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Friday, February 15, 2013

Gold World News Flash

Gold World News Flash

Central Banks Buy the Most Gold Since 1964

Posted: 15 Feb 2013 02:00 AM PST

by Jon C. Ogg, 247WallSt.com:

Worldwide gold demand in 2012 was another record high of $236.4 billion in the World Gold Council's latest report. This was up 6% in value terms in the fourth quarter to $66.2 billion, the highest fourth quarter on record. Global gold demand in the fourth quarter of 2012 was up 4% to 1,195.9 tonnes.

Central bank buying for 2012 rose by 17% over 2011 to some 534.6 tonnes. As far as central bank gold buying, this was the highest level since 1964. Central bank purchases stood at 145 tonnes in the fourth quarter. That is up 9% from the fourth quarter of 2011, and the eighth consecutive quarter in which central banks were net purchasers of gold.

The World Gold Council said:

Central banks' move from net sellers of gold, to net buyers that we have seen in recent years, has continued apace. The official sector purchases across the world are now at their highest level for almost half a century.

Read More @ 247WallSt.com

The Rise and Fall of South African Mining

Posted: 15 Feb 2013 01:00 AM PST

by Andy Hoffman, MilesFranklin.com:

Aside from the MASSIVELY PM-BULLISH factor of limitless Central bank MONEY PRINTING, I have continually harped on the fact evidence points to gold and silver marginal costs of production approaching $1,500/oz and $30/oz, respectively…

GFMS Says 2012 Gold Mining Cash Costs Increased 17% to Most Ever

…thus, preventing production from meaningfully increasing…

Gold Production is Declining

…if at all…

Silver Production in US Declines 8.7% in 2011

Naked shorting of hapless mining shares has further reduced miners' ability to arrest inexorable production declines and counter surging costs; and I strongly urge you to enhance the deleterious "unintended consequences" of this nefarious Cartel scheme by "SELLING MINERS, and DESTROYING THE CARTEL"…

Gold companies looking to forget 2012

In many cases, this is already occurring; but NO PLACE more than South Africa…

Read more @ MilesFranklin.com

Give-Up Phase As Gartman Shorting Gold Is Bullish

Posted: 15 Feb 2013 12:30 AM PST

from KingWorldNews:

Today John Hathaway told King World News, "… we are psychologically at the give-up phase on gold." The 40-year veteran and prolific manager of the Tocqueville Gold Fund also stated that Dennis Gartman announcing he shorted gold yesterday is a very bullish development for the gold market. But first, here is what Hathaway said to expect next for gold: "Eric, this feels to me like last May when gold had a launch into September to complete a pretty big rally. It was a more than a 40% kind of move on the XAU. All of the things I look at, sentiment, trading volume, commentary, you know Credit Suisse put that piece out about the end of the bull market in gold."

Hathaway continues @ KingWorldNews.com

No End in Sight for Global “Currency Wars”

Posted: 14 Feb 2013 10:20 PM PST

by Gary Dorsch, Gold Seek:

With frigid temperatures expected to hover between 15-degree and 23-degree Fahrenheit this weekend in Moscow, it's a wonder why the world's most powerful finance chiefs and central bankers would schedule their Feb 15-16th meeting in Vladimir Putin's backyard. Instead, a better venue for the Group-of-20 would've been the Cayman Islands. The Islands are warm year-round, with average highs holding steady in the 80's. January and February are the coolest months with lows averaging in the lower 70's. However, Russia holds the presidency of the G-20 this year, – so finance chiefs will have to endure the frozen tundra.

A January 16th warning issued by Russia's central banker Alexei Ulyukayev has also set the narrative for the G-20 meeting. "The world is on the brink of a fresh "currency war." Japan is weakening the yen and other countries may follow. If Japan continues to pursue a softer currency, reciprocal devaluations would hurt the global economy," Ulyukayev warned. "We're on a threshold of very serious and confrontational actions. The new government of Japan is a course towards a very protectionist monetary policy through a sharp depreciation of the yen. Other colleagues from respected central banks and governments already pursue this policy. This is not a path towards global coordination but rather a separation," Ulyukayev declared.

Read More @ GoldSeek.com

Zulauf: We May See A Shortage Of Gold & A Massive Price Spike

Posted: 14 Feb 2013 10:01 PM PST

Today renowned money manager Felix Zulauf told King World News, "These are manipulations like we have never seen. Of course the printing of money comes in waves." Zulauf, founder of Zulauf Asset Management and 20+ year Barron's Roundtable panelist, also spoke about Germany's move to repatriate its gold, and the fact that countries are rapidly losing faith in London and the Fed as a place of storage because of suspicions the gold has already been leased out. Zulauf warned, "... this could lead to a tremendous shortage of physical gold." Zulauf believes this would then create a massive spike in the price of gold.

This is part II of a three part written interview series that will be released on King World News today. In these interviews the legendary money manager discusses why he believes central planners will fail, how this will lead to systemic collapse, gold repatriation, what investors should be doing with their money right now, how they can protect themselves going forward, and much more.

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

Still Struggling With Silver Open Interest

Posted: 14 Feb 2013 10:00 PM PST

from TF Metals Report:

Maybe you can help me to make sense of these numbers?

I think you know that the current open interest situation has me perplexed. First of all in gold, since last Thursday, price has fallen by over $26 yet total OI has risen by over 6%, from 420,766 to 446,274. So, who is shorting so much that price is falling? Perhaps more importantly, who is on the other/buy side of those trades? Unfortunately, the deliberately opaque CoT will provide only a few clues.

But what really has me bugged is the OI of silver, specifically since late 2010. Why then?

  • QE2 was announced in early November of 2010.
  • It began in December and proceeded along at approximately today's QE∞ pace of $85B/month until June of 2011.
  • Silver rallied through November and December 2011.
  • It corrected for three weeks in January 2011 before stopping at "Turd's Bottom".
  • It then rallied through March on speculative buying.
  • It spiked in April as fears of a "commercial failure" sparked Cartel short covering.
  • In late October of 2011, MFGlobal collapsed and took with it nearly $2B in clients assets as well as the integrity of the CME and the futures markets as a whole.
  • When QE2 ended in June of 2011, price was near $35. When QE∞ was announced in September of 2012, price was still near $35.

    • Read More @ TF Metals Report.com

ATM Machine SCAMS – YouTube

Posted: 14 Feb 2013 09:46 PM PST

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Beware! when using ATM machines – YouTube

Posted: 14 Feb 2013 09:39 PM PST

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ATM Fraud on BBC1 Fake Britain – YouTube

Posted: 14 Feb 2013 09:31 PM PST

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Gold Will Balance The Balance Sheet Of The Transgressors

Posted: 14 Feb 2013 09:20 PM PST

by Jim Sinclair, JS Mineset:

My Dear Friends,

Please do not be hoodwinked by these demonic sociopath bankster gold banks that, just like in 1979-1980 with the help of Trojan Horse gold writers, stole a huge amount of gold and gold shares from long term cash investors, leaving them without any insurance as the gold market made the highest price and covered the most dollars of appreciation over the shortest period of time.

In the 70s gold appreciated on the basis of what MIGHT happen. Gold is going to and through $3500 because of what has already happened already. Not one more problem by one more dollar is required for gold to attempt to move in price to balance the balance sheets here, there and everywhere.

My advice is to hold all gold positions and wait patiently for the correction to end. Just before the huge 1979-80 surge, we saw a big 'clean out' correction in gold. I believe history is about repeat.
– Richard Russell

Read More @ JS Mineset.com

Chip and PIN Fraud – YouTube

Posted: 14 Feb 2013 09:20 PM PST

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Cloning Credit Cards – YouTube

Posted: 14 Feb 2013 09:16 PM PST

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Platinum & Palladium's Breakout Year

Posted: 14 Feb 2013 09:14 PM PST

Via Sprott Physical Bullion Trusts,

Hard assets are gaining momentum once again as market participants digest the potential impact of central bank printing initiatives. After last year's record level of central bank intervention, 2013 is gearing up to be an even more prolific year on the money-printing front. Japanese Prime Minister Shinzo Abe recently unveiled Japan's tenth Quantitative Easing program to follow the country's current $224 billion stimulus announced on January 11th. The US Federal Reserve is steadily printing US$85 billion a month under its QE3 & QE4 programs, and reports indicate that the European Central Bank is close to launching its much-awaited Open Market Transaction (OMT) program to purchase European sovereign debt. It's a money-printing party and everyone's invited. Even the new Bank of England head, Mark Carney, has hinted of plans to launch more monetary stimulus.

Professional investors have noticed and are expressing concern over the consequences of concerted currency devaluation and the continuation of zero-percent interest rates. PIMCO's Bill Gross, aka "The Bond King", is now regularly touting gold and hard assets as a prudent investment in 2013. While his advice appears to have fallen on deaf ears, interest in inflation protection is once again on the rise. We continue to believe that precious metals remain the place to be invested in this environment and are always interested in different avenues with which to participate in the sector's inevitable rise.

Despite being long-time precious metals enthusiasts and active investors in gold and silver, we did not focus on "the other precious metals", platinum or palladium, until very recently. Our interest in the space was ignited by a client's request to assess investment opportunities in the debt and equity of Platinum Group Metal (PGM) mining companies - an exercise that came up almost completely dry. As long-time resource equity investors, we are familiar with the mining industry's supply/demand cyclicality and the impact it has on commodity prices. Looking more closely at the PGM miners, the platinum and palladium industry reminds us of the uranium industry back in 2003. Like uranium, platinum and palladium are crucial to a number of important industrial applications where demand for them is relatively inelastic to price. And like uranium in 2003, palladium is also marked by an opaque, but rapidly diminishing foreign supply stockpile, which had previously balanced out the market and effectively capped the price. Investors will remember that uranium proceeded to perform extremely well from 2003 onwards based on the fundamental supply/demand imbalances that ensued. Our assessment of the PGM industry has led us to believe that platinum and palladium have the potential to do the same. The one difference being, however, that whereas in uranium, where we chose to build our exposure primarily through uranium mining equities, platinum and palladium exposure appears to be best gained through the metals themselves… hence the launch of the Sprott Physical Platinum & Palladium Trust this past December (NYSE Arca: SPPP, TSX: PPT.U).

PLATINUM

On January 15th, the world's largest platinum producer, Anglo American Platinum Ltd. (Amplats), announced plans to shut down several of its mines, resulting in the layoff of 14,000 mine workers and the reduction of approximately 400,000 ounces of annual platinum production. Given that global platinum mine production has averaged approximately 6.2 million ounces per year, the Amplats announcement is equivalent to almost 6% of global annual mine production in 2012, representing a substantial shortfall to the metal's supply/demand balance. The platinum spot price appreciated by over $30/oz following this announcement out of South Africa.

Our desire to launch the Sprott Physical Platinum & Palladium Trust was partly based on an expectation of further supply disruptions out of South Africa, which produces close to 75% of the world's annual platinum supply and 37% of the world's palladium. Union-led labour strife has become a growing concern in the country, where some 46 people were killed this past summer in violent strikes at Lonmin's platinum mine in Marikana. The labour unrest has come at a time when the industry is already suffering from persistent operating challenges and declining profit margins (see Figure A). The geological nature and depth of many of the country's platinum mines requires large amounts of manual labour, and South African mine workers have become increasingly politicized in their struggle for higher wages. At today's platinum price, however, most platinum miners are unprofitable after netting out the costs of labour, electricity and equipment required to produce the metal. Many are cash flow negative and cannot meet the workers' request for higher wages without sustaining further losses. Roger Baxter, senior executive at the Chamber of Mines of South Africa, recently stated that at least 50% of the country's platinum industry is marginal or in a loss-making position today. In addition, many of the mining operations are suffering from declining ore grades, further lowering mine output. The result has been a 25% decline in annual South African platinum production since 2006. As the Amplats decision plainly underscored, at today's prices, platinum mining in South Africa is simply no longer a profitable affair.

FIGURE A: PRODUCTION MARGIN AND BASKET PRICE
breakout-year-chart 1  

Source: CIBC World Markets Equity Research 2012, PGM Basket consists of Platinum (~60%), Palladium (~30%) and Rhodium (~10%)

FIGURE B
breakout-year fig b
Source: Johnson Matthey Platinum 2012 Interim Review

 

The impact of South Africa's mining woes has completely shifted the platinum market's supply fundamentals over the past year, moving it from a state of oversupply in 2011 to a net supply deficit in 2012 (see Figure B). The recent developments in South Africa strongly suggest platinum's supply deficit will continue into 2013, supporting the platinum spot price and potentially moving it to much higher levels. In fact, some industry estimates have suggested the platinum market will experience a deficit as high as 760,000 ounces in 2013. Platinum miners will not be able to increase production unless the platinum price rises to a level capable of incentivizing further development.

 On the demand side, platinum has benefitted from a steady demand for auto catalysts, which constitutes the metal's primary industrial usage. Platinum and palladium both possess chemical properties that help reduce pollutants produced by gasoline and diesel engines, significantly lowering the air pollution produced by automobiles. Just as we believe the platinum price must go up to incentivize new mine production out of South Africa, the platinum price is further supported by the fact that it CAN go up, because of the relative inelasticity of the demand for its catalytic utility. The average automobile (worldwide) carries a mere $212 worth of platinum group metals per vehicle, making the impact of any platinum price increase on the total wholesale cost of an automobile relatively marginal. In China, for example, where pollution is a critical problem, air pollution levels of 300 or above regularly prompt the US embassy to issue warnings to minimize outdoor or strenuous activity. Air particulate levels in Beijing have often been above 500 recently, sometimes crossing over 700. In response, Beijing has recently tightened emissions standards for new cars to meet European Union Standards, or Euro V, starting February 1st. Increasing the platinum/palladium loadings per catalytic converter is one feasible way of directly addressing this growing problem, as the demand for automobiles in China is expected to grow steadily over the next five years. Platinum has also benefitted from increasing demand for its usage in jewelry, particularly in China, where it is considered to be superior to gold. According to refiner Johnson Matthey, China is expected to have consumed 1.92 million ounces of platinum in 2012, representing 70% of the overall global platinum jewellery consumption of 2.73 million ounces. That total is likely to increase as demand rises in other countries as well. In India, for example, platinum demand is estimated to have increased by 25% this past year, representing a new high of 100,000 ounces. As emerging markets growth continues, we expect platinum jewellery demand to increase along with it.

PALLADIUM

The palladium story is similar to that for platinum from a demand perspective, but has a different supply picture that makes it more compelling in our view. Palladium generally occurs with platinum and other PGM metals and is usually associated with nickel and copper. Like platinum, palladium's main industrial usage is in catalytic converters, most notably in gasoline engines. It is also used in jewellery, watchmaking, dentistry, surgical instruments and electrical contacts.

Almost 40% of the world's annual palladium mine supply comes from Russia, primarily through operations at Norilsk. Russia, naturally, does not provide much information on its palladium stockpiles, but various reporting agencies are able to piece together reliable estimates for annual supply and demand.

The palladium market is tight, and appears to be getting tighter. It has gone from a 1.26 million ounce surplus in 2011 to a 915,000 ounce deficit in 2012. This represents a swing of over 2 million ounces this year due to contracting supply, increasing gross demand and diminished recycling, resulting in a supply decrease of 790,000 ounces (see Figure E). If you factor in the ~200,000 ounces we purchased in our Trust, the deficit for 2012 increases to 1.15 million oz.

As bullish as we are on the supply dynamics of platinum, it is palladium that appears to be poised to move higher in the short-term. The palladium market is now in supply deficit globally and will experience a residual deficit in 2013 even after existing stockpile sales are taken into account. Russia has historically maintained a sizeable palladium stockpile which has represented a key source of supply over the past two decades. 2012 reports suggested that that stockpile was nearing depletion, with sales expected to fall below 100,000 ounces in 2013, versus the 250,000 ounces that are believed to have been sold last year. Those numbers were also supported by Swiss PGM data, where the most recent 2012 numbers show Russian palladium shipments running 72% lower than the same period in 2011. All of this was recently confirmed by Norilsk itself, when an executive conceded in an interview on November 29th (and later confirmed by industry watchers like GFMS this past January) that the supply overhang from Russian stockpiles is officially close to being depleted. If this proves to be true, it will represent a significant shift in supply, since those stockpiles were a main contributor in balancing the palladium market for the last ten years.

FIGURE E
breakout-year fig e
Source: Johnson Matthey Platinum 2012 Interim Review

One other bullish palladium supply factor relates to the Norilsk mines themselves, which produce more palladium than the next four largest palladium producers combined. Norilsk's 2012 palladium production is expected to account for 42% of global supply. Despite higher prices, Norilsk is not expected to expand its annual palladium production for at least 10 years, because that's how long it will take to develop the new mines it requires to increase production. In addition, the existing operations are reported to be having difficulty maintaining their average 2.7 million ounces of annual production due to diminishing ore grades at depth within the ore bodies Norilsk is mining. With Russian state supplies dwindling, and Norilsk's palladium production flat at best, the supply picture in 2013 has a very high probability of tightening further. This is especially likely if South Africa's 1.5 million ounces of palladium production is also impacted by further strikes and mine shutdowns.

Palladium demand has been robust, having risen by 15% year-over-year in 2012 to 9.73 million ounces. The growth has been primarily driven by increased use in autocatalysts, the demand for which alone is forecasted to increase by 7% in 2013. Given the probability of tightening supply in the years ahead, we could potentially see a hoarding reaction by industry users as supply constraints become more pronounced. In year 2000, a similar reaction by industry users led palladium to trade over $1,000/ ounce. It is also interesting to note that palladium has the second highest amount of short positions in the futures market in relation to total annual production - second only to that for silver. The reversal of those short contracts may represent a significant source of investment demand as prices continue to rise.

SUMMARY

The timing of the launch of the Sprott Physical Platinum & Palladium Trust has been favourable thus far. Supply problems out of South Africa will be the driving force behind platinum's price appreciation, while palladium will benefit from the depletion of Russian stockpiles and flat production from Norilsk. Both metals have the potential to see significant demand increases as the autocatalyst market benefits from growing global auto sales, which reached a record 80 million units sold in 2012.

As at February 2013, the Sprott Physical Platinum & Palladium Trust now holds 81,486 ounces of platinum and 186,098 ounces of palladium in bullion form. The Trust is structured similar to our existing Sprott Physical Gold Trust (NYSE Arca: PHYS, TSX: PHY.U) and Sprott Physical Silver Trust (NYCE Arca: PSLV, TSX PHS.U), but differs in that it initially holds approximately equal dollar amounts of platinum and palladium.

We aim to publish more updates in the coming months to analyze developments in the markets for both metals. Although platinum and palladium share gold and silver's "precious metal" categorization, they represent significantly smaller markets in terms of physical production, making them much more responsive to the supply constraints and demand increases that we foresee for both. It is also worth noting that relatively little of the total annual platinum and palladium supply actually makes it to "market" - with the vast majority sold directly to fabricators. Our Trust's December purchases represent 1.3% of 2012's platinum mine supply and almost 3% of palladium supply. If investment demand for platinum/palladium were to grow in an environment where supply is further constrained, it could indeed have a large impact on the spot price for both metals going forward.

Precious metal investors are encouraged to review platinum and palladium's unique supply/demand dynamics. We believe 2013 will be an exciting year for both metals, and that's without even considering what could happen to the precious metals sector as a whole.

Waitress Card Cloning – YouTube

Posted: 14 Feb 2013 09:12 PM PST

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GUEST POST: A Trail of Breadcrumbs – The Resignation of Pope Benedict and the Great Financial Collapse

Posted: 14 Feb 2013 09:06 PM PST

[Ed. Note: Forwarded to SGT Report by the author. To our knowledge this is the first time all of the clues have been assembled in this fashion, and it may be the most rational explanation for the resignation of Pope Benedict XVI that we've heard. The trail gets very interesting with the third and fourth men in this story. As the last line of this article reads, May God help us all.]

For SGT Report, by Galt Speaking, Uncommon Sense:

On Tuesday, February 12th, Pope Benedict XVI shocked the world and his congregation with news that he was resigning the papacy; this is entirely unprecedented in the modern age. The last pope to resign, Gregory XII, did so only to solve a dilemma of leadership in the church. That was 600 years ago, and it hasn't happened since. Every pope in 600 years has died in the arms of the church.

But not this pope. Regardless of what you believe, it is hard to fathom how, within the Catholic framework, he can justify rejecting the papacy theologically or practically. Despite the advantages of medical care and luxury, despite the prospect of remaining servant of God and meeting his creator as pope, he is rejecting his position in relation to God and walking away.

When something extraordinary happens, one must look for extraordinary circumstances. I think I can explain this sudden resignation, if the reader is prepared to follow a trail of breadcrumbs, link after link in a chain that connects five men. This is not a chain of five conspirators, necessarily, but is intended to show the links between our politics, our financial gurus, and our religious leaders.

Read More @ RichardGleaves.blogspot.com

Guest Post: The Deflationary Spiral Bogey

Posted: 14 Feb 2013 08:36 PM PST

Authored by Robert Blumen of the Ludwig von Mises Institute,

What is deflation? According to dictionary.com, it is "a fall in the general price level or a contraction of credit and available money."

Falling prices. That sounds good, especially if you have set some cash set aside and are thinking about a major purchase.

But as some additional research with Google would seem to demonstrate, that would be a naïve and simple-minded conclusion. According to received wisdom, deflation is a serious economic disease. As the St. Louis Fed would have us believe,

While the idea of lower prices may sound attractive, deflation is a real concern for several reasons. Deflation discourages spending and investment because consumers, expecting prices to fall further, delay purchases, preferring instead to save and wait for even lower prices. Decreased spending, in turn, lowers company sales and profits, which eventually increases unemployment.

The problem with deflation, then, is that it feeds on itself, destroying the economy along the way. It is the macro equivalent of a roach motel: perilously easy to enter but impossible to leave. The problem, you see, is that deflation reduces consumption, which reduces production, eventually shutting down all economic activity.

Wikipedia explains it this way:

Because the price of goods is falling, consumers have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity. Since this idles the productive capacity, investment also falls, leading to further reductions in aggregate demand. This is the deflationary spiral.

Deflation is far worse than its counterpart, inflation, because the Fed can fight inflation by raising interest rates. Deflation is nearly impossible to stop once it has started because interest rates can only be cut to zero, no lower. For this reason, "The Ben Bernank" believes that monetary policy should be biased toward preventing deflation more than preventing inflation.

Economist Mark Thornton cites the prominent New York Times blogger Paul Krugman who compares deflation to a black hole, a type of astrophysical object whose gravitational field is so strong that no matter or energy that comes near it can escape. Krugman writes,

... the economy crosses the black hole's event horizon: the point of no return, beyond which deflation feeds on itself. Prices fall in the face of excess capacity; businesses and individuals become reluctant to borrow, because falling prices raise the real burden of repayment; with spending sluggish, the economy becomes increasingly depressed, and prices fall all the faster.

In case you're not already scared straight, the deflationary doomsday has already happened in America when (according to the New York Times) it caused the Great Depression.

Japan, according to Bloomberg "has been battling deflation for more than a decade, with the average annual 0.3 percent decline in prices since 2000 damaging economic growth." The New York Times reports that Japan's new prime minister Abe "has galvanized markets by encouraging bold monetary measures to beat deflation."

I hope that everyone is clear on this.

Now that you understand the basics, I have some questions for the people who came up with this stuff.

Why do falling prices make people expect falling prices?

The observation that prices are falling, means that in the recent past, prices have fallen.

One person noticing that the price of a good, that appears somewhere on their value scale has fallen for some time, might interpret that information and conclude that in the future, the price of that good will be lower. But a second individual might see the same thing and expect the price to level off and stay where it is, and a third might interpret falling prices as an indicator that in the future prices will be higher.

Why should a price having fallen indicate that it will continue to fall? That is only one of three possible future trends. Why should past trends continue indefinitely?

Why will the public mainly choose the first of these three outlooks, more than the other two?

According to economist Jeffrey Herbener, the assumption that falling prices create expectations of more of the same is a feature of certain popular macroeconomic theories in which price expectations are modeled as part of the theory. In his testimony to Congress, Herbener observes that "the downward spiral of prices is merely the logical implication of assumptions about expectations within formal economic models. If you assume that the agents operating in an economic model suffer from expectations that are self-reinforcing, then the model will produce a downward spiral."

Are expectations self-reinforcing? It would make just as much sense to say that expectations are self-reversing—after people have seen prices go down for a while, they will expect prices to go up.

Are these formal models a good description of human action? Contrary to what these models say, there is no fixed response to an event. In my own experience, I can think of many times I, or someone that I know, jumped on a low price because we did not expect the opportunity to last.

But what about wages?

The postponement theory depends on the assumption that a fall in prices will benefit buyers who wait. This is true if we are talking about people who have lots of cash and can sit on it indefinitely. But most of us have ongoing monthly expenses and we depend on our wages to replenish our cash reserves. Our purchasing power, at the time when we want to make a delayed purchase, comes from our cash savings and our wages. A fall in wages, if substantial, would wipe out any gains in purchasing power realized from lower prices.

If consumers do not buy today because they expect lower prices tomorrow, then what are their expectations about their wages? Do they anticipate that their wages will be the same, higher, or lower? If lower, then by how much? As much as prices have fallen?

If consumers forecast lower prices and stable wages, then why are consumer prices included in the models, but wages are not? Does deflation only affect consumer goods prices, leaving all other prices untouched?

According to the deflationary death spiral theory, decisions not to buy drag the economy into a death spiral. Does anyone expect that could happen without affecting wages?

And what about asset prices?

In addition to cash savings and wages, individuals decide how much to spend and save taking into account the amount that they have already saved. Someone who is trying to save to meet their family's future needs will feel less comfortable about spending.

Most people hold some of their savings in cash. That portion of their savings increases in purchasing power when prices fall. But people also save by purchasing financial assets, such as stocks and bonds, or real assets such as property, and rental housing. All of these assets have a price, which could rise or fall. Depending on the mix of cash and other assets that an individual holds, a fall in asset prices could wipe out any gains in purchasing power from the cash portion of their savings.

Do people take value of their past savings into account when deciding whether to buy or wait? Or do people form expectations about consumer prices only and ignore what might happen to their savings in a deflation?

If falling consumer prices generate expectations of more of the same, what impact do falling prices have on expectations about asset prices? Do buyers who delay purchases expect the prices of their saved assets to be lower as well? If not, then do they expect that consumer prices will be lower and asset prices will be higher?

If deflation causes the economy to disintegrate, will asset prices be spared?

Is it only buying behavior that is affected?

The deflation death star begins to destroy the earth when buying is postponed.

But is it only buying that is affected by expectations about the future? If buying is affected but not selling, then why not?

If consumers expect lower prices of most things, including things that they already own, it is equally logical that they would sell their possessions and their assets in order to buy them back later at a lower price. Selling your home and renting a similar one would be the place to start. Selling your car and leasing would be the next step. Finally, selling your assets for cash would be equally profitable. Expectations of lower prices should lead to a spiral of selling, driving prices down even faster, leading to more deflationary expectations and more selling until everyone has no possessions and no assets other than cash.

If this happened, then who would buy?

Do prices ever get low enough?

If buyers expect lower prices, then how much lower? Any number in particular? If a buyer expects a specific lower price, and the price reaches that level, will he buy? Or does he always expect prices to go even lower than they are today, no matter how far they have fallen already?

If expectations of lower prices turn out to be correct, and prices drop to even lower levels, then is there any point where a minority of contrarian buyers defect from the consensus and begin to see a bottom, or even an uptrend? Or do these expectations go on forever adapting to lower prices causing prices to drop indefinitely?

The point of delaying a purchase is so that you can make the purchase in the future and have some additional cash left over to make another purchase or to save. What is the point of delaying a purchase that you never make?

We have all had the experience of buying a new computer, or some other device, the day before the next version was released and it costs less and does more. If you knew would you have waited? Maybe, but maybe not. If you need a computer for work, then you will buy it sooner rather than later.

Many people delayed their purchase of the iPhone 4 in order to buy the iPhone 5, then when available they bought the iPhone 5. My iPhone4 was worn out by that time and I needed a new phone.

What about the Law of Demand?

According to the law of demand, a greater quantity of a good is demanded at a lower price than at a higher price. If that were true, then people would buy more, rather than postponing purchases.

What happens to the law of demand in a deflation? It turns out that the law of demand has a loophole: it requires that all other things remain equal. In a deflation death spiral, all things are not equal. Consumer preferences change in response to prices. Stationary supply and demand curves do not exist in such a world. For prices to fall and yet still fail to induce buyers to buy, the quantity demanded must always fall by more than enough to compensate for the lower asking price. The demand curve is always shifting downward faster than the price falls, to prevent an equilibrium price from ever forming. Economist W. H. Hutt calls this "an infinitely elastic demand for money."

Does this describe the world that we live in, or any world that we could imagine? Do people really react in such a mechanical way to price changes? How do we explain, for example, shoppers competing to buy at low prices?

Why do sellers not lower prices?

Why is it only buyers whose expectations of lower prices are based on falling prices? Are the expectations of sellers included in the model?

If not, is that because the models assume that sellers do not have expectations? Or do the expectations of sellers not match the expectations of buyers?

If sellers have the expectations of lower prices, why do they not lower their prices immediately in order to sell inventory ahead of their competitors?

According to the deflation spiral theory, expectations frustrate market clearing. Yet, as Rothbard argues, speculation about future prices helps prices to converge to market clearing values. If buyers and sellers both expect future prices to be lower, why do market prices not converge upon this new, lower level immediately?

If customers are postponing purchases expecting lower prices in the future, but sellers do not cooperate, then inventories will accumulate. If this began to happen, then why would sellers not lower their prices immediately in order to clear out inventories?

All of us are both buyers and sellers, of different things at different times. To say that only the expectations of buyers are affected by falling prices, is to say that the same person, early in the day, has expectations about his own future purchases, but later the same day, does not have expectations about his own current and future sales. Does the model assume that we have all been lobotomized so the two sides of our brain do not communicate with each other?

Do producers have any control over their costs?

Previously, I asked if sellers could anticipate lower prices as well as buyers. If the producers anticipated lower prices, why did they go ahead and produce the item, or order raw materials with such high costs that they could not make a profit?

If a single business firm is experiencing fewer sales, they may not be able to reduce their costs because a single firm is close to being a price taker in the markets for labor and capital. There are usually alternative uses for their factors that value them more highly, at or close to current prices. But if prices, and sales are falling everywhere, or if everyone expects this to be the case, then why will suppliers not lower their prices if they expect their costs to be lower?

What are people doing with the money that they did not spend?

Suppose that people postpone spending. What do they do with the money they did not spend? Are they increasing their cash holdings? Or are they spending on investment goods? Saving and investing is a form of spending, only the expenditure is for capital goods rather than consumer goods. In this case, there would be no general decline in total spending or employment. Workers would have to change jobs from working in the consumption industry, to working in the capital goods industry, as Hayek explains in his essay "The Paradox of Savings" but production would continue.

How lower prices are necessary to induce people to postpone purchases?

There is a return on the purchase of a consumption good that results in the services provided by the good. This must be balanced against the return on the cash by holding until prices are lower. As noted by the Center for Economic Policy Research (CEPR), a small price change is not much of a motivation to wait, if you need a new product:

[postponement of purchases] would be true for rapid rates of deflation, but Japan's deflation has almost always been less than 1.0 percent a year. In 2011 its inflation rate was -0.2 percent. This means that if someone was considering buying a $20,000 car, they could save $40 by waiting a year. It is unlikely that this rate of deflation affected the timing of many purchases to any significant extent.

Why do quantities adjust but not costs?

If there is a generalized increase in money demand, then prices need to adjust downward. Why is it that all the quantity of goods bought and the quantity of labor employed can adjust, but prices cannot?

According to The Asia Times, when deflation strikes, factories lay workers off in order to cut costs. Why cannot producers lower their bid prices to their labor force and their suppliers in order to preserve production? If they could lower their costs, then they could produce profitably at a lower price level.

The general price level does not matter to business firms, so long as their costs are below their sale prices. Why does a deflationary meltdown assume that business can not operate profitably at any nominal price level? Why can business not lower costs?

Is this really what caused the Great Depression?

What about the credit bubble of the 1920s?

What about bank failures? The great contraction of the money supply?

The Smoot-Hawley tarrif?

What about regime uncertainty?

How about new deal wage and price policies that prevented prices from falling, which would have allowed employment to recover?

Conclusion

The deflation death spiral is a theoretical description of a situation but it does not describe the reality of human action, for any number of reasons:

1. There is in reality always a diversity of expectations among the public. While some people will expect prices to continue in the same direction, others will form the opposite view. Everyone's expectations will change not only in response to changes in the data, but taking into account their entire life experience, their own ideas, and their situation.

2. Expectations are not entirely driven by prices. A broad range of things influences our expectations about price.

3. Lower prices are not always sufficient motivation to delay purchases because everyone prefers to have what they want now, rather than later.

4. Expectations of buyers tend to be met by sellers, if not at first, then fairly soon. In some cases, buyers can hold onto their cash for a bit longer, but most businesses have no choice but to sell their inventories at what the buyer will pay. In other cases, buyers may not be able to delay purchases, or may not wish to, and will pay what they must in order to buy.

5. Everyone—buyers and sellers (and every one of us acts in both of these roles at different times)—has expectations not only about consumer prices, but about wages, employment prospects, even asset prices, the economy in general, the progress of our own life, and the future of our family. A coherent plan of saving and spending takes all of these things into account.

6. Expectations can be met. Buyers have a buying price. Even if not known in advance, they know it when they see it posted. Even if they do not know what they plan to buy in the future, a bargain price will be met by buyers.

7. People only need so much cash. Beyond that, they start to look around for either consumption goods, or investments.

BUY SILVER to PEACEFULLY PROTEST our CRIMINAL FINANCIAL SYSTEM – Chris Duane & BrotherJohnF – PT 1 – YouTube

Posted: 14 Feb 2013 08:02 PM PST

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Warren Buffet acquires ketchup giant Heinz – YouTube

Posted: 14 Feb 2013 07:59 PM PST

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UKIP Nigel Farage, EU no better than a banana republic

Posted: 14 Feb 2013 07:34 PM PST

 

UK Independence party leader says the words legal an European Union do not go together.

Nigel Farage is a UKIP MEP for the South East of England. Elected in 1999, he has used his experience of the EU to increase awareness of its activities back home in the United Kingdom.

Germany, Spain Set To Pull The Plug On Green Energy

Posted: 14 Feb 2013 07:11 PM PST

Over ten years ago, when Europe was a bright and shining example of experimental monetarist "brilliance", and when the money was flowing, the continent decided to do the ethical thing and actively promote the pursuit and development of renewable energy through countless government subsidies. As a result, Germany and Spain became the undisputed leaders in the race for a green future, and both created similar laws to encourage the development of renewable energy. There were two problems: i) green energy, while noble in theory, is about the worst idea possible when it comes to profitability and capital self-sustainability and constantly needs governmental subsidies, and ii) it was the end consumers who would pay for the government's generosity, in the form of a surcharge on electric bills. In Germany, for example, as the industry grew (in size, and thus in losses) demand for the subsidy increased, driving the surcharge higher. In January, the surcharge, which amounts to about 14% of electricity prices, nearly doubled to 5.28 euro cents per kilowatt hour.

And, as the WSJ so deftly explains, "that means ordinary consumers shoulder the lion's share of the costs for what the German government calls its "energy revolution." And here is where a third problem comes into play, because while German and Spanish consumers were happy to pay a surcharge in the golden days of a Dr. Jekyll Europe when everything was great, soon Europe become a doomed Mr. Hyde-ian Frankenstein monster, with imploding economies, 60%+ youth unemployment and resurgent neo-nazi powers. In short: the German and Spanish consumers have had it with funding an infinite money drain (even bigger than Greece), when cash flow is scarce and getting worse, and have just said "Basta" and "Nein", respectively.

Which means it is now a political issue in Spain, where the scandal ridden Rajoy has never been more unpopular, and certainly in Germany where Merkel faces an election in September and can't allow the public opinion to shift against her. As a result "with Spain in the grips of recession, the government wants to lower consumers' light bills. In Germany, Chancellor Angela Merkel faces an election in September and hopes to win points with voters by putting a stop to rising electricity bills."  Specifically, "Ms. Merkel's government on Thursday proposed putting a cap on the green-energy surcharge until the end of 2014 and then restricting any rise in the surcharge after that to no more than 2.5% a year. The government also plans to tighten exemptions, which would force more companies to pay, and achieve a cut in green subsidies of €1.8 billion ($2.42 billion). The plan is a quick fix pending comprehensive reform after the election, government officials said."

Spain is not far behind:

The Spanish parliament took a similar step on Thursday, passing a law that aims to curb rising household electricity costs by cutting aid to the renewable-energy industry.

 

Renewable-energy producers "are going to receive less revenue, but these measures are better for consumers" said Energy Minister José Manuel Soria.

 

Among the changes in the Spanish system, the new law indexes certain subsidies and compensation to an inflation estimate that strips out the effects of energy, food commodities, and tax changes.

Naturally the response from the subsidized industries has been swift and damning:

Renewable-energy companies said that the government was backing away from previous promises that it would ensure them a reasonable return on their investments.

 

"Spain's government is trying to smash the renewable-energy sector through legislative modifications," said José Miguel Villarig, chairman of the country´s Association of Renewable-Energy Producers.

Actually all the Spanish government is thing to do is stay in power, and in order to do so, it must stop demanding that its people pay for the development of financial black hole industries.

The immediate result of these steps will be a widespread collapse in the alternative energy space in Europe, which is barely sustainable on an "as is" basis (see Solyndra) with ongoing government funding, and will melt as fast as a snowball in the Iceland thermal when the money is even modestly cut off.

Because like all truly money losing government ventures, one can't mothball a project that by definition has to lose money in hope one day it will be a new money-winning paradigm, especially since the imminent deleveraging wave which will hit the world once Chinese inflation wakes from its slumber, will mean conventional energy costs will once again have no choice but to drop (see: "On This Day In History.... Gas Prices Have Never Been Higher").

Yet all this means is that the government will merely have to find other, more creative ways to lose money now that the alternative energy fad is virtually dead. Luckily, spending money with absolutely nothing to show for it is one thing that every government in the current insolvent global regime, has a peculiar knack for. It also means that thousands of former government workers with no real marketable skills are about to hit the streets demanding more handouts from the nanny state, and lead to yet another wave of European civil unrest just as the 'other people's money' is about to run out.

Hathaway sees gold in 'give-up phase' just before a big rally

Posted: 14 Feb 2013 06:17 PM PST

8:12p ET Thursday, February 14, 2013

Dear Friend of GATA and Gold:

Tocqueville Gold Fund manager John Hathaway tells King World News tonight that he sees gold in the "give-up phase" that precedes a big rally, the more so because commodity letter writer Dennis Gartman has begun shorting gold. "The physical market is tight," Hathaway adds, "and as usual the selling is all paper gold on the Comex." An excerpt from the interview is posted at the King World News blog here:

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/2/14_Ha...

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


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Opinion Around the World Is Changing
in Favor of Gold -- Find Out Why

When Deutschebank calls gold "good money" and paper "bad money". ...

http://www.gata.org/node/11765

When the president of the German central bank, the Bundesbank, pays tribute to gold as "a timeless classic". ...

http://www.forbes.com/sites/ralphbenko/2012/09/24/signs-of-the-gold-stan...

When a leading member of the policy committee of the People's Bank of China calls the gold standard "an excellent monetary system". ...

http://www.forbes.com/sites/ralphbenko/2012/10/01/signs-of-the-gold-stan...

When a CNN reporter writes in The China Post that the "gold commission" plank in the 2012 Republican platform will "reverberate around the world". ...

http://www.thegoldstandardnow.org/key-blogs/1563-china-post-the-gop-gold...

When the Subcommittee on Domestic Monetary Policy of the U.S. House of Representatives twice called on economist, historian, and gold standard advocate Lewis E. Lehrman to testify. ...

World opinion is changing in favor of gold.

How can you learn why and what it will mean to you?

Read the newly updated and expanded edition of Lehrman's book, "The True Gold Standard."

Financial journalist James Grant says of "The True Gold Standard": "If you have ever wondered how the world can get from here to there -- from the chaos of depreciating paper to a convertible currency worthy of our children and our grandchildren -- wonder no more. The answer, brilliantly expounded, is between these covers. America has long needed a modern Alexander Hamilton. In Lewis E. Lehrman she has finally found him."

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Gold Breaks Downward Sloping Channel

Posted: 14 Feb 2013 06:02 PM PST

courtesy of DailyFX.com February 14, 2013 12:35 PM Daily Bars Chart Prepared by Jamie Saettele, CMT using Marketscope 2.0 Commodity Analysis: “Gold’s rebound from the 61.8% retracement of the rally from 1522 and former resistance (June-August 2012 highs) is constructive but the near term picture is defined by roughly 1650 and 1700. A break of that zone will present the next directional opportunity.” The break below channel support is enough to turn bearish for what may be the beginning of a larger breakdown. Commodity Trading Strategy: Short against 1690. LEVELS: 1563 1590 1626 1652 1673 1686...

Are Price Controls Coming To Venezuela, Where "Nymphomania" For Dollars Is The Next Big Thing

Posted: 14 Feb 2013 06:00 PM PST

In typical 'crazy-talk' ways, Venezuela is 'pledging' that its currency devaluation will not increase inflation in the country and, as The FT reports, has warned it will crack down on businesses that raise prices. Hot on the heels of Argentina's ignoration of inflation and recent price controls (and advertising bans), it would appear Venezuela is next as grey market dollars are changing hands for 22 Bolivars - massively lower than the official (just devalued) 6.3 Bolivars per USD rate. An 'equilibrium' rate is believed to be around 9 Bolivars but with Chavez still MIA and Maduro running the show, the 'nymphomania' for dollars - as Venezuela's finance minister called it - continues as businesses are simply unable to find tenable USD to use for imports. Contagion is also spreading as Colombia's FinMin Cardenas fears goods being smuggled across the border - creating inflation there too.

 

Via The FT,

Venezuela's government warned that it would crack down on businesses that raise prices as it pledged that a devaluation of its currency would not increase inflation.

 

The black market price for dollars in the country has risen to a record high, at more than 22 bolivars. That compares to the new official exchange rate of 6.3 bolivars per dollar, with the old 4.3 rate eliminated last Friday. Economists said that at 6.3 bolivars to the dollar, Venezuela's currency remains overvalued, with the "equilibrium" price believed to be about 9 bolivars.

 

...

 

Finance minister Jorge Giordani spoke of "nymphomania" for dollars in Venezuela this week. But businesses criticised his failure to announce alternative sources of foreign currency for importers after a central bank-run system known as the Sitme was scrapped last Friday. Businesses had been able to obtain dollars for 5.3 bolivars through the Sitme.

 

Fears are growing that businesses will find it increasingly hard to obtain dollars to import goods, possibly forcing them to resort to the more expensive black market for foreign currency, with about a third of consumption in Venezuela supplied by imports.

 

Mauricio Cárdenas, the finance minister in neighbouring Colombia, expressed concern that the devaluation could lead to an increase in goods being smuggled across the border. A rise in inflation in Venezuela and other distortions caused by price controls could create an incentive for some goods to be sold illegally in Colombia.

 

Mr Chávez cracked down on businesses after the government's previous devaluation in January 2010, expropriating supermarkets deemed to be raising prices excessively. There are signs that Mr Maduro will be no less severe.

The Great Rebalancing: 10 Things To Watch In 2013

Posted: 14 Feb 2013 05:26 PM PST

The great trade, capital flow and debt imbalances that were built up over the preceding two decades must reverse themselves. Michael Pettis notes, however, that these imbalances can continue for many years, but at some point they become unsustainable and the world must adjust by reversing those imbalances. One way or the other, in other words, the world will rebalance. But there are worse ways and better ways it can do so. Pettis adds that, any policy that does not clearly result in a reversal of the deep debt, trade and capital imbalances of the past decade is a policy that cannot be sustained. It is likely to be political considerations that determine how quickly the rebalancing processes take place and whether they do so in ways that set the stages for future growth or future stagnation. Pettis' guess is that we have ended the first stage of the global crisis, and most of the deepest problems have been identified. In 2013 we will begin to see how policymakers respond and what the future outlook is likely to be. The following 10 themes are what he will be watching this year in order to figure out where we are likely to end up.

 

Authored by Michael Pettis: What I'll Be Watching In 2013,

I’ll be watching a number of things in 2013 in order to get a better sense of what the future will bring. On January 22 Princeton University Press will be publishing my book, The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead, and in the last chapter of the book I argue that the great trade, capital flow and debt imbalances that were built up over the preceding two decades must reverse themselves. Imbalances can continue for many years, I argue, but at some point they become unsustainable and the world must adjust by reversing those imbalances.

One way or the other, in other words, the world will rebalance. But there are worse ways and better ways it can do so. Large trade surpluses can decline, for example, because exports fall, or they can decline because imports rise. Large trade deficits can contract under conditions of high unemployment, but they can also contract under conditions of low unemployment. Low savings rates can rise with declining household income or with rising household income. Repressed consumption rates can reverse through collapsing growth or through surging consumption. Excessive debt can be resolved by default or by growth.

Any policy that does not clearly result in a reversal of the deep debt, trade and capital imbalances of the past decade is a policy that cannot be sustained.  The goal of policymakers must be to work out what rebalancing requires and then to design and implement the least painful way of getting there.  International cooperation, of course, will reduce the pain. 

For this reason I have no doubt that over the next few years we will see the imbalances I have identified over the years in this newsletter reverse themselves, but whether they reverse in more orderly or less orderly ways will depend on policy decisions. It is likely to be political considerations that determine how quickly the rebalancing processes take place and whether they do so in ways that set the stages for future growth or future stagnation.

My guess is that we have ended the first stage of the global crisis, and most of the deepest problems have been identified. In 2013 we will begin to see how policymakers respond and what the future outlook is likely to be. Here is what I will be watching this year in order to figure out where we are likely to end up (and I have a related article, for those who might care, in last week’s Financial Times).

1.  Watch how quickly growth adjusts. The speed with which China’s GDP growth slows in 2013 will tell us a lot about how determined Beijing is to rebalance the economy in such a way that growth is driven more by higher household income and consumption and less by investment funded by rising government and government-related debt. It will also tell us how successful Beijing’s new leadership will be in consolidating power and forcing the kinds of economic and financial reforms on which most economists now agree, but which are likely to be politically difficult.

China is ending the year on what many are interpreting as a strong note. Manufacturing seems to be growing at its fastest pace in a while. Here is the relevant article in an article from the People’s Daily:

December’s HSBC China final manufacturing PMI rose to a 19-month high of 51.5, thanks to stronger new business in-take and expansion of production, according to figures released by HSBC Monday. The statistics suggest that China’s economy remains on track for recovery as it enters 2013, said the HSBC report. Despite persistent external headwinds, as indicated by still contracting new export orders, the financial organization expects China’s GDP to rebound to 8.6 percent in 2013, underpinned by China’s continued policy support.

An article in Monday’s Financial Times puts a little more meat on the bones:

China’s economy has ended the year on a strong note after a gauge of its manufacturing sector rose to a 19-month high. The HSBC purchasing managers’ index for December climbed to 51.5 from 50.5 a month earlier, according to figures published on Monday. In rising further above the midpoint of 50, the reading signalled an accelerated pace of expansion.

Although China is still set for sub-8 per cent growth in 2012, its weakest in more than a decade, momentum picked up noticeably in the fourth quarter after the government increased its spending on infrastructure. “Such momentum is likely to be sustained in the coming months when infrastructure construction runs [at] full speed and property market conditions stabilise,” said Qu Hongbin, HSBC chief economist for China.

As most of us expected, the end of the year saw a reversal of the attempts earlier in 2012 to slow investment growth, and as a result GDP growth and manufacturing activity have picked up, but so has debt. Beijing probably needed to do this for good political reasons – I suspect that there are many who would have strongly opposed a very weak ending for the Hu-Wen period of government – but the longer they keep this up, the worse the overall adjustment will be, and it will be politics that determines how quickly they can return to a real rebalancing of the economy.

I expect GDP growth in the first half to be fairly high, probably close to 8%, continuing the investment boom that was recently unleashed. I am not fully confident of this number because there seem to be significant strains in the banking system, and without easy credit growth there cannot be much investment growth. Of course part of any credit tightness will be “resolved” by the tried-and-true method of vendor financing, which is already becoming a problem for SOE balance sheets (see for example this article on Zoomlion, the construction equipment manufacturer, which has seen its sales rise in 2012 largely in line with their increased financing of customer purchases), but the idea that Chinese SOEs are rushing in where Chinese bankers fear to tread is not much of a comfort for me.

As an aside, one of my former students, now an investment banker working on the domestic IPO market, came to visit me today and warned me that there is a huge backlog of companies trying to get approval to sell shares. One of the requirements is that they must have two consecutive years of rising net earnings. Many of these firms expected to come to market in 2012 and were able to manage the needed two years of rising net earnings to 2011, but now that they have been pushed back, at least to 2013, they are struggling to show that net earnings in 2012 also went up. For that reason his firm is especially wary of sneaky attempts to boost reported earnings. There are hundreds of companies waiting for approval.

At any rate it is second half GDP growth that interests me more. If Beijing has really gotten its arms around the rebalancing problem and is serious about adjusting quickly, I expect reported growth to drop sharply, perhaps to close to 6%. If not, I expect reported growth to remain well above 7% in the second half of 2013. This would worry me.

2.  Watch how quickly new debt emerges. Debt problems are going to continue to emerge in 2013, but as long as each new manifestation of excessively rising debt is treated as a specific and localized problem that can be resolved with specific polices, overall balance sheets will continue to get worse. We need to watch what Beijing does to rein in the growth in debt, and of course this is closely related to overall GDP growth. As long as GDP is growing at levels above 6% or 7%, it is almost a certainty that debt is rising too fast. If GDP growth levels come in much below 6 or 7%, there is a chance that debt growth is not excessive.

How do we keep track of debt levels? Obviously this is no easy task in China, where both the banks and the informal banking system have done a great job in recent years of hiding loan growth and keeping formal debt levels from looking to risky.

But follow the cash. Large increases in infrastructure investment and in real estate development are almost always funded, directly or indirectly, by increases in debt. Many of the banks seem to be facing tight liquidity conditions, so we should also be watching payables and receivables on the SOE balance sheets. We should also be watching off-balance-sheet activity by the banks.

3.  Watch for financial scandals. We should also be keeping track of stories about defaults and bank runs. Remember that the Chinese financial system does not really “do” defaults. When borrowers are unable to repay debt out of operating cashflow, the problem is usually “managed” away by forcing losses onto some other entity.

South China Morning Post columnist Shirley Yam, who, I am glad to say, recently returned from a one-year leave of absence, wrote one of her typically intelligent articles earlier this month explaining how a RMB 3.5 billion default by Metallurgical Corporation of China was resolved. It is worth reading to get a sense of how low non-performing loan numbers in the Chinese banking system are nonetheless compatible with a surge in bad investments funded by debt.

This is why those economists who understand the structure of Chinese growth and who worry about the consequences of rising debt notice even relatively small defaults. When a default actually takes place, it usually means that the relevant principals have exhausted all other means of hiding the debt and were forced into recognizing the losses. For example, on Saturday the South China Morning Post published this article:

A former employee of Shanghai Pudong Development Bank is alleged to have acted as a loan shark and run illegal businesses to the tune of 6.4 billion yuan (HK$7.9 billion). It is the latest scandal to reflect the severity of the mainland’s shadow banking problem and banks’ lax management of their branches. Ma Yijiang, formerly deputy head of a branch in Zhengzhou, Henan province, allegedly used the money from cash-rich depositors for loan sharking schemes. The bank said in a statement it was assisting the authorities in their investigations.

Last month, the failure of a wealth management product (WMP) issued by Huaxia Bank’s Jiading branch in Shanghai, which resulted in depositors losing several hundred million yuan, set off alarms in the country’s banking sector, and analysts warned similar scandals would surface in the coming months.

A Zhengzhou court heard Ma’s case earlier this week. The Shanghai bank said he resigned in October 2011. The 21st Century Business Herald, an influential business newspaper, said Ma enticed depositors to hand their money to him by offering lofty interest rates between 2009 and 2011.

He lent the money, reported to to amount to 6.4 billion yuan, to other businesses, such as property developers, charging super-high interest, the newspaper said. “It again proved a lack of proper supervision of banking outlets around the country,” said an official with the Shanghai branch of the China Banking Regulatory Commission. “There are increasing risks that the defaults in the shadow banking system would lead to a credit crisis.”

Old news, you might say, and no big deal, but remember that these kinds of problems when they arise tend immediately to be suppressed, and only become public when there is no way to prevent information from leaking out. The fact that we are being regaled almost weekly with stories of banking fraud and scandals suggests just how unsteady credit in China has been. Remember what Irving Fisher told us in The Debt-Deflation Theory of Great Depressions:

The public psychology of going into debt for gain passes through several more or less distinct phases: (a) the lure of big prospective dividends or gains in income in the remote future; (b) the hope of selling at a profit, and realizing a capital gain in the immediate future; (c) the vogue of reckless promotions, taking advantage of the habituation of the public to great expectations; (d) the development of downright fraud, imposing on a public which had grown credulous and gullible.

When it is too late the dupes discover scandals like the Hatry, Krueger, and Insull scandals. At least one book has been written to prove that crises are due to frauds of clever promoters. But probably these frauds could never have become so great without the original starters of real opportunities to invest lucratively. There is probably always a very real basis for the “new era” psychology before it runs away with its victims. This was certainly the case before 1929.

The late stages of a debt bubble are almost always characterized by the sudden emergence of financial fraud, and the huge extent of the frauds lead many to assume that fraud was the source of the credit problems, when in fact widespread financial fraud is more typically a symptom of a financial system that has already gone to excess. This is why I am going to be following financial scandals closely, no matter how arcane or small. The occurrence and pattern of financial scandal will tell us a lot about the likely problem areas in the financial system.

4.  Watch bank activities. More generally I am going to watch the relationship between total credit growth and the growth in RMB loans. Much of the off-balance sheet financing in China is designed specifically to skirt regulations, and the relative size of these transactions will tell us about transparency (or lack thereof). A typical example of this might be this Bloomberg article from last Wednesday:

China’s bank loans as a share of funding in the economy may have fallen to a record low, highlighting the growth of alternative financing channels that have prompted warnings of rising credit risks. New yuan loans probably dropped 14 percent last month from a year earlier, according to the median projection in a Bloomberg News survey of 37 analysts ahead of data due by Jan. 15. That would give bank lending a 55 percent share of aggregate financing for 2012, based on UBS AG estimates, the least in figures dating to 2002.

The decline underscores the waning ability of official loan data to capture the scale of debt in the world’s second-largest economy as borrowers and investors turn to less-regulated, higher-return shadow-banking products. The People’s Bank of China is putting greater emphasis on aggregate financing and the International Monetary Fund says the growth of nonbank credit poses “new challenges to financial stability.”

In 2002, if I remember correctly, bank lending represented 93% of aggregate financing as defined by the PBoC as total social financing.

5.  Watch inflation. Inflation is actually a positive indicator for China’s rebalancing, and also worth watching because I expect (hope) it to rise in 2013, although not by too much. This may sound like a strange thing to say – everyone else thinks of rising inflation as a bad thing – but remember that the more you repress household income growth, the more you divert resources, especially through cheap financing, from consumption into production, and so this tends to be disinflationary.

If China is truly rebalancing, at least part of this is going to show up in upward inflationary pressure, although it is likely to be the “right” kind of inflation – i.e. it will hurt the rich more than the poor because it will be based on non-food rather than food items. Perhaps this inflation is already starting to happen, although not in the way I would like it to happen. There has been an uptick in inflation but it seems to have been caused by the impact of cold weather on food prices, rather than because consumption of manufactured goods is rising faster than production. According to an article in Friday’s South China Morning Post:

China’s inflation spiked to a six-month high in December after a freezing winter pushed up vegetable prices, possibly complicating efforts to sustain a shaky economic recovery. Consumer prices rose 2.5 per cent over a year earlier, up from November’s 2 per cent and the fastest rise since June, the National Bureau of Statistics reported.

That was driven by a 14.8 per cent jump in vegetable prices after the coldest winter in seven years led to smaller harvests. The statistics bureau said vegetable prices in some areas rose as much as 40.8 per cent. Higher inflation could hamper the government’s ability to support China’s recovery with interest rate cuts or other moves for fear of igniting a politically dangerous price spiral. Consumer prices are especially sensitive in a society where the poorest families spend up to half their monthly incomes on food.

6.  Watch the prices of hard commodities. Of course I will be watching copper prices and prices of other hard commodities. I expect that hard commodity prices will fall sharply over the next two to three years, but to the extent that prices rise in the short term, as they have in the past three months, it is likely to reflect additional investment growth in China.

As a quick measure this means that declining copper prices can be seen as a measure of the extent of Chinese rebalancing. The longer it takes for copper prices to drop, the slower is the Chinese adjustment likely to be.

There has, I should add, been a lot of talk recently about the price impact of copper ETFs. Here is a relevant article from the Financial Times:

A group of copper users has rounded on the Securities and Exchange Commission for its “arbitrary and capricious” decision to approve the first US investment product that would hold physical copper. The move is likely to pave the way for a formal appeal, potentially further delaying the launch of the product by JPMorgan

The Gold Price Closed Down Needs to Close Above $1,705 and Silver Above 32.5 Cents

Posted: 14 Feb 2013 05:25 PM PST

Gold Price Close Today : 1,634.70
Gold Price Close 8-Feb-13 : 1,666.00
Change : -31.30 or -1.9%

Silver Price Close Today : 30.343
Silver Price Close 8-Feb-13 : 31.425
Change : -108.20 or -3.4%

Gold Silver Ratio Today : 53.874
Gold Silver Ratio 8-Feb-13 : 53.015
Change : 0.86 or 1.6%

Silver Gold Ratio : 0.01856
Silver Gold Ratio 8-Feb-13 : 0.01886
Change : -0.00030 or -1.6%

Dow in Gold Dollars : $ 176.70
Dow in Gold Dollars 8-Feb-13 : $ 173.63
Change : $3.08 or 1.8%

Dow in Gold Ounces : 8.548
Dow in Gold Ounces 8-Feb-13 : 8.399
Change : 0.15 or 1.8%

Dow in Silver Ounces : 460.51
Dow in Silver Ounces 8-Feb-13 : 445.28
Change : 15.23 or 3.4%

Dow Industrial : 13,973.39
Dow Industrial 8-Feb-13 : 13,992.97
Change : -19.58 or -0.1%

S&P 500 : 1,521.38
S&P 500 8-Feb-13 : 1,517.93
Change : 3.45 or 0.2%

US Dollar Index : 80.394
US Dollar Index 8-Feb-13 : 80.263
Change : 0.131 or 0.2%

Platinum Price Close Today : 1,709.80
Platinum Price Close 8-Feb-13 : 1,713.50
Change : -3.70 or -0.2%

Palladium Price Close Today : 763.65
Palladium Price Close 8-Feb-13 : 751.10
Change : 12.55 or 1.7%

Today the GOLD PRICE fell $9.50 to $1,634.70 and silver ran right along, losing 51.1 cents to close at 3034.3c.

These are not gigantic breakdowns, but with the last few days' breakdowns through support they force us to question how far they might fall. They will run into the downtrend lines from the 2011 highs at 2800c and $1,595. Fall through those points and it's back to last year's lows at 2610c and $1,525.

Those targets are by no means given. Next week after the Chinese holiday the Chinese will return to the market, buying, and who knows what rotten egg, positive or negative, the G20 chickens might lay. Some support for the GOLD PRICE exists also around $1,630 and for silver between 2975c and 3000c. Might stop there.

Up above the gold and SILVER PRICE will not trounce the bears until they close over $1,705 and 3250c.

Bottom line is, hold fast, don't panic. Keep your eyes on the primary trend and the horizon, and you'll ride out the worst storms with silver and gold.

Silver and gold, contrary to what the chart screamed in August and September, and even through most of this correction, have not yet made good on the rally promised by their August breakout through the downtrend line from the 2011 highs. Today because markets fear some statement (don't even say "action") from the toothless G20 discouraging currency wars, short term traders are selling silver and gold, buying dollars and yen, selling euros, and shunning stocks.

Listen, I'm used to people calling me "fool" and "stupid," so it doesn't much bother me. I've been doing this too long. I've learned not to tote up scores too early. I was there in October and November 2008 when from March highs gold lost 30% and silver lost 105% [sic] of its preceding rise, puking in my wastebasket every morning. Tales of great cliffs for gold and silver just past Sunday don't panic me, since I am not selling now anyhow. And if they drop, so much the better, because I'll buy some more cheaper. I was also there at the 2011 peaks, when silver reached 6 times its 2008 low and gold 2.7 times. Truth is the daughter of time.

And it ain't over yet. Banks are still stuffed with rotten assets, governments have reached the limit of borrowing capacity, every central bank in the world is inflating, AND THEY WILL KEEP ON DOING IT TILL THEY BUST. The cause hasn't been removed, so the effect will continue. They continue to inflate, so silver and gold will continue to rise.

I'm content to wait, and be called "wrong" for a long time.

Yet again we are treated to an exhibition of how government and central bank interference in the economy "stabilize" markets. The Gang of 20 nations are meeting this weekend. Now y'all and I and any other rational, sane person knows that like a sow wallowing in the mire, they will keep on wallowing in their Keynesianism, their stimulus programs, and most of all, inflation. Therefore, the chance of anything earth-shaking, any real change, coming out of this meeting is a little less than the chance of your winning the Power Ball Lottery and 30 seconds later being struck by a meteor. They will meet, they will swill and swallow at public expense, they will posture and issue verbose statements carefully bleached of meaning, and then they will go home to feed off their respective nations again. But the mere threat of a "government surprise party" coming out of this weekend has paralyzed some markets and sent others in odd directions as gamblers lay bets on what the Assembled Poo-Bahs and Virtually Important People might do.

So markets are skewed. I have learned, however, that markets can remain skewed and illogical longer than your pockets are deep. That's why I make no short term investments, no day trades, but rather stay with the primary trend. Unsexy and stodgy though that be, it beats panhandling after losing all your money in the futures market.

US dollar index rose today to 80.394, up 32.3 basis points (0.42%), probably because it's viewed as the safest bet before the Gang of 20 meeting. Euro fell to $1.3356 (0.69%), probably on the bet that a high exchange rate hurts the puking-sick European economy and therefore must be brought down. Likewise the yen rose to 107.69 (up 0.39%) most likely on the bet that the other central banks won't stand for more currency warfare from the Japanese and will require them to give back some of their gains.

The looming G20 meeting discomfited stock markets around the globe, and confused them. The S&P500 and the Russell 2000 rose while the Dow and all the Nasdaq averages fell. Other world markets fell.

S&P500 gained 1.05 (0.07%) to 1,521.38 but the Dow wouldn't keep it company. It fell 9.52 (0.07%) to 13,973.39. I very much doubt the stocks' rally has ended, and expect a wild rise before it does. Likely that rally will end as March expires, but it might stretch out a little longer. Might reach 15,000 amidst government, central bank, and media announcements of a "New Era." It won't be.

Dow measured in silver and Dow in Gold have both broken out upside and probably will rise another 6% or so at least.

I am sending this weekly report today because my wife is kidnapping me tomorrow and taking me to New Orleans. She's making me go. Really. So I won't be sending a commentary today or Monday, but I'll think about y'all when I'm sitting in Felix's in front of my second dozen oysters.

Today is Valentine's Day. If you haven't already bought your wife some sweet present, you'd better go find one right now.

On 14 February 1859 the Great State of Oregon was admitted to the Union. The Oregon coat of arms shows a man NOT pumping his own gas over the motto, "We never met a rule we didn't like." I love Oregon and you can live a gourmet's life there, but Mercy! They love those rules. I nearly got arrested once for chewing gum in the state aquarium. Got tailed by the security guard all the rest of my tour. I must look like "one of those people." Can y'all imagine what he might have done if I'd been dipping Skoal? If I'm lying, I'm dying. It happened.

Y'all enjoy your weekend!

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

- Franklin Sanders, The Moneychanger
The-MoneyChanger.com
1-888-218-9226
10:00am-5:00pm CST, Monday-Friday

© 2013, 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 bubble has burst, primary trend down.

WARNING AND DISCLAIMER. Be advised and warned:

Do NOT use these commentaries to trade futures contracts. I don't intend them for that or write them with that short term trading outlook. I write them for long-term investors in physical metals. Take them as entertainment, but not as a timing service for futures.

NOR do I recommend investing in gold or silver Exchange Trade Funds (ETFs). Those are NOT physical metal and I fear one day one or another may go up in smoke. Unless you can breathe smoke, stay away. Call me paranoid, but the surviving rabbit is wary of traps.

NOR do I recommend trading futures options or other leveraged paper gold and silver products. These are not for the inexperienced.

NOR do I recommend buying gold and silver on margin or with debt.

What DO I recommend? Physical gold and silver coins and bars in your own hands.

One final warning: NEVER insert a 747 Jumbo Jet up your nose. No, I don't.

Currency ?War? or ?Revolution?? ? And Gold?

Posted: 14 Feb 2013 04:37 PM PST

Gold Forecaster

Global central banks have collectively "printed" over $11 TRILLION...WHY WOULD YOU SELL YOUR SILVER AND GOLD?

Posted: 14 Feb 2013 04:14 PM PST


The State of the Dollar

Editorial of The New York Sun | February 11, 2013

All eyes will be on President Obama [tomorrow] when he fulfills his constitutional obligation to "give to the Congress Information of the State of the Union, and recommend to their Consideration such Measures as he shall judge necessary and expedient." All sorts of topics are in the advance headlines, from jobs, to the budget crisis, to gay rights, to the war. All of them are worthy of attention by the President and the Congress.

Yet we haven't seen in the headlines about the pending presidential palaver even one mention of the topic that, by our lights, rises above all the others. This is the state of the dollar. Particularly in an age of fiat money, where there is no gold or silver backing for our national currency and the only basis of it is the economic good fortune of the nation, well, particularly in such an age, the state of the dollar can be seen as a proxy for the state of the union itself.

If so, the state of the union is at a historic low. We have rehearsed this point so often in these columns that we fear our loyal readers are in danger of becoming afflicted with monetary monotony. We run the risk because of the aphorism of the Robert L. Bartley, now sadly deceased. "It takes 75 editorials to pass a law," he said. He was speaking of a newspaper that had a daily circulation of 2 million copies. Imagine how many editorials it will take from us more modest sized newspapers.

This topic happens to be getting hotter by the week. The biggest development of late, in our book, was the decision of the Wall Street Journal to issue the op-ed piece by John Taylor warning that the supposedly stimulative monetary policy that Chairman Bernanke and his colleagues have been running is actually a drag on the recovery. That would be like a fire department discovering that the water with which it is hosing down a blaze is flammable.

So what in the world does the President think of monetary policy? Why has he been so all-fired mum on the subject? The question nags at us, particularly in light of his comments during the 2008 campaign. He made them in a meeting with the editors of the Sentinel, a newspaper that is issued at Keene, New Hampshire. We wrote about Mr. Obama's comments in 2011, when the value of the dollar collapsed to below a 1,500th of an ounce of gold.

The question that had been put to Mr. Obama in 2008 — it was perfectly asked by the Sentinel's editor, Jim Rousmaniere — was about the decline of the dollar. "Is that good or bad?" the candidate was asked. Mr. Obama tried briefly to suggest that there were some benefits to a weak dollar, but he was too smart to stick with that argument — at least while he was running for office. The last guy who tried it was a certain peanut farmer who was trying for a second term.

Then Mr. Obama noted that we hadn't seen inflation — yet. "It's not going to last forever," he said. "So the downside is we're going to see inflationary pressures as a consequence of this." Then the candidate asserted that he was "less concerned" about the day to day gyrations of the dollar than "by the underlying economic fundamentals that are causing the dollar to decline," which he characterized as "that we're spending more than we produce, and you know we are losing our competitive edge."

So how's that working out now that Mr. Obama is beginning his second term? The Federal Reserve has expanded its balance sheet to levels it would once have been hard even to dream about. Our central bank is exposed, as George Melloan wrote in a column in these pages called "The Fed's Worst Fear," to the bond market. More than a dozen states are eying making gold and silver coins legal tender. A vast bi-partisan majority of the House wants to audit the Fed, and a new avant garde is talking about the gold standard. Isn't it past time for the President to say something to the Congress and to the American people about the state of the dollar?

http://www.nysun.com/editorials/the-state-of-the-dollar/88190/
____________________________

Obama's Treasury Pick Says He Supports Strong U.S. Dollar
From Reuters
Wednesday, February 13, 2013
WASHINGTON -- Jack Lew, President Barack Obama's pick to run the Treasury Department, on Wednesday said he would support a strong U.S. dollar, in line with longstanding U.S. policy.
"Treasury has had a longstanding provision through administrations of both parties that a strong dollar is in the best interests of promoting U.S. growth, productivity and competitiveness," Lew said during a hearing vetting him for Treasury secretary, in response to a question.
"If confirmed, I would not change that policy."
____________________________
But just how is the 'strong dollar' policy implemented, except by suppressing gold?  Nobody in political authority or journalism ever asks.  Is it implemented at the end of the barrel of a gun, or perhaps with a smart bomb or maybe a drone strike?
____________________________

For an example of "dumb Dollar policy" please refer to comments by then Fed Governor Ben S. Bernanke:


Remarks by Governor Ben S. Bernanke
Before the National Economists Club, Washington, D.C. November 21, 2002
Deflation: Making Sure "It" Doesn't Happen Here
Since World War II, inflation–the apparently inexorable rise in the prices of goods and services–has been the bane of central bankers. Economists of various stripes have argued that inflation is the inevitable result of (pick your favorite) the abandonment of metallic monetary standards, a lack of fiscal discipline, shocks to the price of oil and other commodities, struggles over the distribution of income, excessive money creation, self-confirming inflation expectations, an "inflation bias" in the policies of central banks, and still others. Despite widespread "inflation pessimism," however, during the 1980s and 1990s most industrial-country central banks were able to cage, if not entirely tame, the inflation dragon. Although a number of factors converged to make this happy outcome possible, an essential element was the heightened understanding by central bankers and, equally as important, by political leaders and the public at large of the very high costs of allowing the economy to stray too far from price stability.
With inflation rates now quite low in the United States, however, some have expressed concern that we may soon face a new problem–the danger of deflation, or falling prices. That this concern is not purely hypothetical is brought home to us whenever we read newspaper reports about Japan, where what seems to be a relatively moderate deflation–a decline in consumer prices of about 1 percent per year–has been associated with years of painfully slow growth, rising joblessness, and apparently intractable financial problems in the banking and corporate sectors. While it is difficult to sort out cause from effect, the consensus view is that deflation has been an important negative factor in the Japanese slump.
So, is deflation a threat to the economic health of the United States? Not to leave you in suspense, I believe that the chance of significant deflation in the United States in the foreseeable future is extremely small, for two principal reasons. The first is the resilience and structural stability of the U.S. economy itself. Over the years, the U.S. economy has shown a remarkable ability to absorb shocks of all kinds, to recover, and to continue to grow. Flexible and efficient markets for labor and capital, an entrepreneurial tradition, and a general willingness to tolerate and even embrace technological and economic change all contribute to this resiliency. A particularly important protective factor in the current environment is the strength of our financial system: Despite the adverse shocks of the past year, our banking system remains healthy and well-regulated, and firm and household balance sheets are for the most part in good shape. Also helpful is that inflation has recently been not only low but quite stable, with one result being that inflation expectations seem well anchored. For example, according to the University of Michigan survey that underlies the index of consumer sentiment, the median expected rate of inflation during the next five to ten years among those interviewed was 2.9 percent in October 2002, as compared with 2.7 percent a year earlier and 3.0 percent two years earlier–a stable record indeed.
The second bulwark against deflation in the United States, and the one that will be the focus of my remarks today, is the Federal Reserve System itself. The Congress has given the Fed the responsibility of preserving price stability (among other objectives), which most definitely implies avoiding deflation as well as inflation. I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States and, moreover, that the U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief.
Of course, we must take care lest confidence become over-confidence. Deflationary episodes are rare, and generalization about them is difficult. Indeed, a recent Federal Reserve study of the Japanese experience concluded that the deflation there was almost entirely unexpected, by both foreign and Japanese observers alike (Ahearne et al., 2002). So, having said that deflation in the United States is highly unlikely, I would be imprudent to rule out the possibility altogether. Accordingly, I want to turn to a further exploration of the causes of deflation, its economic effects, and the policy instruments that can be deployed against it. Before going further I should say that my comments today reflect my own views only and are not necessarily those of my colleagues on the Board of Governors or the Federal Open Market Committee.
Deflation: Its Causes and Effects
Deflation is defined as a general decline in prices, with emphasis on the word "general." At any given time, especially in a low-inflation economy like that of our recent experience, prices of some goods and services will be falling. Price declines in a specific sector may occur because productivity is rising and costs are falling more quickly in that sector than elsewhere or because the demand for the output of that sector is weak relative to the demand for other goods and services. Sector-specific price declines, uncomfortable as they may be for producers in that sector, are generally not a problem for the economy as a whole and do not constitute deflation. Deflation per se occurs only when price declines are so widespread that broad-based indexes of prices, such as the consumer price index, register ongoing declines.
The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand–a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.1 Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending–namely, recession, rising unemployment, and financial stress.
However, a deflationary recession may differ in one respect from "normal" recessions in which the inflation rate is at least modestly positive: Deflation of sufficient magnitude may result in the nominal interest rate declining to zero or very close to zero.2 Once the nominal interest rate is at zero, no further downward adjustment in the rate can occur, since lenders generally will not accept a negative nominal interest rate when it is possible instead to hold cash. At this point, the nominal interest rate is said to have hit the "zero bound."
_______________________________

Why Fed Policy Is Hurting The Economy


John Taylor wrote a very interesting article in the Wall Street Journal last week, "Fed Policy Is a Drag on the Economy," in which he argues that the Fed has been hurting the economy by keeping short-term interest rates extremely low, and promising to keep them extremely low for a long time. This of course runs directly counter to what we have been led to believe.
He describes a variety of problems created by super-easy monetary policy (e.g., encouraging people to take on too much risk, creating great uncertainty about the Fed's ability to reverse its QE efforts, making it easy for the federal government to fund its massive spending plans, and forcing other central banks to follow suit). More importantly, perhaps, he argues that very low interest rates create disincentives to save, and this limits the economy's ability to grow. "While borrowers might like a near-zero rate, there is little incentive for lenders to extend credit at that rate. ... lenders supply less credit at the lower rate. The decline in credit availability reduces aggregate demand, which tends to increase unemployment, a classic unintended consequence of the policy."
In other words, while everyone, including the Fed, thinks that ultra low interest rates provide an important source of stimulus to the economy, it's quite likely that they do just the opposite. The Law of Unintended Consequences strikes yet again.
Taylor had a somewhat-related blog post the other day in which he discusses the "strong inverse relationship between fixed investment and the unemployment rate." He accompanied the post with a chart that got my attention, because I saw a way to improve it.
(click to enlarge)
The above chart uses the same data as Taylor's original chart, but includes data going back to 1960 (his only went back to 1990). The interpretation of the chart remains the same. There is a strong inverse relationship between fixed investment as a share of GDP (fixed investment includes private residential and nonresidential construction, and private investment in equipment and software) and the unemployment rate, which is a good proxy for the health of the economy. He is careful to note that while the correlation is strong, we cannot infer the direction of causality. But this does illustrate how a lack of investment could go a long way to explaining why the recovery has been so weak.
It then occurred to me to put his two ideas together, to see if the Fed's monetary policy was correlated with the amount of fixed investment. Where Taylor's WSJ article focuses on how artificially low interest rates limit lending and therefore aggregate demand, and his chart compares fixed investment to the unemployment rate, I wanted to see if there was a link between Fed policy and fixed investment.
(click to enlarge)
As the chart above shows, Fed policy is indeed highly correlated to fixed investment (even more so than the unemployment rate is). This fits hand in glove with the first chart, which links fixed investment to the unemployment rate. The red line in the above chart is the real Federal funds rate (using the Core PCE deflator), since that is a good proxy for the degree to which monetary policy is "tight" or "easy."
This puts some meat on the bones of Taylor's WSJ article. The Fed's unusually accommodative monetary policy stance -- which promises extremely low interest rates (negative in real terms) for a long time to come -- does appear to be a factor in limiting the amount of funds available for investment, and in reducing aggregate demand. And that in turn helps to explain why the recovery has been so weak.
How else to explain the fact that fixed investment is almost always very strong when monetary policy is very tight, and weak when monetary policy is easy? How else to explain how a decade of extremely low interest rates have failed to stimulate Japan's economy?
Food for thought and controversy.
____________________________

Occam's Gold vs Rube Goldberg's Fiat

Tyler Durden's picture
Submitted by Tyler Durden on 02/11/2013 21:35 -0500

Who Is Responsible for Current Weakness in Gold?

Posted: 14 Feb 2013 03:55 PM PST

"Follow the munKNEE" via twitter & Facebook or Register to receive our daily Intelligence Report Just as US investors are advised not to fight the Federal Reserve, gold investors worldwide would be well advised not to fight the Government of India. *India is the world’s largest gold consumer*[and their intent on curbing gold imports by any means necessary could have a negative effect] on world gold demand [and, as such, most likely, on gold prices. IMO,] at best, we will see a sideways market in the price of gold in 2013, and at worst, this will be the year when gold prices start the inexorable drop. So writes the Macro Investor in edited excerpts from an article* posted on Seeking Alpha under the title Gold Under Pressure From New Indian Government Push. [INDENT]*This article is presented compliments of [B]www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and [COLOR=#ff0000]www.munKNEE.com [/COLOR](Your Key to Making Money!) and may have bee...

Stop! Don't Forget Market Risk – Remember What Happened in 2000 & 2007/8.

Posted: 14 Feb 2013 03:01 PM PST

"Follow the munKNEE" via twitter & Facebook or Register to receive our daily Intelligence Report

Investors are more bullish now than at any time since 2002 but the current rally has not been fueled by improved prospects of actual growth and wealth creation. Instead, it's mostly due to 1) investors desperate for income denied them elsewhere by central bank policies; 2) printed stimulus cash seeking a home and 3) sheer technical momentum but nowhere do they seem to be considering market risk – the risk that your investment will lose value because it gets dragged down in a falling market. Words: 615

So writes Cliff Wachtel (http://thesensibleguidetoforex.com) in edited excerpts from his original article* entitled The One Thing You Must Remember Before You Buy Another Stock.

This article is presented compliments of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Investors are more bullish now than at any time since 2002 so a brief reminder is in order:

  • No matter how good the company's prospects,
  • no matter how high or solid the dividend,
  • no matter what the analysts are telling you,
  • and before you go long any risk asset, even if it's a great income stock that will provide a steady high yield no matter what the market does,

consider market risk – the risk that your investment will lose value because it gets dragged down in a falling market.

Most risk assets move in the same direction, regardless of whether they're stocks, commodities, or risk currencies. Most stocks move with the major relevant index, and most global stock indexes move in very close correlation.

How High is the Risk?

~First, look at the chart below of the S&P 500 for the past 14 years. Look at what happened to those who bought risk assets the last two times this bellwether index was at the current level (okay, another 50 points or so), back in 2000 and 2007. Markets plunged in the months that followed, ultimately ceding about half their value.

They came back but why risk the opportunity cost? Moreover, if they take years to recover, what will your stock be worth in real terms, given how the Fed and other leading central banks are trying to debase their currencies?

(click to enlarge)

S&P 500 MONTHLY CHART1998 – PRESENT

Source: MetaQuotes Software Corp, thesensibleguidetoforex.com

Is This Time Different?

~Second, ask yourself this: is there reason to believe it will be different this time? Yes, but not for the better. The underlying fundamentals behind the current rally are worse than they were in 2000 and 2007. Just a few highlights include:

  • At those prior peaks, growth, earnings, employment, jobs were all improving, or at least not stagnant or materially deteriorating.
  • There was no global deleveraging to hamper spending for years to come…
  • There was no unsolved EU debt crisis threatening to crash financial markets.
  • The central banks behind the most widely held currencies were not openly committed to devaluing them and imposing another long-term drain on our purchasing power through currency debasement.

I could go on and on, but this is meant to be just a short reminder.

So Why Are Investors Bullish?

The current rally has not been fueled by improved prospects of actual growth and wealth creation. Instead, it's mostly due to:

  • Investors desperate for income denied them elsewhere by central bank policies
  • Printed stimulus cash seeking a home. This is indeed a difference from the past. The only huge question is how long it can continue without a loss of purchasing power from debased currency that does more harm than the stimulus does good?
  • Most recently, sheer technical momentum (of course, at decade highs momentum will be good).

All of the above could continue, but few believe they're sustainable.

What Is the Risk Versus Reward?

Even medium risk investments are only paying about 6%, yet a normal correction could cost you 10-15% of your principle for a long time (at least in real terms), and also means opportunity cost (in principle and income) of missing a better, post-pullback purchase.

Again, nothing new here — it's just a needed reminder. Remember what happened the last time.

Editor's Note: The author's views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.

*http://thesensibleguidetoforex.com/2013/02/12/the-one-thing-you-must-remember-before-you-buy-another-stock/

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1. Insider Trading Suggests That a Market Crash Is Coming

stockcrashimages-1

What you are about to read below is startling. •Every time that the market has fallen in recent years, insiders have been able to get out ahead of time… •[What] is so alarming [this time round is] that corporate insiders are selling nine times as many shares as they are buying right now. •In addition, some extraordinarily large bets have just been made that will only pay off if the financial markets in the U.S. crash by the end of April. •So what does all of this mean? [Could it be that they] have insider knowledge that a market crash is coming? Evaluate the evidence below and decide for yourself. Words: 570

 2. This False Stock Market Bubble Will Burst, Major Banks Will Fail & the Financial System Will Implode! Here's Why

economic-train-wreck

At some point we are going to see another wave of panic hit the financial markets like we saw back in 2008.  The false stock market bubble will burst, major banks will fail and the financial system will implode.  It could unfold something like this: Words: 660

3. Bull Market in Stocks Isn't About to End Anytime Soon! Here's Why

Investing financial markets

As we all know, money printing always leads to inflation. It's just a matter of figuring out which assets get inflated. This time around gold is not the only beneficiary, stocks are, too, and I'm convinced that the chart below holds the key to the end of the bull market. Words: 475; Charts: 1

4. What Recovery? Contradictions Between Reality & Political Claims Are Everywhere!

economy7

There is no recovery, regardless of what the elite and their minions in the media want you to believe. The economy is sick. It was made so by the malpractice of government and will become even weaker as government continues to administer the poison that got us to this point. The political class's version of remedy is akin to the medical profession's practice of bloodletting. Neither does any good and both, carried to extreme, are fatal. [Let me explain more fully.] Words: 548

5. Ignore Wall Street Cheerleaders: Market Technicals, Fundamentals & Other Info Says Otherwise!

investing2

[In spite of what] the typical Wall Street cheerleaders, I mean strategists, are predicting, we see the equity market ever more closer to its cyclical top, miners about to retest a major bottom and hard assets with a new catalyst. [This article analyzes 9 pieces of information, complete with charts, that show what is actually going on in the marketplace at this point in time and what the short-term future holds.] Words: 930; Charts: 8

 6. The Sports Illustrated Swimsuit Issue Indicator Suggests Another Year of Outperformance for the S&P 500

swimsuit 2013

The Swimsuit Issue Indicator says that U.S. equity markets perform better in years when an American appears on the cover of Sports Illustrated's annual issue as opposed to years when a non-American appears on the cover. [What is the nationality of this year's cover model? Can we expect returns above the norm or will we see a year of underperformance for the S&P 500 this year? Read on.] Words: 323 ; Table: 1

7. QE Could Drive S&P 500 UP 25% in 2013 & UP Another 28% in 2014 – Here's Why

investing2

Ever since the Dow broke the 14,000 mark and the S&P broke the 1,500 mark, even in the face of a shrinking GDP print, a lot of investors and commentators have been anxious. Some are proclaiming a rocket ride to the moon as bond money now rotates into stocks….[while] others are ringing the warning bell that this may be the beginning of the end, and a correction is likely coming. I find it a bit surprising, however, that no one is talking of the single largest driver for stocks in the past 4 years – massive monetary base expansion by the Fed. (This article does just that and concludes that the S&P 500 could well see a year end number of 1872 (+25%) and, realistically, another 28% increase in 2014 to 2387 which would represent a 60% increase from today's level.) Words: 600; Charts: 3

8. The S&P 500 Continues to Rapidly Build Its "Domed House" As Projected

investing9

The broad stock market is on its way to building a "Domed House" and to challenge multi-year highs, or even all-time highs, in the process. Words: 634; Charts: 2

9. Investors, Get Fully Invested! S&P 500 On Verge of Entering Euphoria Stage of Cyclical Bull Market

investing3

[In spite of all that is seemingly wrong with the U.S. economy] I think we are on the verge of entering the euphoria stage of this cyclical bull market where traders become convinced that QE3 is a magic elexir with no unintended consequesnces. [As such,] I see a strong acceleration and a significant and sustained breakout above the S&P 500 September high of 1475. (Words: 264 + 3 charts)

10. These 4 Indicators Say "No Stock Market Correction Coming – Yet"

Investing financial markets

While I remain cautious on stocks and the risk trade, the technical picture shows that the uptrend to be intact and the bulls should still be given the benefit of the doubt for now. At this point, any call for a correction is at best conjecture [as evidenced by the following 4 indicators]. Words: 399; Charts: 4

11. 5 Sound Reasons Investors Would Be Better Off On the Sidelines Than In the Market

Investing financial markets

New year festivities have continued on the stock market even as the Christmas trees have been put away. The "death of the fiscal cliff," not horrible job numbers and supportive comments from Mario Draghi on the other side of the pond have led to bold and bullish behaviors over the last three weeks. While no one can predict the exact peak, here are five reasons you're better off on the sidelines than in the market.

12. These Charts Suggest a Possible +/-60% Decline in the S&P 500 by 2014

Investing financial markets

J.P. Morgan Asset Management has developed a chart showing the past two cycles in the S&P 500 highlighting peak and trough valuations. At face value it is very alarming as it suggests a potential decline of somewhere in the vicinity of 60% over the next year or two and concurs with previous innovative trend analyses included in this article. Charts: 4

 13. 3 Reasons the Stock Market Could Rally & 3 Reasons to Be Cautious Near Term

investing2

The U.S. stock market rally that kicked off the New Year continued last week, and after only two weeks, US stocks are up around 3% for the year. European stocks have posted similar gains and equities in Japan have advanced even further. What's behind this rally – and more importantly, can it continue? In my view, the rally can be attributed to three factors.  Words: 615

14. Start Investing In Equities – Your Future Self May Thank You. Here's Why

investing2

As Winston Churchill once said: "A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty" and in that vain I challenge all readers to fight off the negativity, see long-term opportunity in global equity markets and, most importantly, remain invested. Your future self may thank you. Words: 732; Charts: 6

15. Don't Ignore This Fact: "Greedometer Gauge" Signals S&P 500 Drop to the 500s by July-August, 2013!

stock-market-tsunami

16. Current Market Overvaluation (from 33% – 51%!) Suggests Cautious Long-term Outlook

investing3

Gold Daily and Silver Weekly Charts - The Art of Currency War

Posted: 14 Feb 2013 02:28 PM PST

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

Gold Seeker Closing Report: Gold and Silver Fall Slightly

Posted: 14 Feb 2013 02:21 PM PST

Gold climbed $6.78 to $1649.78 in London before it fell back to as low as $1632.82 by early afternoon in New York, but it then bounced back higher in the last couple of hours of trade and ended with a loss of just 0.45%. Silver edged up to $31.06 at about 8AM EST before it fell to as low as $30.22 and then also rallied back higher, but it still ended with a loss of 1.04%.

“Follow Me” Says This Analyst Who Has Had a String of +500% Winners in the Junior Mining Sector Over the Past 10 Years

Posted: 14 Feb 2013 02:18 PM PST

"Follow the munKNEE" via twitter & Facebook or Register to receive our daily Intelligence Report 

…Even in these challenging times there have been many great winners in the natural resource sector. I have been fortunate, lucky or smart to have racked up some nice gains through the years. I have been consistently picking winners, big winners, monster winners for years - a string of 10 years of 500% plus winners and more, sometimes much more, year after year – …[so] my message to you is simple: follow me! Your only question should be "Which of my current positions will be the next big winners?" Words: 804; Table: 1

So writes Dudley Pierce Baker (www.JuniorMiningResources.com and www.PreciousMetalsWarrants.com) in edited excerpts from a rather promotional and immodest newsletter* release entitled Can Your Advisor or Newsletter Writer Match These Returns?.

 This article is presented compliments of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Baker goes on to say in further edited comments:

"…Until recently I [had] not taken [the] time to schedule out for you my top investment gains. Below are my actual numbers and top returns from 2003 through 2012 which…[were] taken directly from my U.S. Federal Tax Returns for 2002 through 2012.

While I had a gut feeling…[that I had] some investment successes through the years [it was not] until I saw the final schedule below that I realized that, "hey, I am doing great here". I have been consistently picking winners, big winners, monster winners for years – a string of 10 years of 500% plus winners [27 in total] and more [4 up over 1,000%], sometimes much more [1 up 2,158.1%], year after year.

    Top Performance Scorecard
           Years: 2002 – 2012
         Acquired             Sold     %
Company Date     Cost       Date Cost Gains
Coeur d'Alene 10-Oct-2001 $0.83 12-Sep-2002 $1.61   94.0%
Bema Gold 10-Oct-2001  $0.44 12-Sep-2002 $1.23  182.1%
Alamos Gold 24-Oct-2001 $0.22 6-May-2003 $0.73  231.8%
Geocom 20-Jun-2003 $1.13 22-Sep-2003 $3.00  165.5%
Andean America 3-Oct-2001 $0.17 2-Jul-2003 $1.31  684.4%
Bema Gold 10-Oct-2001 $0.44 14-Oct-2003 $2.73  527.6%
Alamos Gold 24-Oct-2001 $0.22 5-Nov-2003 $1.90  779.6%
Orsa Ventures 5-Oct-2001 $0.11 10-Nov-2003  $1.39 1211.3%
Endeavour Mining 20-Jun-2003 $1.50 15-Jan-2004 $3.08  105.3%
Alamos Gold 24-Oct-2001 $0.22 2-Mar-2004 $1.93  793.5%
Bema Gold 10-Oct-2001 $0.40 26-Apr-2004 $2.87  624.7%
Consolidated Puma 1-Dec-2001 $0.09 28-Jan-2005 $0.74  770.6%
Northern Cont'l Res. 1-Nov-2003 $0.10 5-Oct-2005 $0.53  430.0%
Endeavour Mng Wts 21-Oct-2004 $0.99 4-Dec-2006 $2.69  171.2%
International Enexco 20-Sep-2004 $0.17 19-Apr-2006 $1.11  568.7%
Desert Sun Wts 13-Sep-2004 $0.40 3-Apr-2006 $3.65  821.7%
International Enexco 20-Sep-2004 $0.17 23-May-2006 $1.05  517.6%
Northern Cont'l Res. 20-Nov-2003 $0.10 10-Jan-2006 $0.47  375.5%
SXR Uranium 19-Aug-2004 $3.74 4-Dec-2006 $12.16  225.1%
Yamana Gold Wts 13-Sep-2004 $0.39 17-Jul-2006 $4.25  989.7%
Rio Narcea Wts 5-Apr-2006 $0.26 22-Mar-2007 $0.91  256.9%
JNR Resources 3-Apr-2006 $1.00 16-Apr-2007 $3.65  265.0%
Northern Orion Wts 3-Mar-2005 $0.62 29-Jun-2007 $1.73  178.5%
Silver Wheaton Wts 14-Jul-2005 $0.24 26-Oct-2007 $2.02  741.7%
Hathor Exploration 4-Dec-2007 $0.66 3-Mar-2008 $2.13  222.7%
Metallica Res Wts 14-Jul-2005 $0.27 31-Mar-2008 $2.95  992.6%
Quaterra Resources 29-Sep-2005 $0.33 20-May-2008 $3.65  1006.1%
Brett Resources 2-Jan-2009 $0.65 15-Dec-2009 $1.60  146.2%
Eagle Rock Explor 4-May-2009 $0.06 23-Sep-2009 $0.32  471.4%
Evolving Gold 22-Jan-2009 $0.25   15-Jul–2009 $1.65  573.5%
Northern Cont'l Res. 9-Mar-2009 $0.06 1-May-09 $0.15  150.0%
Silver Wheaton Wt U 10-Mar-2009 $1.15 7-May-09 $2.51  118.3%
Wild Stream Explor 4-May-2009 $1.70 29-Dec-09 $4.11  141.8%
Bonterra Resources 12-May-2010 $0.13 17-Dec-2010 $0.33  153.8%
Arsensal Energy 19-Jul-2009 $0.22 19-Mar-2010 $0.89  302.3%
Excelsior Energy 3-Sep-2009 $0.11 14-Sep-2010 $0.35  218.2%
Brett Resources 4-Aug-2009 $0.87 22-Mar-2010 $2.68  208.0%
Silver Quest 6-Oct-2009 $0.30 7-Sep-2010 $0.95  222.0%
Terrance Met. Wts 20-Sep-2007 $0.17 9-Jul-2010 $0.39  129.4%
Arian Silver 7-Oct-2008 $0.08 12-Nov-2010 $0.45  456.3%
Dundee P. M. Wts 22-Apr-2010 $1.30 26-Nov-2010 $5.30  307.7%
Pelangio Explor 24-Nov-2008 $0.04 9-Sep-2010 $0.46  1200.0%
Tradewinds Ventures 20-Dec-2007 $0.05 12-Nov-2010 $0.32  540.0%
Aurcana Corp. 14-Sep-2010 $0.26 23-Feb-2011 $0.91  256.9%
Arian Silver 7-Apr-2010 $0.09 19-Jan-2011 $0.78  747.8%
Donnybrook Energy 7-Jul-2010 $0.13 13-Jan-2011 $0.51  308.0%
Excellon Resources 29-Aug-2009 $0.14 13-Jan-2011 $1.14  693.7%
Great Panther Silver 4-Dec-2007 $1.10 13-Jan-2011 $2.36  114.5%
Great Panther Silver 29-Oct-2008 $0.36 16-Mar-2011 $3.95  997.2%
Soltoro Ltd 27-Aug-2009 $0.33 17-Aug-2011 $1.35  315.4%
US Silver Wts 7-Aug-2009 $0.09 20-Jan-2011 $0.45  400.0%
New Gold Wts A 4-Nov-2008 $0.27 1-Feb-2012 $4.09  1424.3%
New Gold Wts A 19-Nov-2008 $0.16 2-Apr-2012 $3.50  2158.1%
Pelangio Explor 10-Jun-2010 $0.17 2-Apr-2012 $0.40  142.4%
Primero Wts 11-Jul-2011 $0.76 5-Oct-2012 $1.42  86.8%
Sandstorm Gold Wts 28-Jan-2010 $0.21 13-Aug-2012 $1.22  481.0%
Sandstorm Gold Wts 19-Apr-2011 $0.54 13-Aug-2012 $1.24  129.6%
US Silver Wts 7-Aug-2009 $0.09 24-May-2012 $0.35  288.9%

[While] I have had my share of losers, (…picking resource shares…is a challenge and I would guess that for every 10 picks 2 or 3 will be net losers) that's the nature of investing in the natural resource sector – everyone has – but on balance I am ahead, way ahead, from investing in this volatile and speculative sector.

It is difficult for me to assess the overall performance in my portfolio, as I, probably like you, add more funds from time to time to my brokerage accounts or withdraw some funds, so it can be virtually impossible for me to tell you exactly how I have done on a percentage basis each year. [That being said,] what I can tell you is that:

  • since the beginning of the bull market in gold in 2001 my investment account balances have increased approximately 4,650% as of February 1, 2013… [Incidentally, that works out to a 42% cumulative rate of return.]
  • the results of my overall performance would have been 7,400% if I had presented my performance results in January 2011 as we are basically now at the lowest prices for resource shares as measured by the HUI and XAU indices…[and] my portfolio was over 50% higher in value back then.

As I have said above, I've had losses, sometimes…hundreds of thousands of dollars, because I listened to the advice of someone else or another newsletter [regarding] hedging positions, selling short, put options, call options etc. which, admittedly, are not my expertise….However, when I stick to what I do best, picking the best opportunities available in the resource sector which have the potential for 500% to 1,000% gains, I do well, really well….I have been successful because of my money management skills and overall stock selections where my winners greatly outperform ny losing positions.

The ultimate objective for me and all investors is to finish the race as big net winners. I have accomplished this and frankly, I believe the big gains are still in front of us. Folks, my message for you is simple: follow me! Your only question should be which of my current positions will be the next big winners."

Editor's Note: The author's views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.

*http://www.preciousmetalswarrants.com/CanYouMatchTheseResults.html (Written by: Dudley Baker; Copyright PreciousMetalsWarrants.com 2011; All Rights Reserved; In my service I present to all subscribers my Top 40 Positions many of which have the potential to also achieve these 500% to 1,000% winners. If you are not a current subscriber I invite you to visit my web site and join me now.)

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1. What Are Warrants, Options & LEAPS?

Investors are always looking for ways to maximize their gains and warrants, options and LEAPS are a good way to do just that. These investment vehicles are very similar to each other except for issue of time. [Let me explain.] Words: 752

2. Gold Miners Watch: Much Further GDX/HUI Weakness Could Result in a MUCH Further Decline – Here's Why

gold mining

GDX is currently at approx. 42 but should it drop below the 39 & 40 levels reached last May and July our analysis shows that a good deal of sellers could come forward and push GDX a large percentage lower.  That double bottom needs to hold in GDX!!! Take a look at the chart below and you will clearly see why that is the case.

3. Check It Out: Gold Stock Manias in 79/80, 82/83 & 95/96 Saw 2,000 – 4,000% Returns – and It Could Happen Again

buy-gold

The timing of this article may seem incongruous given the current weak performance of gold and gold stocks but that was the identical situation in each of the past manias – both the metal and the equities didn't excel until the frenzy kicked in. The following documentation (exact returns from specific companies during this era are identified) is actually a fresh reminder of why we think you should hold on to your positions – or start accumulating them, if you haven't already. (Words: 1987; Tables: 7)

4. Keep the Faith – This Bull Market in Gold STILL Promises to Be One for the History Books! Here's Why

BULL

Seeing the S&P 500 outperform gold and seeing gold stocks get decimated…has been enough to create suicidal sentiment…in the precious metals (PM) sector…but, as the many calls for an end of the PM bull market…[are expressed,] the risk in the PM sector gets lower and lower. The bigger picture hasn't changed and isn't going to for some time [so] keep the faith and hold onto your PM sector items tight. Don't let the short and intermediate-term noise distract you from what STILL promises to be a secular bull market for the history books. The Dow to Gold ratio will hit 2 and might even go below 1 this cycle. [Let me explain.] Words: 873

5.  Gold Stocks Go Up Dramatically In Inauguration Years – Will Another +20% Increase Occur This Year?

Gold_intro

President Obama will be sworn into office for a second term on January 21 and that's good news if you own gold stocks. Why? Because gold stocks, [as represented by the XAU] have increased, on average, by 20% during inaugural years since 1985 (28% in 2005; 36% in 2003). While there's no real rhyme or reason as to why gold stocks thrive in inauguration years – statistical anomaly or otherwise – it is yet another reason to buy gold stocks right now. Words: 312; Charts: 1

6.  Finally the Final Bottom in Gold Stocks Is Coming – Finally!

gold mining

The m

Currency ‘War’ or ‘Revolution’? – And Gold?

Posted: 14 Feb 2013 02:00 PM PST

Talk of a Currency War is becoming much more frequent these days. What's meant by this is that the competitive devaluations of currencies, which has gone on for such a long time –many years in fact—is going to become destructive to real currency values! This brings into question the entire system of exchange rates.

A Virginia Currency, Jefferson on Financial Speculation

Posted: 14 Feb 2013 01:58 PM PST

It appears that Virginia is the latest state to take steps toward adopting some sort of metallic currency as lawmakers recently approved a measure to study the creation of alternate money in gold and silver coin form. This follows similar moves by other states in recent years that included the decision last year by the state of Utah to recognize gold and silver coins from the U.S. mint as legal tender.

Evidence That Government Is Shrinking

Posted: 14 Feb 2013 01:10 PM PST

February 14, 2013

  • "Hey, whatever happened to the Somali pirates?" Therein lies a tale…
  • Government shrinking? In a way, yes: Neil George explains
  • The last time the world's central banks did something like this was 1964…
  • The "magic material" at work in the shale patch: Two of Byron King's themes merge into one!
  • "Do-gooder" drones? A flying automated emergency room
  • Regarding the bad drones: One reader wonders what our petition will accomplish, while another wants to know how to invest in drone tech. Sincere replies to both below…

  We first spotted it in 2008. As recently as May 2011, we called it a "growth industry." Now its pioneers, if that's what you want to call them, have quite literally given up the ship.

Picture yourself aboard the Queen Mary 2, on a voyage through the Red Sea to Dubai. You see a typical cruise-goer on deck in a Hawaiian shirt, sipping a fruity cocktail… right next to a hardened security contractor armed to the teeth.

Private security has successfully beaten back the Somali pirates.

Passengers don't seem to be bothered by either the threat… or the security. "It doesn't worry me at all," passenger Kiki O'Connell tells Reuters. "Although, I don't suppose we'll see any pirates now. I was hoping for Johnny Depp."

Too bad…

Countries like the U.S., France, India and even China and Russia have had ships stationed in the region to deter piracy, but "in more remote parts of the Indian Ocean, the nearest naval support can be eight or nine hours away." Private security has filled the gap; so far, every ship that relies on it has avoided capture.

Overall, pirate attacks are on the decline. And the guards are a darn sight cheaper than Combined Task Force 151 — a naval task force set up by 25 governments, including the U.S., to fight the pirates.

  The private sector is taking the lead on land and closer to home too — a reversal of trend.

"Over the past 10 years," observes our income specialist Neil George, "the U.S. federal government's spending has expanded by more than 50% — equating to an average annual rate of over 4.1%.

"And that buildup in spending has been a bigger share of the overall economy — hitting a high of over 25.1% of overall U.S. GDP in the fourth quarter of 2009. This run-up is well above the long-term average of 19% going back to 1950," he says.

Same old story, Washington's spending too much, right?

  Here's where it gets interesting: "Spending as a percentage of the U.S. economy," says Neil, "is now ebbing, with the overall contribution by the federal government alone shifting downward to a current 22.5%."

You read that right. The government may actually be getting smaller… compared with the size of the whole economy, that is. That means the private sector may be taking over.

For further evidence, Neil points to a recent Fed survey: "31% of the largest 68 domestic banks and 22 foreign banks with operations in the U.S. state that they're seeing a rise in business loan demand that can be facilitated."

That's good news if you can pinpoint who benefits from the trend. Neil confirmed what we already thought — that if the government is, in fact, getting smaller, there will be winners and losers.

Neil has identified several winners that treat their shareholders well with generous income streams. Subscribers to Lifetime Income Report have the names and tickers. You can join them here.

100  Stocks are adrift this morning. All the major indexes are losing ground, but not much.

"In the first half of this week's trading, stocks stretched higher," Options Hotline editor Steve Sarnoff wrote last night. "I view each day's trading as a struggle between buyers and sellers for the advantage in price direction. In 2013, sellers have been pushed back on their heels and seemingly held up only by the ropes."

Yesterday, however, "I saw signs of buyers' exhaustion and what could be the onset of sellers battling back. Will they come off the ropes swinging? In my opinion, it is likely they will. Buyers may still have enough juice to propel prices, but I'm looking for a coming shift in the balance of power. It may not arrive until March, but it makes sense to use the current stretch to prepare for lower prices and a serious test of complacent buyers' resolve."

  The dollar raced up this morning as sickly GDP figures came in from Japan and the eurozone.

Japan is "officially" back in recession, with two straight quarters of contraction. Europe has now chalked up three.

With that, the yen sits at 93.1, the euro at $1.334… and the dollar index is back to a five-week high at 80.5.

  Precious metals are holding their own — gold at $1,645, silver at $30.83.

  Central banks accumulated more gold last year than any time since 1964, according to figures out this morning from the World Gold Council.

Nearly 535 metric tons of the metal went into central bank vaults during 2012 — with Russia, Brazil and Iraq leading the way.

"As the official reserves of these countries swell, with their heavy emphasis on U.S. dollar and euro-denominated assets, the need for diversification also increases," says the council's latest report.

Yep… We've been on the case ever since central banks became net buyers of gold in 2009. And right now we see no end in sight…

  "The utilization of radioactive waste is the major problem of the 21st century," dean of the chemistry faculty of Moscow State University, Valery Lunin, told Russian Radio this week.

"It is a fundamental and most important task for the economy and science. What is proposed by our colleague as a possible approach can make a breakthrough."

The Russian team's colleague, Rice University's James Tour, the chemist who transformed a cockroach leg into the "magic material," has helped the Russian team to discover another important use for the new tech staple: removing radioactive waste from water.

"Where you have huge pools of radioactive material," Tour explains, "like at Fukushima, you add graphene oxide and get back a solid material from what were just ions in a solution.

"Then," he goes on, "you can skim it off and burn it. Graphene oxide burns very rapidly and leaves a cake of radioactive material you can then reuse."

  The industries to benefit from this practice the most? Fracking and mining.

Oftentimes during the drilling process, naturally occurring radionuclides gather together and rise to the surface. With fracking's use of massive amounts of groundwater, obvious and expensive complications arise. When the groundwater reaches a certain level of radioactivity, says Tour, "they can't put it back into the ground. It's too hot. Companies have to ship contaminated water to repository sites around the country at very large expense."

The potential for graphene to filter these radioactive materials out of the groundwater holds vast implications for the cost-effectiveness, safety and efficiency of the fracking and mining processes.

The latest developments in graphene cover two flagship sectors our resource hound Byron King has been following for years. His latest recommendations are poised to rise as graphene and fracking become universally mainstream. Your opportunity to get in at the bottom is limited, but you can do so right now, before it's too late, here.]

 "When you see this quadcopter drone flying at you," tech blog Popsci advises, "don't run or shoot it down — it's coming to help."

Although the idea of enormous drones flying above playgrounds with heat-seeking missiles is terrifying, and tiny fly-sized drones spying on you from your bathroom ceiling is a disturbing reality, the drone industry is one that will, for better or worse, continue to grow in size and scope in the coming years.

"But," Cambridge grad student Omer Aziz opines, drones are also "beginning to be transformed into civilian tools." For example, he says, "some scientists already use drones to monitor their experiments, the film industry employs a dronelike technology for use as platforms and farmers have begun to turn to drones for crop management."

While the military continues to create more lethal and privacy-destructive drones, many students in the U.S. are taking a different approach… making drones — wait for the shocker — useful.

  "A lot of drones serve as spies, assassins or toys," Popsci goes on. "But if all goes well, rescue workers and emergency response crews could soon deploy the Incredible HLQ (pronounced 'hulk') drone that actually helps humanity by zipping up to 50 pounds of provisions per trip."

Developed by a team of mechanical engineers for their undergrad senior project at San Jose State University, the group has turned to the crowd-funding cradle Kickstarter to make the HLQ a reality. To date, they've raised $8,052, surpassing their $7,500 goal with still 11 days to go.

The HLQ: Rise of the "Do-Gooder Drone"

Meanwhile, a philanthropic startup called Matternet, also in California, aims to launch do-gooder drones in rural areas and overseas to drop necessities when and where needed through a sophisticated digital infrastructure.

And with the economic slump in full sag, some startups are seeing the cost-effectiveness of employee-drones. Take, for example, the Tacocopter, a service allowing you to order tacos from your smartphone and have them drone-delivered to your standing location.

Ironically, Tacocopter co-founder Star Simpson told HuffPost, "current U.S. FAA regulations prevent… using UAVs [unmanned aerial vehicles, like drones] for commercial purposes at the moment."

Why ironic? Because, she goes on, "that's the case in a country where you can be killed by a drone with no judicial review."

Oh, right.

[Ed. Note: As the debate rages on about the militarized not-so-kind type of drones, our petition to stop the militarization of the flying gun-cams on American soil continues to grow in support. If you haven't already, you can sign the petition here.]

  "I feel sympathetic toward the anti-drone petition that you told us about the last couple days," a reader writes. "But I am scratching my head a little.

"I thought you were (back in November) making fun of voting and other political participation as a waste of time, even criticizing such participation as legitimizing a corrupt system. Under such a view, shouldn't a petition like the anti-drone petition be viewed as legitimizing the corrupt government officials to whom it is addressed?

"Maybe I have misunderstood you somewhere. In any case, I am interested in your thoughts.

Thank you for your continued coverage of important-stuff-that-the-mainstream-avoids."

The 5: Observant, you are.

Yes, we mock the idea that collective activity can achieve change for the good. We spurn the notion that electoral politics can make a difference. We dismiss the idea that voting accomplishes anything other than (maybe) making a statement about who you are to other people.

So what's different now?

Simply this: The stakes are high… and the goal is achievable.

On the state level, both houses of the Virginia legislature have passed a two-year drone moratorium. On the federal level, Sen. Rand Paul, R-Ky., is putting a "hold" on the nomination of John Brennan as CIA director.

"I have asked Mr. Brennan," the senator writes, "if he believed that the president has the power to authorize lethal force, such as a drone strike, against a U.S. citizen on U.S. soil, and my question remains unanswered. I will not allow a vote on this nomination until Mr. Brennan openly responds to the questions and concerns my colleagues and I share."

There's momentum. If "we the people" stand any chance at reining in the drones, it's now… while the topic is hot in Washington. Next year, next month, even next week might be too late.

So move now. Take a stand. Sign the petition.

  "I don't think the drones are only Obama's," another reader writes. "I know for a fact the FAA was testing air traffic control procedures with NASA Ames regarding unmanned aerial vehicles at least eight years ago (quite probably longer).

"These could be W's or even Bill Clinton's drones. This issue seems to be beyond Orson Welles' imagination."

The 5: Wouldn't surprise us. The guts of the Patriot Act were drafted by career Justice Department underlings at a time when W was just getting settled into the governor's mansion in Austin.

  "I was disappointed," still another writes, "that The 5 PRO did not give any suggestions on how to invest in the manufacturers of drones, especially after the detailed comments about the drone market in The 5. Do you plan to name the companies that manufacture drones — and to discuss if they are good or bad investments?

The 5: Ah, someone who understands our line of thought about making the empire pay and channeling a few of your wasted tax dollars back into your pocket.

Today and tomorrow, PRO-level readers will get in-depth analysis of two drone plays from our macro strategist Dan Amoss. Read on…

Cheers,

Dave Gonigam
The 5 Min. Forecast

P.S. If you don't have PRO access, we'll open it up again to new subscribers in a few days. Stay tuned.

Hathaway - Give-Up Phase As Gartman Shorting Gold Is Bullish

Posted: 14 Feb 2013 01:01 PM PST

Today John Hathaway told King World News, "... we are psychologically at the give-up phase on gold." The 40-year veteran and prolific manager of the Tocqueville Gold Fund also stated that Dennis Gartman announcing he shorted gold yesterday is a very bullish development for the gold market. But first, here is what Hathaway said to expect next for gold: "Eric, this feels to me like last May when gold had a launch into September to complete a pretty big rally. It was a more than a 40% kind of move on the XAU. All of the things I look at, sentiment, trading volume, commentary, you know Credit Suisse put that piece out about the end of the bull market in gold."

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