Crisis to stagflation? We may be moving from a two year crisis stage to a post stage of stagflation that lasts years. There are several aspects to clarify first. First, assuming there is NOT another credit meltdown this Fall/Winter, and the USD does NOT have a big devaluation event, but rather tails down gradually, then I expect stagflation to emerge. The US and Western economy could do a Japan esq battle with deflation for a decade. It is caused by a hobbled credit system and huge government deficits. Depending on how the West handles that battle, inflation in essentials like food and energy could emerge, while the economy stagnates or has slightly negative growth or flat growth. One problem with the inflation side of the equation is that major currencies are so managed (manipulated) now, that to get inflation in any major currency (especially the USD) requires the others not to inflate or hold their own. But, if the USD devalues, and we still do have fairly large exports that compete out there, then our trade competitors will be very tempted to co devalue, or else face a significant loss of price competitiveness. That currency linkage to exports is what allows the USD to hold up far better than it would with the US Fiscal deficit now running $2trillion a year - another problem that has to be discussed. Even with the US running a $2 trillion Federal deficit, if the other central banks decide to co devalue with the USD, they effectively will underwrite the USD, which can hang in there years after it 'should' before the bond markets rebel. Sort of like the central banks 'holding hands'. Some scenarios So, assuming the USD does not have a bond market rebellion on that $2 trillion deficit, and there is no new credit meltdown like fall 07/08, a stagflation environment emerges. A few years of stagflation is highly gold and commodity bullish - over the long term. Another food shortage Right now, the world economy is battling deflationary forces. I do not see a great deal of inflation, except perhaps food and energy and related commodities. Energy is more manageable, but food production is basically peaking and the world is running out of stocks of grains. Necessities need to be considered separate from the general commodity complex. Obviously if there is any food shortage worldwide, we have a totally new ballgame in many areas. A food price escalation would not be good for an economy struggling to recover. Likely oil speculators would jump in more and do a repeat of the oil and grains speculation bubble of 08 that later collapsed. In fact, if you want one area that can easily do well in 2010, its Potash stocks. Can we survive a credit blowup III Another scenario is what would happen if a third credit blowup like the 08 and 07 fall crisi happened again. Since we really shot the wad on the last two, can we do a third? The 'we' here is the Western central banks. If another credit crisis of the same magnitude of the 07 and 08 fall crashes happen, and 'we' cant' do another $10 trillion or so of bailout on a flash basis, will we lose control this time and actually have a pan Western bank holiday, which results in a total economic shutdown till its sorted out, and likely shortages of food and fuel? I suspect every stop in every central bank in the world would be thrown at any Credit Crisis III because of the economic disaster that would ensue in a few weeks. If you think the economy is bad now, imagine what it could be like if people pulled their money out of banks and we had banks close across the West. So, stagflation in 2010/11 can emerge if the Western economy starts to at least 'land' and gets out of deflation. One problem with that scenario is that we are still at the early stages of the USD bubble deleveraging that began with the housing bubble crash in 06, then led to the credit crisis I in 07 and II in 08. That could prevent deflation from turning into stagflation. The Prudent Squirrel newsletter is our financial and gold commentary. Subscribers get 44 newsletters a year on Sundays, and also mid week email alerts as needed. The alerts include quick notification of important financial news developments by email. Subscribers tell us that the alerts alone are worth subscribing for. I had one potential subscriber ask me if the newsletter has much more content than these public articles, ie, if it was worth subscribing. The answer is that the public articles have less than 10% of our research and conclusions that subscribers see, not to mention the subscriber email alerts of important breaking financial news. We have anticipated many significant market moves in the last year, such as imminent drops in world stock markets within days of them happening, and big swings in the gold markets within days of them occurring. We have also made a number of good calls on big currency swings, such as with the USD, the Euro and the Yen.
Now that we are just about 2 years into the world financial/credit crisis, it's time to ask what is next in one or two years. One is to ask will stagflation emerge in 2010 and after, which is highly gold bullish long term.
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Sunday 30 August 2009
Prelude To Stagflation? Transition From Crisis To Stagflation
Sugar
Fri 28 August 2009 Mov Avg-Exponential Indicator: Conventional Interpretation: Price is above the moving average so the trend is up. Additional Analysis: Market trend is UP. Mov Avg 3 lines Indicator: Note: In evaluating the short term, plot1 represents the fast moving average, and plot2 is the slow moving average. For the longer term analysis, plot2 is the fast moving average and plot3 is the slow moving average Conventional Interpretation - Short Term: The market is bullish because the fast moving average is above the slow moving average. Additional Analysis - Short Term: The market is EXTREMELY BULLISH. Everything in this indicator is pointing to higher prices: the fast average is above the slow average; the fast average is on an upward slope from the previous bar; the slow average is on an upward slope from the previous bar; and price is above the fast average and the slow average. Conventional Interpretation - Long Term: The market is bullish because the fast moving average is above the slow moving average. Additional Analysis - Long Term: The market is EXTREMELY BULLISH. Everything in this indicator is pointing to higher prices: the fast average is above the slow average; the fast average is on an upward slope from the previous bar; the slow average is on an upward slope from the previous bar; and price is above the fast average and the slow average. Bollinger Bands Indicator: Conventional Interpretation: The Bollinger Bands are indicating an overbought market. An overbought reading occurs when the close is nearer to the top band than the bottom band. Additional Analysis: The market appears overbought, but may continue to become more overbought before reversing. Given that we closed at a 45 bar new high, the chance for further bullish momentum is greatly increased. Look for some price weakness before taking any bearish positions based on this indicator. Volatility Indicator: Volatility is trending up based on a 9 bar moving average. Momentum Indicator: Conventional Interpretation: Momentum (8.52) is above zero, indicating an overbought market. Additional Analysis: The long term trend, based on a 45 bar moving average, is UP. The short term trend, based on a 9 bar moving average, is UP. Momentum is indicating an overbought market. However the market may continue to become more overbought. Given the 45 bar new high here this is even likely. Look for some evidenced weakness before getting too bearish here. Rate of change Indicator: Conventional Interpretation: Rate of Change (56.80) is above zero, indicating an overbought market. Additional Analysis: The long term trend, based on a 45 bar moving average, is UP. The short term trend, based on a 9 bar moving average, is UP. Rate of Change is indicating an overbought market. However the market may continue to become more overbought. Given the 45 bar new high here this is even likely. Look for some evidenced weakness before closing long positions here. Comm Channel Index Indicator: Conventional Interpretation: CCI (174.25) recently crossed above the buy line into bullish territory, and is currently long. This long position should be liquidated when the CCI crosses back into the neutral center region. Additional Analysis: CCI often misses the early part of a new move because of the large amount of time spent out of the market in the neutral region. Initiating signals when CCI crosses zero, rather than waiting for CCI to cross out of the neutral region can often help overcome this. Given this interpretation, CCI (174.25) is currently long. The current long position position will be reversed when the CCI crosses below zero. Adding bullish pressure the market just reached a 45 bar new high. RSI Indicator: Conventional Interpretation: RSI has issued a bearish signal (RSI is at 85.08). When RSI crosses above the overbought line (currently set at 80.00) a sell signal is issued. Additional Analysis: RSI is in overbought territory (RSI is at 85.08). However, the market may continue to become more overbought before a top is established, particularly given the 45 bar new high here. Look for a downturn in RSI before taking any bearish positions based on this indicator. MACD Indicator: Conventional Interpretation: MACD is in bullish territory, but has not issued a signal here. MACD generates a signal when the FastMA crosses above or below the SlowMA. Additional Analysis: The long term trend, based on a 45 bar moving average, is UP. The short term trend, based on a 9 bar moving average, is UP. MACD is in bullish territory. And, the market just put in a 45 bar new high here. Look for more new highs. Open Interest Indicator: Open Interest is trending up based on a 9 bar moving average. This is normal as delivery approaches and indicates increased liquidity. Volume Indicator: Conventional Interpretation: The current new high is not accompanied by increasing volume, suggesting that the current move lacks broad participation. Look for a retracement soon. Additional Analysis: The long term market trend, based on a 45 bar moving average, is UP. The short term market trend, based on a 5 bar moving average, is UP.The current new high is accompanied by an increase in volume over the last few sessions. In general this is bullish, but be careful to avoid an overbought market. RSI or MACD may be helpful here. Stochastic - Fast Indicator: Conventional Interpretation: The SlowK line crossed above the SlowD line; this indicates a buy signal. The stochastic is in overbought territory (SlowK is at 98.77); this indicates a possible market drop is coming. Additional Analysis: The long term trend is UP. The short term trend is UP. Even though the stochastic is signaling that the market is overbought, don't be fooled looking for a top here because of this indicator. The stochastic indicator is only good at picking tops in a Bear Market (in which we are not). Exit long position only if some other indicator tells you to. Stochastic - Slow Indicator: Conventional Interpretation: The SlowK line crossed above the SlowD line; this indicates a buy signal. The stochastic is in overbought territory (SlowK is at 92.68); this indicates a possible market drop is coming. Additional Analysis: The long term trend is UP. The short term trend is UP. Even though the stochastic is signaling that the market is overbought, don't be fooled looking for a top here because of this indicator. The stochastic indicator is only good at picking tops in a Bear Market (in which we are not). Exit long position only if some other indicator tells you to. Swing Index Indicator: Conventional Interpretation: The swing index is most often used to identify bars where the market is likely to change direction. A signal is generated when the swing index crosses zero. No signal has been generated here. Additional Analysis: No additional interpretation. Important: This commentary is designed solely as a training tool for the understanding of technical analysis of the financial markets. It is not designed to provide any investment or other professional advice. Note: The above analysis is computer generated from mathematical formulae, and is provided for educational purposes only. Neither the above, nor any information on this site is intended as a trade recommendation.
Contract Specifications:SB,ICE [NYBOT] Trading Unit: 112,000 lbs. Tick Size: $.0001/lb = $11.20 Quoted Units: US $ per pound Contract Months: Jan, Mar, May, Jul, Oct Trading Hours: 1:30 a.m. - 3:15 p.m.(NY time) Analysis
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Friday 28 August 2009
The Metastasis Of Moral Hazard And Its Effect On Gold
Congress and much of the nation are in utter denial about the country's unfolding fiscal catastrophe, as evidenced by federal spending that is actually accelerating, producing all-time debt and deficit records that exceed anything ever experienced by any nation on earth, at any time in history. Denial is a psychotropic, mind-altering drug that by comparison makes crack cocaine look like health food, and addiction to it shuts down the brain. America's denial about its out-of-control spending, non-repayable debt, financial sector fraud and deceit, decadent political institutions, epic dereliction of leadership duty, fiscal and monetary immorality, and disastrously dishonest system of cronyism is leading the nation into an economic nuclear winter of desolation and chaos. Aside from Ron Paul, there is not one politician telling the people the truth about their oncoming debt enslavement and impoverishment; nor is there even one sign of constructive fiscal change on the horizon. Our visionless, gutless and greed-stricken leaders have transformed the United States into a cowardly new world. But these facts are already well-known to the markets. In investing, the unexpected events change the game, causing significant price adjustments, either up or down. Wars, terrorist events, deaths of influential figures, natural disasters, provocations by foreign foes, paradigm shifts, innovations and the opening of commercial, geographic or intellectual frontiers have all, at their appointed times, had meaningful effects on markets. Successful investors need to keep their eyes focused toward the sun, because it is from its bright light that the jet fighters of change appear. Change wants to take us by surprise, and down to the ground. It is a contact sport. Many are now making the assumption that because the country has been able to sustain surrealistically deplorable fiscal numbers for the past twenty years or more, it will be able to sustain them in coming years, too. Elected officials delude themselves into thinking that they have time to tidy up their affairs before announcing that they will not seek re-election so they can "spend quality time with the family," and assume they can get out of Washington before the machine flies apart. They expect to collect rich, self-legislated, taxpayer-funded, cost-of-living-adjusted government pensions plus free health care for life, while basking in the glory of such salutations as, "The Honorable," or "His Excellency." The odds are growing that things won't work out this way, as America burns through its borrowed time with a blowtorch. The question is, what is coming that will change the game and accelerate the arrival of the inevitable? Inferential analysis is now saying that a game-changing trend having the potential to significantly affect America's institutions, economy and society might be well underway. Inferential analysis is the practice of identifying trends from seemingly unrelated events, and projecting their likely effects on the future. It can be highly predictive, and serves as an early warning system. In this article, we will examine three contradictions that we think tell a much larger story in combination than each tells by itself. We will then examine the implications of these contradictions on the markets, and in particular upon the market for gold. CONTRADICTION #1: On February 6, 2009, as it was becoming clear that the $700 billion TARP bailout had failed to achieve any of its promised objectives and as the mood of the citizens was darkening ominously as a result, Pennsylvania Congressman Paul Kanjorski (D), Chairman of the House Financial Services Subcommittee on Capital Markets, was interviewed on C-SPAN. During that interview, Kanjorski attempted to make the case that the frantic, due diligence-free passage of TARP was necessary because Treasury Secretary Paulson and Federal Reserve Chairman Bernanke had told him and other, select members of Congress that the country was facing an historic banking crisis. Here is what he said, transcribed verbatim: "On Thursday [September 11, 2008], at about eleven in the morning, the Federal Reserve noticed a tremendous drawdown of, ah, ah, ah, money market accounts in the United States, to the tune of five hundred fifty billion dollars was being drawn out in a matter of an hour or two. The Treasury opened its, ah, ah, ah, window, to help. It pumped one hundred five billion dollars into the system, and quickly realized they could not stem the tide. We were having an electronic run on the banks! They decided to close that operation, close down the money accounts, and announce a guarantee of two hundred fifty thousand per account so there wouldn't be further panic out there. [He was referring to the FDIC insurance coverage limit increase.] That's what actually happened. If they had not done that, their estimation was that by two o'clock that afternoon, five and one half trillion dollars would have been drawn out of the money market system of the United States. It would have collapsed the entire economy of the United States and, within twenty-four hours, the world economy would have collapsed. Now we talked at that time about what would happen if that happened. It would have been the end of our economic system and our political system as we know it. And that's why when they [the Treasury and Fed] made the point that we've got to act and do things quickly, we did." Kanjorski's interview was broadcast worldwide and viewed by millions. It was also printed in newspapers in virtually every country on earth. It was regarded as a stunning, uncharacteristically honest admission for a politician, and was accepted at face value. At the time, Congress was desperate to convince the citizens that the passage of TARP had not been a bailout, orchestrated by a Wall Street centimillionaire to the express and enormous benefit of a cabal of Wall Street millionaires and billionaires, but rather an heroic act that prevented the collapse of the United States and the world. Washington had to somehow explain why average citizens were being forced to pay for Wall Street's losses, when during the previous decade, Wall Street had kept every dollar of its trillion dollar profits for itself. Now, as Washington and Wall Street were shoving those losses down America's throat without a popular vote, or even a serious debate, they were grasping for straws. But there is a problem: Kanjorski's story makes absolutely no sense whatsoever. He said that $5.5 trillion would have been withdrawn from money market accounts on September 11, 2008, but according to the FDIC, the total amount held in bank money market accounts at that time was only $2.9 trillion. (The grand total of all FDIC bank deposits then, including everything from checking accounts to CDs was $9 trillion.) In addition to bank money market accounts (to which Kanjorski apparently referred, and as Chairman of the House Subcommittee on Capital Markets, he should certainly have been familiar with basic banking terms), there also exist "money market mutual funds," operated by mutual fund companies. Total deposits in those accounts were only $2.3 trillion at the time, for a grand total of $5.2 trillion in both money market categories. Kanjorski's claim was that 106% of all bank and mutual fund money market deposits were going to be withdrawn between the hours of 11 AM and 2 PM on September 11, 2008. In other words, every single money market depositor was going to sell every dollar of their holdings during those three hours that day, plus another 6% out of nowhere. Of course, that would have been impossible. While the numbers themselves prove the invalidity of the story, there are other aspects to it that make no sense, either. Kanjorski said it was "an electronic run on the banks." But to where? If the transfers were electronic, then by definition, they were staying within the United States banking system. The notion that every single money market account holder also had a foreign bank account to which they planned to transfer the money is factually incorrect, and absurd. Every true bank run in history has involved people going to their banks and demanding cash, not electronically transferring their funds from one bank account to another. In a true bank run, depositors want cash because they fear their bank will fail, taking their money with it. As we know, there was not one REAL bank run on September 11, 2008, involving depositors lining up at banks and demanding cash that could not be provided because banks had run out of it. The story was a hoax, either concocted by Paulson and Bernanke to frighten Congress into passing TARP without due deliberation and then repeated by Kanjorski, or concocted by Kanjorski to make him and Congress look like heroes for spending $700 billion of taxpayer money on a desperately flawed bailout that was, at best, an egregiously negligent misallocation of public money, and at worst, the biggest outright taxpayer theft in history. His interview presents a classic case of propaganda and brainwashing, of which even Orwell would be proud. CONTRADICTION #2: For more than twenty years, representatives of the United States government did nothing as millions of manufacturing, information technology, software development, customer service and other jobs were exported to foreign countries. In fact, government actions, such as: NAFTA; direct and indirect currency manipulations that artificially supported the U.S. dollar, negatively affecting exports and opening the floodgates to a cascade of imports; lobbyist-promoted, knee-jerk political support for a fuzzy, untested concept called "globalization;" and a government culture oblivious to or strangely supportive of America's employment crisis, all expressly intensified the country's job losses. The export of American jobs resulted in chronic, multi-hundred billion dollar annual trade deficits, compounding the country's financial distress. It was as if a secret deal had been entered into between the United States government and select foreign trading partners: You buy our bonds, and we will send you our jobs. Apparently, no one in government could have cared less that the lives of millions of American families were shattered as their jobs vanished and their finances crashed, or that the country had become crippled as it lost its manufacturing base and morphed into a so-called "service economy," an economic fantasy that is now failing catastrophically. Perhaps there would have been greater concern in Washington if government jobs were being exported to foreign countries, too. Contrast that to the following: within mere weeks of the Wall Street financial crisis going Code Blue in late 2008 (thanks to Wall Street's own Biblically-epic avarice and recklessness), Congress had passed the largest financial industry bailout package in the country's history, based on nothing more than a few "back of the envelope" proposals made by a seriously-conflicted Goldman Sachs executive turned Treasury Secretary and a cooperative head of the Federal Reserve. This was despite the fact that 90% of the American people were instantly and adamantly opposed to TARP, proving that they are not nearly as stupid as Washington and Wall Street like to think they are. After Wall Street learned how easy it was to obtain $700 billion from the citizens, the floodgates were opened wide and trillions more flooded into their money caverns. Year after year, despite their well-known unemployment misery and its enormous cost to the country, American workers got nothing; Wall Street was given trillions in a matter of weeks just for squealing like stuck pigs, and using their political juice. To the people's credit, we are now learning that the TARP funds were badly misspent, with the government having significantly overpaid for the toxic assets it purchased from crony banks. Nobel Prize winning economist Joseph Stiglitz recently observed that the overpayments were 50% at a minimum, and in many cases much more. This resulted in tens of billions of dollars of additional illicit profits flowing to Wall Street at the expense of the citizens. The people were correct: TARP was a fraud that never should have happened. CONTRADICTION #3: After becoming the nation's top auditor in 1998 as Comptroller General of the United States and head of the Government Accountability Office, David Walker repeatedly warned Congress over a period of several years that government spending was unsustainable, and that unless fiscal policies were reformed, a monetary and economic disaster would ensue. Walker presented irrefutable evidence to Congress to support his warning, evidence so powerful it was never contested because it could not have been. Walker focused Congress's attention on spiraling, deca-trillion dollar Medicare, Social Security, prescription drug, military and government pension, welfare, trade and general obligation deficits and liabilities, in addition to the crippling impact of ever-increasing interest payments on the rapidly increasing debt. Instead of heeding Walker's flawlessly-reasoned warnings, Congress did the exact opposite and went on a spending binge never before seen in American or world history. Just one program, the Medicare Prescription Drug Plan was bankrupt on Day 1, with an unfunded liability of $7,100,000,000,000 that was heaped on top of taxpayers' existing, crushing debt burden. That turned out to be just the warm-up act. It was followed by an unprecedented fiscal year 2009 federal deficit of $1,600,000,000,000+, which will then segue into 70 years' worth of multi-hundred billion to trillion dollar plus deficits. Furthermore, the government approved $13,000,000,000,000+ in bailouts for favored insiders. Every penny spent on these programs represents newly created debt, on which interest will accrue in perpetuity since the principal can never be paid. There are additional, related contradictions, such as presidential candidate Obama promising "change you can believe in," and then, once elected, installing into positions of economic power and influence people such as Lawrence Summers and Timothy Geithner, who had been directly involved with the policies and programs responsible for the crisis in the first place. Obama subsequently proposed that the Federal Reserve be given vast new powers over the financial system. This was astonishing, given that the Fed, under Chairman Greenspan and successor Bernanke was clearly implicated in the meltdown, though not alone in culpability. The fundamental common denominator in each of these contradictions is immorality. Creating money out of thin air is counterfeiting and theft, no matter who does it. Bonds that can never be paid are promises that cannot be kept, and are dishonest. Lying to the people for self-glorification, and to divert attention away from actions that were negligent and destructive is immoral. A government that robs from the poor and gives to the rich is corrupt. A government that casually throws its workers to the wolves while toadying to the wealthy is morally lost. And a Congress that decides, in direct rejection of the United States Constitution, that there will be two classes of citizens in America, the commoners and the elite, the serfs and the nobles, is derelict in its duty and a disgrace to its high office. Contemporary society is an amusement park of addictions. Most emphasis is given to the substance addictions, such as to nicotine, food, alcohol, or drugs. Less attention is given to the activity addictions, such as to shopping, gambling, television and sports, habits less physically dangerous and depleting, but life-affecting for those who become consumed by them. Two other addictions get far less attention than they deserve, given the powerful forces they have exerted on humanity throughout history. Those addictions are to money and power. Washington is about the addiction to power; Wall Street is about the addiction to money. Those two centers of addiction are now galvanizing each other. By finding artificial means by which to temporarily keep the government's sinking financial ship afloat, Wall Street supports Washington's power addiction. By funneling trillions of public dollars to Wall Street, Washington supports the bankers' money addiction. These twin addictions to money and power represent another piece of the moral hazard puzzle. Addiction breeds immorality. Addicts will stop at nothing to get their drug of choice. The colossal miscalculation made by Washington and Wall Street is that they could control the moral hazard genie once they removed it from the bottle. They believed they could use the genie to enrich themselves with trillions of dollars' worth of taxpayer money, and then replace it in the bottle before its magic spell of immorality metastasized throughout society at large. They assumed that the people would be too stupid to see what was going on. And that even if the people did figure things out, they would willingly wear the thick, choking chains of debt being welded to their necks by the financial elite and its Washington enablers. Instead, thanks to the Internet and the democracy of information and insight it affords, the people were instantly wise to what was happening, and it stirred them. The concept of "an eye for an eye, a tooth for a tooth," harkens to the Bible. [1] And perhaps Shylock was speaking for all of humanity when he said, "If you prick us, do we not bleed? If you tickle us, do we not laugh? If you poison us, do we not die? If you wrong us, shall we not revenge?" [2] There is accumulating evidence that the Washington - Wall Street moral hazard experiment has gone disastrously wrong, and that just like any other accidental discharge of a deadly virus, the moral hazard virus is now loose and swiftly propagating throughout society. By so blatantly colluding with Wall Street, Washington has lost all moral authority, and the people now have only one place to turn: themselves. An ethic of, "If they can do it, so can I," is spreading, as people realize that fabric of American society has been shredded and replaced by a free-for-all mentality whereby everyone must fend for oneself in order to survive. If this is so, it is a serious game changer for America. Evidence of the spread of moral hazard is noticeable everywhere. Despite government reports that the economy contracted only 1% last quarter and is now stabilizing, 13% of all home mortgages were either delinquent or in foreclosure in the second quarter, 2009, an all-time record. Credit card write-offs hover near 10%, also a record. Automobile, home equity and personal loan defaults are at or near record levels. Fiscal year 2009 federal personal tax receipts have declined 22% and corporate receipts have plunged by 57%, even though the economy has supposedly declined by only a fraction of that amount. Compared with January through April, 2008, state personal income tax receipts have plummeted by 26% in 2009, with eight states seeing declines ranging from 30% to 54.9%. Prime and Alt-A mortgage delinquencies and foreclosures are climbing rapidly, and are the true canaries in the banking industry mineshaft. Homeowners evicted by foreclosure trash their homes in rage on the way out the door, with an estimated 50% of such dwellings damaged. Looters and squatters destroy many of the rest, stealing copper pipes, wiring, granite counter tops and anything else of value. Dozens of Internet sites such as "youwalkaway.com" provide calculators to help homeowners decide whether or not to "strategically" default on their mortgages. Shoplifting costs retail businesses $35+ million per day, as 27 million shoplifters go on the hunt. Drug addicts who have become shoplifters say that the activity is equally as addicting as drugs, leading to a continuing cycle of theft. [3] Insurance fraud is a systemic financial risk, with 25% of fires caused by arson or suspected arson, making this the greatest cause of property damage in the United States. Even before this financial crisis, which has bankrupted millions, 10% of respondents said it was acceptable to submit a false insurance claims. [4] Medicare fraud exceeds $60 billion per year. Phony automobile and other bodily injury claims cost billions annually, and are difficult to control since it is impossible for a court to tell someone they are not in pain. Despite a massive consumer education campaign designed to thwart it, Identity Theft rose 22% in 2008, to 10 million cases, a record. It takes the average victim 330 hours to repair the damage to their personal reputation. [5] Identity Theft is estimated to cost individuals and businesses $221 billion per year. [6] Each day, 175,000 phony checks are presented as payment. The cost of check fraud is estimated to exceed $50 billion annually. And on and on it goes. The stress tests never envisioned this. The people, whose predictive instincts have been uncannily accurate throughout this crisis, sense that trouble is coming: 80% of them say they expect crime to increase due to the deteriorating economy. [7] As average American citizens lose their jobs by the millions, become mired in financial distress and are crushed by the largest debt increase in the history of civilization to pay for government bailouts and fiscal stimulus programs, several Wall Street firms, in actions so arrogant they beggar and defy belief, have announced that they will pay record bonuses in 2009. These bonuses commonly amount to 20 - 200+ times the median American wage, in other words, 20 - 200+ times the earnings of the citizens whose taxes were spent only a few months ago to keep the Wall Street firms from imploding. Nurses, police officers, school teachers, store clerks, truck drivers, gas station attendants, firemen, flight attendants, ambulance drivers and everyday workers of every other description, many of them struggling to provide only a humble, basic lifestyle for themselves and their families, were asked to reach deep into their pockets to help Wall Street survive. Now that Wall Street has taken their money, it will use it to lavish huge bonuses upon itself, in a callous Roman orgy of excess. The American psychological landscape has been parched by the searing winds of financial desperation, surging inequality and dying hopes. And the tinder of the desiccated American Dream, once the great calling and aspiration of a nation, is now piled so high that a spark igniting it would unleash raging flames reaching up to and scorching an astonished Sun. Yet politicians and the press are so divorced from reality that when the people express at town meetings and other venues their deep, legitimate frustration over the loss of their hopes and nation, they are viewed as whiners, or paid political activists. As noted earlier, denial is very dangerous drug. Civilized society requires a foundation of morality, decency and justice to survive. The spread of moral hazard, should it happen, will have a disastrous effect on America's institutions. Few investment classes will be safe in an environment of elevated moral hazard, because both legal and illegal counterparty risk will surge. Legal counterparty risk occurs when, for instance, a corporate executive at a public company is awarded excessive, unwarranted pay at shareholder expense. (Abercrombie and Fitch recently reported that its CEO was paid $70 million this year, as the company's performance deteriorated and the stock price plunged by 70%. This is an example of legal counterparty risk. It is a disgrace.) Illegal counterparty risk occurs when there is fraud. (Enron and Madoff are just two of many possible examples.) In the emerging social climate, common stocks will face powerful headwinds from a suffering economy made worse by the corrosive costs of theft, fraud, false executive enrichment, phony insurance claims and frivolous lawsuits. Bank deposits, yielding near-zero percent interest rates, are basically no better than cash in mattresses. Corporate bonds carry serious interest payment and default risks. State, county and municipal bonds will become increasingly stressed as deficits grow and proposed tax increases stoke voter anger, making it difficult to close funding gaps. The real estate sector faces a spike in taxation risk, due to deteriorating local and county government finances. It is also subject to interest rate risk, as surging government debt becomes difficult to sell, resulting in higher coupons. The reputations of hedge and private equity funds have been compromised by large losses, the imposition of redemption restrictions, and high fee structures. Algorithmic, black box trading has been largely discredited. Annuities carry heavy fees and important counterparty exposure, as seen by the industry's bailout by government. Commodities prices are volatile, and price manipulations by large traders are legion. CFTC oversight is lax to non-existent, so small investors are without protection. While there are many good commodities funds, they carry counterparty risk. Derivatives markets are opaque and out of control, in addition to being nuclear waste sites of counterparty risk, and are certainly no place for individual investors. Art, diamonds, numismatics, collectibles and other highly specialized asset classes have large transaction costs and are best suited to experts. As we can see, investment safety is hard to find even in normal times, which these are not. In the recent crisis, virtually every investment "truism" has been discredited as a myth. Buy and hold; Stocks for the long term; Efficient market theory; Housing prices only go up; Buy land, they're not making any more of it; Municipal bonds offer safe, tax advantaged returns; Treasurys are guaranteed by the full faith and credit of the United States; the dollar will remain strong because it is the world's reserve currency; A diversified portfolio offers protection; Demand for serious art works is unquenchable; and on and on. The current markets have laid waste to every one of those theories, and many others. Gold is the antithesis of the investment classes described above. Physical gold represents pure wealth of a very finite quantity with absolutely zero counterparty risk. Because of this distinguishing fact, it is immune to the costly effects of moral hazard. Gold does not have expensive skyscrapers named to stroke its ego, nor does it have offices or branches dotting the land. Gold has no CEO who demands a multi-million dollar compensation package just for showing up. It has no employees desiring pay raises, health insurance or vacations. Gold does not take three hour lunches, play golf, drink martinis, do drugs, get sick, or demand a lavish expense account. Gold is not dependent upon protection from regulators who discover frauds only after every innocent investor has been wiped out. Gold is not represented by a Congress that spends it into bankruptcy. Gold is unaffected by the Devil's songs of greed and graft sung by lobbyists and other self-serving parasites. Gold does not charge an endless procession of monthly or annual fees. Gold cannot be manufactured out of thin air by politicians or Central Bank monetary witch doctors. As money, gold has not one legitimate competitor, though it is surrounded by fiat fakes. In time, those frauds always die of their chronic, congenital disease: immorality. Gold is the free and honest money of the people, not the controlled, monopoly money of bankers intent upon destroying it for private gain by debasement and inflation. Having been born at the beginning of civilization, it possesses the wisdom of time. It is liberty. When border crossings have been closed by soldiers with machine guns and paper money has been a useless persuader, gold has opened the gates for refugees fleeing tyranny and oppression, providing them safe passage. With beauty commensurate to what it represents, gold makes tangible the wondrous, invisible force of freedom. In Latin, the word for gold is aurum, meaning "shining dawn." Gold is more than honest money; more, even, than liberty. It represents the endlessly renewing fountain of the future, and the shining dawn of life. As the existing system destroys itself, the question becomes, "how will wealth and financial freedom be defined in the future?" Today, we say that dollar millionaires and billionaires are wealthy. They used to say that about those who possessed millions or billions of Zimbabwean dollars. But that fiat currency is now dead and its possessors are penniless. History is absolutely categorical: fiat currencies are immoral, and because of that, they fail, without exception. Repeat: without exception, as documented throughout all of time. The new wealth will be measured in something different, most likely gold. There are only 5 billion ounces of it on earth, or roughly 0.75 ounces per capita. The supply grows at less than 2% per year, a fraction of world fiat money growth. Much of it is not and will not be for sale; the amount available to the market is less than 0.25 ounces per person. As gold takes its rightful place of honor as the people's reserve currency, demand for its limited supply will continue to grow. Tomorrow's billionaires will be those who prepare today for the coming, inevitable monetary paradigm shift. Those who acquire gold now, while it is still available and inexpensive, will create for themselves a future that is secure, free and rich with opportunity.
To those who study the numbers, it is now obvious that America's fiscal situation is hopeless. Given the country's current debt and unfunded liabilities of $75,000,000,000,000, an amount growing by at least $5,000,000,000,000 per year, it will be statistically impossible for the United States to pay its obligations unless it repudiates them in large measure, or the dollar is sacrificed on the altar of searing, society-altering inflation.
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Peak Oil - Supply Data Doesn't Lie
ENERGY - After the epic crash last year, the price of oil is stabilising and it should rise exponentially over the following years. Over the past year, global consumption has stayed weak, however once the economy recovers, crude oil should resume its secular bull-market. Despite the 'demand destruction' hype, it is interesting to note that during this severe global recession, worldwide oil usage has dropped by a minuscule 2.7%. So, what will happen when the world comes out of this recession? Who will rise up to the challenge and meet our insatiable thirst for energy? These are critical questions not many are willing to ask. According to the US Department of Energy, liquid fuel demand in the developed nations peaked in August 2005 at 41.89 million barrels per day. Since then, it has plunged by 3.6 million barrels per day to 38.27 million barrels per day. However, you may want to note that despite these tough economic conditions, consumption has been extremely resilient in the emerging world. For instance, demand in the developing countries peaked in October 2008 at 46.33 million barrels per day and it is down by only 0.36 million barrels per day! I don't know about you but I am amazed that the worst global recession in decades has barely managed to shrink energy demand in the developing world. Whilst this is wonderful news for the energy investor, it is a terrible sign for society. At present, our world is using up roughly 84 million barrels of liquid fuels per day and for the moment at least, there is sufficient supply to meet demand (Figure 1). However, when economic activity picks up, it won't take much for demand to zip right past supply. Remember, it is much easier to increase usage, but it takes a long time to ramp up production. So, unless this is a permanent global recession (which I doubt), it is inevitable that the price of oil will go up significantly over the medium to long-term. Figure 1: Supply and demand - balanced for now Source: www.yardeni.com On the supply side of the equation, let me be clear. If I was asked to pick the biggest threat to a sustainable economic recovery, 'Peak Oil' would top that list. Remember, 'Peak Oil' doesn't mean that we are running out of oil reserves, crude will be around for decades. However, 'Peak Oil' does imply that we are dangerously close to peak global oil production. 'Peak Oil' also means that rather than experiencing a burst in oil supplies as many expect, from here onwards, we will witness sharp declines in global flow rates. In a nutshell, the era of cheap energy is over and the price of crude oil will rocket higher over the coming decade. Now, many skeptics will argue that if 'Peak Oil' was real, the price of oil wouldn't have dropped to roughly US$30 per barrel in last autumn's stunning crash. Valid point; but let us not forget that the spectacular plunge occurred at a time when global economic activity virtually came to a standstill. Let us also keep in mind that last autumn's crash in asset prices was caused by a total freeze in credit and the associated asset liquidation. Whilst I agree that the final action in crude oil's parabolic blow-off last July smacked of speculation, I can assure you that speculation alone couldn't have created a multi-year boom whereby the price of crude oil went up by almost 1500%! As you can see from Figure 1 above, supply clearly fell short of demand between 2005 and 2008 and this is why we had a magnificent bull-market in crude oil. Make no mistake, global demand for liquid fuels will rise again and if my homework is correct, supply won't be able to keep up. If you ignore the noise and review hard data, you will observe that the vast majority of the world's most prolific oil provinces are now past peak production and in a state of permanent depletion. According to the BP Statistical Review of World Energy, out of the 54 oil producing nations and regions in the world, only 14 are still increasing production. Alarmingly, 30 oil producing nations and regions are definitely past their peak output and the remaining 10 appear to have modestly declining production rates. Put another way, when weighted by production, 'Peak Oil' is already a grim reality in 61% of the oil producing world! Still not convinced about 'Peak Oil'? Then review Figure 2 which charts the expected combined flow rates for crude oil, lease condensates and Canadian Oil Sands. As you can see from the grey shaded area, production is about to decline by roughly 5 million barrels per day by 2012. Figure 2: Has crude oil production peaked? Source: The Oil Drum Ironically, Figure 2 also plots the optimistic (almost laughable) forecast made by the International Energy Agency (IEA) in its "World Energy Outlook 2008". Interestingly, in last year's "World Energy Outlook", the IEA stated that in order to fulfil its optimistic projections, the world had to install 64 million barrels per day of new supply by 2030 or the equivalent of six times the Saudi Arabian output! Furthermore, the IEA declared that the energy industry had to invest hundreds of billions of dollars every year to achieve this favourable outcome. Now, I can understand that the IEA is a government funded agency so it has to paint a rosy picture, but it is ominous that the energy watchdog failed to mention where this surplus oil would come from! Well, I guess you get the idea. Global crude oil production has probably peaked, new discoveries have dried up and there is a shortage of capital for investment purposes. Apart from these factors, if you believe the energy optimists, all is well in the energy industry and the price of oil is about to drop to zero! After years of extensive research, I have no doubt in my mind that unless global demand stays weak forever, we will see supply shortages in the not too distant future. And before that occurs, the price of crude oil will stage an explosive rally. Accordingly, I suggest that all my readers allocate a large proportion of their investment portfolio to upstream energy companies and to businesses in the energy services sector. Finally, in the energy complex, the price of natural gas is still scraping along its recent crash low and this is a fantastic long-term investment opportunity. As we approach winter in the Northern Hemisphere and heating demand picks up, we are likely to see a big rally in the price of natural gas. So, investors may want to allocate capital to this unbelievably inexpensive commodity.
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Monday 17 August 2009
Sunday 16 August 2009
Long-Term Buy Signal
Carl Swenlin says ..... In fact, my recommendation regarding this signal is to use it as an information flag rather than an action flag. For example, we use the long-term signals to determine whether or not the market is in a bull phase or a bear phase. As of Tuesday we consider that we are in a bull market, and this is the long-term context within which we will interpret medium-term price action and technical indicators. Bull market rules apply. The market will tend to stay overbought, and, while overbought conditions require increased caution, they are not necessarily selling opportunities in a bull market. Prices are still pressing the top of an ascending wedge formation. A pullback is possible, but I think, if it happens, it will be quick. Now look at the price range inside the purple rectangle, which encompasses the current 52-week period for measuring new highs. It ranges from 1300 to 680, almost three times the range of the 2002-2003 bottom. The point being that the current 52-week price range is simply too wide by historical standards for an expansion of new highs to take place. Now look at the price range encompassed by the orange rectangle, which is where the range will be in a few months. The top of the 52-week range will be dropping like a rock, making the expansion of new highs virtually guaranteed, providing a serious price decline does not occur. Conclusion: The failure of new highs to expand in spite of a spectacular price move up, has everything to do with an unusually wide 52-week price range, and nothing to do with the internal quality of the rally. The current Rel-to-52 reading is 56, which means that on average S&P 500 stocks have traversed a little more than half their 52-week price ranges since the March lows. As the top of the range compresses over the next few months, this index should move to the top of its range. More important to note is how this measure of internals demonstrates how robust the rally has been. Bottom Line: A new long-term buy signal was generated this week, which means that we are technically in a bull market, and that bull market rules apply. The failure of new highs to confirm the rally is a mechanical issue, not a demonstration of internal weakness.
On Tuesday of this week our long-term model for the S&P 500 switched from a sell to a buy signal. While it is a simple model -- the signals are generated by the 50-EMA crossing over the 200-EMA -- it can also be very effective, capturing a gain of 28.7% over a period of 580 calendar days. During that period the S&P 500 lost -28.5%. Past performance is no guarantee of future results. In fact, like any trend following model it is subject to whipsaw, and will be unprofitable in some cases. It probably will not be fast enough to sidestep to sidestep a surprise crash, such as we had in 1987. 
While price action and indicators continue to confirm our bull market assumptions, one indicator that is not confirming is 52-Week New Highs -- they are hardly expanding at all. I was concerned about this until I looked a little deeper into the matter. On the chart below I have drawn a brown rectangle to encompass the 52-week period in 2002-2003 preceeding and including the expansion of new highs that accompanied the initial breakout of the bull market. Note that the vertical price range inside the rectangle is about 250 points.
Another tool we use to analyze the new high/new low indicator is the Relative to 52-Week High/Low indicator (s-to-52). Decision Point tracks each stock in a given market index and determines the location of its current price in relation to the 52-week high and 52-week low. We express this relationship using a scale of zero (at the 52-week low) to 100 (at the 52-week high). A stock in the middle of its 52-week range would get a "Rel-to-52" value of 50. The Rel-to-52 charts show the average Rel-to-52 for all the stocks in the market index shown.
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The Commodity World is Growing in Strength
Mary Anne & Pamela Aden say ..... They're moving up on signs that the global recession is easing. This is boosting demand, especially in China and Asia, which is pushing prices up. TANGIBLES ARE "IN" Tangibles are growing in strength. From the metals, natural resources, energy and food, these markets are rebounding strongly and they're poised to continue rising in the years ahead. Demand is the driving force, making commodities a powerful market. The Chinese are astute investors. They're buying up lots of hard assets and commodities for infrastructure, and they're using their dollar reserves to buy these goods. The world is on sale and China is the main buyer. The Chinese have already been focusing on resource rich developing countries, and less on monetary investments. They're using their reserves to support and speed up overseas expansion and acquisitions by Chinese companies. This is a growing tendency, and it's not just China. Other countries are doing the same to lock in natural resources for the future. China's economy is showing impressive strength, boosting raw materials' consumption even more. Top Chinese officials have been commenting about this in recent weeks. A research chief, for example, said China should buy gold and U.S. real estate instead of Treasuries. Another top economic official said China should use more of its $2 trillion reserves to buy energy and natural resources. He also believes their 2% gold reserve is too small, even though China has already increased their gold reserves about 75% over the last five years. COPPER: Almost one year high With this kind of demand, it's not surprising to see the base metals rising from major low areas with some like zinc, lead and nickel reaching 10 month highs. Plus, copper jumped up further this month, turning clearly bullish along the way (see Chart 1). The same is true of oil. ASSET CLASSES STILL MOVING TOGETHER The more it looks like the financial crisis and global recession is over, the more this pushes up commodities, stocks and currencies. They are all rising for the same reason, which is understandable, but keep in mind that this is not normal. Commodities and the stock market don't usually move together and at some point they will go their separate ways. When this will happen and what will trigger it remains to be seen but it's something we have to keep a close eye on. Most important is to understand why each market is rising in the first place. For commodities, its demand together with a weak dollar which is very bullish. For stocks, it's optimism for a better economy, but inflation would eventually kill the rise. For currencies, it's the weak dollar, and also the commodity rise for the commodity currencies. For bonds, it's the financial health of the global economy and inflation. The world is slowly moving towards tangibles and away from financials. The ongoing commodity bull market is eight years old and considering that commodity bull markets over the past 100 years have lasted on average 17 years, the current bull-run could go on for another decade. And the long-term leading indicators for oil, copper and the base metals are all reinforcing this. GOLD: THE SPECIAL ONE As for gold, its main purpose is money. Gold is the ultimate currency, it's a safe haven and it thrives during economic uncertainty. Gold and commodities tend to move together in a general wave but it will outperform or under-perform the other metals and commodities at times. China is on the mend and its plans to add more gold to its reserves is very bullish for gold. China could easily overtake India in gold consumption this year, especially since it's the first nation to rebound from the global recession. China's GDP recently rose to 7.9% as the massive stimulus plan and record bank lending began to take effect. Gold's big picture is bullish as you can see on Chart 2. The mega trend is up and the bull market rise since 2001 is turning 8½ years old this month. This is important because the eight year mark has been a key low point for gold going back to the 1960s when gold began trading in the free market. THE TIME FOR TRUTH Chart 2 shows that this pattern has repeated four times since 1969 and the fifth low is now on the longer side of the normal time span. This low period can vary from 7 to 8½ years, following the previous low, which means that, if gold stays above last November's low, then that $705 low was the low for this time around. This would make it a 7 year 10 month low following the previous February 2001 low… just three months shy of the 8 year mark. We'd say that's pretty close. So if the 8 year pattern repeats, and we believe it will, then current prices are still at good levels for buying new positions. We should have all of our positions bought this month because come the Fall, we could really see gold take off. TIMING GOLD Chart 3 shows a closer look at gold's intermediate moves and as you can see, gold has been forming a springboard for upcoming higher prices. As our subscribers know, gold moves in an A-D pattern on an intermediate basis. D declines tend to be the worst decline and gold reached the last D low in November. It then rose from those lows in a moderate rise we call "A" which peaked last February. This is when the springboard began as gold declined from that high to form a moderate "B" low last April at $868. Since then, a C rise has begun. It's been quietly forming a coil and gold looks ready to take off. Gold's been rising this past month and it's strong above $935. It reached a nine week high and it would be very strong above $985. A super strong C rise would be underway above $1004, the record high. Keep in mind, C rises tend to be the best rise in the pattern. By hitting a new record high, gold would confirm that the bull market is entering an even stronger phase and it could then rise to near $1200. It would also confirm that the 8 year low indeed happened last November. Since November, gold's been posting higher lows which is also positive action. For now, if gold stays clearly above the July 8 low at $909, it'll be reinforcing its strong uptrend since November and all systems will continue to be go!
The commodity market is bubbling. Whether it be sugar reaching a three year high, copper and other base metals reaching almost one year highs, or oil and gold rising further. The markets are looking good. 
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Useless, Pointless Gold
SPARE A THOUGHT for the lonely gold analyst. Yes, we get chance to huddle together every so often - Toronto in September or Hong Kong in October, plus a quick 48-hour jolly for members of the London Bullion Market Association in November (downgraded from Lima, Peru this year to Edinburgh, Scotland thanks to credit-crunched expense accounts at the investment banks). And yes, gold analysts now enjoy a little more air-time on the media - and a little more respect from their equity-desk buddies - than they did 265% and ten years ago. But the word "nut" is still sniggered whenever gold gets a mention. That's despite beating every other asset-class hands down since the start of this decade. "If you go back 25 years, gold was totally pointless until eight to 10 years ago," spits one London equity-fund chairman, quoted by the Financial Times alongside BullionVault's own recent analysis of typical seasonal price patterns in gold. "It isn't the long-term store of value that people think it is," he went on. "It has no industrial use, and provides no income." Full Disclosure: This chap's firm lost his Global Opportunities investors more than 32% of their money in the last 12 months. It came 179th out of 183 such funds in its sector. The UK Portfolio (15th out of fifteen year-to-July) hasn't even kept pace with inflation since launching in summer 2001. The Gold Price in Pounds Sterling, in contrast, has tripled. But when it comes to useless, pointless and failed stores of value, who's counting? And as the funds' fact sheets remind us - after stating an aim of "long term capital growth" - "Past performance should not be seen as an indication of future performance." So there's hope for his clients yet. Fund management itself, meantime, is a tough, competitive trade where hard work (successful or otherwise) is amply rewarded. Whereas gold analysts start on a hiding to nothing. Because there's nothing to analyze. There it sits, unchanging at No.79 in the periodic table, untarnished and indestructible. It never promises anything more than to remain unchanged - untarnished and indestructible - tomorrow. And that really is about it. Which is why any useful gold analysis will most likely spend its time talking about everything and anything else, otherwise known as the Zen approach to judging investment. Not that quality varies, however; fine gold is fine gold (look for 99.5% or better, the Good Delivery standard of the deep, liquid professional market, in which the internationally-averaged Spot Price is acknowledged everywhere, albeit with an occasional premium the further East you move from London). And not that the stuff ever does need replacing, of course. Because as we just said, it's indestructible. "Gold is chemically inert," wrote the late Peter Bernstein in the New York Times Magazine in May 1960, "and thus it will not combine directly with oxygen. This means it retains its luster and does not tarnish; the magnificent gold jewelry of the ancients may be seen in the museums today shining as brilliantly as though it had been purchased at Cartier's only yesterday." The result? Best estimates say less than 2% of all the gold ever mined in history has been "lost" - the vast bulk of that buried by ancient types fleeing the Goths, Vikings or marauding English. The outstanding, above-ground supply could meet the next 7,000 days of gold-market demand according to a hedge-fund analysis earlier this decade. Platinum holds the next largest supply at around 15 months, while coffee supplies average 216 days. Natural gas inventories provide for just 37.5 days of required supply worldwide. On consensus logic, therefore, the more "useful" a commodity is, the fewer days' supply humanity would seem to keep at hand. But that's to miss the unique utility of Gold Bullion - the security, liquidity and diversification which owning it brings. The fund's chaired by that chap dismissing gold in the Financial Times have also shed one-third of their value over the last 24 months. But if you should find yourself considering Gold Investment anytime soon, please do remember that it's useless and pointless.
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The Gold/Silver Ratio
Tom Jeffries: David Morgan is one of the world's foremost experts on silver. I would like you to check in with David's excellent Web site, silver-investor.com. That's where you can check out David's monthly investment newsletter, The Morgan Report (full disclosure: I read it every month myself). And there is a ton of excellent resources for the investor of all stripes. You talk many times in your lectures, and you've talked in The Morgan Report recently, about something called the gold/silver ratio and where it's going. Can you talk a little bit about that? David Morgan: It is a controversial subject. There are a lot of people who don't put any credence into it at all, there are some people who put a whole lot of credence into it, and then there are people, like me, who absolutely put some credence into the ratio. The basics of it are this-and I like to go for the long-term version, so-starting at the 12th century or so and going to present time, if you looked at every one foot in length being 100 years (or one century), you would see throughout the entire timeframe that you would have several feet in length and it would only be in the last 19 inches of that chart where the ratio got above 16 to 1. (Note: a discussion of this is done by Franklin Sanders in his book Silver Bonanza.) In fact, the ratio from the 12th century to roughly the 17th century was about 12 to 1, which is what I call the "natural ratio" at that time, and I define the natural ratio as the amount of silver to gold in the earth's surface. Right now it's less than 12 to 1, having dropped down to about 8 to 1, which means that there's about eight ounces of silver in the earth's surface for every ounce of gold. So that's the natural ratio, and that ratio held for hundreds and hundreds of years with the free market making the determination-amazing! Then, Sir Isaac Newton monetized it at a ratio of 15.5 to 1 after England was having a terrible time with their fiat money system. Newton came in and put them on a gold standard and then, with his brilliance, he picked a number basically based on the marketplace (at that time), which determined that the correct ratio of silver to gold was 15½ ounces of silver to 1 ounce of gold. And that's what we called the monetary of the classic ratio, and that held roughly from the 17th century for hundreds of years through about the 1873 timeframe. Then there was The Crime of 1873, which we don't have time to go into, but that was roughly where silver was demonetized in the United States, and after that, you've seen the ratio undergo some really wide swings. It's gone up as far as 100 to 1 a couple of times, and we've seen it just kiss the classic ratio of 16 to 1 for a day. In modern times, meaning during the last big run-up in January of 1980, it got back to classic ratio, but again, it was only for a day or two at the most. And then the ratio dropped off. So having given you all that background, what does it mean? For some it means you can trade the ratio, which is something that I do personally. Secondly it's a good indicator for the overall direction of the market as far as I'm concerned. When silver's leading gold, we've got more momentum in the metals than when it's not, and silver has basically outperformed gold since 2003 until recently. In other words, in the ratio from 2003, the bottom of the silver market, and when gold was at $252 in 2000, silver went from the 80 to 1 ratio down to about 55. Currently it is around the 65 to 1 level. And it was working its way even lower when we had this credit crisis surface, which didn't surprise me. We got a big spike on the ratio and actually it got to around 90 to 1-again, very temporarily, maybe for a day or two. I think it shows that silver is still undervalued to gold, but I'm open-minded enough to think that maybe something else is going on. In an absolute all-out deflation, which would be the better-gold or silver? The preponderance of evidence is that gold does better. I wrote a paper on this; it was in The Morgan Report, and I also did a couple of speeches on this subject. The record is mixed as far as how silver does in a deflation. Gold is pretty much known to do well in deflations, and this is all history. And because it is history, it doesn't absolutely guarantee you that the next time around gold will do great in a deflation, but it certainly implies that it will. As far as silver is concerned, there have been times that silver did better than gold in a deflation, and many times where it did not. But overall it's done fairly well and it held its purchasing power, so even in a deflationary scenario I wouldn't give up on silver. But as far as what will it do, if we look at it today we would say gold has actually done better than silver here in the last several months, because the ratio has gone from the 55 to 1 back to around the current 65 level. Regardless, the overall perspective would be, how is silver doing against all other financial assets, including gold? And the answer to that is, essentially, gold has done best against all other financial assets, the general equities, the mining stocks, housing sector, bonds; and silver has done better than the base metals and most other sectors. Silver is partly industrial and partly monetary and you can argue all day if it's both or not. I'm absolutely convinced that it's both. I've never argued that silver is just money. I have argued very strongly that silver is money but it's not only money; it's certainly an industrial metal as well. In summary, if [our readers] think-as I do-that the main problem ahead is a currency crisis with the U.S. dollar, then I would urge you to study what silver did during the last period (most recent) during a prelude to a currency crisis. Basically, it outshone almost everything! The problem is people are too shortsighted and look out only so far, not realizing that once everyone understands that the death of the dollar is imminent, there will be a mad rush for the precious metals both gold and silver! Mr. Jeffries: David, always a pleasure to have some time with you. We really get a kick out of talking with you, but also I also commend you, too, for the learning. We always have some great information. With due apologies and full credits to the author
The following is an interview I did recently discussing the gold/silver ratio. This topic seems to surface from time to time and Tom Jeffries and I explored it together.
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