stocks today? Back to that in a moment. But first, from the damned-no-matter what you do file is Spain. The Spanish government has announced austerity measures to bring its public debt and deficit into line. On Friday after European markets closed, ratings agency Fitch said those measures would damage Spanish growth prospects. The country's credit rating was downgraded. On the surface, Spain's debt levels don't look as scary as those in Greece. Spain's debt-to-GDP ratio is 53% with a deficit-to-GDP ratio of 11.2%. Both measures are higher in Greece. But Spain's economy is much larger, about $1.4 trillion in GDP. And there are two big other problems, both of which stem from the nature of Spain's credit boom. The first is that the unemployment rate is already 20% in Spain. The real estate boom supported heavy building and construction investment along with lots of employment. Much of that is going away. According to the Associated Press, the total number of unemployed in Spain leapt from 1.7 million in the first quarter of 2007 to 4.6 million in the first quarter of 2010. Needless to say, it's hard to contribute to economic growth when you can't find a job. But the bigger problem is the collateral of the banking system. Granted, this is not just a Spanish problem. But Spain's 45 big savings banks are chock full of housing-backed collateral. Spanish house prices were the asset class that benefitted most in the credit boom. And now, that bank collateral is under pressure, which puts a government with comparatively modest levels of debt under even more pressure. Mind you this is not an example of contagion. The debt disease is everywhere, from Europe to America to Japan and even here in Australia at the household level. Sooner or later, its symptoms - deleveraging, lower household spending, falling asset prices - start to show up. They show up when the cost of servicing existing debt becomes unbearable and the prospect of borrowing even more can only be realised by debt monetisation (the central bank buying government bonds). That, we think, is the big underlying story to Europe's woes. And it raises a question our colleague Porter Stansberry asked late last week: "How long will the capital markets continue to finance government borrowings that may be refinanced but never repaid on reasonable terms? And second, to what extent can obligations that are not financed through traditional fiscal means be satisfied through central bank monetization of debts - that is, by the printing of money?" The answers to those two questions determine in what sequence you will inflation and deflation. Our view is that you'll see more asset deflation (falling house and stock prices) until the government (in various countries) is compelled to support banks and households by buying assets with new money. But over what time frame this all plays out is another matter. Meanwhile, back here in Australia, something extraordinary happened on Friday afternoon. The Australian website reported that Treasurer Wayne Swan, earlier in the month, applied for and received a "special exemption under national emergency powers to waive the government's own advertising rules for a campaign against the miners." If we understand it correctly, the exemption allows the government to mount its own swift, tax-payer funded counter-message to the miners. Cabinet Secretary and Senator Joe Ludwig apparently had authority to grant the exemption under a special national emergency powers basis. Ironically, or hypocritically, it allows the government to avoid its own advertising rules in which it must have its ads vetted by an independent communications committee. The Senator granted the exemption with the following statement: Given that co-ordinated misinformation about the changes is currently being promulgated in paid advertising, I accept the need for extremely urgent action to ensure the Australian community receive accurate advice about the nature and effect of the changes. As the changes also affect the value of the capital assets and impact on financial markets, I am satisfied that a compelling reason for an exemption exists, particularly given the nature and extent of misinformation against a backdrop of continuing market volatility. Hang on! We thought the government had claimed that the resource super profits tax was NOT responsible for the fall in the Aussie dollar or mining stocks. It was all Greece to them. But if Wayne Swan filed this request on May 11th on the basis that the alleged disinformation by the miners was already affecting asset values, why did the government spend all last week saying no such had happened? But this is more than a "gotcha!" moment. It's the government taking its very public spat with the miners to a new level. And what it reveals is a fundamental disrespect by the current government for the private sector. That's not terribly unique to Australia. Cash-strapped governments everywhere are ransacking the economy for cash. However...it's going to be pretty interesting to see what happens to the dollar and stocks this week. Markets in London and New York are closed Monday. When they reopen, who are they going to sell? Dan Denning for The Daily Reckoning Australia Similar Posts: Ratings Agencies Put Spain on Negative Debt Watch The Foreign Debt Bomb Denmark, Spain, the U.K. and Ireland Have Begun to Register Falling Housing Prices Entering into a Culture Good Luck with Money

The Shift Toward De-globalization is Bullish for Gold Posted: 30 May 2010 03:00 PM PDT Source: http://moneymorning.com/2010/05/28/de-globalization/ By Martin Hutchinson, Contributing Editor, Money Morning You can see signs of de-globalization everywhere. Just look at the intense shareholder opposition to Prudential PLC's proposed takeover of the Asian operations of American International Group Inc. (NYSE: AIG). And that's just one example. The market scare on news that North Korea had, indeed, sunk a South Korean Naval vessel was another. The "flight to safety" in U.S. Treasuries – sparked by the increasing concern about the future of the euro and the viability of Greek government finances – is a third. All over the world, little by little, the apparently inexorable tide of "globalization" – making the world "flat" in the words of Thomas L. Friedman – is retreating. If a full-scale financial crisis breaks out in the next few months, that retreat will become a rout. And the world will become de-globalized. Prior Periods of De-globalization De-globalization has happened before. In the 50 years before 1914, the world had become increasingly globalized. That trend included some developments that are hard to imagine today. Passports had become unnecessary for most travel. Tariffs in some countries – most notably the United States and Kaiser Wilhelm II's Germany – remained punishingly high. But there was a system of global finance very much like the one we have today. That system provided ready capital to the "emerging markets" of that era. And that, for example, transformed Argentina into one of the world's 10 richest countries. New barriers against trade and finance were followed by a world war and protectionist policies. Then came the Great Depression. Before any real recovery had occurred, that global downturn caused most countries to raise barriers to imports. The international capital markets disappeared. And the volume of international trade declined by two thirds. During the quarter century from 1950 to 1975, the world remained largely atomized. One-third of the world's population lived under political systems that did not allow markets to operate. Even outside the Russia/China bloc, international capital markets were very limited even for debt. And exchange controls in most countries outside the United States prevented all but a sliver of international equity investment. Globalization Returns The forces that would finally cause world-capital and world-trade markets to open got their start in 1979 with the emergence of British Prime Minister Margaret Thatcher (who that year removed British price controls). The election of Ronald W. Reagan as U.S. president shortly thereafter also was key, as was the fall of Communism a decade later. In the 1990s, most countries were open to world trade, with free-price mechanisms and relatively low tariffs. Public and private equity investments in the "emerging markets" soared in popularity, in spite of the "Asian contagion" and Russian financial crises of 1997-98. These developments were justified by the formerly socialist intellectuals as a new, moderate "Washington consensus," under which governments retained a role in moderating the forces of the market. The Washington consensus tended to fall apart under stress, as it did in Argentina, because of the excessive government spending to which it led. But it didn't hinder globalization in the form of free trade and free movement of capital. With the 2008 financial-system crash, the "Washington consensus" fell apart. The intellectuals had been getting very bored with free markets and had moved on to "global warming" environmentalism. They seized the opportunity to blame free markets for the crash. That change in philosophy allowed protectionist forces in most countries to raise barriers in the form of subsidies and "anti-dumping" actions. It also gave rise to the "stimulus" – thumping big increases in public spending and budget deficits, all of which were pushed through panicky legislatures. Banking systems were bailed out in a big way. But little was done to address the excessive leverage and ultra-low interest rates that had caused the problem. We are now seeing the results. Trade barriers, in the form of anti-dumping actions and ecological subsidies, are far higher than they were a few years ago. Government finances are a mess. And investors are becoming more and more nervous about taking on foreign risk. Banks and hedge funds used cheap money to invest aggressively once the initial crisis was past. Now they're scared again. Moves to Make, Moves to Avoid There is right now a strong flow of funds into U.S. Treasury bonds. But investors will soon discover that "safe haven" is one of the world's more dangerous investments. If the panic over government debt leads to another financial crisis like that of 2008, further bailouts of the financial system are inevitable. And if that happens, be assured that we will move even closer to de-globalization. Further trade barriers will appear, reducing the interchange between economies that is a major engine of world efficiency. But that's only part of the damage. Even worse will be the huge decline in international investing activity. Governments will either limit such investor activity, or investors will be unwilling to do so due to the perceived risk. Investment will be largely domestic, but the United States will have lost much of its cheap capital advantage over other countries because of its persistent balance-of-payments shortfalls and budget deficits. In that case, many of the economic advances that globalization has brought to the United States – and the world as a whole – will be reversed. The world economy will have to adapt to a much lower level of efficiency, with higher manufacturing costs and less outsourcing. Both inflation and unemployment will be high. The result: We'll be looking at a decade of inflationary recession, with declining living standards. We have already traveled a considerable distance toward de-globalization and should work towards reversing this trend. We should keep trade barriers down and international capital markets open. As protection against the possibility that governments and markets will fail in this attempt, investors should look in one direction – at gold. In a world of inflationary recession, in which international investment opportunities are blocked and government bonds are dangerous, gold remains the most reliable store of value. Others will realize this. So investors with gold in their portfolios will at least have the satisfaction of increasing their capital, while others are losing theirs. [Editor's Note: Money Morning readers are often amazed by Martin Hutchinson's profit-focused instincts - as evidenced by his unerring ability to paint a picture of what's to come. He's able to show us the big profit opportunities that are still over the horizon - while also warning us about the potentially ruinous pitfalls hidden just around the corner. So it's no surprise that Hutchinson has pulled off a string of forecasting successes in the face of the worst financial crisis since the Great Depression - a financial crisis that, not surprisingly, Hutchinson is widely credited for having predicted and warned about well ahead of time. For those who aren't regular readers, and who might like an additional illustration of Hutchinson's abilities, consider dividends, the icon of the super-conservative investing set, and gold, the safe-haven nest of perpetual inflation hawks. With his "Alpha Bulldog" investing strategy - the crux of his Permanent Wealth Investor advisory service - Hutchinson has managed to combine dividends, gold and growth into a winning, but low-risk formula that has developed eye-popping returns for subscribers. To take a moment to find out more about the opportunities related to dividends, gold, "Alpha-Bulldog" stocks and The Permanent Wealth Investor, please click here. You'll likely find it time well spent.] News and Related Story Links: Money Morning Special Report: U.S. Treasury Bonds: The Not-So-Safe "Safe Haven." Reuters: Prudential, AIG in talks to cut AIA deal size – WSJ. Wikipedia: Deglobalization. The New Yorker Think Tank Feature: De-Globalization. The BBC Historic Figures Guide: Kaiser Wilhelm II. Investopedia: What is an emerging markets economy? The Free Dictionary: Atomized. The BBC: The Wall Street Crash and the Great Depression. WhiteHouse.gov: Ronald W. Reagan. The BBC Historic Figures Guide: Margaret Thatcher. Wikipedia: Asian Financial Crisis. Library of Economics and Liberty: Balance of Payments.

Two replies to Brett Arends' disparaging of gold in The Wall Street Journal Posted: 30 May 2010 02:42 PM PDT 10:30p ET Sunday, May 30, 2010 Dear Friend of GATA and Gold: Gary North has written a comprehensive and brilliant reply to Brett Arends' essay in The Wall Street Journal last week disparaging gold as an investment. North gets a little angry but he's been fighting this battle a lot longer than most people and he may be forgiven for losing patience with those who are at best uninformed. North's essay is headlined "The Wall Street Journal's War on Gold" and you can find it at Lew Rockwell's Internet site here: http://www.lewrockwell.com/north/north849.html Also replying well to Arends is Robert Blumen, who writes "The Wall Street Journal Does Not Understand How the Gold Price Is Formed." You can find that essay at 24hGold.com here: http://www.24hgold.com/english/news-gold-silver-wsj-does-not-understand-... Your secretary/treasurer made contact with Arends a couple of days ago and encouraged him to review and consider the material in the "Documentation" section at GATA's Internet site here: http://www.gata.org/taxonomy/term/21 With his acknowledgement Arends did not seem very receptive, but you never know when people will entertain the possibility that there may be more to a subject than they think. CHRIS POWELL, Secretary/Treasurer Gold Anti-Trust Action Committee Inc. ADVERTISEMENT Prophecy to Become Coal Producer This Year with 1.5 Billion Tonnes of Resource Prophecy Resource Corp. (TSX.V: PCY) announced on May 11 that it has entered into a mine services agreement with Leighton Asia Ltd. to begin coal production this year. Production will begin with a 250,000-tonne starter pit as planned in August, with production advancing to 2 million tonnes per year in 2011. Prophecy is fully funded to production and its management team includes John Morganti, Arnold Armstrong, and Rob McEwen. For Prophecy's complete press release about its production plans, please visit: http://www.prophecyresource.com/news_2010_may11.php Join GATA here: World Resource Investment Conference Sunday and Monday, June 6 and 7, 2010 Vancouver Convention Centre Vancouver, British Columbia, Canada http://www.cambridgehouse.ca/index.php/world-resource-investment-confere... * * * Support GATA by purchasing a colorful GATA T-shirt: http://gata.org/tshirts Or a colorful poster of GATA's full-page ad in The Wall Street Journal on January 31, 2009: http://gata.org/node/wallstreetjournal Or a video disc of GATA's 2005 Gold Rush 21 conference in the Yukon: http://www.goldrush21.com/ * * * 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: http://www.gata.org To contribute to GATA, please visit: http://www.gata.org/node/16 ADVERTISEMENT Coming Friday-Sunday, June 11-13, at the Dallas-Fort Worth Airport Marriot: The Anglo Far-East Bullion Co.'s Gold and Silver Conference The conference will explore the dangers and opportunities in today's bullion markets and the need for investors to diversify bullion holdings outside of bullion banking and commodities markets. Speakers will include David Morgan of Silver-Investor.com, Gold Anti-Trust Action Committee Chairman Bill Murphy, and Duncan Cameron and Philip Judge of Anglo Far-East Bullion Co. The earliest conference attendees on Saturday will be able to schedule one-on-one interviews for personal consultation with Anglo-Far East's experts on Sunday. To learn more about and register for the Anglo Far-East Bullion conference, please visit: http://www.anglofareast.com/seminar-registration/

Two replies to Brett Arends' disparaging of gold in The Wall Street Journal Posted: 30 May 2010 02:42 PM PDT 10:30p ET Sunday, May 30, 2010 Dear Friend of GATA and Gold: Gary North has written a comprehensive and brilliant reply to Brett Arends' essay in The Wall Street Journal last week disparaging gold as an investment. North gets a little angry but he's been fighting this battle a lot longer than most people and he may be forgiven for losing patience with those who are at best uninformed. North's essay is headlined "The Wall Street Journal's War on Gold" and you can find it at Lew Rockwell's Internet site here: http://www.lewrockwell.com/north/north849.html Also replying well to Arends is Robert Blumen, who writes "The Wall Street Journal Does Not Understand How the Gold Price Is Formed." You can find that essay at 24hGold.com here: http://www.24hgold.com/english/news-gold-silver-wsj-does-not-understand-... Your secretary/treasurer made contact with Arends a couple of days ago and encouraged him to review and consider the material in the "Documentation" section at GATA's Internet site here: http://www.gata.org/taxonomy/term/21 With his acknowledgement Arends did not seem very receptive, but you never know when people will entertain the possibility that there may be more to a subject than they think. CHRIS POWELL, Secretary/Treasurer Gold Anti-Trust Action Committee Inc. ADVERTISEMENT Prophecy to Become Coal Producer This Year with 1.5 Billion Tonnes of Resource Prophecy Resource Corp. (TSX.V: PCY) announced on May 11 that it has entered into a mine services agreement with Leighton Asia Ltd. to begin coal production this year. Production will begin with a 250,000-tonne starter pit as planned in August, with production advancing to 2 million tonnes per year in 2011. Prophecy is fully funded to production and its management team includes John Morganti, Arnold Armstrong, and Rob McEwen. For Prophecy's complete press release about its production plans, please visit: http://www.prophecyresource.com/news_2010_may11.php Join GATA here: World Resource Investment Conference Sunday and Monday, June 6 and 7, 2010 Vancouver Convention Centre Vancouver, British Columbia, Canada http://www.cambridgehouse.ca/index.php/world-resource-investment-confere... * * * Support GATA by purchasing a colorful GATA T-shirt: http://gata.org/tshirts Or a colorful poster of GATA's full-page ad in The Wall Street Journal on January 31, 2009: http://gata.org/node/wallstreetjournal Or a video disc of GATA's 2005 Gold Rush 21 conference in the Yukon: http://www.goldrush21.com/ * * * 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: http://www.gata.org To contribute to GATA, please visit: http://www.gata.org/node/16 ADVERTISEMENT Coming Friday-Sunday, June 11-13, at the Dallas-Fort Worth Airport Marriot: The Anglo Far-East Bullion Co.'s Gold and Silver Conference The conference will explore the dangers and opportunities in today's bullion markets and the need for investors to diversify bullion holdings outside of bullion banking and commodities markets. Speakers will include David Morgan of Silver-Investor.com, Gold Anti-Trust Action Committee Chairman Bill Murphy, and Duncan Cameron and Philip Judge of Anglo Far-East Bullion Co. The earliest conference attendees on Saturday will be able to schedule one-on-one interviews for personal consultation with Anglo-Far East's experts on Sunday. To learn more about and register for the Anglo Far-East Bullion conference, please visit: http://www.anglofareast.com/seminar-registration/

Erik Nielsen On Europe Past And (Immediate And Rosy) Future Posted: 30 May 2010 02:29 PM PDT Goldman's Erik Nielsen has yet to disclose if he is joining his Euro-pal Jim O'Neill in declaring all out war on the bears (for those unsure about the reference see here, and FYI Jim, the grizzlies send their love... and in keeping with the animal references, they don't really give a rats ass about the occasional dead cat bounce). What he has no problem disclosing, however, is his latest round of rose-colored ebullience, even as other, "slightly" more objective europundits see the end of the Eurozone as ever more imminent. It is stunning how cognitive dissonance can lead two people to the following diametrically opposite conclusions: Erik Nielsen: "The European recovery continues to look pretty good and solid to me" and Ambrose Evans-Pritchard: "[the Pan-European austerity package] can end only in two ways. Either Germany tolerates massive monetary reflation by the ECB or Spain will be forced out of EMU, setting off a catastrophic chain-reaction through north Europe's banking system." Of course, when one is in the business of perpetuating ponzies, while another has a page view quota, the truth likely is somewhere inbetween. Then again, "inbetween" two polar opposites is a wide range. Anyway, since we will likely see a lot more pain "on the plain" shortly, here are some soothing words for all those who are still long and strong and need goal-seeked analyses. Happy Friday night, Gosh, I can’t believe I just wrote that, but here I am collecting my thoughts on Europe while others are out having fun.  But I’ll be off to my local coast in Denmark tomorrow morning for a long weekend - and writing this now seems a better idea than spoiling the (almost) midsummer nights up on my childhood beach.  Here goes: The past week delivered another stream of good, to very good, real economy data out of Europe while markets started to calm down the last couple of days. We also saw a number of important policy measures in Spain and Italy. Fitch downgraded Spain today, but I really can’t get excited.  AA+ is fine, but the timing…  Some thoughts on why I differ from a lot of people on the prospects for the Euro-zone. Former PM and finance minister, and present head of the IMF’s European department, Marek Belka is about to be named the next governor of the Polish central bank; great news. Next week in the Euro-zone will be dominated by Wednesday’s FX-auction at the ECB.  A big demand could re-start a degree of market volatility. PMI-week is coming up in the UK; we’ll probably see a levelling off this high level like everywhere else. Switzerland is set to print Q1 GDP and their PMI.  We expect a strong GDP number (+0.8% qoq, non-annualised) and a flattening of the PMI. Sweden will release the two key private-sector business surveys next week; we expect the KI/NIER to push higher, and the PMI to give back a tad. Norway is set to publish retail sales and their PMI; we expect strong retail numbers and a small decline in the PMI. 1. In the battle between the recovery in the real economy and the stress in the financial sector the former is now one set up.  Last week saw further signs of pretty good growth throughout Europe:  Euro-zone confidence indices were stable at good levels (with the exception of French consumers) and Eurocoin pointed to 0.55%qoq (non-annualised) GDP growth in the Euro-zone in May.  Earlier today Switzerland reported very strong export growth in May (+3%mom), suggesting solid demand in their biggest market, the Euro-zone, and Sweden reported a blockbuster Q1 GDP growth of +1.4%qoq (non-annualised) and – in line with our general view that in Europe the PMIs and better indicators of GDP than the first prints – Swedish 2009’Q4 GDP was revised to +0.4%qoq from -0.6% … that’s right; a full one percent qoq better than first reported!  Sweden benefits from exports of investment goods, not unlike Germany; and earlier this week we learned that the strong German export numbers for April was driven by good demand from all markets (apart from India), with – guess who – China taking the biggest increase (14%mom).  God bless the Chinese!  The European recovery continues to look pretty good and solid to me.  After doing its best to spoil the party early in the week, markets starting to cave to the reality of the real world the last couple of days of the week. 2. Meanwhile, progress continued on the policy front.  Italy announced a sizable EUR24bn in budget cuts, mostly on the spending side, for 2011-2012, which should bring the deficit down to 2.7% of GDP in 2012, and Spain passed its package to cut the deficit to 6% of GDP next year (from 11.2% in 2009), including via a 5% wage cut among civil servants – although with just one vote after the Basque nationalists decided to vote against the package.  (See our European Views earlier today for an overview of the measures throughout Europe and their likely impact on growth.)  Equally important, last weekend’s take over of Cajasur seems to have been the opening shot in the (long overdue) acceleration of the bank clean-up in Spain.  Yesterday, the Bank of Spain proposed a number of stricter provision requirements; this is important stuff because it’ll eventually bring clarity to the hole in their banking system.  As Javier Perez de Azpillaga argued in his European Views earlier this week, we think the hole is perfectly manageable and extremely unlikely to amount to more than 10% of GDP. 3. Fitch downgraded Spain to AA+ from AAA earlier today; maybe they got inspired by the FT’s Lex column…  On a more serious note, it didn’t surprise me, and it doesn’t bother me the slightest.  With all due respect, the ratings agencies have proven themselves (again) in this crisis to be lagging indicators of onset of crisis – and of the recovery.  Of course Spain is not AAA, but why downgrade them the day after they pass a good fiscal reform package and the central bank accelerates the regulatory framework that will help sort out the banks?  As Dirk Schumacher showed in his piece in yesterday’s European Weekly Analyst, the Spanish private sector has already delivered more than half of the balance sheet adjustment needed to stabilise Spain’s net international investment position.  Which leads me to my favourite topic:  Adjustments!  At the most fundamental level, where I disagree with the many Europe-bears out there (as opposed to Euro-bears; because I am one of those myself) is in my belief that Europe can adjust.  We had 8-9 years of inappropriately fast convergence of income levels causing divergence of intra-Euro-zone ULC (and current accounts).  Now we need maybe 3-5 years of a partial reversal: Convergence of ULC, which –unfortunately – will cause some divergence of income levels.  This process is already under way via core deflation in several peripheral countries, including declining wages in Ireland and Spain.  In other words, relative prices are moving in the right direction again.  We all seem to broadly agree on the magnitudes needed for these adjustments, but disagreements emerge when we come to the issue of whether it’ll be politically and socially feasible to complete the process in each of the countries.  Ironically, I have found that with respect to this assessment of the socio-political situation in each country , the further you get away from the Euro-zone, the more sceptical (and often the more convinced) observers get.  Makes you wonder, doesn’t it?   4. Yesterday, Poland’s acting President Komorowski was reported to be about to nominate Marek Belka to be the next Polish central bank governor – and Belka is reported to have accepted.  This is good news.  Belka, currently the head of the European Department at the IMF, is an outstanding choice, a man with a fine academic background, followed by stints as both finance minister and prime minister.  His recent statements indicate that he is not worried by the recent Zloty volatility and, in the longer term, supports Poland's entry into the Eurozone, provided that fiscal stability is restored.  The date of the parliament's confirmation has not been announced yet, but this will be a formality. Turning to this coming week: 5. The highlight in the Euro-zone this coming week will surely be Wednesday’s USD-swap auction by the ECB.  Following all the drama of reported dollar shortage in the Euro-zone, it’s probably fair to think that the ECB was a bit relieved to see such a small take-up thus far.  Those warning most dramatically about the imminent disaster have explained the low demand as caused by the expensive price (1.2%), but I am with the ECB on this one; this was a safety valve, so if there really was a need, they would have showed up.  But with the maturing of unsecured USD funding coming up, we should probably expect to see a significant increase in participation this week.  That said I suspect that a big number – say north of $20bn – between several banks (say 20) would raise eyebrows in the market and could restart another round of market volatility around the European banks.  On the data front, apart from the final PMIs and revised Q1 GDP (probably no changes here yet), the key data point will be the Euro-zone unemployment number on Tuesday (E-map importance: 5); we expect a small increase to 10.1% (from 10.0%) – sad and headline-grapping as it is, the fact remains that labour markets are lagging indicators for the recovery.  Also, on Thursday we’ll get the Euro-zone CPI for May; we expect an increase to 1.6% (from 1.5%) on the back of a small energy related base effect. 6. In the UK, the May PMIs are released this coming week (E-map relevance: 4), with Manufacturing on Tuesday, Construction on Thursday and Services on Friday.  The consensus forecast is for each of the three PMIs to remain broadly steady in May, which seems reasonable to us; like for the Euro-zone we are coming towards the end of the long rally.  Our Composite PMI – which includes the CBI Distributive Trades survey – was stable at 55.9 in April, consistent with sequential GDP growth of around 4% annualised.  Were all else equal, then the fall in the CBI survey would imply a decline of around 0.8pts in the Composite index. 7. Switzerland publishes their Q1 GDP and the May PMI (E-map relevance: 4) on Tuesday.  We expect the GDP to bear out the continued strength in the KOF and the PMI over the first three months of this year, so we are looking for a healthy reading of +0.8%qoq (non-annualised); slightly more optimistic than the consensus expectation of +0.7%qoq.  With respect to the PMI, consensus expects a big reversal after recent months’ impressive gains (64.3, after April’s 65.9); we doubt there’ll be much of a correction. 8. Sweden will release the two key private-sector business surveys this coming week.  On Monday, the KI/NIER Economic Tendency Survey for May is released (E-Map Relevance Score: 5).  Though the headline index has slipped slightly in the last two months, at 105.6 it is still consistent with significant expansion.  Given that the KI/NIER Survey lags the PMI by 1-2 months, we expect the May reading to push above 106.  On Tuesday, the Swedbank PMI is released (E-Map Relevance Score: 5). In April the index rose to 64.0 – close to its all-time record high.  While the forward -looking orders/stocks ratio was consistent with even greater strength in May, we nevertheless expect some decline from these giddy heights. Consensus is also forecasting a decline to 62.3. 9. There are two data releases of note in Norway next week.   Retail sales (E-map relevance: 2) for April on Monday should come in at 0.8%mom, above consensus (0.4%) and the PMI (E-Map  relevance 3) will probably drop back slightly to 51.0 after the large jump last month. and that’s the way Europe looks tonight from Chiswick, while enjoying a bottle of Fuller’s local London Pride as a fitting warm-up for the weekend’s Danish brew. Have a good weekend (and a long one for those in the UK and the US.) Best Erik F. Nielsen Chief European Economist

Trend Trading Gold, Silver, Oil & SP500 Posted: 30 May 2010 02:25 PM PDT Last week looked and felt like a pivotal week for both stocks and commodities. The past two weeks have had investors and traders in a panic as they try to find safe investments for their money.  After watching and reviewing the panic selling in the market it looks as though the majority decided to sell everything and be in cash for the time being. This is bullish for the stock market. I will admit it has been tougher to trade recently because of increased risk levels due to the large 2-4% sell offs and rallies happening within minutes… While this is amazing for disciplined and experienced traders who are able to pull the trigger getting in and out with quick profit in the matter of minutes, this same price action can blow up trading accounts of those who do not have a trading strategy, money management and the discipline to take profits and cut losses very quickly. The speed of the rallies and sell offs is the matter of being up or down thousand of dollars in the matter of 5-10 minutes… That is one of the reasons I have stepped back from being aggressive and into more of an observation mode playing with small amounts of money and focusing on the larger trends at. My #1 goal is to make subscribers money with the least amount of risk and watching the market swing 2-4% in minutes makes it extremely difficult to get everyone in and out positions with a profit before the market changes directions. As much as I love trading, some times the best position is to have small ones or be in cash. GLD – Gold ETF Trading Here is my weekly updated chart of gold as it works its way through the correction from last year. The daily chart looks to be forming a larger Cup & Handle pattern which is extremely bullish. If this pattern does a text book move then we could see GLD reach $140 and spot gold would reach the $1400 area. That being said this pattern still has to complete the handle portion which could easily last another 4 weeks, so I am not in a panic to add more to our position. SLV – Silver ETF Trading Silver is in much of the same situation. Because of the added volatility in silver the charts do not look quite the same but they are similar in many ways… Silver is used a lot for industrial purposes and because the economy which is very weak still (though it is getting better) we are not seeing silver demand rise much. If silver can break this large resistance level then we could see silver surge to $25 (25%) this year. USO – Oil Fund Trading USO (Oil) has held up really well in the past 12 months but the recent sell off has seriously damaged the bullish outlook I had not long ago. While it is oversold and looks to have started a bounce last week the chart is pointing to lower prices over the longer term… This USO fund does have contago which makes this fund under perform the actual price of oil. The current prices of oil are still trading at a key support level and could post  nice bounce if not trigger a new rally. The problem with following some ETF's which have contago is that you do not see the real price action of the commodity. But that is were I come in as I track the underlying commodity and relate it to ETFs for you. SPY – SP500 ETF Trading The Stock Market (SP500) sure has been a roller coaster. The chart below shows you what happened in January for the last correction and where we stand currently in comparison. If a setup is obvious in the financial market there is a very high chance it will not work out as planned and by knowing this it allows us to be cautious and take profits at key short term support and resistance levels. Trend Trading Conclusion: In short, I feel gold and silver will drift around to digest the recent move up and to form the handle portion. Oil looks to have put in a short term bottom and if we get a small pullback in the coming days to test the intraday chart breakout level and touch the support trend line we could look to take a position. We tend to see the most price appreciation during the final stages of a trend and we could have seen that on the US Dollar over the past 6 weeks. It looks as though the dollar could have put in a double top. If the dollar rolls over it would help boost precious metals, oil and stocks… But we will not know it's a top until there is a clear trend reversal which in any case will be weeks before that type of price action can unfold. As for the SP500, we have seen the same level of selling as we did in Feb-March 2009. High volume panic selling has ruled the market since late April. There are equal arguments for saying  the market has bottomed with all the panic selling and that we should start another large rally lasting 8-12 months or one could argue this is capitulation volume signaling massive distribution of shares and now every rally/bounce will be sold…  Personally I am torn between the two… but lean more towards higher prices with a multi month grind up at slow rate… If you would like to receive my trading analysis, thoughts and low risk trading setups check out my trading services at www.TheTechnicalTraders.com Chris Vermeulen

Ancient Roman coins with sex scenes - sprintia Posted: 30 May 2010 12:25 PM PDT Attachment 2072 Attachment 2073 This is a spintria. They were used in ancient Rome to request and pay for different "services" in brothels and from prostitutes on the street. Since there were a lot of foreigners coming to the city that did not speak the language and most of the prostitutes were slaves captured from other places the coins made the transactions easy and efficient. One side of these coins showed what the buyer wanted and the other showed the amount of money to be paid for the act. A spintria (plural, spintriae ) is a Roman token, possibly for brothels, usually depicting sexual acts or symbols More Pics and and text here => http://neoncobra.blogspot.com/2010/0...ex-scenes.html Attached Images sprintia%5B2%5D.jpg (45.1 KB) coins-2%5B2%5D.jpg (99.9 KB)

Guest Post: Goodbye Keynes - Hello Ricardo! Posted: 30 May 2010 12:20 PM PDT Submitted by Frode Haukenes of Econotwist Goodbye Keynes - Hello Ricardo! The world has been fighting the financial crisis by using every possible trick according to John Maynard Keynes‘ playbook. But, as The Great Depression taught us, extreme government spending tends to cause about as much problems as it solves. Perhaps it’s time to put Keynes back on the bookshelf, and pull out the 200 year old theories of David Ricardo. “While budget stimulus measures are intended to boost demand from financially constrained consumers, it may for others – the majority – result in the emergence of Ricardian behavior.” Philippe d’Arvisenet For those not too familiar with economic theories; Ricardian behavior is basically increased  consumer spending due to expectations of higher taxes in the future. This effect has been shown to emerge more widespread in countries with large governmental debt, and lead to significant difference in the recovery process among nations. The increase in public debt registered over the last few years is without precedent. In each of the main OECD countries, public debt is not on a sustainable path, BNP Paribas chief economist, Philippe d’Arvisenet writes in a research paper. This contrasts with past periods, during which emerging markets have appeared more at risk from this perspective. The majority of developed countries will have a public debt ratio in excess of 90% in the middle of the decade, BNP Paribas estimates. However, according to the IMF,  from 2007 to 2014, the debt ratio in these countries is expected to rise by an average of more than 30 points of GDP, reaching an average of 110% of GDP. Philippe d’Arvisenet points out that of this increase, 3 points will be related to supporting the financial system. 4 points to the increased cost of debt. 10 points to automatic stabilizers. 3.5 points to budget stimulus measures. 9 points to losses of tax revenues relating to the decline in asset prices. “The widening of deficits is largely structural in nature. The deficit ratio adjusted for cyclical variations is 4.4% in the euro zone out of a total deficit of 6.7 points, with 9.8 points in the UK (out of a total of 13.3 points) and 8.8 points in the US (out of a total of 10.7 points). In the past, this structural deficit has shown a strong tendency to persist,” the french chief economist writes. For the time being, surplus production capacity limits the risk of public debt having a crowding-out effect on private investment. Ricardo, Who? About 200 years ago British economist David Ricardo presented his “theory of equivalence” in a newspaper essay. In Ricardo’s view, it does not matter whether you choose debt financing or tax financing, because the outcome will be the same in either case. Flip a coin if you like, because in terms of the final results, raising taxes by $1,000 is equivalent to the government borrowing $1,000. According to traditional economic theory, like the Keynesian, public debt has a significant effect on the overall economy because consumers regards public debt as net wealth. The Ricardian equivalence theory, on the other hand, suggest that is has no effect so ever. While budget stimulus measures are intended to boost demand from financially constrained consumers,  in their case  the classic system of budgetary multipliers (Keynesian style economics) takes full effect. But for others – the majority – the result will most likely be widespread emerging of so-called Ricardian behaviour. Ricardian behavior is a term economists use to describe growth in consumer saving to cope with the costs of expected increasing taxes in the future. The consumers expectations are usually fulfilled, and often extended, later research have shown. In most cases, government borrowing ends up being more expensive for the citizens when inflation, higher borrowing costs and interest rates are taken into account. The theory of Ricardian behavior is controversial, as it assumes that people think and behave financially rationally. We know we don’t. But other factors can trigger similar behavior, like lack of transparency in the state finances and mistrust in the governments economic policy. In any case; Ricardo’s main point that government borrowing is nothing more than a way of delaying tax hikes, seems to be accepted by many leading economists today. No More Free Lunch It should be clear by now that the public finance situation calls for credible recovery measures. “While the conventional crowding-out effect does not have an impact, the budget situation – contrary to the situation before the financial crisis – now affects the assessment of risks and may inflate risk premiums. This results in a higher cost of debt, making adjustment even more difficult,” Mr. d’Arvisenet writes. Adding that this situation could make an end to the until now observed developments characterized by rising debt with no impact on interest payments because of falling interest rates – a kind of “free lunch”. “A high level of debt increases the probability of an interest rate or growth shock resulting in unsustainable debt, with higher debt ratios and a widening gap between the apparent real interest rate and the rate of growth. This configuration makes adjustment even more difficult and in any case presents a number of threats (snowball effect of debt).” Recent data clearly call for immediate action. BNP Paribas points to the fact that, as a direct consequence of the financial crisis – with an increase in the cost of capital and structural unemployment and a decline in economic activity – the potential level of GDP in the OECD region is around 3.5 points below the pre-crisis level. In addition, unless there is an increase in taxation, the higher cost of debt means that some public services will have to be sacrificed. An increase in taxation is frequently synonymous with fiscal distortions that can harm growth. Debt then eliminates the ability to implement new support measures if needed. A Credible Exit Strategy; Fact Or Fiction? Ricardo’s theories might very well be correct,  but only in a perfect economy with free markets and responsible, rational people. However, by understanding Ricardo’s line of arguments, it becomes more clear what’s wrong with the current economic policy. BNP Paribas chief economist writes: “In addition to purely budgetary considerations, deterioration in public finances is a potential challenge for central banks. The level of debt may result in not only increases in inflationary anticipations, but also uncertainties about the success of consolidation measures, making steering of monetary policy more complicated (what is the appropriate interest rate?). The weighting of the cost of debt may result in pressures favoring monetisation, casting doubt on the independence of central banks, not taking account of the fact that these institutions – which have increased the share of public debt securities in their balance sheets – are therefore exposed to greater interest rate risks.” According to the IMF, a primary structural surplus of 8 points of GDP from 2011 to 2020 (from -4.3% to +3.6% of GDP) would be necessary in order to bring the debt ratio to 60 points of GDP in 2030, although with significant differences between countries: one-fifth of developed countries would have to make an adjustment of more than 10 points and two-thirds would have to make an adjustment of less than 5 points. The adjustment would be halved for a target of stabilizing the debt ratio at the 2012 level. The IMF estimates that over 10 years, and assuming growth of 2%, the end of stimulus measures could contribute 1.5 points of GDP. In addition to the freeze on public spending excluding health-care, which implies priorities and efforts to improve efficiency, stabilization in expenses relating to the aging of the population proportional to GDP would provide a contribution of 3-4 points of GDP and tax deductions would provide a contribution of around 3 points. “In the shorter term, as suggested by recent research, displaying a credible budgetary consolidation policy concerning primarily expenditure can enhance the effectiveness of support measures in place, by means of both consumer behavior (Barro-Ricardo effect) and also interest rates,” Philippe d’Arvisenet writes. The Ricardian Union (Formerly Known As E.U.) Research by Antonio Alfonso at Universidade Tecnica de Lisboa, published in 2001, concludes that debt hardly will become neutral. And he’s probably right. But Alfonso’s finding, based on studies of 15 European countries, indicates that government debt has a considerable stronger effect on consumer spending in highly indebted countries, as compared to the less indebted nations. There seems to be a limit around 50% of GDP; a debt-to-GDP ratio over 50 tends to make people more aware, and cautious, about their financial situation. They become Ricardian. The prospect of a return to sustainable debt allays fears of inflation and therefore anticipations of a hike in interest rates, which helps to contain the rise in long-term rates, BNP Paribas argues. “A budgetary exit strategy is a difficult exercise. The change in the primary balance needed to ensure a similar level of debt to that observed before the crisis – which would avoid transferring the consequences of the crisis to future generations – is considerable but not unprecedented.” “Recourse to inflation” as dreamed of by some, does not seem to be the solution, according to BNP Paribas, refering to analysis of successful experiences of budgetary consolidation shows that a significant reduction in the debt ratio has been achieved in 10 or so countries, mainly by means of the primary balance. The contribution of growth was negligible in this respect (apart from in Spain and Ireland), chief economist Philippe d’Arvisenet says. “We can therefore see that consolidation measures are taken with a long-term view – one or two years has not been enough. This does not mean that it is not necessary to continue with the reforms intended to support growth,” he adds. However, there are just too many uncertainties relating to this matter to be able to count considerably on this factor. What About Fiscal Illusions? Among the uncertainties are another – rarely mentioned – theory called “fiscal illusion.” “Fiscal Illusion” is a public choice theory of government expenditure first developed by the Italian economist Amilcare Puviani in 1897. “Fiscal Illusion” suggests that when government revenues are unobserved or not fully observed by taxpayers then the cost of government is perceived to be less expensive than it actually is. Examples of fiscal illusion are often seen in deficit spending. CATO Institute economist William Niskanen, has noted that the “starve the beast” strategy popular among U.S.  conservatives wherein tax cuts now force a future reduction in federal government spending is empirically false. Instead, he has found that there is ‘a strong negative relation between the relative level of federal spending and tax revenues. Tax cuts and deficit spending, he argues, makes the cost of government appear to be cheaper than it otherwise would be. Paulo Reis Mourao at Australian National University presented in 2008 an empirical attempt to measure fiscal illusion for almost 70 democracies since 1960. The results obtained reveal that Fiscal Illusion varies greatly around the world. Countries such as Mali, Pakistan, Russia, and Sri Lanka have the highest average values over the time period considered, while Austria, Luxembourg, Netherlands, and New Zealand have the lowest. But, as you know; some illusionists are better than others. The French Solution The greatest increase in public debt forecast for the next few decades relates to the aging of the population, BNP Paribas concludes. “The matter of health-care and pension reforms is crucial (without reform, the associated cost would be 4-5 points of GDP between now and 2030,” according to the French banks research. “Reforms in this area are even more important as their effects become more significant with time and their initial cost is limited.” Based on lessons of other recent research, BNP Paribas notes: “The greater effectiveness of rules that are easy to implement (public spending versus deficit), as demonstrated for example by the failure of the Gramm Rudmann Hollings Act of 1985 and the success of the Budget Enforcement Act that succeeded it;” * The increased effectiveness of automated mechanisms, compared with discretionary practices such as those relating to sanctions for excessive deficits in the euro zone; * The appeal of anti-cyclical measures (rainy day funds etc.). The bank make the following suggestions: (1) To stabilize the public debt ratio (debt to nominal GDP), it is necessary to generate a primary balance equal to the product of the debt ratio by the difference between the real rate of interest on debt and the rate of growth. (2) Not forgetting that inflation is not manifesting itself and that inflationary fears alone are likely to provoke a rise in real interest rates. (3) From this viewpoint, the change in retirement age has substantial effects both directly (increase in tax revenues, reduction in expenditure) and indirectly on potential growth (working-age population and participation rate).

'Pieces of Eight': The Constitution and the Dollar Posted: 30 May 2010 12:20 PM PDT 'Pieces of Eight': The Constitution and the Dollar By Seth Lipsky The Wall Street Journal Saturday, May 29, 2010 Edwin Vieira Jr. escorts a visitor through his gray, clapboard home at the north end of the Shenandoah Valley, and into the woodworking shop. Laid out on a table is his latest project, a handcrafted doorframe, each joint precisely squared and fitted. Nearby, on the wall of the stairway leading to his study, is a copy of his real obsession: the U.S. Constitution. I've driven to Virginia from New York to visit Mr. Vieira, a retired chemist and a lawyer, because I've been reading his magisterial, 1,800-page book called "Pieces of Eight." It is a two-volume treatise on the monetary powers of the Constitution. Now out of print, it has become a kind of cult classic, selling on the Internet for hundreds of dollars a set. It addresses questions that, with the value of the dollar having collapsed to 1,200th of an ounce of gold, are suddenly timely. What is a dollar? How did it become our money of account? What powers in respect of money were given to the federal government in 1787? What disabilities, or prohibitions, are in the Constitution? How have we managed to get so far from the law as the Founders wrote it? And what can be done to bring us back from the brink? The title of the book comes from the nickname for the coin the Founding Fathers were referring to when, in the Constitution, they twice used the word "dollars." Its definition was codified in the Coinage Act of 1792, which provided for minting gold and silver coins and defined a dollar as having "the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy-one grains and four sixteenth parts of a grain of pure, or four hundred and sixteen grains of standard silver." Mr. Vieira speaks for a school of thought -- it goes back to James Madison and Alexander Hamilton and comes together today in, among other places, the Foundation for the Advancement of Monetary Education -- that reckons that such dollars, and their free-market equivalent in gold, are the only constitutional money in America. Lately Vieira has been arguing for the establishment by the states of separate monetary systems. The authority to do so is in Article 1, Section 10, of the Constitution, which prohibits the states from making "any Thing but gold and silver Coin a Tender in Payment of Debts." "What are you going to do when the currency doesn't function anymore?" is one of the ways Mr. Vieira puts the issue to me as we tour his study, a trig garret crammed with such books as a multivolume set of the Colonial Records of Rhode Island, where Mr. Vieira, the son of a U.S. Navy physician, was brought up. "If you look at the hyperinflations of the 20th century -- Weimar Germany, Hungary, Argentina, Brazil, Uruguay, Bolivia -- in every one of those systems, there was, somewhere in the world, a first-class currency that they could use, directly or indirectly" when their own currency collapsed. "What happens now, when the Federal Reserve Note goes down -- what are we going to use?" He pauses and then asks, with a chuckle, "Are we going to stabilize the euro?" The Southern Poverty Law Center has criticized Mr. Vieira because of the importance he attaches to the Founders' concept of the militia. He and other sound-money activists are sometimes dismissed as cranks, given that the Supreme Court sustained paper money as legal tender in 1871 (Knox v. Lee). But with the value of the dollar now at a historic low and everyone from the communist Chinese to the United Nations fretting about the need for a new world reserve currency, he is starting to look less like a crank than a prophet. Mr. Vieira -- who holds degrees from Harvard (a B.A., an M.A., a Ph.D. in chemistry, and a doctorate of law) -- came to the cause of constitutional money via his legal work. He started at the National Right to Work Legal Defense Foundation, where he argued and won a famous Supreme Court case, Communications Workers of America v. Beck (1988). The opinion, written by Justice William Brennan and joined by justices across ideological lines, established the right of a nonunion member not to have the fees he paid to a union for representational services go to political activity he disapproves of. An earlier case drew Mr. Vieira into the money question. It involved the efforts of the owner of a property seized by Maryland in an eminent-domain proceeding to get paid in the gold or silver coin that states are permitted to make legal tender. Mr. Vieira, who speaks with a gentle voice most of the time, still shakes with indignation when he talks of the refusal of the courts even to consider the constitutional question. He eventually lost that case, but his research took him in the early 1980s to Washington to meet U.S. Rep. Ron Paul, R-Texas, who was part of a just-established United States Gold Commission. An aide suggested that Mr. Vieira submit his points to the commission in writing, and work began on what would become "Pieces of Eight." The finished book begins with a quote from Justice Stephen J. Field's dissent in a legal tender case, Dooley v. Smith (1871), warning that arguments in favor of legal tender paper currency "tend directly to break down the barriers which separate a government of limited powers from a government resting in the unrestrained will of Congress." Mr. Vieira believes the Federal Reserve is unconstitutional on, among other points, the same grounds that FDR's National Recovery Administration was found unconstitutional -- namely, that Congress had delegated too much of its own lawmaking responsibilities. He is less harsh toward Fed officials. "I don't basically attribute either greed, stupidity, or evil to these people," who are "caught up in this extraordinarily difficult position," he says. But Mr. Vieira believes that the federal government has gone way past what would have been red lines for the Founders -- and that we are now in a "race against time" over "which happens first, the crisis or the reform." He finds himself in an isolated spot. Those who want to secede from the Union don't call him, he says, because "I'm against secession." Nor do the paper money people, because "I point out that paper money is absolutely unconstitutional." The gold standard people don't call, "because I point out that the constitutional standard is silver." Mr. Vieira offers this hope. "We're in a better position than the Founding Fathers," he says, noting they faced stagflation, dissension from those loyal to England, devastation from war in large sections of the country, and regional jealousies. "And they came together in Philadelphia, and they worked out this document -- a work of practical genius." He considers it a wonder that, despite all the damage done to it over the years by politicians, "it's still with us and it contains the answers. It's right there." ----- Mr. Lipsky, founding editor of The New York Sun, is the author of "The Citizen's Constitution: An Annotated Guide" (Basic Books, 2009). http://gata.org/node/8688

Beyond Market Turbulence Posted: 30 May 2010 09:19 AM PDT Via Pension Pulse. As a follow-up to my last comment, David Parkinson of the Globe & Mail reports, Despite the turbulence, strategists stay bullish: The sight of slumping stock prices hasn’t shaken most market strategists’ confidence that the bull market#001f5e ! important; padding-bottom: 0px ! important; color: #001f5e ! important; background-color: transparent ! important; background-image: none; padding-top: 0pt; padding-right: 0pt; padding-left: 0pt;"> still has further to fly. But they warn investors to buckle up – we could be in for plenty of turbulence.   In the wake of a selloff that has knocked the U.S. benchmark S&P 500 stock index into official “correction” territory (a drop of more than 10 per cent) in the space of a month while lopping 7 per cent off Canada’s S&P/TSX composite, strategists on Wall and Bay streets are reminding clients that the size of this correction is nothing out of the ordinary in a post-recession bull market. What’s more, they insist that the selling is being driven by fear rather than fundamentals – meaning that markets with solid growth prospects are merely getting cheaper and creating buying opportunities.   “It is difficult to be very bearish of corporate assets when growth is reasonably strong, inflation is low, margins are expanding, monetary policies are easy, and valuations are undemanding,” said economist Larry Hatheway of UBS Ltd. in London.   “In the first four months of this year, investors had become increasingly complacent to risk,” he said. “This was a market vulnerable to correction – all that was missing was a catalyst.”   However, that catalyst – a major sovereign-debt scare out of Europe – has re-awakened investors’ hyper-sensitivity to risk, a lingering effect of the credit crisis of 2008-09. The depth and speed of this risk adjustment does suggest that even if stocks can track generally higher in the coming months, they may do so in a very moody, volatile way.   “People are now a lot faster on the trigger in reducing risk. This increased volatility could be a byproduct of a new way of managing portfolios,” said Stéfane Marion, chief strategist at National Bank Financial in Montreal.   “But we have to keep things in perspective. We haven’t yet seen the collateral damage [from the European debt woes] that would upset global growth.   “In a world where credit markets remain functional, I don’t think the amount of selling we’ve seen can be justified,” he said. “The valuations we have right now are very reasonable.”   George Vasic, chief strategist for UBS Securities Canada Inc., noted in a research report that over the past 50 years, post-bear-market rallies on the Toronto Stock Exchange have all been met with corrections on the scale of what we’ve seen recently; the average pullback has been 13 per cent. Similarly, Pierre Lapointe, global macro strategist at Brockhouse & Cooper Inc. in Montreal, said the S&P 500 has routinely rallied in the year after the end of a recession, yet those rallies have all included a considerable correction within them, averaging 17 per cent.   “The next few months will remain volatile, but history tells us that the year that follows a recession is usually very profitable for equities,” said Mr. Lapointe, who reiterated his overweight recommendation on global equities.   David Bianco, chief U.S. equity strategist at Bank of America-Merrill Lynch in New York, is among several strategists who issued research notes in the past few days reiterating their earnings and stock-index targets over the next 12 to 18 months. His 12-month target for the S&P 500 remains at 1,350, a whopping 25 per cent above Tuesday’s closing levels.   He said the current S&P 500 levels imply a price-to-earnings multiple of about 12 times, far below the historical norm of 15 times. At normal P/Es, current levels are pricing in S&P 500 earnings of just $72 (U.S.) a share for 2011 – almost 20 per cent below Mr. Bianco’s “base-case” forecast, and toward the low end of his worst-case projections in the case of another global recession.   “Times like this make it clear that the risk equity premium is no free lunch, and volatility is gut-wrenching, even for the most long-term investors,” he said. “[But] we believe the best way to feel better during a correction is to buy some shares.” I think volatility is here to stay. Itchy traders selling at the first sign of weakness, memories of 2008, and way too much risk management stifling the large portfolios, forcing managers to cut positions when the VIX rises is all creating havoc in markets. Add to this market misinformation usually spread by large investment houses or their large hedge fund clients looking to capitalize on volatility, and you come away thinking that maybe the month of May was a harbinger of things to come. But the reality is that US fundamentals have turned the corner. Allan Robinson of the Globe & Mail reports, U.S. consumers could give global stocks a lift: The bull market needs some fuel and that will come once the U.S. jobs picture improves, incomes start to rise and consumer spending revives, strategists say.   “History tells us that a peak in the U.S. unemployment rate has the potential to sustain the equity rally – globally,” said Pierre Lapointe, a global macro strategist with Brockhouse Cooper. “We have calculated that every time the unemployment rate peaks after a business cycle, the post-recession global rally gets a second wind.”   Basically, investors bet on a recovery. “Investors realize if the jobs market gets better that means consumers will start spending again and that means profits down the road,” Mr. Lapointe said.   What is the market looking for now?   After three solid months of increased spending, economists are looking for consumers to take a breather and investors may need to be patient. Personal spending data scheduled for release Friday is forecast to have increased 0.3 per cent during April, compared with a lofty 0.6 per cent rise in March, according to a survey of economists by Bloomberg.   On the plus side, personal income is expected to have crept higher rising 0.4 per cent in April, compared with 0.3 per cent in March.   Another positive for U.S. consumers is that they have had no reason to be worried about rising prices. The personal consumption expenditures inflation data, known as the PCE deflator, measure price changes for a broad range of goods and services, excluding food and energy. The deflator also due out Friday is forecast to have declined to a 47-year low of 1.1 per cent in April, well below the U.S. Federal Reserve Board’s long-run forecast of 1.7 per cent to 2 per cent, according to BMO Nesbitt Burns Inc.   “The sharp turnaround in the labour market in recent months suggests that incomes will soon start to rise more significantly,” said Paul Dales, the U.S. economist for Capital Economics Ltd. “This will allow households to raise their savings rate without too much of a slowdown in consumption growth,” he said.     How will the market react?   So far stock markets have not reflected that bullish scenario. Investors have been preoccupied with sovereign risks concerns, which has driven stock markets lower. Last week the VIX, a measure of equity volatility, soared to 45.79 but this week it plunged to about 30.   “Only on five occasions in the past 25 years has the VIX reached such heights,” said Carmine Grigoli, chief investment strategist with Mizuho Securities USA Inc. Such elevated readings suggest emotional selling and on average the stock market has jumped 26 per cent in the following year.   And Brockhouse Cooper’s Mr. Lapointe said that on average six months after U.S. unemployment levels peak (in October, 2009) global markets increased 9.4 per cent, compared with the recent 1.1-per-cent decline. “One year after the unemployment rate peak, global equities were up 17 per cent on average,” he said. It's easy to get all flustered in these markets. With volatility on the rise, more uncertainty over Europe's future, stocks coming off one of the worst months, it's no wonder everyone is pessimistic and bearish. But if you look beyond the turbulence, and focus on the improving fundamentals, then a different picture emerges. To be sure, the big beta moves of 2009 are over, but going forward, there will be money to be made if you pick your stocks and sectors right. That much I'm sure of. Below, William Greiner, chief investment officer at Scout Investment Advisors, talks with Bloomberg's Matt Miller and Carol Massar about the outlook for U.S. inflation. Greiner also discusses the outlook for U.S. stocks, corporate earnings and Europe's financial crisis.

A U.S. Government Bond Bubble Posted: 30 May 2010 08:24 AM PDT Moses Kim submits: What follows will read like an indictment on our entire economic system. But underlying my (relatively mild) harangue is an observation that people are ignoring the most obvious bubble out there; that is, the bubble in U.S. government bonds. Efficiency Market Theory Complete Story »

Germany’s MMNews interviews GATA’s secretary Posted: 30 May 2010 05:51 AM PDT 10:26a ET Sunday, May 30, 2010 Dear Friend of GATA and Gold: Germany's financial news Internet site, MMNews, today posted an interview with your secretary/treasurer about the gold price suppression scheme. The interview was done by reporter Lars Schall, it's headlined "Everyone Is Deceived," and you can find it at MMNews here: http://www.mmnews.de/index.php/english-news/5658-everyone-is-deceived CHRIS POWELL, Secretary/Treasurer Gold Anti-Trust Action Committee Inc. Join GATA here: World Resource Investment Conference Sunday and Monday, June 6 and 7, 2010 Vancouver Convention Centre Vancouver, British Columbia, Canada http://www.cambridgehouse.ca/index.php/world-resource-investment-confere… * * * 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: http://www.gata.org To contribute to GATA, please visit: http://www.gata.org/node/16

Funds seek Midas touch with miners Posted: 30 May 2010 05:51 AM PDT By Cameron French and Steve James Reuters Friday, May 28, 2010 http://www.reuters.com/article/idUSN2514925320100527 Top hedge fund stock pickers have extended their bets on gold, adding gold mining stocks to their investments in the precious metal. Last year, investors such as John Paulson and Richard Chilton piled into shares of the exchange traded fund SPDR Gold Trust (GLD.P), which is directly backed by the metal. This year, many managers have added shares of gold producers like Barrick Gold and NovaGold Resources, as well as the Market Vectors Gold Miners ETF, which owns stakes in several dozen publicly traded companies. Among 30 of the largest equity-oriented hedge funds tracked by Thomson Reuters, including those run by Paulson and Chilton, 12 reported owning substantial plays on gold in regulatory filings that covered portfolios as of March 31. Gold is seen as a safe haven in a world stressed by the hangover from the financial crisis, particularly potential weakness in the euro because of the budget distress faced by many European governments. Gold has often worked as a long-term hedge against inflation when governments are forced to print money to keep their economies afloat. The addition of mining stocks to portfolios of the "Smart Money" 30 reflects continued faith in the price of gold, according to analysts and other investors. The metal hit an all-time high two weeks ago at $1,248.95 an ounce and is currently trading at around $1,215. "In the next two years it's going to $2,000 or I have to shave my hair off," said Charles Oliver of Toronto's Sprott Asset Management, referring to a pledge he has made publicly. He co-manages a $600 million precious metals fund. Oliver echoes the thinking of many investors that the best way to profit from a surging price now is through shares of a gold producer. "Gold bullion is defense," he says. "On the offensive side, if you want capital gains, (you want) gold stocks. We're in a bull market in gold and, generally speaking, most of the time gold stocks will outperform bullion." While gold stocks have actually lagged the metal's performance during much of the past decade — which many attribute to rampant mining cost inflation in 2005-2008 — the relationship appears to have reversed this year. During gold's run-up since the end of March, gold mining stocks have risen more than 16 percent, versus a 9 percent rise for the metal. A belief that this will continue has prompted many fund managers to increase their exposure to gold stocks. Paulson, who presciently bet housing prices would fall three years ago, announced plans late last year to make a big bet on gold by launching a new fund devoted to the metal. He has turned to gold as a currency alternative to the U.S. dollar, as he worries inflation could jump due to the political difficulty of removing the U.S. government's mountain of stimulus cash from the economy. At the end of the first quarter, Paulson held 31.5 million shares of the popular SPDR Gold Trust, as well as a 12 percent stake in Anglogold Ashanti and a 4 percent stake in Kinross Gold. Chilton's fund bought shares of Kinross and Barrick, among others, in the first quarter. Eric Mindich's Eton Park Capital bolstered positions in gold, including Barrick and Newmont Mining. And John Griffin's Blue Ridge Capital reported a 5.1 million-share holding of the miners ETF. Paulson raised a few eyebrows in March when he agreed to take a 9 percent stake in junior miner NovaGold. NovaGold, also favored by billionaire George Soros this year — he now holds more than 8 percent — owns 50 percent stakes in the Galore Creek and Donlin Creek deposits in British Columbia and Alaska. Both have huge reserves but are beset by multibillion-dollar start-up costs. "The criteria that appear to be used by some of these funds is they're looking for assets in politically safe jurisdictions — Canada and the U.S. being targeted," said Paolo Lostritto, an analyst at Wellington West. An investment in a junior like NovaGold also suggests faith that the metal is headed upward, said Ian Nakamoto, director or research at MacDougall, MacDougall, and MacTier. "If you have a bias toward high gold prices, you would want companies that have a lot of potential reserves," he said. "You don't necessarily want gold companies that are producing now and selling into the market and getting $1,200″ an ounce. "Maybe you want a company that's going to produce in three years and get $1,700." As a hedge against inflation, gold benefited from billions in stimulus dollars spent last year — particularly in the United States — to kick-start economic growth. It has pushed even higher in recent weeks as the European debt crisis has begun undermining the euro. Central banks, meanwhile, have reversed their past practice of selling gold and are now expected to add hundreds of tonnes of bullion to their holdings, a shift seen as a bullish signal. Adam Graf, an analyst at New York's Dahlman Rose & Co, sees those pressure driving gold to at least $1,800. "I think over the longer term gold should have upward pressure for quite a while," Graf said. Western countries "have printed a lot of money and keep doing it," he added. * * * Join GATA here: World Resource Investment Conference Sunday and Monday, June 6 and 7, 2010 Vancouver Convention Centre Vancouver, British Columbia, Canada http://www.cambridgehouse.ca/index.php/world-resource-investment-confere… * * * 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: http://www.gata.org To contribute to GATA, please visit: http://www.gata.org/node/16

Still Clueless About Gold and Paper Money Posted: 30 May 2010 05:51 AM PDT Tim Iacono submits: How can you write an entire article that bashes gold (e.g., how it has no intrinsic value, pays no dividend, etc. ) and not once mention the negative attributes of paper money – what replaced gold for good (supposedly) about 40 years ago? Really! Think about it for a second. You can't. Why? Because once you start talking about how you don't really need a gold standard or anything backing a currency so long as governments and central banks act prudently, you realize that governments and central banks are completely incapable of doing so over long stretches of time and the end result will always be the destruction of the currency. But that's what Brett Arends does in this report from the Wall Street Journal on investing in gold and, in the process, he quotes famed investor Warren Buffett who also seems to be deficient in this area: Warren Buffett put it well. "Gold gets dug out of the ground in Africa, or someplace," he said. "Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head." … It's a currency "substitute," but it's useless. In prison, at least, they use cigarettes: If all else fails, they can smoke them. Imagine a bunch of health nuts in a nonsmoking "facility" still trying to settle their debts with cigarettes. That's gold. It doesn't make sense. Honestly, the Wall Street Journal has been one of the more enlightened mainstream media outlets when it comes to gold, but this really sets them back a few notches in my view. This is like something that you'd read in Money Magazine. With the help of Wikipedia, let's review what's sorely missing from this story by recalling the most important attributes of "money", whether its pure fiat money or dumb 'ol gold coins. Read more »

David Einhorn’s ‘Good News for the Grandchildren’ Posted: 30 May 2010 05:51 AM PDT Market Folly submits: Earlier, we posted a compilation of notes from the Ira Sohn Conference and we also detailed Steve Eisman's presentation, Subprime Goes to College. Next, we're detailing the speech from Greenlight Capital's David Einhorn. The hedge fund manager's speech entitled, "Good News for the Grandchildren" focuses on how our grandchildren won't have to pay for the consequences of our actions; we will. He thinks a crisis has already unfolded and that our generation will be the ones paying for it. Instead of watching the situation spiral into a debt crisis, Einhorn urges us to address the situation right now. As you can imagine, Einhorn likes gold and gold stocks. In particular, he mentioned African Barrick Gold (ABG) traded in London. Additionally, Einhorn attacked the ratings agencies and again mentioned he was still short Moody's (MCO) and McGraw Hill (MHP). Some of you will remember that Einhorn originally laid out his short thesis on these names at last year's Ira Sohn Conference when he presented The Curse of the Triple-A. To see what else Einhorn has been investing in, we highlighted his new position in NCR (NCR) and we've also covered Greenlight's portfolio for those interested. To learn more about Einhorn and his investment process, we recommend checking out his book, Fooling Some of the People All of the Time. Read more »

U.S. Mint News Posted: 30 May 2010 05:51 AM PDT US Mint American Buffalo Gold Proof Coin Launches June 3, 2010 May 28, 2010 at 9:03 AM The United States Mint today announced the beginning of sales for the 2010 American Buffalo Gold Proof Coins on June 3, 2010, at noon Eastern Time (ET). The price of the 24-karat gold one-ounce coin will be based on the United States Mint's pricing structure for numismatic products containing precious metals. Read more….

Mr. Denninger and Gold or Why the Dollar-Deflationists Are Wrong Posted: 30 May 2010 05:04 AM PDT via Gordon Gekko's Blog Those who know Mr. Denninger know that he, well, for lack of a better word, hates Gold. It only goes to show the level of disinformation and ignorance prevalent in our society when even smart people like Karl fail to get it. From what I hear anybody even mentioning the word Gold runs the risk of being permanently banned from one of his "forums". In a recent commentary entitled "Ten Things for 2010" he was at it again bashing Gold. Here is what he had to say: We're not looking at hyperinflation folks, in my view - we're looking at a deflationary collapse…If you fear hyperinflation do not look to Gold, instead buy a small (5% of your total portfolio) position in far out of the money LEAP CALLS on the major indices, spread across them.  Why?  Because (1) the tax structure on gold is unfavorable, (2) gold has never performed well on a contemporary basis .vs. inflation and (3) you can't eat it.  If you try to get around the tax man structure you're going to get creamed; governments can and WILL prevent that from working.  My recommendation thus is to buy insurance against a hyperinflationary event using instruments that do not try to evade the formal financial structure, are levered (to get around the tax hit) and are defined risk (so as to avoid losing your ass if you're wrong.) Really Karl? LEAP Calls? In a hyperinflation? That’s a good way to lose 5% your portfolio. I’m assuming you know what hyperinflation is - in a hyperinflation the currency becomes worthless, as in toilet-paper. Why would anyone want to get paid their "winnings" in a worthless currency, assuming there are stock indices and counterparties left who can pay off these worthless winnings when countries collapse?  And the tax structure is FAR more favorable for Gold than ANYTHING else, if only you are not in the habit of bending over. Buy cash and keep your mouth shut – it’s very simple – or just move to another country where the government is not as intent on raping its citizens. I know privacy is a foreign concept in America these days, but still. All your other assets, including stock market profits, are fully open to the government and there is nothing stopping them from taxing them to the hilt. Trust me, when it all hits the fan Gold in your personal possession will be your best friend.  Which brings me to my favorite part: gold has never performed well on a contemporary basis .vs. inflation Poor Gold. The thing gave an instant 75% profit when Roosevelt confiscated it in 1933 and rose 24x (yes, that’s 24 TIMES) from $35 to about $850 in a space of 10 years from 1970 to 1980. And even during the past decade from 2000-2010 it has risen 5x outperforming ALL asset classes. Overall, from 1933 till date it has risen about 60x. That is, if you simply held Gold since 1933 you would be now 60 times richer, at least in nominal terms. Yet nobody remembers all that. All they remember is the lousy 20 years from 1980-2000 when the full force of the derivatives market was brought to bear upon it to suppress it’s price (well, that’s a topic for another post), as is being done even now absent which it would have easily crossed 10x (from the 2000 low) by now – which it will at some point in the future as the market cannot be suppressed forever. Indeed, the longer the suppression, the more forceful the eventual price rise as happened when the London Gold Pool collapsed during the late sixties soon after which Gold shot up 24x during the next decade. If you’re not that devoted a disciple of Karl I suggest you hang on to your Gold for a little while longer. In my humble opinion, it will outpace all gains in all other asset classes since the creation of the dollar – in not only nominal, but real purchasing power terms. And then there was this again: The last time I checked they didn't take 100oz bars at WalMart, but they sure do take $100 bills And the last time I checked Karl, they weren’t taking stock certificates and bonds either. Also, there was a funny thing I noticed: there was NOTHING stopping me from getting dollar bills, euros, yen – you name it – for my Gold. In fact, everytime I sold some Gold I got even more paper tickets than the last time – which meant that I could buy even more stuff with the same amount of Gold. How surprising, no? Well, Karl was definitely surprised: Precious metals will not be a safe haven: Clean miss.  Gold and silver have both performed well. And talk about reaching wrong conclusions: Discovery that the metals market has been "polluted" to the point of irrelevance would mean that those around the world who had bought and were holding alleged gold bars that in fact aren't gold had tendered good money for nothing.  This would be a monstrous deflationary event - after all, the definition of deflation is the destruction of money, and that's exactly what would have happened, just as if you took a stack of $100 bills and burned them in your back yard. No Karl, the bills still exist – in the bank account of whoever was paid to obtain the said Gold. It is the Gold which is discovered to be no longer existing, thus causing the apparent supply to be further reduced and spiking the price.  Karl thinks he’ll be safe watching these “fireworks” from the sidelines. Not so Karl. By not buying Gold (and holding dollars), you are smack in the middle of them. You are not simply “missing out” on some investment gain but stand to lose everything as the purchasing power of the dollar is decimated. This is why those advocating holding only paper cash as a “safe alternative” are in fact harming those who listen to them. Now don’t get me wrong - I agree with a lot of what he says in general – he’s a good reporter (which is why I keep him on my “must read” list) - but when it comes to Gold, Karl simply doesn’t “get it”. First of all, when you talk about deflation you have to ask the question, “In terms of what?”.  Most people ala Mish, Prechter, Karl et. al. when they talk about deflation are referring to deflation in terms of the dollar, i.e. they are, in fact, “dollar-deflationists”*. One can’t really blame them since the dollar is considered by most people as “money” today and is therefore their frame of reference. But this is a critical error of perception that will prove fatal to those who hold their life’s savings in dollars when it all finally implodes.  The dollar today is just another fiat currency created at will out of thin air by bankrupt and corrupt governments and their Central Banks. It is an illusion of money, not money; which brings us to the question of:    What is money? This is a topic which can fill an entire book, but I’ll just quote the best one I found (Mises): In the marketability of the various commodities and services there prevail considerable differences. There are goods for which it is not difficult to find applicants ready to disburse the highest recompense which, under the given state of affairs, can possibly be obtained, or a recompense only slightly smaller. There are other goods for which it is very hard to find a customer quickly, even if the vendor is ready to be content with a compensation much smaller than he could reap if he could find another aspirant whose demand is more intense. It is these differences in the marketability of the various commodities and services which created indirect exchange. A man who at the instant cannot acquire what he wants to get for the conduct of his own household or business, or who does not yet know what kind of goods he will need in the uncertain future, comes nearer to his ultimate goal if he exchanges a less marketable good he wants to trade against a more marketable one. It may also happen that the physical properties of the merchandise he wants to give away (as, for instance, its perishability or the costs incurred by its storage or similar circumstances) impel him not to wait longer. Sometimes he may be prompted to hurry in giving away the good concerned because he is afraid of a deterioration of its market value. In all such cases he improves his own situation in acquiring a more marketable good, even if this good is not suitable to satisfy directly any of his own needs.   A medium of exchange is a good which people acquire neither for their own consumption nor for employment in their own production activities, but with the intention of exchanging it at a later date against those goods which they want to use either for consumption or for production.   Money is a medium of exchange. It is the most marketable good which people acquire because they want to offer it in later acts of interpersonal exchange. Money is the thing which serves as the generally accepted and commonly used medium of exchange...  (All emphasis mine) Money was created by the markets; by humans trading goods and services amongst themselves; by the need for indirect exchange. This is one of the major misconceptions of the dollar-deflationists - that money is what the government says it is. Although Governments do their best to convince people otherwise, including putting a gun to their collective heads via legal tender laws, they cannot dictate what money is – not for long periods of time anyways – which is why whereas Gold has been money for thousands of years, you’d be hard pressed to find a fiat currency that has existed past a few decades. The present period is one such short period of mass delusion where the majority has been convinced – including, apparently, Mr. Denninger - that the colored pieces of paper being printed by various men behind the curtains is, in fact, money.  Gold is the commodity that humans chose to be “money”- the most marketable good. It didn’t happen overnight, but over thousands of years of evolution. Billions of trading decisions over centuries made by free men of their own volition – the collective wisdom – installed Gold as money. It needs no government violence to enforce as money because the force of nature that is the market chose it to be money. Indeed, it was the governments who hijacked the free-market commodity money of Gold into “backing” their various fraudulent paper money scams using fractional reserve systems. Why? Because the power to create money is the ultimate power. It is not for no reason that Mayer Amschel Rothschild said: “Give me control of a nation's money and I care not who makes her laws.” And why do we know Gold is still money today? It’s simple – Gold has the highest stocks to flow ratio of any commodity i.e. its total above ground stockpile is very large compared to its annual production which is NOT the case for other commodities. The reason for this is that while other commodities are primarily mined for consumption, Gold is not consumed but hoarded. Its primary function is that of a store of value – a wealth reserve. Why do you think the Central Banks keep Gold on their balance sheet even today? Right. Even the Gold jewellery demand in countries like India is, in fact, investment demand in disguise – hidden firmly behind veils of religion and culture to protect their real wealth from the depredations of various rulers and governments that have pillaged her over the many thousands of years of her existence.  Moreover, even though most people don’t realize it, even today the dollar is only acceptable as money because it is indirectly “backed” by Gold (via the derivatives market) i.e. you can get Gold in exchange for paper dollars on the open market. The proof of this lies in the fact that were, for some reason, the convertibility of Gold into dollars suspended today [on the open market], the dollar would instantly collapse.  Gold IS Money – not the dollar, not ANY fiat currency. Period. As the king of banksters J.P. Morgan himself testified before the Pujo Committee in 1913: “Gold is money and nothing else”.   The Fiat Money Scam Throughout history no fiat currency has survived – ever. There is a reason for it. Paper money is inherently a scam – a scheme to loot the people who actually produce the goods and services in the economy. Just because it is legalized and its perpetrators hold fancy government titles does not mean it is not a fraud. The issuer can create unlimited pieces of paper – or computer bits today – at essentially no cost and use them to appropriate real goods and services in the economy. So whereas you and I have to actually do real work to procure it, the printers of the currency can basically print whatever they need. This is why there is a constant inflation of money supply under a fiat money regime as has been the case since the Federal Reserve was established in the US in 1913, as constant theft requires constant creation of new money. The evidence of this inflation is the annihilation of the dollar’s purchasing power since then:   The Dollar's Purchasing Power Since the Creation of the Federal Reserve in 1913 This is why we have legal tender laws making the unconstitutional Federal Reserve Notes legal tender with the monopoly of the private banking cartel (i.e. the Federal Reserve) enforced by the courts enabling the banks and the government to essentially enslave the populace. This is also exactly why the founders of America prohibited anything except Gold and Silver to be used as money, and why the governments go to great lengths to suppress their price. Indeed, America today is the very antithesis of what its founders intended. The fraudulent money system today is the source of all the rottenness. The various scams in progress today - the entrenched corruption - can be all be traced back to it. The rot is at the very top of the pyramid from which the fountain of fiat money emanates. It is indeed telling that the two World Wars occurred right after creation of the Federal Reserve. Further, no amount of prosecution will fix the system because the prosecutors themselves have been corrupted. As Ayn Rand said: "When you have made evil the means of survival, do not expect men to remain good. Do not expect them to stay moral and lose their lives for the purpose of becoming the fodder of the immoral. Do not expect them to produce, when production is punished and looting rewarded. Do not ask, 'Who is destroying the world? You are.” It is too lucrative a scam to be given up voluntarily by those owning the printing press while the going is still good. It is like expecting a thief to stop stealing while not only being immune from any sort of legal prosecution, but actually having the power to create laws. The system cannot be fixed - the only way this will stop is a collapse of the existing system so that a new one can be built – and we are in the middle of it right now. Deflation in Terms of Gold, Hyperinflation in Terms of the Dollar By its very nature, due to economic control being concentrated in a few hands and fraudulent creation of money out of thin air, the fiat money system creates massive misallocations of capital and resources throughout the economy. The economy under a fiat money system is no different than a centrally planned one, such as the Soviet Union.  Moreover, since the entire world is on a fiat money standard today – with the various fiat currencies themselves being “backed” by the fiat dollar - misallocations of capital have occurred throughout the world resulting in malinvestments. These misallocations are both material and human, as exemplified by the skyrocketing unemployment rate. The malinvestments now need to be liquidated i.e. converted to the most liquid form – “the most marketable good” or money - so that the capital can be reallocated to more productive uses. Loans are called in as they can no longer be serviced. This results in deflation, i.e. rising demand for money in relation to everything else, and consequently falling prices and increasing purchasing power of money. Moreover, economic uncertainty means that more and more people want to hold “the most marketable good” i.e. money thus further increasing the demand for money. Now normally – since a lot of debt-money is destroyed in the process and there is a rising demand for money - this would lead to a rising dollar (in terms of purchasing power, not the meaningless DXY), but that would mean that the whole “theft-via-inflation” scam would fall apart. The government can’t tax a rising purchasing power! They simply CANNOT allow deflation in a fiat money regime as it would defeat its very purpose – that of allowing them to appropriate resources from the rest of the economy. This would threaten their very existence.  This is why holes created on the banks’ balance sheets by defaulting loans – which would normally create deflation - are being eagerly filled by the Central Banks. This is why the Fed is now simply printing money out of thin air – both overtly and covertly, with the derivatives market being cleverly used to absorb the excess money creation (so you were wondering why the derivatives monster is increasing exponentially in size?) - to fund the government’s operations as there is not enough money in the market to lend to the government. Hiding under esoteric nonsense terms like “quantitative easing” does not change the fact that it is simply creating money via ledger entries and outright STEALING.  Whether they “allow” it or not deflation WILL take place – not in terms of dollars, but in terms of Gold. It’s simply forces of nature – the market – at work. The dollar deflationists expect the dollar to suddenly reverse its 100 year long drop in purchasing power. Ain’t gonna happen. What the government is doing now – i.e. spending raw printed money into a contracting economy - assures us that we will end up with the hyperinflation of the dollar. The only thing they can do is prolong its demise with intermittent bouts of induced apparent “deflation” to keep the inflationary scam going a little bit longer - remember 2008? (h/t Gary). Initially, of course, many people (such as Mr. Denninger) – mistakenly thinking the dollar to be “money” – will rush to its perceived safety causing the dollar to rise.  But ultimately, as more and more people realize that the government will not – indeed, cannot – stop inflating the currency into oblivion, will choose to hold the ultimate “marketable good”, i.e. Gold. This is the reason why Gold is the only asset class at new all time highs. Rest as

Why It's Likely a Correction and Not Another Train Crash Posted: 30 May 2010 04:49 AM PDT Prieur du Plessis submits: Global equity markets have been hemorrhaging from the debt crisis in the European Union that began in Greece and subsequently spread to Portugal and Spain’s equity markets, losing more than 15% in terms of U.S. dollars since the recent high in mid-April. Click on charts to enlarge: Complete Story »

Panic Its Over: War, Gulf Catastrophe, Economy Collapse, Europe Collapse, Rioting Ahead Posted: 30 May 2010 03:25 AM PDT Let's start with Gerald Celente of Trend Forecasters: "It did collapse. It collapsed in March of 2009. The world equity markets collapsed. What they did was they propped them up. And they propped them up with stimulus packages worldwide. The United States has lent, spent and guaranteed $11 trillion, to prop up this economy. So the collapse happened. But it hasn't crashed. And we are looking for the crash to come.[..] I want to make this clear: capitalism is dead in America. And it's not socialism, like all these people are yelling about. The merger of state and corporate powers, by definition, according to someone who knew the definition really well, is called fascism. That's what Mussolini called it. Fascism has come to America." Hedge funder Hugh Hendry needs less words: 'I would recommend you panic'. Canadian fund manager Eric Sprott has this (about the US): "The debt, the deficits are enormous. The industrial capacity has been gutted. One cannot make a positive story for it other than some temporary trading phenomenon because something else is uglier than the dollar." The US M3 money supply (the most comprehensive number, albeit no longer supplied by the government, is sinking like an anvil, with an annualized rate of contraction of 9.6%. And even though nobody I've read seems prepared to call this spade for what it is, this, dear grasshoppers, is what constitutes deflation. Not falling prices, they are but a consequence of a falling money supply and velocity (which today is slower than the heavy mud BP so far fails to use to plug its "leak"). And as much as it may seem astonishing to see the money supply fall that hard and fast, it does so, and we at The Automatic Earth did tell you well in advance. The deleveraging going on inside all the fields combined that make up the economy is simply too much of a force to plug with a bunch of trillions of dollars and/or golf balls. Yes, the comparisons between the failed and failing US financial policies on the one side, and the botched beyond belief BP disaster inevitably come to the forefront as President Obama visits the Gulf region for a second time in 38 days. Where are his priorities? Why does he act as he does? It was clear for many from the get-go that Deepwater Horizon had the potential to be the worst environmental calamity in US history. Where was Obama? How does a president decide he doesn't have to be where it hurts? Now, after all this time, he shows up and claims that Washington won't let the people of the Gulf of Mexico fall. Problem is, Washington, and the president, already have. And neither can have those 38 days back.. California's municipalities are, ever more of them, considering bankruptcy as a last resort to escape at least some of their worst and darkest dreams. So does Miami. New York State seems set to increase borrowing from its own funds to keep up appearances a little longer. Never mind. It's over, guys, it really is. Look at the stock markets, look at Europe, look at Sacramento, Miami, Ohio, Illinois. Does anyone near you really still believe that we'll have an economic recovery, with real economic growth, anytime in the next little, say, decade? If they do, please refer them to the M3 number. And if they don't even get that one, give up. You must surely be talking to a pride of religious crazies. More Here...

Dylan Grice Finds Value Within The Printing Orgy Posted: 30 May 2010 03:16 AM PDT This weekend's must read note, from SocGen's Dylan Grice - Print baby, print... emerging value and the quest to buy inflation

Canada's Banks: 3rd Worst Of The G7 Countries Posted: 30 May 2010 03:09 AM PDT The sorry spectacle of Conservative cabinet ministers flying around the world defending banks from a tax to cover their next, inevitable, meltdown is bad enough. What is perhaps worse is that it is being largely justified by the perpetuation of the myth that Canada did not have to bail out its banks. Wrong. We are, according to the IMF, actually the third worst of the G7 countries, behind the US and Britain, in terms of financial stabilization costs. First, we put up $70 billion to buy up iffy mortgages from the big five banks, through the Canadian Mortgage and Housing Corporation, taking them off the banks' balance sheets. That is almost the exact equivalent the US bailout – it spent ten times as much, $700 billion, and its economy is about 10 times as large. Secondly, the Harper government established a fund of $200 billion to backstop the banks – money they could borrow if they needed it. The government had to borrow billions – mostly from the banks! – to do it. It's euphemistically called the Emergency Financing Framework – implying that our impeccable banks might actually face an emergency. It is effectively a line of  low-interest credit and while it has not all been accessed, it's there to be used.  Could it help explain why credit has not dried up here as much as it has in the US More Here.. $930-Million Security Tab to be Incurred by Canadians For The Upcoming G8 and G20 Summit More Here..   This posting includes an audio/video/photo media file: Download Now

Russell Napier On When To Expect The Treasury Bubble Crash Posted: 30 May 2010 02:54 AM PDT A week ago at the CFA Institute's 2010 Annual Dinner, Baupost's Seth Klarman stole the spotlight by announcing to everyone that he was "more worried about the world than ever" while making it clear that he was on the same Jim Grant and Julian Robertson "Treasury put" bandwagon. Yet another speaker present at the event, who undeservedly received much less attention, was CLSA'a Russell Napier, who has long been warning about precisely the thing that all asset managers are realizing rather belatedly, that Treasuries are a very "fundamental asset bubble." The only relevant questions, which Napier has previously discussed extensively, are "when do treasuries crash" and "what do you do" when that happens. The attached presentation provides some color on both.  Russell Napier, whose Anatomy of the Bear (available for a pdf-special $3.95 steal on DocStoc) is one of the better market analysis books available, had one quite insightful observation. As the CFA noted in its press release on the matter, "One point that Mr. Napier made toward the end of his  presentation was that the difference between current borrowing and previous peaks in government debt is that previous surges in the debt load were linked with the financing of conflict. As he put it, the current borrowing is to keep people alive rather than to kill. The implication for the global economy of this key difference is that social programs to subsidize a certain quality of life are not a profit-making endeavor in the same way as traditional twentieth century conflicts." We wish we were as sanguine about this conclusion as Mr. Napier. With a rapidly deteriorating geopolitical situation in both the Middle and Far East, perhaps the massive entitlement spending has been nothing short of a diversion from the the traditionally massive "defense" spending. After all, there have been over $257 billion in defense vendor payments by the US Treasury since October, an outlay smaller only than Social Security Outlays and Medicare. And since Napier's perspective has been largely ignored by the Mainstream media, we provide a link to his most recent comprehensive presentation on the topic of the Treasury bubble from earlier this year. In it, Napier takes (apriori) on a point made last week by Albert Edwards, an states that "balance of payments is key, not current account" pointing out that bigger CA deficits do not necessarily mean falling reserves as can be seen in the Thailand case, leading him to conclude that "Asian reserves will grow as capital flows reverse." Furthermore, back in February, Napier predicted perfectly the most recent TIC data which showed a record foreign capital flow into US securities (whether this was predicated by the capital flight ouf of Europe is largely irrelevant). Napier also questions the role of US commercial banks, and is confident they can plug a hole of up to $1 trillion in Treasury demand, saying "bank purchases of government debt can reflate America" in one of the most vicious Catch 22s, since the Fed funds banks at the discount window with money used to subsequently purchase safe assets, thereby monetizing debt with one small step of separation, a topic long discussed by Zero Hedge. Another key point is the recently notable observation on the plunging M3 via Ambrose Evans-Pritchard - as Napier shows this is certainly not the first time that broad money supply has contracted and led to lower inflation. The real question is what happens to credit demand in a disinflationary phase, all else equal, which however thanks to Europe, will not be the case for a long time. Lastly, the Asian expert analyzes the role of governments, and specifically those of Asia and China as a preamble to the great Treasury bubble pop: China’s return to gradual appreciation of the renminbi does not stop funds pouring into Treasuries A one-off revaluation was not spurred by 8% inflation in China in 2008 so it will not happen now Capital controls are coming in Asia Capital controls will be insufficient and credit controls will follow Such measures shorten the duration of the great distortion but still current due to CA surpluses While Napier does not provide the ever-elusive answer on when to expect the bubble pop, his insights give some more variables to juggle as we all await the bursting of the greatest bubble in capital markets history. Full presentation:   Attachment Size CFA Napier.pdf 96.35 KB When Do Treasuries Crash.pdf 233.8 KB This posting includes an audio/video/photo media file: Download Now

India Markets Saturday Round-Up: Spain Looms Large Posted: 30 May 2010 02:52 AM PDT Equitymaster submits: The week ended largely positive for most of the world’s indices. The US was the worst performing market of the week (down 0.6%) as news of Spanish debt downgrade came in late Friday. Other than the US, the only market to close in the red was Japan (down 0.2%). Among the other world markets, China (up 2.8%) was the top performer followed closely by Brazil (up 2.8%). Up by 2.5%, India’s benchmark Index BSE-Sensex was also among the top performers of this week on the back of an increase in FII inflows. In Europe, UK (up 2.5%) was the best performer with France (up 2.5%) and Germany (up 2%) following close behind. Singapore and Hong Kong were up by 1.4% and 1.1% respectively. Complete Story »

Germany's MMNews interviews GATA's secretary Posted: 30 May 2010 02:28 AM PDT 10:26a ET Sunday, May 30, 2010 Dear Friend of GATA and Gold: Germany's financial news Internet site, MMNews, today posted an interview with your secretary/treasurer about the gold price suppression scheme. The interview was done by reporter Lars Schall, it's headlined "Everyone Is Deceived," and you can find it at MMNews here: http://www.mmnews.de/index.php/english-news/5658-everyone-is-deceived CHRIS POWELL, Secretary/Treasurer Gold Anti-Trust Action Committee Inc. ADVERTISEMENT Prophecy to Become Coal Producer This Year with 1.5 Billion Tonnes of Resource Prophecy Resource Corp. (TSX.V: PCY) announced on May 11 that it has entered into a mine services agreement with Leighton Asia Ltd. to begin coal production this year. Production will begin with a 250,000-tonne starter pit as planned in August, with production advancing to 2 million tonnes per year in 2011. Prophecy is fully funded to production and its management team includes John Morganti, Arnold Armstrong, and Rob McEwen. For Prophecy's complete press release about its production plans, please visit: http://www.prophecyresource.com/news_2010_may11.php Join GATA here: World Resource Investment Conference Sunday and Monday, June 6 and 7, 2010 Vancouver Convention Centre Vancouver, British Columbia, Canada http://www.cambridgehouse.ca/index.php/world-resource-investment-confere... * * * Support GATA by purchasing a colorful GATA T-shirt: http://gata.org/tshirts Or a colorful poster of GATA's full-page ad in The Wall Street Journal on January 31, 2009: http://gata.org/node/wallstreetjournal Or a video disc of GATA's 2005 Gold Rush 21 conference in the Yukon: http://www.goldrush21.com/ * * * 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: http://www.gata.org To contribute to GATA, please visit: http://www.gata.org/node/16 ADVERTISEMENT Coming Friday-Sunday, June 11-13, at the Dallas-Fort Worth Airport Marriot: The Anglo Far-East Bullion Co.'s Gold and Silver Conference The conference will explore the dangers and opportunities in today's bullion markets and the need for investors to diversify bullion holdings outside of bullion banking and commodities markets. Speakers will include David Morgan of Silver-Investor.com, Gold Anti-Trust Action Committee Chairman Bill Murphy, and Duncan Cameron and Philip Judge of Anglo Far-East Bullion Co. The earliest conference attendees on Saturday will be able to schedule one-on-one interviews for personal consultation with Anglo-Far East's experts on Sunday. To learn more about and register for the Anglo Far-East Bullion conference, please visit: http://www.anglofareast.com/seminar-registration/

Germany's MMNews interviews GATA's secretary Posted: 30 May 2010 02:28 AM PDT 10:26a ET Sunday, May 30, 2010 Dear Friend of GATA and Gold: Germany's financial news Internet site, MMNews, today posted an interview with your secretary/treasurer about the gold price suppression scheme. The interview was done by reporter Lars Schall, it's headlined "Everyone Is Deceived," and you can find it at MMNews here: http://www.mmnews.de/index.php/english-news/5658-everyone-is-deceived CHRIS POWELL, Secretary/Treasurer Gold Anti-Trust Action Committee Inc. ADVERTISEMENT Prophecy to Become Coal Producer This Year with 1.5 Billion Tonnes of Resource Prophecy Resource Corp. (TSX.V: PCY) announced on May 11 that it has entered into a mine services agreement with Leighton Asia Ltd. to begin coal production this year. Production will begin with a 250,000-tonne starter pit as planned in August, with production advancing to 2 million tonnes per year in 2011. Prophecy is fully funded to production and its management team includes John Morganti, Arnold Armstrong, and Rob McEwen. For Prophecy's complete press release about its production plans, please visit: http://www.prophecyresource.com/news_2010_may11.php Join GATA here: World Resource Investment Conference Sunday and Monday, June 6 and 7, 2010 Vancouver Convention Centre Vancouver, British Columbia, Canada http://www.cambridgehouse.ca/index.php/world-resource-investment-confere... * * * Support GATA by purchasing a colorful GATA T-shirt: http://gata.org/tshirts Or a colorful poster of GATA's full-page ad in The Wall Street Journal on January 31, 2009: http://gata.org/node/wallstreetjournal Or a video disc of GATA's 2005 Gold Rush 21 conference in the Yukon: http://www.goldrush21.com/ * * * 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: http://www.gata.org To contribute to GATA, please visit: http://www.gata.org/node/16 ADVERTISEMENT Coming Friday-Sunday, June 11-13, at the Dallas-Fort Worth Airport Marriot: The Anglo Far-East Bullion Co.'s Gold and Silver Conference The conference will explore the dangers and opportunities in today's bullion markets and the need for investors to diversify bullion holdings outside of bullion banking and commodities markets. Speakers will include David Morgan of Silver-Investor.com, Gold Anti-Trust Action Committee Chairman Bill Murphy, and Duncan Cameron and Philip Judge of Anglo Far-East Bullion Co. The earliest conference attendees on Saturday will be able to schedule one-on-one interviews for personal consultation with Anglo-Far East's experts on Sunday. To learn more about and register for the Anglo Far-East Bullion conference, please visit: http://www.anglofareast.com/seminar-registration/

Guest Post: Preparing For What's Next Posted: 30 May 2010 01:59 AM PDT Submitted by David Galland of The Casey Report Oh, what a tangled web we live in. On one side of the Atlantic, there is a fundamentally broke European Union. On the other, the world’s largest debtor nation, these United States. Rotate the globe and you discover China, the world’s most populous nation: a nation whose economy is desperately dependent on export revenues, without which its government may find it hard to meet the population’s soaring aspirations. And who is China’s largest trading partner? The European Union, that’s who. The web also encompasses the role that the U.S. dollar plays in the relationship between the European Union and the Chinese. Or, more specifically, the role the peg plays that China maintains with the U.S. dollar. As long as the U.S. dollar is weak, the Chinese yuan is weak and therefore competitive in European markets. The problem now is that, with the euro falling, in order to remain competitive, Chinese companies must reduce their margins. Therein lies the rub, because the razor-thin margins of the Chinese companies – estimated to be on the order of just 2% -- face the very real danger of thinning to the vanishing point. After which the best a Chinese company will be able to hope for is to make up its losses on volume. That was a joke. It gets more tangled. Because as the euro falls, the competitiveness of eurozone companies on world markets rises, adding further pressures on the trade that China so desperately needs (and that the U.S. would like more of as well). In this race to the bottom that the editors of The Casey Report have been warning of, the latest leg goes to the Europeans, though no conceivable improvement in their exports will offset the crushing debt burden that is now laying the continent low. While this chapter in the unfolding saga may not end with the phrase, “And so it was that the eurozone collapsed and its common currency passed into the annals of history,” as this chapter is still being worked on, it could end that way. Likewise, with China’s #1 market on the thin edge of becoming uneconomic, so, too, the current chapter might end with the myth of the Chinese miracle being shattered. And the U.S.? To get to a rational assumption about the U.S., we need to ponder the fate of the dollar, as this plays a mighty role in the global economy. We begin our pondering by recognizing that, given the massive sovereign – and private – debt load, there’s no way that the central banks of Europe or the U.S. are going to voluntarily raise interest rates anytime soon. To do so would be akin to Count Dracula voluntarily stepping into the sunlight. Regardless of the wishes of the sovereign debtors, whether rates rise – especially when it comes to medium and long-term paper – is almost entirely driven by market forces. And what market forces might cause rates to rise? One is that the supply of new credit greatly outstrips demand. We already know that the U.S. is blowing out Treasuries in a manner not dissimilar to the way that the Deepwater Horizon well is blowing out crude. However, dominating the news just now is the massive bailout organized by the European Union in an attempt to beat back the troubles besetting eurozone banks with balance sheets buried in the unpayable sovereign debt of the PIIGS – an amount that could exceed a trillion dollars. This bailout will require, &cute; la the U.S., a serious ramping up of the supply of eurozone sovereign debt. With one important difference – while the situation in the U.S. is untenable, as it is not front page news, it is not urgent. Therefore, at this point in the crisis, while LIBOR is on the rise, the U.S. Treasury is again enjoying a wonderful uptick in demand for its trash and that, in turn, is driving U.S. rates down and helping to prop the dollar up. Still with me? Getting circular here, we return to the fact that China’s link to the dollar means that its currency is likely to keep rising in relation to the common currency of its largest trading partner – the eurozone. And per above, that risks shoving a stick into the spokes of the Chinese economy. On that point, an excellent recent commentary by Eclectica fund manager Hugh Hendry included a quote by China’s Vice Commerce Minister Zhong Shan in the Wall Street Journal: “Water doesn’t boil if it is heated to 99 degrees Celsius. But it will boil if it is heated by one more degree.” And, “A further rise in the yuan by a very small magnitude might cause fundamental changes.” A serious downturn in China will have big consequences. For instance, as Hendry also points out, while China represents just 7% of the world’s GDP, it currently consumes upwards of 30% of the world’s aluminum, 47% of the steel, and 40% of the copper. So what are we to make of all of this? How are we to invest? Until there is some semblance of clarity in just how badly banged up the balance sheets of the European banks are, and whether the governments of that region will be able to pull the oars in sync, the euro is in for a lot of trouble. Counter-trend reversals aside, parity with the U.S. dollar is not out of the question. That increases the potential for China to hit a wall, at which point the world will find itself facing a whole new set of problems. Per many past comments on the topic, for us the myth of China has long sounded eerily like that of Japan in its now past glory days. All of which is to say that, in the current chapter of the crisis, the U.S. dollar is likely to regain its aura of being the fair-haired lad of the global financial community, albeit a deeply dysfunctional fair-haired lad. For commodity investors, that gives rise to the clear potential that the base metals and energy sectors are going to come under considerable pressure. As will gold, if for no other reason than that when the trading herd sees the dollar rising against the euro, it reflexively hears “sell gold.” Of course, with the “safe harbor” trade back in vogue, the U.S. government will redouble its efforts to paper over the nation’s systematic problems – a papering over that will only accelerate as it becomes apparent that the economy is headed for the next leg in the crisis. While the timing is impossible to predict, I suspect that in a relatively short period of time (three months? Six months?) it will become clear to absolutely everyone that the U.S. has no intention of changing its spendthrift ways, making it no safe harbor, at which point the show for tangible assets – gold, above all – will really get moving. The way to play the situation is to follow our constant advice to have a heavier-than-normal concentration of cash in your portfolio and look to use corrections to steadily build positions in gold and the high-quality gold stocks. And, as energy is also under pressure – pressure that would intensify if China stumbles – you need to be researching the sector now, with an eye toward building a solid portfolio in that sector as well. Not quite yet, but soon. Now, having shared those prognostications, a caveat is in order. Namely that no one can tell the future. The best we can do is to examine the data and try to make rational assumptions. Those are my assumptions, but I may have overlooked many a critical factor in this immensely complex and interconnected world. And, of course, more than just about any time in living memory, there is a heightened probability that a black swan might land and turn everything on its head. Even so, a portfolio whose core is heavy with cash against near-term deflation and that gives you the flexibility to buy tangible assets when they get cheap… bolstered by a solid position in gold to ward off the effects of an all-but-certain future inflation, and a winner in crisis as well… and which focuses on a slow build of shares in high-quality precious metals and energy companies… should pretty much get you through any conceivable scenario that may come to pass.

Guest Post: The Path To Hyperinflation Posted: 30 May 2010 01:50 AM PDT Submitted by Jordan Roy-Byrne of Wall St Cheat Sheet As we’ve discussed recently, persistent deflationary forces do not augur for a repeat of Japan circa 1990s or the US in the 1930s. Instead, because of the inability of governments to finance their current and future debt burden (there is a dearth of domestic savings and global capital), deflationary forces will ultimately lead to severe inflation or hyperinflation. In today’s missive, we explain how this will happen but in various stages. In the first stage, the economy enters a recession after a large credit bubble. The recession and end of the credit bubble lead to deflation. As a result, the US Dollar and US Treasuries outperform. Think 2008. Policy makers (a term for interventionist bureaucrats) then provide stimulus via monetary easing and deficit spending. Gold (NYSE: GLD) and gold stocks (NYSE: GDX) outperform with silver not far behind. Think late 2008 to early 2009. The economy gets a bump from the stimulus and economically sensitive markets such as commodities and stocks outperform. Think 2009. This brings us to where we are now. The market is starting to sense that Europe’s debt burden is too high as its economies struggle to recover under the weight of excessive debt. The market is beginning to sense a rising probability of default. Precious metals are soaring against the Euro, the Pound and the Swiss Franc. Meanwhile, with money moving back into US Treasuries, the US will have the ability to attempt another stimulus and announce further quantitative easing.  Europe is currently ahead of the US on its track to currency depreciation, rising inflation expectations, and rising CPI/PPI. The US still has time before the market begins to worry about its debt burden. The next stage is the transition from the initial outbreak of price inflation to severe inflation. Inflation accelerates due to a loss of confidence in governments and currencies. A failed economic recovery leads the market to realize that the debt burden is too large and will ultimately be defaulted upon or inflated away. At this juncture, all commodities begin to perform well again. It may take anywhere from six to 18 months for this stage to be evident. Finally, inflation is exacerbated as supply shortages emerge. Tight credit restricts new production and consumers begin to hoard. During such a period, precious metals and commodities will continue to perform well but the agriculture sector will be the real leader. In order for an investor to maximize returns, they must be able to hold their convictions and adapt to the changes in the coming cycle of inflation. Currently, precious metals are obviously far and away the best play. While more and more investors are waking up to gold, they are not embracing it enough. If it is clear that Gold is a safe haven, why are you only devoting 5-10% of your portfolio to it? Moreover, why do you have zero or 5% exposure to gold stocks when their outlook is superior to commodity stocks and emerging market stocks? Of course market timing is important and we are here to help. Our combination of technical analysis and sentiment tools has allowed us to catch the last two short-term bottoms in the precious metals sector. We also use the same techniques in our Macro newsletter. If you’d like professional help in navigating the coming mania in the gold and silver stocks, then consider a free 14-day trial to our premium service. Good luck and protect yourself!

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