Gold in a Low-Inflation Environment

19 October 2010

"There is too little money in the economy."     – Bank of England governor Mervyn King, 19 October 2010 SO the FEDERAL RESERVE is dead-set on creating inflation, and it's plain to see why. Household debt in the US now stands so large, paying it down to 2001 levels – as a proportion of income – would require a drop in consumer spending of $2.7 trillion, some 18% of this year's gross domestic product. Deleveraging to 1990 levels of gearing (again, a then-record at the time) would cost US households $3.5 trillion, well over a quarter of their 2010 incomes. It ain't gonna happen, in other words. Not this side of Paul Krugman joining John Maynard Keynes in that eternal "long run" in the sky. So what's needed, or so the theory runs, is inflation in prices. It would make deleveraging very much easier, as happened during the last retrenchment, back in the early 1980s. Consumers got to pay down debt without...well, without paying it down! And that gave households enough confidence (and rope) to start expanding their debts again. Y'know, like the corporate sector is already doing today... "We do have to wonder just what sort of 'liquidity trap' we are in – a state of paralysis where only cash will do, remember – when US (indeed, global) high-yield [debt] issuance hits its highest on record, as it did this past quarter," writes Sean Corrigan of Diapason Commodities at the Cobden Centre. "We also wonder just what sort of 'liquidity trap' we are in when equity IPOs increase 55% in value and 215% in number from the same period in 2009. "We further wonder just what sort of 'liquidity trap' we are in when US-based [mergers and acquisition] rises 22% year-on-year, with private-equity involvement up 117% to a two-and-a-half-year high and, as such, [is] responsible for more than 10% of all deals. "We wonder, too, just what sort of 'liquidity trap' we are in when the number of ETFs grows 22%, their assets rise 14%, and trading volumes jump 15% in the first nine months of the year." But while all the money spat out since late 2008 by the Federal Reserve and its friends in London, Tokyo, Frankfurt and Zurich has indeed found a home – and a home where it's got busy with multiplication, too – it hasn't yet reached the "economy". Not the "economy" that you, me and Mervyn King at the Bank of England think of when we use the word – meaning our neighbors' pockets. Because although central banks can raise asset prices, as well as the cost of living, by nakedly slashing the value of cash...and even though they can do it with greater success than the Japanese beta-test of 2001-2006 – when the Nikkei-225 just about got back to break-even, rather than adding two-thirds as the S&P 500 has done since early 2009...they have yet to reverse unemployment or raise household incomes. So even with debt falling in real terms, households lack the inflated incomes they need to take advantage. Yes, Washington's official Consumer Price Index may indeed be a joke, just like today's near-zero reading of inflation. Yes, the US Bureau of Labor Statistics itself admits that, if international standards are applied, CPI rose 1.9% in the year-to-Sept., rather than the 1.1% headline reported. And yes, John Williams' Shadowstats puts the true rate of US inflation some four times higher again, way up at 8% per year, simply by applying the methodology used by Washington back in 1980. But inflation in prices is only making things worse for consumers, not better, because inflation in wages is entirely absent. That's unlikely to change with unemployment running at either 10% (official), 17% (the old U-6 measure) or perhaps 22% (Shadowstats, again). The top of the debt cycle – now three years since – therefore remains structural, because households cannot and will not raise their borrowing. The recent past – and likely future – of the US economy, therefore, really is another country. Japan, in fact, as this chart from PragCap so neatly shows... Looking ahead, Step #1, we guess from here, is that the Fed keeps pumping money into the banks – and thus commodities and financial markets – until inflation on the official CPI finally shows up. Or hyperinflation. Or a hot war with China. Or a sweeping Democrat victory in Utah. Whichever happens first. Let's call it the "Krugman Trap" – the belief that, when an idiotic policy fails, it must be applied again, but raised to the power of, say, the number of idiotic things you can say in one column for the New York Times. Step #2 – once that fails to work, again – will see the Fed stop buying Treasury bonds, and try instead to jivvy up corporate spending and bank lending by buying commercial debt, equity funds, or even real-estate investment trusts direct. Never mind that debt issuance and equity prices have had all the help they might need; it's what Japan is about to try, 20 years after its bubble blew. Why not steal a march on Tokyo, and apply its latest ideas right now? "With growth in private final demand having so far proved relatively modest, overall economic growth has been proceeding at a pace that is less vigorous than we would like," said the Fed chairman in his recent speech, Monetary Policy in a Low-Inflation Environment. "In particular, consumer spending has been inhibited by the painfully slow recovery in the labor market, which has restrained growth in wage income." If only inflation in prices would spark inflation in wages – or consumers just did what they should and got back to borrowing and spending – then the recovery would be upon us! Even though, as noted above, the household sector in aggregate has lost all appetite for extending its debts without retrenching first. So finally, and unless sanity breaks out at the next Jackson Hole summit of central bankers...and barring the intervention of hyperinflation, a hot war with China, or the Democrats winning Utah...we move to Step #3 – outright gifts of cash to US households, personally delivered by the Fed chairman in a Santa outfit, if not buried in disused coalmines. Because that's what it will take to get US households spending more than they earn again any time soon. And it's a trick the Bank of Japan has yet to try...so hey! It might just work! "In reality," writes Nomura economist Richard Koo in his 2008 book, The Holy Grail of Macroeconomics, "borrowers – not lenders, as argued by academic economists – were the primary bottleneck in Japan's Great Recession. If there were many willing borrowers and few able lenders, the Bank of Japan, as the ultimate supplier of funds, would indeed have to do something. But when there are no borrowers the bank is powerless." You can lead a horse to water, and drown the bloody thing if you want. But you can't make people borrow when they've barely begun to pay down the greatest credit bubble in history. The problem for retained wealth, therefore, is trying to second-guess what Dr.Ben's patented deflation cure – the one he urged on Japan's central bankers around a decade ago – will do to your money. Adrian Ash Head of Research Bullionvault.com City correspondent for The Daily Reckoning in London, Adrian Ash is head of research at BullionVault.com – giving you direct access to investment gold, vaulted in Zurich, on $3 spreads and 0.8% dealing fees. Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Gold: Strong Bullish Action

Gold's strength is unusual. Just when we thought that gold was taking a breather from its stellar rise, it quickly turned up. Gold has already surpassed its June record high. Its decline through July was moderate, giving up less than 8%, and this action is bullish. Someone is clearly buying up gold at every opportunity. Is it central banks, hedge funds, or nervous investors? We think it's all of the above. A NEW ERA Many believe that gold will have a sharp decline before another up leg gets underway. It's a rare time in history to see gold rise steadily for almost two years, without more than a 14% correction. This alone is why another leg up is unexpected.This month, however, marks a year since gold broke into a stronger phase of its decade-long bull market when it closed above $1,000. If gold continues to rise, it will clearly reinforce that a stronger phase in the new era of precious metals is indeed underway. GROWTH MARKET Gold demand continues to grow. It surged 36% in the second quarter and the amount of gold held at exchange-traded funds is way up. The SPDR Gold Trust (NYSE: GLD) is the sixth-largest holder of gold in the world today. But even with overall demand growing, gold as a percentage of global financial assets is still small compared to 1980, when the gold price reached a record high. This tells us that gold's bull market is still young, in spite of its 9 1/2-year rise. HISTORICAL COMPARISONS In fact, the gold price this past decade reminds us of the US stock market in the 1980s. It had a good run, but the best was still to come. The 1990s were filled with optimism and good times. A new revolution in technology was in full swing, which pushed the stock market to new heights.In comparison, the coming decade has the opposite outlook. While technology continues to get better, the US and other Western economies are racked with debt, global power is shifting, and we have war. BONDS - A VIABLE ALTERNATIVE? Bond prices have been soaring as interest rates decline. Recessionary pressures took their toll, but it looks like the bonds' strength won't overtake gold's. In 2003, gold confirmed its strength over bonds for the first time in over 20 years and has been stronger than bonds since then (excepting the brief gold dip during the heat of the meltdown in 2008). A CLASS BY ITSELF Gold is stronger than stocks, bonds, and the dollar... and it's positioned to move higher in an intermediate rise, especially considering the seasonal trend. For those of you who have been waiting to buy at a better price, we believe it's best to average in. A correction will come, likely in October, and when it does, take advantage of it -- but don't wait for it completely. Keep new positions focused on gold and silver from now onward. A NOTE ON SILVER Silver is starting to take off. It jumped up in recent weeks as it benefits from the gold and copper rise. You may remember that silver outperforms gold when the resource sector and gold are both strong at the same time. This was the case from 2003-2007 and it's starting to happen again Note silver's uptrend and channel since 1990. It actually reached a low in 1990 and it essentially moved sideways during the 1990s while gold fell. Since 2004, silver has been strong, and it doesn't show any sign of losing momentum. Now that silver has closed clearly above its 2008 high of $20.80, the $25-$28 level is our next target. Mary Anne and Pamela Aden Editors, The Aden Forecast Aden Forecast.com Mary Anne and Pamela Aden are internationally known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts on gold, gold shares and the other major markets.

Gold futures hit new high near $1,378 - MarketWatch

Gold futures hit new high near $1,378 - MarketWatch

TOKYO (MarketWatch) -- Gold futures climbed Thursday in Asia's morning trading to touch a high of nearly $1,378 an ounce on Globex. Expectations for another round of quantitative easing from the U.S. Federal Reserve had fueled a rise in prices Wednesday in New York, which marked the 16th record high in five weeks. In Asia's morning trading, December gold was up $6.10 at $1,376.60 an ounce on Globex after trading as high as $1,377.90. On Wednesday in New York, it settled at $1,370.50, up $23.80.

Gold futures hit new high near $1,378 - MarketWatch

Gold futures hit new high near $1,378 - MarketWatch

TOKYO (MarketWatch) -- Gold futures climbed Thursday in Asia's morning trading to touch a high of nearly $1,378 an ounce on Globex. Expectations for another round of quantitative easing from the U.S. Federal Reserve had fueled a rise in prices Wednesday in New York, which marked the 16th record high in five weeks. In Asia's morning trading, December gold was up $6.10 at $1,376.60 an ounce on Globex after trading as high as $1,377.90. On Wednesday in New York, it settled at $1,370.50, up $23.80.

Massachusetts governor race - Do we really have any good choices

Nobody Looking Good in This One

Massachusetts Gov. Deval Patrick, saddled with a weak economy and an anti-incumbent mood in the electorate, should be smiling after a week that saw his two rivals go after other with a gusto that ought to cheer anyone not in the crossfire.

So did Gov Deval Patrick raised taxes 8 time, Did property taxes go up, and did the state lose jobs?  Most likely Yes but remember the time we are in and what we have just been thru.  Time we hard on every one in the state of Massachusetts.  And we want the servers need in our town and city's right?  Were does the money come from?

Republican Charlie Baker is the former CEO of Harvard Pilgrim Health Care. He has served as state secretary of Health and Human Services and secretary of Administration and Finance.

Charlie Baker might claim that he was only "one of about 50 people" involved in the Big Dig, but, as Brian McGrory from the Boston Globe noted, Baker was “state secretary of Administration and Finance, the most prominent fiscal adviser to the governor” and “the state’s chief budget writer” at the time of the Big Dig.  [Boston Globe, 3/3/10]  

Charlie Baker might claim that his "approval meant nothing", but the fact is that Massachusetts taxpayers are STILL paying off the cost of the Big Dig to this very day.  [Boston Globe, 3/3/10]  


Do we all want this type of person running our state???

If you want to say goodbye to jobs in Massachusetts, say hello to Charlie Baker.  While he claims he’ll improve the job situation in Massachusetts, the truth is that Baker favors tax loopholes that encourage corporations to ship jobs overseas. [ATR, 8/12/10; USA Today, 3/21/08]

So the question is this do we want more of the same Gov or do we want to change and see that he is or might follow in Gov Patrick foot steps for the next four years!!

Israel vs Palestine a Repeat of History

Are we not seeing history repeat itself? Germany vs the Jews? That was not right so what give the right for Israel to the the same to Palestine?Its been along time since any one has seen peace in that area.  So what will it really take before peace is seen? Another War were no will win and the lose of life will be greater than anyone can ever see?


We all should call on Israel to stop and think and make PEACE!!