“Dress rehearsal for the last contango” The coming crisis in gold

By Antal E. Fekete, The Gold Standard Institute.

I have written about “the last contango in Washington” before. The phrase covers the gold crisis that has been brewing under the surface in the world for 60 years due to the insane gold policies of the U.S. Treasury. As a result all newly mined gold, surpassing the quantity of all gold ever mined prior to 1947, has gone into private hoards, from which it will be next to impossible to coax out. The measure of this act of disappearance of gold is the vanishing of the basis, or the last contango.

In the technical jargon of the futures markets, the basis is the spread between the nearest futures price and the cash price in the same location. The gold market has always been a carrying-charge market — a contango market — due to the monetary metal status of gold. This means that the gold spread has always reflected the carrying charge, the opportunity cost, of carrying gold, most of which is foregone interest.

But a strange phenomenon has been manifesting itself for 35 years, since the inception of gold futures trading. Rather than remaining constant, the basis as a percentage of the rate of interest has been vanishing and now has dropped to zero. At the same time gold holdings registered at the Comex-approved warehouses have been dwindling. Both indicators point toward a shortage of monetary gold that appears irreversible.

The support of the paper gold markets is at stake. Without cash gold backing it up, paper gold trading is not viable.

When the gold basis goes negative, that’s the end not only to contango but also to gold futures trading as we know it. Permanent backwardation in gold has never ever been experienced — unless we imagine that there is a gold futures market in Harare. Gold is not available at any price quoted in Zimbabwe dollars. In that sense the last contango has first occurred in Zimbabwe.

Whatever paper trading of gold is still going on in the United States, it is at best a dress rehearsal for the Last Contango in Washington, which will be followed by the regime of permanent backwardation.

The meaning of this is that physical gold cannot be purchased at any price quoted — this time, yes, in U.S. dollars.

The U.S. dollar rubbing shoulders with the Zimbabwe dollar?

Mainstream economists and financial journalists shrug: “So what? We are not watching the basis of frozen pork bellies trading either when we make monetary policy.” These gentlemen betray a lack of comprehension of the nature of the present financial and credit crisis. Whatever else it may be, this crisis, first and foremost, is a gold crisis with an incubation period measured in scores of years. It is about to reach its climax.

The world appears to be totally unprepared for it — witness the silence surrounding the gold nexus.

Even the so-called sound-money Internet sites misread the situation. They are talking about an imminent breakout of the dollar price of gold from its holding pattern below $1,000 per ounce. Such breakouts have occurred from time to time since 2001, when gold broke through the “resistance levels” of $300, $400, etc. The coming breakout is not distinguished by the fact that $1,000 is an even rounder figure than the previous round figures that have been surpassed. It is distinguished by the fact that we are confronting a world event the like of which has never happened.

It has never happened that gold was unobtainable at any price. It has never happened that all governments have defaulted on their debt obligations simultaneously.

Still, we have to explain the relevance of this to the credit crisis. It is no secret that the bonds, notes, bills, and other obligations of the U.S. government, or any other government, for that matter, are irredeemable. That is, they are redeemable in nothing but more of the same. For example, the bonds of the U.S. Treasury are redeemable in Federal Reserve credit, which is itself irredeemable and is “backed by” the self-same bonds of the U.S. Treasury. Why is it, then, that these Treasury obligations are in demand where one might think that redeemability is a sine-qua-non of issuing them? What makes people participate in this shell game? How can such a crude check-kiting scheme mesmerize the entire population?

Come to think of it, the sight of this Ponzi scheme would shudder the Founding Fathers of our great Republic.

This is not an easy question to answer. But going through all the alternative explanations one by one, we come to the conclusion that the debt of the U.S. government is still redeemable in a sense, however limited or restrictive it may be. The debt of the U.S. government has a liquid market in which it can be exchanged for Federal Reserve credit. In turn, Federal Reserve credit can still be exchanged in liquid markets for physical gold, the ultimate extinguisher of debt, albeit at a variable price.

But if you break that final link, when gold is no longer for sale at any price quoted in U.S. dollars, then the rug will have been pulled from underneath this house of cards, and the international monetary system will collapse like the twin towers of the World Trade Center. And this is the situation that we are confronted with.

Look at it this way. There is a casino where the lucky gamblers can gamble risk-free. Their bets are “on the house.” This casino is the U.S. bond market. There is only one catch. The pile of the winning chips in front of each gambler may become irredeemable at the exit when the hairy godfather waves his magic wand.

As the gold markets enter their phase of permanent backwardation, all rational basis for holding U.S. Treasury debt — or any debt, for that matter — will disappear. There will be a mad rush to the exits, and holders of debt will trample one another to death in trying to cash in on their winnings.

In July I attended the Santa Colomba Conference 2009 at the Palazzo Mundell near Siena, Italy. There were 50 people in attendance by invitation of Robert Mundell of Columbia University, recipient of the Nobel Memorial Prize in economics 10 years ago. They were mostly officials of various treasuries and central banks, ambassadors, bankers, professors of monetary economics, authors of monographs, and editors of financial journals. Paul Volcker, a former U.S. Treasury official and chairman of the Federal Reserve Board, was present.

Prior to the conference I circulated several papers among the participants. I was trying to show that the cataclysmic nature of the present credit crisis could not be understood without trying to understand gold, the ultimate extinguisher of debt. We are all passengers on a runaway train on a down-sloping track, the brakes of which (gold) have been dismantled at the top of the hill. The train is picking up speed beyond any safe limit, and a crash appears inevitable.

Our gracious host and the chairman, Professor Mundell, made two references to gold during the two days of the conference, asserting that, apart from wartime, the gold standard has been the most crisis-free monetary system in history. (Of course, all monetary system have a habit of breaking down during wars.) Yet not one participant picked up the ball dropped by Mundell. They kept talking about “green shoots,” the recovery of the stock markets, and coming bailouts and stimulation packages. As to my papers stating that this crisis is a gold crisis, I got just one bit of feedback, in private. Apparently the rest of the participants have been turned off by the four-letter word “gold.” It was not worth their while to read the ramblings of this loner on the problem of “putting spent toothpaste back into the tube.”

One of my papers was an open letter addressed to Volcker. In it I asked whether there were contingency plans in the Treasury or Federal Reserve to meet the coming crisis of permanent gold backwardation.

Volcker declined to answer my question, in public or in private. I am inclined to think that there are no such contingency plans other than “muddling through,” as they have in all previous monetary crises. None of the policy-makers sees the uniqueness of the coming and predictable crisis, or the need to confront it with a comprehensive plan. There is an overwhelming unwillingness to admit that the international monetary system as now constituted has been built on quicksand. It is a mere makeshift that took its origin in the last gold crisis of 1971. Cracks have been papered over as they appeared after every subsequent crisis. Every opportunity to sit down and work out a permanent solution was passed up. This seems to have worked well enough in the past. Policy makers see no reason why it would not work in the future.

Yet the Last Contango in Washington will be different from all previous crises. It will be elemental, devastating, and apocalyptic. It will destroy virtually all paper wealth and render virtually all physical capital idle. It will involve hordes of unemployed people roaming the streets, caring for no law and order, pillaging homes and institutions. It will destroy our freedoms. It may destroy our civilization unless we take protective action.

On the positive side, it will sweep away the complacency of the managers of the regime of irredeemable currency and fundamentally weaken the sway of Keynesian and Friedmanite economics as it has a stranglehold on the teaching of economic science.

The Last Contango in Washington will eclipse the Great Depression of the 1930s. Be prepared.

Bob Chapman: The Formula For Hyperstagflation

How come you don’t hear much about the Airbus Defense Contract scam?

Source: The International Forecaster.

Inflation predicted over the next year, expect rate hikes over the next 12 – 18 months, failures pile up, failed measures to save the economy to have a cumulative effect, orgy of Wall Street fraud causes credit crunch, a worldwide disaster in the making, commodities rigging has a golden lining

The acceleration of inflation is baked into the economic cake for, at minimum, the next 12 to 18 months worldwide. Fed jawboning won’t change that. Phony PPT dollar rallies won’t change that. Fed rate hikes won’t change that. The reduction of money and credit won’t change that. Falling oil prices won’t change that. Lies about economic statistics, and especially about inflation data, won’t change that. So, why can’t the rate of inflation be changed for the next 12 to 18 months, you might ask? The reason is because inflation is not determined by smoke and mirrors, or by gimmicks and false data. It is determined by the rate at which the total supply of money and credit is being expanded or contracted (what economists call M3), which is measured by determining how much money and credit is being fed into, or subtracted from, each nation’s financial system by its central bank over the course of a given month, as compared with the amount determined for the previous month. That figure is then annualized. Basically, the annualized rate of M3 that is determined for any nation becomes that nation’s rate of inflation (expansion) or deflation (contraction), with a delay that usually runs about 6 to 18 months.

Contrary to what the fane-stream media, pusillanimous pundits and Wall Street shills might tell you, inflation is caused by too much money and credit chasing after too few goods, and today’s oil and food crisis is now providing everyone with a textbook example of how profligate expansion of money and credit can ruin an economy in a frighteningly short period of time. The baked-in inflation rate for the US will run from its current 12.625% to as high as 18% over the next 12 to 18 months, even if the Fed totally cuts off all money and credit tomorrow and then throws rate hikes in for good measure! Our current actual (as opposed to official) rate of inflation of 12.625% is running at a lag of about one year from the time M3 had reached the 12.625% level, and that is why we see 12 to 18 more months of 12.625% to 18% inflation. We have extended our projection out to 18 months because we do not see M3 going below 12% any time soon.

If the Fed and the traitors in the White House and Congress want to see stagflation gone wild, just go ahead and let the Fed raise rates and/or contract the supply of money and credit. The baked-in inflation will then continue even as the economy goes into a thermonuclear meltdown! The Dow will lose 500 to 1000 points on each .25% rate hike as de-leveraging accelerates, margins are tightened and liquidity is drained from the system. Bond markets will be destroyed as principal plummets. The situation is now so bad that even a substantially weaker yen cannot bring enough carry trade liquidity into the system to hold up the general stock markets. It now takes 3.5 more yen to buy a dollar or a euro than it did with the Dow was just over 13,000, yet the Dow is now at just over 12,300. Part of the current stock market weakness is due to the lack of support from the PPT, which is trying to minimize the liquidity and profits available to large specs that could be used to rally metals. Hence, the need for protective derivatives.

Further, any dollar strength achieved by any such Fed rate hikes will have little impact on gold and silver because the resulting destruction of the economy will send everyone to gold and silver as the safe-haven of choice. Treasuries and money markets will still be yielding negative rates of return while the banks are getting hammered by the next round of the ongoing real estate debacle. As attention moves from the hundreds of billions of toxic waste held by banks in off-balance sheet SIV’s to the hundreds of billions in toxic waste held by banks in off-balance sheet VIE’s (Variable Interest Entities), any dollar-denominated treasuries and money markets aren’t going to cut it any more as the real estate market drops into an even deeper, darker pit, sending the various real estate derivatives, and bank balance sheets, further down into the depths of the abyss. You will then watch precious metals go up with the dollar instead of running contrary to one another, and food and energy commodities might keep going up as stocks, bonds and other paper assets continue to be shunned by traders despite the stronger dollar. Throw in bank failures, heavy toxic waste write-downs, earnings disappointments, a consumer spending crisis, a credit default swap crisis, a new false-flag attack and/or a new theatre of conflict, and only precious metals will be going up with oil as the dollar gets taken out by the ensuing recession.

Rate hikes, coupled with weaker real estate values, and thus huge declines in both bond principal value and bond collateral value, could set off a bear market in bonds that could take the whole system down even more quickly than the credit-crunch and subprime debacles combined.

Note that when the Fed was on its rate hike campaign that terminated at 5.25%, inflation continued to grow because M3 was wildly expanded during the entire rate hike campaign. That is what separates the current inflationary debacle from all other periods of inflation. During all other periods of high inflation, the cure for an overheated economy was applied by either an increase in interest rates or by a contraction in M3, or by both. The current inflationary cycle is the first period of high inflation where interest rate hikes were totally offset, and overwhelmed by, the expansion of money and credit which totally negated any slowing of the economy that might have been achieved by the rate hikes. The Fed, Wall Street and our bought-off and compromised government officials conspired to keep up the speculation that was used to power the ongoing derivatives fraud by pumping out prodigious amounts of money and credit while lying to us about inflation, which was skyrocketing as a result. That is the precise reason why the Fed’s rate hikes failed to cool the economy and to slow inflation. Instead, the derivatives fraud led to the credit-crunch, which then cooled our economy. Then, in order to attempt to save our economy, rates had to be cut back by the Fed while money and credit were expanded even further, the perfect formula for hyperinflation which you are now witnessing as we write this issue of the IF. In addition, the economy was not saved, and now inflation is getting worse as the direct outcome of the failed measures to save our economy, thus causing further and additional damage to our economy as food and energy costs skyrocket and US consumers are tapped out. That, in turn, is the perfect formula for hyperstagflation.

Note that our economy was destroyed already before the credit-crunch by free trade, globalization, off-shoring, outsourcing and both legal and illegal immigration, and now we have rampant inflation to boot. Precious metals and their related shares, professionally managed Forex accounts and Swiss franc-denominated government bonds are your only options at this point to avoid being beggared and impoverished by the Illuminati.

As mentioned above, an orgy of Wall Street fraud has brought us an economy-killing credit-crunch. That credit-crunch has forced the Fed to initiate a maniacal expansion of money and credit to keep Illuminist insider financial institutions from imploding. Much of the money and credit from that maniacal expansion is not being re-loaned because all confidence in the system has been lost due to rampant, rampaging fraud, much of which was committed by Illuminist insiders against other Illuminist insiders, proving once again that there is no honor among thieves. So where is this huge portion of all that money and credit going if it is not being re-loaned? A very large portion is being used to make substantial, speculative profits from a whole bevy of commodities, especially from crude oil and agricultural products, by virtue of a loophole provided by the depraved group of village idiots who run our country (Congress), a loophole that allows big banks to operate in the commodities markets without position limits, allowing them to run amok in those markets with privileges that are not extended to other, non-elitist players. Our government regulators always provide us with such a level playing field, don’t they? What an absolute disgrace.

Inflation is destroying the world economy as central banks around the globe pump out money and credit until it inundates everything, and the leading creator of inflation and destroyer of the world economy is the Federal Reserve, a private banking concern, a majority of which is owned by two shareholders, namely, JP Morgan Chase and Citigroup, the main fraudsters of Wall Street. Wherever you see financial chicanery, these two malfeasants are usually somewhere in the mix. Ask Enron and Bear Stearns shareholders. And now the Fed’s machinations, in cahoots with elitist banks around the world, have caused a worldwide stock market crash and have sent the world financial system into an inflationary quagmire, perhaps to pave the way for world government. You have already seen us drop from a high last year of about 14,200 on the Dow to today’s roughly 12,300, a 13%+ loss. That would have been triple or quadruple were it not for the PPT. Then there is China, whose stock market has shed 50% from its peak, India, whose markets have shed 27% from their peak, Japan, whose stock markets have been in a state of implosion for two decades and Brazil, which is about to watch its currency implode for the second time in a decade. China uses 5 times more oil per unit of GDP produced than does the US. What do you think oil prices are doing to them? So much for free trade and globalism, and so much for the hypothesis that emerging markets can carry the world financial markets while the US and other western economies in Canada and Europe go under. What you have is a worldwide disaster in the making, with food shortages, starvation, social upheaval and revolution on their way. The would-be lords of the universe have really done it this time. We expect that very few of them will survive when people find out what they have done.

Robert the Bruce stopped the British Black Nobility from imposing their draconian feudal system on Scotland in 1314 at the Battle of Bannockburn. Our Founding Fathers fought and won two wars against the perfidious British Black Nobility to keep them from imposing their mercantilism and European-style, debt-based, private fractional reserve banking system on America with victories in the Revolutionary War and the War of 1812. Now we can add Ireland, whose citizens have stopped the European Union and its free trade, globalist agenda, both supported by the British Black Nobility and the other Black Nobility of Europe, dead in their tracks with a vote against the Lisbon Treaty, which was the EU’s attempt to short circuit the common folk of Europe to establish their regional dictatorship and regional currency in preparation for a diabolical one-world government and one-world currency. Let’s hope that the citizens of the US do the same with the clandestine North American Union and the Amero. This adds to the EU’s woes as a one-interest-rate-fits-all policy continues to alienate the weaker EU members from the EU’s economic powerhouse, Germany, the vast majority of whose citizens want their old Deutsche Marks back. While that group of weaker members may include Ireland, and while Ireland has shown considerable weakness from an economic point of view lately, that weakness does not appear to extend to their political wisdom. Let’s hear it for the Irish! ERIN GO BRAGH!!!

Retail sales rose 1.0% for the month of May. Big whoop! That figure is not adjusted for the actual rate of inflation, which also just happens to be approximately 1.0% per month here in the US. That means retail sales were actually flat, with all growth attributed to price increases and not a smidgeon to an increase in the amount of goods which consumers purchased. Thus, our 160 billion-stimulus package netted a big fat goose egg.

It is clear that oil and food are being driven up while gold and silver are being suppressed, so that when it comes time for the next precious metals rally, everything else will be hit and the dollar will be talked up. Apparently the cartel has not yet figured out that all the money from the sell-off of oil and other commodities will have to find a home somewhere, and precious metals are a very likely resting place. No one believes anything emanating from Bernanke, the Fed or our Treasury anymore. They have been dead wrong about every prediction they have made, and have lied pathologically. We will likely see rate cuts before we ever see rate hikes. The next debacle is on its way, and as soon as Ben the Bear Killer gets wind of it, he’ll drop rates faster than JP Morgan Chase took over Bear Stearns with a big, juicy taxpayer gift courtesy of the Fed. Meanwhile, we must endure the poppycock drivel that the Fed and our Treasury support a strong dollar, with M3 still over 16% and ongoing, unbridled speculation by banks in the commodities markets with easy cash and credit from the Fed, received in exchange for toxic waste collateral. Again, perfect.

Not only does the nominal price of gold and silver tell you how desperate we are financially, but the degree of manipulation should also be considered. If gold and silver are used as hedges, especially gold, then why do they go down when everything else is going up? Oil was only at 112 when gold was over 1000. Now we have 870 gold with oil at 135 and many food commodities doubling, tripling and quadrupling. Does that make any sense to anyone? If it does, then they are either a cartel insider, or they are just plain dumb. Three cheers for ETF’s and mint certificates, backed by the gold and silver of the proletariat which is now being used by the elitists to suppress precious metals by selling and leasing the very gold and silver which the duped proletariat think they own, while resource shares are ignored or naked-shorted. This transpires as bullion banks are paid to take out short-term silver leases and as specs continue to gamble in rigged casinos owned by the elitists while refusing to purchase and take possession of their gold and silver for cash. Welcome to corporatist, fascist America, where the sheople continue to confirm P. T. Barnum’s famous quote. Detach yourself from the Matrix, or get reamed.

If you think employment is bad now, wait until thousands of municipalities go bankrupt. They are the only ones making any significant contributions of good-paying jobs at this point. Their tax receipts are dropping into the tank as their bond insurers go belly up, as their ratings drop off a cliff, as their lending rates double, triple or more, and as the auction rate municipal bond market goes the way of the dodo bird, while the 330 billion owned by auction rate municipal bondholders goes up in flames since there exists no market where they can be sold, and bank’s do not intend to revive the old one. The state and local governments are about to join consumers in the big “Sorry-We’re-All-Tapped-Out” final binge party as they make appointments to have consultations with their bankruptcy attorneys. This transpires as they are forced to take over houses that have been abandoned by people who should never have owned them in the first place and as they make accommodations for the tent cities that are growing in size and number by the hour. Wonder what corporate earnings will look like when the municipal tits are shut off.

Previously our Defense Department gave a $35 billion air fleet tanker contract to EADS, which manufactures the Airbus, rather than to Boeing – a contract that should have never been written in the first place. The US doesn’t need the tankers. In that process 44,000 well paying US jobs were lost to Europeans. As it turns out the bid-awarding process was corrupt. The EADS fleet will cost American taxpayers dearly and the model is less safe than the Boeing model. Boeing could have saved taxpayers $90 billion. The EADS contract will cost us $40 billion. The aircraft is less capable. EADS is using illegal subsidies. EADS won exemptions from key national security laws. The Boeing model produces 25% less carbon dioxide, reducing greenhouse gases and offers a 24% fuel savings – a cost borne by taxpayers. Even as the contract for $40 billion is being handed over, the federal government is aggressively pursuing legal action against EADS at the WTO for getting grants and loans at unfairly favorable rates.

The key Senator John McCain (R-AZ) played a crucial role in blocking the deal to build air tankers from going to Boeing. The position fattens his campaign coffers.

The question is who arranged the payoffs and who received them?

Bernanke’s Attempt to Jawbone or Verbally Manipulate the Markets

Bob Chapman says that gold price suppression is JOB ONE at the Fed—I think there’s a lot of manipulation going on behind the scenes. However, it can only work for so long.

From Mark OByrne’s article, “Gold Continues to Consolidation” in The Market Oracle.

While the dollar rose and gold fell during and after Bernanke’s attempt to talk up the dollar and bolster confidence in the increasingly fragile U.S. economy, no amount of jawboning by Bernanke or anyone else will help rectify the huge fundamental headwinds facing the U.S. economy in the face of a housing crash, huge deficits, huge credit and systemic risks and the increasing reality of stagflation.

Bernanke’s comments follow the now familiar refrain of sanguine complacency and a fear of calling a spade a spade and dealing in financial and economic reality. His comments that the dollar “remains strong and stable” will be seen as odd by some and laughable by more astute market observers.

Gold has a habit of falling when Federal Reserve Chairman speak and this often occurred under Greenspan’s watch in the early stages of the gold bull market. This led some to come to erroneous notions based on very short term market moves. (Short term speculators tend to salivate like Pavlov’s dogs at positive spin by Federal Reserve, Treasury and government spokespeople and other insubstantial twaddle rather than focussing on economic reality). Conspiracy theorists will say that today’s action looked likely to have been the ‘invisible hand’ of the market in the form of the President’s Working Group in Financial Markets – intervening and manipulating the dollar and gold markets in order to attempt to contain inflation and inflation expectations, maintain faith in the dollar and in the U.S. economy. Bernanke’s comments are unlikely to have much of an affect, if any, and if they were to have an affect, we will only know by the close of trade today and in the coming days and weeks.

Again despite all the talk of the dollar surging on Bernanke’s comments, the truth is that the dollar only surged versus the EUR of all the major currencies. While the dollar was up by some 0.65% against the EUR, it is notable that the dollar was actually flat vis a vis GBP and weaker by this amount and more against the CAD, JPY and CHF.

Unfortunately for us all, the U.S. economy will not find redemption in any amount of spin from the new Federal Reserve Chairman or any of the other economic cheerleaders who refuse to deal in economic reality. Indeed, moral hazard and false hope and false sense of security is all that is achieved and the inevitable day of reckoning while postponed will be made all the more painful when it inevitably comes. none.

Today’s Daily Reckoning – Welcome to Squanderville

Actually, this was yesterday’s DR, but I thought it too good to pass by, especially the information at the end.

Source: Bill Bonner, The Daily Reckoning.

Today is a holiday in Britain and America. But here at The Daily Reckoning, we are on the job – because there are things that need to be reckoned with.

Before we get down to serious reckoning, however, we give you a look at the news from the end of last week.

On Friday, the Dow fell another 145 points. Oil stuck around $132 and the dollar at $1.57 per euro. Gold rose to $925.

Remember when you could buy an ounce of gold for less than $100? We do. Remember when you could buy a gallon of gas for 25 cents? We do. What is Memorial Day for…but for remembering?

First, let us pause for a moment of silence, in honor of our ancestors, our veterans and our war dead. Like Pericles, we recognize that we have a big debt to the generations that went before us — their sacrifices have helped made us what we are…and made the country what it is. They saved. They invented. They built. What we see around us is mostly the result of their hard work…and many years of saving. If our ancestors had used up everything they produced, there would have been nothing left behind. But they didn’t. They left us their inventions and their constructions. They left us money, too. In the post-WWI period up until the mid-‘1980s, America was the world’s biggest creditor. More people owed more money to Americans than to any other nation. Public finances were occasionally stretched – such as during WWII itself – but from the founding of the republic almost until the Reagan years, each federal administration generally tried to leave the government cash till in about the same state it found it.

But in the space of a single generation, that huge legacy of capital and custom has been squandered. Now, the United States is the world’s greatest debtor – by a huge margin. Every year, it spends approximately 6% more than it earns. Its leaders have abandoned the virtuous practices of their ancestors. They no longer even pay them the homage of hypocrisy; they don’t even pretend to balance the budget, and the latest tally reported in these reckonings put the total unfunded liability at $61 trillion. This has effectively bankrupted the average family. It also turns every new baby in the U.S.A. into a major debtor – with more than $100,000 worth of unpaid bills –on the day he is born.

So we have a lot to remember this Memorial Day, and a lot to reckon with.

Warren Buffett was born in 1930. He must remember what the United States was like when it was still growing and genuinely prosperous.

“I’m fond of 1929,” said he a few months ago. “I was conceived that year and have always had an agreeable feeling towards the crash.”

Now, the richest man in the world, Buffett has come to Europe looking for better investments.

In an interview for Der Speigel, the Sage of the Plains said the United States was already in a recession and that it would be “deeper and longer than people think.”

He was in Madrid over the weekend, so we picked up a copy of El Pais to see what else he was saying.

When will growth in the U.S. economy pick up, the Spanish paper wanted to know?

“I have no idea,” Buffett replied.

When will the financial markets stabilize?” El Pais persisted.

“No idea about that either.”

So you see, Buffett could write for The Daily Reckoning; he would fit right in. Go ahead; ask us a question. We’ll give you the same answer Buffett gives:

We have no idea. But we do have opinions.

And in our opinion, George Soros is probably right when he says:

“The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the second world war at intervals ranging from four to 10 years. However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.”

*** Yes, it was a super-boom that Soros describes. And it coincided with your author’s life. He was born at the beginning of it. He has now reached what he thinks is the end of it. That financial super-boom also probably marked America’s great peak – when everything went so well for so long that politicians and central bankers all wanted to claim credit for it.

But the tippy top of the peak also coincided with a number of trends and events that made it possible. Among the most important was a low oil price. Back in the ‘70s, the price of oil went to $30 – and shocked the world. It stayed around that level for 5 years, long enough to convince people that it was permanent. Consumers – especially in Europe – learned to live with less energy. Oil companies spent fortunes to produce more. And then the price plummeted back to $10…and world enjoyed a great boom.

That boom seems to be over, it drowned in the rising tide of the oil price. The black goo has gone up $50 a barrel since last September. The world’s consumers and producers should simply take the price clue with good grace – cutting back consumption and looking for new supplies, just as they did in the ‘70s.

That is what is happening. The oil companies are spending four times as much on exploration as they did eight years ago. And consumers are being forced to cut back too. But it is not all that is happening. Central banks are fighting the correction with everything they have – and all they have is cheap money.

As you know, the combination of higher fuel prices…and lower housing prices…is squeezing America’s family. Comes news at the end of last week that the typical house in California is down 32% from a year ago. The state also has the second highest foreclosure rate in the nation, with one out of every 204 houses going back to lenders.

The other thing putting pressure on U.S. family budgets is the price of food. For the 15 years, up to 2007, food prices rose only 2.5% per year. This was the “Great Moderation” that central banks felt so proud of. But in the last 12 months, food prices are said to be up 4%.

We use the expression “said to be” as a polite way so saying that the government is lying. The raw data show food prices going up twice to three times as fast. Wholesale food prices are going up even faster. And every independent tally of prices at the supermarket shows much bigger increases than the government’s numbers are willing to confess.

For example, on this Memorial Day, you’ll find the price of hot dogs about 7% higher than a year ago, according to the Associated Press. Soda and potato chips are 10% higher. And hamburger buns are up 17%.

What do we have to thank for such high prices? Partly, it is a natural, cyclical trend in the food sector. But that’s not all. There is also all that cheap money that central banks are putting out. Speculators are using it to wager on oil…and food.

*** Think you’ve got it bad. El Pais sent a reporter to Cuba to see how the island was doing now that Fidel has stepped down.

It appears that bro’ Raul is trying to take the country in the direction China has taken: preserve the communists’ grip on power, but give the economy some air.

The El Pais reporter found a country desperate for some fresh air. Nothing seems to work – not even the public toilets. And thanks to bad agricultural policies (collective farming) vast tracks of what would otherwise be productive farmland have gone to seed. A nasty shrub tree, the marabu, has taken over. Crews of laborers work all day, with machetes, clearing them out.

A man can clear two “cordels” of land in a day, each measuring 400 square meters, says the reporter. For each cordel cleared in the Cuban worker’s paradise, he is paid 1 euro (about $1.57).

But if the money is bad, the satisfaction is worse.

“You can clear a whole field,” said one worker, “and then if they don’t put tractors and pesticide on it, you’ve done nothing. It [the marabu] just comes back.”

*** “When the price of oil was $25 and gold was $300, it was easy to know what to do with your money,” lamented MoneyWeek editor Merryn Somerset Webb last week. “Now, it’s not so easy.”

A friend in Paris echoed her sentiment on the weekend:

“I just don’t know what to do…I’ve got all my money in cash, because I can’t decide…and the dollar is falling. This is terrible. What should I do?”

We gave our friend the same answer Buffett gave El Pais. We don’t know.

It is not given to man to know his fate. We don’t know what will happen.
Still, you need to make decisions. So, here we offer a very little, very modest bit of advice. It is worth every penny you pay for your Daily Reckoning subscription:

First, pay attention to your business…or your earnings. This is where you get your money. Make sure you understand what you’re doing.

Then, make sure your costs are lower than your income.

If you have a house, make sure it is a place to live, not a speculation.

When you invest, there too make sure you’re really investing – not speculating. Buffett told El Pais what he always tells investors: never invest in anything you don’t understand. If you don’t understand it – that is, how the underlying business works and how you will make money from it – it’s not an investment. It’s just a speculation.

Right now, we are putting cash into three things:

1) Gold…for all the reasons you have read about in these Daily Reckonings. Is gold going up? We don’t know…we think there is a fair chance of it. But we don’t care; the gold (we hope) is for the next generation.

2) Swiss francs…because it is not the dollar

3) Emerging markets…because they are going up; it’s a trend we think will continue as the world economy regresses to the mean. We suggest an ETF of major developing markets…recognizing that some will probably fail and others will continue to grow.

What about oil? What about commodities? We don’t know enough about them to speculate. But from what we see, they look toppy.

Enjoy your Memorial Day,

Bill Bonner

Devalue US Debt Through Inflation? Three Lessons from History

Source: Adrian_Ash, The Market Oracle.

“…Might the scam work? Can the United States really settle its debt with devalued dollars, free of all historical fall-out…?”

“WE CAN PAY ANYBODY by running a printing press,” said Thomas Gale Moore, one of Ronald Reagan’s economic advisors, when the United States became a net debtor to its foreign investors in 1986.

“Frankly, it’s not clear to me how bad [being a net debtor] is,” he added. And for the next two decades or so, owning fewer assets overseas than foreigners laid claim to inside the United States didn’t seem so bad at all.

The long boom delivered by a steady inflow of foreign credit and cash delivered the greatest stock market gains ever enjoyed by US investors. When they topped out, the party switched straight into real estate – adding more than one-third to America ‘s household wealth on the Federal Reserve’s metrics.

So what if non-US claims on that surging wealth rose faster still? Now the party’s over, inflating away the value of America ‘s debt will worked just as beautifully as it always before. Right?

“In my view,” says John H.Makin – a visiting scholar at the American Enterprise Institute writing in the Wall Street Journal – ” the least bad option [in fixing the financial crisis] is for the Federal Reserve to print money to help stabilize housing prices and financial markets.”

” America is a country that owes money,” agrees Philippa Malmgren, a former Bush advisor and now head of a risk consultancy in London . “It is natural when you are a debtor that you lean in the direction of inflation, because it makes paying it back so much easier.”

The logic is simple: inflate the number of Dollars in issue, and you’ll shrink the real value of each outstanding Dollar you owe. But if escaping your debts really could prove that easy, how come history is littered with the mischief that inflation causes instead…?

Restoration England , 1668

Charles II – still playing his “divine right” as king some 20 years after Parliament cut off his father’s head – steps up the issue of new bonds. Then called “stocks”, they let the King raise cash for yet another losing war against the Dutch.

Charles side-steps Parliamentary approval for these new debts, and starts selling stocks against the promise of future tax receipts (the same wheeze adopted by governments worldwide today, of course). Come 1671, however, all the new money raised went straight to paying interest on the outstanding loans. So Charles opted to default, wiping out 11 of London ‘s 14 biggest goldsmiths – those early banks who’d first lent the Crown money – and destroying his credit with England ‘s loyal subjects.

The upshot? The King strikes a secret deal with France, promising to stay out of its war against the Dutch in return for regular cash pay-offs. But the deal – uncovered amid a rash of anti-Catholic panics in London – undermines all support for the Stuart royal family. Fifteen years later, and with the English crown bankrupt once more, his brother James II is overthrown in a popular and (pretty much) bloodless coup.

He’s replaced by William of Orange …head of the Dutch Republic !

Revolutionary America , 1775

Lacking a mandate to tax its population while fighting a war, the second Continental Congress authorizes the “limited” issue of paper money. The new notes, known as Continentals, are backed by neither Gold nor silver, but by the expectation of future tax receipts.

Effectively acting as tradable bonds – but exchangeable for goods and services amongst the Patriots, rather than hard currency – the Continentals will only be redeemed when the Colonies win their independence from Great Britain . But long before that happy day, they race towards zero, becoming progressively worth less as their supply increases.

During the first six months, the supply of Continentals goes from $2 million to $6m. By 1779, the total supply reaches $242m on one estimate – more than twenty times the volume of gold & silver money in circulation before the war began.

“A wagonload of currency will hardly purchase a wagonload of provisions,” complains George Washington. In March 1780, Congress announces a plan to redeem the Continentals at one-fortieth of their face value, effectively stuffing the American people and taxing the new citizenry more aggressively than George III ever did.

“So much for Congress’s honor,” notes Thomas E.Woods for Mises.org today. But for once, at least, these un-backed and over-inflated notes don’t end with political or military defeat. Other than for the Patriots’ cry for lower taxation, that is.

Weimar Germany , 1920

Besides losing 13% of its territory and 10% of its population under the Versailles Treaty after World War One, Germany also owes “reparations” to the Allied victors worth almost 37,000 tonnes of gold – around one-third of the world’s entire above-ground supplies at the time.

Expected to settle the final payment seven decades later, the German government opts instead to pay early by printing money. The volume of Reichsnotes in issue rises 35 billion times over between 1918 and 1924 – and “the young and quick-witted did well,” as the German journalist Sebastian Haffner will record, fifteen years later.

Equity prices in Berlin rose some 2,772,164% by the time a loaf of bread cost a wheel barrow-full of banknotes. The value of those Reichsnotes, however, went the other way – sinking from 8.0 per US Dollar to 4.2 billion per Dollar.

The resulting chaos, now regularly blamed for the rise of Hitler during the Great Depression of the early 1930s, saw “wages paid twice a day and promptly and completely spent within the hour,” notes Glyn Davis in his History of Money .

“Large sections of society, including the middle classes, became impoverished; food riots were common; there was a complete flight from money, which had clearly become worthless to hold.”

A more honorable legacy, perhaps, was the inflation-fighting Bundesbank of the 1970s and ’80s. Staffed by bankers and academics who’d lived through both the Weimar inflation and its World War Two replay – which saw worthless coupons issued as money to Nazi citizens, Wehrmacht troops and even concentration camp victims – the West German central bank refused to devalue the Deutsche Mark alongside the Dollar, British Pound and French Franc by setting interest rates low.

The Bundesbank kept inflation far below the double-digit rates suffered by UK and US households as Gold Prices rose 20 times over against the Dollar. It finally bit the bullet with the birth of the Euro in 1999.

The new European Central Bank has since let slip its money-supply growth target of 4.5% per year. At last count, the supply of Euros was expanding by 10.3% per year, just below 2007′s three-decade record for Europe monetary inflation.

The Global Banking Crisis, 2008: ” US money supply growth is running at a 47-year high,” notes Bedlam Asset Management, “as the authorities seek to inflate away the debt bubble and prop up house prices.

“Clearly printing such huge amounts of money is not great for the exchange rate. A weak Dollar has forced the hand of other central banks as they try and keep their currencies competitive with it.”

But might the scam work? Not if China , Japan and the big Dollar-holders of the Arab oil kingdoms can help it. Will they really let their own currencies rise…just so the United States stuffs them by paying its debts with devalued Dollars?

Inflation, it’s claimed, eases the burden of settling your debts. But for government and private debtors alike, that’s only true if your income rises faster than your on-going cost of expenditure. Otherwise, you end up struggling to make ends meet today, only to leave yesterday’s debts for repayment tomorrow again.

Middle-class families and savers looking to get ahead of the game – both inside and outside the Federal Reserve’s fast-inflating currency zone – might want to consider Buying Gold as defense. Because however this latest attempt to inflate away debt pans out in the long run, it’s sure to make history.

And history says – time and again – that solid Gold Bullion holds its value whenever man-made currencies are forced to lose value.

Gold Correction Near its End on Converging Signals from Bonds and Currencies

Source: Jim Willie CB, Market Oracle.

The springtime corrections are really about done. They have gone on for a couple of months. The extent of the pullbacks have been tested and retested. The long-term trends are just about ready to asset themselves again. Grand deceptions have resumed to attempt to fool the public and the investment community that the worst is over for banks, housing, and mortgage bonds. That is not even remotely true. The deeply wounded banks, the sharply corrected home prices, and the badly damaged mortgage bonds have much more pain ahead. Nothing has been fixed. Many mortgage resets have yet to take place. The New Resolution Trust Corp to facilitate secondary mortgages, to bury dead mortgage bonds, and to renegotiate home loans is not even agreed upon, let alone installed. Its operation will be sometime in 2009 at the earliest.

Until then, the system burns as foreclosures mount, inventory bloats, and home prices come down much more, guaranteeing another ugly storm of bank losses in mortgage bonds.

The ultimate determining factor right now is home prices , which are accelerating down. Wall Street seems unwilling even to mention home prices, preferring to talk about bank liquidity concerns having been addressed. Except that bank capital is still negative. Let’s take a whirlwind tour of relevant charts, to see that the progress of the corrections is in its last stages. Sentiment is not good for gold, but it never is when the next upleg begins, the nature of the beast. Only the mentally tough, the well informed, and the unshakable types are loaded with gold & silver when the uplegs begin. The bull market in metals and bear market in US$-based paper is ready to resume.

GOLD

The gold price has corrected in a triple wave. Retests at the 850 level have been completed. Longer-term moving averages remain properly aligned. A big pullback from 1020 to 840 will next see the 180-point momentum swing to 1200, once again capturing global attention. The remedies all involve monetary inflation, which will be amplified as problems and crises persist.

SILVER

The silver price has corrected in a more volatile triple wave. Retests at the 16.30 level have been completed. Longer-term moving averages remain properly aligned. A big pullback from 21 to 16 will next see the 5-point momentum swing to 26, once again capturing global attention. The gains in silver will be double those of gold on the next uplegs.

US DOLLAR

The USDollar has bounced in an irregular double quantum jump. It is resisted by the 100-day moving average, which has held firm for over a full year. Longer-term moving averages remain properly aligned. No fundamental improvement has come to the four pillars of insolvency for the United States : federal budget deficit, trade & current account deficit, insolvent big banks, and rising tide of negative equity for homeowners. All pillars are seeing worsening conditions. The epicenter for US collapse financially is New York City , without dispute. The epicenter for US collapse economically is either the Midwest ( Ohio ) or California . My focus is squarely on California , sure to capture the news since the rate of decline will be so magnificent and tragic. It is also where the location of the greatest abuses of mortgage loans. Retests of the 71 level lie ahead. The only saving grace for the USDollar is the breakdown in the British pound sterling, and the potential of a Euro Central Bank official rate cut that would weaken the euro currency. The Competitive Currency Wars have no winners, only relative losers.

LONG-TERM USTREASURY (TNX)

The 10-year USTreasury Note competes with gold directly. The rise in its bond yield, known as the TNX, has come with the advent and heavy deployment of US Federal Reserve lending facilities to the big banks of many stripes. The USFed is actually draining bank funds from the bank system in order to rebalance its own donated portfolio of bonds. This is covered fully in the May Hat Trick Letter reports. Soon, the USFed will resort to outright monetization of bank insolvency, attempt to restore bank capital, and flood the system with printed money as it addresses its own portfolio lent in exchange for private mortgages heavily damaged. Longer-term moving averages remain properly aligned, although the 50-day MA threatens to cross over. On the other hand, the 200-day MA might offer stiff resistance. Falling long-term rates go hand in hand with heavy USFed monetary inflation of the pure variety. Falling long-term rates go hand in hand with gold rallies. Heavy resistance lies right here for the TNX to head back down, favorable for gold.

EURO

The euro exchange rate has corrected in an orderly fashion. Retests at the 154 level have been completed. Longer-term moving averages remain properly aligned, with the 50-day MA offering surprising support. A big pullback from 159 to 154 will next see the 5-point momentum swing to 164, once again capturing global attention. However, if the Euro Central Bank does change course with an official rate cut, then the euro will possible decline, and easily close the entire range down to the 148.50 level. That would aid the US $ DX index. That would also create a more powerful gold bull market in Europe , a bigger center of wealth than the crippled Untied States lately! The net effect might actually be positive for gold, as investors realize that a magnificent next stage of powerful broad inflation will be unleashed upon the entire Western world. Then there is the British pound sterling story.

BRITISH POUND STERLING

The pound sterling is in the middle of a crash. The UK currency is looking very weak, having gapped back down to the critical 194 support level, as forecasted last November in the Hat Trick Letter. Housing prices in the UK have begun to fall for the first time in a decade, a trend very early here in its pathogenesis, sure to continue for another two years or more. Recession in the UK economy is assured, since they deployed the lunatic AngloSphere model of housing bubble foundation for economic vitality. That heretical catastrophic model was hatched across the Great Pond, the location of the primary meltdown in the Wall Street. The long-term picture is analyzed more fully in the May Hat Trick Letter report out this weekend. A painful disaster this way comes for England . The heavy duty monetization of their bank system, kept in highly questionable secrecy, will feed the gold bull, if not from plain vanilla monetary inflation, then from fear of the unknown.

JAPANESE YEN

The Japanese yen exchange rate has corrected in an orderly fashion. Retests at the 95 level have been completed. Longer-term moving averages remain properly aligned, with the 100-day MA offering strong support. A big pullback from 102 to 95 will next see the 7-point momentum swing to 109, once again capturing global attention. However, if the Bank of Japan does return to normalcy with an official rate hike, then the yen will rise with sudden power. It will force the liquidation of more Yen Carry Trades, and render deep damage to the Japanese exporters. Japan has two big trade partners nowadays, both the US and China . The irony here, not unknown to the FOREX arena, is that the yen might rise substantially as the Japanese economy undergoes a recession. Their stimulus to exit such a situation will feed the gold bull across Asia . One should know that the US $ DX index has a aberrant tiny yen component. My name for the DX index is the ‘Anti-Euro Index’ since the euro is oddly weighted by over 50% within it, but the yen is under 20% in weight. Big moves in the yen will not move the DX index much.

OIL/GOLD RATIO

The ratio of the crude oil price to the gold price has really shot up considerably. The USDollar weakness has opened the door for a big rise in crude oil, aided by speculators, probably with heavy US bank participation (to improve damaged balance sheets). Funds must have an eye on possible expansion to the Iran war front, even to Lebanon as a second front. Regardless, the oil price is due for correction, and with it, a relaxation of the ratio shown in favor of gold again.

CDNX/GOLD RATIO

The ratio of the Canadian exchange stock index, laden with a heavy representation of mining stocks, versus the gold price, is another important indication of trend. The ratio hit bottom this March and has begun to recover. This is a very promising signal for not just gold, but leveraged investments like gold mining stocks in a general sense. Watch for a bullish crossover of the 50-day moving average above the 100-day MA. Later expect crossovers above the 200-day MA, during a full blown recovery.

BANKING STOCK INDEX

The BKX is a stock index worth watching as attempts are made to remedy the current US bank insolvency. Tremendous losses have been incurred on their balance sheets with asset backed bonds. Those losses are matched by tremendous losses in their stock equity, even their bond principal. Also, dividends have been cut. Notice that an attempt at recovery has taken place. The real story seems to be a newly formed bearish triangle though, one which indicates a huge decline if a breakdown occurs below 76. Given the next round of bank losses in commercial mortgages, prime adjustable mortgages, car loans, credit card lines of credit, it seems a cinch for another BKX breakdown , just like what occurred with the homebuilders.

HOMEBUILDER STOCK INDEX

Only a partial stock chart is shown here. In previous years, a previous huge decline occurred in a breakdown for the HGX index. The breakdown was duplicated in 2007. My forecast is for yet another HGX breakdown in 2008. How far down will it go? TO ZERO. The housing glut and declines dictate and assure that a remedy to the housing and mortgage systems comes only when almost all the homebuilders are out of business. If the system adds to the glut of supply, then the system is nowhere near completion of the remedy. Losses continue to be announced of very significant size for the entire group, on many fronts like deep discounts, land options, mortgage portfolios, and violations of bond covenants.

QUICK CONCLUSION

Sadly, the insolvent US$-based economic and financial system has a long way to go before any recovery can be claimed. The four primary pillars of the federal budget deficit, the trade and current account deficit, the bank insolvency, and the rising tide of negative equity homeowners, these scream of ongoing need for remedy. All forms of remedy involve monetary inflation. The current approach has been careful and directed. The next steps will be much more broad and systemic in the face of desperation to avert collapse. Beware of civil disobedience toward mortgages. Beware of civil disturbances. Beware of open scuffles at gasoline stations. Beware of possibly food riots in poor neighborhoods. Being the newest Thrid World nation, the Untied States will see food riots similar elsewhere in the world. The system inside the US is moving toward chaos. An inflationary recession does that. Job loss and rising prices make for a nasty cauldron for emotions. The only known plan will be to produce enough inflation to keep the system running. The implemented cure will plant seeds for further crisis one year from now, and guarantee a severe change via disruption. The only safe place to be will be commodity investments that oppose the Great Paper Chase in dissolution, in particular precious metals and energy. My favorite remains silver, for many reasons.

GATA (Gold Anti-Trust Action Committee) went to Washington

By Alex Stanczyk, Your Financial Future:

As many of you know, the Gold Anti-Trust Action Committee (GATA) just had a conference in Washington DC. For those of you who follow GATA’s work, you know that they have accumulated an overwhelming body of evidence that points to the ‘management’ of the gold price.

I have had mixed feelings over the likelihood of such a conspiracy, and until I can prove something or at least be able to use available evidence to form an educated opinion I tend to dis-believe such things. However, one thing I can say after attending the conference this weekend, is that there are some very suspicious interactions on the part of the Fed, the Treasury, and the IMF when dealing with GATA.

Specifically, GATA has requested through the Freedom of Information Act, information that supports the governments’ claims of the current physical gold reserve of the United States. One thing that I find very curious is that to date the Fed, and Treasury have failed to produce any materials in response to this request.

Now, maybe I am just being cynical here, but I think most folks who have any common sense would agree that if the government does not want the public to have transparency into an issue, it is usually because it is being naughty, and there is something that they don’t want the public to know. For the life of me I cant see why there would be anything to keep secret, even if it is a National Security issue, unless of course the gold isn’t there anymore, in which case it would very well indeed be a National Security issue. Now of course if the gold IS gone, then it just supports GATA’s assertion that it has been used to suppress the gold price for decades.

I will recap what I got from each speaker in brief:

Dr. Edwin Vieira Jr., The Foremost Authority in the United States on Constitutional Money -

* Only a return to Gold and Silver can stabilize our currency.
* Desperate people start to ask questions, and shortly thereafter that, assign blame. If our politicians want a long and successful career (or life) they should be aware of this.

Reginald Howe, Golden Sextant Advisors LLC -

* Out of all commodities, gold is the one best suited for use as money
* The ‘gold price’, should actually be termed ‘exchange rate’ as with all currencies
* Central Banks are now lending gold at negative lease rates, effectively paying institutions to sell gold into the market
* Since the day the gold window has been closed, the Supreme Court has refused to hear any case challenging the current monetary system

James Turk, Goldmoney -

* The Chinese are indeed buying gold, using intermediaries and proxies to do so
* Chinese Proverb: Wisdom begins by calling a thing its proper name. Gold is not an investment, it is money.
* Do not put dollars into gold expecting a return, expect preservation of purchasing power. To get a return, it implies there must be a risk, and gold has held its purchasing power better than anything else in history.
* We are looking at huge problems, possibly as soon as this summer.
* Be prepared for Capital Controls in the US soon.

Peter George, Trinity Asset Management -

* Many hedge funds are having liquidity issues right now, when they see a bid, they are hitting it.
* It will take 10 years to bring new ultra-deep mining operations at 5000meters or deeper online.
* Since 1994 virtually all commodities have gone vertical and pulled away from gold.
* Goldfields has the largest un-hedged position in the WITS Basin, which holds an approximately 40,000 more tons of gold.
* Anglogold Ashanti is hedged $7Billion
* Barrick is hedged $9Billion
* Oil will go to $500 a barrel in time

Adrian Douglas, Market Force Analysis

* Gold is the investment opportunity of a lifetime.

John Embry, Sprott Asset Management -

* This is the best opportunity I have seen in 45 years in the investment business

In summary, by hearing views from almost every sector that touches the gold and silver markets such as mining, fund managers, analysts, attorneys, constitutional law experts, private bullion custodians, it appears obvious that there is indeed something fishy going on with the price of gold. The only players that affect the gold markets who didn’t have anything to say was the Fed, the Treasury, and the CFTC. How curious.

This is all fine and good of course, because I own gold and silver, so when this whole thing does come unglued and make the Enron scandal look like romper room on Paxil in comparison, some of us will be getting quite rich.
Got gold yet?

The Dollar Hasn’t Bounced

Commentary by James Turk, Founder of GoldMoney:

I first presented the following chart with its downward pointing arrow in my alert on November 11, 2007, and made the following observation. “When taken together, the eerie calm as the dollar collapses and the arrow in the above chart pointing to the building downside momentum suggest that the dollar is nowhere near its final low.”

I drew the downward pointing arrow back then purposefully. All the signs indicated to me that years of dollar mismanagement were finally taking its toll. I concluded that the dollar was heading for a major collapse that would culminate in a currency crisis by this summer, which is the time frame indicated by the arrow.

Anyone who has read these alerts or the book I co-authored with John Rubino knows that I am expecting a total collapse in the dollar. As I have said many times, the dollar is on the road to the fiat currency graveyard. But the question I am always asked is when will it get there? When will it collapse? The answer is in the above chart – this summer.

The dollar of course has been collapsing for years. Inflation has eroded its purchasing power, and inferior assets on bank balance sheets have debased its quality. What’s more, rather than being left unfettered as a neutral tool for use in global commerce by one and all – which is the role required of the world’s reserve currency – U.S. politicians have turned the dollar into an imperial weapon to extend their influence, further undermining its usefulness as currency. So it is not surprising that the Dollar Index has declined 41% from its peak on July 5, 2001, nor is what is happening now a surprise. Maybe I should say what isn’t happening now. The dollar hasn’t bounced.

We can see on the above chart the dollar’s steep drop from December 20, 2007 to March 17, 2008. Under intense selling pressure, the dollar fell on 40 of these 60 trading days from 77.79 to its record low of 71.46. That 8.1% drop equates to a breathtaking 50% annual rate of decline. After a drop like that, one would expect a bounce in normal circumstances, just like the dollar bounced after the other huge drops that we can see on the chart. But it didn’t happen. Why not?

One can only conclude that these are not normal circumstances. In other words, I think we have reached the ‘tipping point’.

More people want out of the dollar than those who are willing to hold it. The final collapse of the dollar begins now. It will I expect play out over the next three to six months, culminating in a major dollar crisis.

I have been waiting for two events in particular to signal that the final collapse of the dollar had begun. One was for the Dollar Index to make a new record low by breaking below 78.30, which it did just a few weeks before I drew the arrow in the above chart last November. The other event was for gold to break above $1,000, which I anticipated would happen this year. Gold did briefly break above $1,000 last month before being beaten back down below that much-watched level by the gold cartel. I recommend reading the article in the current issue of Investor’s Digest by John Embry of Sprott Asset Management describing this brief encounter with $1,000.

So the gold cartel once again ‘circled the wagons’, just like it has done for years at other critical price levels. It temporarily put a lid on gold, thereby keeping it from rising in order to blunt gold’s signal that severe problems with the dollar are building. This activity by the gold cartel will be a major topic in next week’s conference sponsored by the Gold Anti-Trust Action Committee. GATA’s international press release announcing this important conference can be found at the following link: http://www.gata.org/node/6226. Extensive documentation about government intervention in the gold market is available free on GATA’s website.

Regardless of these recent price capping activities by the gold cartel, there is an important message about recent events embedded in the price action of the above chart. Despite all the central bank intervention, despite the repeated declaration of the so-called “strong dollar” policy, despite all the maneuvering by the Federal Reserve to remove inferior assets off over-leveraged bank balance sheets, despite all the tough talk about being vigilant to “fight inflation”, the dollar hasn’t bounced. None of these things have helped strengthen the dollar’s exchange rate to the world’s other major currencies. To me that means the front gate of the fiat currency graveyard is wide open, and the grim reaper is waiting for the dollar to enter on the next new low in the Dollar Index. When that happens, it won’t take long for gold and silver to climb back above $1,000 and $20 – and this time stay there.

Retirement investors concerned about economy are turning to precious metals

Source: Tim Grant, Pittsburgh Post-Gazette.

©Newmont Mining via AP

It used to be that an IRA could be funded with only cash, stocks or bonds, but Congress has expanded the rules governing individual retirement accounts to include gold and silver bars and coins. And more investors who are concerned about turbulence in the U.S. and global economies are taking advantage of that option.

“When you get into very volatile markets and people are afraid of stocks and bonds, they look for safe havens, and gold has always been a safe haven,” said Nadav Baum, managing director of investments at BPU Investment Group, Downtown.

Transactions for precious metals IRAs have increased 523 percent in the past eight months at GoldStar Trust Co., a leading custodian for self-directed IRA accounts, based in Canyon, Texas, said Trey Hightower, a precious metals specialist.

GoldStar’s IRAs allow investments in gold, silver, platinum and palladium bullion bars and coins. Its precious metal assets under management were valued at $312 million as of Dec. 31, 2007.

“The economy and the weak dollar is driving a lot of people into precious metals,” Mr. Hightower said.

Traditional and Roth IRAs that contain precious metals operate under the same rules as conventional retirement accounts. The metals cannot be withdrawn from the account without penalty until the investor reaches 59 1/2 years old and withdrawals are required starting at age 70 1/2.

But the roundabout process of setting up a precious metals IRA is where the similarities end.

Investors must contact a self-directed IRA custodian who handles precious metals accounts. Once that account is open and funded with cash, the customer then contacts a coin dealer and locks in a price for the metals.

The IRA custodian issues a purchase order to the coin dealer and the metals are shipped to a depository, such as HSBC Bank in New York. Once the custodian gets confirmation from the depository that the metals have arrived, the custodian documents it into the IRA account and pays the coin dealer.

“The customer never holds the metals while they’re in the IRA,” Mr. Hightower said. “But they can sell the metals within the IRA and take a cash distribution or take the metals out as a distribution.”

The combination of dollar weakness, falling interest rates and rising inflation has created an ideal environment for rising precious metals prices. Gold, which recently traded above $1,000 a troy ounce, is known as a crisis commodity. It tends to appreciate in value under the worse economic conditions.

In 1997, gold and silver bullion were approved for IRAs. But only gold coins having a purity of 24 karat are allowed in the retirement accounts, with the exception of the 22 karat U.S. Gold Eagle. The South African Krugerrand is not permitted in an IRA because it is a 22 karat bullion coin.

David Morgan, a world renowned silver expert and founder of silver-investor.com in Spokane, Wash., said he was familiar with the handful of IRA custodians who handle precious metals and was not aware of any problems with any of them.

“I’m not advocating you put all your IRA money into gold and silver,” Mr. Morgan said. “There are a lot of people whose main savings is an IRA account, and therefore they should put at least 10 percent in precious metals.”

One of the most innovative ways to buy and sell precious metals in an IRA was recently introduced by the Entrust Group, based in Reno, Nev. Through its partnership with GoldMoney.com, investors can buy and sell digital gold, which allows the movement of physical gold bullion in their IRAs from one account to another online.

James Turk, founder of GoldMoney.com, based in the British Channel Islands, said he believed that the trend in gold would continue upward until problems related to the U.S. dollar have been solved.

“Gold, as we know, is an inflation hedge,” he said. “But people are starting to understand its other attribute, which is a catastrophe hedge. Gold is a tangible asset which is not dependant on someone else’s promise.”

Mr. Turk said GoldMoney is an online bank account that is denominated in gold grams and mills rather than dollars and cents. The precious metals in GoldMoney accounts are stored in Zurich, Switzerland. Investors can always sell their gold and have the proceeds sent to an IRA custodian in the United States.

The downside of holding precious metals in an IRA is the account owner must pay storage fees to the depository where the metals are held. And there are often big spreads in the buying and selling exchange rates.

Those fees can make bars and coins an expensive way to diversify a low-balance portfolio, which is why many financial advisers prefer to put clients into gold and silver exchange traded funds, which are traded on the stock market.

“There’s not much advantage and a lot of disadvantages in having physical bullion,” said Bruce Fenton, president of Atlantic Financial in Boston. “What happens if it’s stolen or it melts? You don’t have to worry about that if it’s electronically protected.”

Donald Gould, president of Gould Asset Management in Claremont, Calif., said it makes sense to own gold as part of a diversified portfolio, but that it doesn’t make sense to hold gold bullion in an IRA.

“An IRA is a tax-deferred vehicle,” he said. “It makes sense to put [assets] in there that have high current taxable income. Gold pays no interest or dividends.

So therefore, using your IRA to buy gold is an inefficient use of [the IRA] from a tax perspective.”

Whether or not it’s a good time to be buying gold is debatable, said Paul Burkemper, president and founder of Burkemper Group in St. Louis.

He thinks gold could be overpriced in the current environment. There will be an adjustment, and prices tend to fall faster than they rise.

“My concern is a lot of people will jump into gold chasing returns, thinking it won’t go down,” said Mr. Burkemper, whose firm specializes in IRA and retirement planning and distribution. “We thought home prices wouldn’t go down, and we got a rude awakening.”

Given all the factors that influence the price of gold and what’s happening in the economy, James DiGeorgia, author of “The New Bull Market In Gold,” is predicting gold will trade at $2,500 a troy ounce in three to five years. Silver will trade in the $30 an ounce range, and platinum will top $5,000 an ounce, he said.

Craig Smith, CEO of Swiss American Trust, a full service brokerage firm for early American coins in Phoenix, said customers who prefer to own the physical metal have a different psyche than those who want paper assets.

“Your physical gold is your asset and no one else’s liability,” Mr. Smith said. “You don’t have to depend on anyone else to perform, and that’s what we like about gold.

“When people plan for retirement they want to be sure the money they put away will be enough to maintain their standard of living, and gold always maintains its buying power.”

Tim Grant can be reached at tgrant@post-gazette.com or 412-263-1591.

Comment from Signs of the Times: Which would you rather hold for the next five years? $100,000 in US Dollars or $100,000 in gold? Don’t think too hard.