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The Goldbugg Report – January 26, 2010

January 26, 2010

- “4 Reasons Why Silver is the Most Undervalued Commodity.”

-“Why Physical Silver Investors Love ETFs But Do Not Own Them.”

SILVER

Gold to silver ratio at 80 to 1 with gold at $1,500 the silver price would be $18.75

Gold to silver ratio at 70 to 1 with gold at $1,500 the silver price would be $21.43

Gold to silver ratio at 60 to 1 with gold at $1,500 the silver price would be $25.00

Gold to silver ratio at 50 to 1 with gold at $1,500 the silver price would be $30.00

Gold to silver ratio at 40 to 1 with gold at $1,500 the silver price would be $37.50

Gold to silver ratio at 30 to 1 with gold at $1,500 the silver price would be $50.00

Gold to silver ratio at 20 to 1 with gold at $1,500 the silver price would be $75.00

Gold to silver ratio at 15 to 1 with gold at $1,500 the silver price would be $100.00

-It struck us, especially as long-time gold bulls, what little attention silver gets even though the two precious metals are driven by similar developments over time. The reality is that bullish sentiment on gold right now is infinitely higher than it is for silver; and keep in mind that while gold is the most malleable metal of all (the only metal that will look the same 1,000 years from now as it does today), silver pieces going all the way back to pre-biblical times were the primary medium-of-exchange (fiat paper currency, in the overall scheme of things, is a relatively new phenomenon and a convenient one for politically sensitive central banks). How well known is that up until 1968, silver certificates were redeemable for an equivalent amount of silver?

Since that time, these have been replaced by the Federal Reserve Notes declared as being official Legal Tender and backed by a printing press (now operated by none other than Ben Bernanke, who in four years has managed to create out of thin air 60% of the entire monetary base of the country since the United States was established 233 years ago). And how well known is it that theCoinage Act of 1965 removed all the silver from newly-minted quarters and dimes?

The difference between precious metals and fiat money is that the latter is not backed by any physical asset and as such has no intrinsic value whatsoever a medium of exchange, perhaps, but backed by nothing except its ‘legal tender’ status. Keep that in mind when you flip through your wallet (the term ‘dollar’, as an aside, was not a made-in-U.S.A. development but in fact was adopted from the Spanish dollar which itself was a silver coin from a Bohemian mine).

Silver also is very likely the metal that has the most industrial uses from batteries to mirrors to video equipment, so it is more than just a store of value as gold is. The silver price is more than 60% below its prior peaks even after the impressive rally of the past year. And when you take a look at where silver trades to gold, which is still flirting near record highs, it would have to triple to get to where gold was in relative terms at the peak back in January 1980 (gold was trading near $740/oz more than 30% below where it is today when silver was trading at its record peak back in January 1980 at $45/oz).

Relative to oil, silver could surge 4x from here and it still wouldn’t match the prior high in this relationship over three decades ago. Considering the problems that plague every major currency in the world, from the U.S. dollar, to the Yen, to the Euro, to sterling, and knowing from the McKinsey report that the need to monetize the surge in public debt will be required to cushion the economic blow from what will likely be another 5-6 years of deleveraging in the private sector, and given the much more stable supply outlook for silver (all the low-cost shallow mines on the planet have already been gutted) and where it trades relative to gold, not to mention what little attention the metals grabs and how under-owned it still appears to be, exposure to silver, whether it be in bars, coins, ETFs or mining companies, is likely going to be prove to be a very attractive investment in coming years. David Rosenberg-Gluskin/Sheff

-Silver has been of late and may remain over the near-term, a more profitable way to play the bull market in precious metals, considering how less “overbought” it is relative to gold bullion. The net speculative long position is high 45.059 contracts (5,000 troy ounce) but nowhere near the relative highs that have been hit in the gold market. David Rosenberg-Gluskin/Sheff

-Ted Butler is enthused about CFTC movement on position limits. Read more here-http://www.gata.org/node/8244

-Howard Ruff silver interview. Read more here-http://news.goldseek.com/GoldSeek/1263588641.php

-4 Reasons Why Silver is the Most Undervalued Commodity. Read more here-http://news.silverseek.com/SilverSeek/1264140240.php

-Why Physical Silver Investors Love ETFs But Do Not Own Them. Read more here-http://news.silverseek.com/SilverSeek/1264106417.php

-Silver set to shine. Read more here-http://www.fin24.com/articles/default/display_article.aspx?ArticleId=1518-2438-2439_2568072 or http://personalfinance.iafrica.com/moreinvest/2173160.htm

-A Decade of Hot Commodities. Gold had the most positive years its streak now stands at nine straight years after a 5.5 percent loss in 2000, when the bullion price dipped below $265, roughly a quarter of the current price. Oil, platinum and silver all had eight positive years during the decade, while nickel had six down years. Read more here-

http://news.goldseek.com/GoldSeek/1263920761.php

GOLD

-2010 Sectors to Watch: Gold. Cramer finished his weeklong series on 2010’s top investing themes with a focus on gold. The precious metal shot up 24% last year, marking the ninth straight year where the price increased.

“And I don’t think gold is done,” Cramer said. Gold historically has been considered a defensive play. Investors buy it to protect against both inflation and overall market volatility. The idea is that while some stocks in a portfolio are dropping, gold heads the other way, thereby helping to stem big losses. But the commodity has been rallying right along with stocks, turning it into an offensive play as well.

That’s because gold has developed into a legitimate growth investment. As more and more people flood in net investment in gold jumped fivefold in 2008 the price increases. A big driver has been investors’ seeking safety as world governments issue billions in cash to fund their economic stimulus programs, and, as a result, debase their currencies.

Many developing nations have used the same strategy, buying gold to maintain their exchange rates because they no longer trust devalued dollars and euros. The central banks of Russia, India and China all have upped their gold holdings over recent years.

Another relevant gold trend concerning the BRIC nations involves their growing middle classes. What do people do with their newly found disposable income? They spend it, of course. And a healthy chunk is going toward gold jewelry. “Central banks, currencies, interest rates this stuff is all important,” Cramer said. “But don’t underestimate the power of bling.”

A last couple of points regarding gold: The economy eventually will rebound, meaning inflation is on its way. And again gold is a play on that. So expect the price to rise accordingly. Also, gold producers have reduced their hedges, which is a sign that they too think prices are going higher. Not to mention, they can’t find enough gold to meet the growing demand, and that will play a part here as well.

-The bottom line here is that every portfolio should contain some gold. It plays on both sides of the ball: defensively it protects against market trouble, and offensively it capitalizes on the commodity’s growth. “Consider it term life insurance for your nest egg,” Cramer said. Read and watch more here-http://www.cnbc.com/id/34772171

-Five Fundamental Reasons Gold Will Hit $5,000. Read more here-http://www.dailymarkets.com/economy/2010/01/14/five-fundamental-reasons-gold-will-hit-5000/

-Gold price to hit $1,600 an ounce in 2010. Read more here-http://www.commodityonline.com/futures-trading/technical/Gold-price-to-hit-$1-600-an-ounce-in-2010-14027.html

-Two Important Messages from the Fear Index. The Fear Index remains within its decade-long bullish uptrend, so we therefore know as a consequence that gold also remains within an uptrend. But the Fear Index is also giving us another important message. It is that gold remains undervalued.

Gold’s valuation is indispensable information given its exceptional appreciation this decade. In other words, even though gold has risen nine years in a row against the US dollar, it remains relatively cheap. This conclusion is illustrated with the following chart.

The dashed horizontal line on this chart marks 2.63%, which is the average value of the Fear Index since August 1971. That is the date when President Nixon with total disregard to the US dollar’s 180-year history turned the dollar into irredeemable fiat currency, in effect declaring by presidential edict that the monetary requirements of the Constitution were null and void.

The Fear Index is presently 2.05%. Note that it is lower today than August 1976 when the Fear Index was 2.28% and gold was $104. Therefore, gold at $1106 its December 31, 2009 price is even more undervalued than it was at $100 back in 1976. How is that possible? How can gold be more than 10-times more ‘expensive’ today and still be better value?

Simple. A 2010-dollar is not the same as a 1976-dollar. The dollar’s name has not changed, but the dollar has been terribly debased over the past 34 years. It has lost much of its moneyness its innate value as money in two insidious ways.

It has lost purchasing power because of inflation. Secondly, it also has 0.23% less gold-backing today than it did at the low point of the Fear Index in 1976. Even though dollars can no longer be redeemed for gold, dollars are still partially backed by gold.

The Fear Index measures to what extent gold backs the dollar, assuming of course that the 261.5 million ounces in the US Gold Reserve really exist and have not been loaned out, encumbered or put in play as part of the gold price suppression scheme led by the US government.

What is clear from the above chart is that one cannot use the dollar price of gold to determine whether or not gold is good value. The purchasing power of the dollar and the extent of its gold-backing are ever-changing. So the dollar is not a good measuring stick. It is not a numéraire.

The important conclusion from the above chart is that gold remains relatively cheap. We should therefore continue to accumulate it. James Turk-Read more here-

http://www.fgmr.com/two-important-messages-from-the-fear-index.html

-Gold still on a feverish pitch. Read more here-http://www.moneycontrol.com/news/business/gold-still-onfeverish-pitch_436812.html

-Schmidt’s Gold Thoughts. Read more here-http://www.kitco.com/ind/Schmidt/jan182010.html

-In nominal dollars, new-home prices have retreated to 2003 levels. Priced in gold ounces, however, the median new-home “price” has collapsed to 1984 territory. After Nixon’s 1971 severing of the dollar’s tie to gold, price inflation, recession, and economic stagnation followed.

With similar conditions extant today, we expect gold to retake and then exceed its prior purchasing power high of 100 ounces buying a median-priced U.S. McMansion. Indeed, the “100-ounce house” would today require $2,000 gold, a target we think will be easily achieved. But a far more plausible scenario pairs a rising gold price with persistent home price weakness.

The possibility of the “50-ounce house” could be ahead of us. Read more here-http://caseyresearch.com/displayCcs.php?e=true

-The Overwhelming Evidence For Peak Gold. Read more here-http://www.businessinsider.com/peak-gold-is-happening-everywhere-2009-12

-Jim Sinclair: The Games Of The Paper Gold Market. Read more here-http://jsmineset.com/2010/01/21/the-games-of-the-paper-gold-market/

-Russia’s Central Bank Boosts Gold Holdings 4.1% in Month. Read more here-http://www.bloomberg.com/apps/news?pid=20601012&sid;=af8ronprmsBE

-Adrian Douglas: The ‘tiny’ gold market is actually the world’s biggest. Read more here-http://www.gata.org/node/8248

-Is There Gold in Fort Knox? Read more here-http://moneywatch.bnet.com/economic-news/article/is-there-gold-in-fort-knox/385523/

CHART OF THE WEEK-QUOTES-QUICK HITS

-Chart of the week: Workers Are Unemployed So Long, They’re Forgetting Their Skills. As highlighted by The Economist, only 400,000 more Americans were employed in 2009 vs. 1999 despite the fact that the population had grown by 30 million.

Yet it gets worse Not only has unemployment skyrocketed, but long-term unemployment has skyrocketed even higher. (Shown in the chart below.) The Economist: Long-term unemployment is what will make this economic downturn inordinately tough for many Americans to bear.

Regardless of what headline U.S. GDP data may do, many of the people represented by the spike below will experience a multi-year personal economic downturn regardless. Of course, it’s worth asking whether the skills they forget will even be valuable by the time things turn around. Read more here-http://www.businessinsider.com/chart-of-the-day-long-term-unemployment-2010-1

Source: chartoftheday.com

-Should you be a trader or a long-term Investor? Good question. How many of you that got into the gold market made a ton of money trading it from its $35 low in 1973 to its 1976 high of $200 had any profit left over when it suddenly dropped back to $100 in 1977? I’m willing to bet that not one of you got back in when gold soared passed $200 or passed $300 or $500 by the Fall of 1979?

But most everyone was jumping in as gold gapped up as much as $30 a day into its ultimate high of $850+ into December 1979. Instead of reaping fortunes most traders ended up in the hole, while those slow dumb investors who just grabbed on to the Bull and hung on became very rich. Aubie Baltin

-Why do we enjoy volatility? We do not like or dislike volatility, we are neutral to fluctuations. We do, however, like opportunity, and volatility often creates opportunity. In fact, I would go so far as to say volatility usually creates opportunity. How does this happen? Human nature is driven by greed and fear, among many other motivating influences.

However, the insecurities that lead to greed and fear are more urgent in many people, and greed and fear motivate more personal behavioural volatility. If the markets are volatile, you can be certain that some people are losing money. Those who are losing money often decide to sell down to the sleeping level at a time when the price is low and a buyer with cash and moxie can do very well.

Many huge fortunes have been built on this principle. For these reasons, and for other reasons too numerous to mention, the markets often create great opportunities to buy valuable assets at a low price. Monty Guild

-According to Egon von Greyerz a leading gold commentator, gold could reach $10,000 per oz due to the state of the world paper currencies. He has released a hard hitting analysis of the effects of toxic loans and printing of money to prop up the economies.

Greyerz, a former Deputy Chairman of Dixons and now Managing Partner of GoldSwitzerland, also states that we could see hyperinflation and the collapse of the dollar. The public’s perception of gold will change dramatically in the next 12-18 months.

With the likely major decline of currencies like the dollar and the pound and the resurgence of problems in the financial system, the coming rapid appreciation of gold will make major headlines.

At that point the media will totally change their attitude and treat gold with the respect that it requires as the only surviving currency of the last 6,000 years. Gold at $1,135 will be regarded as an absolute bargain in 12 months time. Listen here-http://goldswitzerland.com/index.php/bbc-radio-interview-with-egon-von-greyerz/

-As for the equity market well, it is more than just fractionally overvalued more like 25% at the least. In our morning reading, we came across this little ditty in the New York Times from the venerable Jeffery A. Hirsch, the editor of the Stock Trader’s Almanac: “The market has been pricing in a pretty robust and unwavering recovery.

The selloff today is the market coming back to the reality that it did get a little bit ahead of itself, and that it we’re probably going to have some struggles going forward.” We wouldn’t disagree. David Rosenberg-Gluskin/Sheff

-Both the average and median one-year forward P/E multiple on the TSX is just over 14x, so our earnings projection would yield a ‘fair value’ on the Canadian market at around 10,150. That would suggest a current overvaluation of 15%.

Even the consensus earnings view of $750 which would imply over a 20% profits surge this year (highly unlikely in our opinion) would spin out a fair-value index level of 10,725 nearly 9% overvalued. No matter how you slice it, this is an overvalued market perhaps not egregiously so and certainly not as overdone as is the case in the USA, but it is expensive nonetheless. David Rosenberg-Gluskin/Sheff

-Mr. Market has sent out an early message this year that he is going to be far more discriminating this will not be another year when the rising tide lifts all the boats. The shorts have long been covered, the hedge funds have reached their high-water marks, mutual fund manager cash ratios are back at the lows, and the VIX index is half the level it was a year ago in a show of how the market has shifted from being completely catatonic to completely complacent. David Rosenberg-Gluskin/Sheff

-Russia diversifies into Canadian dollars. Read more here-http://www.ft.com/cms/s/0/22f1bd26-05db-11df-8c97-00144feabdc0.html

-Canada Keeps Lending Rate 0.25%, Repeats June Pledge. The Bank of Canada left its benchmark interest rate at a record low and repeated a pledge to leave it unchanged through June as a strong currency and weak U.S. demand slow an economic recovery. Read more here-http://www.bloomberg.com/apps/news?pid=20601082&sid;=aLnRrLuuIK8k

-Is America’s financial collapse inevitable? Read more here-http://www.wnd.com/index.php?fa=PAGE.view&pageId;=122030

-Illinois enters a state of insolvency. As Illinois’ fiscal crisis deepens, the word “bankruptcy” is creeping more and more into the public discourse. “We would like all the stakeholders of Illinois to recognize how close the state is to bankruptcy or insolvency,” says Laurence Msall, president of the Civic Federation, a fiscal watchdog in Chicago.

“Bankruptcy is the reality that looms out there,” Republican gubernatorial candidate Andrew McKenna Jr. says. Read more here-http://www.chicagobusiness.com/cgi-bin/mag/article.pl?articleId=32910&seenIt;=1

-Unfunded Benefits Dig States’ $3 Trillion Hole. Everyone seems to know the current path of federal fiscal policy is a deathtrap over the long term. What’s peculiar is the relative inattention to the balance sheets of state and local governments.

Hidden behind accounting fictions, the politically unspeakable reality is that public employee pension systems are under-funded by more than $2 trillion. Add more than $1 trillion in unfunded health-care benefits for retired public employees, and state governments face protracted structural deficits ranging from challenging to insurmountable.

Unfunded promises are the equivalent of government debt. The burden of promises made by state governments to their employees effectively an invisible wealth transfer from future taxpayers to current and prospective public-sector employees amounts to about one quarter of U.S. gross domestic product. The strength and durability of the current economic recovery are unknowable; that state and local governments, which employ one in nine workers, will be a drag on that recovery is certain.

Ultimately, mathematically unsustainable trends must reverse. As with New York City in the late 1970s, eventually the federal government may get involved in redefining the services state and local governments provide, the benefits paid to public employees and the burdens on taxpayers. States cannot kick the can down the road ad infinitum. Read more here-

http://www.bloomberg.com/apps/news?pid=20601039&sid;=aKQk6SUcSr3A

-Jobless Claims in U.S. Unexpectedly Rise on Backlog. Read more here-http://www.bloomberg.com/apps/news?pid=20601110&sid;=apSsE1zr0Syo

-Jobless rates seen high for many more years. Read more here-http://www.reuters.com/article/idUSTRE60J0WB20100120

-NYC Jobless Rate Rise to 10.6%, Highest Since 1993. Read more here-http://www.bloomberg.com/apps/news?pid=20601110&sid;=aDG58D9xbVsk

-Capital One US credit card charge-offs hit 10 pct. Capital One Financial Corp’s U.S. credit-card charge-offs rose to double digits in December, showing consumers became increasingly stressed in the holiday shopping month.

In a regulatory filing on Friday, Capital One said the annualized net charge-off rate debts the company believes it will never collect for U.S. credit cards rose to 10.14 percent in December from 9.60 percent in November. Read more here-http://www.reuters.com/article/idUSN1517993820100115

-Britain’s recession the steepest for 88 years. Read more here-http://business.timesonline.co.uk/tol/business/economics/article6986312.ece

-U.K. families face years of pain, says bank. Families must steel themselves for years of hardship even though the recession is all but over, the governor of the Bank of England has warned. Read more here-http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7030904/Families-face-years-of-pain-says-Bank.html

-Britain borrowed £15.7bn to balance the books last month, the highest December figure on record, as two-and-a-half years of financial crisis and recession took a toll of the public finances. Read more here-http://www.guardian.co.uk/business/2010/jan/21/government-borrowing-december-record

-European Ministers Say Greece Must Tackle Deficit. Read more here-http://www.bloomberg.com/apps/news?pid=20601068&sid;=anQmz0rOyhjY

-ECB prepares legal grounds for euro rupture as Greece festers. Read more here-http://www.gata.org/node/8246

-Doug Casey: Stock Market Set to Crash. Read more here-http://www.321gold.com/editorials/casey/casey012110.html

-Martin Armstrong New Year’s message to the masses. Read more here-http://www.scribd.com/doc/25227935/Behind-The-Curtain-The-Full-Monty

-Martin Armstrong bio. Read more here-http://en.wikipedia.org/wiki/Martin_A._Armstrong and http://armstrongeconomics.com/about/

-China, which cut Treasury holdings by the most in five months in November, may scale back purchases of U.S. debt on concern the dollar will decline, said Liu Yuhui, an economist at the Chinese Academy of Social Sciences. Read more here-http://www.bloomberg.com/apps/news?pid=20601083&sid;=aCbMn3vSkuGI

-Boomers see retirement later, less likely. People just starting to consider retirement are less optimistic about their ability to stop working than older people, but many still want to move when they reach traditional retirement age, according to a survey commissioned by homebuilder Pulte Homes Inc.

Of those who turn 50 this year, 41 percent say they will never be financially capable of retiring and 23 percent have not even started to save, Pulte revealed at the International Builders’ Show, homebuilding’s annual industry event, held here this week.

The study compared attitudes toward retirement by older and younger baby boomers, the massive age cohort born between 1946 and 1964 whose sheer size makes it a prize demographic across industries. Read more here-http://www.reuters.com/article/idUSTRE60J5CA20100120

-Don’t Like the Numbers? Change ‘Em. If a CEO issued the kind of distorted figures put out by politicians and scientists, he’d wind up in prison. Politicians and scientists who don’t like what their data show lately have simply taken to changing the numbers.

They believe that their end socialism, global climate regulation, health-care legislation, repudiating debt commitments, la gloire française justifies throwing out even minimum standards of accuracy.

It appears that no numbers are immune: not GDP, not inflation, not budget, not job or cost estimates, and certainly not temperature. A CEO or CFO issuing such massaged numbers would land in jail. Read more here-http://online.wsj.com/article/SB10001424052748704586504574654261655183416.html?mod=rss_Today%27s_Most_Popular

-U.S. counter terror agency lacks “Google-like” search. Read more here-http://www.reuters.com/article/idUSTRE60J5FA20100120

-Iran Says Western Warships Would Be Targeted in Event of Attack. Read more here-http://www.bloomberg.com/apps/news?pid=20601110&sid;=ajBZ7h4oXTak

-FBI Chief Tells Congress Terrorist Threat Grows More Worrisome. Read more here-http://www.bloomberg.com/apps/news?pid=20601110&sid;=aSYnKM0fj_HY

WWW.RARECOLOREDDIAMONDS.COM

-The Rare Colored Diamonds Historical Value Tracker system is the perfect tool for investors to view the potential future value of a rare colored diamond based on the current market trend of a particular type of diamond. Track the potential future value of colored diamonds here-http://www.rarecoloreddiamonds.com/HistoricalPriceTrackingsystem.html

-Watch BTV interview of Harold Seigel on colored diamonds and his website http://www.rarecoloreddiamonds.com/. Watch video here-http://www.rarecoloreddiamonds.com/watchnow.html

-Rio Tinto Diamonds announced last week that production at its fully owned Argyle mine in Australia was 33% lower than the same quarter of 2008. Israelidiamond.co.il

-Diamonds as good an investment as gold. Gold may be the preferred metal when it comes to investment, but with availability of small diamonds even the sparkler is being fancied by many. “If you compare gold and diamond in terms of return in last 10 years then both stand almost equal.

Both have given average 15 to 20 per cent return per year over a period of 10 years despite a three year recession period in both”, said Rohit Mehta, president of Surat Diamond Association. Read more here-http://timesofindia.indiatimes.com/city/surat/Diamond-as-good-an-investment-as-gold/articleshow/5474352.cms

OIL-NAT GAS

-Oil Shortages to Reappear in 2011, Goldman Sachs Says. Read more here-http://www.bloomberg.com/apps/news?pid=20601082&sid;=axnm2BeGMveI

-There’s oil in them thar wealth funds. Read more here-http://blogs.reuters.com/globalinvesting/2010/01/14/theres-oil-in-them-thar-wealth-funds/

-Triple Digit Oil and Economic Change. Read and watch more here-http://jessescrossroadscafe.blogspot.com/2010/01/triple-digit-oil-and-economic-change.html

-Venezuela Power Shortage May Push Oil Above $100. Read more here-http://www.bloomberg.com/apps/news?pid=20601110&sid;=akwFudCxmFUM

-Cheap Oil is Gone, and That’s Good News. Read more here-http://news.goldseek.com/GoldSeek/1263591623.php

-China completes 1st phase of nat”l strategic oil reserve project. Read more here-http://www.kuna.net.kw/NewsAgenciesPublicSite/ArticleDetails.aspx?id=2055244&Language;=en

-China’s Round-The-Clock Auto Factories Still Cannot Meet Demand. Read more here-http://www.bloomberg.com/apps/news?pid=20601109&sid;=av3dPlponcBw

-Henry Ford Raising Wage May Give China Tip on Worker Prosperity. Read more here-http://www.bloomberg.com/apps/news?pid=20601110&sid;=au7tdjzgHks8

-U.S. Overtakes Russia as Biggest Natural Gas Producer. Read more here-http://www.bloomberg.com/apps/news?pid=20601095&sid;=a48PBeFePGE8

INSIDER STOCK BUYING DROPS TO LOWEST LEVELS IN A YEAR

-As the recession on Main Street continues the negative trends in insider buying get even worse. Insider buying fell to a new low of $7.8MM on the week. Selling dropped from $318MM to $293.22MM, but remains at very high levels.

I continue to believe this is a reflection of the ongoing secular bear market as corporate insiders see little to no real recovery in revenues and sustainable organic growth. Due to this, they have little to no faith in the long-term sustainability of future increases in their own corporation’s stock prices. This is best reflected in the incredibly lopsided insider transactions. Read more here-

http://pragcap.com/insider-buying-drops-to-lowest-levels-in-a-year

JAPAN POST BUBBLE RALLIES

-Here’s a new chart that gives a closer view of the cyclical rallies and their duration during Japan’s secular bear market, now in its 20th year. Read more here-http://www.dshort.com/articles/2010/Japan-post-bubble-rallies.html

S&P; 500 ANNUALIZED TOTAL RETURN ROLLER COASTER

-Imagine that ten years ago you invested $10,000 in the S&P; 500. How much would it be worth today, adjusted for inflation with dividends reinvested? Brace yourself: Your investment has shrunk to about $7,246, an annualized return of -3.17%. That’s a 27.5% loss.

And this is an improvement over the same ten-year return as of March, when your annualized return would have been -5.93%, for a total loss of 45.7%. Read more here-http://www.dshort.com/articles/2010/SP-Composite-annualized-total-return-roller-coaster.html

BANKING CRISIS

-Banks Stand to Lose Billions in Value, Face Skeptical Investors if FASB Rule Adopted. Banks are likely to lose hundreds of billions of dollars in total common equity possibly damaging their ability to attract investors and raise capital if a shift in accounting rules to be proposed this quarter goes into effect.

That’s the conclusion of Fitch Ratings, the New York-based credit ratings agency, which just released a study of the impact that fair value accounting would have on loans.

In its report on fair value, Fitch analyzes the impact of the change on 20 large banks, concluding that those institutions alone would experience a decrease in shareholder equity of $130 billion, or 14% on average, if the standards change had been implemented last fall. An exposure draft is expected this quarter, but a rule would not be implemented before 2011. Read more here-

http://www.fincriadvisor.com/2010-01-17/fitchonFASB

-Barclays, Lloyds May Need 25 Billion Pounds to Bolster Capital. Barclays Plc and Lloyds Banking Group Plc, two of the U.K.’s biggest banks, may need to raise as much as 25 billion pounds ($41 billion) to meet new rules on how much capital to hold against losses, according to Matrix Corporate Capital LLC and Credit Suisse Group AG.

Lloyds, Britain’s largest mortgage lender, may need to raise as much as 7.8 billion pounds, Matrix said, while Barclays may require as much as 17 billion pounds, according to Credit Suisse. The country’s biggest bank, HSBC Holdings Plc, will also have its capital buffer reduced under the proposed new Basel Committee on Banking Supervision rules, according to Matrix, though it won’t be forced to raise money.

The Basel Committee works under the Bank for International Settlements to set financial company capital rules and is proposing regulation that may come into effect in 2012. Regulators want lenders to hold better-quality capital to prevent a repeat of the crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc. when trillions of dollars of taxpayers’ money was used to prevent bank failures.

“Changes in regulations for bank capital are a game changer for the sector,” according to Andrew Lim, analyst at Matrix in London. The proposals will “increase the quantum of capital in the system, improve its quality, force out complexity from balance sheets and ultimately drive down return on equity,” he said.

Banks probably will have to maintain a so-called core capital ratio of at least 6 percent under the Basel Committee proposals. The ratio is a measure of financial strength that compares a bank’s capital to its loans and other at-risk assets. Read more here-http://www.bloomberg.com/apps/news?pid=20601087&sid;=a622iFzFpcBU&pos;=5

-Banks pull another $1 billion from small business lending. The nation’s biggest banks cut their collective small business lending balance by another $1 billion in November, according to a Treasury report released late Friday. The drop marked the seventh straight month of declines.

The 22 banks that got the most help from the Treasury’s bailout programs have cut their small business loan balances $12.5 billion since April, when the Treasury began requiring them to file monthly reports on the tally. The banks’ total lending has fallen 4.6% in that seven-month period, to $256.8 billion.

As Wall Street megabanks return to health and celebrate with lavish bonuses President Obama and his administration have been pushing financiers to help spur a Main Street recovery. Small business owners are still reporting difficulty finding banks willing to extend the credit they need to launch, run and grow their ventures.

In December, the President met with a dozen CEOs of the nation’s biggest banks to pressure them to reverse their small business lending declines. Read more here-

http://money.cnn.com/2010/01/18/smallbusiness/small_business_lending_drop/index.htm

-FDIC geared up for busy year of bank failures. Read more here-http://www.reuters.com/article/idUSTRE60J53220100120

-Regulators shutter small banks in Illinois and Minnesota. Read more here-http://money.cnn.com/2010/01/15/news/economy/bank_failure/index.htm or http://www.fdic.gov/

-Utah’s Barnes Banking Company closed by regulators. Read more here-http://www.marketwatch.com/story/utahs-barnes-banking-company-closed-by-regulators-2010-01-15-201570

-President Barack Obama’s proposal to regulate banks should include a requirement that chief executive officers and their spouses forfeit their assets when companies fail, billionaire Warren Buffett said on Fox Business Network.

“There ought to be a huge downside,” said Buffett, whose Berkshire Hathaway Inc. is the largest shareholder in Wells Fargo & Co. “Make it so that the CEO of an institution that fails, or goes to the government and needs help, really gets destroyed himself financially. Why should he come out any better than somebody that gets laid off as an auto worker at General Motors?” Read more here-http://www.bloomberg.com/apps/news?pid=20601110&sid;=awAvKWXCljy8

INFLATION

-The CPI chart reflects our estimate of inflation for today as if it were calculated the same way it was in 1990. The CPI on the Alternate Data Series tab here reflects the CPI as if it were calculated using the methodologies in place in 1980.

In general terms, methodological shifts in government reporting have depressed reported inflation, moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living. Read more here-http://www.shadowstats.com/alternate_data/inflation-charts

-Consumers Squeezed as Inflation Outpaces Wages. Read more here-http://moneynews.com/InvestingAnalysis/US-Economy/2010/01/15/id/346518

U.S. DEBT CRISIS

-US Fed’s balance sheet liabilities hit record. The U.S. Federal Reserve’s balance sheet rose to a record in the latest week, boosted by its ongoing efforts to support the mortgage market, Fed data released on Thursday showed. The Fed’s balance sheet a broad gauge of its lending to the financial system rose to $2.274 trillion in the week ended Jan. 13 from 2.216 trillion in the prior week.

After declining early last year, the balance sheet generally has been accumulating mass amid the Fed’s asset-buying program, in which the central bank’s holdings of agency debt and mortgage-backed securities have grown to more than $1 trillion.

The latest rise in the balance sheet came on the back of a jump in its holdings of agency mortgage-backed securities, which rose to $968.59 billion in the week ended Jan. 13 from $908.74 billion in the previous week. The Fed’s holdings of agency debt totalled $160.83 billion in the week ended Jan. 13 versus $159.88 billion the previous week.

By the end of March, the Fed plans to have bought $1.25 trillion worth of mortgage-backed securities and about $175 billion worth of agency debt. Read more here-

http://www.reuters.com/article/idUSN1423394420100114

-Democrats propose $1.9T increase in debt limit. Senate Democrats on Wednesday proposed allowing the federal government to borrow an additional $1.9 trillion to pay its bills, a record increase that would permit the national debt to reach $14.3 trillion. Read more here-http://news.yahoo.com/s/ap/20100120/ap_on_bi_ge/us_congress_debt_limit_11

-Debt ceiling fight: It’s back. Read more here-http://money.cnn.com/2010/01/19/news/economy/debt_ceiling/index.htm

REAL ESTATE-FORECLOSURES-MORTGAGES

-In my view, three years after the detonation in residential real estate, it is still all about housing. And it will be interesting to see how the markets handle a near-term renewed decline in the Case-Shiller home price index since the consensus is that housing values have bottomed, and what happens if home

prices do fully mean revert and drop another 10-15% from current levels (on top of the 30% decline already posted). The implications for confidence, wealth, spending, foreclosures, writedowns and bank credit growth are enormous.

But not only are house prices still overvalued relative to wages and rents, but there is still far too much supply relative to the underlying demand, a message that has come out ringing loud and clear in each of the last two NAHB surveys:

• There are two million U.S. homes sitting vacant with a “For Sale” sign.

• There is another 3.4 million homes that are vacant but are being “held off the market” for unspecified reasons. In other words, the “shadow” inventory of foreclosed units that has yet to be listed.

• There are an additional 3.5 million homes that are occupied but are listed for sale right now.

• We have 235,000 newly built units sitting vacant too.

• There are a record 4.6 million vacant rental units nationwide that are competing for all this outstanding supply of houses, and rents are deflating at a record rate, which is impeding the relative improvement in the costs of homeownership.

So we have supply, both potential and actual, of over nine million homes and condos nationwide. That is a huge overhang. On top of that, an 11%-plus rental vacancy rate as a viable option for households looking for a place to live.

For some reason, this does not add up to anything but a long and winding road for continued house price depreciation going forward. There may be subprime areas of Florida, California, Nevada and Arizona that look very attractive, but the overall market also includes the northeast and Midwest and the mid to high-end part of the real estate space where deflation is going to remain a reality for years to come. David Rosenberg/Gluskin/Sheff

-Homebuilder Confidence in U.S. Unexpectedly Decreases. Read more here-http://www.bloomberg.com/apps/news?pid=20601110&sid;=aWgr38GummuE

-U.S. life insurers, a group led by MetLife Inc. and Prudential Financial Inc., may face $15 billion in additional commercial real estate losses, most of which will be recognized in the next two years, Fitch Ratings said.

The life insurers have already booked about $5 billion in such losses since the economic crisis began, bringing the expected total to $20 billion, Douglas L. Meyer, a Fitch analyst, said today in an interview. Most future losses will be taken this year and in 2011, he said. Read more here-http://www.bloomberg.com/apps/news?pid=20601110&sid;=aA2KSAm14FVQ

-Record 3 million households hit with foreclosure in 2009. Read more here-http://money.cnn.com/2010/01/14/real_estate/record_foreclosure_year/index.htm or http://www.reuters.com/article/idUSTRE60D0LZ20100114

-Treasury Delay on Home-Equity Debt Imperils Housing. Read more here-http://www.bloomberg.com/apps/news?pid=20601214&sid;=acBzdzGqrIoI

-Loan Modification Recipients Fall Short, Drop Out. About 25 percent of homeowners who received trial loan modifications through President Barack Obama’s main foreclosure prevention plan are failing to keep up with their new reduced payments, the Treasury Department said. Read more here-http://www.bloomberg.com/apps/news?pid=20603037&sid;=aBE9Z4fJhiAg

-Homeowners opt to flee instead of fight as loan modifications start to lose luster. Read more here-http://www.palmbeachpost.com/money/real-estate/homeowners-opt-to-flee-instead-of-fight-as-183341.html?printArticle=y

-$8 million in assets and can’t get a mortgage. The wealthy have money problems, too yeah they do. Even refinancing a mortgage for their fancy digs or getting a new loan can be near impossible these days thanks to skittish lenders. And the higher the loan value, the more they worry.

Still, that people with high six-figure incomes, stellar credit histories and gobs of assets get mortgage requests turned down seems weird. “It’s amazing really,” said Susan Bruno, a financial planner with Beacon Wealth Consulting in Rowayton, Conn., “but it makes sense when you think about it.”

For one thing, many rich folks have fallen behind on their loans. About 12% of U.S. mortgages of $1 million and larger were late this fall, twice the rate for loans under $250,000 and nearly triple the default rate on million dollar mortgages 12 months earlier, according to First American CoreLogic Inc., a California-based research firm. Read more here-

http://money.cnn.com/2010/01/20/real_estate/mortgage_woes_for_wealthy/index.htm

© 2012, Worldwide Precious Metals Canada Ltd.
www.wwpmc.com

The Goldbugg Report – January 26, 2010
Posted by Worldwide Precious Metals on Tuesday, January 26, 2010

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