Gold World News Flash

Gold Seeker Weekly Wrap-Up: Gold and Silver Gain Again This Week
Join GATA next weekend at the Phoenix conference
More Fed secrets: Bernanke's 2009 interview withheld by crisis panel
New York Sun: The fiat kilogram
Precious Metals and the Validity of Technical Analysis - Part 1
No Exits
Silver and Gold Price Have Not Declined Enough After a Gold/Silver Ratio Low, Is the Correction Still to Come?
Gold ETF outflows and shifts in investor sentiment
Feb 12, 1851 : Edward Hargraves discovers Gold at Bathurst
How to Profit from Rising Interest Rates
No meeting of the minds on the dollar
Losing Faith in Paper Money
Lessons Learned, Lessons Ignored
Buy Silver — Crash JP Morgan in Berlin
Timing Gold - Bond Yields' Ratio Doesn't Matter Much, But Gold:Bonds Ratio Does
Part 4 – Silver and Gold Manipulation Explained
Gold Timing, Gold:Bonds Ratio Matters Over Bond Yields' Ratio
The Silver Bears Are Here Again, Explaining Why Blythe Has A Problem
Possible shift from paper gold to real sneaks into bottom of FT story
Bullion banks get FT's help in trying to talk silver down
Bullion Banks Add to Net Short Silver Futures Positions
In The News Today
M2 Grows By $40 Billion In One Week, Hits Fresh All Time High
A Sideways View of the World
Gold Daily and Silver Weekly Charts
How to Live Off Your Investments
Gold lower on Mubarak resignation, dollar
Later Is Now: Profiting from Rising Interest Rates
Peter Grandich: Gold, the Mother of All Bull Markets
Eric Sprott: “Gold is reverting back into a world reserve currency – it’s so clearly visible now.”
COT Gold, Silver and US Dollar Index Report - February 11, 2011
Gold & The Dollar Current Signals
“Reforming” Fannie and Freddie
Insuring Your Pension Savings
Fiat World: Uprising and Downfalling
Dutch Central Bank: Pension Fund Must Sell Gold
Exclusive: Interview With Eric Sprott
Watch out for the canary in the Treasury coal mine
IMF Calls for SDR-Denominated Bonds... Middle East Revolutions Force West to Knees?
LGMR: "Actually Insurance" Says Euro-Pension Fund Ordered to Cut Position
Housing Is a Buy
Analyzing a Basket of Miners
The Inflation Tipping Point (Part Four of Four)
The Illuminati's Secret 20 Trillion Dollar Bank
In the Midst of the Big Bang of 2008, Economic Collapse Has Already Occurred
Insuring Your Pension Savings With Gold
Q&A With Simon Black: Mubarak's Out, Gold In Panama And More
Precious Metals and the Validity of Technical Analysis -Part 1
World Money Show Report: gurus buying gold plus…
What NOT to Believe About the State of the Housing Market

Gold Seeker Weekly Wrap-Up: Gold and Silver Gain Again This Week

Posted: 11 Feb 2011 04:00 PM PST

Gold fell $5.30 to $1357.20 in London before it rose to see a $5.63 gain at $1368.13 in early New York trade and then fell back off for most of the rest of the day, but it then bounced off its late session low of $1353.65 in the last half hour of trade and ended with a loss of just 0.2%. Silver fell to $29.91 and rose to $30.285 before it also fell back off in later trade, but it then bounced off its early afternoon low of $29.688 and ended with a loss of just 0.23%.

Join GATA next weekend at the Phoenix conference

Posted: 11 Feb 2011 02:29 PM PST

10:29p ET Friday, February 11, 2011

Dear Friend of GATA and Gold (and Silver):

With so much of North America frozen solid, there may not be a more prospective place than the Phoenix Resource Investment Conference and Silver Summit next Friday and Saturday, February 18 and 19.

In addition to GATA Chairman Bill Murphy and your secretary/treasurer, speakers will include GATA favorites Ted Butler of Butler Research, who exposed the silver price suppression scheme more than a decade ago; David Franklin of Sprott Asset Management; Peter Spina of GoldSeek.com; Al Korelin of the Korelin Economics Report; newsletter writer Jay Taylor; mining industry writer David Bond; and economist and historial Antal Fekete.

Dozens of resource companies will be exhibiting.

The conference will be held again at the beautiful Renaissance Glendale Hotel and Spa and conference center just a few miles west of Phoenix, adjacent to the Westgate City Center shopping and restaurant complex and the University of Phoenix football stadium.

Admission to the conference is free if you register in advance.

Next week's forecast for Phoenix is sunny with temperatures in the 70s. Some of us can't wait.

You can learn all about the conference at the Cambridge House Internet site here:

http://cambridgehouse.com/conference-details/phoenix-investment-conferen...

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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Sona Drills 85.4g Gold/Ton Over 4 Metres at Elizabeth Gold Deposit, Extending the Mineralization of the Southwest Vein on the Property

Company Press Release, October 27, 2010

VANCOUVER, British Columbia -- Sona Resources Corp. reports on five drillling holes in the third round of assay results from the recently completed drill program at its 100 percent-owned Elizabeth Gold Deposit Property in the Lillooet Mining District of southern British Columbia. Highlights from the diamond drilling include:

-- Hole E10-66 intersected 17.4g gold/ton over 1.54 metres.

-- Hole E10-67 intersected 96.4g gold/ton over 2.5 metres, including one assay interval of 383g of gold/ton over 0.5 metres.

-- Hole E10-69 intersected 85.4g gold/ton over 4.03 metres, including one assay interval of 230g gold/ton over 1 metre.

Four drill holes, E10-66 to E10-69, targeted the southwestern end of the Southwest Vein, and three of the holes have expanded the mineralized zone in that direction. The Southwest Vein gold mineralization has now been intersected over a strike length of 325 metres, with the deepest hole drilled less than 200 metres from surface.

"The assay results from the Southwest Zone quartz vein continue to be extremely positive," says John P. Thompson, Sona's president and CEO. "We are expanding the Southwest Vein, and this high-grade gold mineralization remains wide open down dip and along strike to the southwest."

For the company's full press release, please visit:

http://sonaresources.com/_resources/news/SONA_NR19_2010.pdf

Join GATA here:

Phoenix Investment Conference and Silver Summit
Renaissance Glendale Hotel and Spa
Friday-Saturday, February 18-19, 2011
Glendale, Arizona

http://cambridgehouse3.com/conference-details/phoenix-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

Prophecy Resource Spins Off Platinum/Palladium Venture:
World-Class PGM Deposit in Yukon

Company Press Release, January 18, 2011

VANCOUVER, British Columbia -- Prophecy Resource Corp. (TSX-V:PCY)and Pacific Coast Nickel Corp. announce that they have agreed that PCNC will acquire Prophecy's Nickel PGM projects by issuing common shares to Prophecy.

PCNC will acquire the Wellgreen PGM Ni-Cu and Lynn Lake nickel projects in the Yukon Territory and Manitoba respectively by issuing up to 550 million common shares of PCNC to Prophecy. PCNC has 55.7 million shares outstanding.

Following the transaction:

-- Prophecy will own approximately 90 percent of PCNC.

-- PCNC will consolidate its share capital on a 10 old for one new basis.

-- Prophecy will change its name to Prophecy Coal Corp. and PCNC will be renamed Prophecy Platinum Corp.

-- Prophecy intends to distribute half of its PCNC shares to shareholders pro-rata in accordance with their holdings.

Based on the closing price of the common shares of PCNC on January 17, $0.195 per share, the gross value of the transaction is $107,250,000.

For the complete announcement, please visit:

http://prophecyresource.com/news_2011_jan18.php

More Fed secrets: Bernanke's 2009 interview withheld by crisis panel

Posted: 11 Feb 2011 02:04 PM PST

Bernanke's 2009 Interview Withheld by Crisis Panel

By Joshua Zumbrun and Scott Lanman
Bloomberg News
Friday, February 11, 2011

http://www.bloomberg.com/news/2011-02-11/bernanke-s-2009-interview-with-...

WASHINGTON -- The Financial Crisis Inquiry Commission, created by Congress to investigate and report on the causes of the market meltdown late last decade, won't publicly release its full 2009 interview with Federal Reserve Chairman Ben S. Bernanke, a commission spokesman said.

The FCIC is withholding records when there is "legal or proprietary information in those interviews that meant they could not be made public," or no audio, transcript, or summary exists, Tucker Warren, the FCIC's spokesman, said after the panel yesterday released more than 300 witness interviews. He declined to elaborate on Bernanke. The interview is among records being transferred to the National Archives that will be made public in five years, Warren said.

"There's absolutely no reason to hold it," unless it contains proprietary details about banks or international trading, said University of Texas Professor Robert Auerbach in Austin, a former congressional economist and author of the 2008 book "Deception and Abuse at the Fed." "Bernanke will be long gone when it comes out, and that's not a way to establish responsibility," Auerbach said.

... Dispatch continues below ...

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Prophecy Resource Spins Off Platinum/Palladium Venture:
World-Class PGM Deposit in Yukon

Company Press Release, January 18, 2011

VANCOUVER, British Columbia -- Prophecy Resource Corp. (TSX-V:PCY)and Pacific Coast Nickel Corp. announce that they have agreed that PCNC will acquire Prophecy's Nickel PGM projects by issuing common shares to Prophecy.

PCNC will acquire the Wellgreen PGM Ni-Cu and Lynn Lake nickel projects in the Yukon Territory and Manitoba respectively by issuing up to 550 million common shares of PCNC to Prophecy. PCNC has 55.7 million shares outstanding.

Following the transaction:

-- Prophecy will own approximately 90 percent of PCNC.

-- PCNC will consolidate its share capital on a 10 old for one new basis.

-- Prophecy will change its name to Prophecy Coal Corp. and PCNC will be renamed Prophecy Platinum Corp.

-- Prophecy intends to distribute half of its PCNC shares to shareholders pro-rata in accordance with their holdings.

Based on the closing price of the common shares of PCNC on January 17, $0.195 per share, the gross value of the transaction is $107,250,000.

For the complete announcement, please visit:

http://prophecyresource.com/news_2011_jan18.php

The interview is quoted in the congressionally authorized panel's final report, which cites the November 17, 2009, "closed-door" session in 11 footnotes. The Fed chief discussed a range of topics including the central bank's failures and why the government rescued Bear Stearns Cos. and let Lehman Brothers Holdings Inc. go bankrupt, the FCIC report shows.

Bernanke's is among 200 to 300 interviews that are being withheld from the public now, Warren said. Michelle Smith, a spokesman for the Fed Board of Governors, declined to comment. The FCIC is now in the process of shutting down, having concluded its work, Warren said.

In the unreleased interview, Bernanke also criticized credit-rating companies, discussed how he underestimated effects from the subprime-mortgage crisis, and said the central bank's lack of aggressiveness in mortgage regulation "was the most severe failure of the Fed in this particular episode," according to the report. Bernanke told the FCIC that after Lehman failed, the Fed was concerned that Goldman Sachs Group Inc. would "go under."

The commission interviewed Bernanke more than nine months before he gave public testimony to the panel in September 2010. It's the only "closed-door session" with anyone that's cited by the FCIC in its footnotes.

The FCIC's meeting with Bernanke lasted 90 minutes and was held at the commission's eighth-floor office near the White House, according to Bernanke's daybook from the Fed.

"There are others that are at a Bernanke level that won't be made public as well," Warren said. "Bernanke is not being singled out in that regard."

The FCIC released audio this week of interviews with other Fed officials, including Vice Chairman Janet Yellen and Governor Kevin Warsh.

The 10-member commission released split findings last month. While the Democratic majority pinned much of the blame on Wall Street firms and Washington regulators, Republican members issued two dissents that criticized Democrats for failing to uncover the actual causes of the crisis.

The commission was created by the Fraud Enforcement and Recovery Act passed by Congress and signed by President Barack Obama in May 2009. Among its charges was to "seek testimony or information from principals and other representatives of government agencies and private entities that were significant participants in the United States and global financial and housing markets."

The crisis panel came under the scrutiny of Representative Darrell Issa, chairman of the House's Oversight and Government Reform committee, in July after it asked Congress for an additional $1.8 million on top of its $8 million budget.

Issa, a California Republican, has pledged to look into the group's spending and said he also wants to investigate why its members were unable to come up with a unanimous conclusion for the final report.

* * *

Join GATA here:

Phoenix Investment Conference and Silver Summit
Renaissance Glendale Hotel and Spa
Friday-Saturday, February 18-19, 2011
Glendale, Arizona

http://cambridgehouse3.com/conference-details/phoenix-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

Sona Drills 85.4g Gold/Ton Over 4 Metres at Elizabeth Gold Deposit, Extending the Mineralization of the Southwest Vein on the Property

Company Press Release, October 27, 2010

VANCOUVER, British Columbia -- Sona Resources Corp. reports on five drillling holes in the third round of assay results from the recently completed drill program at its 100 percent-owned Elizabeth Gold Deposit Property in the Lillooet Mining District of southern British Columbia. Highlights from the diamond drilling include:

-- Hole E10-66 intersected 17.4g gold/ton over 1.54 metres.

-- Hole E10-67 intersected 96.4g gold/ton over 2.5 metres, including one assay interval of 383g of gold/ton over 0.5 metres.

-- Hole E10-69 intersected 85.4g gold/ton over 4.03 metres, including one assay interval of 230g gold/ton over 1 metre.

Four drill holes, E10-66 to E10-69, targeted the southwestern end of the Southwest Vein, and three of the holes have expanded the mineralized zone in that direction. The Southwest Vein gold mineralization has now been intersected over a strike length of 325 metres, with the deepest hole drilled less than 200 metres from surface.

"The assay results from the Southwest Zone quartz vein continue to be extremely positive," says John P. Thompson, Sona's president and CEO. "We are expanding the Southwest Vein, and this high-grade gold mineralization remains wide open down dip and along strike to the southwest."

For the company's full press release, please visit:

http://sonaresources.com/_resources/news/SONA_NR19_2010.pdf

New York Sun: The fiat kilogram

Posted: 11 Feb 2011 01:50 PM PST

9:46p ET Friday, February 11, 2011

Dear Friend of GATA and Gold:

If the dollar can float, The New York Sun asks in an editorial today, why not the kilogram as well? Both are supposed to be measures, but without constancy the dollar is really no measure at all. The Sun's editorial is headlined "The Fiat Kilogram" and you can find it here:

http://www.nysun.com/editorials/the-fiat-kilogram/87235/

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

Precious Metals and the Validity of Technical Analysis - Part 1

Posted: 11 Feb 2011 01:00 PM PST

Over the last eight years or so we have seen the Technical Analysis approach to the gold price give incorrect signals, when seen in isolation. Many times the technical picture pointed down on the gold price in the face of a strong fundamental picture. We know that this has wrong-footed many gold investors who found themselves waiting for a fall only to see it consolidate then rise.

No Exits

Posted: 11 Feb 2011 12:57 PM PST

Put meaningful GSE reform - along with changing fiscal and central bank management, and go ahead and throw in the return of an international gold standard - on my wish list of things so highly improbable that they don't merit much time ... Read More...

Silver and Gold Price Have Not Declined Enough After a Gold/Silver Ratio Low, Is the Correction Still to Come?

Posted: 11 Feb 2011 11:37 AM PST

Gold Price Close Today : 1,359.90
Gold Price Close 4-Feb : 1,348.30
Change : 11.60 or 0.9%

Silver Price Close Today : 2999.2
Silver Price Close 4-Feb : 2906.4
Change : 92.80 or 3.2%

Gold Silver Ratio Today : 45.34
Gold Silver Ratio 4-Feb : 46.39
Change : -1.05 or -2.3%

Silver Gold Ratio : 0.02205
Silver Gold Ratio 4-Feb : 0.02156
Change : 0.00050 or 2.3%

Dow in Gold Dollars : $ 186.57
Dow in Gold Dollars 4-Feb : $ 185.37
Change : $ 1.19 or 0.6%

Dow in Gold Ounces : 9.025
Dow in Gold Ounces 4-Feb : 8.967
Change : 0.06 or 0.6%

Dow in Silver Ounces : 409.22
Dow in Silver Ounces 4-Feb : 416.00
Change : -6.79 or -1.6%

Dow Industrial : 12,273.26
Dow Industrial 4-Feb : 12,090.71
Change : 182.55 or 1.5%

S&P 500 : 1,329.15
S&P 500 4-Feb : 1,310.85
Change : 18.30 or 1.4%

US Dollar Index : 78.417
US Dollar Index 4-Feb : 78.540
Change : -0.12 or -0.2%

Platinum Price Close Today : 1,805.90
Platinum Price Close 4-Feb : 1,842.00
Change : -36.10 or -2.0%

Palladium Price Close Today : 811.55
Palladium Price Close 4-Feb : 812.25
Change : -0.70 or -0.1%

GOLD PRICE today closed Comex down $2.00 at $1,359.90. Low came at $1,354. Technically that doesn't damage the chart, but it does confirm that gold is consolidating between $1,368 and $1,355. If gold crosses that upper threshold, it will sprint to $1,380. If it trips over that bottom threshold, it will fall -- to $1,345, maybe $1,330.

Let the week speak for itself, before I put any words into its mouth. SILVER rose heftily, GOLD reluctantly, stocks admittedly. US dollar index closed lower on the week, but actually is recovering. Platinum and Palladium dropped. I remain out of synch with silver and gold.

A clue to where silver and gold are headed may come from the GOLD/SILVER RATIO, which made a new low this week at 45.08. FOR the present it appears to have made a double bottom, but it hasn't risen much (to 45.36 today) to support that conclusion. Since silver tends to outperform gold when stocks are rising, you must expect stocks to continue to rise if you expect that ratio to keep on falling, i.e., silver to keep on rising.,

To maintain rally-mode the SILVER PRICE must close above 3049c next week. That was this week's intraday high. Today silver dropped along with gold, losing 9.9c to close at 2999.2c, a scootch below 3000c, which makes me grind what's left of my teeth.

I keep on seeing Internet stories about silver's "backwardation," but can't find it in the futures closes. Today, although the contango is pretty slim, silver futures from Feb. 2011 through March 2012 were in contango (distant months were more expensive than near-by months). When you get out to the really long contracts, beginning in March 2012 out to December 2015 there is a slight backwardation, but I'm not sure that says a whole lot. Not what a backwardation of the nearest three months would say, certainly.

Silver's five day chart looks to be rolling over to the downside, although it must fall below 2870c to confirm that. On the upside silver's challenge remains conquering 3050c.

What's the bone sticking in my throat crosswise? Just this: silver and gold have not declined enough in price nor delayed enough in time to fulfill the typical reaction after a gold/silver ratio low. After that very long rise that topped on 3 January 2011 (from November 2008), it seems to me that silver and gold are most likely to take a rest, correct, shake out new, inexperienced investors, and build strength for the next rise. They aren't doing that, they are holding up, even if gold is not particularly enthusiastic.

But I may just be sour because the market is not meeting my little expectations. Of course, if my suspicions prove correct I look like the prince of wise men. Y'all see why it's so hard to win in this game?

All this musing has to do only with the immediate future for silver and gold, not the long term. For that, silver and gold remain in a primary uptrend with three to ten years to run.

Maybe I just don't trust the quiet.

US DOLLAR INDEX recovered its drug-induced enthusiasm this week. On Wednesday it spiked down to 77.50, then rebounded smartly to end today at 78.417, up .21%. That wasn't quite its 78.697 high, but it made good yesterday's gains. On a five-month chart (stockcharts.com, "$usd") the dollar index has traced out an upside-down head and shoulders since mid-January. Other indicators point upwards, and today the dollar index left behind its 20 day moving average (78.09). Barring a close below 77.50 the dollar should ease its way upward.

Stocks edged higher this week, but without impressing me. They've made another bearish upward wedge, or extended the existing one. This will end badly. My friend Michael Peroutka talks about the Mojo, that is, the spell that keeps folks from noticing that the emperor is stark, staring naked. From nowhere does The Mojo ooze out more powerfully than Wall Street and financial topics. Might as well hit yourself in the head with a ball peen hammer as to try to explain to an "expert" financial planner or stock broker why his product will inevitably drop because it is trapped in a primary downtrend. The Mojo creates such a dark, fiery cloud that folks can't even hear you. Some of 'em can't even see your lips moving.

When somebody asked Flannery O'Connor why she wrote such bizarre stories, she replied, "When people are deaf, you have to shout to make them hear." She might have been talking about investing today.

Stocks remain the pneumonic plague in the Cosmic Encyclopedia of Investment Diseases. Expose yourself at your own risk.

Y'all enjoy your weekend.

Argentum et aurum comparenda sunt -- -- Gold and silver must be bought.

- Franklin Sanders, The Moneychanger
The-MoneyChanger.com
Phone: (888) 218-9226 or (931) 766-6066

© 2010, The Moneychanger. May not be republished in any form, including electronically, without our express permission.

To avoid confusion, please remember that the comments above have a very short time horizon. Always invest with the primary trend. Gold's primary trend is up, targeting at least $3,130.00; silver's primary is up targeting 16:1 gold/silver ratio or $195.66; stocks' primary trend is down, targeting Dow under 2,900 and worth only one ounce of gold; US$ or US$-denominated assets, primary trend down; real estate in a bubble, primary trend way down. Whenever I write "Stay out of stocks" readers inevitably ask, "Do you mean precious metals mining stocks, too?" No, I don't.

Gold ETF outflows and shifts in investor sentiment

Posted: 11 Feb 2011 11:00 AM PST

[UBS precious metals analyst Dr. Edel Tully] also warned against assuming that outflows from gold ETFs represented "absolute selling" as there was evidence to suggest that some institutional investors had been switching their exposure from ETFs into "allocated" gold (numbered bars held in bank vaults in a separate allocated account).

[source]

PG View: This FT piece starts out rather ominously, suggesting that the recent outflows from ETFs were the result of a major shift in gold market sentiment. However, if the real impetus was a desire to have real physical gold, rather than paper/digital representations of gold, I actually found myself encouraged by this article. It may just be that the shift in sentiment is more centered on the growing distrust of paper.

Feb 12, 1851 : Edward Hargraves discovers Gold at Bathurst

Posted: 11 Feb 2011 11:00 AM PST

How to Profit from Rising Interest Rates

Posted: 11 Feb 2011 10:16 AM PST

Terry Coxon, The Casey Report writes: In the fall of 2008, the Federal Reserve responded to the Lehman bankruptcy by igniting a rapid expansion in the U.S. money supply. It did so because, by its lights, the immediate and obvious menace to the economy was a deflationary collapse, with one giant bankruptcy breeding another. And it went about the task without compromise; the monetary base more than doubled in less than a year, and the public's M1 money supply (checkable deposits plus hand-to-hand currency) jumped by 20%.

No meeting of the minds on the dollar

Posted: 11 Feb 2011 10:11 AM PST

by Babu Das Augustine, Deputy Business Editor
February 12, 2011 (Gulf News) — One of the most interesting sideshows of the World Economic Forum in Davos this year was French President Nicolas Sarkozy's attempt to rally the Group of 20 powers to the idea of a more varied monetary system after decades of the dollar's supremacy as the world's reserve currency.

By pure coincidence I have met a few economists during the last couple of weeks who have disclosed some strong views on much the same subject.

Speaking on the sidelines of Asian Financial Forum in Hong Kong, Robert Mundell, credited as the intellectual father of the euro, seemed to support Sarkozy's thesis of weaning the world away from the dollar.

… The reserve currency debate comes at a time when many countries are aggressively letting their currency drop to promote exports and growth, even if that could be at one another's expense.

In a recent paper, 'The Role of Gold in the New Financial Architecture' Nasser Saidi, chief economist of Dubai International Financial Centre, argued that a single reserve currency issued by a country whose relative economic share is dwindling exposes the world economy to severe instability.

[source]

Losing Faith in Paper Money

Posted: 11 Feb 2011 10:01 AM PST

I was planning to go into a bizarre and irrational rant against JP Morgan for its obvious scam of manipulating the silver market by massive naked-short positions, and including in my Loud Mogambo Diatribe (LMD) the scumbag government and "regulators" who are supposed to keep this kind of fraud out of the commodities markets. Preparing myself by taking a long pull on a bottle of tequila, rehearsing every curse word I could remember and loosening up the vocal cords ("Mi mi miiiiii! Get out of my yard, you stupid kids! Yo, Adrian!"), I was almost ready when I got a copy of an email from David Bond, in his role as First Lord of the Treasury for the Island Kingdom of Colemania, who reports the news that JP Morgan has announced that they will accept gold as collateral for margin loans. The part that saved me from denouncing JP Morgan is when he went on that "Whilst JP Morgan is pleased to now to accept physical gold as collateral for credit, it will NOT ACCEPT equivalent value (or any va...

Lessons Learned, Lessons Ignored

Posted: 11 Feb 2011 10:01 AM PST

The 5 min. Forecast February 11, 2011 02:29 PM by Addison Wiggin - February 11, 2011 [LIST] [*] Mubarak learns his lesson, but the U.S. Treasury forges on in ignorant defiance: The 5 picks apart Fannie/Freddie “reform” [*] Chris Mayer squares the perky quarterly earnings reports with the lousy jobs picture [*] Dutch court orders pension fund to sell most of its gold holdings... while China looks to bulk up to Fort Knox proportions [*] Is Glenn Beck following our work? Striking visual evidence [*] “Watch the earnings in 2012” and other sage advice from your fellow readers [/LIST] When it comes to clinging to an outmoded paradigm in the face of public anger and all evidence to the contrary… Hosni Mubarak has nothing on the U.S. Treasury. At least he had the good sense to step down. For their part, the U.S. Treasury is out this morning with a grand plan to “reform” Fannie Mae and Freddie Mac...

Buy Silver — Crash JP Morgan in Berlin

Posted: 11 Feb 2011 10:00 AM PST

A Sideways View of the World

By John Mauldin

February 7, 2011

Today’s OTB features an excerpt from my friend Vitaliy Katsenelson’s recently published The Little Book of Sideways Markets. Vitaliy is CIO at Investment Management Associates, a value investment firm in Denver, and he is a prolific and engaging writer (you can find and subscribe to his articles at http://ContrarianEdge.com). I had the pleasure of writing the foreword to Vitaliy’s book, and here is a brief excerpt:

“Markets go from long periods of appreciation to long periods of stagnation. These cycles last on average 17 years. If you bought an index in the United States in 1966, it was 1982 before you saw a new high – that was the last secular sideways market in the United States (until the current one). Investing in that market was difficult, to say the least. But buying in the beginning of the next secular bull market in 1982 and holding until 1999 saw an almost 13 times return. Investing was simple, and the rising markets made geniuses out of many investors and investment professionals.

“Since early 2000, markets in much of the developed world have basically been down to flat. Once again, we are in a difficult period. Genius is in short supply.

“ ‘But why?’ I am often asked. Why don’t markets just continue to go up, as so many pundits say that “over the long term” they do? I agree that over the very long term markets do go up. And therein is the problem: Most people are not in the market for that long – 40 to 90 years. Maybe it’s the human desire to live forever that has many focused on that super-long-term market performance that looks so good.

“In the meantime, we are in a market environment where investors have to be more actively engaged in their investments than before during a bull market when the rising tide lifted all ships. The Little Book of Sideways Markets is a life preserver that will help you navigate these perilous waters. Wear it well and wisely.”

In the excerpt that follows, Vitaliy explains the whys and wherefores of bull, bear, and sideways markets.

John Mauldin, Editor
Outside the Box

JohnMauldin@InvestorsInsight.com

A Sideways View of the World

Vitaliy Katsenelson

What Happens in a Sideways Market

MOST PEOPLE (MYSELF INCLUDED) find discussions about stock markets a bit esoteric; for us, it is a lot easier to relate to individual stocks. Since a stock market is just a collection of individual stocks, let’s take a look at a very typical sideways stock first: Wal-Mart. It will give us insight into what takes place in a sideways market (see Exhibit 2.1).

Exhibit 2.1 Wal-Mart, Typical Sideways Market Stock

Though its shareholders experienced plenty of volatility over the past 10 years, the stock has gone nowhere – it fell prey to a cowardly lion. Over the last decade Wal-Mart’s earnings almost tripled from $1.25 per share to $3.42, growing at an impressive rate of 11.8 percent a year. This doesn’t look like a stagnant, failing company; in fact, it’s quite an impressive performance for a company whose sales are approaching half a trillion dollars. However, its stock chart led you to believe otherwise. The culprit responsible for this unexciting performance was valuation – the P/E – which declined from 45 to 13.7, or about 12.4 percent a year. The stock has not gone anywhere, as all the benefits from earnings growth were canceled out by a declining P/E. Even though revenues more than doubled and earnings almost tripled, all of the return for shareholders of this terrific company came from dividends, which did not amount to much.

This is exactly what we see in the broader stock market, which is comprised of a large number of companies whose stock prices have gone and will go nowhere in a sideways market.

Let’s zero in on the last sideways market the United States saw, from 1966 to 1982. Earnings grew about 6.6 percent a year, while P/Es declined 4.2 percent; thus stock prices went up roughly 2.2 percent a year. As you can see in Exhibit 2.2, a secular sideways market is full of little (cyclical) bull and bear markets. The 1966–1982 market had five cyclical bull and five cyclical bear markets.

This is what happens in sideways markets: Two forces work against each other. The benefits of earnings growth are wiped out by P/E compression (the staple of sideways markets); stocks don’t go anywhere for a long time, with plenty of (cyclical) volatility, while you patiently collect your dividends, which are meager in today’s environment.

A quick glimpse at the current sideways market shows a similar picture: P/Es declined from 30 to 19, a rate of 4.6 percent a year, while earnings grew 2.4 percent. This explains why we are now pretty much where we were in 2000.

Bulls, Bears, and Cowardly Lions – Oh My

Exhibit 2.3 describes economic conditions and starting P/Es required for each market cycle. Historically, earnings growth, though it fluctuated in the short term, was very similar to the growth of the economy (GDP), averaging about 5 percent a year. If the market’s P/E did not change and always remained at its average of 15, then we would not have bull or sideways market cycles – we’ d have no secular market cycles, period! Stock prices would go up with earnings growth, which would fluctuate due to normal economic cyclicality but would average about 5 percent, and investors would collect an additional approximately 4 percent in dividends. That is what would happen in a utopian world where people are completely rational and unemotional. But as Yoda might have put it, the utopian world is not, and people rational are not.

Exhibit 2.3 Economic Growth + Starting P/E =

The P/E journey from one extreme to the other is completely responsible for sideways and bull markets: P/E ascent from low to high causes bull markets, and P/E descent from high to low is responsible for the roller-coaster ride of sideways markets.

Bear markets happened when you had two conditions in place, a high starting P/E and prolonged economic distress; together they are a lethal combination. High P/Es reflect high investor expectations for the economy. Economic blues such as runaway inflation, severe deflation, declining or stagnating earnings, or a combination of these things sour these high expectations. Instead of an above-average economy, investors wake up to an economy that is below average. Presto, a bear market has started.

Let’s examine the only secular bear market in the twentieth century in the United States: the period of the Great Depression. P/Es declined from 19 to 9, at a rate of about 12.5 percent a year, and earnings growth was not there to soften the blow, since earnings declined 28.1 percent a year. Thus stock prices declined by 37.5 percent a year!

Ironically – and this really tells you how subjective is this whole “science” that we call investing – the stock market decline from 1929 to 1932 doesn’t fit into a “secular” definition, since it lasted less than five years. Traditional, by-the-book, secular markets should last longer than five years. I still put the Great Depression into the secular category, as it changed investor psyches for generations. Also, it was a very significant event: stocks declined almost 90 percent, and 80 years later we are still talking about it.

However, a true, by-the-book, long-term bear market took place in Japan (take a look at the next chart). Starting in the late 1980s, over a 14-year period, Japanese stocks declined 8.2 percent a year. This decline was driven by a complete collapse of both earnings – which declined 5.3 percent a year – and P/Es, which declined 3 percent a year. Japanese stocks were in a bear market because stocks were expensive, and earnings declined over a long period of time. In bear markets both P/Es and earnings decline.

In sideways markets P/E ratios decline. They say that payback is a bitch, and that is what sideways markets are all about: investors pay back in declining P/Es for the excess returns of the preceding bull market.

Let’s move to a slightly cheerier subject: the bull market. We see a great example of a secular bull market in the 1982–2000 period. Earnings grew about 6.5 percent a year and P/Es rose from very low levels of around 10 to the unprecedented level of 30, adding another 7.7 percent to earnings growth. Add up the positive numbers and you get super-juicy compounded stock returns of 14.7 percent a year. Sprinkle dividends on top and you have incredible returns of 18.2 percent over almost two decades. No surprise that the stock market became everyone’s favorite pastime in the late 1990s.

The Price of Humanity

Is 100 years of data enough to arrive at any kind of meaningful conclusion about the nature of markets? Academics would argue that we’d need thousands of years’ worth of stock market data to come to a statistically significant conclusion. They would be right, but we don’t have that luxury. I am not making an argument that sideways markets follow bull markets based on statistical significance; I simply don’t have enough data for that.

Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble . . . to give way to hope, fear and greed.

–Benjamin Graham

As the saying goes, the more things change the more they remain the same. Whether a trade is submitted by telegram, as was done at the turn of the twentieth century, or through the screen of an online broker, as is the case today, it still has a human originating it. And all humans come with standard emotional equipment that is, to some degree, predictable. Over the years we’ve become more educated, with access to fancier, faster, and better financial tools. A myriad of information is accessible at our fingertips, with speed and abundance that just a decade ago was available to only a privileged few.

Despite all that, we are no less human than we were 10, 50, or 100 years ago. We behave like humans, no matter how sophisticated we become. Unless we completely delegate all our investment decision making to computers, markets will still be impacted by human emotions.

The following example highlights the psychology of bull and cowardly lion markets:

During a bull market stock prices go up because earnings grow and P/Es rise. So in the absence of P/E change, stocks would go up by, let’s say, 5 percent a year due to earnings growth. But remember, in the beginning stages of a bull market P/Es are depressed, thus the first phase of P/E increase is normalization, a journey towards the mean; and as P/Es rise they juice up stock returns by, we’ll say, 7 percent a year. So stocks prices go up 12 percent (5 percent due to earnings growth and 7 percent due to P/E increase), and that is without counting returns from dividends. After a while investors become accustomed to their stocks rising 12 percent a year. At some point, though, the P/E crosses the mean mark, and the second phase kicks in: the P/E heads towards the stars. A new paradigm is born: 12-percent price appreciation is the “new average,” and the phrase “this time is different” is heard across the land.

Fifty or 100 years ago, “new average” returns were justified by the advancements of railroads, electricity, telephones, or efficient manufacturing. Investors mistakenly attributed high stock market returns that came from expanding P/Es to the economy, which despite all the advancements did not turn into a super - fast grower.

In the late 1990s, during the later stages of the 1982–2000 bull market, similar observations were made, except the names of the game changers were now just-in-time inventory, telecommunications, and the Internet. However, it is rarely different, and never different when P/E increase is the single source of the supersized returns. P/Es rose and went through the average (of 15) and far beyond. Everybody had to own stocks. Expectations were that the “new average” would persist – 12 percent a year became your birthright rate of return.

P/Es can shoot for the stars, but they never reach them. In the late stage of a secular bull market P/Es stop rising. Investors receive “only” a return of 5 percent from earnings growth – and they are disappointed. The love affair with stocks is not over, but they start diversifying into other asset classes that recently provided better returns (real estate, bonds, commodities, gold, etc.).

Suddenly, stocks are not rising 12 percent a year, not even 5 percent, but closer to zero – P/E decline is wiping out any benefits from earnings growth of 5 percent and the “lost decade” (or two) of a sideways market has begun.

This Time Is Not Different

I’ve done a few dozen presentations on the sideways markets since 2007. I’ve found that people are either very happy or extremely unhappy with this sideways market argument. The different emotional responses had nothing to do with how I dressed, but they correlated with the stock-market cycle we were in at the time of the presentation.

In 2007, when everyone thought we were in a new leg of the 1982 bull market, I was glad that eggs were not served while I presented my sideways thesis, for surely they would have been thrown at me. In late 2008 and early 2009, my sideways market message was a ray of sunlight in comparison to the Great Depression II mood of the audience.

Every cyclical bull market is perceived as the beginning of the next secular bull market, while every cyclical bear market is met with fear that the next Great Depression is upon us. Over time stocks become incredibly cheap again and their dividend yields finally become attractive. The sideways market ends, and a bull market ensues.

Where You Stand Will Determine How Long You Stand

The stock market seems to suffer from some sort of multiple personality disorder. One personality is in a chronic state of extreme happiness, and the other suffers from severe depression. Rarely do the two come to the surface at once. Usually one dominates the other for long periods of time. Over time, these personalities cancel each other out, so on average the stock market is a rational fellow. But rarely does the stock market behave in an average manner.

Among the most important concepts in investing is mean reversion, and unfortunately it is often misunderstood. The mean is the average of a series of low and high numbers – fairly simple stuff. The confusion arises in the application of reversion to the mean concept. Investors often assume that when mean reversion takes place the figures in question settle at the mean, but it just ain’t so.

Although P/Es may settle at the mean, that is not what the concept of mean reversion implies; rather, it suggests tendency (direction) of a movement towards the mean. Add human emotion into the mix and P/Es turn into a pendulum – swinging from one extreme to the other (just as investors’ emotions do) while spending very little time in the center. Thus, it is rational to expect that a period of above-average P/Es should be followed by a period of below-average P/Es and vice versa.

Since 1900, the S&P 500 traded on average at about 15 times earnings. But it spent only a quarter of the time between P/Es of 13 and 17 – the “mean zone,” two points above and below average. In the majority of cases the market reached its fair valuation only in passing from one irrational extreme to the other.

Mean reversion is the Rodney Dangerfield of investing: it gets no respect. Mean reversion is as important to investing as the law of gravity is to physics. As long as humans come equipped with the standard emotional equipment package, market cycles will persist and the pendulum will continue to swing from one extreme to the other.

Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of The Little Book of Sideways Markets (Wiley, December 2010). To receive Vitaliy’s future articles by email, click here.&l

Gold Daily and Silver Weekly Charts

Posted: 11 Feb 2011 08:10 AM PST

This posting includes an audio/video/photo media file: Download Now

How to Live Off Your Investments

Posted: 11 Feb 2011 08:00 AM PST

"Most people want to be rentiers," said Elizabeth. "I know I do."

Rentiers are people who collect "rentes" – that is, they are people who live on their investments. If you have an investment in an apartment building, for example, you collect rents. That's why you own the building. You want the income.

That makes you an investor. If you buy the building because you think it is going up in price you are not an investor; you're a speculator. You're speculating that you'll get an increase in your capital.

"Most people who call themselves 'investors' are not really investors," we explained, to know one in particular.

"If you are a real investor, you have to study your investments carefully and make sure they produce a stream of income that justifies the investment. But very few stocks provide enough in dividends to give you any real return on your money. The dividend yield is only about 2%, on average…or about the same as the official inflation rate. The real inflation rate is much higher…meaning, you lose money unless your stocks go up in price."

How likely is it that stocks will go up in price? Everyone seems to think they'll go up. Ben Bernanke – the most powerful economist in the world – says he'll make sure they go up. And they've been going up for almost 2 years.

So… Why not buy stocks?

And guess what…they're cheaper today than they were yesterday.

The Dow went down 10 points yesterday. If the Dow goes down another 5,000 points, we'll be a buyer too.

Bill Bonner
for The Daily Reckoning

How to Live Off Your Investments originally appeared in the Daily Reckoning. The Daily Reckoning has published articles on the impact of quantitative easing, bakken oil, and hyperinflation.

Gold lower on Mubarak resignation, dollar

Posted: 11 Feb 2011 07:53 AM PST

By Claudia Assis
Feb. 11, 2011 (MarketWatch) — Gold futures ended lower Friday as reports that Egyptian President Hosni Mubarak resigned took away some of gold's safe-haven appeal, and the dollar strengthened.

Gold for April delivery declined $2.10, or 0.2%, to settle at $1,360.40 an ounce on the Comex division of the New York Mercantile Exchange. On the week, however, gold gained 0.8%.

… Gold wavered between small gains and losses immediately after the reports out of Egypt, but the contract later drifted into the red. Jubilant crowds were seen celebrating in Cairo's streets after reports of Mubarak's resignation.

[source]

Later Is Now: Profiting from Rising Interest Rates

Posted: 11 Feb 2011 07:50 AM PST

In the fall of 2008, the Federal Reserve responded to the Lehman bankruptcy by igniting a rapid expansion in the U.S. money supply. It did so because, by its lights, the immediate and obvious menace to the economy was a deflationary collapse, with one giant bankruptcy breeding another. And it went about the task without compromise; the monetary base more than doubled in less than a year, and the public's M1 money supply (checkable deposits plus hand-to-hand currency) jumped by 20%.

Peter Grandich: Gold, the Mother of All Bull Markets

Posted: 11 Feb 2011 07:48 AM PST

Source: George Mack of The Gold Report 02/11/2011 Market commentator and investor Peter Grandich of Grandich.com and Grandich Publications tells The Gold Report that certain plays on surging demand and looming commodity shortages are no-brainers for investors, and he shares a few ideas on how to profit from these conditions. Peter also believes that U.S. monetary policy has been a disaster and that it will "end badly" for the U.S. stock market and economy. He's bullish on China and on base—and especially—precious metals, energy, food and water. Gold and silver are still his big plays. The Gold Report: With the turmoil going on in Egypt, were you surprised that gold didn't spike up a bit? One might look at this situation and conclude that gold is fully valued for the intermediate term and that perhaps investors should be looking elsewhere. Peter Grandich: I believe that gold was correcting, and as I noted on Friday, January 28, I think the bottom was put ...

Eric Sprott: “Gold is reverting back into a world reserve currency – it’s so clearly visible now.”

Posted: 11 Feb 2011 07:37 AM PST

ZEROHEDGE: Exclusive: Interview With Eric Sprott Share this:

COT Gold, Silver and US Dollar Index Report - February 11, 2011

Posted: 11 Feb 2011 07:32 AM PST

Gold & The Dollar Current Signals

Posted: 11 Feb 2011 07:28 AM PST

Super Force Signals A Leading Market Timing Service We Take Every Trade Ourselves! Email: [EMAIL="trading@superforcesignals.com"]trading@superforcesignals.com[/EMAIL] [EMAIL="trading@superforce60.com"]trading@superforce60.com[/EMAIL] Weekly Market Update Excerpt Feb 11, 2011 UUP (US Dollar Proxy) Chart US Dollar Analysis: [LIST] [*]I have a buy signal on the US Dollar, yet I warn you this is a trade for the nimblest of traders, and could be your last kick at the long US Dollar can. On a fundamental basis, the plight of the dollar couldn't be any worse, yet our government seems to be obsessed with turning a nightmare turn into a coffin, by further growing their outrageous debt. Then making us pay for it! [/LIST] [LIST] [*]This nightmare is why Gold is your must-own asset. Yet only 2% of the population owns any Gold! [/LIST] [LIST] [*]In the language of common sense, the above statistic means that only 2% of the population is even remotely concerned about the ...

“Reforming” Fannie and Freddie

Posted: 11 Feb 2011 06:48 AM PST

When it comes to clinging to an outmoded paradigm in the face of public anger and all evidence to the contrary… Hosni Mubarak has nothing on the US Treasury. At least he had the good sense to step down.

For their part, the US Treasury is out this morning with a grand plan to "reform" Fannie Mae and Freddie Mac. Indeed, they plan to phase out the infamous government-sponsored enterprises (GSEs) and give the private sector a greater role in mortgage finance.

The problem at present is best captured in this chart:

Public vs. Privately Issued Mortgage Originations

Whether it's Fannie, Freddie or federal agencies, Uncle Sam is the housing market…accounting for nine out of 10 mortgage originations in the past year.

When we forecast in 2004-2005 "the total destruction of the US housing market", the suggestion was met with more than a snicker. Yet as this chart reveals…without government-sponsored activity, we were dead-on.

Now, Mr. Geithner and his minions are mulling over three options to wind down Fannie and Freddie over a period of 5-7 years. We'll spare you the details, because the details are rendered more or less irrelevant by this passage in their 32-page report:

"Our commitment to ensuring Fannie Mae and Freddie Mac have sufficient capital to honor any guarantees issued now or in the future and meet any of their debt obligations remains unchanged. Ensuring these institutions have the financial capacity to meet their obligations is essential to continued stability, and the administration will not waver from its commitment.

"Given Fannie Mae and Freddie Mac's current role in the mortgage market, we must proceed carefully with reform to ensure government support is withdrawn at a pace that does not undermine economic recovery."

Translation: The blank check the Treasury gave Fannie and Freddie (on Christmas Eve 2009, when no one was supposed to notice) remains in force. No one – certainly not the lenders who knowingly fobbed their crappy mortgage paper onto Fannie and Freddie – will be allowed to feel any pain.

Well, no one except taxpayers, who remain on the hook for $134 billion.

Addison Wiggin
for The Daily Reckoning

"Reforming" Fannie and Freddie originally appeared in the Daily Reckoning. The Daily Reckoning has published articles on the impact of quantitative easing, bakken oil, and hyperinflation.

Insuring Your Pension Savings

Posted: 11 Feb 2011 06:47 AM PST

How much gold is too much gold if you're a fixed-income investor...? Gold Doesn't pay any income, of course. Which is why retirees and pensioners should hate it. But since gold cannot go bust - and because its tight supply typically finds ... Read More...

Fiat World: Uprising and Downfalling

Posted: 11 Feb 2011 06:45 AM PST

By James West MidasLetter.com February 11, 2011 Certain characteristics of crumbling empires are historically recurring, and pattern recognition practitioners are thus informed and so forewarned. Their discourse is labeled contrarian, hysterical, strident or radical, depending on the source of criticism, who seldom survive the subsequent reality to be told "I told you so". Thats not the point anyway. Napoleon in Russia, Rommel in North Africa, the Japanese at Pearl Harbour. The Romans, the Incas, Vikings, Mongols – all representative of empires whose downfall was precluded by geographic overextension of the armed forces, one of the aforementioned ubiquitous characteristics of regimes whose days are irrevocably numbered. And then currencies: the German Mark, the Italian Lira, the Zimbabwean dollar – diluted and inflated to astronomic excess – another sign of a civilization on the brink of decline, and perhaps, collapse. Literature assures us that a nation who refuses to l...

Dutch Central Bank: Pension Fund Must Sell Gold

Posted: 11 Feb 2011 06:39 AM PST

"SLV adds more silver...and the Comex ships out more silver. Silver Backwardation for Years, Possible Hyperinflation - James Turk. "The Rarest Earth"...an essay by silver analyst Ted Butler...and much more. " Yesterday in Gold and Silver The gold price was under pressure pretty much through the entire Far East and London trading session on Thursday...with the low of the day coming shortly after the Comex open at $1,350.50 spot. Shortly after 10:30 a.m. Eastern, gold finally caught a bid...with gold's New York high coming a few minutes before 11:30 a.m. at $1,367.40 spot. From there, it basically traded sideways into the close of electronic trading. Silver traded mostly unchanged until around 1:00 p.m. Hong Kong time on Thursday. From that point, the selling pressure really began in earnest. Silver's low came shortly after 11:00 a.m. GMT in London...and traded sideways until it's New York low of $29.69 around 8:35 a.m. Then silver also caught a bid......

Exclusive: Interview With Eric Sprott

Posted: 11 Feb 2011 06:37 AM PST

Zero Hedge had an opportunity recently to ask Eric Sprott a variety of questions touching on everything from investment recommendations, to policy guidelines, to a general outlook for the world economy. As Sprott has long been a rare voice of contrarian reason in a field of lemming-like uniformity, lately driven by nothing more than a pursuit of centrally planned momentum and Bernanke-induced "heatmapping", we believe the answers were vastly more interesting and illuminating than anything available for mass media consumption.

Interview with Eric Sprott of Sprott Asset Management

1. The conspiracy of optimism, suggested by the likes of almost anyone appearing in the MSM (print and cable), is that the US is the place to invest in 2011. A glance at the hedge funds you manage (as of the end of 2010) suggest that you are not buying into this hype. Are the short positions you have in your Hedge Funds still mainly in the US? If so what sectors and why?

A: Our short positions are all exclusively in large cap US names, with a focus on the financial and consumer discretionary sectors. We’ve been bearish on US equities for some time, particularly those in the financial sector that remain severely over-levered in this environment. We’ve managed our long/short hedge fund with the view that we entered a long-term bear market in 2000, and we’ve enjoyed maintaining an active short portfolio throughout the decade. It’s provided specific opportunities to produce alpha, and also provided negative beta exposure during the sell offs when downside protection was needed most. I urge all my investors to consider adding a hedge fund that can short effectively. It really is one of the best investment vehicles to own during a long-term secular bear market for equities, which I firmly believe we are still in.

2. Conversely you are mostly long Canadian equities, with some international exposure. What international countries and sectors do you have exposure too?

A: Most of the equities we invest in long are listed in Toronto. Their underlying assets tend to be distributed globally, however. In the case of our mining exposure, we own mines all over the world: Africa, Southeast Asia, United States, South America. Our location in Toronto has proven advantageous in that it grants us access to the best management teams in the resource industry. Toronto is a major mining-finance capital and we have one of the busiest foyers on Bay Street, with various resource management teams visiting with us regularly to provide updates. We’ve been investing in this space for almost ten years now, so we’ve developed deep contacts within the mining industry internationally. Our sector focus is currently concentrated in precious metals and energy equities. We manage all the company-specific risks on an individual basis, but the sector weights are guided by our macro views.

3. We are currently seeing a massive rise in commodity costs across a broad spectrum of raw materials. The result of the Bernanke "wealth effect". What do you see as the consequences of the rise in commodity prices, for equity and credit markets?

A: It’s unbelievable to see. The food inflation is astounding,… when you see vegetable prices rising 40% in a month, grains up 20% on the year, eggs, sugar,… meat, all up 20-30% since July, it makes you wonder how they manage to massage the CPI so effectively. It’s becoming quite a serious issue, really. The Brent price is especially problematic – we always wonder about the consequences higher oil prices could potentially have on this “recovery”. We all saw the peripheral damage it caused in 2008, completely aside from the banking collapse that was happening at the time. There’s little doubt that these price increases are having a major impact across the globe – look at Egypt, for example. How much of that situation was initiated by food inflation? Same with UK with their recent numbers. It’s only a matter of time before we see more direct effects on prices here at home.

4. How do you see the end of QE2 playing out across the credit and equity markets?

A: I don’t think the market is prepared to go it alone yet. I don’t think we can have a strong equity market without more stimulus. It was amazing to see the sentiment shifts in January, as pundits began declaring the end of QE2, and no need for QE3,… but of course a few weeks pass and problems surface somewhere, this time in the Middle East, and Obama has to get up there and promise more printing to prevent a sell-off. I think the US is in such a difficult situation now with their Treasury auctions. We wrote about this in late ’09, asking how the US could realistically fund their debt requirements. The big question is how much of QE2 has been indirectly funneled back into on-the-run issues. It’s obvious the market doesn’t want to go there yet, but that is a vital question in anticipating the need for QE3.

5. Now that the "Wealth Effect" seems to be the main mandate of US the Federal Reserve, do you envision Bernanke having the ability to implement further incarnations of QE? If so under what circumstances?

A: I just think of how much they’ve spent up to this point to keep this thing going. Think of all the programs they’ve initiated. QE 1, QE 2, TARP, TALF, Fannie and Freddie – it’s all adds up to trillions, so it doesn’t seem far fetched to assume they’ll institute more measures to plug the dam.

6. Do you see any bubbles present or being blown in the world right now? If so, where and what are they?

A: I don’t see any greed bubbles in this market. Nobody’s buying T-bonds to get rich. While I do think the US bond market is a ‘bubble’ in the sense that it’s widely mispricing US risk, I don’t think investors are buying bonds with the expectation of selling them higher down the road. Investors are just trying to maintain some level of real return in here. Many are also trying to game the Fed, stay ahead of them. The commentators who call the precious metals market a bubble are laughable. Nobody owns the stuff. It’s extremely tightly held. Plenty of paper gold floating around, but that’s another story.

7. What possible or probable black swan event (timeline of 12-24 months) keeps you up at night?

A: A major supply disruption in the oil market would throw us over the edge. The economy isn’t strong enough to withstand high energy prices for an extended period.

You also have to wonder what happens if they don’t extend QE2 – and the impact the inevitable rise in rates would have on the US and global economy. We’re obviously in a very precarious environment today, so we have to be prepared for a “black swan” type event at any time. We’ve been managing our funds with a defensive view for over ten years now, so I would hope we could weather them better than most.

8. Your views on precious metals are well known. If there is a collapse in the USD and/or fiat currencies in general, how will gold be valued?

A: They’d likely be valued in terms of other goods, rather than in units of fiat currency. Investors won’t care what an ounce is worth in USD if the USD can’t be exchanged for anything. They’ll want to know what an ounce is worth in water, or food, anything consumable.

I think most mainstream investors still struggle to appreciate the changes that have occurred in precious metals market since 2008. Gold is reverting back into a world reserve currency – it’s so clearly visible now. It’s one of the only asset classes that has ‘worked’ for investors and savers. And yet there remains this large contingent who continue to question its legitimacy as an asset class.

One of the great struggles investors continue to have with gold, particularly in the US, is in embracing it as a monetary alternative. There are money managers and pension trustees who refuse to view gold as a store of value. They don’t understand the value argument. It’s a peculiar thing. If we lived in a different environment today, I’d understand their hesitance to embrace gold, but after everything we’ve gone through, and after acknowledging the fiscal reality of the Western powers, I just don’t understand why anyone would question the benefits of a hard currency. We need a hard currency today for SAVERS. Gold is for savers. We all need some sort of risk-free return vehicle in a properly functioning financial system. Bonds pay a negative real return today, so we’re forced to up our risk tolerance into equities or high-yield. You can’t save capital in cash in this environment – it’s as simple as that. You have to find another asset class to perform that function, and precious metals are once again reverting to their traditional monetary status to meet that need.

9. If you had the opportunity, what 3 policies would you enact that you believe would put the US on a path towards sustainable growth?

A: That’s a tough one. I try to focus more on what they’re doing, rather than worrying about what they should do. I think I’ve been fairly clear in articulating the challenges Western governments face today. Realistically, there is only so much austerity a country can take – look at the impact it’s already having in the UK. I just don’t see the US making the sacrifices required to put them back on the right path long-term. When you see the CBO forecasting budget deficits into 2021, one can only assume that the US plans to borrow in perpetuity. That only works as long as you can get the borrow. But we all know the game changes when the US can’t get the borrow through traditional means. We may already be there.

If I were to make recommendations, I’d focus on addressing leverage in the banking system. I firmly believe 20:1 is far too high a leverage multiple to maintain in this environment. I don’t even know what the right number is – maybe it’s no more than 5:1. But we can’t keep this situation going where a mere 5% shift in asset prices can completely wipe out your tangible equity. I would also try removing the “too big to fail” safeguards that allow the financials to reach such insane levels of leverage. And then of course there’s the derivatives issue, which almost nobody even wants to talk about anymore… but it never went away. It’s probably an even bigger problem today.

10. You have been in the financial industry for well over 35 years. If you had to create a portfolio for a 30 year today, what would it look like. How would you advise one to manage said portfolio?

A: I would be invested heavily in precious metals, both the bullion and equities. I would maintain exposure to energy, and I would have some shorts on the table. Buy-and-hold isn’t dead if you hold the right things, but 30 years is probably too long a timeframe to park capital and forget about it. I’ve always been more of a long-term investor than a trader, and although my themes tend to last for many years, I’ve seen many different markets throughout my career. I’ve definitely repositioned my funds over time. I sincerely hope we do see a true bull market in equities again at some point – I would be the first to applaud one because it’s easier to pick stocks in a secular bull market. But for the time being, until we solve the debt problems, I think our current positioning is the best way to be invested. And for what it’s worth I also think there’s plenty of opportunity in this market as well – there certainly has been for us. It’s just a matter of staying on top of macro developments, focusing on valuation and investing with conviction.

Special thanks to Lizzie.

Watch out for the canary in the Treasury coal mine

Posted: 11 Feb 2011 06:35 AM PST

By Michael Mackenzie
February 11 2011 (Financial Times) — … Since November, when the Federal Reserve began buying Treasuries under quantitative easing, or QE2, [...] the 10-year benchmark yield, which moves inversely to prices, hit a high of 3.77 per cent this week, its highest level since last April, extending its three-month bear run from around 2.5 per cent.

Not surprisingly, given its extra bond-buying should in theory drive down interest rates, the Fed has downplayed the rise in yields. Instead, it has extolled how QE2 has boosted stock prices, making people feel wealthier. The slide in Treasuries may just be the flip side of stronger equities, then.

… Investors and the Fed can also draw some comfort that the recent rise in Treasury yields has not been accompanied by sharply higher inflation expectations, in spite of rising commodity prices. For now the likely consequence of higher petrol and food prices is that they act as a curb on discretionary spending, keeping the risk of runaway inflation firmly in check. That's why some in the bond market think yields are close to a peak and why we are seeing a repeat of a pattern seen in 2009 and 2010, when bear runs in the first half of those years were followed by rallies.

That theory, though, could soon be put to the test, with 30-year bond yields just over 4.7 per cent — a key technical level that chartists say, if broken, could lead to a longer-term decline in bond prices. If the 30-year closes out February above 4.70 per cent, the secular fall in yields since 1987 is likely to be over.

The 30-year Treasury is an important gauge. It is neither favoured by QE2 buying nor, like shorter-term maturities, anchored by near zero overnight rates. Indeed, the "Long Bond" stands as the only true barometer of market sentiment. If this 'canary in the Treasury coal mine' stops singing, the longer term bear market for US bonds will really have begun.

[source]

RS View: The long bond at the current level of yield is surely close to being the riskiest gamble in the world today. Thirty years is a loooooooong time to be locked in at such low rates given all the official stirrings that are underway regarding the reform of the international monetary system to lessen the dollar's prominent structural centricity, that role being a barbarous relic of 1900′s politics.

IMF Calls for SDR-Denominated Bonds... Middle East Revolutions Force West to Knees?

Posted: 11 Feb 2011 06:08 AM PST

IMF Calls for SDR-Denominated Bonds Friday, February 11, 2011 – by Staff Report International Monetary Fund director Dominique Strauss-Kahn (left) calls for new world currency ... Dominique Strauss-Kahn, managing director of the International Monetary Fund, has called for a new world currency that would challenge the dominance of the dollar and protect against future financial instability ... "Global imbalances are back, with issues that worried us before the crisis – large and volatile capital flows, exchange rate pressures, rapidly growing excess reserves – on the front burner once again," Strauss-Kahn said ... "Using the SDR to price global trade and denominate financial assets would provide a buffer from exchange rate volatility," Strauss-Kahn said, while "issuing SDR-denominated bonds could create a potentially new class of reserve assets." – UK Telegraph Dominant Social Theme: Since national fiat currencies are unstable, le...

LGMR: "Actually Insurance" Says Euro-Pension Fund Ordered to Cut Position

Posted: 11 Feb 2011 06:06 AM PST

London Gold Market Report from Adrian Ash BullionVault Fri 11 Feb., 09:35 EST Gold Rises as Stocks Slip, "Actually Insurance" Says Euro-Pension Fund Ordered to Cut Position DOLLAR-PRICED GOLD held onto this week's 1% gain in London trade by Friday lunchtime, holding steady against the rising US currency as bonds pushed higher but world stock markets headed for their first weekly loss in three. "Euro denominated gold has now convincingly broken back above the €1000 level" per ounce, says one London dealer in a note. The gold price in Sterling today rose above the £852 level it touched four times in the last three weeks. "We expect all the Chinese to be back in the game on Monday" says Swiss-based MKS Finance, echoing comments from many Hong Kong and London dealers, after the long Lunar New Year holiday extended into this week. "Activity in China remains muted [but] there is evidence of strong interest for silver," says Standard Bank. "China's recent rate hike is also fuelli...

Housing Is a Buy

Posted: 11 Feb 2011 06:00 AM PST

In a recent Daily Reckoning column, "Buy a House…Then Buy Another" I told you about John Paulson, the billionaire hedge fund manager who switched from betting against housing to now telling people they should buy a house…or even two houses.

Bill Ackman, the successful hedge fund manager behind Pershing Square Capital Management, is another case in point. He, too, saw the housing bubble before it popped. He made a now famous argument as to why the stock of MBIA, which guaranteed the slop coming out of the mortgage factories during the bubble, was going to crumble. And it did, netting Ackman more than $1 billion. MBIA was, at the time, one of the five biggest financial institutions in the US.

But now, like Paulson, Ackman is bullish on US housing. He recently made a compelling case focused on five key areas. Let's take another look at the case for housing and add more meat to the bones.

First, housing is cheaper now than it's been in a generation. The median income is now 78% above what it takes to qualify for a fixed-rate loan on 80% of the median purchase price. Mix that with housing prices that are 30% off their peak nationally and low mortgage rates and you get a cocktail of affordable housing.

The second key part to the argument is to look at the number of forced sellers. As a buyer, it is more favorable to you if you buy from people who have to sell. Makes sense right?

In housing, about 30% of sellers are in foreclosure or approaching it. These are national figures, so in some markets, there are more forced sellers than others. "Buyers benefit when conventional sellers compete with distressed sales," Ackman says. "Las Vegas is an extreme example, where distressed and nondistressed sale prices have nearly converged."

Ultimately, this process is good for the home market. As Ackman points out, "Overpriced and overleveraged homes will be transitioned to new, stable owners at more reasonable prices and on more favorable financing terms." From such stable bases, new bull markets are born.

Third, we look again at financing terms and costs. Blue chip companies don't get the deal you get when you buy a home. You can borrow at about 5% fixed for up to 30 years, putting down only 20% (3% for FHA loans). You have no prepayment penalties – so you can, if rates fall, refinance. But if rates rise, you can sit tight. And you can deduct the interest from your taxes. It is a sweetheart deal.

Rates, by the way, haven't been this low since the Freddie Mac survey began.

This also makes for a great inflation hedge. Housing, as an asset class, performed extremely well during the inflationary 1970s. Today's borrowers have similar upside. Ackman demonstrates how even small price increases multiply the equity in your house, assuming conventional 80% financing and a 10-year holding period:

Homebuyer's Prospective Profit

People who are skeptical of housing think prices won't rise anytime soon. But as this exercise shows, you don't need much of an increase. Even a 1% annual increase over a 10-year period gives you 2.7 times your money. Anything better and your upside soars!

So far, the case for housing is familiar and easy to grasp. Now we get to the fourth and fifth pieces of the argument, which clinch the case, in my view: the long-term supply and demand for housing. Let's start with supply.

What can we say about the supply of houses in the US? There is a lot of it right now, which is what weighs down pricing. This is what creates the opportunity for buyers. But there is more. "Builders have sharply reduced their construction capacity, increasing lead times when the market does recover," Ackman says. "It can take three-seven years to get land permitted in many of the more desirable markets."

This means that we can't turn on a switch and get a lot more houses. As with mining, it is important to consider how long it will take to bring new supply to the market. As investors, we want new supply to come slowly.

The number of housing starts is lower than at any time in at least the past 50 years. New construction is about half the long-term average. Again, good news for investors in housing, since this means that new supply is growing very slowly.

Now let's turn to demand. Demand for new housing is depressed. Home ownership rates are back down to pre-bubble levels. But housing demand – based simply on demographic trends – should rise inexorably for years to come.

You take the growth in households – driven by population growth – and apply a home ownership rate. Demographically, the US is still a growing country. By 2030, there will be 370 million Americans. Even using the long-term average home ownership rate means we'll need 1.1-1.2 million new single-family homes per year.

Here is another chart that puts supply and demand together and captures how depressed things are. The chart shows housing starts. The dotted line shows you projected annual demand of about 1.2 million homes per year. So you can see the big gap as the market digs into existing supply. At some point, housing starts will rebound. This could happen as early as this year…

Seasonally Adjusted Housing Starts

The prime beneficiary of any rebound would be the homebuilders. There are several interesting possibilities in homebuilder stocks, such as Lennar (NYSE:LEN) or MDC Holdings (NYSE:MDC). I don't think we need to rush to buy any of these just yet, but they are on the radar.

There will be other beneficiaries of a housing rebound, too. There are all those depressed building supply stocks. There are the many little local banks that finance housing. Each has been an area we've sought to avoid, but they have become promising fishing holes.

The risks seem low. We've already seen the bubble collapse. A second collapse is unlikely. The market is adjusting to a more normal level. All is to say that as contrarian as it seems, housing is now a good bet for the long term.

Paulson and Ackman – two great investors – made fortunes betting against housing, but now they've changed their views as the market changed. Maybe we should too.

Regards,

Chris Mayer
for The Daily Reckoning

Housing Is a Buy originally appeared in the Daily Reckoning. The Daily Reckoning has published articles on the impact of quantitative easing, bakken oil, and hyperinflation.

Analyzing a Basket of Miners

Posted: 11 Feb 2011 05:54 AM PST

This is the sequel which I promised readers following my previous piece, "The Bullion Bulls Basket". Before I get further into this, I want to remind readers that this is not an exercise in pointing readers toward particular companies, but rather in teaching/explaining to readers how to select and invest in these companies on their own.

As I pointed out in the first commentary, we have been left with little choice when it comes to handling our investments. First, the vast majority of financial advisors demonstrated (via the Crash of '08) that they were utterly clueless as to the level of vulnerability they had created for their clients.

Following that ugly episode, these "experts" (on a near-unanimous basis) pronounced that "buy and hold is dead" – this being the strategy which they had consistently recommended to these same clients in previous years. As I also observed, warning their own clients that they could no longer trust the investments which these experts chose for them (over any length of time) is nothing less than an admission of their own incompetence. Telling an investor to "buy something", and then whispering in his ear "…but don't hold it for too long" is not financial advice which inspires confidence.

Having thus been forced to take responsibility for our own investments, the obvious question to ask is "how can we possibly justify paying trading commissions to these incompetent middle-men?" For those who are unable to come up with a good answer to that question, we offer investors guidance in becoming their own "financial advisor".

The hypothetical, five-company "basket" of miners which the three members of our "team" each selected for the original piece is obviously not meant to be a comprehensive strategy in itself. Five companies is simply not a large enough number to provide the optimal degree of balance and diversity. Added to that equation is our own individuality: we all have different investment parameters and different levels of tolerance for risk.

Thus, we chose our example-baskets to start the thinking process for readers/investors, rather than attempting to do their thinking for them. What could you add to those "baskets" to make them more balanced/diversified? What would you change in those baskets, to make them more suitable for your own portfolio? My most important objective in the original piece was simply to get people to start to look at these companies.

This installment is dedicated to arming investors with the right questions to ask, as they examine individual companies as potential investments in accumulating their own baskets. However, before getting into specifics, those pondering self-investing must always adhere to 'The Golden Rule' for all would-be investors: know thy self.

An investor can spend dozens (hundreds?) of hours pouring over these companies, and construct a "perfect" basket of miners for himself – and still end up self-destructing. Deciding on the appropriate level of risk (and stock-selection) for one's portfolio is not merely a function of age, income, and long-term investment strategy. Equally important in that "mix" is being honest about one's own psychology.

Deciding that an "aggressive strategy" which incorporated a "moderate level of risk" is most suitable for your own portfolio is not an advisable plan if you are not able to cope with the high degree of volatility which such a strategy implies. Specifically, those investors who take on a level of risk which is higher than what they can be comfortable with are (by far) the most likely investors to self-destruct. They are more likely to dump their stocks in a "panic", and also more likely to "chase" stocks when the market surges.

We all know that we are supposed to "buy low" and "sell high". However, investors who take on too much risk always end up being ruled by their emotions, and a century of market history shows us that "emotional investors" spend most of their time buying high and selling low. Thus, first we must pick an overall strategy which suits our personalities, then we adopt a particular "plan" to fit that general strategy into our individual financial parameters, and then (finally) we can start to select the right companies to execute that plan.

Once investors reach that stage, here are some of the key criteria/questions which they should be examining as they evaluate these mining companies – and create a "diversified" basket of miners.

The Inflation Tipping Point (Part Four of Four)

Posted: 11 Feb 2011 05:44 AM PST

[Continuing from Part Three...]

The Fed, already deep into a dilemma largely of its own making, is about to find itself facing an even more unpalatable choice before long: Accommodate the surge in demand for real goods with a continuing easy money policy or, alternatively, slam on the brakes sufficiently to force an end to the incipient behavioral changes behind the growing stagflation, thereby running the risk of causing another acute round in the ongoing financial crisis.

So what is the Fed going to do? Take responsibility? Well that would be rather out of character given that the Fed so far has steadfastly denied any blame whatsoever for the credit (or asset) bubble that it created with a prolonged period of excessively easy monetary conditions in 2003-07. More likely, the Fed will simply hope that somehow inflation will rise moderately to a level which helps to reduce the real debt burden on the economy and then stabilize. But if an inflation tipping point is soon reached and consumer price inflation ratchets sharply higher this year, no doubt the Fed will deny that such inflation is in any way a monetary phenomenon, notwithstanding the analysis above and Milton Friedman's famous dictum to the contrary.

The Fed's denials will by no means stop there. They will also deny that this inflation is harmful, using a range of arguments such as "Price increases are indicative of firming economic activity," or "Recent spikes in volatile food and energy prices are isolated to those markets and not indicative of rising core inflationary pressures." No doubt the Fed will take comfort that real wages are likely to remain stagnant or even decline, implying that their preferred, arbitrary measure of "core" inflation remains low. But for people who work for a living, the combination of rising food and energy prices on the one hand and stable or declining real wages on the other will not be cause for comfort, rather the opposite.

We mentioned briefly above that the current surge in global commodity prices is now comparable to the first half of 2008. It is easily forgotten that the global economy grew extremely rapidly in 2006 and 2007, thus entering 2008 on the verge of overheating. It is easy to attribute the sharp slowdown in economic activity in 2008 and early 2009 to the US-centered global credit crisis but history demonstrates that sharply rising commodity prices–a classic indicator of economic overheating–have preceded all major modern recessions, including those of 1973-75, 1980-82, 1991-93 and of course 2008-09. So to dismiss the role played by soaring commodity prices in the most recent case would seem inappropriate.

Given recent developments, this should give investors cause for concern. As one overheating economy after another raises interest rates–China, India, Brazil, Russia, Indonesia and South Korea belong to this group–the risk of a general, global economic slowdown increases and with it the possibility that equity and commodity prices are heading for a major correction. Indeed, the US and European equity markets are beginning to look like the outliers in a global trend toward lower equity market valuations. The Chinese stock market has been in a gentle downtrend since November and, for those who enjoy technical analysis, has formed a bearish, so-called "reverse head-and-shoulders" pattern. The Indian and Brazilian stock markets also peaked in November and declined sharply in January. Is this telling us something significant?

We believe it is. As these regions now comprise the more dynamic part of the global economy, their softening stock markets might well be leading indicators of looming downtrends in developed-market equities. And it would be entirely consistent for commodity prices, in particularly those for cyclical, industrial commodities, to follow along. Defensive investors should take note.

As we write frequently in the Amphora Report, in a world of general fiat currency inflation and devaluation, commodities provide an alternative, superior store of value. While many investors consider gold and silver ideal in this regard, there is no reason why other commodities cannot also serve an important role, in particular to provide additional diversification benefits. Agricultural commodity prices, for example, have risen strongly over the past year but have remained largely uncorrelated to gold and silver. Yet while industrial commodities have risen particularly strongly of late, these are also the most exposed to a sharp correction. At this point in time, heeding the growing signs of slowing emerging market economies, we would be underweight industrial commodities.

Thinking farther ahead, we remain confident that, in the event of a general, global economic slowdown, policymakers in heavily-indebted developed economies will continue to follow generally inflationary policies in order to support growth, notwithstanding the evidence, both historical and contemporary, that such policies are at best ineffective and, at worst, counterproductive. We lean toward the latter view. Yes, a correction in equity and commodity markets may be coming, but so is another subsequent wave of freshly printed fiat money. Just where it is going to go, and how long it will take to get there, is anyone's guess. But we know from where such "money" is ultimately being covertly taken (stolen): The earnings and savings of working people the world over. While it is the responsibility of investors to grow wealth when conditions are favorable–and at least protect it when not–we should all remember that inflation is not merely a monetary phenomenon but, much more importantly, an immoral one.

Regards,

John Butler,
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]

The Inflation Tipping Point (Part Four of Four) originally appeared in the Daily Reckoning. The Daily Reckoning has published articles on the impact of quantitative easing, bakken oil, and hyperinflation.

The Illuminati's Secret 20 Trillion Dollar Bank

Posted: 11 Feb 2011 05:43 AM PST

Zen Gardner writes: Of all the scams, the worldwide banking system is one of the most mind-boggling. Never mind the entire false premise of fiat money and the debt system, that vast amounts of this illusory "currency" get shifted every micro-second just begs deceit and piracy.

In the Midst of the Big Bang of 2008, Economic Collapse Has Already Occurred

Posted: 11 Feb 2011 05:36 AM PST

In the 1930’s Georges Lemaître presented the theory that our universe started with a Big Bang. For the better part of the 20th century, it was assumed that the Big Bang event took place in a matter of a few seconds and sent the necessary elements for everything from magnetism to stars to life flying throughout the universe.

Insuring Your Pension Savings With Gold

Posted: 11 Feb 2011 05:30 AM PST

How much gold is too much gold if you're a fixed-income investor...? GOLD DOESN'T pay any income, of course. Which is why retirees and pensioners should hate it.

Q&A With Simon Black: Mubarak's Out, Gold In Panama And More

Posted: 11 Feb 2011 05:14 AM PST

"Soverign Man" Simon Black submits his latest Notes from the Field

Questions: Mubarak's out, Gold in Panama... and am I nuts?

I'm spending a long weekend in the beautiful city of Temuco, located in Araucania, Chile's southern lakes and volcanoes region. The further south you go in this country, the more the climate and geography changes from desert and semi-arid to something that looks like New Zealand's south island.

Temuco looks a bit like Washington state or British Colombia-- mountains, forests, and lush greens. I'm researching some real estate deals here before hopping on a plane for Panama next week for our first-ever Sovereign Man offshore workshop.

I'll tell you more about Temuco on Monday-- first, this week's questions:

To start us off, Jim asks, "Simon, I'm attending the workshop in Panama and I have gold (200 oz's in total) I would like to store outside the US. I would really like to know if it is legal to carry gold into Panama, can you help?"

It's perfectly legal to bring gold into Panama... however Panama considers gold coins to be merchandise. As such, gold coins need to be declared at Panamanian customs if the market value (not face value) is above $2,000. You may end up having to pay 7% tax.

Because of this, I think there are much better places to store gold outside of the United States-- Switzerland, Austria, Hong Kong, and Dubai to name a few.

Next, Julian in Germany asks, "Simon, if I hire a local registered agent to open a corporate bank account on my behalf, will I have any certainty that such service provider will not keep any back door open to access my bank account?"

That's a great question. Often, forming a corporation overseas requires relying on lawyers and registered agents to incorporate the entity and open a bank account. Among the important things to understand are the requirements for directors.

Directors have legal authority over a company and it bank accounts. Each jurisdiction has specific requirements for directors-- how many are required, of what nationality, etc.

For example, Panama requires a board of at least three directors, each of whom must be a natural person (as opposed to a corporation). This means that if you intend to own a company by yourself, you will need to pay annual fees to at least two strangers (your lawyers) to act as nominee directors.

Furthermore, Panama maintains a public registry of all corporations, and the names of each director are listed. This makes both control and anonymity difficult in Panama.

Conversely, in other jurisdictions, only one director may be required, and that director can be a legal entity which you control.

This makes it much easier to maintain complete control over the company, its bank accounts, and your privacy. I'll be discussing this more soon at the workshop next week, and in an upcoming edition of Sovereign Man: Confidential.

Next, in response to yesterday's letter, reader Eric T. chides me-- "Simon are you nuts? Belize is no longer a safe banking haven. They will do whatever the USA wants. They have no choice."

Cute. To be honest, I don't particularly care for Belize as a banking jurisdiction, but I'm willing to make an exception for Caye Bank. Why? Because I know the owners quite well-- they are freedom-loving, libertarian-minded gringos who run a very conservative balance sheet.

Caye Bank is a reasonable place to establish a small account just to have a financial toehold outside of your home country, though it is by no means the -only- option... just one idea. Many options exist in better jurisdictions.

Last, Alexandra asks, "Simon, what do you make of this Egypt soap opera? Mubarak is such an ass... he's in, he's out, he's in, he's out...."

Ha. Well, as I have just received a flurry of emails and text messages from some friends in the area, I see that he seems to be unofficially 'out'. We'll see if it lasts.

I suggested early last month that this would be the year for Mubarak and other aging autocrats to finally croak or get kicked out. I really admire Egyptians' dedication vacating this thug from office... but at the end of the day, they are only going to trade one crook for another.

These protests are underpinned by the erroneous belief that government is capable of providing solutions, and if they can just get the 'right' government in place, things will start ginning.

This is the same attitude around the world-- it's all about getting the 'right' people into office, whether by 'free and fair' election, by protest, or by force.

What people just about always find out a few years later is that the new guy is just as bad as the old guy... and that the more things change, the more they stay the same.

There's right and wrong in this world... and standing against Mubarak is clearly right. But we all have a finite about of time, energy, and financial means at our disposal, and directing those resources towards political change, while just, generates a very low return and comes at a steep opportunity cost.

I would argue that resources are better spent solving problems at the individual and community level, not trying to get one set of criminals to relinquish control to another set of criminals.

Have a great weekend, more soon.

Precious Metals and the Validity of Technical Analysis -Part 1

Posted: 11 Feb 2011 05:11 AM PST

World Money Show Report: gurus buying gold plus…

Posted: 11 Feb 2011 05:02 AM PST

by Matt Schifrin
Feb. 11 2011 (Forbes) — This morning I moderated a panel called Forbes Newsletter Editors Roundtable: Best Investment Ideas for 2011 at the World Money Show in Orlando, Fla. … Here is a quick run down of what these investment gurus told the crowd of investors.

Both Richard Lehmann [editor of Forbes Lehmann Income Securities Investor] and Marilyn Cohen [editor of Bond Smart Investor] thought Meredith Whitney's doomsday report on 60 minutes about the coming collapse of the municipal bonds related to 50 to 100 municipalities was exaggerated.

… I asked the entire panel about their view on gold. Not surprisingly inflation predictors Richard and Marilyn both expected gold to go up. They say it is a buy.

John Reese [editor of Validea Hotlist] is more quantitative in his approach and he hasn't seen gold stocks in his screens so he is neutral. Marc Gerstein [editor of the Forbes Low Priced Stock Report] actually identified a gold stock that has come up on one of his screens so he was somewhat positive on gold. Janet [Brown, editor of No Load Fund X], another quant in her approach to picking mutual funds and ETFs, was recommending at least one silver fund in her newsletter for aggressive investors.

[source]

What NOT to Believe About the State of the Housing Market

Posted: 11 Feb 2011 04:56 AM PST

The Wall Street Journal says it's time to buy a house. Time magazine says houses are still for selling. Which distinguished publication has the right call?

To begin answering that question, a brief retrospective may be helpful. Time magazine – like its kindred spirits, BusinessWeek and The Economist – is infamous for its epic wrong calls. So much so that Legg Mason strategist, Paul McRae Montgomery, came up with the "Magazine Cover Indicator."

The logic behind Montgomery's unique contrarian indicator goes like this: By the time a particular investment trend reaches the cover page of a major publication, it is so widely embraced by the public that "everyone is in" – i.e., there is no one left to perpetuate the trend. Therefore, the trend is close to reversing…often with a vengeance.

No one can say for certain when Time, BusinessWeek and The Economist began establishing their "indicator" credentials. Examples of very poorly timed cover stories date back to the 1930s. But BusinessWeek holds title to the most infamous cover story ever.

In August of 1979, the cover of BusinessWeek proclaimed, "The Death of Equities." As it turned out, equities were far from dead. In fact, they were on the verge of a major rebirth. Stocks bottomed early in 1980, before taking off on the biggest bull market in history. Just three years after this cover story appeared, the S&P 500 index had doubled. And three years after that, the S&P 500 had tripled.

But in the dark days of 1979, after equities had languished for more than a decade, no one wanted to touch the things.

"The masses long ago switched from stocks to investments having higher yields and more protection from inflation," The BusinessWeek article observed. "Now the pension funds – the market's last hope – have won permission to quit stocks and bonds for real estate, futures, gold, and even diamonds. The death of equities looks like an almost permanent condition – reversable someday, but not soon."

Twenty-three years after the "Death of Equities" cover story, BusinessWeek cemented its "indicator" credentials for all time by running a cover story entitled, "The Angry Market." During the two years that preceded this story, the stock market had been very angry indeed. An epic bear market had erased nearly half the S&P 500's value. But during the two years that followed this story, the S&P soared more than 40%. Three years later it was up 60%, five years later it was up 100%. In fact, the S&P hit the exact low of its 2000-2 bear market on the day "The Angry Market" cover story hit the newsstands!

But BusinessWeek cannot claim all the accolades for poorly timed cover stories. Time magazine also deserves a dishonorable mention…particularly when it comes to stories about the housing market.

In September, 1977, Time's cover story lamented, "Sky-High Housing." And while it's true that the median price of an American home had doubled over the preceding decade, the median home price would double again over the following decade…and would quintuple between September 1977 and September 2005!

Then, just as this once-in-a-lifetime housing boom was ending, Time hit the newsstands with a cover story entitled, "Home Sweet Home – Why We're Going Gaga Over Real Estate."

"Ah, the blistering real estate market," the Time's story gushed in June of 2005, "where dreams of big bucks come wrapped in aluminum siding… Your house is now your piggy bank, ATM and 401(k)… Folks brag about having bought their home in the '90s the way they used to brag about having bought Microsoft in the '80s. Even if you're not contemplating buying or selling anytime soon, the amazing lift in home values is changing the way we think about the roofs over our heads. Real estate isn't so much about nesting today as it is about nest feathering."

But at that very moment, the spectacular American housing boom was already on its way toward an equally spectacular bust. Condominium prices topped out in the identical month this Time cover story appeared – June 2005. Single-family home prices topped out shortly thereafter.

"Homebuilding Stocks went a bit higher during the month or so subsequent to that cover story," Paul MacRae Montgomery relates. "[But] from that point they crashed 78%-90%… Housing prices per se [have fallen] a more modest 28%… But this drop was still enough to constitute the worst drop ever in home prices – worse than in the Great Depression."

Now comes the Time cover story of last September, "Rethinking Homeownership: Why owning a home may no longer make economic sense."

"Homeownership has let us down," the cover story lamented. "For generations, Americans believed that owning a home was an axiomatic good… A house with a front lawn and a picket fence wasn't just a nice place to live or a risk-free investment; it was a way to transform a nation… [But] The dark side of homeownership is now all too apparent: foreclosures and walkaways, neighborhoods plagued by abandoned properties and plummeting home values… If there ever were a time to start weaning America off the idea that homeownership cures all our ills, now…would be it."

"According to the Magazine Cover Indicator," Montgomery relates, "this dour treatment [of the housing market] suggests that it is now time to begin considering investments in real estate related assets."

The Wall Street Journal's Brett Arrends agrees. In an article entitled, "10 Reasons to Buy a Home," Arrends proclaims, "Enough with the doom and gloom about homeownership. Sure, maybe there's more pain to come in the housing market. But when Time magazine starts running covers to declare, 'Owning a home may no longer make economic sense,' it's time to say: Enough is enough. This is what 'capitulation' looks like. Everyone has given up…"

Eric Fry
for The Daily Reckoning

What NOT to Believe About the State of the Housing Market originally appeared in the Daily Reckoning. The Daily Reckoning has published articles on the impact of quantitative easing, bakken oil, and hyperinflation.