Daily Dispatch: Weekend Edition – Oct 31, 2009

October 31, 2009 | www.CaseyResearch.com Weekend Edition

Dear Reader,

Welcome to the weekend edition of Casey’s Daily Dispatch, a compilation of our favorite stories from the week for the time-stressed readers.

Of course, if you want to read all of the Daily Dispatches from the week, you may do so in the archives at CaseyResearch.com.

Black Gold… Green Oil
By Michelle Burgess

This summer and early fall, there’s been a flurry of new green announcements from the world’s major oil firms. ExxonMobil, Chevron, Valero, Statoil, Marathon, and Sunoco have all thrown their hats into the green ring.

According to a recent article in Newsweek:The list [of Big Oil investors] goes on. And this time it’s the real deal. It’s not just that these projects involve bigger money, …it’s that companies are actually beginning to think about alternatives not just as a tool for greenwashing (throw up a few solar panels here, sponsor a conference on wind energy there) but as real businesses that might turn real profits—or at least help make fossil-fuel production more profitable. The catalyst is that governments are moving to force industry to cut carbon emissions, creating a new “long-term regulatory reality” that favors alternative energy, says PFC Energy chairman J. Robinson West.

Meanwhile, President Obama’s green-stimulus efforts and China’s massive investment in alternatives have created a serious market for green technologies.
The fact that nations like Russia and Venezuela are pushing out big oil companies also gives CEOs an incentive to consider green alternatives. So does the fact that oil companies are among the world’s biggest energy users, and will ultimately need to offset emissions. “I believe the large integrated oil firms will eventually become major players—perhaps even the dominant players—in alternative energy,” says Don Paul, a former Chevron executive who now runs the University of Southern California’s Energy Institute.

Big Oil is taking a closer look at how [renewable energy] might be used to increase efficiency internally, or to free up increasingly profitable fossil fuels, like natural gas, for commercial sale. When you consider that the top 15 oil and gas companies have a market capitalization of $1.9 trillion, it’s clear that these firms themselves have the potential to be major renewable customers.
Oil companies are also taking a harder look at how to make their own business models work in the alternative sector. Companies like Chevron are capitalizing on geological expertise to build large geothermal businesses.

Big Oil is going to be an increasingly important investor in alternative energy. Venture-capital money has dried up. But with oil at $70 a barrel, the internal venture arms of the major oil firms are increasing the amount and percentage of investment going to alternatives. Historically, when Big Oil spends a dollar on research, it will spend many hundreds more to bring a product to market. If the new projects coming online this summer are any indicator, alternatives may soon be awash in black gold.
U.S. government subsidies into renewable energy are forming a green bubble. One that’s steadily inflating. But the catch is: only one alternative energy is currently economically viable before subsidies… and that’s geothermal.

That would explain the interest Big Business has in the sector.
Another member of the oil community, Statoil, has formed StatoilHydro, to focus on advanced geothermal development.
Google.org — the charitable wing of the search engine giant — has become the largest funder of enhanced geothermal research in the country, outspending the U.S. government.
Alcoa, the world’s largest producer of aluminum, is actively participating in the geothermal Iceland Deep Drilling Project (IDDP).
And then there’s the mining industry.
Lihir Gold has already used geothermal resources to build a power plant, which today provides green electricity for their mining operation in Papua New Guinea.
BHP Billiton is currently investigating the potential for using geothermal heat in the Olympic Dam region of Southern Australia.
The smart money likes geothermal.

To learn how you profit from the growing green bubble, sign up for a 3-month trial subscription to Casey’s Energy Report by clicking here now.

Why Gold Has a LONG Way to Go
By Jeff Clark, Casey’s Gold & Resource Report

A couple weeks ago, I had my TV tuned to a business show that loves to give predictions on the markets and the economy. On that day, one of the program’s regular guests declared it was time to “short” gold, that it had reached its top, and that the precious metals bull market was over. I’ll try to be nice in my rebuttal.
So, what was his reasoning: technical analysis of wave counts? falling demand? a telling ratio? sun spots? No, he noted that upscale department store Harrods in London began selling gold bullion and coins “over the counter,” ergo, the top was in. Nice try, “Bert,” but this is amateurish. You really shouldn’t be playing with the big boys if that’s the basis of your call.

Yes, gold will someday put in a top, and since the gold price is largely determined by psychology, the end of the bull run will be marked by behavioral types of signals. But calling a top in gold now is like declaring that WWII was over because the Allies won a small skirmish in early1942. To have made such a statement, based on a small, isolated event, ignored the greater forces that had yet to play out and would have made any journalist or military strategist look foolish indeed.

And here’s why Bert looks equally silly today…

If the top were in, we’d be in the midst of an all-out Mania. Are we? Do you get the impression there’s a rush into gold by the greater public right now? Are headlines blazing on the covers of major magazines pronouncing gold as the new investment king? Has Wall Street gone gaga over gold and silver? I ask because these are the true signs that a trend has entered its final blow-off top and would signal it’s time to get out.
I decided to put Bert’s prognostication to the test, and I invite you to play along.
First, I struck up casual conversations with my friends, neighbors, relatives, acquaintances, my wife’s co-workers heck, even my seatmates on airplanes angling to learn how much gold they were hoarding, about the killing they were making in gold stocks, and how they were getting rich from all their precious metal investments. (In fairness, I had to exclude my dad, who is an award-winning gold panner, but he’s the only one.)

I found no one not one person who is actively investing in anything gold or silver, let alone rushing to buy or hoard the stuff. I had two people who confided that they did own gold, but in both cases it was inherited. A few were curious how they would go about doing such a thing, and fewer asked if I thought they should. Most everyone looked at me blankly when I asked; they didn’t seem to know what I was talking about. When I got a reaction like that, it was pointless to ask about gold stocks. Of the handful I did ask, most had never heard of Barrick Gold, the world’s largest gold producer.
Now ask yourself the same thing: how many of your family, friends, neighbors, and co-workers are buying gold and silver coins? Are any of them giving you hot stock tips about a fantastic gold producer, or telling you about the latest gold discovery made by a company in China? Have any fellow investors told you they’re dumping their brokers because they can select gold stocks better on their own? Anyone telling you they’re going to night school to learn the gold mining business?

Next, I surveyed a large sampling of print media looking for some of these signals that Bert must have spotted. Over the past couple weeks, not one of the major business magazines I reviewed had anything on the cover about gold or silver. Further, there were no articles on precious metals, such as the best ways to buy or store all this gold everyone is buying that surely signals the top is in.

One magazine ran an article about ways to prepare for inflation, and gold wasn’t even mentioned! I did see an ad from the U.S. Mint in another, along with a couple small ads in the back that said they had the best prices on bullion (right beside the teasers for buying a Russian wife), but that was it. Even the portfolio allocation models recommended in the articles made no specific mention of precious metals (one recommended a “resource” fund, but their discussion of it was centered around energy investments).
Other than the articles you seek out, how many mainstream magazines do you see extolling the virtues of gold and silver on their cover? How many bestsellers are prominently displayed at your nearest bookstore that scream at you to buy gold stocks? Are you getting fed up with all the junk mail you get about gold and silver?
Last, I went out of my way to look for stories on gold and silver on TV and radio. About all I could find were the same ads that popped up after last year’s Super Bowl commercial by Cash4Gold. A couple programs quote metals prices, and I was able to find another that actually used the word “gold” in a sentence. It might just be me, Bert, but I can’t find any news anchors talking about the latest gold discovery or that “must own” gold stock. No in-depth special reports from investigative journalists on the hot Canadian junior mining sector. Nothing on my radio about the best ways to store all the silver every smart investor has been buying.

How about you are you feeling bombarded by TV and radio ads and segments on precious metals? Do you have the clear impression gold and silver are the hot new investing trend around the world? Are you Tivo-ing certain TV shows because of all the great info they provide about picking the next great gold stock?
If we were in a Mania, Bert, all of this would be happening. But it’s not. Those who buy gold coins in the U.S. are still largely viewed as members of a fringe group. There is no public discussion on gold, no insider tips on the latest hot gold stock, no special reports on how to store all the bullion you’ve collected. The psychology isn’t on our side yet. One signal does not a Mania make.

Last and perhaps most important, Bert, are you sure the dollar is done falling? You’re absolutely convinced we won’t see price inflation? Our current debt load won’t pose any future problems? No more worries about foreigners buying all that debt? Obama and Bernanke really have saved the day?

Bert, send me your shorted gold positions, I’ll buy them from you. And although the gold price could see a correction in the near term, and several more along its journey to “the top,” remember that battle in early1942 and all that had yet to occur before the war was over.

And one more thing: when you finally become breathless to buy gold stocks, I just might be ready to sell them to you.

Are you convinced you have the right gold and silver investments for what lies ahead? For just $39/year, you can be sure you have the best gold and silver stocks, along with specific recommendations on the best places to buy bullion. Check out Casey’s Gold & Resource Report.

Who Owns Your Mortgage?

The New York Times ran an interesting story a couple days ago, citing a federal bankruptcy court case in which the judge wiped out a $461,263 mortgage debt on a property because the lender hadn’t proved its claim to the delinquent borrower’s home.
That seems kind of strange. Why would the lender not prove its claim to the property in question? Simple answer: It couldn’t, because the note had gone missing.

To quote the article:The reason that notes have gone missing is the huge mass of mortgage securitizations that occurred during the housing boom. Securitizations allowed for large pools of bank loans to be bundled and sold to legions of investors, but some of the nuts and bolts of the mortgage game — notes, for example — were never adequately tracked or recorded during the boom. In some cases, that means nobody truly knows who owns what.
So, the judge in this case ruled that the homeowner’s mortgage debt was canceled because there was no hard proof that anyone actually had title to it.
Is this a trend that could actually pick up steam?

Real estate entrepreneur and friend of Casey Research, Andy Miller, weighs in with some other thoughts for us:This is happening in an isolated way. It isn’t very significant at this point. However, there are many other pitfalls for lenders today. The difficulty in being a lender today is in trying to proceed against your collateral. Courts are not very sympathetic to lenders, and the entire system is overloaded and being tilted toward the borrower.

This is having an impact in the land of unintended consequences. Private lenders are now finding it too risky to make mortgage loans, and as a result, they have contracted. This happens, of course, at the worst possible time. This is the time when we need private lenders to enter the market, not exit the market. Fannie, Freddie, and FHA are responsible for 80%-90% of the origination of new U.S. residential mortgages.

Effectively, the home mortgage market has been nationalized. This is the reason that I am very bearish about the home market. If the government withdrew its support for home mortgages, the entire mortgage market would implode. Values would crater, and private money would rush in to fill the void albeit at large discounts and higher yields.

Are Fannie, Freddie, and FHA at risk of being curtailed? No, not at this moment.
One must remember, though, that the entire U.S. mortgage market is dependent on bond buyers purchasing mortgage-backed securities. Right now, bond buyers are focusing on bonds backed by the full faith and credit of the U.S.A. Fannie bonds, Freddie bonds, and GNMAs. No one wants the junior bonds created by uninsured private mortgages.

If the dollar continues to weaken, or if inflation begins to take its toll on purchasing power, then buyers of mortgage-backed securities will most certainly rethink their purchasing strategy.

This would be catastrophic. However, I think it is inevitable.
The Fed has sponsored the purchases of “agency securities” to the tune of $1.5 trillion. That, if you recall, was part of their strategy in “quantitative easing.” It sounds just like the Treasury markets. It is. When Treasuries lose their luster, which is highly likely, then the agency market will collapse as well. This will happen at the worst possible time, when the government bond market becomes tenuous. Yields will have to increase, which means that mortgage rates will increase, and the vicious cycle will be initiated in the home market and the attendant mortgage market.
Thank you, Andy. Very interesting and, as always, much appreciated.
If you want to read more of what Andy Miller has to say on all things real estate, sign up for a risk-free three-month trial of The Casey Report and access his exclusive interviews in the archives.

A Look Behind GDP
By Kevin Brekke

Yesterday the Bureau of Economic Analysis (BEA) released the advance GDP numbers for 3Q09, and they showed the economy grew at an estimated annual rate of 3.5%. But, like the saying goes about drowning in a lake with an average depth of three feet, it’s what lies beneath the surface that requires our attention. And so it is with GDP announcements. I took a look at the full report and charts, and here’s what they reveal:
Motor vehicle output added 1.66 percentage points to the Q3 change in real GDP. The report concedes that the jump in output is the result of the Cash for Clunkers program. For the previous quarter, motor vehicle output added just 0.19 percentage points to the second-quarter GDP change.
The change in non-farm inventories added 0.91 percentage points to the third-quarter change in real GDP, the largest amount since 4Q05. This figure is way above the historical Q3 trend for inventory change, and reflects inventory replenishing after the last three consecutive quarters saw hefty declines.
Personal consumption expenditures added 2.36 percentage points to the Q3 change in real GDP.
Personal consumption expenditures increased 3.4% from the prior quarter.
Personal income (wages and salaries) declined slightly from the prior quarter.
The first two items above are one-offs and will not likely be repeated next quarter. Just for fun, let’s see what the number would have been without these extraordinary events. Reducing the 3.5% advance GDP number by the approximately 1.47% artificial boost from the Clunkers scheme (1.66% – 0.19%), and 0.66% for inventory build-up (third-quarter trend is roughly 0.25%), gives us a rounded figure of 1.4%.

But wait, the BEA shows in another impressive chart that the average revision from the advance GDP (what was just reported) to the final (what will be reported in two months) is ±1.3%. So the “un-juiced” number we just calculated is almost within the margin for error. One guess not subject to error is that 4Q09 GDP, unless Washington rolls out some other spending-inducing programs, is almost certain to be far lower.

The personal consumption figure indicates that consumer spending accounted for 67% of GDP down from the bubble years’ high of 70%, but still lofty nonetheless.
How are consumers maintaining their spending in the face of high unemployment? Look at the last two items above: Personal consumption climbed while personal income fell. The only way to fill that gap is to borrow more debt. Old habits do indeed seem hard to kick.
So although the headlines are filled with glee and government leaders are walking with a little more spring in their step as they approach the dais to announce the corner has been turned, we remain unconvinced. One suspect quarterly number does not a trend make. We’ll continue with our finger on the pulse of all things economic in The Casey Report and keep our subscribers armed with reality-based facts.

And that, dear reader, is that for this week. See you on Monday!
Chris Wood
Casey Research, LLC

Fekete and Hugo Price Hinder Free Market Development

(With “free market” advocates like these, we’ll never return to honest money!)

Silver Stock Report

by Jason Hommel, October 29th, 2009

Sometimes well meaning “experts” do more harm than good.
Antal Fekete explains “free coinage of gold” — to New Zealanders

Antal Fekete wants government to open their mints to the people, for free coinage of precious metals, to allow people to turn scrap gold, or newly mined gold, into gold coins for free.

Thus, he wants government to provide free (subsidized) services of four different businesses: assaying, refining, minting, and retail coin shops.
As he says, “the proper role of government is to provide coins for the realm”.
He also wants no seigniorage nor any tax nor cost associated with such conversions. Seigniorage is the extra value of precious metal in “official” coin form.


Antal is living in a fantasy land.

Government “help” can never be free. Subsidies and bail outs always come at a cost, it’s only a matter of who pays.

What’s especially troubling about Antal’s advocacy is that government subsidies are inconsistent with free market theory!

Since we handle three of those four services ourselves (all but refining) I think I’m qualified to speak on this topic.

Government bail outs are uneconomic, don’t work, and always come at a much higher cost than when provided by businesses in a competitive free market.
Government minted Silver Eagles already cost more than privately minted 1 oz. rounds, showing that government is not providing the service better or cheaper than private industry already does.

Furthermore, the US government’s current minting program sells retail “collectable” silver and gold to the public at the mint’s web site, but only at extremely high prices. The mint sells cheaper bullion to about 15 major wholesalers, who then re-sell to other dealers, like ourselves, who then sell to the public. This private-industry re-sale market is more efficient, and less costly, than direct purchases from the US Mint.

Assaying gold, refining, minting, and selling retail gold coins are all businesses that involve advertising a place of business, hiring skilled employees, paying for equipment, installing security systems, and training skilled people. Also, such businesses need to know how to offset the risks of price movements in the metal such as avoiding taking a short position in a bull market, and providing these services more efficiently than the competition.

Assaying requires a skilled and trained assayer making a quick and accurate estimated value of the underlying bullion. That estimate must also include all such costs of the business, such as advertising, rent, salaries, time taken away from other customers, etc.

One time, I needed to cover a silver order, and I was talking to some customers. Due to my 10 minute delay, I lost $150, because the silver price went up.
It is simply impossible for any government or any entity to sustainably pay everyone 100% of the bullion value for their bullion. Doing so would only create another government program that is open to being scammed and defrauded, at the ultimate cost to the taxpayers.

There are simply not enough real world resources, such as fire crucibles, to give every customer an individual 100% accurate fire assay, and it would be completely uneconomic to melt a single $25 pair of earrings in a special melting pot, which could cost well over $25 in energy just to melt, if melted individually, to obtain 100% accuracy. 100% accuracy would come at a loss of efficiency, and only businesses are able to understand this, and allocate resources to most appropriately meet these real world trade offs in the most efficient way. In some cases, it might cost 100% or more to give a 100% accurate assessment, which could result in offering nothing to the customer, or costing the government everything.

We pay from between 60% to 85% of our estimated bullion value when we buy scrap gold, which is higher than all other locations that we have heard of in the Sacramento Area. The difference is explained by the amount of time it may take to do an assay, and also by the accuracy of our assays, and also by the amount brought in by the customer. If a customer can bring in over 5 ounces of gold, we are simply able to pay more. If the quality of the gold is difficult to determine such as is the case with placer nuggets, or smaller 10k-18k jewelry items, we must offer less. Scrap gold comes in many forms, with many contaminants, and refining is a real, added cost.

Refining is a separate business which must aggregate, or pool together, enough scrap or placer gold to melt them economically. Our current refiner only works with established businesses like our coin shops, who will bring in repeat business of about 30-50 oz. of scrap gold per month. Refiners operate on the slimmest of margins. A man called us this week to sell us a new $1 million dollar machine to refine gold, so we could do our own refining, instead of using our current refiner. I said, “Great, we can pay for that machine, given our current refiner’s costs, in about 100 years!” At $1 million in start up, compared to our current great prices from our refiner, it’s just not economic for us to try to do it ourselves!

Minting coins is a business that today requires a minimum of 10 different machines and processes. We have a pre-melt bucket, a continuous caster, a rolling mill, a slitter mill, a punching machine, a rimming machine, an annealing oven, a burnishing vat, die making machines, and stamping mills. We are looking to buy a wrapping/tubing machine. All of those machines cost money, the installation costs money, the rent costs money, employees cost money. And we are still not yet set up to mint a single thing! How can it be provided for free?
Bottom line is this: Antal’s position assumes that these services should be provided by government for free, or essentially, at prices substantially less than the prices charged by existing, sustainable, competitive businesses in the free market today. Antal is thus claiming that the prices charged by businesses today are too high for his theoretically optimum scenario. It he accusing these businesses today of price gouging?

If current assaying, refining, minting, and retailing prices are really too high, then Antal should go into the market, and provide those services cheaper than industry is already providing. Go ahead Antal, start up your own scrap gold buying business if you think prices charged are too high. Nobody is stopping you. There is little government regulation, thank God, so the market is already free, and highly competitive in this area.

Many investors who could provide these services instead choose to buy mining stocks, as real business involves real work!

But Antal should not claim to be a free market advocate, while asking for government intervention and subsidy. That kind of rank hypocrisy can win no support from the public, who is sick of seeing government handouts, and can easily see they hypocrisy of a “free market” gold advocate who seeks government handouts.

The gold market does not need government welfare. We need government to get out of the gold business, and stay out.

What’s especially ironic about Antal’s position is that the government is already providing gold at “below market” costs, as they are dumping gold onto the market through the leasing of government central bank gold to bullion banks, who dump it into the market at opportune times, which is helping to manipulate prices lower than they should be.

In essence, Antal is already getting what he wants, that is to say, cheap gold provided on an uneconomic basis, but those of us who can see this correctly, are correctly identifying this as market manipulation, and we recognize that it is unsustainable, and is ending, which is leading to the higher gold prices we are seeing.


Another advocate of using precious metals as honest money is billionaire Hugo Salinas Price, in Mexico. Here’s some of his work:



Hugo wants the Mexican Central bank to provide a price quote that would be a virtual nominal currency value for a 1 ounce silver round, a value that will never go down, just as nominal values on notes and engraved values on coins never go down. It sounds elegant at first glance. Hugo maintains that this “price floor” for a silver coin is essential for helping it circulate as currency, since money holders should not be taking on the role of speculators.

But expecting to be able to ask the Mexican central bank for a favor that works against its own interests is self-defeating. Would I ask any of my customers to shoot themselves in the foot? Of course not!

Nobody expects the dollar, or any other currency, to “never move down” compared to other currencies of the world! There might be an exception. True, China is trying to let the value of their currency “only move up” against the dollar, but this is after they already devalued their own currency by 40% against the dollar a few years ago. Such attempts are normally and appropriately called price fixing, and are widely recognized as totally contrary to free market principles.

Nobody should expect society to return to free market money by violating free market principles!

Why should silver investors, or silver holders, get a government guarantee that the nominal value of the silver coins they hold will never go down? No other investor gets such a guarantee. No other currency holder gets such a guarantee. Why should silver investors be so special?

Hugo is just another billionaire looking for a government hand out or bail out.
When silver is already the lowest valued thing on earth you can buy, value for value, why would a “price support” system even be necessary?

The problem here is that asking for government intervention hinders what Hugo could already be doing if he simply decided to do it himself.

Hugo could already mint his own 1 oz. rounds privately. He could reduce the spread if he wants, all on his own. He owns a chain of Mexican electronics stores, and he could sell 1 oz. privately minted rounds emblazoned with his own store’s logo, and he could sell the coins at 10% over spot, and even accept them at up to 10% over spot, or 9% over spot, or whatever he may choose, in return for his store merchandise.

But he will never even think to develop his own plan, as long as he wastes his time and money on seeking a handout from the Mexican government. Or, as he said to me a few years ago in his own words, “It’s too late in the game now to try and change tactics. I’ve already gotten so many on board with the current plan, I don’t want to confuse anyone.”

And so, his refusal to change, and his insistence on seeking government handouts, prevents the actual implementation of real world silver as money that could be issued by his own stores directly, within a few weeks!

No government is preventing Hugo Salinas Price from issuing silver as money.
No government is preventing Antal Fekete from buying scrap gold as from the public.

Both of these men are hindered only by their own hypocritical cries for government intervention.

Two warnings:
The firearms manufacturing industry, after WWII, fearing the dumping of surplus military weapons onto the market, pushed for gun restrictions, or “government protection” for their businesses, as if they didn’t make enough money during the war years! Today, those gun restrictions have mutated into nearly destroying the firearms industry who has been beset with lawsuits for selling “assault” weapons.

Another story: Over 100 years ago, silver advocates pushed for a government handout. They wanted the silver price to be guaranteed to be set at a 15 to one ratio with gold. Western states wanted to be able to pay their debts with silver. This would be price fixing, completely contrary to free market theory, and would have cost the government their entire gold hoard. The compromise? Silver advocates (Democrats) lost to Republicans, who demonetized silver, and made the paying of all debts greater than $5 due in gold only. The ‘gold standard’ advocates ended up being the champions of the banking industry, who eventually demonetized gold as well.

Moral? Government subsidies backfire! They always do.
Yes, I advocate silver and gold to be used as money, as Hugo and Antal do. But I’m not asking for the government to do anything.

I’m doing it.

I’m using silver and gold on a daily basis. We buy scrap and sell to a refiner. We have coins minted. We sell bullion to the public.

I’m helping people to use gold and silver as a form of savings, since I sell it to them. I’m helping others liquidate it, both of which help to monetize it.
Nearly every day I explain to people why we can pay 99% of the spot price for a gold Eagle, but only 60% to 85% of the spot price for jewelry. One is fungible, the other is not. One is money, the other is not. One is similar enough to be like any other similar piece of gold as to be easily exchangeable and interchangeable. The scrap stuff is not. Scrap must be assayed, then refined, then minted, and then it can be sold in a coin shop (yes, at one more small mark up), as a stable form of money.

Warning, numismatic silver and gold items are not fungible, despite the claims of many numismatic dealers who attempt to make them fungible with quote books, and grading slabs, etc. It can cost up to $60 just to grade a silver Eagle. What a rip-off market! if you spend $300,000 on numismatic investments you “ARE” the numismatic market! It’s a horrible trap.

Those who ignore the danger of non-fungible gold have to pay the price.
Asking government to pay, really just gives the government a license to steal from others to be able to pay for it. Gold and silver stand in the way of such government theft, if properly used and understood.

Besides, when silver was money in the USA, the markup on silver coinage was up to 400%. The government bought silver for 29 cents per oz., and turned it into $1.40 of coinage! ($1 of 90% silver coinage contains .72 of an oz. of silver. $1.40 x .72/oz. = 1 oz.).

So if the government gets into this game of “FREE” coinage, you will likely trade 1 oz. of scrap silver to the government, and get maybe a 1/5th of an oz. of silver back in an “official” silver piece! That’s not free at all!

You can turn your 1000 oz. bricks of silver into fungible and usable 1 oz. silver rounds, by contacting www.goldenstatemint.com in LA. They are not affiliated with us, but they are one of our trusted suppliers.

For $.75/oz., they can make bricks of silver into commonly recognized, easily assayed, easily tradeable, easily exchangeable, one ounce rounds.
If you want them to pay to ship to them your 1000 oz. silver bars by Fed Ex, the cost is $.85/oz.

They have been doing hundreds of conversions of these bars in the last few months, which, to me, means they are helping the national silver supply play “catch up” for when the world ran out of silver rounds in 2008 last year, and only had 1000 oz. bars available.

Contact www.goldenstatemint.com
Phone 909-792-5756
Golden State Mint asked us to wait 1 week to manufacture 2000 rounds that we ordered today. Often, they can deliver immediately!

Sometimes, a true free market advocate, like me, hinders his own business, in the pursuit of truth and free markets, and for the best deals for the customer. Why would I advertise my competitor? Because I think there will be more than enough business for us all. And, like Fekete, I do recognize that minting is a valuable service that is desperately needed by the world if the world is going to use silver and gold as money. Besides, my mint is still not yet up and running, so I pose no competition as of yet.

But we have over 20,000 oz. of silver, and over 100 oz. of gold for sale for immediate delivery.

I strongly advise you to get real gold and silver, at anywhere near today’s prices, while you still can.

Call us today.

Yes, we sell silver, and gold at the JH MINT!
Buy it now! Buy Silver or Gold Now!
Inventory & Price List
Call the JH MINT, 10AM to 5PM Pacific, Monday to Friday:
100 oz. silver minimum, USA shipping, wire transfer only!
(530) 273-8175
Janelle (530) 913 0553 silver_support1@vzw.blackberry.net

Active, live price quotes list:


Jason Hommel

In case you miss an email, check the archives:

Or visit www.momsilvershop.com
(Mom will ship in lots of more or less than 100 ounces, and overseas, and take credit cards or pay pal.)

If you are in Northern California, see:
Rocklin Coin Shop
4870 Granite Drive, Rocklin, CA 95677

Every gallon of gas delivered to troops in Afghanistan costs taxpayers $400


The Super Rich are Laughing

The US as Failed State

The US has every characteristic of a failed state.

The US government’s current operating budget is dependent on foreign financing and money creation.

Too politically weak to be able to advance its interests through diplomacy, the US relies on terrorism and military aggression.

Costs are out of control, and priorities are skewed in the interest of rich organized interest groups at the expense of the vast majority of citizens. For example, war at all cost, which enriches the armaments industry, the officer corps and the financial firms that handle the war’s financing, takes precedence over the needs of American citizens. There is no money to provide the uninsured with health care, but Pentagon officials have told the Defense Appropriations Subcommittee in the House that every gallon of gasoline delivered to US troops in Afghanistan costs American taxpayers $400.

“It is a number that we were not aware of and it is worrisome,” said Rep. John Murtha, chairman of the subcommittee.

According to reports, the US Marines in Afghanistan use 800,000 gallons of gasoline per day. At $400 per gallon, that comes to a $320,000,000 daily fuel bill for the Marines alone. Only a country totally out of control would squander resources in this way.

While the US government squanders $400 per gallon of gasoline in order to kill women and children in Afghanistan, many millions of Americans have lost their jobs and their homes and are experiencing the kind of misery that is the daily life of poor third world peoples. Americans are living in their cars and in public parks. America’s cities, towns, and states are suffering from the costs of economic dislocations and the reduction in tax revenues from the economy’s decline. Yet, Obama has sent more troops to Afghanistan, a country half way around the world that is not a threat to America.

It costs $750,000 per year for each soldier we have in Afghanistan. The soldiers, who are at risk of life and limb, are paid a pittance, but all of the privatized services to the military are rolling in excess profits. One of the great frauds perpetuated on the American people was the privatization of services that the US military traditionally performed for itself. “Our” elected leaders could not resist any opportunity to create at taxpayers’ expense private wealth that could be recycled to politicians in campaign contributions.


Daily Dispatch: Buffaloes and Bureaucrats – Oct 20, 2009

October 20, 2009 | www.CaseyResearch.com Buffaloes and Bureaucrats

Dear Reader,

In yesterday’s edition of the Daily Dispatch, I closed by commenting on a much circulated video of climate change skeptic Lord Monckton. In that video, he shares his opinion that by signing the climate change agreement now being worked up for the UN Copenhagen Climate Change conference in December, the U.S. would be essentially signing away its sovereignty.

Last night, I made my bedtime reading the 181-page United Nations Framework Convention on Climate Change agreement that Monckton referenced.
If you can read this document without getting incensed and perhaps even a little green around the gills, you are made of sturdier stuff than I. While I did not get all the way through the bureaucratic brick, from what I did read, the following principles/objectives are clear:1) The developed world owes a “carbon debt” to the developing world, which should be settled posthaste by providing billions of dollars in additional aid each year.

2) The document grossly conflates climate change alarmism with economic development. And I quote…

“Developing countries face not only the additional challenge of adaptation but also the need to put their economies on a sustainable path. All Parties agree that developing countries face serious adverse effects of climate change as well as threats to their future economic potential due to insufficient access to shared global atmospheric resources.”

(Ed. Note: I am shaking my head at that last line, which seems to say that because of proposed new emissions caps, the developing countries will have to remain quiet backwaters that rely for their subsistence mostly on the billions in fresh aid. )

3) There is no further debate as to whether or not the world is on the path to climate-related destruction, or whether it is entirely the fault of mankind. Those are officially settled in no uncertain terms in the document, even though there is no consensus among real scientists (versus the pretend sort).

4) It makes a clear attempt to squeeze as many recipient nations as possible under the tent into which the developed nations are expected to throw their many billions. Again, below I provide a quote, leaving intact the proposed edits that are still found in the document. To assist you in translating same, I am boldfacing the definitional phrases.

“[Recognizing that sustainable development that ensures capacity for] [A shared vision recognizes that] [adaptation to the adverse effects of climate change is the most important issue for] [the most vulnerable countries are] all developing countries, [particularly] low-lying and other small island countries, countries with low-lying coastal, arid and semi-arid areas or areas liable to floods, drought and desertification, and developing countries with fragile mountainous ecosystems are particularly vulnerable to the adverse effects of climate change, [as stated in preambular text 19 of the UNFCCC].”

So, just to be clear, if you are a developing country with a coast line, or an arid or semi-arid region… or an area that occasionally floods, or suffers drought, or you have mountains, then it’s under the tent and onto the gravy train for you.
In other words, every developing country in the world will qualify.
Now, as fast as I read, I was unable to battle through the bureaucratese to the parts where the U.S. signs over its sovereignty although there are many clauses even in the early going that are strongly suggestive of same.
For instance…12. [All Parties should take mitigation actions under an enlightened sense of solidarity] [All Parties should contribute to the global effort to combat climate change], in accordance with their common but differentiated responsibilities and respective capabilities [ a spectrum of effort is envisaged]. All countries will need to develop comprehensive climate response strategies, in line with their individual responsibilities and capabilities, that achieve an emission trajectory to a low emission economy.
(Ed. Note: Can you say “From each according to their abilities, to each according to their needs”?)13. [[In this context,] developed country Parties [have committed to] [should] demonstrate that they are taking the lead in modifying [the] long-term trends in emissions [reduction] consistent with the objective of the Convention [and in accordance with its provisions and principles.] In doing so, Annex I Parties pledge to meet their targets fully, effectively and in a measurable, reportable and verifiable manner.
(Ed. Note: “Annex I Parties” are the developed countries the milking cow in this treaty.)
So, is this treaty something to be concerned about? Yes and no.
Yes… because if this treaty were to be signed in Copenhagen, it would open up a whole new chapter in the global reach of government, including billions in new spending and tax mandates.

No… because as feeble-minded as people in power can be, I have to believe that no leader of a developed nation is going to sign on to this insanity. If I’m wrong, however, then good luck to us all we’ll need it.

For those of you made of sturdier stuff, you can download the document and delve into it yourself, by following the link just below.

Text of the Convention

Before moving on, if you feel like taking a break for some humor, you can read the posting on Watts Up With That? on the court in Louisiana that ruled the unfortunates living in the path of Hurricane Katrina can sue energy companies over the global warming that the plaintiffs’ ambulance chasers say caused the hurricane.

Hurricane Katrina Victims Have Standing To Sue Over Global Warming Watts Up With That?

All of which makes me wonder as I read this stuff if I’m still asleep and having a dream… or a nightmare, such as the case may be.

The Housing Trap

No surprise to you, dear readers, but the latest data find that fewer houses are being built than anticipated in the celebratory gushings about the many green shoots now rising steadily into the blue sky.

According to reporters at Bloomberg, the likely reason for the unexpected slowdown is the builders’ growing and entirely valid concern that demand will again dry up once the government’s $8,000 sticky trap for new homeowners is withdrawn on November 30.

Proving that the first-time homeowner should energetically avoid these traps traps that, once stepped into, leave the recipient inextricably stuck with taxes, upkeep expenses, repairs, etc. our own Jake Weber has produced a chart that does much to dispel the popular illusion that real estate was uniformly a good investment over the recently deceased bubble years. Here’s his report…

The stretch from 1997 to 2007 was the helium-rich years of a multi-decade-long credit bubble, when buying and selling dot-com stocks was replaced with suburban houses as the path to riches.

However, IRS data show that during these years, as Americans pocketed $5,312 billion in capital gains, they simultaneously shelled out $5,252 billion in mortgage interest and real estate taxes a difference so small as to be a rounding error. Over the same period, homeowner costs rose 122% for mortgage interest and 112% for property tax, while personal income increased by a paltry 63%. The cost of home-sweet-home ownership was eating Mr. & Mrs. Suburbia alive.

This 10,000-foot view is just a snapshot of the big-picture trend. There were obviously home flippers and stock market players that profited handsomely during the market’s boom. And we haven’t factored in the balance between taxes saved from interest/taxes written off and taxes owed from capital gains. But as a whole, did the nation grow any wealthier as a result of Americans being obsessed with selling their houses to each other? At best it looks like a zero-sum, tax code-induced illusion.

As Doug Casey has long and often said, a house is not an investment, it’s a consumer good, albeit the most expensive one that most Americans will ever make. And consumer goods are not, as a rule, great investments.

For over 28 years, Doug Casey has spotted the big-picture trends emerging throughout the investment universe. But more importantly, he understands how to profit from them by investing ahead of the crowd. So what does Doug Casey think makes for a great investment in today’s frenzied markets? Find out now by accepting our no-risk, 100% satisfaction guaranteed trial subscription to The Casey Report by clicking here.

David again. Whereas most housing hasn’t been a particularly good investment, gold certainly has been. On that topic, here’s some breaking news from Jeff Clark, editor of our popular Gold & Resource Report…

Buffaloes Are Back!
By Jeff Clark

You may recall the U.S. Mint stopped producing the American Gold Buffalo coin late last year when demand for all things gold and silver skyrocketed and they couldn’t keep up. I was personally disappointed, because I love that coin.

Well, I’m glad to report it’s back on sale! Beginning this Thursday, October 22, you can once again buy the 2009 Gold Buffalo. The U.S. Mint is officially releasing the coin for sale that day, and you can purchase them from the Mint directly or from any dealer who’s got them available.

What many people don’t know is that the Gold Buffalo is the only U.S.-minted 24-karat gold coin. Wait, you’re saying, isn’t the American Eagle 24 karats? Nope, it’s a 23-karat coin; it contains one ounce of gold, but it also contains an alloy, about 10%, presumably to make it sturdier. The Buffalo contains no alloy and is thus the purest form of gold you can buy.

If you’d like to own a Buffalo, I’d suggest calling Asset Strategies International (1-800-831-0007). Why? Even though you can’t buy it today, they’ll take your name and number now and then call you on Thursday to lock in a price. They’ve also got the best price I’ve seen: they’re currently asking a 6% premium (or lower for larger orders).
This is a better deal than Kitco, for example, because they’re not taking orders yet and also said their premium is likely to be at least 8.25%. Keep in mind, though, that premiums could easily be forced up if the demand, like last time, is strong. I suspect it will be for this popular coin.

If you think the gold price is going to fall and could thus get it cheaper, I’ll mention that the U.S. Mint projects they’ll produce enough coins to keep up with demand. This doesn’t mean your dealer couldn’t run out, but hopefully the mint’s calculations are correct and there will still be plenty of coins available at later times. No guarantees, though, and premiums will certainly fluctuate.

[Not all precious metal dealers are created equal. Want to know whom we trust to buy our gold and silver from? Check out our archived issues by subscribing to the new Casey’s Gold & Resource Report for just $39. Click here to learn more.]

Is Limited Government an Oxymoron?

This past Sunday, a television station in Texas ran a program by the title above, featuring Thomas Woods of the Ludwig von Mises Institute and our own Doug Casey.
If you’ve got the time, give it a watch, as it offers worthwhile insights into the philosophical underpinnings of the case for small governments.
Watch it here…

Is Limited Government an Oxymoron?


Fannie & Freddie are worthless. Yesterday, leading bank analysts Keefe, Bruyette & Woods (KBW) updated their opinion of Fannie Mae and Freddie Mac, the two government-sponsored mortgage providers. Between them, Fannie and Freddie backed 68% of all mortgages generated so far in 2009.

So, how, according to KBW, are they doing?

Well, despite the government (taxpayers) pumping a cool $98 billion into these lap dog institutions, KBW has cut their target price from $1.00 to $0.00. Yes, zero.
While they used more genteel terms to describe the dysfunctional pair, their final analysis might be summed up as saying that Fannie and Freddie are a couple of bungling bureaucratic and bankrupt black holes whose business has largely been bank-rolling billions in bad loans.

Olympic Dam Update.As reported here previously, Australia’s massive Olympic Dam mine recently suffered severe damage to its main shaft. Today we found out just how severe, when mine operator BHP Billiton declared force majeure on contracts tied to the mine’s production. In its announcement, BHP said they expected to produce 20% less uranium and copper from the mine for a period of up to six months.

Glancing over the portfolio of uranium companies now being followed by Casey’s Energy Report, you can see the results of this announcement in spiking share prices… with Denison Mines as a representative example, up over 7% so far today, despite the broader markets and even gold heading in the opposite direction.

(For all our favorite uranium picks, and much more, try a risk-free, three-month subscription to Casey’s Energy Report today.)

And with that, dear reader, I must sign off. As I do, I see the U.S. stock market is giving back most of its gains from yesterday. Be careful, we are on thin ice.
Thanks for reading and for being a subscriber to a Casey Research service!

David Galland
Managing Director
Casey Research

Gold & Silver Daily: JPMorgan Holds 40% of All Silver Short Positions – Oct 17, 2009

JPMorgan Holds 40% of All Comex Silver Short Positions
Gold and silver didn’t do much anywhere on planet earth yesterday. Their respective lows were at the Comex open… and a $10 rally in gold, along with a 30 cent rally in silver, came to an abrupt end just minutes after London closed for the weekend. After that, both metals prices sagged a bit before heading sideways for the rest of the New York trading session. Both metals posted small gains over Thursday’s closing price… as did the HUI and XAU precious metals indexes.

The changes in open interest for Thursday aren’t worth spending much time on. Even though both metals had substantial down days, and short covering should have been expected… open interest actually rose in both metals. In gold, o.i. was up 639 contracts… and silver o.i. was up 33 contracts. Basically unchanged in both. Volume was pretty chunky, however. In gold it was 162,299 contracts… and in silver it was 41,549 contracts.

The big story was the Commitment of Traders report which came out at 3:30 p.m. yesterday for positions held as of the end of trading on Tuesday, October 13th. Surprisingly, there was almost no further deterioration in silver, as the bullion banks only increased their net short position by a very smallish 238 contracts. Right now the bullion bank net short position is a whopping 65,426 contracts… 327.1 million ounces of paper silver.

In my daily conversation with Ted Butler, he broke the numbers down even further. ‘4 or less’ bullion banks are short 63,383 Comex silver contracts… which is 97.6% of the entire net short position of 65,426 contracts. ‘8 or less’ traders are short 76,168 Comex silver contracts, which represents a stunning 116% of this same short position. And the most grotesque number of all [when you take out all the market-neutral spread trades] is that JPMorgan, all by itself, is short about 40% of the entire Comex silver market!!! The full-colour COT graph for silver is linked here.

In gold, the bullion banks increased their net short position by another 14,062 contracts. Only by purchasing 4,493 long positions did the bullion banks save themselves from the notoriety of being net short over 30 million ounces of gold at the end of this reporting period. Their new net short position [as of Tuesday] was 295,926 contracts… or 29.6 million ounces of gold. The ‘4 or less’ bullion banks are short 19.6 million ounces of that… and the ‘8 or less’ bullion banks are short 27.0 million ounces of gold… or 91.2% of the entire net short position. The full-colour gold COT report is linked here… and is a sight to behold.

Yesterday afternoon, Ted Butler did his usual weekly interview with Eric King over at King World News. The interview is a must listen and I advise you to stop reading right here and listen to this report before continuing. The link is here.

Yesterday, the CME’s Daily Delivery Notices showed that 97 gold contracts were scheduled to be delivered on Tuesday. There were no deliveries reported in silver. Their were no changes to the alleged holdings of either the GLD or SLV yesterday. The U.S. Mint updated their eagles numbers again… another 6,000 gold and 150,000 silver… to 56,000 and 1,417,000 respectively month-to-date. And the daily change in the Comex-approved depositories were, once again, not worth mentioning.

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The usual New York gold commentator reported the following yesterday… “Thursday’s down $14.10 December gold close saw a 639 increase in open interest to 511,391 lots… a new 2009 high.”

“India was an importer all day even though the rupee weakened. However, the currency did gain on the week, the 6th weekly gain running. Since the March low, the rupee has risen 12.8% against the US$. Mitusi-London today noted better Indian gold off-take, but like many, presumes there will be a substantial post-Diwali decline, which I doubt. Unfortunately for the nerves of gold’s friends, Monday is an Indian holiday.”

Gold at the TOCOM was active. Confusingly though, the public cut another 2.32 tonnes from its long, which now stands at the very low level of just over 14 tonnes.”

“Bearishness is widespread, with a majority [9/16] of gold traders in Bloomberg’s weekly poll forecasting a decline next week.” [The link to that story is here.

“The influential Gartman Letter is suggesting… we’ve every reason to believe that our target back toward $1,000 shall be seen at some point in the next week or so…”

“I believe that, as so often, this expectation is based on an in adequate appreciation of the state of the physical market.” [We shall see. – Ed]

Eric King of King World News was kind enough to interview me the other day, and you can listen to the interview here. I have quite a few new stories today, but since it’s the weekend, I hope you can find the time to run through them.

The first story was sent to me by Craig McCarty. It’s a Reuters piece that was posted yesterday evening, so it hasn’t seen much exposure so far. “Billionaire hedge fund founder Raj Rajaratnam and executives from some of the most prestigious U.S. companies were charged on Friday with the largest hedge fund insider-trading scheme ever. Also, three executives from major American companies IBM, top consulting firm McKinsey & Co… and the venture capital arm of chip giant Intel Corp are also facing criminal charges.” The headline reads “U.S. charges billionaire Rajaratnam with record insider trading”… and the link is here.

The next three stories are all courtesy of the King Report. The first is a story posted at . “Despite concerted government-led and lender-supported efforts to prevent foreclosures, the number of filings hit a record high in the third quarter, according to a report issued Thursday.” The headline reads “Foreclosures: ‘Worst three months of all time'”. As I keep saying… call me in 2013 and we’ll talk about a bottom in the U.S. real estate market. The link is here.

In another Reuters story, the headline reads “Capital One credit card defaults rise in September”. Capital One is not the only company recording losses of this magnitude. Most companies are now reporting loss rates of over 10%. The story says that this problem will peak in Q4 of this year “and remain elevated in 2010.” These guys are dreaming in Technicolor if they think that will be in the case. Net charge-offs will get much worse than this before there’s any sign of leveling off. The link to the story is here.

The last story that’s courtesy of the King Report is an offering from Ambrose Evans-Pritchard from The Telegraph in London. The headline reads “German ‘Wise Men’ fear credit crunch in 2010”. “Germany’s leading institutes have warned that the pace of economic recovery is ‘unsustainable’ and that the country’s banks may face a fresh crisis over the next year as bad debts surface in earnest.” Further down in the story, ratings agency Moody’s said this week that Spanish banks face “severe asset quality deterioration” and have yet to make provision for “losses that could reach 225 billion Euros. The link is here.

The last two stories are courtesy of reader P.S. The first is a story from finance.yahoo.com The video clip starts as soon as you hit the link, but the written story posted beside it is a much better synopsis of the situation, and you should pay more attention to that then the video. In the video they never mention two items that are on the screen… the increase in the gold price from $280 to $1,060… nor the price of crude oil, which was a $16.44 back in 1999, and is now over $75. But to their credit, they mention that the dollar has lost 25% of its purchasing power, so today’s 10,000 Dow is, in actual fact, worth 7,500. It’s a short item headlined “Dow 10,000: The More Things Change, The More They Stay the Same”… and is well worth the read… and the link is here.

Lastly is a story posted over at mises.org. “One of the few places in the world not yet plagued by government intervention is the internet. Although some governments in certain parts of the world have infiltrated the activities of the internet to varying degrees, it remains the closest thing to a purely free economy that we can identify in the modern world.” The essay, which isn’t particularly long, is entitled “Witness the Freest Economy: the Internet” and the link is here.

Who looks outside, dreams; who looks inside, awakens. – Carl Gustav Jung
Today’s ‘blast from the past’ goes back to 1972… and, as usual, needs no introduction whatsoever. So turn up your speakers and click

. I would be the first one to admit that, in the short term… the next 6 weeks… I have no idea which way the gold and silver markets are going to go… and I’m getting tired of repeating myself day after day. If you took the time to listen to what Ted Butler said in his interview with Eric King, you’ll understand why I’m sitting on the fence. Nobody knows for sure how this is going to end… but end it will, one way or another… maybe even with a bang. This is certainly not a market for the faint of heart.

I must, again, repeat what I say every week at this time, In order to participate and gain maximum benefit from this ongoing bull market in the precious metals, you must make the right investment decisions. As a writer in the gold and silver market, and as a member of GATA for the last nine years, I have free access to a lot of precious metals investment newsletters that are sent my way…lots of them! And I can say without a word of a lie, that Casey Research’s International Speculator is far and away the best of the bunch. I know the price is steep… but quality pays… it never costs. But included in that is a complimentary subscription to Casey’s Gold & Resource Report… plus, your satisfaction is 100% guaranteed. I strongly urge you to give this serious consideration.

I await Sunday evening’s opening of the gold market in the Far East with great interest.

Enjoy what’s left of your weekend, and I’ll see you on Tuesday morning.

Gold is over $1000 an ounce – Now what?

Paul van Eeden

The Federal Open Market Committee recently announced that the US central bank will “… continue to employ a wide range of tools to promote economic recovery and to preserve price stability.”

This means that the Fed will continue to buy agency and Treasury debt in the market to suppress interest rates and that it will do so with newly created money to keep prices from falling in aggregate. The Fed said that it would purchase a total of $1.25 trillion worth of agency mortgage-backed assets and $200 billion worth of agency debt by the end of the first quarter of 2010. It would also have bought $300 billion worth of Treasury debt by the end of October 2009. Since December 2007 the Fed’s balance sheet has already expanded by $1.2 trillion.

That $1.2 trillion, for the most part, represents new money that the Fed created. When the Fed creates new money it inflates the money supply, which, in turn, devalues the dollar. That is how the Fed hopes to prevent prices from falling and keep prices rising: by devaluing the dollar.

All this inflation the Fed is creating by monetizing agency and Treasury debt has fired a healthy fear of inflation in the hearts and minds of many. Fear of inflation has created demand for investments that act as inflation hedges and that is at least one of the drivers behind the current rally in the gold price.

The other usual driver behind increases in the gold price is weakness in the US dollar exchange rate. As the US dollar exchange rate falls the gold price in US dollars rises; not because of increased demand for gold, but merely to bring the US dollar gold price back in line with the gold price in other currencies.

Since there is palpable fear of further future inflation and widespread concern that the US dollar will continue to weaken against other currencies as it loses its status as the global reserve currency, it is no surprise that some of those concerns and fears are being manifested in a higher gold price. Gold is currently trading for more than its fair value yet since markets are forward looking a case can be made that the premium in the gold price is merely a reflection of what is to come.

The question before us is therefore whether the rally in the gold price is founded in reality, or in fear induced fantasy.

As a reminder, the fair value of gold in terms of US dollars increases in proportion to the dollar’s inflation rate. Thus the $1.2 trillion expansion of the Fed’s balance sheet should cause the value of gold to increase versus the dollar. For a more detailed look at how the value of gold can be calculated please refer to the articles on my website: link.

For us to know whether the rally in the gold price is rational, or not, we need to do some accounting.

In December 2007 the US money supply as measured by the Actual Money Supply (link) was approximately $7.5 trillion. The current money supply is approximately $8.4 trillion, an increase of roughly $900 billion over the twenty months since January 2008.

We also know that the Fed’s balance sheet has expanded by $1.2 trillion over the same period of time. We cannot merely assume, however, that the entire $1.2 trillion expansion of the Fed’s balance sheet represents an increase in the money supply. Items that added to reserves (increased the money supply) on the Fed’s balance sheet increased by approximately $1.2 trillion, and items that reduced reserves (removed money from the money supply) increased by approximately $300 billion. That means that the expansion of the Fed’s balance sheet since January 2008 added approximately $900 billion to the US money supply.

The money supply also increases as new bank loans are created and decreases as bank loans are paid back, when banks issue equity, or when banks borrow money by selling bonds. Bank profits also decrease the money supply.

So we know that the US money supply since January 2008 increased by about $900 billion and that happens to be about the same as the total amount of money that the Fed created during the same period by monetizing US agency and Treasury debt, and from the bailouts of AIG and Bear Sterns.

Since the increase in the US money supply equals the increase in the money created by the Fed we also know that new bank loan creation was almost exactly offset by the recapitalization of the banks through equity issuances, bond issuances and from operating profits. This implies that if the Fed had not added to the money supply the US money supply would have not grown at all since January 2008 – a highly unusual condition for a fractional banking system based on fiat money.

However, it is anticipated that the banks have more assets that they’ll have to write down, which means they will have to raise more capital. The Fed continues to monetize agency and Treasury debt to combat the deflationary impact on the money supply when banks raise capital.

Since the credit crisis came to light, the Fed has been creating new money and increasing the US money supply, while the banks have been sucking money out of the money supply to recapitalize themselves.

What we need to take home from this is that while the Fed has been increasing the money supply by monetizing debt, the extent to which it has inflated the money supply is $900 billion. Not $12 trillion, or $24 trillion, or any other absurd number that gets bantered about the Internet.

And while the increase in the US money supply as a result of the Fed’s priming is material, and has maintained US monetary inflation at historically high levels, it is nowhere near hyper-inflationary rates, nor is there any reason to believe that hyperinflation is remotely likely in the US.

We can calculate the percentage change in the US money supply on a year-over-year basis for each month, and then calculate a rolling 12-month average of the monthly, year-over-year changes (link). The average increase in the US money supply over the past twelve months, on that basis, has been 8.44%. That is a very high rate of monetary inflation for the United States. For example, the average inflation rate during the 1970s was 8.33% based on the increase in the Actual Money Supply.

To correctly analyze gold’s value vis-à-vis the dollar we also have to consider the inflation rate of the gold supply. The value of gold declines in proportion to the net amount of gold that is added to the above ground supply of gold just like dollar inflation devalues the dollar. While I don’t yet have all the gold production and consumption data for 2009 to complete the calculation, I estimate that the gold inflation rate could be around 1.5% for the year.

For a quick and dirty answer we can subtract the expected gold inflation rate from the dollar’s inflation rate (~8.5% less ~1.5%) to arrive at a rough guide to what gold’s average value for 2009 could be in terms of US dollars. The average value of gold was $762 an ounce in 2008. If we now add ~7% to that we arrive at an estimate of $815 an ounce as the average value of gold in terms of US dollars for 2009.

Take note that that is an average value for the year, and not a year-end or current date value. Nor is it a price prediction. This method of valuing gold is an attempt to quantify the value of gold, not predict its price.

The reason for doing it, though, is that we can see what effect the monetary inflation rate of the US dollar has on the value of gold in terms of US dollars. As you can see, the Fed’s activities have indeed had a positive impact on the value of gold, but not nearly as much as the market is factoring into the gold price.

The average gold price for September was $997 an ounce and gold is currently trading well over $1,000 an ounce. The current gold price is more than 25% higher than its estimated average value for 2009, and even though we would expect the current value to exceed the average value for 2009, it would not be nearly by that much.

The market appears to be too fearful of inflation and has factored too much potential future inflation into the gold price. The Fed clearly announced that it would end the monetization of Treasury debt by the end of October this year and the monetization of agency debt in the fist quarter of next year. That means that in six months’ time the Fed will stop creating inflation. I realize that the FOMC could decide to extend the monetization of debt, but at this time we have no reason to believe that it will. Therefore it seems to me that the current bout of Fed manufactured inflation is coming to an end.

The US government, however, will continue to run a massive deficit that has to be financed with the issuance of Treasury debt. Assuming the Fed stops supporting the bond market and the Treasury keeps issuing record quantities of new debt, we can expect to see US interest rates start moving up.

The current level of interest rates in the US is historically, and unnaturally low. Interest rates will rise. It’s a question of “when”, not “if”. Given that the Fed has announced it will stop supporting interest rates in six months, and that the market is forward looking, it could be sooner rather than later.

Rising interest rates could be positive for the dollar in spite of the massive issuances of US Treasury debt, and that could put downward pressure on the gold price since the gold price moves inversely to the dollar’s exchange rate.

So in spite of the fact that the Fed has been inflating the US money supply by monetizing debt, and in spite of the fact that dollar-bearishness is in abundant supply, and that the US dollar is very likely losing its status as the sole reserve currency, there is a good chance that US interest rates will have to rise and that could cause a rally in the US dollar and a decline in the gold price.

Gold bugs have been conditioned to believe that the gold price has to rise in times of financial or political turmoil. But that is not necessarily the case. Lately, when greed dominates the market large institutions buy emerging market and Asian assets, and sell US dollars. That puts downward pressure on the dollar exchange rate and causes the gold price to rally. In other words, the gold price rallies when things are going well and greed is the dominant emotion.

When fear grips the market institutions sell emerging market and Asian assets and buy US dollars, sending the dollar exchange rate higher and putting downward pressure on the gold price. So when things go bad, the gold price falls.

During 2008, in spite of the fact that the United States was the epicenter of the financial crisis, the US dollar rallied, money poured in US bonds, and the gold price fell. Just a few weeks ago, when the US housing data disappointed the market, the dollar rallied and the gold price fell.

The belief that the gold price will respond positively to bad news and fear could well be misplaced, and is certainly not supported by recent market movements. It also ignores the fundamental and underlying factors that determine the value of gold and moves its price.

Aside from money, inflation and exchange rates, we hear a lot about China and its impact on markets. Chinese residents are now allowed to buy gold. China buys vast quantities of all sorts of raw materials such as copper, iron and oil and hope has been pinned on China’s revival since the economic crisis began. The Chinese economy barreled ahead as if nothing happened while North America, Europe and Japan’s economies collapsed.

Exports represented 35% of China’s GDP last year, according the World Bank website. China’s exports fell approximately 30% since last year, which means we would have expected China’s GDP to decline by more than 10% this year. Instead, the Chinese economy grew by 8%! How is that possible?

The Chinese government announced a massive stimulus program, much larger than the US stimulus package as a percentage of GDP. Yet it is almost certain that only a portion of the stimulus plan has been executed. A more likely source for China’s growth is the expansion of its bank credit this year. Bank credit in China has increased by 28% of GDP since January. To put that in perspective, that is equivalent to a $4 trillion increase in the US money supply, more than ten times the amount by which the US money supply actually did increase since January this year. Anyone concerned about inflation should be concerned about the inflation of the Chinese renminbi.

But I got side tracked; we were talking about the Chinese economy’s miracle growth. The theory goes that the credit expansion in China is fueling a consumer binge to such an extent that China’s internal consumption has replaced the lost export markets and then some. Before we just take this on blind faith, we should note that China’s economic numbers are not calculated in the same way as equivalent figures in North America. Specifically, in North America GDP is measured by expenditures while China’s GDP is based on production; and that is a very material difference.

For instance, the manufacturing of products is a component of Chinese GDP and not the sale of those products. Consider that if China wanted to increase its GDP all it had to do was produce more goods without regard for whether there was a market for those goods. Of course, manufacturers cannot continue to produce more and more without selling their products – they will rapidly run of money. But they could if the banks are willing to lend them money to build inventories of manufactured goods. I have a sneaky suspicion that the explosion of Chinese bank credit was used to finance a massive increase in production so that GDP growth would meet the Party’s expectations.

This would explain quite a lot, and it has severe repercussions. It would explain why China continued to buy large quantities of raw materials that could not be reconciled with the collapse in the market for its goods (exports). An economy cannot sustain itself if debt is used to manufacture products for which there is no market. Either the banks, or the manufacturers, or the retailers have to eat the losses. Regardless of where those losses come home to roost such an economy as a whole is rotten to the core.

The inconsistency in the Chinese data and the anecdotal evidence that China is building vast inventories can only be reconciled if one assumes that there was a surge in the production of goods that now decay in stock yards and warehouses. That means that China’s economy has the potential to implode with a reverberating bang unlike any other that has ever emanated from the East.

The Chinese Communist Party apparently learned from America that debt financed consumption was not a sustainable economic model. Their solution, it seems, is even more absurd: debt financed production in the absence of demand.

While such an economic model is flawed, China has vast resources, such as approximately $2 trillion in reserve assets, with which it can finance its folly. That implies that the Chinese conundrum could last much longer than we may expect. Even so, just like the debt financed US consumer spending spree had to come to an end, so too must China’s debt financed demandless production spree.

Earlier we reached the conclusion that US interest rates could potentially start increasing and cause the US dollar exchange rate to strengthen, which, in turn, would cause the gold price to fall. We can now add that the massive inflation of China’s money supply can cause the renminbi to collapse and send another currency crises rippling through financial markets. A collapse of the Chinese renminbi could also result in a stronger dollar and lower gold price.

But consider what could happen when the Chinese miracle economy is unveiled to be no better than the US miracle economy had been.

Last year when the US was the epicenter of the financial crises the US dollar rallied and the gold price fell. What would happen if China were the epicenter of an economic collapse? What happens when the gold and commodity bulls realize China cannot continue to consume at an even greater pace than it had been when the world was buying its goods, but, instead, now has to work down the excess inventory it built up? It would be a good bet that the US dollar would rally and the gold price would fall.

Given that the gold price is trading at a 25% premium to its fair value and that we can imagine several scenarios whereby the US dollar could rally and the gold price could fall, it seems to me that betting on a higher gold price right now is merely a bet on the Greater Fool Theory. That is not to say that the gold price could not continue to rally – markets can remain irrational far longer than rational people ever imagine they would. Personally, though, I have no interest in buying an over-priced asset in the hope that it will become even more over priced – not even gold.

Paul van Eeden

This letter/article is not intended to meet your specific individual investment needs and it is not tailored to your personal financial situation. Nothing contained herein constitutes, is intended, or deemed to be — either implied or otherwise — investment advice. This letter/article reflects the personal views and opinions of Paul van Eeden and that is all it purports to be. While the information herein is believed to be accurate and reliable it is not guaranteed or implied to be so. The information herein may not be complete or correct; it is provided in good faith but without any legal responsibility or obligation to provide future updates. Neither Paul van Eeden, nor anyone else, accepts any responsibility, or assumes any liability, whatsoever, for any direct, indirect or consequential loss arising from the use of the information in this letter/article. The information contained herein is subject to change without notice, may become outdated and will not be updated. Paul van Eeden, entities that he controls, family, friends, employees, associates, and others may have positions in securities mentioned, or discussed, in this letter/article. While every attempt is made to avoid conflicts of interest, such conflicts do arise from time to time. Whenever a conflict of interest arises, every attempt is made to resolve such conflict in the best possible interest of all parties, but you should not assume that your interest would be placed ahead of anyone else’s interest in the event of a conflict of interest. No part of this letter/article may be reproduced, copied, emailed, faxed, or distributed (in any form) without the express written permission of Paul van Eeden. Everything contained herein is subject to international copyright protection.

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The Public v Private Waves & Switzerland’s Fate – Sept 24, 2009

The Public vs Private Wave & Switzerland’s Fate Along With the Rest of Us:
The William Tell Tax Rebellion
By Martin A. Armstrong (c) Sept 24, 2009
Former Chairman of Princeton Economics Intl

ArmstrongEconomics -(at)- gmail.com
OR send email to k58 -(at)- gmx.com for a faster reply.
(c) Sept 24, 2009 All rights Reserved

Questions can be directed by postal mail to: (because he has very limited internet access)

Martin A. Armstrong
FCI Fort Dix Camp
PO Box 2000
Fort Dix, NJ 08640