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The GoldBugg Report - Buy Silver For The Long Run

February 19, 2008

TOP HEADLINES AND QUOTES

• "Buy silver for the long run. Nothing available anywhere has the potential to change your economic circumstances like silver."Ted Butler
• Bullion or Mining Stocks Do You Have the Right Mix? In 2005, a study by Ibbotson Associates concluded that holding gold, silver and platinum bullion (7.1% for conservative portfolios, 12.5% for moderate portfolios and 15.7% for aggressive portfolios) could reduce risk and improve returns. During periods of economic uncertainty or high inflation, allocations should be higher. Gold and silver have been used as money for over 3,000 years, and platinum for centuries.
  
  Today, the world's wealthiest families still hold bullion to protect their wealth. Precious metals have proven to be the best protection an investor can have against both inflation and monetary crises. As the financial storm clouds become evident to everyone, any portfolio without bullion is needlessly at risk.
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• There is also the risk of competitive currency devaluation as central banks embark on a massive cycle of global money and credit creation. Inflate or die seems to be the new mantra. This is obviously extremely bullish for the finite currency that is gold and will likely see gold reach its inflation adjusted high of $2,400 per ounce faster than market participants expect. The macroeconomic climate for gold is possibly the most conducive it has ever been.
  
  It is even more conducive than in 1971 when Nixon went of the gold standard. Gold rallied nearly 3,000% in the next 9 years from a fixed price of $35 per ounce to over $850 per ounce. Were gold to again rise 3,000% from its lows in 1999 at some $250 per ounce it would reach $7,500. This is possible especially if politicians and central bankers continue to print and therefore cheapen money in a way akin to a banana republic.
  
  Gold reaching the inflation adjusted 1980 high of 28 years ago of $2,400 per ounce in the next 5 years seems more than likely in the present macroeconomic, systemic and monetary climate. There is little in the way of important data today and thus market sentiment may be again gained from equity markets. Continued volatility in international equity markets will increase safe haven demand for gold.Gold.ie
• Bernanke Warns of Worsening Economy. Fed Chairman Tells Congress That Business Prospects Are Deteriorating.
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• World equity markets lose $5.2 trillion in January. Emerging markets fell 12.44%, while developed markets lost 7.83%, one of the worst ever starts to a new year, S&P reports.
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• January retail worst in almost 40 years in U.S. Here's a sign of how shaky the economy has become: Wal-Mart says its shoppers are redeeming holiday gift cards for basics pasta sauce, diapers, laundry detergent instead of iPods or DVDs.
  
  On Thursday, the nation's retailers turned in their worst January in almost four decades as high gasoline and food prices, a slumping housing market, tighter credit and a tougher job market squeezed consumers. Sales at 43 retailers surveyed by the UBS-International Council of Shopping Centers rose just 0.5 percent in January, well below the original 1.5 percent forecast.
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GOLD

• Is the gold standard still the gold standard among monetary systems. Yes!
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• Cash or Gold is King? Gold will continue to be supported by investment demand internationally due to the international credit crisis but particularly from increasing demand in Asia, the Middle East and internationally. While Indian demand has slowed down recently it is important not to look at this one fact by itself as demand in other regions is outweighing the recent slowdown in demand from India.
  
  The Star Business reports that 'More investors turn to gold amid struggling stock market'. "Cash might be king, but gold could again rule. Amid a struggling stock market, rising prices and uncertain prospects in the property sector, many Chinese people think that gold is the safest and most reliable asset." A range of developments over the past year seems to show the increasing allure of gold. "At the 2007 China Gold and Precious Metal Forum held last December in Shanghai, the China Gold Association estimated that more than a million Chinese then had gold investments.
  
  In Beijing Caishikou Department Store, the capital's largest gold jewellery, accessories and decorations retail store, two tonnes of gold bars commemorating the Lunar Year of Rat, retailing at 238 yuan a gram, sold out in under two hours in November. China's first gold investment instrument, CGS Standard Gold Bars, sold 2.7 times more bullion last year than in 2006." Gold.ie
• Stagflation and Gold. In the same way that the 'R' word (r is for recession in case you didn't know) was verboten some 6 months ago so now the 'S' word for stagflation is verboten despite increasing evidence of slowing growth and increasing inflation and all the classic symptoms of stagflation.
  
  The FT reports that risk aversion among fund managers has reached the highest level in more than seven years, and almost a third of managers have taken out protection against another sharp fall in equities over the next three months. More than two-thirds of the asset allocators in Merrill Lynch's latest monthly fund managers' survey said markets were facing "stagflation", with above-trend inflation combined with below-trend growth.
  
  Stagflation is gold's best friend and saw gold rise some 3,000% or 30 fold from 1971 to 1980 or from $35 to over $850 per ounce. A similar performance by gold would see it reach some $7,500 $250 X 30) in the coming years. While this is certainly possible, it is safe to say that the inflation adjusted high of $2,400 per ounce is a near certainty barring a massive and complete reversal of all the existing supply and demand and macroeconomic and geopolitical fundamentals. This is more than unlikely. Gold.ie
• IMF Gold Sales. Over the last two days gold has greeted the weekend comments regarding the possibility of IMF gold sales with disdain. Unsurprisingly this latest gold sale proposal failed to deter gold buyers. The Italian Economy Minister Tommaso Padoa-Schioppa, announced at the G7 meeting in Tokyo that the Group of Seven (G-7) approved the sale of gold by the International Monetary Fund (IMF) from April.
  
  The IMF has 3,217 tonnes of gold in reserves the third largest holding in the world after the Federal Reserve's 8,133.5 tonnes of gold and the Bundebank's 3,427.8 tonnes of gold. It is unlikely and implausible and is not the first of similar proposals that have gone nowhere. Even Gordon Brown mooted the possibility of IMF gold sales. Despite presiding over the sale of much of the UK's gold bullion reserves at record low prices. Which incidentally has left the UK in a more precarious position should there be a global systemic and monetary crisis.
  
  As ever the proposal was very sketchy in detail. Particularly with regard to how the major obstacle of the majority voting rights of the U.S. in the IMF and the small matter of the U.S. congress having to vote on such a proposal would be overcome. In the past many U.S. lawmakers have been very vocal in opposing IMF gold sales.
  
  It reeks of desperation on the part of the G7 and is a further case of panicked irrational short term thinking designed to treat the symptoms of the present global financial and economic crisis rather than treat the root causes which are cheap money in the form of irresponsible monetary policies which has caused the creation of significant asset bubbles and humongous levels of debt at all levels of western society (particularly in the Anglo Saxon world).
  
  It is especially ironic that in this era of unprecedented systemic and monetary risk that politicians of the G7 are so ignorant that they would sell the one asset which may protect the institutions and the citizens faced with this growing crisis. Whereas any new IMF gold sales today would instead meet with a strong bid from anxious investors and private householders looking to defend their wealth. If it sells gold now, the IMF looks very unlikely to dent gold prices. Indeed, "every time the IMF has sold gold it has actually triggered more buying interest," says Mario Innecco, a broker at MF Global in London, to Bloomberg.
  
  "It will just make it easier for the big sovereign buyers" the big central banks outside the G7 who want to build up their gold reserves "to snap up cheap gold from the IMF." Selling gold is another short sighted illusory panacea which will create more problems for western financial institutions in the long term. Indeed it may ultimately lead to a further increase in the wealth and power of Asian and other emerging economies and diminution in that of western economies and particularly the U.S. Gold.ie
• IMF Gold Sales Face Impasse in U.S. Congress.
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• IMF Gold Sales: Does It Matter?
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• Jim Sinclair: Any IMF sales will be great for gold.
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• Gold a Better Inflation Hedge Than Real Estate. The U.S. will likely spin into a long era of high inflation. The coming years will look like the 1970s. There is also a good risk of hyperinflation, which is a particularly severe bout of high inflation. Thus, the vital question for every investor is: How to hedge, or protect your wealth, against inflation? Some, especially realtors, urge to hedge this risk with real estate. So, should we really hedge with real estate?
  
  The right answer calls for knowledge of two closely-related topics. First, what is an inflation hedge? Second, what makes a good inflation hedge? The first answer is simple. An inflation hedge is an asset that loses little value in periods of rising prices. Thus, it holds its value and its purchasing power during inflation. This also applies to hyperinflation. An investor expecting inflation will buy this asset to hedge against inflation.
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• Merrill Lynch substantially raises gold prices forecast, ups silver too.
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• Newmont predicts all major gold miners will see production decline. As gold prices continually break records, Newmont Mining President and CEO Richard O'Brien warned analysts that the number of major gold prospects are declining globally.
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• More Chinese investors turn to gold amid struggling stock market.
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• Gold-USD Decoupling as Gold Approaches $1,000.
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• India 07 gold demand 773.6 tonnes, up 7 pct on yr WGC.
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• India Saw Highest Gold Demand in 2007.
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• GATA's ad reaches national audience in South Africa.
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SILVER

• Silver Is Leading-James Turk.
  
  The price of gold and silver rarely move at the same rate. The reason for this outcome is that their respective demand is fundamentally different. To put it into economic terms, the demand for gold is inelastic, while that for silver is elastic. In other words, the demand for silver is very sensitive to changes in its price, while in contrast, the demand for gold is relatively insensitive to changes in its price.
  
  The result is that in precious metal bull markets, the price of silver typically rises faster than the price of gold, and vice versa in precious metal bear markets. This relationship is made clear by the following chart of the gold/silver ratio, which shows how many ounces of silver it takes to purchase one ounce of gold.
  
  
  
  As precious metal prices peaked in January 1980, it took only 16.7 ounces of silver to buy one ounce of gold. Thereafter as precious metal prices fell, the ratio began climbing. In February 1991 it took 101.8 ounces of silver to buy one ounce of gold, at which point the ratio reversed course. Since then the ratio has been falling, indicating that the precious metals are in a bull market. The ratio is now 53.8, and I expect will in the years ahead eventually fall to the January 1980 level. In other words, silver is leading.
  
  Since 1991 its price has been rising faster than that of gold. Silver has risen 4.9 times compared to gold's 2.6 times. However, for nearly a year, gold has been rising faster than silver. This short-term uptrend in the ratio can be seen on the above chart, with the ratio climbing and then staying above its 40-week moving average. But this trend is about to change in favour of silver. The ratio looks ready to fall below its 40-week moving average and resume its major downtrend. This event would bode well for silver, which is an outcome consistent with the following chart.
  
  
  
  Silver continues to follow the same pattern from the first pennant. If history continues to repeat, silver will soon exceed $20. Importantly, silver is also looking very good in terms of other currencies. The following charts present silver in terms of the euro and British pound.
  
  
  
  
  In summary, it looks like the short-term trend in the gold/silver ratio will soon be in harmony with its long-term trend, with both trends falling. This event combined with the strength silver is displaying against various currencies could mean that a powerful rally in silver is just around the corner.
• The Gold & Silver Ratio.
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• Silver more compelling than ever. Frankly, I think the case for silver is more compelling today than it was five years ago. When we compare today's circumstances with the current price, silver looks better today. Of course, a 50-cent sell-off then is the equivalent of a $1.50 sell-off now. But a tripling in price then brought us to $13 to $15, now triple brings us to $40 or $45.
  
  Still under priced. The doubling and tripling in the price of silver over the past few years hasn't caused it to become over-valued, based on current fundamentals and circumstances. Although silver has appreciated as much as any precious metal, it has greatly lagged the price performance of the base metals. The GFMS base metals index is up almost 5-fold over the past five years, almost doubling silver's price performance. This suggests silver is still undervalued.
  
  A special trait. One special trait that distinguishes silver from all the other industrial metals is investment demand. It sets silver apart from any other industrial metal. Silver will always be considered as a true investment asset by people around the world. Investors large and small, hold silver in their own possession or in storage. They hold it in a wide variety of forms, including coins and bars. The only other metal that can be compared to silver in terms of investment holdings is gold. But gold is not considered an industrial material. The only true investment metals are gold and silver.
• Panic. Industrial commodities can enter temporary periods where physical availability is a problem. This is reflected in time delays for physical delivery and premium prices being offered for prompt delivery. This almost always occurs when industrial users attempt to build up inventory to avoid disruptions to production. No industrial concern will willingly shut down and send employees home for lack of a key ingredient or component. It is precisely the need to avoid shutdowns that cause industrial users to build inventory when availability gets tight, causing more overall tightness and shortage. It leads to panic buying.
  
  Buy silver for the long run. Nothing available anywhere has the potential to change your economic circumstances like silver.
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PLATINUM-PALLADIUM

• Platinum rose to a record in New York as Impala Platinum Holdings Ltd., the second-biggest producer of the metal, forecast a drop in output because of a power shortage in South Africa. Palladium was little changed. The Johannesburg-based company said it may lose 40,000 ounces of production, equal to more than two days of global supply. Platinum rose to a record $2,030.60 an ounce today after breaching $2,000 yesterday.>
  
  The metal also gained to a record in London, topping $2,000 an ounce for a second day. "The market remains very strong," said James Steel, an analyst with HSBC Securities in New York. "There is a wide spread concern about the power shortage in South Africa and what it will mean for platinum production."
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• Johnson Matthey releases "Platinum and Palladium 2007 Interim Review."
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• Platinum 'Will Stay in Demand'.
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• Power Cuts Deprive South Africa of Platinum Windfall.
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• Frank McGhee, head metals trader at Integrated Brokerage Services in Chicago, who said in an interview, "There are very significant power-generation constraints in South Africa and because of that there is a lot of talk of platinum at $2,100 to $2,200" an ounce.
  
  "There is just so little of it," McGhee continued, "and it is used in so much of the modern world, that it certainly has always had an opportunity to have a better bullish component to it than in some other markets." McGhee concluded by saying, "Overall size of the platinum market is very small, so some minor change in demand can significantly impact it. If you are in the market, ride it, if you are not, be very careful." Kitco Daily Resource
• How far can palladium substitute for platinum. With the big and rapid increase in platinum prices over the past month, an analyst's thoughts turn to substitution, and here some of the likelihoods of increased palladium for platinum substitution in the catalyst and jewellery sectors are examined.
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COMMODITIES-OIL-GAS

• OPEC May Cut Output to Defend $80 Oil, Officials Say.
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• Nigeria's shut-in oil production seen hitting 1 million barrels per day.
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• Investors: Don't blame us for high oil prices. Despite increased public scrutiny over investors' role in $100 oil, they say it's about diversifying investments, and that trading activity is here to stay. Despite widespread public perception that speculative investing is to blame for high oil prices, big investors distanced themselves from it Tuesday, saying the recent run up has more to do with strong demand, tight supply, and a desire to diversify instead of trading momentum.
  
  "It's buying into an asset class that has very little correlation to [company stock prices]," said Andrew Safran, Citigroup's vice chairman for global investment banking, speaking at the Cambridge Energy Research Associates' (CERA) annual energy conference in Houston Tuesday. "They aren't really speculators, they are making alternative investments."
  
  With oil prices near $100 a barrel and gasoline hovering around $3 a gallon, speculative investment from banks and hedge funds has taken heat for adding as much as $30 or $40 to the cost of a barrel of oil. The finger-pointing became especially acute in 2007, when crude prices went from around $50 to nearly $100 in 12 months. "It's pure speculation," longtime Oppenheimer oil analyst Fadel Gheit said in a recent CNNMoney.com story. Nothing has changed from a year ago, he said, he said "Not a single thing."
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• Panning for black gold, a global challenge. Exxon, Conoco, Hess and Saudi Aramco address the difficulties they face in satisfying the worlds growing thirst for oil.
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• More cost overruns for Horizon oilsands project.
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• Impact of China's Power Crisis on Oil Demand Is Uncertain.
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CHAVEZ THEATENS TO CUT-OFF U.S. OIL

• Chavez Threatens US Oil Cut-off. President Hugo Chavez on Sunday threatened to cut off oil sales to the United States in an "economic war" if Exxon Mobil Corp. wins court judgments to seize billions of dollars in Venezuelan assets. Exxon Mobil has gone after the assets of state oil company Petroleos de Venezuela SA in U.S., British and Dutch courts as it challenges the nationalization of a multibillion dollar oil project by Chavez's government. A British court has issued an injunction "freezing" as much as $12 billion in assets.
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• Venezuela's Chavez Threatens 'Economic War' Over Exxon Freeze.
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• Venezuela cuts ties with Exxon. State-run Petroleos de Venezuela says it 'has paralyzed sales of crude' to the No. 1 U.S. oil company.
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• Oilsands Producers Can't Fill Gap if Venezuela Cuts Off Oil to U.S.
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OPEC MAY SWITCH TO EURO-SAUDI'S TO KEEP DOLLAR PEG

• OPEC may abandon the dollar for pricing oil and adopt the euro but any such switch will "take time", OPEC Secretary-General Abdullah al-Badri was quoted as saying by a weekly magazine. A decline in the dollar has eroded oil exporters' purchasing power, prompting some members of the Organization of the Petroleum Exporting Countries to call for a switch away from the U.S. currency.
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• OPEC secretary general Abdalla El-Badri tells the Middle East Economic Digest in an exclusive interview that the producers' cartel may switch to the euro within a decade to combat the dollar's decline. OPEC has rekindled talk of switching the pricing of oil to the euro from the dollar because of the continued weakness of the US currency. The cartel is under pressure from its members, who have seen the potential value of their earnings fall sharply since 2000,as a result of the continued reliance on the dollar.
  
  The dollar has fallen in value by 44 percent against the euro over the past seven years. OPEC secretary general Abdalla El-Badri tells MEED in an exclusive interview that the producers' cartel may switch to the euro within a decade to combat the dollar's decline. "Maybe we can price the oil in the euro," El-Badri says. "It can be done, but it will take time."
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• Saudi official says riyal's peg to dollar will continue.
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INFLATION

• Global inflation climbs to historic levels. In China, government data there show that consumer inflation remains near an 11-year high. Inflation is at 16-year highs in Saudi Arabia, a 14-year high in Switzerland, a 25-year high in Singapore. And the list goes on and on. Australia's central bank bluntly warned Monday that it would need to raise interest rates further to contain inflation, even though it had lowered its outlook for economic growth.
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• No hiding huge inflation in Britain anymore. Families are having to pay an extra £1,300 a year in household bills as food and fuel prices rise at their fastest rate for 17 years.
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U.S. RECESSION-WILL EUROPE CATCH U.S. COLD

• The U.S. economy has entered a recession that will be more painful and drawn out than the usual downturn, the director of the Reuters/University of Michigan consumer sentiment survey said on Friday. Inflation pressures will linger despite the retrenchment in consumer spending, complicating the task of policy-makers, the University's Richard Curtin said in a report, citing data from the Reuters/University of Michigan Surveys of Consumers.
  
  "This is no ordinary recession," he said. "The aftereffects will last much longer than the typical downturn." He said the Reuters/University of Michigan's expectations index is a strong predictor of economic contractions, and that it is currently flashing red.
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• U.S. Recession Is Now an Even Bet as Spending Slows. A U.S. recession is now an even bet as job losses and the housing contraction jeopardize the longest- ever expansion in consumer spending, according to a Bloomberg News survey. The world's largest economy will grow at a 0.5 percent annual rate from January through March, capping the weakest six months since the last economic slump in 2001, according to the median estimate of 62 economists polled from Jan. 30 to Feb. 7. Federal Reserve Chairman Ben S. Bernanke will lower the benchmark interest rate a further half point by June, adding to the fastest easing since at least 1990, the survey showed. The odds of a recession over the next 12 months, pegged at 40 percent in the January survey, jumped to 50 percent as payrolls, auto sales and stocks slumped. "Consumers are squeezed on many fronts," Kurt Karl, chief U.S. economist at Swiss Re in New York, the world's largest reinsurer, said in a Bloomberg Television interview.
  
  A recession "could have started already or is likely to start very soon. We're slipping." The anticipated rate of expansion for all of 2008 was reduced to 1.7 percent, the lowest in six years. Economists also slashed the projected growth rate for the second quarter to 1 percent from the 1.8 percent forecast last month.
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• U.S. Executives Forecast Economy Will Slow, Avoid a Recession.
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• Europe Economy May Stay Sick After Catching U.S. Cold. Europe's economy has caught the U.S.'s cold, and may be sick longer. Persistent inflation and budget deficits may prevent policy makers in the 15 nations that share the euro from moving as aggressively as their U.S. counterparts to cut interest rates and taxes. Meanwhile, Europe's labor laws will make it harder for companies to speed a recovery in profits by reducing payrolls.
  
  "A European downturn will take noticeably longer to run its course than the U.S. one," Nobel laureate Edmund Phelps, an economics professor at Columbia University in New York, said in an interview. Next year "might be a period of 'reverse decoupling,' with the U.S. economy enjoying a sharp recovery and the euro-area economy stagnating," says Dario Perkins, senior European economist for ABN Amro Holding NV in London. "A relatively inflexible economy and 'sticky' inflation" will hold Europe back, he says.
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WORLDWIDE FINANCIAL CRISIS

• Senior global policymakers have raised projections for the size of subprime-related credit losses in a move that implies financial institutions will have to increase write-offs. Speaking after the meeting of Group of Seven finance leaders, Peer Steinbrück, German finance minister, said the G7 now feared that write-offs of losses on securities linked to US subprime mortgages could reach $400bn.
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• Credit writedowns may total $175B analyst. Bear Stearns analyst sees financial firms logging billions more in writedowns, but believes the worst is over.
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• Citigroup Inc. and seven other top investment banks may need to write down at least $15.1 billion on unsold loans and bonds for leveraged buyouts in their first quarter earnings, according to Bank of America Corp. analysts. As prices of high-yield debt continue to fall this year, banks including Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Merrill Lynch & Co. may have more writedowns for $157 billion of loans and bonds than they did in the third- quarter, analysts led by New York-based Jeffrey Rosenberg wrote in a research note yesterday.
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• $1.2 Billion Write-Down at Credit Suisse.  Switzerland's two largest banks may have their Zurich headquarters within walking distance of each other but when it comes to weathering the credit crisis they are miles apart. One bank, Credit Suisse, said Tuesday that it had write-downs of 1.3 billion Swiss francs, or $1.18 billion, in the fourth quarter on debt related to the tight credit market and the subprime crisis in the United States.
  
  A larger rival, UBS, wrote down $14 billion in the same period. The difference is mainly the result of Credit Suisse's management scaling back riskier investments before the subprime crisis started.
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• American International Group Inc., the world's largest insurer by assets, said auditors found a "material weakness" in how the company values its credit- default swap portfolio. The stock fell the most in 20 years.
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• Japan is the next sub-prime flashpoint. There is still $300bn of bad debt out there, and Japan could be hiding most of it. Just as battered investors had begun to glimpse signs of recovery in America, the next shoe has dropped with an almighty thud in Japan. Echoes are rumbling across the Far East.
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• A widening array of financial-market problems threatens to trigger a new phase in the global credit crunch, extending it beyond the risky mortgages that have cost banks and investors more than $100 billion in losses and helped push the U.S. economy toward recession. In the past few days, low-rated corporate loans the kind that fueled the buyout boom of recent years have plummeted in value. As a result, banks are expected to try to unload some of those loans this week at fire-sale prices.
  
  Nervous buyers also have retreated in recent days from the market for securities backed by student loans and municipal bonds, roiling some corners of the short-term money markets. Similarly, investors have recoiled from debt backed by commercial real estate, such as office buildings.
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• Mortgage Crisis Spreads Past Subprime Loans. The credit crisis is no longer just a subprime mortgage problem. As home prices fall and banks tighten lending standards, people with good, or prime, credit histories are falling behind on their payments for home loans, auto loans and credit cards at a quickening pace, according to industry data and economists. The rise in prime delinquencies, while less severe than the one in the subprime market, nonetheless poses a threat to the battered housing market and weakening economy, which some specialists say is in a recession or headed for one.
  
  Until recently, people with good credit, who tend to pay their bills on time and manage their finances well, were viewed as a bulwark against the economic strains posed by rising defaults among borrowers with blemished, or subprime, credit. "This collapse in housing value is sucking in all borrowers," said Mark Zandi, chief economist at Moody's Economy.com.
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• Bear Stearns Is 'Short' Subprime Mortgages $1 Billion.
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• IKB Deutsche Industriebank AG will receive a 1.5 billion-euro bailout ($2.2 billion) led by the German government, the third rescue package for the bank as it reels from U.S. subprime investments.
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• WestLB AG, the government-owned German bank reeling from subprime-related losses, will cut about 25 percent of its workforce after the company's owners agreed to provide a 5 billion-euro ($7.2 billion) bailout.
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• IndyMac Posts $509.1 Million Loss as Slump Deepens.
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• Canada's big banks solid, IMF says.
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• $30B Fed auction aims to ease credit crisis. Following aggressive rate cuts, the Federal Reserve provided $30 billion to commercial banks in the fifth such auction since December. The Federal Reserve, seeking to combat the effects of a serious credit crisis, said Tuesday it had auctioned $30 billion in funds to commercial banks at an interest rate of 3.010 percent.
  
  It marked the fifth in a series of auctions that so far have pumped $130 billion in money into the nation's banking system in effort to provide cash-strapped banks with extra reserves. The Fed's hope is that the increased resources will keep banks lending and prevent a severe credit squeeze from making the current economic slowdown worse.
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• Bond Insurance Turns Toxic for Munis as Rates Soar. Bond insurance sold by MBIA Inc., Ambac Financial Group Inc. and Security Capital Assurance Ltd. is backfiring on counties, universities and hospitals across the U.S., more than doubling some borrowing costs. Park Nicollet Health Services in Minneapolis may pay an extra $5 million to $6 million this year, about a quarter of its operating profit, because interest on $375 million in floating rate debt doubled in the last six weeks, said Chief Financial Officer David Cooke.
  
  The rate on $98 million insured by Ambac climbed to 6 percent on Jan. 30 from 3.06 percent on Jan. 2. "We'll have to reduce our capital expenditure program, which means less equipment, less modernization of facilities," Cooke said in an interview. The hospital paid Ambac to "count on that AAA insurance for 30 years. Now it's going away on us."
  
  Investors are shunning insured bonds after three of the biggest guarantors, owned by Ambac, Security Capital and FGIC Corp., were stripped of at least one AAA credit rating amid losses on debt tied to subprime mortgages. Interest costs on floating-rate bonds sold by more than 100 governments, hospitals and colleges rose as much as 7 percentage points since the beginning of January even as the Federal Reserve lowered its benchmark rate for U.S. borrowing by 1.25 percentage points.
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• CDO Losses Driving Credit-Default Swaps to Record, Analysts Say.  Banks are driving the cost of protecting corporate bonds from default to the highest on record as they seek to hedge against losses on collateralized debt obligations, according to traders of credit-default swaps.
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• Late payments among bonds backed by car loans surged last month to their highest level in a decade, Fitch Ratings said Thursday, renewing concerns that the credit problems plaguing the housing market could be spreading. The delinquent loans are piling up not just among subprime borrowers those with shaky credit histories but also with consumers who bought their vehicles with solid credit, Fitch said. The ratings agency said delinquencies of more than 60 days on prime loans rose to 0.77 percent in January their highest level in 10 years and a 44 percent increase over the same month last year.
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U.S. BUDGET DEFICIT DOUBLES-U.S. TRADE DEFICIT

• The federal budget deficit is running at a pace that is more than double last year's imbalance through the first four months of the budget year.
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• Bush Signs $168 Billion Measure Designed to Stimulate Economy.
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• Senior benefit costs up 24%. 'Health care crisis' leads to 8-year rise.
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INTEREST RATES

• Federal Reserve Chairman Ben S. Bernanke indicated that policy makers are prepared to lower interest rates further as the economy continues to deteriorate. The Fed "will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks," Bernanke told the Senate Banking Committee in Washington today. "A significant worsening in financial conditions or in credit availability would certainly be a warning bell that we need to take further action."
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• Fed official: Too early for rate cut reversal. "The threat hasn't passed," says San Francisco Fed President Janet Yellen, who adds that other problems are currently more dire than inflation.
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• Fed Interest-Rate Cuts Fail to Lower Borrowing Costs.
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REAL ESTATE FORCLOSURES

• US credit crisis escalates as defaults spread.
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• Paulson, U.S. Banks Forge Foreclosure-Freeze Deal.
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GEOPOLITCIAL

• 'A new phase in the arms race is unfolding' says Putin.
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• Homeland Security Chief Michael Chertoff's eyes narrow and his voice develops a stern, urgent tone as he reveals America's biggest vulnerability to terrorism. "The great weapon they have is persistence and patience, and the one weakness that we have is the tendency to lose patience and become complacent," Chertoff tells WTOP.
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• Iran's President to Visit Iraq in March.
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• Israel: Iran seeking nuclear weapons.
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• US Intel Links Iran With Nuke Bomb Bid.
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• Al-Qaida in Iraq threatens Israel. The purported leader of al-Qaida's affiliate in Iraq called in a new posting on a militant Web site on Thursday for attacks on Israel and proposed that Iraq's territory be a "launching pad" to seize Jerusalem.
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• Hezbollah chief threatens Israel. The chief of Hezbollah told throngs of supporters at a funeral for slain commander Imad Mughniyeh his group would retaliate against Israeli targets anywhere in the world after accusing the Jewish state of killing the militant.
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• Following the assassination of Hizbullah arch-terrorist Imad Mughniyeh, the Prime Minister's Office (PMO) on Thursday issued a global terror warning to all Israeli citizens abroad.
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• Olmert vows to protect Israel from Palestinian rockets.
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The GoldBugg Report - Buy Silver For The Long Run
Posted by Worldwide Precious Metals on Tuesday, February 19, 2008