Friday, May 26, 2006


Markets Quiet Going Into Holiday Weekend

A quiet trading day to end a busy week. "The Canadian dollar dropped slightly against the U.S. dollar on Friday, unable to carry momentum from a rebound in commodity prices into a muted session heading into a long U.S. holiday weekend. The loonie closed at C$1.1073 to the U.S. dollar, or 90.31 U.S. cents, down from C$1.1067 to the U.S. dollar, or 90.36 U.S. cents, at Thursday's close."

"'The Canadian dollar managed to hold in today because we saw a further rebound in a lot of the commodity prices and the Toronto Stock Exchange,' said Doug Porter, deputy chief economist at BMO Nesbitt Burns. 'Generally the U.S. dollar was a little bit stronger and that may have been one reason why the Canadian dollar didn't show more strength in the face of a rebound in commodity prices and just overall the markets were a little bit quieter heading into the U.S. long weekend."

"Gold futures climbed Friday in a holiday-shortened trading session as renewed strength in the U.S. dollar lured investors away from the precious-metals market, but prices still ended the week with a loss of more than $6 an ounce. Gold for June delivery rose $2.50 to close at $651 an ounce on the New York Mercantile Exchange after trading as low as $640.50."

"'We cannot expect full-blown participation in the gold-trading pits to show up in terms of commitments to positions either [Friday] or (overseas) on Monday,' said Jon Nadler, an analyst at 'The current gold-price range may well have $675 as the overhead resistance point that needs to be overcome before traders declare the recent correction as being ready to be archived,' said Nadler."

"On Thursday, gold rallied $11, but prices had dropped more than $36 Wednesday. July silver added 13 cents to finish at $12.73 an ounce, ending 3% above last Friday closing level. June palladium rose $3.10 to close at $355.10 an ounce, up 1.5% from last week's close of $350, while July platinum closed at $1,298.10 an ounce, up $3.10 for the day, but down 0.9% for the week."

"Also Friday, the StreetTracks Gold Trust exchange-traded fund, the first exchange-traded fund to invest in shares of public gold-mining companies, closed higher by 0.6%, or 23 cents, at $38.55."

"Nadler questioned 'how much lighter the correction may have been were the gold ETF products absent from the marketplace. There are some opinions out there that these new vehicles have contributed to the rally (certainly, in terms of offtake), but that they also magnify the intensity and swiftness of the corrective phases of the markets,' he said."

Have a great holiday weekend everybody! If I run across any M&M news, I'll post it.
If I ever get my notes organized, I'll lay out my "depression case" for John in VA, too.

Enjoy the weekend, everyone!
I'll lay out my "depression case" for John in VA, too.

I'm waiting with Prozac in hand!
we've got a long way to go before we have a gold bubble.

"Gold buyers have been waiting 25 years to make a buck," Mr. Battipaglia said. "Now they're saying gold is the answer."
Damn it, John in VA, every time I try to organize my thoughts I feel I'm well on my way to a fair-sized novel. Don't have the time for that, so here goes...


* We're already in a recession -- negative GDP growth, 7+% inflation, 12+% unemployment.
John Williams' Shadow Government Statistics

* We're up to our eyeballs in debt:
America's Total Debt Report
Prudent Bear Chart Library

* Did I mention the zero savings rate?

* Nearly all jobs created this century have been in government or as a result of the boom in real estate. Oh, and real wages are down.

* Wall Street is hiding it's dirty laundry. Addressing unfunded pension obligations would decimate S&P 500 earnings, whereas options expensing would obliterate NASDAQ earnings.

* We're at the mercy of the world, with an over 70% dependence on foreign energy, and a $700B+ current account deficit.

* Homeownership has a "natural" historic rate of 64%. This rate has reached 69% through extensive subsidies and agressive sub-prime lending, despite lower overall affordability.

* Household formation runs about 1.3M per annum and housing unit destruction runs around .3M per annum; however, housing construction has averaged 2.2M in recent years.

* Despite historically low but rising rates, ARMS dominate and sub-prime lending is at record highs.

* Despite MBS, bank exposure to RE is at record highs whereas bank reserves are at record lows. [Note: Pension funds also have large MBS exposure.]

* The "Housing ATM" and the "wealth effect" have allowed consumer spending to rise faster than incomes.

* Adjusted for inflation, size & quality of construction, home prices were last at their historical median in 1996(!).

* Despite a near doubling in the U.S. median home price, homeowner equity as a percentage has declined.
[NOTE: Even the preceding statistics can misleadingly understate the underlying problems. For example, a significant minority of people save a lot of money and have paid-off homes, therefore the actual savings rate and homeowner equity percentage (on mortgaged properties) is overstated!]
Ben,TJ,John,John L etc... Take a moment and read this, is you have not already.

Thanks! Two key passages...

Either way, long-term interest rates in the US are headed higher than expected. In addition to an accelerating sell-off in the bond market, US equities are also poised for a swoon.

A sharp decline in US stocks and bonds may begin to shake foreign investors, who hold over US$6 trillion worth of these assets. Foreign capital flight from the US, which has probably already begun, could prompt the devaluation of the dollar and a prolonged period of global economic weakness.

PART I (addendum)

Didn't quite cover the whole pension crisis...

* PBGC facing insolvency, and that's before the likely assumption of obligations from airlines & automakers.

* All levels of government (city, county, state) have growing retirement obligations that will overwhelm budgets within the next decade.

* Most private & government pension program's current funding is based on highly optimistic assumptions of investment returns.

* Private pension plans are shifting from fixed benefit to 401Ks.

* Retirement health benefits are NOT guaranteed by law.
I'm not sure that we disagree on any of the points you laid out (very good analysis, by the way). I've said that we're likely in for a sharp recession; you think it will be a depression. We differ on the severity. What I want to understand is how a severe recession or depression (usually a deflationary event) helps gold and other commodities. What happened to gold prices when Paul Volcker caused a recession by rapidly raising interest rates? Prices cratered.

What would probably be good for gold prices is if the U.S. decides to let the dollar wither on the vine in order to inflate our way out of debt. However, it's hard to see how that will help matters. The government's borrowing costs would skyrocket and the government still needs loads of money to finance all of its obligations (not to mention pork). Furthermore, the direction of the Fed right now is up -- they're removing liquidity and that is propping up the dollar.

Here's what I think will transpire in a recession/depression: American consumers, no longer to tap into the housing ATM, will finally taper their voracious consumption of cheap Chinese-made crap. That, in turn, will bring down China's house-of-cards economy and dramatically curb worldwide demand for commodities, especially industrial metals like copper. Gold, which has been trading in sympathy with industrial metals (largely because of the inflationary pressures created by rising metal prices) will decline or stagnate as commodity prices fall.

I think that many gold enthusiasts try to play both sides of the expansion/recession fence. On one hand, when economies are growing they claim that rising inflation and commodity prices in general generate upward pressure on PM prices (which is the correct argument, IMO -- witness how gold prices have moved in generally the same direction as the DOW recently). However, they also try to claim that PMs and other commodities will do well in a contracting economy, when you would expect the dynamic to reverse.
There's certainly a big guessing game going on right now between inflation vs. deflation. (Sadly, there's little argument about the fact that the dollar is doomed, its just the cause of death that's being debated).

I'll throw in my vote for death-by-inflation, partially because it leaves the door open for a possible happy ending in terms of US national debt. Inflation is easier to correct at the central bank level. But IMHO more importantly, inflation is the more politically feasible. For one, it gets the US off the hook more easily for all of its obligaions from Social Security to gov't pensions, and it solves the national debt problem (which is denominated in dollars). It also likely prevents the housing bubble from bursting.

Inflation favors debtors, and we're a nation of debtors.

On the other hand, if we didn't have high oil prices right now, we'd already be in a state of deflation. (Which does make one a bit conspiratorial about oil wars, since technically they're the only thing keeping us from deflation).
John, John, John...

I've just gotten started! So far I've only set the stage. I still plan on covering WHAT'S HAPPENING NOW and then WHERE WE'RE HEADED for both housing and the economy.

I will take a moment to address this statement, though:

I think that many gold enthusiasts try to play both sides of the expansion/recession fence.

That's the interesting duality that is PMs, though.

Annual gold & silver production isn't that large. Gold production goes mostly for jewelry, plus some for industrial uses. Conversely, silver goes mostly for industrial uses, plus some for jewelry, etc. That makes them both basically commodities... in good times. Therefore, they're subject to the same boom & bust cycles commodities experience due to underinvestment / long lead times vs. overproduction.

HOWEVER, in bad times PMs revert to their historical roots as the ultimate store of value. IOW, the one and only true global currency. Fiat money requires faith in the issuer, and bad times shake that faith.

Can PMs possibly benefit from both at the same time? Of course. Even if these were good times, we're just barely into a classic commodity boom cycle. We're not in good times, though... faith in the world's reserve currency is badly shaken and getting weaker. The world's fate (and that of their currencies) is inextricably tied to the U.S., too. Throw in terrorism, Iranian nukes, globalization, and a future where nations will likely fight over dwindling resources, and you have a whole lot of bad vibrations.

Got gold?

p.s.: The end of the housing bubble foreshadows the end of the dollar. Stay tuned for parts 3 through 6 of my series!
TJ & John!
There is another most probable scenario IMO.
Deflating assets (stocks, bonds, real estate etc.) and inflating commodities ( energy, food etc.).
In hard time people don't think of investing but, rather, of survival.

"Gold production goes mostly for jewelry, plus some for industrial uses."
I think you wrong here TJ.
The biggest user of Silver and Gold is central banking industry.
For Hording. This is only money for them. Inter-banking settlements are done by silver and gold. However they never admit that.
That is why I think we are in long term PM bull.
Let me explain.
We all know that since 1980's central banks have done everything possible to suppress price of gold from 0.5% leases, shadow selling for lower than highest bedder prices, dumping on the market, propaganda (gold is commodity not money), to collusion with biggest producers, convincing them to hedge on futures market at the time when spot prices going higher and higher.
This game played very well for long time. What change now?
My explanation is that, all those tricks worked when all the biggest market players have been in agreement. Even when new players showed up on the field: emerging Eastern Europe and later India, they were easily absorbed by the The Team Of Gold Manipulators, because of traditional ties to Western Europe.
But new player with the goals of its own show up on the field. China. And I don't think they can convince Chinese to their gold and silver plays. It may happen later on after possible "Great Depression" in China, but so far they think independently.
I can add to this picture excess of Petrodollars pouring into gold, too.
However, I think jewelry and industrial uses can explain some shorter cycles.
April, May is peak of weddings season in India and, if you look at charts you can see many tops in the spring season.
But you cannot explain rising POG by retail interest. We will see it later, but we are at least 5 years from there.
On depression case.
I think the Fed will inflate like crazy, which we all know is in the process for many years now. recently they were inflating mortgage market. What they inflate next?
I think once again we will see stock market inflated. I am talking new highs on absurdly higher level.
In the last faze of inflating, FED will pay failing medicare and other obligations directly with the freshly printed dollar, just to keep it going. At that point we will be living in Wiemar. And after then collapse, deflation and Greatest Depression.
But we still some time from that and we have some beautiful gold rally ahead of us to benefit and prepare.
It is my take. I hope you dont mind.
Just in case any of you missed this profound insight...

A speech by Sean Corrigan given to the Gold Investing conference May 18, 2006, titled "What Does the High Price of Gold Mean?":
Mike C.:

Deflating assets (stocks, bonds, real estate etc.) and inflating commodities ( energy, food etc.).

Actually, this has been a position of mine (too) for quite some time. Must say, though, it's mostly due to "peak oil", a subject I've read extensively on.

One of the biggest revelations (for me) from "Twilight in the Desert" was that when an oilfield eventually declines production literally drops of a cliff. Once the Ghawar super-giant exhausts itself (sometime very soon), Saudi Arabia's production will be cut in half. Same for Mexico's Cantarell. The day either go down is the day the world market goes from a minor surplus to a minor deficit; that alone could propel oil past $100. When both go? You don't want to think about it.
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