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The GoldBugg Report – May 13, 2008
May 13, 2008
-”(Gold-Silver) This is the best opportunity I have seen in 45 years in the investment business.” John Embry-Sprott Asset Management
-”If you don’t own gold, silver and/or their related assets, we suggest that your last investment be the purchase of a pancake flipper so that by your surviving relatives can remove and separate your body from the flattened vestiges of our economy.” Bob Chapman
-Jim Sinclair, of jsmineset.com, isn’t mincing his words on the subject. “Keep in mind,” he writes, “that the fundamental reason for gold’s normal violent reaction was the euro coming off the $1.60 level, seen by some as a top. It is NOT!”
He goes on to say that “it is unlikely that the ECB will join the Fed in the race to 0%. Considering inflation even at the manufactured rate the PPI and CPI show, the Fed is giving away money in exchange for garbage paper at ZERO percent.” Sinclair concludes: “I dare to say the bottom in gold has occurred this week. Gold will take out $1024 on the third try. Now the magnet is at $980 to $985.” Kitco Daily Resource
GOLD
-Irrational Exuberance Again. Markets have entered a new irrationally exuberant phase where risk is again being massively discounted once again and the cheerleaders put on the blinkers. Denial is rampant and the word ‘stagflation’ is verboten despite it being an increasingly likely reality.
It is important to remain cognoscente that the U.S. is suffering from ever-increasing credit losses for both consumer and commercial loans due to a weakening economy and ongoing housing crisis. The UK, Ireland and Spain face similar issues. The U.S. is likely already in what will most probably be a severe recession. The notion that the worst of the credit crisis is over is positively delusional.
Indeed the next phase of the crisis will be even more severe as the Alt-A mortgage market implodes it may make subprime crisis look like small beer. We are clearly in the end of the beginning phase rather than the beginning of the end phase, as permabulls would have us believe, and risk aversion and long term diversification into gold remains prudent. Gold.ie
-”The real current threat to the economy is inflation, as food and fuel are taking a big bite out of everyone’s wallet,” said Miguel Perez-Santalla, of Heraeus Precious Metals Management in New York. “With this kind of mixed news [strong dollar vs. rising inflation], the market is sure to be choppy in metals and any big dips may be considered good buying opportunities.” Kitco Daily Resource
-Julian Phillips, an analyst at GoldForecaster.com, admits that the finance ministers from the G-7 industrialized nations “have made it clear that they do not like a weak dollar and will do something about it, which could be why the dollar is stronger” against the euro. However, “We believe the gold price will soon reflect a bigger picture than simply the euro/dollar exchange rate,” Phillips said. Kitco Daily Resource
-The wheat price has broken. Rice price has a short-term top. Corn may be topping out. Gold is down. Silver has taken a dive. Housing prices are in the middle of decade long bear market. Yet, oil futures continue to move higher, fuelled by margin led speculation. All of that oil action is happening when no shortages of petroleum seem to exist anywhere.
Oil price is rising due to 93+% financing of the purchase price of a futures contract. With that level of margin requirements, one has to wonder if the NYMEX is acting responsibly. We need to ponder how low Gold might slide when paper oil does finally start liquidation. Gold certainly has neither confirmed the recent oil price, nor the possible negative ramifications of persistent $121+ oil. Does Gold know something the paper oil speculators do not?
Gold continues to digest the juices that pushed it to more than $1,000. A second period of deeply over sold conditions developed last week. That was expected as a correction is composed of several such events. Corrections are a series of sharp rallies from deeply over sold, followed by further corrective action. That chain continues till the final bottom is found. We never know the final bottom on a correction till well after the fact. For that reason, investors should be adding to portfolios during those periods of an extreme emotional absence of buyers.
Market participants have convinced themselves that the U.S. dollar’s bear market should pause. That pause, while they trade paper oil, has contributed to Gold’s correction. But a nation’s money is really no more than a claim on the net assets, or equity, of a country. As past and present policy errors at the Federal Reserve continue to push the value of the U.S.’s equity ever lower, the dollar’s bear market will renew. $1,500+ Gold is not a dream, but rather it seems a policy goal of the Federal Reserve. Ned W. Schmidt
-In Defense of Gold-Frank Holmes. The price of gold has corrected by close to 20 percent since peaking on March 17. If you have been listening to the popular press and business TV, you may be convinced that the gold and commodity “bubbles” have popped.
Once you back away from the day-to-day noise and put things into perspective, we believe this correction in gold, while painful in the short term, is just another pause in a long-term secular bull market. As it has been said, bull markets climb a wall of worry.
Over the past year, gold bottomed around $640 per ounce in late June. As the financial crisis unfolded, it staged a spectacular rally, surging more than 60 percent to $1,032. Gold has since pulled back, but given that the long-term fundamentals remain intact, we believe it is setting the stage for the next leg up. Here are some of the reasons why:
Negative real interest rates-The macro environment for gold is still supportive based on negative real interest rates. The one-year Treasury bill is offering just 2 percent, while the official inflation rate is around 4 percent. Negative interest rates make gold look more attractive compared with other safe investment alternatives, such as T-bills and certificates of deposit.
We believe the Federal Reserve will keep interest rates below the rate of nominal economic growth in order to support a fragile economy in an election year. Negative real rates between mid-2001 and spring 2005 powered gold’s biggest bull run in decades, with prices rising from $255 to $455 per ounce.
Real inflation is underreported-The official inflation rate is around 4 percent, but when you include the rapidly rising prices for food and energy and understated housing costs, the real inflation rate is even higher. One of the best ways to protect yourself against inflation is to participate in it by investing in commodities such as oil and agricultural products. Historically, gold also has proven to be a viable hedge against rising inflation because it maintains its purchasing power.
We agree with those who estimate that the actual inflation rate is close to double digits due to the Fed’s massive injection of new money into the economy to avert a recession. MZM (money zero maturity), the amount of money in the economy that’s easily accessible for spending, is up 15 percent compared with the same time last year.
ETF redemptions-The current correction in gold has been led by sizable ETF redemptions. The StreetTracks Gold Shares ETF (ticker GLD) lost 1.3 million ounces of gold over the past two weeks, with nearly a third of that amount being redeemed this Tuesday alone. This may mark the first-ever ETF-led gold correction.
This correction is not surprising, given the strong acceleration in the first quarter of 2008 and typical seasonal trends. Some short-term profit-taking is likely, along with speculation that prospects have improved in financials and technology.
But in our opinion, this move out of gold is not indicative of the smart money, as momentum investors chased performance on the way up. The price action appears to be signaling a rotation from weak gold holders, perhaps back into the broader equity market.
Other factors-On top of the factors above, there are other fundamental factors that we believe will drive the price of gold higher over the longer term. Declining output from existing mines, particularly in South Africa, and a virtual absence of large new discoveries will reduce the supply of gold available in the market. At the same time that gold supply is falling, demand is increasing due to rising wealth levels in China, India and other nations with cultural affinity for gold.
In addition, history suggests that jewelry demand, which fell off when gold surpassed the $1,000 mark, is likely to pick up again during a gold-price retrenchment. It’s easy for investors to get swept up in the emotion of a strong rally or a significant correction. In these volatile times, we suggest that investors protect themselves from suboptimal decision-making by not losing sight of their long-term asset allocation strategy.
-Is IMF trying to recover its gold by pretending to sell it? Read more here-http://www.gata.org/node/6281
-Gold is back, but how long can it last? London-based VM Group* forecasts the possibility of gold trading within a wide range over the next 18 months from $700 to $1,300 as it falls back from its recent peaks. Read more here-http://www.mineweb.com/mineweb/view/mineweb/en/page33?oid=52167&sn;=Detail
-Gold Pausing Before the Next Advance. Read more here-http://www.silverbearcafe.com/private/5.08/pausing.html
-Peter Brimelow: Buggiest bugs show grit about gold. Read more here-http://www.gata.org/node/6277
-Money Pours Into Precious Metals Funds. Investors continued to pour into precious metals in March, adding a hefty $1.2 billion into the mutual funds and exchange-traded funds that concentrate on the specialty sector. That brought the total flow of cash into the subsector for the first quarter to $3.6 billion as investors sought safe-haven assets amid the ongoing credit crisis, which brought investment bank Bear Stearns to its knees, surviving only after a rescue by JPMorgan Chase. Read more here-http://www.thestreet.com/print/story/10415032.html
-Metals Surge as Rationing Cuts Power at Biggest Mines. Chile’s worst drought in five decades and power rationing from South Africa to China mean the price of aluminum, gold, copper and platinum will keep climbing as the lights go out in the world’s biggest mines. Read more here-http://www.bloomberg.com/apps/news?pid=20601109&sid;=aCUU6NbjPfmM&refer;=home
-Barrick concerned about lack of new gold industry discoveries, drop in global mine production. Barrick Chairman Peter Munk declared Tuesday at the company’s AGM that, “this is as tough a business as it gets, and it’s not getting any easier.” Meanwhile, ailing CEO Greg Wilkins made a surprise appearance. Read more here-http://www.mineweb.com/mineweb/view/mineweb/en/page34?oid=52491&sn;=Detail or http://www.resourceinvestor.com/pebble.asp?relid=42554
-AngloGold to Reduce Gold Hedge Book by 45%. New CEO Mark Cutifani is not all talk. After months of openly expressing his distaste for AngloGold’s massive gold hedge book, he announced plans during the company’s quarterly results presentation on Tuesday to sell $1.6 billion worth of shares to cut the company’s hedge book down by about 45%. Read more here-http://www.resourceinvestor.com/pebble.asp?relid=42567
-Akshaya Tritiya: Indian Jewellers Ready for Gold Buying Spree. Jewellery showrooms across India are all decked up with ‘golden make-up’ to celebrate Akshaya Tritiya, the Hindu religious festival considered an auspicious time to buy gold. Read more here-http://www.resourceinvestor.com/pebble.asp?relid=42542
-And now it’s the Peruvian miners planning to strike. Gold silver and base metals would be impacted. As another example of continuing simmering unrest in the mining sector, Peruvian unions say they will call their mineworker members out on strike from May 12th. Read more here-http://www.mineweb.com/mineweb/view/mineweb/en/page34?oid=52493&sn;=Detail
or http://www.bloomberg.com/apps/news?pid=20601091&sid;=asjNuYf3ghlg&refer;=india
SILVER
-Investment Demand Could Be a Silver Lining. The silver price enjoyed four consecutive years of double digit gains from 2004, averaging $13.38/oz in 2007, a 27 year high. It began 2008 just shy of $15/oz but then rocketed 40% to peak at almost $21 on 17th March only to fall below $17 by the beginning of April.
Nonetheless precious metals consultancy GFMS, who launched the World Silver Survey 2008 at the Silver Institute in New York today, anticipates that investors will drive silver back towards $20/oz by the end of the year from its current level of $16.80 even though the supply/demand fundamentals for the metal are likely to be weaker than last year.
A key development in silver’s changing fortunes, argues GFMS, has been the pronounced shift in investment behavior in the silver market. The market has moved from a situation of net disinvestment in the 1990s (when there was dishoarding after the boom/bust of the 1970s/1980s) to net investment. The investment boom, which began around 4 years ago, received a huge boost in 2006 from the launch of the ETFs in silver.
Even though the annual investment figures remain small relative to other components of supply and demand (and to investment in gold) GFMS contends that investment has “punched above its weight” in the determination of the silver price. Read more here-http://www.resourceinvestor.com/pebble.asp?relid=42589 or http://www.mineweb.com/mineweb/view/mineweb/en/page32?oid=52519&sn;=Detail
-Silver outshines gold as inflation hits Egyptians. Silver is gaining ground in Egypt’s jewellery market amid record gold prices and as surging inflation cuts the purchasing power of Egyptians, once leading world gold buyers. Read more here-http://www.gulfnews.com/business/Commodities/10210828.html
-Silver Zinc Batteries last 40 Percent Longer. Read more here-http://news.idealo.co.uk/news/1559/zpower-silver-zinc-batteries-last-40-percent-longer.html
-Laptops May Get More Battery Life From Silver-zinc. Laptop users may soon get longer battery life from their machines, with ZPower set to plug in its new silver-zinc batteries, which it claims last significantly longer than traditional lithium-ion batteries. The batteries will be available in consumer and business laptops from major PC makers starting in August, according to Ross Dueber, the CEO of ZPower, although he declined to name any of the vendors on Thursday.
Silver-zinc batteries pack more energy than lithium-ion batteries, giving laptops 40 percent more run time, according to Dueber. If a laptop runs for two hours with a lithium-ion battery, it should run for closer to three hours with a silver-zinc battery, he said. The battery’s water-based chemistry also makes it nonflammable, compared to lithium-ion, which uses dimethyl carbonate, a flammable liquid. Cells can go off “like firecrackers” in lithium-ion batteries, Dueber said.
The silver-zinc batteries also won’t degrade in capacity during the first year, while lithium-ion batteries can lose up to 30 percent of their capacity over that period, Dueber said. After a year, however, silver-zinc batteries start degrading at a rate similar to lithium-ion batteries. Read more here-
-A Silver Coating in the Fight Against Microbes. Silver nanoparticles could be the next step forward in antibacterial products. A new technique in paint making could soon make almost any surface germfree. Researchers have made paint that is embedded with silver nanoparticles known for their ability to kill bacteria and other microbes, in the hope that hospitals will coat their walls and countertops to fight infection.
According to the U.S. Centers for Disease Control and Prevention (CDC), more than one million people a year contract bacterial infections in hospitals. Silver itself is an excellent bacteria fighter, and in nanoparticle form it is even more potent at killing microorganisms. So far it has not shown any adverse effects in humans. Read more here-
http://www.sciam.com/article.cfm?id=silver-coating-fights-microbes
-Why Is Canada’s Mint Doubling Its Gold & Silver Debts? This report is the result of a passing interest in the Royal Canadian Mint’s latest annual report (2007). I wanted to further validate whether silver sales for last year were up substantially and if so, why the Mint’s bullion revenues were not substantially higher.
Those revenue numbers seem to check out, but in the process I uncovered a matter potentially far more serious: the doubling of both gold and silver debt obligations. Excerpts from the Annual Report are bulletted and in italics. The remainder is my commentary. I would like to thank silver analysts Ted Butler and Jason Hommel for taking the time to review this before I posted. Read more here-http://news.silverseek.com/SilverSeek/1210053660.php
PLATINUM-PALLADIUM
-First U.S.-Listed Platinum ETNs to Launch on NYSE. Read more here-http://www.resourceinvestor.com/pebble.asp?relid=42637
COMMODITIES
-Commodity Investments at $225 Billion, Barclays Says. Read more here-
http://www.bloomberg.com/apps/news?pid=20601072&sid;=auwCOfI.aW4Q&refer;=energy
-Zinc Price May Jump More Than 50% in Five Years, Macquarie Says. Read more here-http://www.bloomberg.com/apps/news?pid=20601012&sid;=aCPNe.ePEIws&refer;=commodities
-Congress considers the steel penny. Cost of making a penny is more than a penny, pushing the government to think about bringing back the steel-made pennies of World War II. Read more here-http://money.cnn.com/2008/05/07/news/economy/steel_pennies.ap/index.htm
-Chinese economic boom to last until at least 2020. Read more here-http://www.chinadaily.com.cn/china/2008-05/01/content_6656452.htm
OIL-GASOLINE
-Analyst predicts $200 oil could happen this year. Goldman analyst predicts $150 to $200 oil could soon be reality, but peak price still unclear. A Goldman Sachs analyst predicts that oil prices could reach $150 to $200 a barrel over the next 6 months to two years, but said that how far prices could climb still “remains a major uncertainty.”
“We believe the current energy crisis may be coming to a head, as the lack of adequate supply growth is becoming apparent,” analyst Arjun N. Murti wrote in a client note. Read more here-http://biz.yahoo.com/ap/080506/oil_200.html?.v=1&printer;=1 or http://www.bloomberg.com/apps/news?pid=20601087&sid;=ayxRKcAZi630&refer;=home
-Oil Prices May Climb to $150 a Barrel, Boone Pickens Says. Read more here-http://www.bloomberg.com/apps/news?pid=newsarchive&sid;=ajs4Ujqxar2I
-Tracking Saudi Oil from Space. How much do they really have? Read more here-http://online.wsj.com/article/SB121002229576468609.html?mod=googlenews_wsj
-OPEC to earn over $1 trillion from oil exports-EIA. Read more here-http://uk.reuters.com/article/oilRpt/idUKN0717698020080507
-OPEC April oil output slips. OPEC oil supply fell in April to its lowest this year as a strike cut Nigerian output and top OPEC exporters Saudi Arabia and Iran trimmed production, a Reuters survey showed last Thursday. Output from the Organization of the Petroleum Exporting Countries slipped to 31.64 million barrels per day in April from 32.05 million bpd in March, according to the survey of oil firms, OPEC officials and analysts.
The 12 members bound by output targets, all except Iraq, pumped 29.41 million bpd, down from 29.75 million bpd in March and below their target of 29.67 million bpd, the survey found.
OPEC pumps about two in every five barrels of oil. Reuters
-Iran Doubles Oil Stored in Tankers, Bolstering Rates. Read more here-
http://www.bloomberg.com/apps/news?pid=20601109&sid;=akLt5fJKQNr8&refer;=home
-Non-OPEC oil producers hampered in efforts to boost output. Oil producers outside the OPEC cartel are unable to pump enough oil to reduce crude prices, hampered by robust domestic demand, weak investment and exhausted oil fields, analysts say. In the short term, “no non-OPEC member is in a position to produce more,” said Francis Perrin of the publication Petrole et Gaz arabes.
“They are selling all the oil they can.” The Organization of Petroleum Exporting Countries, by contrast, has reserves equivalent to about 2.0 million barrels a day, essentially in the hands of Saudi Arabia. Read more here-http://afp.google.com/article/ALeqM5jKirnHzlnzQIkNXO82_-ZfB_ey2Q
-Indonesia May Leave OPEC in 2009 as Oil Output Drops. Indonesia, the only OPEC member in Southeast Asia, may leave the group as early as next year because shrinking production has made the country a net importer of oil. “We are now studying the option,” Energy Minister Purnomo Yusgiantoro told reporters in Jakarta today.
The government may leave the Organization of Petroleum Exporting Countries in 2009 because it has paid its membership fee for this year, he said. Read more here-
http://www.bloomberg.com/apps/news?pid=20601080&sid;=aR0tAsnC7ua8&refer;=asia
-India Crude Oil Imports Rise 9.1% in 2007-08. India imported 9.1% more crude in 2007-08 compared to the earlier financial year as refining capacities expanded and local demand clocked the highest growth in eight years, official data indicated. Read more here-http://www.resourceinvestor.com/pebble.asp?relid=42444
-Venezuela’s oil reserves swell to 130 bln barrels. Venezuela’s proven crude oil reserves had swelled to 130 billion barrels as of late April, marking a rise of 30 billion from its prior estimate, energy and oil minister Rafael Ramirez said Thursday.
-Why $120 oil is good. Speculators are often blamed for artificially inflating crude prices, but some experts say high prices are needed to cut demand and develop new resources. Read more here-http://money.cnn.com/2008/05/07/news/economy/120_oil/index.htm?postversion=2008050812
-Retail gas prices soar to fresh record. With nationwide prices at an all-time high of $3.645 a gallon, drivers now pay 20% more than they did last year. Read more here-
http://money.cnn.com/2008/05/08/news/economy/gas_prices/index.htm?postversion=2008050806
FOOD CRISIS
-Brace yourself, Canada, for higher grocery bills. Read more here-http://www.cbc.ca/world/story/2008/05/02/f-food-inflation-canada.html
-Global free market for food and energy faces biggest threat in decades. Read more here-
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/08/bcnfood108.xml
-Food crisis payback for ‘20 years of mistakes’: UN expert. Read more here-http://afp.google.com/article/ALeqM5jPVE6iCKQ9smXW6zFJXz74OHqgOg
-Central bankers sound alarm over food prices. Read more here-http://www.reuters.com/article/idUSL0512998320080505
CREDIT-LIQUIDITY CRISIS
-Investment guru Warren Buffett says the worst of the global credit crunch is over for Wall Street, but not for the average man or woman on the street. The CEO of Berkshire Hathaway said there would be “a lot of pain to come” for mortgage holders. He made the comments as Berkshire Hathaway’s annual meeting got under way in Omaha, Nebraska, attended by a record 31,000 people. Read more on Buffett here-http://www.bloomberg.com/apps/news?pid=20601068&sid;=ahKOXy.Kublo&refer;=economy or http://www.bloomberg.com/apps/news?pid=20601087&sid;=aMWbId0HNwOk&refer;=home
-Credit crisis far from over: expert. A Derivatives expert who two years ago warned of a potential meltdown in global credit markets has cautioned that the crisis is far from over, and has endorsed recent calls to relax controls on inflation and allow higher prices to help markets trade their way out of their problems. Longtime critic of derivatives markets, Satyajit Das, says those who believe the US sub-prime loans crisis, and the drought in credit markets it triggered, are nearly over are wrong.
“I think the cycle has some way to run yet,” he told a Financial Services Institute of Australasia function in Sydney yesterday. “It’s a matter of years, not a matter of months.” In particular, investors in the US stock market, which has climbed off its lows amid a growing mood that the worst of the crunch was over, were being too optimistic, he said. The author of Traders, Guns & Money warned that many of the problem financial instruments were still hidden and the total amount of debt attached to them largely unknown.
Losses incurred by US banks were certain to rise as $US1 trillion ($1.06 trillion) in sub-prime housing loans was due to reset to higher interest rates in the next two years. The use of credit card debt now totaling $US915 billion was cushioning US home owners. But, in an ominous sign, card issuers were rapidly increasing their provisions for bad debts, by as much as 500 per cent in the case of one bank. The use of sub-prime debt structures was also a feature of other markets, such as private equity, where $US300 billion in loans were due to be refinanced in the next two years.
Mr. Das said another $US1-$US5 trillion of assets would have to come back on to US bank balance sheets as a result of defaults on housing and other debts, and it was unclear how the banks could fund them issuance of preference shares by US banks was already at a record high. He said losses at financial institutions from the credit crunch were likely to almost double to $US400 billion. There were also second-round effects to come as the damage done to the real economy from financial sector losses fed back into further bank losses.
Mr. Das said there needed to be a massive reduction in debt levels globally or a “nuclear deleveraging” before the crisis could be said to be over. That could be achieved through an economic crash “on the scale of 1929″ but allowing inflation to rise would help to avoid that scenario. Higher inflation was a legitimate policy option since it reduced the real value of debt and gave companies and individuals breathing space to reduce their leverage by helping to put a floor under asset prices.
His comments come as some economists urge Australia’s Reserve Bank to relax its inflation targeting policy to help avoid a severe economic downturn. He acknowledged that as inflation rose higher it was more difficult to control it, but noted the global economy was moving into a period of higher inflation anyway. “It could be the lesser of two evils,” he said. Theaustralian.news.com.au
-JPMorgan says no near end to financial crisis: report. Read more here-http://www.reuters.com/article/idUSL0353675920080503
-Swiss Bankers Assn head sees more nasty surprises ahead in financial crisis. Read more here http://www.forbes.com/markets/feeds/afx/2008/05/05/afx4969231.html
-Outstanding short-term loans to banks by the Federal Home Loan Banks are on pace to hit $1 trillion by August as financial institutions continue to seek liquidity for housing, the federal regulator of the FHLB said on Tuesday.Read more here-http://www.reuters.com/article/idUSN0656294220080506
-Fed Survey Shows More U.S. Banks Tighten Loan Terms. Read more here-
http://www.bloomberg.com/apps/news?pid=20601087&sid;=a45nIbT1eKLo&refer;=home
-Fannie Mae, the largest U.S. mortgage finance company, reported a wider loss than analysts estimated, cut its dividend and said it will raise $6 billion in capital as the worst housing slump since the Great Depression deepens. Read more here-http://www.bloomberg.com/apps/news?pid=20601087&sid;=ava6rLMVLLA4&refer;=home
-American International Group Inc., the world’s largest insurer by assets, said it will raise $12.5 billion after posting back-to-back quarterly losses for the first time as a publicly traded company. AIG had a record first-quarter net loss of $7.81 billion, or $3.09 a share, compared with earnings of $4.13 billion, or $1.58, a year earlier, the New York-based company said today in a statement. Read more here-http://www.bloomberg.com/apps/news?pid=20601087&sid;=adyL.GUyLSbM&refer;=home
THE FOUR MEGA DANGERS INTERNATIONAL FINANCIAL MARKETS FACE
-In my judgment, there are currently four major dangers facing the world economy, and all of them are currently obscured by the fact they play themselves out slowly.
The Four dangers,
The first danger we have witnessed since August 2007: The subprime mortgage crisis gave rise to a liquidity crisis in the international banking system, due to uncertainty about who holds the losses. This is leading to reduced lending to firms and households. But that is not the end of the story, because the reduced lending will lead to reduced consumption and investment. With a lag, reduced sales of goods and services will reduce stock market valuations. And, with another lag, the lower stock market prices will in the absence of any favorable fortuitous events intensify the banks’ liquidity crisis.
The second danger lies in the dynamics of U.S. house prices. As more and more U.S. households find themselves unable to repay their mortgages, foreclosures are on the rise, more houses are put on the market, the price of houses falls further with further lags this leads to more foreclosures and declines in housing wealth. This dynamic process plays itself out only gradually, as households face progressively more stringent credit conditions and house sales gradually lead to lower house prices.
The third danger results from the interaction between wealth, spending and employment. As U.S. households’ wealth in the housing market and the stock market falls, their consumption is beginning to fall and will continue to do so, again with a lag. This decline in consumption is leading to a decline in profits, of which more is on the way, which in turn will lead to a decline in investment. The combined decline in consumption and investment spending will eventually lead to a decline in employment, as firms begin to recognize that their labor is insufficiently utilised. The decline in employment, in turn, means a drop in labor income, which, with a lag, leads to a further drop in consumption.
And that leaves the fourth (and possibly the nastiest) of the dangers, one that concerns the latitude for monetary policy intervention. As the Fed reduces interest rates to combat the crisis, the dollar is falling. This is leading to higher import prices and oil prices in the United States, putting upward pressure on inflation. The greater this inflationary pressure which is currently in excess of 4 percent the more difficult it will be for the Fed to reduce interest rates in the future, without running a serious risk of inflaming inflationary expectations and starting a wage-price spiral. U.S. firms and households will gradually recognize this dilemma and the bleak prospect of little future interest rate relief will further dampen consumption and investment spending.
Eventually, of course, the decline in spending will lead to a decline in inflation, but this will only happen with a lag. The longer the lag turns out to be, the longer the period over which the U.S. economy will endure stagflation, that is, a cruel combination of rising prices and falling aggregate demand. Much hinges on how persistent U.S. inflation is. More persistent inflation will inevitably give rise to higher inflationary expectations, leading gradually to higher inflation, and so on. It took central banks over a decade, in the 1980s and early 1990s, to get inflationary expectations under control, and the fruits of this battle are now in danger of being lost. Dennis J. Snower-Read more here-http://www.resourceinvestor.com/pebble.asp?relid=42413
INFLATION
-Fed’s Hoenig Says Inflation `Serious,’ May Prompt Rate Increase. Read more here-
http://www.bloomberg.com/apps/news?pid=20601087&sid;=apCx9hwG3ZQ4&refer;=home
-IMF Says Inflation Back After Years of `Quiescence’. Inflation is reemerging as a threat to economic stability after years of “quiescence,” and officials must be wary of policies that stoke consumer prices, the International Monetary Fund’s deputy chief said. Read more here-http://www.bloomberg.com/apps/news?pid=20601087&sid;=aQobtd4SwuXw&refer;=home
-Trichet Sees `Rather Protracted’ High Inflation. European Central Bank President Jean- Claude Trichet said inflation will remain “high” for some time, signaling that the bank is in no rush to lower interest rates as economic growth slows. Read more here-
http://www.bloomberg.com/apps/news?pid=20601087&sid;=aZrZpAw8DbmI&refer;=home
INTEREST RATES
-Inflation worries will drive interest rates higher: Rubin. Read more here-
http://www.globeinvestor.com/servlet/story/RTGAM.20080505.wrates0505/GIStory/
-Bank of England Keeps Rate at 5% to Gauge Inflation. Read more here-http://www.bloomberg.com/apps/news?pid=20601068&sid;=awuqFMLD7KlU&refer;=home
-ECB, BOE Keep Main Rates Unchanged to Fight Inflation. Read more here-http://www.bloomberg.com/apps/news?pid=20601087&sid;=akvg.YMVjX6c&refer;=home
-Fed likely to prefer more lending over interest-rate cuts. Read more here-http://www.gata.org/node/6274
-Fed is running out of room to help economy. Read more here-http://www.nypost.com/php/pfriendly/print.php?url=http://www.nypost.com/seven/05012008/business/fed_is_running_out_of_room_to_help_econo_108979.htm
-Global monetary policy. Disentangling the links between the Fed, the falling dollar and the soaring price of the world’s commodities. Read more here- http://www.economist.com/finance/PrinterFriendly.cfm?story_id=11294547
-Ben Bernanke is no Paul Volcker. Peter Schiff-Read more here-http://www.321gold.com/editorials/schiff/schiff050208.html
U.S. RECESSION-BANKRUPTCIES
-It’s a recession to 4 out of 5 Americans. A CNN/Opinion Research poll shows that the nation is becoming more convinced the economy is in a nosedive. Read more here-
http://money.cnn.com/2008/05/06/news/economy/recession_poll/index.htm?postversion=2008050705
-Economy May Face Prolonged Pain, History Suggests. The worst of the financial pain may have passed, but the economic pain could be just starting. Read more here-
http://online.wsj.com/article_email/SB120993516590765753-lMyQjAxMDI4MDA5NTkwMzU1Wj.html
-Feldstein Says U.S. Economy `Sliding’ Into Recession. Harvard University economist Martin Feldstein, a member of the committee that charts the American business cycle, said the U.S. economy is “sliding into a recession.” Read more here-http://www.bloomberg.com/apps/news?pid=20601068&sid;=aLkqZ.fSIOdY&refer;=home
-Americans skeptical of Fed. Poll shows that majority of respondents are unsure about the central bank’s ability to improve the economy. Read more here-
http://money.cnn.com/2008/05/07/news/economy/fed_poll/index.htm
-Why the economy is worse than we know. Read more here-http://www.mindfully.org/Reform/2008/Pollyanna-Creep-Economy1may08.htm
-Low Spending Is Taking Toll on Economy. Read more here-http://www.nytimes.com/2008/05/01/business/01econ.html?_r=4&oref;=slogin&ref;=business&pagewanted;=print
-False hope’ seen in April store sales gains. Analysts, citing numerous headwinds, aren’t buying that last month’s gains indicate a rebound in consumer spending. Read more here-
http://money.cnn.com/2008/05/08/news/economy/retail_sales/index.htm?postversion=2008050810
-U.S. Consumer Debt Rises More Than Forecast in March. Read more here-http://www.bloomberg.com/apps/news?pid=20601068&sid;=aSN4AbFYIoCc&refer;=economy
-Vallejo, California, Officials Vote for Bankruptcy. Read more here-http://www.bloomberg.com/apps/news?pid=20601087&sid;=aCWpB6JlHN9Y&refer;=home
-Consumer bankruptcies jump 47.7 percent. Read more here-http://www.reuters.com/article/idUSN0217061320080502
-U.S. April Business Bankruptcy Filings Increase 49. Read more here-http://www.bloomberg.com/apps/news?pid=newsarchive&sid;=adsu_ZvUytSs
-Tropicana Entertainment files for bankruptcy. After losing its New Jersey gaming license, president says the casino operator needs a ‘breathing spell.’ Read more here-
http://money.cnn.com/2008/05/05/news/companies/tropicana_casino.ap/index.htm
-Subject: Filed for Bankruptcy. Just in case you didn’t know, the following companies just filed for Bankruptcy. Jim Sinclair
- Hollywood Video
- Levitz
- Sharper Image
- Performance Team Freight
- Linens-n-Things
• Circuit City
-Down on Its Luck. Las Vegas used to be a recession-proof oasis. Not anymore. Read more here-http://www.newsweek.com/id/135638/output/print
-Economic Troubles Affect the Vegas Strip. Read more here-
http://www.nytimes.com/2008/05/06/business/06vegas.html?_r=2&oref;=slogin
-Failing Economy Predicts Worse Health. Read more here-http://www.time.com/time/printout/0,8816,1737546,00.html
U.S. DOLLAR-FOREIGN CURRENCY
-Dollar’s reserve status is tale of fading glory. Read more here-http://www.gata.org/node/6272
-Nameless central bankers try talking dollar back up via FT. Read more here-http://www.gata.org/node/6284
-Michael Kosares, proprietor of Centennial Precious Metals in Denver and host of its invaluable Internet bulletin board, the USAGold.com Forum, speculates in commentary posted today that the European Central Bank has begun to intervene surreptitiously in the currency markets to halt the euro’s rise, and that gold’s recent fall can be largely attributed to this. Kosares’ commentary is headlined “Has Europe Declared War on the Weak Dollar?” and you can find it at USAGold here-http://www.usagold.com/amk/usagoldmarketupdate050108.html
STOCK MARKET
-”Suckers’ Rally” Signaled After S&P; 500 April Surge. Read more here-http://www.bloomberg.com/apps/news?pid=20601213&sid;=acxhKAQnJ9JA&refer;=home
-Are Canadian investors being too cautious? Read more here-http://www.cbc.ca/money/story/2008/05/07/cibc.html
REAL ESTATE
-Home Prices Fall in 22 Cities as Foreclosures Rise. Read more here-
http://www.bloomberg.com/apps/news?pid=20601103&sid;=aCOFOjeLZx.Q&refer;=news
-Pending Sales of Existing Homes in U.S. Decreased 1%. Fewer Americans signed contracts to buy previously owned homes in March for the second consecutive month as falling prices and tougher loan rules discouraged buyers. Read more here-http://www.bloomberg.com/apps/news?pid=newsarchive&sid;=aYwV23U9qcv4 or http://money.cnn.com/2008/05/07/news/economy/pending_home_sales/index.htm?postversion=2008050710
-U.K. house prices fall at sharpest pace since 1993. Read more here-http://uk.reuters.com/article/idUKNOA22571120080502
-U.K. house Prices Fall by £45 A Day. Read more here-http://uk.news.yahoo.com/skynews/20080430/tuk-house-prices-fall-by-45-a-day-45dbed5.html
-U.K. Nationwide Consumer Confidence Falls to Lowest Since 2004. Read more here-http://www.bloomberg.com/apps/news?pid=20601087&sid;=alpWNX070i5M&refer;=home
-How low will real estate go? Read more here-http://www.latimes.com/business/la-fi-forbes-housing5-2008may05,0,1708683.story
-Are house prices heading for a 1990s-style crash? Read more here-http://timesbusiness.typepad.com/money_weblog/2008/05/are-house-price.html#more
-Bulletproof housing markets get hit. The mortgage meltdown has finally gotten to Seattle, Charlotte and and other cities where prices had been holding up. Read more here-
http://money.cnn.com/2008/05/01/real_estate/bulletproof_cities/index.htm?postversion=2008050611
-It’s Newer Homes That Stand Empty as Vacancies Rise. Read more here-http://www.nytimes.com/2008/05/03/business/03charts.html?_r=1&oref;=slogin&ref;=business&pagewanted;=print
-The incredible shrinking house. Soaring fuel costs, environmental concerns and aging baby boomers mean the American dream home is a lot smaller than it used to be. Read more here-
-Canadian home sales will fall 11.5% this year, realty group predicts. Read more here-http://www.cbc.ca/money/story/2008/05/06/realestate.html
-Housing starts decline in April: CMHC. Read more here-http://www.cbc.ca/money/story/2008/05/08/housing-starts.html
-Building permits cool on Alberta weakness. Read more here-http://www.cbc.ca/money/story/2008/05/06/buildingperms.html
FORECLOSURES-MORTGAGES
-U.S. House Approves Democratic Anti-Foreclosure Bill. The U.S. House of Representatives approved legislation to let the government insure up to $300 billion in mortgages to help homeowners avert foreclosure over White House objections the measure would force the government and taxpayers to take on excessive risk. Read more here-
http://www.bloomberg.com/apps/news?pid=20601087&sid;=aRtzYp_OzosY&refer;=home
-Americans split on homeowner bailout poll. Poll: About half of Americans favor special treatment for homeowners facing mortgage default. Read more here-
http://money.cnn.com/2008/05/08/real_estate/mortgage_poll/index.htm?postversion=2008050812
-House passes $15B anti-blight bill. Lawmakers say the funds will allow states to buy and repair foreclosed properties in an effort to prevent neighborhoods from deteriorating. Read more here-http://money.cnn.com/2008/05/08/real_estate/antiblight.ap/index.htm?postversion=2008050812
-New Price Drop Could Imperil Mortgage Agencies. Read more here-http://www.nytimes.com/2008/05/06/business/06fannie-web.html?_r=1%26oref=slogin%26partner=rssyahoo%26emc=rss%26pagewanted=print
-Countrywide Takes Away Home-Equity Credit Lines in Las Vegas. Read more here-http://www.bloomberg.com/apps/news?pid=20601109&sid;=adSiHtVyQXmc&refer;=home
-U.K. Buy-to-let mortgages fall by 85 per cent in the past year. Read more here-http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/06/cmbuy06.xml
GEOPOLITICAL
-Israelis Mark Milestone Amid Prosperity They Struggle to Enjoy. By plenty of objective measures, Israelis have reason to celebrate as they observe the 60th anniversary of their nation’s founding this week.
Their economy is growing at almost twice the pace of the world’s developed countries, the average citizen can expect to live longer than a German or an American and Israeli millionaires are snapping up prestige properties like New York’s Plaza Hotel. Read more here-http://www.bloomberg.com/apps/news?pid=newsarchive&sid;=aMvKlfd4_Oj8
-Israel: Iran could have nukes by ‘09. Read more here-http://www.jpost.com/servlet/Satellite?cid=1209627027461&pagename;=JPost%2FJPArticle%2FPrinter
-Israel’s Peres says nuclear Iran would be ‘nightmare’. Read more here-http://www.breitbart.com/print.php?id=080505113728.56898vfs&show;_article=1
-Ahmadinejad: Israel a ’stinking corpse’. Iranian President Mahmoud Ahmadinejad said on Thursday that the state of Israel is a “stinking corpse” that is destined to disappear, the French news agency AFP reported. “Those who think they can revive the stinking corpse of the usurping and fake Israeli regime by throwing a birthday party are seriously mistaken,” the official IRNA news agency quoted Ahmadinejad as having said.
“Today the reason for the Zionist regime’s existence is questioned, and this regime is on its way to annihilation.” Ahmadinejad further stated that Israel “has reached the end like a dead rat after being slapped by the Lebanese” – referring to the Second Lebanon War in the summer of 2006. Jpost.com
-Iran vows not to halt its nuclear program despite pressure. Iran’s top leader says his country will not bend to international pressure and give up its nuclear program, according to state television. Supreme Leader Ayatollah Ali Khamenei, who has the final say in all state matters, said Iran will continue its nuclear program despite Western efforts to thwart it with sanctions.
“No threat can hinder the Iranian nation from its path,” he said Sunday. The U.N. Security Council has already imposed three sets of sanctions on Iran for its refusal to halt uranium enrichment. World powers agreed Friday to try again to lure Iran to the nuclear bargaining table with a repackaged set of incentives. Diplomats said the offer contained no major new enticements. AP
-John Bolton, America’s ex-ambassador to the United Nations, has called for US air strikes on Iranian camps where insurgents are trained for war in Iraq. Read more here-
http://www.telegraph.co.uk/news/1931520/John-Bolton-US-should-bomb-Iranian-camps.html?service=print
© 2012, Worldwide Precious Metals Canada Ltd.
www.wwpmc.com
The GoldBugg Report – May 13, 2008
Posted by Worldwide Precious Metals on Tuesday, May 13, 2008
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