Jun 26

Fed Tightening = Bust

Gold Price Comments Off on Fed Tightening = Bust
The Federal Reserve will, sooner or later, have to bring about an economic bust…

ACCORDING to most commentators, reducing monetary stimulus and winding down the balance sheet of the Fed without major economic disruptions is going to be a major challenge for US central bank policy makers, writes Dr Frank Shostak for the Cobden Centre.
On Wednesday June 19, the Chairman of the Fed Ben Bernanke said that given an improved outlook on the economy, the US central bank may moderate the pace of monetary pumping. According to Bernanke, by mid-2014 the Fed may even end the purchasing of assets.
Is it possible to slow down the pace of monetary pumping without major side effects?
According to the popular way of thinking, on account of major shocks prior to 2008 emanating from disruptions in the credit markets the US economy was severely dislocated from a path of self-sustained economic growth.
As a result since 2008 the Fed has had to step in with massive monetary pumping to bring the economy onto the path of self-sustaining economic growth.
Now in this way of thinking the spending of one individual becomes the income of another individual whose spending in turn gives rise to the income of other individuals etc. In the absence of shocks this process tends to become self-sustaining. The role of the central bank here is to make sure that the process does not get disrupted and prevent bad dynamics. (Thus if on account of a shock consumers curtail their spending this could lead to an implosion in economic activity).
Note that the central bank is expected to intervene not only in response to negative shocks but also on account of positive shocks that tend to move the economy strongly above the path of self-sustaining economic growth.
Now, the manifestation of negative shocks is a decline in the growth momentum of prices and a fall in economic activity. In contrast the manifestation of a positive shock is overheated economic activity and a rising growth momentum of prices of goods and services.
On this way of thinking, if the central bank is not careful enough in its response to negative shocks this could push the economy into a so-called overheated zone.
It seems that although not an easy task, experienced and wise policy makers should be able to navigate the economy away from various disruptions and keep the economy on a healthy growth path.
Hence policy makers must carefully monitor key economic data in order to make sure that the economy, once it is brought onto a self-sustaining economic growth path, stays there.
Builders expectations index jumped to 52 in June from 44 in May. The growth momentum of housing starts shot up in May from the month before. Year-on-year the rate of growth of starts climbed to 28.6% from 13.5% in April.
Also economic activity in general appears to be gaining strength. The Philadelphia Fed business index had a big increase in June from May rising to 12.5 from minus 5.2. The New York Federal Reserve economic activity index had a visible strengthening rising to 7.84 in June from minus 1.43 in May.
It is against this background that one can understand the logic of Ben Bernanke and his colleagues when they say that given the strengthening in economic activity and the likely strengthening in the labor market US central bank policy makers are likely to trim the pace of monetary pumping in the months ahead.
Note again that what is required here for the successful accomplishment of the Fed’s monetary policy is the correct assessment of the future course of the US economy.
Even if one were to accept this way of thinking, the dynamics of events is never possible to predict with great accuracy. The Fed’s policymakers are likely to be in the dark as to whether the economy is approaching the self-sustaining growth path or has already surpassed this path and has entered a rising inflationary path.
Note that policy errors are likely to add to various shocks that these policy measures mean to counter. (The key policy measures of the Fed are monetary pumping and interest rate manipulations).
On this score, whenever the Fed changes the pace of pumping the effect on various markets is not instantaneous. The newly injected money moves from one market to another market – there is a time lag.
For some markets the time lag is short for other markets it can be very long. Whenever the new money enters a market it means that now more money is chasing a given amount of goods in that market. The monetary expenditure or the monetary turnover in the particular market is now higher.
Now, various economic indicators depict changes in monetary turnover in various markets. For instance, changes in money supply after a time lag of nine months will manifest in changes in the so-called gross domestic product (GDP). Note that the alleged economic growth in this indicator has nothing to do with true economic growth but comes in response to past increases in the money supply rate of growth.
Given that the time lags are variable, various indicators such as price indices might be responding to changes in monetary policy that took place several years earlier.
Hence a situation could emerge that on account of the variability in the time lags there could be a variety of responses in various indicators at a given point in time. (For instance a strengthening in the yearly rate of growth of the CPI whilst economic activity is declining).
We know that Fed’s policy makers tend to be – most of the time – reactive to changes in economic indicators, which means that most of the time policy makers are responding to past policies. (It is like a dog chasing its own tail). Needless to say that such types of policies tend to amplify rather than mitigate shocks.
Now we are of the view that the entire framework of thinking regarding the existence of some kind of a growth path that the Fed supposedly could navigate the economy onto is erroneous. There is no such thing as an economy as such; there are only individuals that are engaged in various activities to maintain their lives and well-being.
Whenever the central bank raises the pace of monetary pumping in order to bring the economy onto a self-sustaining growth path it in fact sets the platform for various non-productive bubble activities. The increase in these activities, which is hailed as economic prosperity, sets in motion the diversion of real wealth from wealth generators towards bubble activities. It weakens the process of wealth generation.
Whenever the Fed curbs its monetary pumping this weakens the diversion of real wealth towards bubble activities and threatens their existence. Note that bubble activities cannot support themselves without the monetary pumping that diverts real wealth from wealth generators. This leads to an economic bust.
Obviously then there is no way that the Fed could somehow curb the monetary pumping without setting in motion an economic bust. It would contradict the law of cause and effect. The severity of the bust is in accordance with the percentage of bubble activities out of overall activities. The larger this percentage is the greater the bust is going to be.
This percentage in turn is dictated by the magnitude and the length of the loose monetary stance of the Fed. Once this percentage gets out of hand the pool of real wealth comes under pressure. Consequently, banks willingness to engage in the expansion of lending despite the central bank’s loose stance is reduced. This leads to a decline in the growth momentum of the supply of credit out of “thin air”, which in turn leads to the decline in the growth momentum of money supply. After a time lag this works towards a decline in economic activity i.e. sets in motion an economic bust.
Meanwhile after closing at minus 1.4% in September 2012 the yearly rate of growth of the Fed’s balance sheet jumped to almost 20% in June. On account of banks reluctance to lend (surplus cash stood at $1.963 trillion in June) the downtrend in the growth momentum of US AMS remains intact. (After closing at 14.8% in November 2011 the yearly rate of growth stood so far in June at 7.7%). We suggest this has already set in motion an economic bust.
According to most commentators, although not an easy task, experienced and wise policy makers should be able to navigate the US economy away from various bad side effects that come in response to a tighter Fed stance. We suggest that whenever the Fed raises the pace of monetary pumping in order to “revive” the economy it in fact creates a supportive platform for various non-productive bubble activities that divert real wealth from wealth generators. 
Whenever the US central bank curbs the monetary pumping this weakens the diversion of real wealth and undermines the existence of bubble activities – it generates an economic bust. We suggest that there is no way that the Fed can tighten its stance without setting in motion an economic bust. This would defy the law of cause and effect.
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Jun 25

Tokyo First, Then Buenos Aires

Gold Price Comments Off on Tokyo First, Then Buenos Aires
Hold on tight for America’s rapid tour of the monetary mayhem worldwide…

WHEW! The US Federal Reserve is number one in central banking. And it’s finding out just how tough it can be to meddle with a $16 trillion economy, writes Bill Bonner in his Daily Reckoning.
Last Wednesday, Ben Bernanke came out with a public statement. He said that if all went well…and he didn’t change his mind…and nothing unexpected came up…and the Federal Reserve’s Open Market Committee felt like it…the Fed would begin tapering its bond buying sometime soon.
That was all it took to send a shiver up investors’ spines…and a sell signal to Wall Street. Everything sold off – stocks, bonds, commodities, gold…you name it.
Over the next two days, the Dow sank more than 500 points, before stabilising on Friday. From Adrian Foster, head of financial markets research for Asia-Pacific at Rabobank International in Hong Kong:
“Clearly, the Fed tapering is on the table now. There is a reversal of perception in liquidity and it will take some time for investors to digest, rebalance and what not.”
When the Federal Reserve’s EZ money programs end, there will be Hell to pay. We’re not sure that bill has come due yet. We’ll have to wait and see.
But Mr. Market wants a correction. Mr. Bernanke wants to avoid it. In the long run, we don’t have any doubt about who will win. Mr. Market always wins. But rarely in the way you expect.
Mr.Market might play with Mr. Bernanke for years before administering the coup de grâce. Investors might be deceived, surprised, and completely faked out once…twice…three times before the curtain finally falls.
Do you want our best guess?
Here it is: Tokyo…then Buenos Aires.
We suspect that the Great Correction is intensifying. Stocks will fall. Bonds will fall. Real estate will fall. Just like they did in Japan.
But unlike Japan, yields will rise. Yes, that’s the most interesting thing that is happening. After 30 years, the bull market in bonds appears to have finally come to an end. Yields are rising. Bond prices are falling.
And this is happening at the worst possible time. Just what you’d expect, in other words.
Let’s go back a bit further to get more perspective. Aided and abetted by the Federal Reserve, for 60 years America’s private sector loaded itself with debt. Then, in 2007, the weakest link – subprime mortgage debt – broke apart. The end of the cycle was at hand.
We estimated that the process of de-leveraging – paying down, writing off, defaulting, going broke, inflating away and otherwise shucking debt – would take 7 to 10 years. We’re now in year 6.
We knew the feds would fight the correction, but we didn’t realise how reckless they would be about it. Their interventions, worldwide, have cost $7 to $12 trillion, depending on whose tally you believe. These meddles make it very hard to know what is really happening.
The Federal Reserve rigs the most important price in the most important economy in the world – the price of credit. All other prices are affected. You can study price movements, but it’s impossible to know what they really mean.
One thing is sure, the Fed – and not a real recovery – was responsible for the big run-up in stock prices from 2009. So, it’s reasonable to expect that when the Fed backs off…so will stock prices.
Then, instead of the ‘wealth effect’ helping to hold up the economy, we’ll have a negative wealth effect – falling asset prices – pulling it down.
A correction is meant to correct mistakes. The Federal Reserve has tried to stop it. It has kicked the can down the road. But over the last 6 years…we have gone further down the road.
And there is the can again! And now, it appears that the Great Correction must intensify. It must continue its work: correcting the foolish mistakes of the bubble period AND the foolish mistakes of the last five years too.
But if the bond market has turned against the Fed, falling bond prices will make it harder for borrowers everywhere to keep going. And the biggest borrower in the world is the Fed’s own boss – the US government.
Federal Reserve governors know they have to ‘taper’ sometime…or risk a bigger calamity. But they can’t back off now…not with the bond market falling. They’ll have to increase their buying…and cause even more distortions.
That’s how we get to Buenos Aires. Hold on tight!
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Jun 25

We’re About to See What Happens When the Music Stops

Gold Price Comments Off on We’re About to See What Happens When the Music Stops
Why 2014 looks like being the year of the great crash…

THE MARKETS have begun to swoon and among the first ‘canaries’ are two Thai tycoons, writes Martin Hutchinson for Money Morning.
This pair of Thai tycoons, neither of them well-known internationally, has made a total of $27 billion in acquisitions in the past year, more than all Thai companies spent abroad in the preceding three years. 
That’s the kind of statistic common in today’s global deal mania, fueled by the glut of funny money. It raises a dreaded question: what happens when the music stops, and when global leverage stops being so available?
We’re about to see…
The Thai billionaires – 74-year-old Dhanin Chearavanont and Charoen Sirivadhanabhakdi, 69 – were both well-established in the Thai business community, but nevertheless their combined $27 billion of acquisitions represented a risky gamble. 
One bought a wholesaler on 50 times earnings, while the other bought the flagship Singapore brewer Fraser and Neave for $11 billion, quadrupling his holding company’s debt-to-earnings ratio. 
The trouble is Thailand has been here before – and well within living memory. It was an orgy of leveraged and overpriced acquisitions that led to the Thai banking and monetary crisis of 1997 that sparked an Asia-wide crisis and led to the Thai stock market losing nine tenths of its value. 
In today’s markets, the aggressive Thai acquirers seem likely to be the first victims of any credit squeeze that might occur. 
After Fed Chairman Ben Bernanke’s recent news conference, it certainly looks like the squeeze is beginning. 
And last Friday, an auction of short-term domestic Chinese T-bills was only two-thirds subscribed. It turns out that the interbank rate in China is currently around 8%, way above the 3.9% the government was paying for its T-bills and way above Chinese inflation, which at least on official figures is running just over 2%. Tight money in China will inevitably affect the rest of us at some point.
Bernanke and his British and Japanese counterparts (but not necessarily European Central Bank head Mario Draghi) will fight bitterly against a credit crunch, but they will have little or no effect. 
Contrary to a recent revisionist theory, Bernanke was already printing money like a madman in 2007-08 when the housing bubble burst, and he proved completely unable to avert a crunch. Walter Bagehot in 1873 said that the solution to a credit crunch was to lend unlimited amounts of money, but at very high interest rates. 
In 2008, that solution was never tried – instead Bernanke dropped interest rates to zero – and it won’t be this time, either.
Credit crunches hit because lenders have lost confidence in the value of the collateral against which they have lent. In those circumstances, misguided “mal-investment” has occurred, as Austrian-school economists call it, and that investment needs to be liquidated. 
The market has become imbalanced, with more demand for funds than supply. To ensure that ordinary profitable commerce goes on, interest rates need to rise. That reduces the demand for funds (as borrowers put off projects that are no longer viable, and cease speculative investments) and increases the supply (as banks and other lenders decide that higher interest rates make it more attractive to save than to spend.) 
If this happens, a recession occurs, to be sure, but there is no financial crisis and no prolonged period of underemployment such as we have seen since 2008.
The good news is that interest rates are already beginning to rise; the 20-year Treasury bond yield has risen from about 1.5% to around 2.4% yesterday. That won’t be a smooth rise, any more than the stock market fell smoothly in 2000 and 2007, after it had peaked. 
However, at some point long-term interest rates will revert to their normal level, 2.5% to 3% above the rate of inflation – or about 5% today. That will cause a credit crunch, which Bernanke and his international colleagues will attempt to fight, but they won’t succeed, because by fighting it they will merely worsen the funds imbalance and reduce the availability of funding for trade and sound projects.
It’s difficult to guess the timing of this downturn, because so much depends on unpredictable market psychology. At one extreme, if China’s money tightness causes ripples in the world economy and US Treasury bond rates rise sharply, panic could come quite quickly. 
However, with central banks continuing to ease and markets generally continuing positive, my “best guess” is that interest rates will have to rise quite a lot further before a credit crisis ensues, and that certainly no break is likely while 10-year treasury yields remain below 3%, which was their level during much of 2009-2011. 2014, not 2013, looks to be the year of the great crash.
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Jun 25

Fed Kills Gold with Tapering. Really?

Gold Price Comments Off on Fed Kills Gold with Tapering. Really?
Ben Bernanke’s real message for gold investment needs translating…

WALTER J. “John” Williams has been a private consulting economist and a specialist in government economic reporting for more than 30 years.
John Williams’ early work in economic reporting led to front-page stories in the New York Times and Investor’s Business Daily. Today his economic consultancy is called Shadow Government Statistics, better known as ShadowStats.
And here, in this interview with The Gold Report, John Williams says his corrected economic indicators show the US is nowhere near a recovery. In fact, the Federal Reserve will have to increase rather than decrease bond buying to prop up the banks and push off inevitable Dollar debasement.
That could be very bad for savers, but good for gold investment, he believes…
The Gold Report: Last week Ben Bernanke said the US Federal Reserve might begin tapering quantitative easing by the end of the year based on signs of an improving economy. Gold immediately dropped from $1347 an ounce to $1277, the lowest price in more than two years. The Dow Jones Industrial Average and Nasdaq were also off more than 2%. Yet you called this “jawboning” and said that due to stresses in the banking system the Fed would be obliged to continue bond buying. Why would the central bank threaten to cut off the flow if it didn’t plan to do it?
John Williams: All the hype over the Fed’s so-called tapering is absolute nonsense. Fed chairman Ben Bernanke said the Fed’s pulling back of quantitative easing was contingent on the economy recovering in line with the Fed’s relatively rosy projections. He also indicated, however, that if the economy worsened, he would expand quantitative easing. When you consider that the official Fed projections are grossly optimistic, the conclusion is that we will have more, not less, bond buying from the government.
The jawboning was a multifaceted attempt to placate the Fed’s critics, while soothing the stock and bond market jitters at the same time. The comments, however, hammered equities and bonds, as well as gold. The negative impact on gold investment likely would have been viewed as a positive result by the Fed.
The banking system nearly collapsed in 2008. The federal government and Federal Reserve took extraordinary measures to keep the financial system from imploding. Those actions prevented an immediate systemic collapse, but they did very little to resolve the underlying problems. I contend that we’re still in recession, with the economy deepening into a renewed downturn. At the same time, the banking system solvency problems continue. Little has changed in the last five years.
The purported nature of the quantitative easing is a fraud on the public. While Bernanke describes the extraordinary accommodation in terms of trying to stimulate the economy, lowering the unemployment rate and attaining sustainable economic growth in the context of mild inflation, those factors are secondary concerns for the Fed.
The US central bank’s primary function always has been to assure banking system solvency and liquidity. All the easing efforts have been aimed at the banking system. The flood of liquidity spiked the monetary base, but it has not flowed through to the money supply and ordinary people.
Simply put, the Fed is propping up the banking system. Bernanke is using the cover of a weak economy to do that because the concept is not politically popular, but it’s what the Fed has to do because the underlying system is just as broken today as it was in 2008.
TGR: Let’s go back to your statement that the economy is doing worse rather than better. Didn’t positive housing start statistics and consumer confidence numbers just come out? How do you know if the economy is getting better or worse?
John Williams: Housing starts are still down 60% from their peak. Based on the first two months of the second quarter, housing starts are on track for a quarter-to-quarter contraction, a rather substantial one. Industrial production also is on track for a quarterly contraction.
These indicators easily could foreshadow a contraction in the current quarter’s gross domestic product. The underlying economic issues remain, as in 2008, with structural constraints on consumer liquidity and banking system stability. With those ongoing, fundamental weaknesses, there has been no basis whatsoever for the purported economic activity since 2009, or for a recovery pending in the near term.
The consumer directly drives more than 70% of GDP activity. Indirectly, the consumer impacts the balance of the economy. To have sustainable growth in consumption, there needs to be sustainable growth in liquidity, reflected in income and, ideally, supported by credit. Instead, household income is shrinking and traditional consumer credit is heavily constrained.
Headed by two former senior Census Bureau officials, SentierResearch.com publishes monthly estimates of median household income adjusted for the government’s headline CPI inflation number. Those numbers show that household income plunged toward the end of the official economic downturn. Officially, the recession went from the end of 2007 to the middle of 2009, but the reality is that household income kept plunging after the middle of 2009.
Income hasn’t recovered. Right now, it’s flat and bottom-bouncing at the low level of activity for the cycle.
If you look at those numbers on an annual basis, again adjusted for headline CPI inflation, median household income in 2011 (latest available) is lower than it was in the late 1960s and early 1970s. The consumer here is in severe trouble. You can’t have inflation-adjusted or real growth in consumption without real growth in income. Income drives consumption. That’s basic.
You can buy a little extra consumption through debt expansion. The consumer in the precrisis era tended to maintain his or her standard of living by borrowing from the future. Recognizing a developing liquidity squeeze, then-Fed Chairman Alan Greenspan encouraged the consumer to take on as much debt as possible. In the decade prior to the 2008 panic, the bulk of economic growth was fueled by debt growth, not income growth. For the consumer, the credit crisis dried up everything except federally issued student loans, and those don’t buy washing machines and houses.
If you don’t have income growth or credit availability, that takes a toll on consumer confidence. Usually consumer sentiment follows the tone of the popular press on the economy, and monthly movement in the different consumer measures can be quite volatile. Despite the happy hype of recent headline monthly gains in consumer confidence, the news doesn’t have much relevance to our being out of economic trouble. Consumer confidence plunged starting in 2006 and we’ve been bottom-bouncing ever since. Current levels are consistent with numbers seen during the depths of the worst recessions in the post-World War II era. We’re still at recession levels in consumer confidence; those measures have not shown the full recovery that has been reported in the GDP.
Official GDP reporting shows that the economy turned down right after the end of 2007, plunged through 2008 into the middle of 2009, and then started turning higher and has continued higher ever since. If you believe the GDP numbers, the economy fully recovered as of the fourth quarter of 2011, regaining its prerecession highs, and has continued to expand ever since. No other economic series confirms that pattern.
The big issue in the reporting of the GDP is with the inflation-adjustment process. The government in the last several decades has changed its inflation estimation methodologies to lower the reported rate of inflation. In the case of the CPI adjustments, it’s has been trying to cut budget deficits by using a lower inflation rate to calculate cost of living adjustments for Social Security. A number of the changes to CPI reporting also affected estimates of the GDP’s implicit price deflator, the inflation measure used to remove the effects of inflation from the GDP calculations.
If you correct for the understatement of GDP inflation, the accompanying overstatement of economic growth reverses, showing that the GDP started to turn down in 2006, plunged into 2009 and has been bottom-bouncing along with other indicators, including housing starts, median household income and consumer confidence measures, and along with reporting of other series corrected for inflation overstatement, particularly industrial production and real retail sales. Other real world business indicators, including corporate sales of consumer products, are showing the same pattern of plunge and bottom-bouncing, as opposed to plunge and recovery. The reality is that the economy is weak and it’s going to get weaker.
We haven’t seen a recovery and that is why the Fed won’t end quantitative easing. Any talk of tapering is pure propaganda to placate global markets on the US Dollar, trying to hit gold and maybe get a sense of how the markets would respond to an actual withdrawing of quantitative easing.
TGR: We saw the response loud and clear on Thursday.
John Williams: Yes, the stock market is like a drug addict and Bernanke’s been the drug dealer, pushing direct liquidity injections.
TGR: Do you think the plunge was just a temporary knee-jerk reaction and things will be back to their upward trajectory in no time?
John Williams: The stock market is irrational. It’s heavily rigged with big players manipulating it, and with the President’s Working Group on Financial Markets taking actions to prevent “disorderly” conditions in the equity market, as well as other markets. I would tend to avoid the stock market. Gold took a big hit too, but the underlying fundamentals remain extraordinarily strong for gold. This is not a situation where everything’s right again with the world and the Fed is going to pull back from debasing the Dollar. If anything, the Fed is going to have to move further into Dollar debasement. That is what Bernanke was saying. If the economy doesn’t recover we’ve got to expand the easing. He is propping up the banking system under the cover of propping up the economy. Nothing that he is doing is helping the economy.
TGR: You called the Dollar “a proximal hyperinflation trigger” and said that “gold is the primary and long-range hedge against the upcoming debasement of the Dollar irrespective of any near-term price gyrations.” Yet the Dollar seems to be stronger than ever. What would trigger the Dollar-selling panic that you have predicted by the end of the year?
John Williams: A visibly weaker economy could have a devastating impact on the Dollar. It would force Bernanke to expand rather than contract quantitative easing. That would result in heavy selling pressure against the Dollar and a spike gold prices.
At present, there are four major factors out of whack between market perceptions and the fundamental, underlying reality. These misperceptions will tend to shift toward reality, and a confluence of these factors would be devastating to the US currency.
At the top of the list, at the moment, is Fed policy, which we’ve been discussing. My contention is that the Fed is locked into quantitative easing. It can’t escape it.
A close second are US fiscal conditions and long-range sovereign insolvency risks. Fiscal issues should come to a head after Labor Day, when the government runs out of room with all its current bookkeeping finagling so as not to exceed the debt ceiling. Prospects for a meaningful resolution of the fiscal problems remain nil. In the summer of 2011, the market reaction to the government’s fiscal inaction was clear: Heavy Dollar selling and gold buying came out of that.
The third factor, again, is the economy being a great deal weaker than consensus expectations, based on the indicators I outlined. As weakening business conditions become more evident in the popular economic releases, that should be a large negative for the Dollar. Aside from increasing speculation as to increased Fed easing, it also would have a negative impact on the federal budget forecasts going forward. Economic growth of 4% projected for 2014 is not going to happen. The deficit will explode, and, again, that is very bad for the Dollar.
Finally, developing scandals in Washington have the potential to hit the Dollar hard. The press has started raising questions about a number of cover-ups. I was involved in the currency markets during the Watergate era. I can tell you that on a day-to-day basis in 1974, as the scandal began to unfold, whenever the news was bad for President Nixon, the Dollar took a hit. Anything that questions the stability of the government is a big negative for the Dollar.
All of these factors work in conjunction with each other. That is why I am predicting a massive decline in the Dollar at some point this year, which will spike inflation, certainly spike gold prices and will lead us into the very high inflation environment that will provide the basis for actual hyperinflation in 2014. It’s not just current government actions. It’s series of circumstances that have evolved over decades into a developing crescendo of Dollar debasement or inflation.
TGR: You recently wrote that we’re approaching the endgame based on volatility in equities, currencies and monetary precious metals of gold and silver. What will that endgame look like? And how will we know if we are in it?
John Williams: Primarily I would look at the US Dollar as an indicator, when very heavy, consistent, massive selling of the US Dollar and Dollar-denominated assets begins. As the selling becomes heavier, pressure to remove the Dollar from its current world currency reserve status should become unstoppable. I would take that as a sign that we are moving into the position that will set the stage for the hyperinflation.
TGR: Whatever happens in the economy, it sounds as if Bernanke’s days will be numbered. What could that mean for economic policy and Federal Reserve actions? And what advice do you have for whoever takes his place?
John Williams: I wouldn’t want to be the person who takes his place. Bernanke is a very smart and generally well-intentioned individual who’s in a situation that was not of his creation, but one that he has been trying, with great difficulty, to extricate the Fed from. The Fed doesn’t have any real options here. The best it can do is continue to buy time.
There’s nothing the Fed can do that will stimulate economic activity, except possibly to raise interest rates. Low interest rates are actually negative for economic activity at this point. They constrain loan growth. With higher interest rates, banks have the ability to make more of a profit margin on their lending. The greater the profit margin, the greater the ability to lend to perhaps less qualified borrowers, to take a little more credit risk, but with that also comes loan growth. That helps fuel economic activity. It might even cause the money supply to pick up. The biggest constraint on bank lending, though, remains the still-troubled nature of the banking industry.
Separately, low interest rates devastate the finances of those trying to live on a fixed income. It used to be you could go invest your money in a CD and make a positive return, after inflation, and your money was safe, at least within the insured limits of the banking system. That’s not the case anymore. Domestically, there is no safe investment where you can beat the rate of inflation. Government policies are driving savers into riskier investments, such as the highly unstable stock market.
TGR: So you think by default we will have a continuation of the current policies?
John Williams: Yes, effectively. The Federal Reserve board has run along with the program, moving in accord with the government to save the financial system. Back in 2008, it could have let the banking system fail. Understandably, though, the Fed and the federal government decided to save the system at all costs. That meant spending, creating, lending and guaranteeing whatever money was needed. Whatever had to be done they did. They prevented the system from collapsing, pushing the problems down the road. Now all those problems again are coming to a head. With many of the same risks in the system today, as in 2008, there is potential for another panic. The Fed has to keep easing here to maintain liquidity in the banking system. The US central bank does not have a choice in the matter.
TGR: It sounds as if there isn’t a lot that Bernanke’s replacement could do. Would your only advice be don’t hold a lot of press conferences?
John Williams: That would be a big plus. If there’s bad news, basically the central banker has to lie. If he or she says, “The banks are going to collapse,” or “The economy is going to hell,” that will move the process along in a self-fulfilling negative cycle. Accordingly, central bankers often attempt to put false a positive spin on things. Having a Fed chairman hold press conferences is actually something relatively new. “Jawboning” was one tool Bernanke thought he could use to influence the economy and market behavior. That’s deliberate policy, but it has problems, as we saw on Wednesday. The tradition for Fed chairmen has been to keep remarks to the minimum, whenever possible.
TGR: Sounds like some very good advice. Thank you for your time.
John Williams: Thank you.
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Jun 25

Ten-Year US Treasury Yields: King of Numbers

Gold Price Comments Off on Ten-Year US Treasury Yields: King of Numbers
Nothing matters more in money than the 10-year US Treasury bond rate…

ONE NUMBER is, by far, the most important number in finance, writes Steve Sjuggerud in his Daily Wealth.
And in the last two months, this number has soared by 60% – its greatest percentage move since 1962.
This is bad news. When this number changes, every other number in finance changes. Because when you’re talking about money, the interest rate on the US 10-year Treasury bond is the most important number on the planet.
Just about everything relating to the financial markets is either based on the 10-year Treasury yield or strongly affected by it.
In the last six weeks or so, the interest rate on the US Treasury bond has soared from 1.7% to 2.6%. That’s a huge jump in such a short time. And it’s having ripple effects.
For example, mortgage rates have soared from 3.4% in early May to 4.4% today. Nothing has changed in real estate. It’s just that mortgage rates are based on the 10-year US government bond rate. And when it goes up, mortgage rates go up.
It’s also causing Brazilian stocks to crash. The stock market in Brazil has lost 20% of its value – in just the last month. You might think that something went really wrong in Brazil for Brazilian companies to fall that much. But that’s not it. The 10-year US Treasury bond yield went up. And that has crushed asset prices across the globe, including Brazilian stocks.
Here’s the basic idea…
You might not have realized that what happens in a US government bond affects the world. But it does…more than most people can imagine.
If this interest rate keeps going up, it could spell the end of our good times… It could mean the end of the Bernanke Asset Bubble.
I’ve been writing about the Bernanke Asset Bubble for years. It’s the idea that Federal Reserve chairman Ben Bernanke’s zero-percent interest-rate policy will drive stock prices and home prices higher than anyone can imagine. My True Wealth subscribers have made some fantastic gains through the Bernanke Asset Bubble so far.
But we have hit a few of our “trailing stops” in recent days. If the interest rate on the 10-year Treasury keeps going up, our Global Bernanke Asset Bubble thesis will struggle.
In the short term at least, I think Treasury yields will come down. Because all the bets now are on higher interest rates for 10-year Treasurys. Usually, when EVERYONE is making the same bet, the opposite happens. The simple reason is there is nobody left to make that same bet to push ihigher.
So I think the most important number in finance will start to fall – for a little while – and the boom will kick in again.
If I’m right, we’ll continue to profit from the Bernanke Asset Bubble. If I’m wrong, I’m willing to follow my trailing stops and sell.
I urge you to do the same.
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Jun 25

Continental Gold Limited Remains Debt-Free and Well-Funded

Gold Price Comments Off on Continental Gold Limited Remains Debt-Free and Well-Funded

Continental Gold Limited (TSX:CNL,OTCQX:CGOOF) announced updates from its Buriticá project in Antioquia, Colombia.

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Jun 24

Paranoid? Or Justifiably Worried?

Gold Price Comments Off on Paranoid? Or Justifiably Worried?
How easy would it be to ‘disappear’ you from the internet…?

TRAVEL is tiring. Often, it’s our laptop computer that shows the signs of fatigue first, writes Daily Reckoning founder Bill Bonner.
Yesterday, it got fed up and refused to deliver the mail. We could neither send nor receive mail…neither from our laptop nor from our iPhone, which normally accesses our email account.
We should have been delighted. We were in Ireland. Now we had an excuse not to work. We could pay attention to our surroundings…and enjoy them.
But with no means to contact the outside world, we grew anxious. Who was trying to contact us? What important messages were we missing? And who was monkeying around with our email account?
The root of the problem was that our email provider had noticed some strange behavior. We were apparently using our account from two places at once. It looked as though we were in Ireland and in the US at the same time. The provider suspected that our account had been hacked. It simply shut down the service.
We still walked and talked…we still took up space and breathed air…but on the internet, we had ceased to exist. We had disappeared.
No forwarding address had been left. We could not communicate with anyone. We could not go onto Amazon and buy anything. We could not make travel arrangements or reserve a table for dinner.
This, of course, raises deep and disturbing questions about the nature of existence. If you do not exist on the internet, do you really exist at all? Do you exist fully?
We pass over those questions and go on to more practical…but no less worrying…matters.
We thought, briefly, about putting in a call to the National Security Agency.
‘Hello, we’re hoping you can help us. Our email account stopped working. We’re afraid we may have missed something. And we know you fellas make a habit of recording every communication, whether it is any of your business or not. So would you mind sending our email from yesterday to another address?’
On further reflection, we decided not to make the call. They might have thought we were joking. They don’t appreciate jokes. At least, not jokes at their expense.
Twelve years ago — when the ‘homeland’ was first invented (a smooth adaptation of Hitler’s ‘fatherland’) and TSA agents began frisking grandmothers — the whole thing seemed like a joke.
It looked as though America’s leaders had gotten themselves into a hysterical panic. They thought al-Qaida really existed…that there were terrorist sleeper cells in every hamlet and burg…and that these infiltrators were about to wreak havoc on the nation.
It was a preposterous lie, but we figured they’d come to their senses soon.
Instead of coming to their senses, America’s leaders — Republican and Democrat — began to see the advantage of a war that could neither be won nor lost.
As long as the country was ‘at war’, the money flowed freely to zombie ‘defense’ industries and the good citizens submitted to indignities that would be intolerable in a more civilized nation.
Leaving the US, our 93-year-old mother was forced to go through the body scanner twice. 
Wheelchair-bound, with severe osteoporosis, she was unable to put her hands above her head as ordered. So the TSA enforcer insisted that she do it again.
Why? Did anyone really think our mother posed a threat to air traffic safety?
Arriving in Ireland was entirely different. The agent barely looked at our passports. 
‘Welcome to Ireland,’ he said.
In Henry Downes bar in Waterford, a group of Irishmen recounted their own experiences with America’s border guards.
‘It is unbelievable the way they treat you,’ said one man. ‘We got in line. Someone began shouting at us. The woman in front of me didn’t speak English well. She was French, I think. The guard asked her what she was in the US for. She explained that she had come to visit her daughter who had just had a baby. The guard acted like she was lying. He kept challenging her until she started crying. I don’t think she was used to being treated like that.’
‘I go to the US often,’ said another young man. ‘I know I have to have a story to tell them. I work for a US company. But if I say that, they think I am working in the US without a work permit and it gets very messy. So I have to come up with a plausible reason to go. But you have to be careful. They’ll try to catch you up. It’s very unpleasant. I only go when I have to.’
‘It feels like you’re entering a police state,’ a young woman took up the conversation. ‘They have guns and dogs. And they yell at you. I’m afraid of being taken out of the line for closer inspection in a little room somewhere. I know it is not reasonable, but I feel like I’d never come out. That I’d just disappear.’
Unreasonable? Yes. But not unthinkable. People can now disappear — electronically. 
The NSA has 14,000 smart people in its employ. They can know exactly what you are writing to friends and associates.
They can put down an electronic cone of silence around you. Your phone and your computer could stop working. You may never know why. Whom would you call? How?
They could also shut down your bank account and all your credit cards. Then how would you support yourself?
Suppose you were traveling when this happened? Again, you may never know why…and may never have any means of remedying the situation. You simply disappear.
As far as we know, the Federal Reserve, and their private-sector zombie contractors, are not disappearing American citizens…yet.
But the fruit hangs too low to resist. With a few keystrokes, they can silence their critics. They can muzzle their enemies. They can disappear anyone who cares about privacy or liberty.
And then, if you try to leave the country, you will find that your passport won’t work, either. You will arrive at the border (assuming you find a way get there without money) and the border guard will take you into custody. You have been traveling with a fraudulent passport, he will say.
Paranoia? We hope so.
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Jun 24

A Terrible Time for Gold & Silver Miners

Gold Price Comments Off on A Terrible Time for Gold & Silver Miners
But that creates lots of high-value opportunities says this analyst…

CHEN LIN writes the popular stock newsletter What Is Chen Buying? What Is Chen Selling? for Taylor Hard Money Advisors, Inc.
While a doctoral candidate in aeronautical engineering at Princeton, Chen found his investment strategies were so profitable that he put his PhD on the back burner. He employs a value-oriented approach, overlayed with market timing via technical analysis of price charts.
Here he tells The Gold Report what he looks for to make the critical purchase decision, and why he believes that platinum and palladium should do well regardless of what is happening with gold and silver.
The Gold Report: As you noted in your last interview with The Gold Report in February, Goldman Sachs was predicting that gold would to go down to $1200 ($1200 per ounce) in several years, and now “Dr. Doom,” Nouriel Roubini, says it’s going to $1000 per ounce. What’s your view?
Chen Lin: In the near term, I think gold is being controlled by the paper market on Wall Street, which is unfortunate. However, I’m still bullish for the long run.
TGR: Do you see anything on the economic horizon that could create a more positive environment for gold in the near term?
Chen Lin: Personally, I’m not sure all the problems are behind us. Japan just had a big swing in the stock market and is going through a risky experiment to do a quantitative easing (QE), which is actually on a much larger scale than that of the US.
I think Japan, for the next few months if not year or two, will decide how successful QE can be. Japan is doing much, much stronger QE than that of the U.S, which has 100% debt to gross domestic product (GDP). Japan has over 200%. So actually it’s a blessing to the US to see what is going to happen with the Japanese experiment. I think that will be a key indicator for the longer term effectiveness of QE.
TGR: What do you think is going to happen with silver in light of the gold price predictions?
Chen Lin: Silver has been more volatile than gold. I’m also bullish long term on silver. But near term, there could be more downside because investment demand is down and there could be a surplus this year. Only investment demand can pick up the surplus. So if the demand is not here, we could have more downside with silver. Again, I’m watching the exchange-traded fund inflow and outflow very carefully to see the investment demand for both gold and silver.
TGR: What part of silver demand do you think might be due to industrial uses versus investment or speculation?
Chen Lin: Demand has been picking up especially for electronic components, but the total production in silver is much greater than industrial demand. The surplus has to be absorbed by either jewelry, which is limited, or other investment demand.
TGR: You talked last time about your more positive outlook for base and industrial metals. Does your outlook remain the same?
Chen Lin: I’m still bullish on platinum and palladium. Both the European Union and China will have new car emission standards starting in January 2014. I believe the car manufacturers will start to stockpile those metals in the second half of 2013. Plus, we have South African labor issues and then Russia finishing up stockpiling palladium. I’m bullish on both metals, and I have been holding both.
I actually turned quite bearish on base metals earlier this year, right after the February interview, because I saw rapid slowing in China. I even told my subscribers to write a note to themselves saying China is slowing down and then put it on their monitors so they would be reminded every time they trade. I believe this is a major change in the commodity market, and it can play out for years.
As I stated in my newsletter, I shorted copper as a trade. I also shorted the Australian Dollar, oil and US government bonds. I’ve already closed the Australian Dollar short for a nice profit. I shorted it when it was trading at a $1.05 premium to the US Dollar and now it has gone down to $0.92. So, generally, I turned very bearish on base metals, but I’m still bullish on the platinum group metals – platinum and palladium.
TGR: How are your current price expectations influencing your investment strategy and stock picks at this time?
Chen Lin: Because of the near-term uncertainty and with summer coming, which is usually the weakest period for gold and silver miners, I’m actually trying to stay light on both silver and gold miners except in special situations. For the miners, I focus on those that can be self-funding and do not need to come to the market to issue shares that dilute existing shareholders.
TGR: Can you tell us how your gold and silver stock portfolio has been doing since last February and how you’ve been coping with this choppy market?
Chen Lin: My portfolio has done terribly this year for gold and silver miners. As I told my subscribers, when gold and silver started to crash in early April, I pulled back and I moved the capital to hotter areas, like biotech. I’m still keeping some positions in gold and silver miners, and I believe one day the market will turn around.
TGR: So what kind of strategy should investors be looking at now when it comes to precious metals investments over the next few months?
Chen Lin: I’m cautious on gold and silver mining because the end of June is the end of both the quarter and the half of the year. There could be more fund redemptions in the near term. But I like special situations. So those kinds of special situations exist for those investors who are willing to look into the market. The first thing for investors in this brutal bear market is to stay alive. I believe there will be great opportunities waiting for us.
TGR: Do you think any of these companies are takeover targets at this point or do the potential buyers have too many of their own problems to be worrying about takeovers?
Chen Lin: That’s a great point. The majors are having problems. They are facing management changes and shareholder revolts. There may be some takeover targets, but I would first want the company to be self-funding and self-growing, and there will be winners coming out of this correction.
TGR: Any other thoughts that you’d like to leave with us on the precious metals?
Chen Lin: The gold and silver miners are going through a terrible time. Some of the problems are due to the weak gold and silver price, but a lot are due to mismanagement. The miners could be weakened further as we head into the summer, which is the traditional weak season. This is truly a stock picker’s market because people are throwing out the baby with the bath water. Right now, I’m focused on special situations. The one thing I hope comes out of this correction is that miners learn lessons from their past failures and that they can run lean and efficiently. Then if gold and silver take off, we can have some huge rallies in the stocks, just as in 2009.
TGR: Managements tend to get overly optimistic when things are going well, just like real estate investors. Then when things get tough, they learn lessons.
Chen Lin: Let’s hope they learned the lesson. There has been a lot of incredible mismanagement.
TGR: Thanks for speaking with us today, Chen. We appreciate your updates and hearing about your current expectations.
Chen Lin: Thank you.
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Jun 22

Estrella Gold Continues to Work with Cliffs Natural Resources Exploration on Henry Sur

Gold Price Comments Off on Estrella Gold Continues to Work with Cliffs Natural Resources Exploration on Henry Sur

Estrella Gold Corporation (TSXV:EST) announced that Cliffs Natural Resources Exploration Inc., a wholly owned subsidiary of Cliffs Natural Resources Inc. (NYSE:CLF), has decided to fund additional exploration work on the Henry Sur property, following the expiration of the Alliance Agreement.

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Jun 20

What Happens If the Fed Starts to ‘Taper’

Gold Price Comments Off on What Happens If the Fed Starts to ‘Taper’
The Federal Reserve can’t print money forever…

THE WAIT is over. The Federal Reserve will conclude its Federal Open Market Committee (FOMC) meeting today and, of course, all of you will know what Chairman Ben Bernanke’s current thinking will be, writes George Leong of Investment Contrarians.
We have been hearing grumblings from other Federal Reserve members across the nation about how the voting members should consider tapering the Fed’s bond buying.
While there has been no timeframe offered, the overall feeling, including mine, is that the Federal Reserve must have an exit strategy in place.
The economy is showing signs of improving in consumer spending, gross domestic product (GDP) growth, the housing market, and manufacturing; albeit, the jobs market is still not at the level that the Federal Reserve wants to see.
Yet I have been concerned about the flow of easy money, a flow that has helped to drive the global economy and stock markets.
Take, as an example, the big Ponzi scheme created in Japan through the adoption of “Abenomics” by the country’s free-spending Prime Minister. The trillion-Dollar stimulus plan drove up the Japanese Nikkei 225, but the rate was way overblown. Japan’s economy is showing signs of improving, but just like the US economy, the Japanese economy is artificial.
Wait to see what happens once they start tapering the monetary stimulus. The potential result from this tapering is why stocks were under pressure leading up to today’s meeting. In Japan, when the Bank of Japan recently refrained from adding additional stimulus, stock traders ran for the exits.
Trust me: the same will happen here when the Federal Reserve announces its intentions, and it will be worse when they announce when the tapering might start. But this would only be the beginning of a potential stock market correction that will occur as interest rates and yields edge higher.
The Federal Reserve will not be able to print money forever. The stimulus will need to be tightened, but with advance warning and in an orderly manner.
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