Thursday, February 17, 2011

What If We Had A Bubble And Nobody Came?

Jeff Berwick, The Dollar Vigilante
15 February 2011
You could not have written a better script for gold. It is almost as if the US Government and the Federal Reserve are trying to destroy the dollar and demolish the country - and taking most of the western world with it.

At the beginning of this gold bull market, in 2000, no one had ever heard of Barack Obama or Ben Bernanke. But, 11 years later, and an outright socialist profligate spender is President of the US and a College professor who believes in crackpot Keynesian theories about how money printing can save economies is the Chairman of the Federal Reserve.

Yet, it is now 11 years into the most consistent bull market on earth, and hardly anyone owns gold.

The amount of money invested in US Money Market accounts is $2.8 trillion. As comparison, the amount currently invested in Gold ETFs is less than $100 billion.

Talking to the average man on the street is an exercise in futility. Before gold hit $1,000/oz in US dollar terms no one owned gold. Since it has hit $1,000 a few people have become aware of its existence but of those the vast majority will tell you that, " it's too late now to buy gold. We missed the run."

Anyone who has been around for any of the numerous bubbles that have been spawned by the massive amount of monetary inflation over the last few decades knows that this is not what a bubble top looks like. It's not even what a bubble looks like. was just a domain name and a business plan to sell pet accessories online in 1999 and it had a market capitalization of $300 million and people were begging to get a piece of its IPO. "It's the new economy," they said.

Taxi drivers in Las Vegas were buying 4 or 5 houses as speculative properties in 2005. "House prices never go down," they said.

Yet, gold almost always gets pegged by mainstream media as being "in a bubble" despite showing none of the outward signs of being in a bubble. Not to mention the fact that the mainstream media completely missed the fact that tech stocks and the housing market were in a bubble - but somehow managed to spot this one!

Look at Central Gold Trust (NYSE:GTU TSX:GTU.UN). It is a fund that only holds gold bullion. It is currently trading at less than its Net Asset Value (0.3% discount). In most bubbles, publicly traded holding companies in the hot sector normally trade at large premiums to their NAV. Certainly not at a discount.

In a recent poll by Bloomberg of 1,000 of its subscribers they asked where they saw gold prices going one year from now. 35% said higher, 39% lower and 24% said little changed. They also asked if they thought gold was in a bubble. 52% said yes and 43% said no with the rest saying they didn't know.

These are simply not the types of numbers you would ever see in a bubble or near the peak of a bubble!

Bubbles only tend to pop once greater than 90% of the general public think it is a sure thing to go higher and to always go higher. And, as we pointed out in the January issue, you certainly wouldn't expect the producers of an asset that has moved dramatically higher over the last 10 years to be underperforming the asset they produce, which is and has been the case since 2004.

The last time gold stocks traded at the same level compared to gold was in 2003 when gold was $360/oz.

Gold has more than tripled since then and gold stocks have not moved higher as you would expect they would if it were a bubble.

If gold was in a bubble you would certainly expect that annual gold production from mines would have increased dramatically since the price of gold began to rise in 2000. Again, not the case. Gold production peaked out when gold was trading at its lowest levels in 2000 and 2001.

Some say that gold has been in a bull market and that it must be nearing the end of its bull move.

However, it is only in US dollar terms that gold has been in such a stellar bull market. When looking at gold versus other assets, such as oil, gold was in a bear market from 2001 to 2008 when after the "financial crisis" it began to move dramatically higher.

In fact, this chart of gold versus oil explains many of the other seeming irregularities. One of the reasons gold production hasn't increased over the last ten years is, compared to other assets, gold has been in a bear market until 2008. This also explains why gold stocks have not outperformed gold bullion during that same period.

Gold versus copper shows much the same thing.

Lastly, when looking at the past highs in gold and silver in 1980 as adjusted for a more realistic CPI, as calculated by, shows that the earlier all-time high for gold of $850.00 on January 21, 1980 would be $7,824 per troy ounce in terms of SGS-Alternate-CPI-adjusted dollars. In like manner, the all-time high price for silver in January 1980 of $49.45 per troy ounce has not been hit since, including in terms of inflation-adjusted dollars. Based on SGS-Alternate-CPI-adjusted dollars the 1980 silver price peak would be $455 per troy ounce.

In other words, hold your gold & silver. This train hasn't even left the station.

The Dollar Vigilante released a Special Report on "How to Own Gold and Silver" this week to subscribers in which we detail how to own gold & silver bullion safely and securely (Subscribe today to receive this Special Report - 90 day 100% Money Back Guarantee on Subscriptions).

The government and financial establishment on November 9th made it clear that they are declaring war on the precious metals. They are about to find out that this time they are not up against one or two brothers, but the brotherhood of all of humanity who is turning its back on this failed centrally planned financial system and returning to an honest, free-market money.

Investigating Asset Allocation

Tehmaas S. Gorimaar
February 15, 2011
Much has been made of asset allocation as a means to reduce risk in an investment portfolio. This short essay points out why diversification into several asset classes may not be a prudent strategy under present day conditions, where we are witnessing excessive money creation, competitive devaluations, outright currency wars, unimaginable debt loads, and deficits, as far as the eye can see.

Ever since Harry Markowicz published his Nobel prize-winning essay titled "Portfolio Selection" in 1952 in the Journal of Finance, numerous criticisms have been levied against it, even before the onset of the current economic crisis.

Essentially, Markowicz showed, statistically, that diversification among stocks, and, subsequently, among asset classes, results in portfolios with reduced levels of risk at a given return. Conversely, returns can be enhanced at a given level of risk through diversification. Like any other mathematical model, Markowicz's Modern Portfolio Theory (MPT) is dependent on certain assumptions and arbitrary definitions. As an example, MPT arbitrarily assigns a value of one to the beta of the stock market. The question that arises in my mind is why the stock market should be assigned a value of one. The bond market is much larger than the stock market, and the currency market even larger. One would think that one of these two markets would take precedence over the stock market. The fact that neither one has been assigned the magical value of one leads me to believe that the arbitrary assignment of a beta of one to the stock market creates an impression in most investors' minds that this is a must-have asset. It is more psychological than factual. Is it just coincidence that brokerage fees are greater for equities than for bonds? Also, investment in precious metals is discouraged. Is it because brokerage houses don't sell bullion?

There is another question that has been asked before, and it has to do with using standard deviation, or volatility, as a measure of risk. Is this the best we can do? After all, it is well known that the U.S. dollar, often regarded as a paragon of stability - a risk-free asset, as it is often called - has lost over 75% of its value against gold since Nixon took the U.S. off the gold window. Although gold can be volatile, which would you rather own? As a long-term investor, should you be concerned with short-term volatility, or should you be more interested in maintaining and/or increasing the purchasing power of your savings?

In the late eighties and early nineties, there were a couple of studies conducted by Brinson et al that appeared in the Financial Analysts Journal: see references (1) and (2). After studying numerous pension fund portfolios, they concluded that around 90% of a portfolio's variability, over time, can be ascribed to asset class selection, and less than 10% to the selection of individual equities. This is a startling fact. If 90% of the variability can be ascribed to asset class selection, shouldn't you be conducting due diligence on the various asset classes available to you for investment, and spending less time and effort on individual stock selection? Given the nature of the times, and the fragility of paper currencies, shouldn't you have the majority of your savings in tangible assets like gold and silver, and far less in assets that are based on fiat currencies? And, should you even be measuring the value of your stocks and bonds in terms of fiat currencies? Shouldn't you measure them in terms of ounces of gold and silver? These studies must be revealing, especially, to those of you who spend endless hours researching stocks.

Once you realize the importance of Brinson's studies, which are based not on a theoretical construct, but rather on substantive and substantial data, you really need to ask yourself, "What types of assets do I want to own in an era that can only be defined as the race to the bottom in the context of fiat currencies?" And lest you think that real estate is a hard asset, I would point out that it is now part of the credit bubble, and will only return to its true nature of being a hard asset after an exhaustive liquidation.

Mark Lundeen did an exhaustive paper - that showed how little the Dow Jones Industrial Average depended on earnings, and how much it depended on the Federal Reserve for support. Well, credit creation will take you only so far. When debt monetization is added to the mix, the results can be disastrous. Do you know when the tide will turn against you?

So, before you go venturing out into the investment world, be cognizant of three things:

  • that 90% of a portfolio's variability arises from proper asset selection
  • that entire classes of financial assets that may exist in your present portfolios should be regarded as derivatives of endless currency creation and
  • remember John Exter's inverted gold pyramid. (If you google "John Exter's Inverted Pyramid" you'll find numerous references to it

In my opinion, precious metals are the go-to asset class for today's investor. Paper asset pushers may regard gold and silver as speculative; gold bugs may regard them as wealth protection; in reality, they could be your salvation.


(1) Brinson, Hood and Beebower, Financial Analysts Journal, July/August, 1986
(2) Brinson, Singer and Beebower, Financial Analysts Journal, May/June, 1991

The New US $100 Note

The new US$100 note is touted as being difficult to counterfeit, which is bit rich as the bill itself has been counterfeited at the time of production by the Treasury as it is just a mental concept of money with no intrinsic worth in itself. Unlike earlier forms of money in gold and silver coin, which even when debased by successive Emperors, Kings and Presidents still retained some intrinsic value.

If you are into symbols it seems the left side of the new note represents the old currency, green and the right side the new, with gold coloured text and symbols, but no amount of bling is going to change the fact that it is still an un-backed piece of cotton trash

Stocks fall, oil, gold, silver rise as Mideast unrest grows

From Arabian Money:

In what may become the common theme of 2011 yesterday stocks fell while Brent Crude topped $104 and gold and silver headed back to their former highs of last year. The cause? More unrest in the Middle East.

Switch on the global news media and there is the ‘Day of Anger’ in Bahrain, opposition protests in Tehran, vocal protests in the streets of Yemen and who knows what is simmering from Algeria to on

Chinese Buy As Much Gold In January As They Did In Half Of 2010

From Business Insider:

Demand for physical and non-physical gold in China is soaring. The Industrial and Commercial Bank of China (ICBC) reportedly sold nearly 7 tons of physical gold in January alone, almost half of what they sold in all of 2010, according to Reuters.

The bank expects to sell 5 billion yuan worth of gold linked deposits this year, after having sold 1 billion yuan worth of the deposits in 2010, according to Zhou Ming, the deputy head of the ICBC's precious metals department.

With Chinese CPI at 4.9% it comes as no surprise consumer are rushing to buy the precious metal to hedge against inflation. Gold prices in Asia steadied in overnight trading while gold futures rose on the Comex in New York. The metal has been trading lower on the market today.

The ICBC teamed with the World Gold Council to launch China's first gold gift investment bar on Tuesday. The Only Gold Gift Bar comes in 10, 20, 50, 100 and 1000 gram denominations and the word "fu" (joy) engraved on the bar. Ming said in a statement on Tuesday:

"We are working closely with the World Gold Council to provide a variety of physical or physical backed gold solutions for our customers. Last year we sold more than 15 tonnes of bars and coins and we have a strong start in January with almost 5 tonnes of sales."

With 1,161.9 tons, China has the world's sixth largest gold reserve valued at $50.19 billion. The country is the world's largest gold producer, yet it imported 209 tons of gold last year.

An Imminent Silver Explosion?

From The Golden Truth:

With the ever-shrinking stockpile of physical silver, as evidenced by the unusual degree of backwardation in the price structure of silver futures, the noose is clearly tightening around the necks of the bullion bank(s), which are short an absurd amount of silver. I haven't seen anyone write about this yet, so maybe my thinking is out of whack, but there also seems to be another inverse head-and-shoulders forming in the daily silver chart. Here see for yourself:

(click on chart to enlarge)

It's there - see it? The last inverse HnS formation was formed roughly from late 2009 to April 2010. It then consolidated sideways until August 2010, when it exploded up to $30 - A 67% move. It would appear that this inverse HnS is forming around the $30 level. We have no way of knowing how long it will take to either fail or resolve with another big move higher. However, given that the basic supply/demand fundamentals, plus the underlying monetary fundamentals which are fueling gold and silver, are even stronger now than during all of 2010, I am placing my bet on a much higher price of silver sometime during 2011.

I have to say that I am quite excited by the reports, if they are true, about some big silver mining companies hedging out some of their production. On one hand, it's not an imprudent business decision to lock-in some profits and create some predicability in the revenue stream. On the other hand, just like Barrick and Anglo-Ashanti, these silver mining companies will likely lose a lot of money on their hedges. And this will create a massive short-cover bid in the future that will drive the price of silver even higher.

Most of you have likely already seen this article about some Asian buyers who are taking a big position in SLV as a means of accumulating a lot of silver (with SLV you can convert your shares if you own, a minimum very large amount, into the delivery of physical silver held by the trust, assuming the silver is not leased out or otherwise encumbered), but here's the link in case you have not had a chance to read this: LINK

What's wrong with US Economy?


The 10 economic charts posted below are meant to shock you. Most Americans today need to be shocked before they will be motivated to take action. Please share these charts with as many people as you can. Hopefully we can wake enough people up that something will be done about all of these problems while there is still time.

1 - Government spending is expanding at an exponential rate. As you can see from the chart below, federal spending is almost 18 times higher than it was back in 1970. Now Barack Obama has proposed a budget that would increase U.S. government spending to 5.6 trillion dollars in 2021. Just imagine what the following chart would look like if that happens....

2 - U.S. government debt is absolutely exploding. The U.S. national debt is currently $14,081,561,324,681.83. It is more than 14 times larger than it was back in 1980. Unfortunately, the national debt continues to grow at breathtaking speed. In fact, the Obama administration is projecting that the federal budget deficit for this year will be an all-time record 1.6 trillion dollars. Can we afford to continue to accumulate debt at this rate?....

3 - Unless something changes right now, the outlook for U.S. government finances in future years is downright apocalyptic. The chart posted below is from an official U.S. government report to Congress. As you can see, it is projected that interest on our exploding national debt is absolutely going to spiral out of control if we continue on the path that we are currently on....

4 - Household debt has soared to almost unbelievable levels over the last 30 years. The sad truth is that it is not just the U.S. government that has a massive debt problem. U.S. households have also been accumulating debt at a staggering rate. Total U.S. household debt did not pass the 2 trillion dollar mark until the mid-1980s, but now total U.S. household debt is well over 13 trillion dollars....

5 - The total of all debt (government, business and consumer) in the United States is now well over 50 trillion dollars. For the past couple of years this figure has been hovering around a level that is equivalent to approximately 360 percent of GDP. This is a debt bubble that is absolutely unprecedented in U.S. history....

6 - As tens of thousands of U.S. factories get shut down and as millions of our jobs get shipped overseas, the number of unemployed Americans continues to go up and up and up. As you can see from the chart below, there has been a long-term trend of increasing unemployment in the United States. In fact, there are about 3 and a half times as many unemployed workers in the United States today as there were when 1970 began. These jobs losses are going to continue as long as we allow our corporations to pay slave labor wages to workers on the other side of the globe. All of the major trends in global trade are very bad for the U.S. middle class. For example, the U.S. trade deficit with China for 2010 was 27 times larger than it was back in 1990. How long will our politicians stand by as our nation bleeds jobs?....

7 - The median duration of unemployment in the United States is in unprecedented territory. For most of the post-World War 2 era, when the median duration of unemployment in America reached 10 weeks that was considered a national crisis. Well, today competition for jobs is so intense that the median duration of unemployment is now well over 20 weeks....

8 - Since the Federal Reserve was created in 1913, the value of the U.S. dollar has declined by over 95 percent. One of the reasons given for the existence of the Federal Reserve is that the Fed helps control inflation. But that is a huge lie. The truth is that the United States never had consistently rampant inflation until the Federal Reserve took control. In particular, once the U.S. totally went off the gold standard in the 1970s inflation really started escalating out of control....

9 - Now the Federal Reserve says that the solution to our current economic problems is to print even more money out of thin air. The games that the Federal Reserve is playing with our money supply are simply inexcusable. Just look at what the Federal Reserve has done to the monetary base since the beginning of the recession....

10 - All of this new money is creating tremendous inflation. In particular, the price of oil is now ridiculously high. A high price for oil is very, very bad for the U.S. economy. Our entire economic system is based on being able to use massive quantities of very cheap oil. Unfortunately, that paradigm is starting to break down and the consequences will be very bitter. Back in mid-2008, the price of oil hit an all-time record of $147 a barrel and subsequently the world financial system imploded a few months later. Well, the price of oil is on the march again and that is very bad news for the U.S. economy....

Needless to say, if the economic trends documented by the charts above continue the U.S. economy will be totally wiped out. The U.S. economy as it currently exists is unsustainable by definition. It is only a matter of time before we slam into an economic brick wall.

We have developed an economy that cannot function without debt, and at this point it seems like almost everyone is drowning in red ink. The federal government is massively overextended, most of our state and local governments are massively overextended, most of our major corporations are massively overextended and the majority of U.S. consumers are massively overextended.

The only way that the game can continue is for the Federal Reserve to print increasingly larger amounts of paper money out of thin air and for everyone in the economic food chain to go into increasingly larger amounts of debt.

But no debt spiral can go on forever. At some point this entire house of cards is going to collapse.

When that happens, there is going to be economic pain that is greater than anything that this country has ever seen before.

Someday we will all desperately wish that we could go back to the "good times" of 2011. A great economic collapse is coming, and all of us had better get ready.

Why Isn't Wall Street in Jail?

From Rolling Stone
By Matt Taibbi
February 16, 2011 9:00 AM ET

Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate investigator laughed as he polished off his beer.

"Everything's f''ed up, and nobody goes to jail," he said. "That's your whole story right there. Hell, you don't even have to write the rest of it. Just write that."

I put down my notebook. "Just that?"

"That's right," he said, signaling to the waitress for the check. "Everything's f''ed up, and nobody goes to jail. You can end the piece right there."

Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw virtually every major bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished millions and collectively destroyed hundreds of billions, in fact, trillions of dollars of the world's wealth — and nobody went to jail. Nobody, that is, except Bernie Madoff, a flamboyant and pathological celebrity con artist, whose victims happened to be other rich and famous people.

This article appears in the March 3, 2011 issue of Rolling Stone. The issue is available now on newsstands and will appear in the online archive February 18.

The rest of them, all of them, got off. Not a single executive who ran the companies that cooked up and cashed in on the phony financial boom — an industrywide scam that involved the mass sale of mismarked, fraudulent mortgage-backed securities — has ever been convicted.

Their names by now are familiar to even the most casual Middle American news consumer: companies like AIG, Goldman Sachs, Lehman Brothers, JP Morgan Chase, Bank of America and Morgan Stanley. Most of these firms were directly involved in elaborate fraud and theft.

Lehman Brothers hid billions in loans from its investors. Bank of America lied about billions in bonuses. Goldman Sachs failed to tell clients how it put together the born-to-lose toxic mortgage deals it was selling.

What's more, many of these companies had corporate chieftains whose actions cost investors billions — from AIG derivatives chief Joe Cassano, who assured investors they would not lose even "one dollar" just months before his unit imploded, to the $263 million in compensation that former Lehman chief Dick "The Gorilla" Fuld conveniently failed to disclose. Yet not one of them has faced time behind on