Gold World News Flash

MISH, Steve Keen and Prechter were right. Schiff, Rogers, Gross, Faber, Puplava, Taleb Were Wrong.
Crude Oil Hovers Under Resistance, Gold Tries to Regain Composure
How the Islamic World Plans to Beat the West: A Gold Coin
Amusing Idiocy From David Stockman
Bear Market Race Week 146: Credit Use and Abuse 1920s-30s
The Daily Gold Podcast #1 w/ Dave Skarica
Nielson: The End Game is Either Hyperinflation or Debt Implosion - Got Gold?
How to Find Low Risk SP500, Gold and Oil ETF Setups
Whats unravelling is gold price suppression
Mrs. Watanabe Gets a Margin Call
The Case for Gold: Bull or Bear
Jim's Mailbox
Why the Rothschild’s got out of the London Fix. . . . . .
Why the Rothschild's got out of the London Fix. . . . . .
Why more Quantitative Easing can’t be avoided and will threaten the developed world and the U.S. Dollar
Three Out of Four Economists are Wrong
Why Bankers Didn't See Collapse
How to Find Low Risk SP500, Gold & Oil ETF Setups
Housing Market Sinks Beneath the Waves
Notes from Hong Kong: Signs of China Slowdown
Top 10 Most Read Posts In The Past Week
Rare Earth Elements: The World Is Rapidly Running Out And China Has Most Of The Remaining Supply
Broader Market Technical Analysis Update
Bubblemania: Part I, Defining a “Bubble”
Bubblemania: Part I, Defining a “Bubble”
Gene Arensberg: Gold a buy, silver not quite yet

MISH, Steve Keen and Prechter were right. Schiff, Rogers, Gross, Faber, Puplava, Taleb Were Wrong.

Posted: 01 Aug 2010 07:09 PM PDT

Does Anyone Else Remember When All The Big Investors Were Betting On Inflation?

Crude Oil Hovers Under Resistance, Gold Tries to Regain Composure

Posted: 01 Aug 2010 07:01 PM PDT

courtesy of DailyFX.com August 01, 2010 10:51 PM Increasing risk appetite across the financial markets is supportive of the ongoing crude oil rally, but the coming week is not without risks. Gold has been rebounding, but investors remain on the sidelines for now. Commodities – Energy Crude Oil Hovers Under Resistance Crude Oil (WTI) $79.25 +$0.30 +0.38% Commentary: Last week saw crude oil dip early in the week and then rebound late in the week to finish essentially flat in the period. With risk appetite across the broad financial markets returning, crude oil prices should be well-supported early this week, but there are two releases to watch out for. The first is the U.S. DOE inventory report on Wednesday. Last week saw an enormous build that sent inventory levels to just shy of 10-year highs on the back of a surge in imports. If we see a similar build this week, it could jeopardize the rally. The other data point to watch for is the ...

How the Islamic World Plans to Beat the West: A Gold Coin

Posted: 01 Aug 2010 06:31 PM PDT

LewRockwell.com – The Muslim world has found a novel way to strike back at the West – or at least at Western bankers who rule the world's currencies – introduce a gold coin. Malaysia expects to use gold dinars to trade only between Islamic countries beginning in 2003. The gold dinar, which is 4.25 grams of 24-carat gold, would unite Muslim nations who blame "greedy" currency traders for Asia's downfall in the economic crisis of 1997–98. There is also a silver Islamic Dirham coin of 3.0 grams silver. The dinar is being privately used in 22 countries and is minted in 4 countries. More.

Gold Dinar, Silver Dirham (DINAR:PMF)

Amusing Idiocy From David Stockman

Posted: 01 Aug 2010 06:02 PM PDT

Market Ticker - Karl Denninger View original article August 01, 2010 02:35 PM You have love this sort of thing... [INDENT]More fundamentally, Mr. McConnell's stand puts the lie to the Republican pretense that its new monetarist and supply-side doctrines are rooted in its traditional financial philosophy. [/INDENT]I don't think anyone would argue with this. But it's what comes next that raises eyebrows... [INDENT]More specifically, the new policy doctrines have caused four great deformations of the national economy, and modern Republicans have turned a blind eye to each one. [/INDENT]It's all the Republican's fault, you see. Yes, Nixon did close the gold window. But exactly who has made current-account deficits one of their prime mantras? Let me ask - has President Obama closed the border? How about Clinton? Throw out all the cheap labor and enact wage-parity tariffs? You know, things that would actually address the premise of curren...

Bear Market Race Week 146: Credit Use and Abuse 1920s-30s

Posted: 01 Aug 2010 06:02 PM PDT

The 1929 & 2007 Bear Market Race to The Bottom Week 146 of 149 Credit Use and Abuse 1920s-30s Consumer Credit’s Largest Contraction Since 1946 The DJIA and Barron’s Gold Mining Index: 1938 to 2010 Mark J. Lundeen [EMAIL="mlundeen2@Comcast.net"]mlundeen2@Comcast.net[/EMAIL] 30 July 2010 Color Key to text below Boiler Plate in Blue Grey New Weekly Commentary in Black Below is my BEV chart for the Bear Race. We are in the “Summer of Recovery.” But what’s recovering? I don’t know; you tell me? July was a good month for the Stock Market; except for the 30 Companies in the Dow Jones Industrial Average. July covers Wk 142-146 in the Chart above. Is this the best the Bulls can do? Maybe in August the Bulls will show a little more enthusiasm, and then maybe not. For the Record, I’m not Anybody’s “Investment Advisor.” I’m just offering my personal research to the public, an...

The Daily Gold Podcast #1 w/ Dave Skarica

Posted: 01 Aug 2010 05:54 PM PDT

We are going to do a few podcasts per week with various guests. Friend and colleague Dave Skarica was here for our first podcast. Listen below:

Nielson: The End Game is Either Hyperinflation or Debt Implosion - Got Gold?

Posted: 01 Aug 2010 05:48 PM PDT

How to Find Low Risk SP500, Gold and Oil ETF Setups

Posted: 01 Aug 2010 05:37 PM PDT

Whats unravelling is gold price suppression

Posted: 01 Aug 2010 05:30 PM PDT

Mrs. Watanabe Gets a Margin Call

Posted: 01 Aug 2010 03:53 PM PDT

Annnnd we're back. This week begins with very different levels of manufacturing activity in China and Australia. One is bullish. The other not so much. One confirms the basic idea that the world is slowing down, growing less fast, writing down bad credits, and saving for a rainy day. The other doesn't exactly contradict that idea.

But we'd like to begin this week of reckoning with a simple observation: the rigging of short-term interest rates can prompt ordinary people to take extraordinary risks.

We hesitate to say bad risks because each act of risk taking is an individual thing. But what they have in common is that access to cheap money effectively lowers personal inhibitions to risk in the same way that a shot of tequila increases your chance of doing something stupid in a bar.

Take the Mrs. Watanabes of Japan. Its term that refers to retail investors in Japan who play the foreign currency markets with lots of leverage seeking lots of yield. The hunt for yield is prompted by an anti-deflationary monetary policy in Japan that has left short-term and bank interest rates appalling low, and often negative in real terms (below the rate of inflation).

That's right. If your cash is getting hammered in a savings around and if it's relatively inexpensive to borrow, why not gear up and speculate on something like, say, Australia's commodity currency? The Financial Times is reporting that Japan's regulators are cracking down on the amount of leverage forex speculators can use. The aim is to reduce "excessive speculation" by "inexperienced traders."

The new rules limits borrowing by traders to fifty times whatever collateral they can post. Next year, it will be dialed back to twenty-five times collateral. The new rules, the FT claims, have accounted for a move up in the Yen as retail investors close out positions to comply. Just what they will do with their underperforming cash instead (buy stocks) is unclear.

What's perfectly clear is that an inflationist monetary policy of cheap rates turns ordinary people into speculators. It's a practical response. As cheap money distorts asset values and punishes those on a fixed income, you have to take greater risks just to find a decent yield for your money. By preventing retail investors from doing something to earn a return on their money, the regulator are just compounding the original mistake of forcing people to speculate in the first place.

But since we're talking about speculating, and since we're assuming that most people in Australia are not going to do so in the forex markets, what about stocks? Is that a reasonable way to speculate? Well, it certainly could be, if you're able to find a stock tied to an asset that's being revalued/de-risked/or in demand.

Diggers and Drillers editor Dr. Alex Cowie will be looking for a lot of those shares this week at the Diggers and Dealers conference in Kalgoorlie. At first we were concerned about the tremendous confusion that might result on Alex's name badge. But the stock Doc has been jet setting his way from one mining project to another in the last three months. So we agreed that the possibility of confusion was worth whatever new stories he might come across in Kalgoorlie. He'll be filing reports with DR all week. And D&D readers, as usual, will be treated to a comprehensive round up of the week's events in Alex's subscriber-only e-mail update on Friday.

But really if you read about India's purchase of nearly $1 billion worth of coal tenements in Queensland, you'll know what we're talking about. Speculating on resource stocks can pay. It can also drive you nuts and lose you a fortune. But it can pay.

The deal in question is between Indian coal giant Adani and Linc Energy (ASX:LNC). Linc will be a familiar name to long-time Australian Small Cap Investigator readers. Your truly tipped it several years ago as a play on the unconventional gas-to-liquids industry that might develop from Queensland's stranded coal fields (coal deposits too small or low in quality to qualify as a mine, but too rich in energy to be ignored altogether).

Linc's business plan was always complicated, gasifying the coal underground in a barely commercial process, and then turning the gas into a liquid fuel in a proven process that's been around for a long time and has been used by the Germany in World War Two and South Africa during apartheid.

But the basic value proposition hinged on the coal in Linc's tenements being valuable. And despite the changing regulatory and political environment, the coal in the ground was coal in the ground. The deal still requires approval by Australia's Foreign Investment Review Board. If it goes through, it will be India's largest deal in Australia yet, and probably not its last.

For the record, ASI editor Kris Sayce sold out of the Linc position in February of this year. When he sold, the stock was up 122% from the original share price. Kris managed to bank gains on the stock, even though the business itself has yet to generate cash-flow in the way your editor described in the original story. That's the world of speculation, where you take your gains when you have them.

Will there be more on offer this year, though? Kris and Alex think so, obviously. And they are paid to do nothing but look for such opportunities every day. So we hope the find some. Of concern, though, is the report today from China's Federation of Logistics and Planning that manufacturing activity fell in July.

Mind you the survey showed that China's manufacturing is still expanding, but barely so. The big question is whether this slowdown is evidence that the government's crackdown on housing and real estate speculation is slowing the whole economy down and leading to slower demand for Aussie resources. And if it's working, has it just started or is it already over?

We won't bore you by reciting our theory again about how a bursting Chinese property bubble could do serious damage to Aussie resource investors. But it IS our story and we're sticking to it. And the relatively encouraging Aussie manufacturing data released today (which also show expansion) doesn't change our mind.

Finally, how about that Alan Greenspan? He is the gift that just keeps on giving. No longer speaking in any official capacity as the leader of banking cartel, the former Fed chairman now says things in public which seem contradictory to his policy objectives as Fed chief. It's as if Greenspan is now saying all the things he secretly thought, or simply thinking thoughts that were unthinkable when he worked as the lead shill for the Fed.

The Maestro did point out that while the Fed can control short-term interest rates (as the Bank of Japan and the RBA can generally do as well), it can't control long-term interest rates. Speaking to Bloomberg, Greenspan said, "There is no doubt that the federal funds rate can be fixed at what the Fed wants it to be but which the government has no control over is long-term interest rates and long-term interest rates are what make the economy move."

This is relevant for Australians, too. As we've said, we reckon that what banks charge for mortgage loans here in Australia will be less and less a function of the cash-rate (the RBA's price of money) and more and more a function of the global cost of capital (where Aussie banks borrow in the wholesale funds market in Europe and America.)

To the extent that Aussie banks can attract more deposits through higher bank interest on savings accounts, it's possible that more funding needs can be sourced by a growing deposit base. But without crunching the raw data, we'd suggest the rate of expansion in the Aussie economy would be a lot lower if it has to be sourced from available savings. Slower, but a lot healthier.

It might not be all peaches and cream for America, though. Greenspan says that, "If this budget problem eventually merges to the point where it begins to become very toxic, it will be reflected in rising long-term interest rates, rising mortgage rates, lower housing. At the moment there is no sign of that because the financial system is broke and you cannot have inflation if the financial system is not working."

Come again? Do what now?

We think the Maestro means that as long as investors keep dumping savings into the U.S. bond market, rates will stay low and the massive expansion of the Fed's balance sheet will not result in any runaway inflation in the U.S. We will have "deflation" (lower credit growth and bank lending and falling asset prices) as long as banks remain undercapitalised and continue to carry hundreds of billions of dollars (if not trillions) of bad loans and dodgy collateral.

What happens when the financial system starts working again? We'll tackle that one tomorrow. Until then...

Dan Denning
for The Daily Reckoning Australia

Similar Posts:

The Case for Gold: Bull or Bear

Posted: 01 Aug 2010 02:38 PM PDT

Gold has been the talk of the town: some are raging bulls, while others are raging bears. One thing is for certain - gold is the only bull market in town; and the precious metal has been the best performing asset of the past decade. Read More...

Jim's Mailbox

Posted: 01 Aug 2010 02:37 PM PDT

Are the bond bulls about to get steamrolled?
CIGA Eric

As the deflation rhetoric intensifies and scares the hell out of the gold community, it's not hard to find a bond bull praising the virtues of fixed investments. Talk, however, is cheap. I prefer to follow the money.

Money flows suggest that the bond bulls and all their bravado are standing in front of oncoming steamroller. Connected money, huge bulls in April, has turned statistically bearish into strength.

US TBd (20 Years +) and the Commercial Traders COT Futures and Options Stochastic Weighted Average of Net Long As A % of Open Interest:

Retail money (also know as wrong way Charlie), huge bears in April, has turned statistically bullish into strength.

US TBd (20 Years +) and the Commercial Traders COT Futures and Options Stochastic Weighted Average of Net Long As A % of Open Interest

Technically speaking, the up trend appears to have been broken. I will be watching US Long Bonds (TLT) for the completion of a distribution sequence known as a "Three Drives to a Top."

US Long Bonds ETF (TLT)

What should be most concerning to the bond bulls is TIME. A predominate up cycle for bonds (decline in yields) is nearly over.

30-Year US Bond Yields:

As long as these trends persist, the bond bulls would be wise not to attempt to stand their ground to the oncoming steamroller backed by connected money. Now, those within the gold and stock community might be taking this analysis one step further and asking the next logic question. What does this mean for gold and stocks? I will leave that for discussion.

Jim's should serve to remind us all of the importance of US bonds (a proxy for US dollars).

Five Pillars of Gold:

More…

Why the Rothschild’s got out of the London Fix. . . . . .

Posted: 01 Aug 2010 02:13 PM PDT

Something to chew on six and a half years from the date first posted with an intro from Chris Powell. Mr. Kosares still publishes a newsletter available by registering for our free NewsGroup here:

NewsGroup Reg

For those of you with a hankering for the good ole days. . . . . . . . . .Here you go. It still works.

__________

A Great Speculation On Rothschild's Withdrawal From The London Gold Market.

10:38p ET Thursday, April 15, 2004 — Dear Friend of GATA and Gold:
Once again Michael Kosares, proprietor of Centennial. Precious Metals in Denver and its essential Internet site, www.USAGold.com, has casually tossed off the most timely and insightful commentary — this time about the withdrawal of the Rothschild firm from the London gold market. Kosares writes: "People talk about paradigm shifts all the time and throw the phrase around with casual aplomb, but let me say that this is the kind of paradigm shift all of us in the gold market have been waiting for. …

And this is precisely what Rothschild is reacting to."Kosares isn't yet ready to release it as a formal essay, but you can find his commentary at USAGold's Forum here:

MK (04/15/04; 17:26:52MT – usagold.com msg#: 119988)

Acutally, my good friend,

http://www.thebulliondesk.com/content/reports/press/pa.pdf

you caught during my afternoon quiet time when I remove myself forcefully from the office and head for a quieter place to work on things I like to work on – and posting on the forum happens to be one of the things I like to do.
You are correct. We are very busy these days, as we almost always are when the price drops, and the true-believers make their presences known. I find the type of client who calls during these down treks to be the most enjoyable of our clientele – people who know what they are doing and why they are doing it. The physical market is quite a different animal from the paper trade and the motivations of the participants are different, as I can see from my visits to the forum, where some of the paper traders find this a good place to grumble about their losses. But that leads me to your good question, and as always, it does not surprise me that you are the one here (among some others) who senses that the Rothschild move might be important.

As you know, I have been a student of the Rothschild dynasty for a good many years and I certainly appreciate them for what they are – one of the first and most significant investment banking houses. I also appreciate the long term role they've played in the gold market. After all they did start out as a simple purveyor in coins and bullion and transformed that humble beginning under the Red Shield thanks for the most part to a combination of brains and good fortune into a legendary financial business – one synonymous with banking and running parallel to much of European history. And through it all they managed to remain a private firm owned by the family – an achievement I admire. By the way the story, as I know it, is that Nathan Rothschild had carrier pigeons as a hobby and received information of Wellington's victory long before the rest of the market and therefore had the opportunity to buy cheap before his City competitors knew of Napoleon's defeat. But that's neither here nor there…….I am neither a defender nor a critic of the House of Rothschild, just an observer.

The press release from NMR to me was more revealing than the colorful journalism that accompanied the announcement and my reading of it was that Rothschild was leaving the "trading" aspect of the gold business, but that they would continue with lending end of things which is where the real money is made. I've linked the actual price release above which was provided this morning by our good friends at thebulliondesk.com. I wouldn't be surprised however if they slowly but surely unwound the gold lending business as well, in that the nature of the business itself has changed and the role of lender to the mining companies is diminishing on its own. With Rothschild the motivation is the lack of returns on the simple commission gold business – which trades at very thin margins. The bigger profit gold carry trade business – which included loans and hedging operations (and all the management fees attached) – is dying, if not already dead, as mine companies go to the demand side of the gold fundamentals ledger. It signals the future of gold. The death of the gold carry trade/mine hedging businesses has come to fruition as I predicted a long time ago with the Rothschild retirement from the Fix being a final and highly symbolic milestone. Others will follow, as they go on to what they deem to be more lucrative businesses.

But what is the City's loss will be the physical owners gain because what the Rothschild withdrawal signifies is a reduced role for the banking functions – the operations as Aragorn and FOA pointed out here long ago that became anathema to higher prices. What is ironic about the whole thing is that the seeds of Rothschild's self-styled withdrawal as the lead firm in the London trade were planted a few years back by the firm itself when it pushed hard for more transparency in the gold market. NMR played lead dog in an effort that ultimately led to the first Washington Agreement and the beginning of the end for the gold carry trade and mine company hedging programs. That effort was led by a friend of a mutual friend of ours who posts under the CoBra handle – Guy……………(can't remember his last name) perhaps CoBra can help us.

I accept what NMR is saying at face value. I do believe that they do not do enough business on what they call the "commodity" end of things to support the infrastructure required to do it right. I note that they were careful to let their mine company clientele know that they would not be abandoning the business completely, and I'll tell you why I believe they went to those lengths: The trend now is for miners to buy back their hedges. Over the last few months I have been doing a great deal of research for the publication of the updated version of The ABCs of Gold Investing, and I can tell you, unequivocably that the most important development over the last few years is the swing by the mining companies from the sell side of the fundamentals ledger to the demand side – a swing of between 500 to 600 tonnes on the average (using GFMS' conservative numbers). That is a very big number. (I read with interest the comments here the other day about various writers picking up things and running with them. Wait til this little observation sinks in.) Rothschild is aware of the number. The hedge funds are aware of that number and that is why they are now net long the gold market.

People talk about paradigm shifts all the time and throw the phrase around with casual aplomb, but let me say that this is the kind of paradigm shift all of us in the gold market have been waiting for. (And now I've given you a glimpse of the theme of the new book – just recently accepted for editing by my publishing house). And this is precisely what Rothschild is reacting to.

I would not be surprised to see that firm end up in this market as an investor, as opposed to a broker – a move in keeping with their long history of exploiting major opportunity. There is more money to be made as an investor in gold these days, than in brokering it. Rothschild has no interest in the retail business, and that's the only place money can be made with regularity in today's gold business – they have always been essentially a wholesaler and syndicator of financial opportunities, and I couldn't think of a better opportunity at the moment than gold. However, I believe they will keep it to themselves just exactly how they will go about exploiting that opportunity.

Now here's the last part of what I have to say on this for the moment and now the groundwork is there to tell you why I believe Rothschild was so careful in their announcement today to let their mine company clientele know they would be there for them. Since the trend among mining companies is to buy back metal and settle their hedgebooks, how would you feel if you ran a mining company and one of your chief bullion banks told you they were cutting and running in toto? Your first question would be: "Well, how will I go about settling my book? I thought you would be here to buy for me if I needed it." That's the one thing I find unsettling about this whole withdrawal. If Rothschild had announced that they were completely out of the business, I think several mine company executives would have had to have been peeled from the ceiling. As it is, they say they are not dropping their lending business. Does that include assuring their clientele that they will be buying gold for them? Let's turn the coin over. Maybe, it is precisely because they have to buy for their clientele that they no longer want in on the London fix and the daily trade AS THE KEY PLAYER!

There is much to think about here, and I assure you there will not be a lack of players to fill the Rothschild gap (at least with respect to the prestige associated with the London fix), but the remaining question on the table is who is going to be the main player in the physical gold business now that NMR, at least on the surface has withdrawn. Can the market find the physical? And who's going to get it?

All of this dovetails with Aragorn's earlier post on the French/German situaion and I would like to say a few words on that, then try to pull this all together into some kind of sensible framework. Aragorn you talk about misplaced sentiments and your points are well taken. It is even more convenient to misplace the role of the central bank which is not as a quasi-hedge fund, but as a steward of the nation's money and protector of the banking system. The function of a reserve asset is not to make a central bank returns, but to give the nation a fall-back position should it need to defend its currency or raise capital in the event of a national emergency. The folly of casting central bankers as portfolio managers for the nation's assets can be most readily seen in the Bank of England's botching of its gold sales – all accomplished at cyclical lows in the $250 range. But I do not see that trend reversing itself.

The problem with the modern central banker is that he is no longer content to play the traditional role of steward of the nation's money and banking system. In order to emulate his colleague on the commercial side, he would rather trade the markets. Such thinking, in the age of the day trader, has become epidemic. Central banking used to be a conservative profession whose masters were drawn from the desks of the oldest and most influential banks, steeped in the tradition of making a sound loan, and providing an atmosphere which encouraged deposits. You could rely on these people. Now you had better know how to trade the markets and find the best returns if you want to call yourself a central banker and the Welteke affair, in this light, becomes a bit more understandable. My, how times have changed……. Next Europe will draw its central bank governors from the commodity trading pits and the hedge funds. But who am I to defend the old ways, humble Denver-based gold broker that I am? Better to sit back, watch the show, and help our clientele to weather the uncertainties such perfidy engenders.

In the end though, we all know that this business of selling off the national gold has something more behind it than simply garnering a better return on assets, don't we? All of which explains the full court press to bring the French and German gold reserves to the table – two of the largest remaining gold hoards on earth – in some quarters, it would seem, better achieved now at $400 per ounce then months and years from now at double or triple that price.

So it all ties neatly together. All signposts pointing somewhere the geography of which can be ascertained but not clearly described.
I'll leave this in the air……and a subject for discussion……at this highly visited, well read, and perfectly positioned Table Round.

Chris Powell: I would like to ask that this remain here only as a matter for discussion at this table. It is not polished and meant for the wider world. Just some conjecture for table 'insiders' to chew on.

Why the Rothschild's got out of the London Fix. . . . . .

Posted: 01 Aug 2010 02:13 PM PDT

Something to chew on six and a half years from the date first posted with an intro from Chris Powell. Mr. Kosares still publishes a newsletter available by registering for our free NewsGroup here:

NewsGroup Reg

For those of you with a hankering for the good ole days. . . . . . . . . .Here you go. It still works.

__________

A Great Speculation On Rothschild's Withdrawal From The London Gold Market.

And this is precisely what Rothschild is reacting to."Kosares isn't yet ready to release it as a formal essay, but you can find his commentary at USAGold's Forum here:

MK (04/15/04; 17:26:52MT – usagold.com msg#: 119988)

Acutally, my good friend,

http://www.thebulliondesk.com/content/reports/press/pa.pdf

Why more Quantitative Easing can’t be avoided and will threaten the developed world and the U.S. Dollar

Posted: 01 Aug 2010 01:00 PM PDT

The U.S. economy can, at best, be described as in an "L"-shaped recovery. It is anemic, faced with unyieldingly high unemployment and overburdened with debt, but worst of all, the average consumer that has little to no confidence in the economy or housing for the next couple of years.

Three Out of Four Economists are Wrong

Posted: 01 Aug 2010 12:05 PM PDT

What does an economist think...when he adjourns to the local bar...or is hauled away to the asylum? In the dead of night or the quiet of a confessional, does he laugh sourly at having fooled most of the people most of the time? Or does he curse his trade and feel like hanging himself?

The thing economists said was nearly impossible actually happened last week. Yields on 2-year US debt hit a record low just as the Treasury prepares for another record-setting deficit. The supply of Treasury debt and the demand for it hit new highs - together. Stranger things have happened. But the strangeness of this event has caused a furor loquendi amongst economists. Usually, there are only two major ways of misunderstanding current events. Now there are at least four of them.

Party economists take the party line; whenever the party flags, get out more gin. Now, they say the recovery is proceeding, thanks to adroit demand management. Unsurprisingly, since they are the authorities, they claim that record low Treasury yields mean investors have confidence in the authorities. Deficits don't matter, they add.

Another group - the Paul Krugman, Martin Wolf, Joseph Stiglitz wing of the neo-Keynesian faction - fear the recovery may stall, as it did in America in the '30s and Japan in the '90s. They say deficits do matter; they wish there were more of them. Low bond yields are cheap gin to them.

In opposition is a large group of "inflationistas." (Marc Faber, Jim Rogers...). They believe the authorities have already added too much monetary juice. And now they're afraid the feds will run bigger deficits and add even more monetary inflation. Along with tightened supplies and demand pressure from the emerging markets, this will cause consumer prices to rise more than expected. The dollar and bonds will be crushed.

A small group of 'hardcore deflationists,' meanwhile, believes falling yields prove the economy is sinking into a deep hole of debt destruction and depression. (Robert Prechter, Gary Shilling) These Jeremiahs expect the main US stock index - the Dow - to lose 95% of its value and the bond market to continue to rise.

Yet another school of thought confines itself to this Daily Reckoning. It acknowledges that nobody knows anything, but it doesn't mind taking a guess. Herewith is its view, beginning with a critique of its opponents. Fair-minded reader, you be the judge.

Mainstream opinion is contradicted by the facts. Fewer people are employed today in the US than when the stimulus program began. Sales are down. Growth is falling. Credit is contracting. Even hairstylists and cab drivers know something is wrong.

As for the 'inflationistas' view, it makes sense. The feds add money. Prices should rise. But in Europe and America, the rate of consumer price inflation is generally ebbing. That's what low bond yields are really telling us; they signal deflation, not inflation. Maybe the inflationistas will be proven right, eventually. But for the moment, prices in the developed world are going down; they should remain weak until this phase of debt reduction is largely complete.

Meanwhile, 'hard-core' deflationists could be right too. A big credit expansion typically gives way to a big credit contraction. The past is not prologue, it is an account payable. Now it's due. But there's room for negotiation. If the 'hard-core deflationists' are right, credit will contract back to '70s levels and asset prices will correct as much. But a lot has happened since the Carter era. There's much more demand, for example, coming from all over the world. China is now a bigger energy consumer than the US, and a bigger auto buyer too. Demand for just about everything is growing. This new demand is bound to boost prices.

The supply side, too, puts a brake on deflation. The easy, cheap oil has already been pumped. Other resources - including food and water - require huge new capital investments before supplies will increase. Domestic inflation rates in China and India are already increasing. It's just a matter of time before the exporters put inflation in a shipping container and send it west.

But we don't need to rely purely on guesswork. We have an example right in front of us - Japan. The island has been de-leveraging its private sector since 1990 - complete with ultra-low bond yields. Consumer prices fell. Between real estate and stocks, investors lost an amount equal to three years' total output.

Economists misunderstood it completely and gave consistently bad advice. And the authorities took the advice and squandered a whole generation's savings. But the world did not come to an end. Japan de- leveraged while the rest of the world went on a buying spree. Now, the entire developed world de-leverages, while the emerging world continues to shop.

Nobody knows anything. But readers should expect a long, soft correction just the same.

Regards,

Bill Bonner
for The Daily Reckoning Australia

How to Find Low Risk SP500, Gold & Oil ETF Setups

As we all know there is an unlimited amount of ways to trade the financial markets. Each person sees the market in a different way, has different skill sets, trading experience and risk tolerance levels. While some individuals create and use complete systems to make money there are some very basic trading strategies which still work well and require nothing more than basic charting, patience and a little money management.

Let me explain:

SPY – SP500 Index Trading Fund

You can clearly see the longer term trend which is down (blue trendine). But from simply drawing a couple trendlines and looking at the MACD (momentum) indicator you can see there is a possible trend reversal taking place. So far the SPY has broken out of its down trendline with a 4 day pop, and it's now pulled back down to test support. A close below the trend line or the 50MA would be the exit points if the market did start to go south.

The SP500 is still stuck under major resistance, its 200 day moving average. But is trading above key support levels (20MA, 50MA and Trendline). I can feel the tension in the market between traders and we are about to see a big move once a breakout to the upside or down side is established. At this time its best to be in cash or have a small position with a protective stop in place. Once a trend starts there should be some low risk entry points along the way. If we see a strong reversal to the upside On Monday or Tuesday I would expect big buyers would step in to catch this new trend up.

GLD – Gold ETF Trading Fund

Looking at the price of gold we can see the trend is still down along with the momentum. A breakout would be the first step towards a possible entry point but I prefer to wait for a pullback after the breakout has taken place. Once we get a test of support I look to enter a position once there is a strong reversal candle to the upside. From there I draw a new support trend line from the previous low and connect it to the new pivot low (bottom of reversal candle). That becomes my new protective stop.

Gold still has some work to do before I would even be interested in taking a long position for a swing trade. But on a short term time frame (intraday charts) gold looks to be forming a low risk setup which I hope unfolds for my subscribers this week.

USO – Crude Oil Trading Fund

Oil has been trading in a large bearish pennant for the past 2 months and it is nearing the apex of this pattern. The longer term picture of oil is bearish but the most recent dotted trend line and the 20/50MA crossover is signaling some strength. Also the momentum for oil is positive and that helps support the price also. Again if this was to breakout to the upside I would wait for a low volume pullback to test the breakout level, then enter on a reversal back up.

Oil is one of the more challenging commodities to trade because it is affected by the US Dollar, Political Events, and Weather. In short, even if you had the analysis and timing correct there are other factors which move the price of oil on a regular basis that could quickly turn the trade against you. That being said, keep trades small when trading oil.

How to Find Low Risk Trading Setups:

In short, trading can be complex, simple or somewhere in between. You can spend 14 hours or 20 minutes a day analyzing it depending on what investments you trade, whether you're trading full time or just checking up on longer term investments.

This analysis and basic strategy shown above can be profitable if followed correctly and works for stocks, commodities and indexes. It's just to show how simple one can swing trade the market using very basic analysis. Personally I use a much more complex strategy incorporating 15+ other data points which allows for precise entry and exit points.

If you would like to Get My Low Risk Trading Signals visit my services at:
www.TheGoldAndOilGuy.com – ETF Trading – Index, Sectors & Commodities
www.FuturesTradingSignals.com – Futures & ETF Trading – Index & Commodities

Chris Vermeulen

GET MY FREE WEEKLY TRADING REPORTS DELIVERED TO YOUR INBOX!

Tags: Help Me Trade ETFs, How to be a Conservative Trader, How to Find Low Risk Trading Setups, How to Trade ETFs, How to Trade The Market

Housing Market Sinks Beneath the Waves

Posted: 01 Aug 2010 11:40 AM PDT

The markets gave no clear sign of their intentions yesterday. The Dow fell 30 points. Gold rose $8.

And this morning, stock markets in Asia dropped. Earnings are up, just as they are in America. But earnings have a "last waltz" sound to them. AP reports:

New figures from Japan offered a sobering reminder that the world's No. 2 economy remains fragile: The jobless rate rose, deflation deepened, and factories made fewer cars and mobile phones.

There's news from the housing market. This update from Bloomberg:

About 18.9 million homes in the US stood empty during the second quarter as surging foreclosures helped push ownership to the lowest level in a decade.

The number of vacant properties, including foreclosures, residences for sale and vacation homes, rose from 18.6 million in the year-earlier quarter, the US Census Bureau said in a report today. The ownership rate, meaning households that own their own residence, was 66.9 percent, the lowest since 1999.

Lenders are accelerating foreclosures as borrowers fall behind in mortgage payments after the worst housing crash since the Great Depression. A record 269,962 US homes were seized in the second quarter, according to RealtyTrac Inc. Foreclosures probably will top 1 million this year, the Irvine, California- based data company said in a July 15 report.

"There are a lot of people losing their homes and either moving in with family or renting places to live," said Patrick Newport, an economist with IHS Global Insight in Lexington, Massachusetts. "Foreclosures are still going up."

Foreclosure filings climbed in three-quarters of US metropolitan areas in the first half as high unemployment left many homeowners unable to pay their mortgages, according to RealtyTrac Inc.

The number of properties receiving a filing more than doubled from a year earlier in Baltimore, Oklahoma City and Albuquerque, New Mexico, the mortgage-data company said today in a report. Notices of default, auction or bank seizure rose more than 50 percent in areas including Salt Lake City; Savannah, Georgia; and Atlantic City, New Jersey.

"Foreclosures are spreading out from areas that had been hardest hit," Rick Sharga, senior vice president for marketing at Irvine, California- based RealtyTrac, said in a telephone interview. "We're dealing with underlying economic weakness as opposed to unsustainable home prices and bad loans."

Okay...so the housing situation isn't great. But housing is not a leading indicator. It's a lagging indicator. It's what happens after people have lost their jobs, for example.

But then, as more and more foreclosures happen, more and more houses are available for purchase - many in desperate circumstances. Prices tend to fall. And then, people who still have jobs and houses find that their net worth isn't what it used to be.

Already, millions of people are underwater. As housing prices fall, millions more will slip beneath the waves. Some will go down with the ship. But many will take to the lifeboats - sending back the keys instead. This will add to the number of foreclosures and to the inventory of unsold and vacant houses.

When does it end? It ends when it comes to rest on the bottom.

Where's that? No one knows. But just as houses tend to be priced at more than they're really worth in a bubble, they tend to be priced at less than they are really worth in a bust. More below...

You can get a rough idea where the bottom in housing might be by doing a little math. You should be able to buy a house at a price where, financially, the decision to buy or rent is relatively neutral. There's no particular reason why a person should invest in a house rather than in stock or in other investments. His goal is to maximize his quality of life...and his wealth. So, if he can rent a house for less than he can buy it...he should rent, because that gives him the same quality of life at a lower cost, leaving him more money to put to work increasing his wealth. On the other hand, if he can buy more cheaply, he should buy...for the same reasons.

If houses are going up, he'll pay more for a house - in anticipation of the capital gains. But if prices are flat or falling - he'll look only to the stream of income he can get from the house (or the enjoyment he'll get from it personally)...and put on an additional discount to protect himself from capital losses.

Three years ago, it cost much more to buy a place than it did to rent it. A house you might have rented for $1,500 a month might have sold for $300,000. There's no way that was a good investment. A 6% mortgage alone would be $1,500 a month in interest. Once you'd paid upkeep and property taxes, you'd be in the hole.

Now, that house is down a bit...say, to $200,000 or $250,000. But it's still a long way from the point where it makes sense to buy rather than rent. Figure you need about 10% per year to pay taxes and maintenance. Plus another 7% for the cost of money. So a house purchase makes sense when you can rent for 17% of the purchase price. Or, to look at it from the other direction, if a house will rent for $1,500 per month, you can pay $108,000 for it.

Now, assume that the price overshoots on the downside. You might expect to pick up the house at a price under $100,000...say $79,000 or $89,000. Most areas are far from yielding bargains like that.

*** Yesterday, the alarm went off. The French government requires us to have a smoke alarm. And since the house is used for large groups who hold conferences here, we're also required to have fire doors that close automatically when the fire alarm is sounded.

So when the fire alarm sounded, the heavy doors swung shut, supposedly cutting off the flow of oxygen to the fire.

What the planners apparently hadn't considered is what would happen to the old and the weak, trapped behind the fire doors. Our mother, 88, reports:

"When the alarm went off I didn't know what to think. But the cat was disturbed by the high-pitched noise so I thought we should both leave the room. But when I got out into the hall I discovered that the hall doors were closed. I tried to push them open, but I couldn't. The cat and I were stuck. It's a good thing it wasn't a real fire, or we would have been cooked."

Regards,

Bill Bonner
for The Daily Reckoning Australia