May 23, 2006

The return of fear to world stock markets

>Published: May 20 2006 03:00 | Last updated: May 20 2006 03:00

Like a sudden storm on a clear day, the tempest that swept through the world's stock markets over the course of the past 10 days caught many investors by surprise. That storm abated yesterday but left the markets battered in its wake. Since peaking in late April/early May the FTSE 100 index has fallen 7.5 per cent, the S&P 500 4.6 per cent, the Eurotop 7.1 per cent and the Nikkei 225 8 per cent. During the three-year-long bull market that began in March 2003, there have been other corrections, all of which were short-lived. But this one may turn out to be more significant.

Even after the recent declines, world stock markets remain far above their 2003 lows. The FTSE 100 index is up 73 per cent, the S&P 500 58 per cent, the Eurotop 91 per cent and the Nikkei 112 per cent. It is too soon to say the bull market is over. However, the latest sell-off reflects changes in global conditions that will make further equity gains much more challenging.

One dramatic change is the increase in volatility. The Chicago Board Options Exchange VIX index, which measures market expectations of volatility, jumped from 11.83 on May 1 to a year-high of 17.31 in trading yesterday. While volatility is important in its own right, this jump reflects deeperconcerns.

The market is gripped by two scares: an inflation scare and a dollar scare. One of the most widely used measures of US inflation expectations, the spread between nominal and inflation-protected government bonds, has risen from 2.34 per cent on January 1 to 2.66 per cent yesterday. Rightly or wrongly, the credibility of the Federal Reserve under its new chairman, Ben Bernanke, is being openly questioned.

Meanwhile, equity investors have taken fright at the fall in the dollar since early April. The dollar recovered some ground this week, on expectations that inflation concerns would force the Fed to raise US interest rates further. But it remains down 3 per cent on a trade-weighted basis since April 1.

Of the two scares, investors should worry less about US inflation and more about the dollar (though the two are obviously related). All new Fed chairmen are tested by the markets. Mr Bernanke is no inflation dove, core inflation on the Fed's preferred measure is still only 2 per cent and the US economy is slowing towards trend.

The dollar is a bigger concern. While a steady and broad-based decline of the kind seen in late April/early May is both necessary and desirable, it could give way to a dollar rout and higher US interest rates. Much depends on Asian central banks, whose intervention to support fixed exchange rates frustrated a decline in the dollar in the post-dotcom bubble period, and their counterparts in oil exporting countries.

In valuation terms, the case for equities also looks weaker than it did a year ago. The rise in long term interest rates (from 4.4 per cent at the start of the year to 5.2 per cent in the US) means shares no longer look as cheap as they did relative to bonds. The yen "carry trade" (borrowing in yen at low interest rates and investing in higher yielding assets), which helped boost all risky assets, is fading away as Japan's economy revives.

If there is no cause for panic, then, there is cause for caution. Investors should expect more volatility ahead. With risk premia still very low by historic standards, there is little scope for outperformance by high-risk assets. If either the inflation scare or the dollar scare prove correct, shares could have a long way further to fall.

May 22, 2006

More on the relative abundance of Gold and Silver


David Zurbuchen submits:

Silver is rarer than gold. Period. There is less silver in the world, above ground than there is gold. That is easy to document. Since I have been harping on this point, no one has been able to refute it.


Even though there are five ounces of gold in the world now for every one ounce of silver, this 5 to 1 ratio will expand as newly mined gold is added to above ground supplies… This should get your juices flowing. It should drive you to buy silver… Silver is more rare than gold, and rarer still is someone who knows this fact. You should act accordingly.

-Ted Butler

Where has Ted Butler so easily documented his claim that silver is more rare than gold? I don’t recall ever reading his proof text. If one does happen to exist, I would appreciate someone sending it to me.

As far as I know, Ted Butler is dead wrong in all of his above pronouncements. It was comments like those above that mislead me into writing my first ever Gold-Eagle essay entitled “Silver: A Rare Opportunity”, an essay which emphasized the very ‘facts’ that I’m now attempting to refute.

Now, I realize I’ll probably be making some enemies by calling Ted Butler a liar, but I believe this is an important issue to come to terms with. If our investment decisions are founded upon fictions, then we are prone to failure. That being said, I do truly enjoy Ted’s writings, after all, he was one of the few writers who really piqued my interest in silver over the years. But nevertheless, I don’t want the average person to be misled by the above claims he has frequently made.

So here are my opposing claims:

1.Silver is not rarer than Gold.

2.The gold to silver rarity ratio is about 1 to 5, not 5 to 1.

3.Finally, there is nothing factual about the statement that silver is rarer than gold, UNLESS you qualify it with the condition that you are only referring to market accessible silver in the form of bullion.

But this is an unfair comparison, because you are including all gold in jewelry form while excluding all silver in jewelry, sterlingware, and privately held bullion/coin forms. Granted, the market price of silver will need to rise a greater percentage than the market price of gold before either its jewelry, silverware, or privately hoarded coin forms become available to the market in large quantities, but the fact still remains that this form of silver is available at some price*.

(We’ll deal more with this ‘price’ in an upcoming essay. For now one would be advised to read “Hidden Silver About to Surface?” But a word of caution, at this time I believe Gene Arensberg’s estimate of how much silver is held in private hoards, if only dealing with silver in coin and bullion form, is too high.)

The Real Silver Deficit

Let us begin by reading a very telling quote from pg. 1046 of the 1954 Minerals Yearbook:

According to the Bureau of the Mint, the world output of silver from 1493 through 1954 was 20,039,4621 troy ounces, valued at $17,278,499,800. Of this total yield, North America produced 62 percent and South America 20 percent. Mexico contributed 35 percent of the total, the United States , Bolivia 9, Peru 9, and Canada 4. It has been estimated that about one-third of the total world production of silver is in circulation as coinage or held by governments for monetary purposes; one-third, including that hoarded, is privately owned; and one-third has been misplaced or dissipated.

Since silver mine production from 3000BC to-1492AD was equal to about 7.6B ounces (Part 1), we must add to this the 20.0B ounces mined from 1492-1954 to arrive at a total of 27.6B ounces of worldwide silver production from 3000BC to 1954AD.

If only two-thirds of those 27.6B ounces remained, then in 1954 there were roughly 18.4B ounces of silver in existence, mostly in the form of coinage, government bullion, private bullion, jewelry, and silverware/sterlingware.

From the following information we can begin to determine the world’s silver supply/demand deficit for the period 1955-2005:

- Worldwide mine production from 1955-2005 was about 19.5B ounces.
- Free-World industrial demand (I.D.) from 1955-2005 was 19.4B ounces.
- I.D. from transitional economies from 1955-2005 is estimated at 3.7B ounces.

(Transitional Economies supplied roughly 16% of the mine supply during this period, so I will also assume that they contributed 16% of the overall industrial demand.)

- I.D from ‘other countries’ from 1977-2005 is estimated at 0.378B ounces.

(Assumes that of the total industrial and arts demand of 630.2M ounces, 60% was used in industrial applications. Data for the period 1955-1976 is missing, but this is relatively insignificant.)

From the above, we discover that the aggregate world demand for the period 1955-2005 was 23.48B ounces (19.4B + 3.7B + .378B = 23.48B ounces)/

If we subtract this number from the cumulative mine supply during this same period (19.5B ounces), we are left with a massive deficit of 3.98B ounces.

(Interestingly enough, in 1941 the total world monetary stocks of silver were about 4.5B ounces (see: Minerals Yearbook 1941 pp. 55-56). When considering that the above deficit of 3.98B ounces does not account for the period of 1942-1954, it becomes crystal clear that there is very little cheap silver remaining.)

But we have yet to factor in old scrap supply, which CPM Group, in their 2003 Silver Survey, defines as:

Scrapped fabricated objects, old coins, old jewelry, decorative objects, household objects, a host of industrial waste, spent ethylene oxide catalysts, old electronic scrap, old sterlingware, old silverware and finally, photographic chemicals, films, and papers [emphasis mine].

Since the vast majority of old scrap supply has come from spent photographic materials (est. 80% in 2000) and catalysts (est. 10% in 2000) [see:], we will assume that 90% of the old scrap that comes to market had its origin in industry as opposed to the arts (i.e. jewelry, sterlingware, decorative objects, etc.). We will then subtract this additional supply from the deficit to arrive at an accurate estimate of how much silver remains.

- Estimated scrap supply from 1955-2005 was 5.45B ounces though due to a deficiency of old scrap supply data for the years 1955-1959, some approximations had to be made based upon known ratios of industrial demand vs. old scrap supply in the neighboring years.

Since we are assuming that 90% of the old scrap came from industrial sources we have:

(-3.98B ounce deficit) + (5.45B ounce scrap supply x 0.90) = 1.47B ounce surplus for the period 1955-2005.

One other factor to consider is a loss of silver content in coinage due to abrasion. For the years 1955-2005, coinage demand was 2.73B ounces. Since the vast majority of this demand was realized between 1955 and 1970 (1.83B ounces worth), I will assume that the loss due to abrasion was 15% of the total in the ensuing 35 years.

- 1.83B x 0.15 = 0.27B ounces lost to abrasion of the coinage.

I’m confident this estimate is conservative for the following reasons:

1. Obviously these newly minted coins were not the only coins in existence during this period, and if we were to include all the coinage that was undergoing abrasion, the above 15% figure would shrink relative to the context of what it described (e.g. 15% loss due to abrasion of 1B ounces worth of coinage is only 7.5% loss due to abrasion of 2B ounces worth of coinage).

2. Large amounts of coins were melted down in the late 1970s, contributing considerably to the surge in old scrap supply during those years. Therefore, my previous assumption that 90% of old scrap had its origin in industrial recycling is probably over-estimated by at least 10-30% during the period 1975-1981, since all of those coins that were melted down would have in effect undergone a 100% loss due to abrasion while simultaneously contributing to the overall old scrap supply.

3. I’m assuming that the other 900M ounces of silver coinage minted between 1971 and 2005 underwent no abrasion at all.

For reasons that I will expound upon in a future essay dealing with the topic of abrasion prior to the 20th century, I feel that the above estimate of silver lost to abrasion should be several orders of magnitude higher. But for the sake of conservatism, I will work with the above number of 0.27B ounces.

•1.47B ounce surplus - 0.27B ounces lost due to abrasion = 1.2B ounce surplus for the years 1955-2005.

Thus, at year-end 1954 we begin with 18.4B ounces of silver existing in all forms, and through the period 1955-2005 which witnessed the rise of the electronic age, it appears we only increased the overall supply of silver by 1.2B ounces, even though we mined almost 20B ounces from the ground! This leaves us with a total of just 19.6B ounces of silver left in existence!

Now, there will likely be some misgivings about the weight I have attributed to the statement from the 1954 Minerals Yearbook, which said, “one-third [of total silver production] has been misplaced or dissipated.”

One might well wonder what exactly is meant by ‘misplaced’?

In order to error towards overstating the amount of silver that remains, so as to avoid as much skepticism as possible, let us assume that 20% of the misplaced silver referred to in the Minerals Yearbook dated 1954 has since been found. This would then leave us with 7.36B ounces of ‘lost’ silver during the period 3000BC-1954AD, instead of the previously stated 9.2 billion ounce loss. All in all, this has the effect of raising the amount of silver left in existence by 1.84B ounces. Thus, our conservative total now stands at 19.6B+1.84B = 21.44B ounces.

Now to compare our findings with those of the CRA Report published in 1992.

From the CRA Report
(Year-end 1991)

CRA estimates that from 1921 through 1990, 10 billion ounces were irrecoverably lost in North America alone, and 12.6 billion ounces for the entire world.

Note: The above estimate is fairly close to the one made in the 1954 Minerals Yearbook.

Before evaluating the CRA Report’s findings, let’s make use of the above statement to make one more estimate of how much silver remains.

1. According to my data, the world produced a total of 45.38B ounces of silver from 3000BC-2005AD.

45.38B -12.6B (silver “irrecoverably lost in North America”) = 32.78B ounces of silver left in existence when accounting for silver lost during the period 1921-1990.

2. From 3000BC to 1920 the world produced about 22.17B ounces, and of this total I estimate that 25% was lost to abrasion (vast majority), shipwreck, or even buried as treasure (including silver buried in tombs).

32.78B – (22.17B x 0.25) = 27.24B ounces of silver left in existence when accounting for silver lost during the period 3000BC –1990AD.

3. From 1991-2005, the world’s industrial demand for silver was 8.63B ounces.
During this same period the world supplied only 2.5B ounces of old scrap.
Assuming that 90% of the old scrap had its origin in recycled industrial materials as before, we are left with:

27.24B ounces – (8.63B – (2.5B x 0.90)) = 20.86B ounces of silver left in existence when accounting for all the silver lost from 3000BC – 2005AD.

This number varies by less than 3% of our previous 21.44B ounce estimate.

Back to the CRA Report and what it had to say about how much silver remained in 1992:

- Total Silver that remains above-ground (all forms): 19.06 billion ounces
- Total Silver contained in silverware and art forms: 16.48 billion ounces
- Total Silver contained in bullion form: 1.40 billion ounces
- Total Silver contained in coin and medallion form: 1.18 billion ounces

Updating the CRA Numbers

During the period 1992-1994: World mine production of silver totaled 1.373 billion ounces (Minerals Yearbooks).

During the period 1995-2004: World mine production of silver totaled 5.639 billion ounces (The Silver Institute).

During 2005 (Partial): World mine production of silver in 2005 totaled 527.3 million ounces (CPM Group – Silver Survey 2005).

Total World Mine Production from 1992 to 2005 = 7.54 billion ounces

Combining this number with the CRA Report’s estimated total above-ground supply of 19.06 billion ounces, we arrive at 26.6 billion ounces of silver remaining above ground.

Since 1992, the world has used nearly 8.1B ounces of silver industrially, but has only returned 2.4B ounces as old scrap. Assuming that 90% of the old scrap had its origin in recycled industrial materials, this leaves us with a total of just 20.66B ounces [26.6 – (8.1B – (2.4 x 0.90)] remaining above ground.

This number is strikingly similar to our 2 other separate findings of 21.44B ounces and 20.86B ounces.

By taking the average of all three, we arrive at 20.99B ounces of silver remaining in the world in all forms (mostly jewelry and silverware).

But in order to temper our enthusiasm in discovering what would actually be a relative rarity ratio between gold and silver of less than 1 to 5 based upon the above numbers, let us further assume that a maximum of 4 billion ounces of silver could be recycled from existing industrial (not including jewelry or sterlingware) materials if the price were right (say $50-$100/ounce). Including this additional potential supply, 24.99B ounces of silver would remain in all forms.

Here then is our new gold to silver ratio based solely upon relative rarity, buffered for the sake of being conservative with that extra 4 billion ounces. Again, I hope the inclusion of this additional 4 billion ounces will be a more than sufficient compromise to account for my inevitable bias towards silver.

The new gold to silver ratio is 24.99 billion ounces Ag/ 4.25 billion ounces Au (see Part 1)/ = 1 to 5.88 (Gold vs. Silver)

This means that based solely upon relative abundance, silver should be trading at about $110.50/ounce (using a gold price of $650.0).

Patience, it seems, is destined to pay some incredible dividends.


Clearly, silver is not more rare than gold, but a 1 to 5.78 rarity ratio is indicative of the incredible leverage to be found in all silver related investments since the current ratio stands at roughly 1 to 54. Will it ever reach the ‘magical’ 1 to 5 ratio insisted upon by Bunker Hunt over 30 years ago? That remains to be seen. But at least now we know for certain that such an idea isn’t nearly as far-fetched as it might have otherwise seemed.

Sources, Updates, and Validation

Sources for calculations in this article:

1. CPM Group’s Silver Survey 2003 & 2005 (
2. US Geological Survey (USGS)
6. Minerals Yearbooks 1932-2004
7. The Silver Institute (
8. Stocks of Silver Around the World (Charles River Associates, 1992)

Further Validation of the 60+ Year Structural Silver Deficit

Since 1946 the industrialized nations [i.e. the free-world] of the world have consumed more silver than they have mined, to meet growing demand…

-Sarnoff, Paul. Silver Bulls: The Great Silver Boom and Bust. Connecticut: Arlington House Publishers, 1980 (p.3).

A New Data Point for “The World’s Cumulative Silver Production”

Total Silver mined from 4000 B.C. through 1991: 37.5 billion ounces.

Source: Blanchard, James. Silver Bonanza: How to Profit from the Coming Bull Market in Silver. New York: Simon and Schuster, 1993.

Since mine production from 1992 to 2004 was about 7.0 billion ounces (Part 1), the new total is 37.5 billion ounces + 7.0 billion ounces = 44.5 billion ounces

Previously, the average cumulative silver production based upon 5 sources was 45.55 billion ounces.

With this additional data point, the world’s cumulative silver production is now the even more certain figure of 45.38 billion ounces.

This post is part of a multiple essay series

May 21, 2006

Stagflationary Recession underway in US

The 2005 to 2007 inflationary recession has moved well beyond stagflation. Circumstances deteriorated markedly in the last month, and market perceptions of same have begun to surface, as exhibited by strong gold and a weak dollar. Moreover, the trouble is not confined to a weak economy and higher inflation. It also includes a foundering administration and increasing odds of a shift of power coming out of November's election.

"Signs that the economy is not doing too well abound. Housing starts appear ready to signal recession, and the housing sector has been one of very few bright spots in economic activity over the last six years or so. Aside from politically-gimmicked GDP reporting, most numbers, net of inflation, have been soft to down over the last month, including retail sales, purchasing managers new orders, help wanted advertising, narrow money growth, real earnings, consumer sentiment and even the employment report. Exceptions have included strong industrial production, volatile new orders for durable goods and an improved but still staggering trade deficit.

"Although purposely suppressed in the 'official' data (PPI and CPI), there is an inflation problem. It is driven by oil, and increasingly, it also is being driven by dollar woes. These are factors separate from strong economic activity that commonly is viewed as the source of inflation.

"In like manner, Fed tightening -- designed in theory to slow the economy in order to slow inflation -- will do little to cool the current problem, shy of Volckerish rate hikes aimed at triggering such a severe downturn that prices are pulled down along with business activity into a depression. Quite to the contrary, current Fed activity has been the reverse of the jawboned inflation fighting, aimed at stimulating liquidity, not killing it. While short-term interest rates have been increased, broad money growth also has been soaring, at least prior to its reporting cut-off. Excessive money growth tends to be an inflation stimulant, not a retardant.

"In general, the broad economic outlook has not changed. The 2005 to 2007 inflationary recession continues to deepen. Recession, inflation and risks of heavy dollar selling are upon us, gaining greater market credence, and they continue to offer a nightmarish environment for somewhat less Pollyannaish financial markets than were in place last month.

"The Shadow Government Statistics' Early Warning System (EWS) was activated in May 2005 and signaled the onset of a formal recession in July 2005. The EWS looks at historical growth patterns of key leading economic indicators in advance of major economic booms and busts and sets growth trigger points that generate warnings of major upturns or downturns when predetermined growth limits are breached. Since the beginning of 2005 a number of key indicators have been nearing or at their fail-safe points, with four indicators moving beyond those levels, signaling a recession. Once beyond their fail-safe points, these indicators have never sent out false alarms, either for an economic boom or bust. Housing starts appears ready to generate such a signal in the next month or so.

"With a resumed economic boom massaged into first-quarter GDP reporting, negative GDP growth is not likely to surface in regular government reporting until after the November 2006 election, given the rampant political manipulation of most key numbers. The National Bureau of Economic Research (NBER) should time the downturn to mid-2005 and announce same also sometime after the election, so as not to be deemed politically motivated in its timing.

"Whether or not there is a recession will be a hot topic in the popular financial media, with politics helping to fuel the debate as the election nears. Those Wall Street economists who act as shills for the market will keep up their 'strong growth is just around the corner' hype regardless of any and all evidence to the contrary."

May 20, 2006

Unusual wave of derivatives activity...

May 19 – Financial Times (Gillian Tett ):  “The recent sharp falls in stock markets appear to have been exacerbated by an unusual wave of derivatives activity on the part of hedge funds and big banks, traders yesterday indicated. In particular, some banks and big investors appear to have been forced into selling large amounts of equity futures because they have been acting as counter-parties to large, leveraged bets on the direction of stock market volatility in recent months - and these bets are now unravelling because volatility has increased sharply.  This forced selling has hurt equity futures index prices on markets such as the London International Futures Exchange - and depressed the value of cash equities as well, some observers suggest.  ‘This is an incredibly sensitive topic but it looks as if some big investors are being forced into big moves because they need to hedge these [derivatives] positions,’ one senior trader said yesterday.  It is impossible to track this type of derivatives trading with accuracy, since the investors and banks engaged in these markets are extremely anxious to keep their positions private.”

May 18, 2006

Longer Bull Run = Bigger bubble: Marc Faber | May 10, 2006

Born in Zurich, Switzerland Mark Faber got his PhD in Economics by age 25. He has worked in all the major money centres of the world from New York to Hong Kong. CNBC-TV18 caught up with investing guru Marc Faber. Excerpts from an interview:

When you were growing up, you were a surgeon's son -- what propelled you to study economics?

Actually at that time I was skiing for the Swiss national team and I did not really know what to study, but I knew that Economics was a relatively easy thing to do. It took only four years.

What did they teach you - what was the world like in the 1960's - and how has your worldview changed through the lenses as an economist?

I think in the 1960s the world had far fewer opportunities; we still had the cold war, the Vietnam War was on and as an investor one couldn't invest in countries like China or India or Taiwan or Indonesia. So the world was much more limited in terms of investment opportunities and even the total credit take -- 3:32 was much lower as a per cent of the economy than it is today.

In other words, that time people had relatively high incomes but the asset values were relatively low. Today in real terms, in the western world, people have relatively low incomes and asset values are high measured by the Dow Jones or by housing prices.

How was the first impact of Asia on you? Being a disciplined Swiss -- was it chaotic, disorganised?

No, not really. I arrived in Hong Kong in the 1970 and Hong Kong Chinese were very hardworking but of course what strikes me today is, how poor Asia was in 1973; if one went to Taiwan, Korea or Singapore, these were very poor societies and if one looks back at the last 30 years -- the progress that has been achieved is just mind boggling.

All I can say is that history is accelerating in terms of speed of change. If one looks at how Bangalore has developed in the last 10 years or how Shanghai has developed in 10-20 years time, there will be changes in the world and in Asia that nobody can really comprehend today.

At that time steel and shipyards were the talk of Asia?

Yes, shipping was a big thing in the 70s. Everybody was building steel plants and cement but in the 1970s, very few people were interested in investing in Asia. Some American institutions had few investments in Japanese stocks (like the Templetons of the world) but aside form British institutions that bought some shares in Malaysia, Hong Kong and Singapore, there were practically no funds of flows out of America and Europe into Asia.

All the flow that time was from Asia into US stocks and also into gold, silver and other precious metals. Then in the late '80s the flow began into Asia from the western world.

There are great myths built about the market and you spent the better part of your life adding to the truths and destroying the myths - one of the great myths is that stock market always goes up in the long run?

That is very difficult to tell. One could argue that in the long run most things will appreciate in value, but the problem is that most companies live only 30 years and then they die. In other words, they go bankrupt.

So when people talk about stocks going up in the long run, one would have to constantly re-balance one's portfolio. One could also argue that stocks go up sometimes but they fall as a result of inflation adjusted or in other words against another currency or gold.

In the long run, it is also said that it is never different -- there is a myth that every bull market will say it is different this time -- is it right?

I think in every asset mania what then happens is that if asset price or a stock or real estate have gone up for a long time, one will find university professors who write books and say why real estate goes up or why stocks always appreciate and so on. The fact is simply that, markets move up and down and that will never change.

The myth that a bull market contains the seed of destruction to the next bear market.

I suppose the longer a bull market lasts, the more likely it is that it will end in a colossal bubble because if you consider that there are in this room several asset classes: real estate, stocks, bonds, commodities, etc.

And say stocks always go up more than commodities, then obviously all the money will move into stocks because they will outperform other assets and so once all the money moves into stocks, then obviously you will end with the whole room only owning stocks and thus the bubble.

And frightfully expensive P/E ratios?

Yes exactly, but the beauty of the bubble is because it attracts so much money, it will leave other asset prices depressed compared to the bubble sector. So if one looks at the 2000 bubble, we had the bubble in the TMT sector but we did not have a bubble in the steel stocks or commodity related shares such as oil companies and that is where the value was at that time.

So the great truth is that every crisis creates an opportunity?

Yes, that is for sure, but not necessarily where the crisis occurs. Every bubble also creates an opportunity because rise in one sector creates an undervaluation somewhere else. Since the year 2002 and since Mr Alan Greenspan embarked on this highly expansionary monetary policy; all asset prices have gone up, bond prices have rallied, commodity prices are up, stock prices are up and real estate is up and this is across the world.

Today it is difficult to find something that is distressed; I think there is only relative value at the present time.

You say in your books -- "don't listen to analysts; listen to markets" -- could you explain that?

I think analysts are frequently not very objective because they work for large investment banks and have a vested interest. It is very seldom in life to find someone who is in real estate who is negative about real estate or an art dealer who will tell you art prices will go down or a stock broker who will tell you stocks will go down.

I am sceptical about analysts that specialise in one sector because they have vested interest that that sector remains popular and actually attracts a lot of money. It is the same as a fund manager -- he cannot turn and tell his investor I don't think you should invest in India if he is an Indian fund because if his investors leave his fund, then he has no business left.

So these types of people with self-interest have a tendency, whether they are at heart optimistic or not, but at least to tell the public that they are optimistic.

You wrote a paper on life cycle of emerging markets. How relevant is that today and over the years what has been your experience of how the emerging markets behave?

I think all markets go through stages whether they are in a phase Zero which would be defined as a phase, where there is really no interest whatsoever in that asset class. It could be Latin American shares in the late 1980s after Latin America had gone through very high inflation rates, or it could have been Japanese shares, recently in 2003 after 14 years of bear market, there was very little interest in Japanese shares.

In India, we had several cycles and until three years ago, foreign investors have shown very little interest in Indian shares. Then there is usually a catalyst, which leads to some improvement in the economic conditions and financial conditions of that country, and then you have a bull market, which usually ends in a bubble.

Nobody knows whether in India, the bull market is ending now with this new high, or whether we will go to 15,000.

How would you judge the top?

I would say that frequently it is easier to identify a major low. When lows occur, you have very often have a lengthy base-building period during which a commodity, or a stock trades sideways for many years, and then there is a breakout on the upside.

With the market tops, a bubble is a bubble and you hardly know at what point it will break. If you take Nasdaq, it could have been broken at 4000 a year earlier, or at 5000 in March 2000, or at 7000, who knows, it was exaggerated any way. To identify tops is easier once the top has already occurred, than ahead of time.

A lot of people say that you get the trend right, but the timing wrong. Is it important to get both of them right?

I don't think I always have been pessimistic. I have been involved in fund management as a chairman of a variety of funds. I have written a lot about emerging markets and promoted emerging markets over the last 25 years.

Concerning the timing, I am the first one to admit that to press a button and say this is the low and press it again and say this is the peak, is very difficult. I am not sure if anyone has successfully managed to do that. I always look at what is the risk and what is the reward of an investment.

If you can find an asset class or stock market that is inexpensive I am prepared to wait until it moves. People criticized me in 1999, when I said buy gold now because it has gone down for 20 years, it may be an opportunity to buy it and it started to move in 2001. For two years you are sitting without any reward but then it went up significantly since then.

How important is it to understand the role of the Federal Reserve to understand the world economy?

I think it is very important to understand the fact that we have a central banking system where the central banks can indicate, theoretically drop dollar bills from Helicopters. You won't be able to do that because all American helicopters are in Iraq. But they can print money, that is a fact and they can flood the system with liquidity.

Then you have to find a measurement of inflation. We measure inflation by rise in money supply. It would be wrong to think that the inflation is just consumer price increases. Inflation is a loss of purchasing power of your currency, dollar or Rupee.

It can manifest itself by rise in consumer price but it can also manifest itself by a loss of purchasing power of money against real estate, or against stocks and real estate.

Americans have fewer passports than their mortgages, so clearly they don't care about dollar depreciating?

The difference between America and an emerging economy is that, the emerging economy usually borrows in a hard currency. They have difficulties in borrowing in local currencies. So they borrow in dollars or in yen.

So when the current account deficit balloons, it comes to a currency crisis and depreciation of currency and then an adjustment in the economy takes place with consumption slumping and then the current account balance will be retraced.

In the case of the US, they can print money as much as they like and keep current account deficit ballooning and also have a very negative net asset position and it doesn't hurt them because their borrowings are in dollars.

How long will the foreign governments, the Chinese, the Japanese continue to subsidies these huge deficits. What are the implications when they pull from the T-bill auctions?

It is conceivable that we have a dollar stand and dollar depreciates in value. Since the year 2000, the stock market has deprecated against the price of gold and dollar has depreciated against the price of gold.

The gold price has gone up in dollar terms and that could continue for quite some time. I think eventually the world will be very apprehensive to hold dollars and will rush into assets.

What is the public enemy No 1 in your book, would it be inflation, or deflation?

In my book public enemy No 1 are the central banks. I think the world will be much better off under a gold standard. Other than that, I think the asset inflation is much more dangerous than consumer price inflation because asset inflation is driven by a huge credit bubble. Then asset prices become very expensive and when asset prices go down it leads to recession.

So the Central Banks will support asset prices and see to it that they keep on going up. So they will inflate more and more and eventually you will come to an economic collapse.

Can the dollar fall alone, or would it be the dominos effect, which would take down other markets?

In my opinion, the dollar will depreciate mostly against the gold. In the long run, what you will see is the standard of living in America will decline very significantly compared to the standard of living in Asia.

And the stock market capitalization of US, which is now 52% of the world's stock market capitalization, which will decline to somewhere between 20% and 30% and the Asian stock market capitalization will rise to between 20% and 30%, possibly 50% of the world.

What are your thoughts on the kind of meltdown that has happened in the commodity space and what has brought it about?

Basically not much has changed but the markets became over-extended in the last ten days with some industrial commodities going up vertically. So the market was terribly overbought and now we have a setback but that is for the time being.

Most asset markets have kind of reached the peak and I would stay aside from the market because one never knows if this is just a correction in the last ten days or is it the beginning of something more serious.

I'm not sure but looking at the shape of the market we could have most markets including India headed for something like a 30% correction.

When would you like to take that call on commodity markets? When would you decide that it is not just a technical correction that we saw yesterday but also something more serious? What signals you would be looking for?

In principle, the commodity complex is still from a longer-term perspective, attractive because we had a bear market from 1980 to 2000 and then the bull market started in 2001 and now we are in 2006.

So the bull market is five years old and the upward or the downward phase in commodity prices lasted for about 22 to 30 years. In other words, from peak to peak or soft to soft, the commodity cycle lasts for 45 to 60 years. So I think we still have some room to run.

Having said that, if one looks at the last bull market in commodities from 1970-1980; then in 1973, sugar, wheat and corn peaked and thereafter they never hit a new high.

So one can have in commodity markets, like in stock markets, different groups peaking out at different times. And it would not surprise me if some industrial commodities have not made a major high and may not make a new high in the near future or ever again in this cycle.

Across assets classes though it's been a secular run whether it is equity, commodities or even real estate. Do you think it is going to be a case of who blinks first or will weakness in one asset class lead to weakness across the others?

That is a good point because in every asset class, we have genuine buyers. If someone says I want to own India and I am prepared to ride out the fluctuations in the Indian market if it goes down 30%, then I would be prepared to buy more because I believe in the fundamental story of India.

But at the same time we have hedge funds, a trillion dollar in the world that are leveraged. So if we are conservative, we are talking about a leverage of 2:1 or 3:1, so it is $2:3 trillion that's splashing around the world.

In addition to that, we have hedge funds similarly hazier because whether it is a Goldman Sachs or a Morgan Stanley, they are essentially paid on performance of traders.

So they behave like hedge funds; they go long in markets that have strong upward momentum and then they go short when the markets turn down. We can have big fluctuations on a given day and what we had in the last two years is unusually low volatility, which usually gives way to much higher volatility.

You said you see a 30% correction in markets including India. Is that across classes or is it only the equity markets that you see this correction in?

This correction is expected mostly in equities and commodities and I have to say 30% correction is nothing in a lifetime. If someone cannot take a 30% correction, he should not touch anything at all, 30% is a norm of movement in individual stocks in market trend.

When you say 30%, what period of time do you see this correction coming in?

In the Middle-East the markets were very overbought and the Middle-East is an interesting example because oil prices are still near a record, so one cannot say that liquidity has contracted and yet most Middle-Eastern stock markets are down between 30-50% from their peak.

May 15, 2006

Trouble, Trouble, Debt, and Bubble

William K. Tabb 

The questions regarding U.S. macroeconomic policy these days come down to whether the country can keep borrowing. Can consumers keep spending by increasing their debt level? Can the federal government keep running a large budget deficit without serious problems developing? Can the U.S. current account deficit keep growing? Will foreigners keep buying government bonds to cover this growing debt? If the answer is no to such questions, we can expect serious trouble and not just for the United States but for the rest of the world, which has grown used to the United States as the consumer of last resort. The United States buys 50 percent more than it sells overseas, enough to sink any other economy. In another economy, such a deficit would lead to a severe devaluation of the currency, sharply inflating the price of imports and forcing the monetary authorities to push interest rates up considerably.

The United States started to run annual trade deficits in 1976 and has done so every year since. In 1985, this country became a net debtor nation, owing more to the rest of the world than is owed to it. By 1987, it became the world’s largest net debtor nation. The debt has grown and grown since, to the point where economists Nouriel Roubini and Brad Setser suggest that “The current account deficit will continue to grow on the back of higher and higher payments of U.S. foreign debt even if the trade deficit stabilizes. That is why sustained trade deficits will set off the kind of explosive debt dynamics that will lead to financial crises.”

However it also seems to be in everybody’s interest to keep the game going. Asian countries, especially China, want to continue exporting to the United States and keep their currencies from strengthening, preferring to export to Americans and then to loan the money back to them so that they can buy more. Much of the foreign savings go into U.S. government bonds, keeping U.S. interest rates down (currently half of U.S. Treasury bonds are owned by foreigners). The cost of this debt seems manageable, in part because there is slower growth in most of the world’s countries, and so there is plenty of finance capital looking for a safe place to get positive returns. And the low interest rates allow American households to borrow more cheaply, using home equity loans on the seemingly ever-rising value of their homes.

The problem is, as Herbert Stein, Nixon’s economic adviser, famously said, “Things that can’t go on forever, don’t.” Surely a reckoning is coming. U.S. household debt has reached $11.5 billion, an amount equal to an unprecedented 127 percent of annual disposable income. The most recent figures by the Federal Reserve show the cost of debt servicing nearing a record high of 14 percent of disposable income—and interest rates are going up. How long will Asians and others hold U.S. debt when the dollar finally starts to fall and they take losses on their holdings?

Ah, but we have the equally famous retort from Mr. Nixon’s Treasury Secretary, John Connally, “It’s our currency, but it’s your problem.” America’s creditors can’t let the dollar fall too far without serious costs to themselves (their dollar holdings will buy less the lower the exchange value of the dollar). They will be drawn to keep lending. And sure enough, recently the dollar has defied expectations and strengthened, not weakened.

The bubbles and all the debt are serious economic problems and will have political consequences. However, people have been waiting for the dollar to collapse for a while; if it does, will all the unsustainable debt really be unsustainable? Will the dollar fall this year or next? Maybe. But it is possible to argue, and many do, that in an era of financial globalization, in which productivity growth in the United States continues to outpace that in other advanced economies, the United States will continue to be the destination for investment capital. As foreigners diversify out of their own economies, the United States continues to look good. Why shouldn’t foreign investment exceed 100 percent of the U.S. GDP? Why would this be a problem? Why would anyone want their money back if returns are competitive? Why then should the dollar fall? In any case, the big buyers of U.S. treasuries are foreign governments. They are not motivated simply by financial returns. Political pressure can be exerted by Washington should their view of their own self interest change. But why should it change? As for the federal deficit, why shouldn’t the Republicans keep enlarging the national debt? This “starves the beast.” It prevents public spending they don’t want on other grounds.

Is there support for such a Panglossian perspective? The “know-how” that U.S. transnationals export when they invest abroad is a major and uncounted (in the U.S. international financial accounts) export which seems to be responsible for the higher return on foreign investment enjoyed by U.S. investors compared to the return on foreign investment made in the United States. Michael Mandel, Business Week’s economics editor, argues that the United States is really doing far better than the trade and capital flow accounts indicate because of what is going on in the knowledge economy. Intangibles such as research and development (R&D) and the export of knowledge are poorly tracked by the federal government’s outmoded statistical gatherers, who still use industrial era categories. According to Business Week calculations, the ten biggest U.S. companies that report their R&D spending—firms such as ExxonMobil, General Electric, Microsoft, and Intel—have boosted R&D spending by 42 percent from 2000 to 2005, while over these years their capital spending only increased by 2 percent. What looks like less investment is really less investment in plant and equipment but not in intangible investments calculated to improve profits. America’s “knowledge-adjusted” GDP is moving right along, and that is why profits stay high. The decline in nominal investment also reflects the fact that capital goods are becoming less expensive because of productivity growth in the capital goods sector, capital deepening, and the enhanced efficiency due to improved information technology.

Even conceding that investment in the United States may be somewhat higher than official data show, it is not doing much to help the United States become more competitive. The nation’s problems are more severe, upsetting not only to its working people but to some unexpected establishment ideologues who have long celebrated globalization. Thomas Friedman, the New York Times columnist, argues that Bush is not good for America. He writes that the country “faces a huge set of challenges if it is going to retain its competitive edge. As a nation, we have a mounting educational deficit, energy deficit, budget deficit, health care deficit and ambition deficit. The administration is in denial on this, and Congress is off on Mars.” Friedman asks where are the American corporate leaders who would benefit from a serious effort to address these deficits. He can point to G.M.’s interest in health care since its benefit costs have made it noncompetitive and asks if there is any corporation in America that should not be protesting Bush’s cuts in federally sponsored basic research, a key source of innovation. But he also answers with a different voice noting that many key U.S.-based industries get most of their profits and increasingly their best talent from abroad. They are less motivated than in the past to deal with a Congress “catering to people who think ‘intelligent design’ is something done by God and not by Intel.”

There is, however, another way of looking at this. Consider that part of the higher return enjoyed by American investors results from the power of the U.S. imperial state, power that insures against bad treatment. U.S. power sets the rules on debt repayment, intellectual property rights, investor security, market access, and so on, things that no other state can insure for its investors, at least not to the same degree. The difference in the rate of return exists because foreigners are interested in a safe return and the security of their principal, while Americans investing in risky assets have some assurance that the global state economic governance institutions such as the World Bank and the International Monetary Fund, or if needed the U.S. Marines or threats by the State Department, will enforce debt collection so that their debts will be collected. U.S.-based firms charge exorbitantly for intellectual property and collect intellectual property rents, enforced by the World Trade Organization and the U.S. government, but these go to the bottom line of the companies in question. This is surely good news for those who own those U.S. assets abroad.

Sadly, working-class Americans, who are experiencing stagnant or falling real wages, do not share this satisfaction. For them, wages, shrinking benefits, and deteriorating job quality matter more than the external balance position of the United States. In the United States in which they live, income inequality grows dramatically, health care costs rise beyond the means of families, and secure retirement is a vanishing prospect. These are the real deficits for most Americans, serious shortfalls from what they have been led to expect. They are now told that to be competitive, their country must sacrifice its working people’s legitimate hopes.

In the United States where the president talks of creating an ownership society in which workers would “own” their own health care and retirement through privatized individual accounts, defined-benefit pensions, which guarantee a fixed amount of money after retirement, are replaced by defined-contribution plans, in which benefits depend upon what a worker can put in and the uncertainty of the equity market. The basic idea of social insurance, where all contribute and receive based on need, is canceled as those who can afford more not only get more but receive favored tax treatment for each dollar they set aside for their own welfare.

As part of the program, there are reductions in income tax (paid disproportionately by the rich), in taxation of corporations, and in capital gains and inheritance taxation that overwhelmingly benefit the rich. Government deficits created by these regressive tax cuts are partially offset by increases in payroll taxes, and proposals pour forth in support of consumption and flat-tax ideas—all new tax burdens for workers, with capital exempt.

Instead of unemployment benefits, there are to be personal reemployment and training accounts of limited size. Instead of well-funded public education, there are unfunded mandated testing and school vouchers. Consumers hurt by defective products and such are limited in their right to sue, and people who are bankrupted by personal tragedy can no longer seek bankruptcy relief as they have in the past. Government regulations to protect consumers are seen as inefficient because they increase the costs of doing business and are repealed or go unenforced, or are enforced by former industry partisans. Devolution of responsibilities from federal to state government undermines promised benefit levels, since states cannot afford such burdens and federal help is reduced.

This is the Ownership Society as envisioned by George W. Bush and those around him. It is a package of policies attacking the idea of citizenship rights and follows Margaret Thatcher’s principle that there is no such thing as society, only individuals. It stands in contrast to the principle unifying working-class movements everywhere—and at all times—solidarity. The deficits the Bush administration have created are undermining American society as we have known it. They are, however, in the narrow interests of the capitalist class.

While experts debate how long things can go on without a serious crisis, there is a structural issue of great importance to consider, namely the lack of significant domestic investment by U.S.-based transnationals and the continued expansion of their investment elsewhere. While U.S.-based corporations are earning record profits, they are investing little in the United States. For 2005, the Standard and Poor’s 500 U.S. corporations set new records, spending half a trillion dollars both to buy back their own stock and to pay dividends. Even the fund managers who profit in the short run worry that companies are underinvesting in their businesses. While profits were in many cases setting records, firms were not increasing investment; instead they were retrenching. Their profits were in fact coming from cost-cutting. This is not to say consumption was not rising. It did increase. But the majority of the increased spending was funded through debt creation, most of this due to the wealth effect of the increased value of real estate. Between 2000 and 2005, U.S. house prices increased by more than 60 percent. The market value of real estate in 2006 is about 200 percent of personal disposable income, and mortgage related assets are equal to over 60 percent of bank lending compared to 25 percent in 1970. As one investment analyst has written, “George W. Bush was re-elected president during 2004 because he presided over more housing inflation than any other American president.” That, and by scaring voters. The single-minded war on terrorism obscures stagnant and falling living standards for most of the U.S. working class.

Investment in residential construction is not the sort of investment that provides a surplus to repay foreign debt. The sectors which are growing in the United States, like health care, produce for the most part nontraded goods and services. It is only the growth of financial services, some specialized high-tech exports, and foreign investment that are showing high returns, and the firms controlling these are moving more activity offshore, following manufacturing’s lead and leaving the domestic service economy to create jobs—many low paying, temporary, and without benefits.

U.S. foreign borrowing is not significantly being used for investment to increase the productive capacity necessary to pay back the debt but for consumption, tax cuts, and military spending. From a ruling-class perspective (or at least some fraction of it), it could be argued, military spending is investment in the capacity of the U.S. state to intimidate others into accepting U.S. rules and to obtain control over valuable resources such as oil. From such a perspective, this is money well spent. However, the cost of imperialist adventure is going up and is not matched by success, so the cost/benefit ratio as seen by most ordinary Americans is not looking very good. The Persian Gulf War under the first Bush cost about $61 billion. Eighty percent of the total was paid for by American allies—Saudi Arabia, Kuwait, the United Arab Emirates, Germany, Japan, and South Korea, leaving the dollar cost of that war at only $7 billion for the United States (Japan alone contributed $13 billion). The Iraq invasion and occupation is a very different story. The United States is paying in lives and treasure, and it will continue to pay. The inflationary impact of such spending is hidden by low interest costs and the willingness of lenders to finance American profligacy.

What about the countries that are lending the United States all this money? Much of the so-called savings glut is coming from Asia. It is not the result of increased saving by households or private corporations. Rather it is fed by public sector saving as governments have cut back and increased their surpluses. Since the 1997 Asian financial crisis, which the Asian governments understand to have been a liquidity crisis, they have taken precautionary steps to dramatically increase their reserves to prevent a replay. Between 1996 and 2003, developing countries as a whole moved from a collective deficit of $88 billion to a surplus of $205 billion, a net change of $293 billion, a vast increase in global savings. The Federal Reserve estimates that this surplus increased by $60 billion in 2004. Figures for 2005 will show further increase. It is also the case that since the crisis, investment rates have fallen in the region (except for China) by more than 10 percent from the mid-1990s peak, as excess capacity is still being worked off and adjusted to the China impact. Because all of this saving is not being absorbed in productive investment, interest rates have fallen. Low interest rates have fueled the real estate bubble in the United States and some other places and allowed the cashing-out of the home equity loans that have fueled U.S. consumer spending.

Government-generated liquidity is also the engine of the other great motor of the contemporary global economy, China. China’s incredible investment rate, about 45 percent of its GDP, is also being driven by liquidity and not necessarily by expected profitability, raising the potential that China is growing too fast for its own good. State-owned banks are lending money to state-owned companies. In the case of enterprises owned by provincial authorities, borrowing and investment often seem to be uncorrelated with profitability, but rather are politically driven. Saving rates in China remain high in part because of an aging population worried about life in a free-market economy in which the provision of pensions, housing, education, and health care are not provided as a right by the state. At the same time, the significance of the U.S. current account deficit with China is complicated by a number of factors. First, most of China’s exports are controlled by foreign companies. These companies receive the profit when, say, a Barbie doll made for thirty-five cents in China sells for twenty dollars in a rich country’s market. Second, many of the products exported from China are not made there but assembled there from high-value components produced elsewhere. China’s value added is a fraction of the value of exports.

In 2005, China was the dominant Asian exporter, while exports from Asia as a whole were 36 percent of all world exports. In 1990, when Japan was the dominant exporter and we worried about Korea, Taiwan, Singapore, and Hong Kong, total exports from Asia were 38 percent of world exports. Much of what comes from China used to come from someplace else in Asia. Today Sony, Toshiba, and Panasonic, among others, send their products to the United States from China. Korea’s Samsung has twenty-three factories in China employing 50,000 workers. Taiwan may still control the market for computer components, but they are assembled in China by low-wage workers. Locals get only a small part of the profits generated. So while it is true that the U.S. deficit with China rose by 25 percent (to over $200 billion in 2005, and this is the largest debt the United States has ever run with any country), it is also the case that China’s deficit with the rest of Asia was more than two-thirds the size of its surplus with the United States. All together, the U.S. deficit with Asia has changed very little in recent years. It is the total value of oil and other energy sources that has been rising dramatically, thanks to the demand of a United States which refuses to conserve energy, causing it to run an increasingly large deficit when oil prices rise.

Importantly, on a global scale, saving and investment rates have both gone down, trends mainly reflecting developments in the industrial countries where both saving and investment have been trending downward since the 1970s even as saving has been increasing in the oil-producing countries and in Asia. The industrial countries still account for 70 percent of world saving, but this is down from 85 percent in 1970. Together, global savings and investment are near historic lows, having fallen markedly since the late 1990s. The even more telling figure is for the rate of growth of the global economy, which has been falling since the 1960s, when it was 5.4 percent to 4.1 percent in the 1970s, to 3.0 percent in the 1980s, to 2.3 percent in the 1990s. While mainstream economists dismiss any idea of a race to the bottom, there is an unquestionable slowing of growth and an emergent underconsumptionist, or rather overaccumulationist, trend. While global growth has slowed, the reach of transnational capital has dramatically increased, and its power to seek out lower costs and play workers in one place against workers elsewhere has grown. What we are seeing is a process of redistributional growth, in which over the ups and downs of the business cycle, capital’s share of the social product is increasing and labor’s share is diminishing.

There is a clear thread that connects domestic developments in the U.S. income distribution, debt-funded growth, the increased dominance of the rentier capitalists who profit from these developments, and global ambitions and the projection of imperial dominance. A century ago John A. Hobson argued that as the power of rentiers grows and taxation becomes more dramatically regressive, a hegemonic power (then Great Britain) is tempted to engage in imperialism. Hobson urged higher taxation of incomes generated as a result of financial speculation and government favoritism to produce a more equal distribution of income and higher working-class and middle-income spending, which would encourage domestic investment and make imperialism less attractive. He wrote,
The issue in a word, is between external expansion of markets and of territory on the one hand, and internal social and industrial reforms upon the other; between a militant imperialism animated by the lust for quantitative growth as a means by which the governing and possessing classes may retain their monopoly of political power and industrial supremacy, and a peaceful democracy engaged upon the development of its national resources in order to secure for all members the conditions of improved comfort, security, and leisure essential for a worthy national life. (John A. Hobson, “Free Trade and Foreign Policy,” Contemporary Review 64 [1898]: 179, quoted in Leonard Seabrooke, “The Economic Taproot of US Imperialism: The Bush Rentier Shift,” International Politics 41, no. 3 (September 2004): 293–318.

Today the “rentier shift” produces the very conditions Hobson warned of in the context of Great Britain a century ago. The growth of the rentier economy and the drive for external expansion long evident in U.S. history (and surely under both Clinton and Bush, albeit with a different policy mix) has been fed by an investor politics that has favored the very rich disproportionately in both taxation and government spending priorities. The dramatic increases in the upward redistribution of income have contributed to driving the investor class to look for opportunities abroad as the slower growth, and indeed saturation, of domestic markets pushes them to do. And this is taking place even as their increased class dominance—with trade unions and working-class power weakening, and real wages stagnating—allows them to push for a greater degree of regressive taxation and less progressive redistributive state spending.

Along Hobsonian lines, Arjay Kapur, a Citigroup strategist, argues that the rich are responsible for the low saving rate in Anglo-Saxon economies, which he describes as “plutonomies”—economies driven primarily by the wealthy as compared to the more egalitarian Japanese and European economies. In the plutonomies, above all the United States, it makes little sense to speak of the average consumer, since the top one percent of all households has 20 percent of the income, about the same as the bottom 60 percent.

Spending in the United States is driven by the asset inflation of the equity and real estate holdings of the top 10 percent of the income distribution. The wealth effect of such holdings allows debt- financed spending and results in the negative saving rate. Kapur finds that throughout our history there has been a strong negative correlation between the share of U.S. income going to the top 1 percent and the overall saving rate—the higher the share, the lower the saving rate. Economies with low saving rates tend to show current account deficits and the need for foreign borrowing.

To this analysis one might add that the power of the United States to command foreign credit depends in some measure on the power of the U.S. state, the continued use of the dollar as the reserve currency, and other factors which ultimately rest on U.S. imperial power. This relation is two-way. Harvard’s Linda Bilmes and Columbia’s Joseph Stiglitz estimate that the eventual cost of the war in Iraq will be more than a trillion dollars and possibly closer to two trillion dollars. So far the Bush administration has borrowed the money and underestimated the cost, but its policies raise the specter of imperial overstretch and the need for further coercion to keep the American economy afloat.

Past empires have followed the path that the United States seems to be going down, a movement from manufacturing production as the core activity to financialization and rentier income, and then finally bankruptcy from a loss of competitiveness and the cost of maintaining empire. For the elite there seems no better alternative, even if this is finally a negative-sum result. Any more positive strategy from the perspective of a democratic majority would require policies that would weaken the power of the ruling elite. It appears to this elite that it is better to continue to get rich and maintain power through the period of national decline. To the extent that this class can obtain rents from the familiar sources of state handouts, corrupt dealings, and tax policies, it stands to gain.

In conclusion, the concern over debt levels and bubbles is certainly appropriate. What is essentially a regional and sectoral disproportionality crisis leading to imbalance in capital flows and the high debt position of the United States is deserving of the attention it is receiving from all points on the ideological compass. What must be central to such discussions, however, is the class dimension of the accompanying redistribution of wealth and power and the resultant impact on members of the world’s working classes. Disproportionalities are more than matters of technical economics. They are manifestations of class struggle. Understood in this way, analysis enables more clear-sighted mobilization addressed at real enemies and demands for real solutions. Imperialist adventurism today serves the U.S. ruling class. It comes at the expense of working people everywhere.

May 12, 2006

Gold Bugs


By Peter McKay

The Wall Street Journal

Thursday, May 11, 2006

Investing pros have begun pondering the possibility that gold will

hit a record over $800 a troy ounce soon. This means that the gold

bugs -- that patchwork of sometimes offbeat investors who love the

shiny stuff -- are happier, and louder, than ever.

Gold futures for May delivery have risen this week 3.2%, or $21.50,

to a 25-year high of $703.70 per troy ounce. In the past two years,

prices have soared 86%.

"We all said what was going to happen and why," says Bill Murphy, an

ex-professional football player and trader who heads up a group that

goes by the name Gold Anti-Trust Action Committee, or GATA.

There are lots of reasons behind the move: For one, the dollar has

weakened, and seems headed lower. When people lose confidence in

paper currency some turn to gold, which is still seen in some parts

of the world as an alternative store of value, despite many years in

disfavor. This reputation as a store of financial value means it is

also seen as a hedge against inflation, which shows signs of picking

up, and against political turmoil, like say, turmoil in Venezuela,

Iran and Iraq.

For some gold bugs, though, it's rarely that simple. Back in 1999,

when gold was at multiyear lows around $250, GATA argued the metal's

price was being artificially suppressed by a cartel of large private

banks selling borrowed gold, much of it on loan from powerful

central banks. The latest stage of the rally, Mr. Murphy says, is

because Russia has become a heavy buyer, helping to squeeze the

alleged cartel.

"They're a little conspiratorial, for me even," says money manager

Peter Schiff, an outspoken gold bug himself. "I don't know if there

was any real orchestrated event."

Whatever the case, the gold bugs aren't alone anymore. The

investment audience for the precious metal is broadening as hedge

funds and others seek alternatives to stocks and bonds. Because the

gold market is relatively small, in terms of physical metal

available and the number of investors who have traditionally

participated, even a small increase in mass appetite for the metal

can result in more price increases.

Pick your reason. Gold seems headed higher still.

May 11, 2006

Copper Commision Report bullish

Copper nominal price reached on Friday a new historical high of 354,256 ¢/lb., growing by 8% with
respect to last Friday. Stocks registered with metal exchanges closed at 159,630 MT, falling by
2.6% (-4.3 thousand MT), showing current market shortage.

Copper price increase was due to the influence of different factors such as the present stocks
decreasing trend, optimistic reports regarding copper market future issued by some important
market agents such as BHP Billiton, and the US dollar weakness encouraging investors’ entrance
to the market. All occurred during a week in which holidays in China and Japan have moderated
market activity.

News of this week related to supply show the appointment of an arbitrator in the negotiations
between workers and Lomas Bayas (property of Falconbridge), which if no agreement is reached, it
could mean that strike would come into effect next Monday. On the other hand, paralyzation at La
Caridad mine in Mexico –it started last 24 March– continues. Besides, comments of BHP-Billiton’s
marketing director regarding prices will remain high until stocks increase from their current low
levels, strongly impacted as the current market bullish view was reaffirmed by one of the world’s
main copper producers.

Regarding demand information, different economic indicators show good future outlooks. In the US,
the leader indicators of industrial activity, ISM, and the factory orders surpassed market
expectations. On the other hand, the European leading industrial indicator grew with respect to last
month. There exists an historical positive correlation between both indexes and copper demand,
thus allowing anticipating that it would continue as dynamic as scheduled.

Demand dynamism, within a low copper availability context, explains part of spot premiums growth
in Europe, currently averaging US$ 165 per MT, with respect to US$ 135 per MT in April. It must be
considered that premiums correspond to the paid value on copper price and reflect physical market
trends. Besides, concentrates market information is confirming the expected lower availability. The
Germany refinery Norddeutsche Affinerie informed that raw material shortage would last until next
year, thus allowing anticipating strong mid-year negotiations between mining companies and
smelters in defining supply treatment charges. These have already established a strong downtrend
placed in values near 100/10 (and even lower) from 140/14 previously registered in the spot market.

The American currency fell by 0.5% until Thursday with respect to the previous Friday, and
surpassing 1.27 US$/€, at similar values as those of May 2005. A weak dollar has a positive effect
on commodities, which is reflected in the LME metals price index, which as of yesterday grew by
6.9% with respect to the previous Friday, due to strong rises of zinc and copper. Precious metals
were also influenced by the US dollar weakness, closing gold today at 682 US$/ounce (London
Initial) and silver at 14.070 US$/ounce (London Spot), growing by 6.9% and 12.1%, respectively.

Copper price, whose bullish trend has not changed, will continue to be determined by the evolution of the
pending labor issues (Grupo México, Lomas Bayas), as well as by any other new information mainly related
to supply. Besides, the US dollar evolution could continue influencing on commodities’ price.

May 10, 2006

Someone big wants in to the Gold Market

Gold has surged to $700 an ounce for the first time in 26 years after Chinese economists suggested the country should quadruple its bullion reserves to protect against a falling dollar.Speculators have been alert to any sign that Beijing may be planning to switch a portion of its massive $875bn reserves into gold, a move that would electrify the market.

They seized on comments yesterday by Liu Shanen, an official at the Beijing Gold Economy Development Research Centre, who said China should raise the portion of gold in its reserves from 1.3 percent today to between 3 and 5 percent. Such a move would entail the purchase of 1,900 tonnes of gold, equivalent to gobbling up nine months of global mine production.

Washington's cold response to Iran's move to defuse nuclear tension also helped fuel yesterday's rally. "No one is buying Iran's overtures," said Frank McGhee, a metals trader at Integrated Brokerage Services. "This is a purely geo-political move for gold. We've been here before. The difference is that this time, there are nukes involved."

June gold futures jumped $20.10 an ounce in New York, briefly touching the $700 line before falling back slightly.Tan Yaling, an economist at the Bank of China, backed the call for higher gold reserves to "help the government prevent risks and handle emergencies in case of future possible turbulence in the

international political and economic situation".John Reade, a UBS analyst, said neither economist had any official role but hints were enough to drive prices in the current climate. "This is an investor frenzy, and China has become the
biggest rumour in the gold world right now," he said.Mr Reade said gold had changed stride since the middle of last year, the key moment when it broke out against all major currencies and began to attract investment from the big money brigade.
"Speculative and investment interest has replaced jewellery demand. The last time that happened was in 1979 to 1980," he said.He said it was likely that Middle Eastern investors were switching
petrodollars into gold after burning their fingers in local stock markets.

Ross Norman, director of the, said China may already be a silent buyer on the open market.Central banks are supposed to record their gold purchases with the IMF promptly, but they have been known to move stealthily for months before declaring.

"This market has been bouncing back so quickly after each bout of profit-taking that it looks as if somebody big is trying to get in. It's too darn hot for my liking," Norman said.Mr Norman said there was a fair chance that gold mining equities would start to play "catch-up."

Special report from The Privateer - A newsletter I recommend.

As you will know by now, spot future Gold rose $US 21.60 to hit $US 701.50 at the close on Tuesday, May 9. This event was reported on under the headline: $700 Gold: Want in? Think Twice. On the surface, this is the normal type of stuff that the US mainstream financial media comes up with. They have to report it because it's news, but they structure the story in a way that they hope will dissuade most people from diving into the Gold market.

As we said, "normal", at least on the surface. But check out this story from exactly the same source, posted just under a month ago on April 11: $600 Gold: Want in? Think Twice. We strongly suggest that you print both these stories out and compare them. You will find that practically nothing but the numbers ($600 vs $700 as a Gold price) has changed. Clearly, the author of the two reports simply used the $600 Gold report as "boiler plate", substituted $700 for $600 in the $700 Gold report, and left the rest completely unchanged.

Please note that our Gold This Week commentary for April 14 - "Gold's Great - But Not For "Individuals" was based on this $600 Gold report from CNNMoney. What we said in that report goes double or triple for this new report, published less than a month later and with Gold $US 100 or 16.7% higher. This is very sloppy work indeed from the mainstream media. It will be interesting to see if they do it again at $US 800 Gold.

May 08, 2006

Mirages of Western Gold Bugs:


I think that this piece reflects my position to a significant degree... 

The Islamic Gold Dinar, the Iranian Oil Bourse and the Gold Standard

Dr. Eckart Woertz
Dubai, UAE
May 8, 3006

For many Western gold bugs, the precious metal is not an investment but a religion. Not surprisingly, the styles of their writings often resemble apocalyptic judgment sermons rather than sober investment analysis. The ideological importance they attribute to gold is rivaled only by the one the Communist Manifesto used to have for a different tribe. If gold is salvation, there needs to be a devil taking the other side. For die-hard gold bugs, this is the paper dollar and its various sinister manifestations reaching from big government to Wall Street, and the freemasons. Everything that is supposedly against such evil mongers has to be blown out of proportion and the farther away the country of origin the more outlandish the exaggerations become. Two perfect examples are the Islamic gold dinar and the Iranian euro-denominated oil bourse. Living in the Middle East, I have repeatedly been astonished by the huge gap that exists between web-based gold bug perceptions on the one hand and actual reality on the other hand.

The Islamic gold dinar was supposed to be used to settle bilateral trade between Muslim countries. By randomly surfing the Internet during the height of Islamic Dinar advertisements in 2002 and 2003, one could have gained the impression that the Islamic world was on the verge of skipping any payments in dollars or other paper money and switching to a gold standard like that of the good old 19th century. Unfortunately, off the web, in Middle Eastern reality the gold dinar was a non-issue. Yes, the initiator, Malaysia, had talks with Iran, Saudi-Arabia, and some other countries, but that was pretty much it. Even specialized central bankers in the region who were supposed to make the gold dinar a reality didn't have a clue about the idea. Thus, nothing has happened, Iran has not engaged in a settlement of bilateral trade with Malaysia using gold dinars, and the Gulf countries, which offered some polite interest, have quietly withdrawn, and are more inclined to discuss diversification into the Euro. A possible explanation for this failure is the trade surplus of Malaysia, which would have sucked the tiny gold reserves of the Gulf countries dry in no time, as an adjustment mechanism between the gold dinar as a trade currency and the money supply of the participating countries was not intended. Even more importantly, this hints to the simple fact that Islamic governments also love some expansionary monetary policies every once in a while. With the retirement of the main gold dinar proponent, former Malaysian Prime Minister Mahathir, the insight has dawned on many that the idea is dead. Even hard core gold bugs who are reporting from the "occupied South" or roaming the forests of Montana with their militia buddies should have grasped this in the meantime. But that's no problem as there is a new kid on the block: the planned Iranian oil bourse, which will offer euro-dominated oil contracts and will thus bring about the fall of the dollar.

The oil bourse as well has not really been a topic in Iranian newspapers. The Iranians do not seem to attribute the historical 'dollar-killer role' to the idea like gold bugs do. On May 6, Mohammad Javad Asemipour, advisor to Iran's oil minister and head of the bourse project, dismissed such notions as "propaganda." The project was not intended to rival marketplaces in New York, London, and Dubai, he said. Its goal was simply to increase liquidity in local energy markets, and in the beginning there was not to be any trading in crude oil, only in petrochemical products. The real bombshell for gold bugs, however, was that he said that pricing in euros was not intended! Anyway, after some postponements, the Iranian oil bourse is supposed to be set up this month on Kish, a small island free trade zone in the Arabian Gulf. The island is sleepy, and in the middle of nowhere. Along an empty road outside the city center there is a concrete desert of run-down hotels where workers from Dubai dwell. When their UAE visas are up for renewal, their employers send them to Kish for a visa roundtrip. But sometimes the paperwork does not arrive for weeks due to red tape and deliberate delays and they get stuck - cost-efficiently 'stored' without pay.

If you told one of these desperate souls that the lost island they are on will be the center stage of the coming dollar collapse, they would probably think you are crazy. It is not really a place where a highly paid oil trader from London, New York, or Singapore would like to relocate. It is as far from a functioning financial infrastructure as Pyongyang or the Antarctic. Back office facilities, settlement procedures, trading infrastructures, legal frameworks, debt markets, you name it. Need some credit to finance a major transaction? No problem, fill out a form and send it to one of the government-owned banks in Teheran, and in the meantime relax and enjoy the sunny climate. Pricing oil in euros would certainly be a nightmare for the dollar, but it will not happen to any meaningful extent because of the Iranian oil bourse. Like the Islamic gold dinar, it is a mirage of Western gold bugs - they see it from far away, on the web, but if they took the pain to apply for a passport and travel a bit, they would see it disappear.

I guess the political correctness squads of the gold bug community are already on their way to flood my mailbox. But wait a minute - I like gold, I am heavily invested because I think it will go much further, especially in dollar terms. Yes, the US twin deficit has gone out of control, and yes, Helicopter Ben is likely to choose inflation over deflation as a 'solution' to the debt problem. But at the same time, this debt is the only thing that keeps the world economy running, as every gold bug accurately observes. The US housing and consumer markets that goes without saying, but the Japanese love it as well, as the yen carry trade has enabled them to stabilize their shaky financial system with a zero interest rate policy and without inflation. China and Southeast Asia still have no alternatives developed for their export-oriented industrialization, and the Europeans have not exactly invented balanced budgets - they are content to sail in the geopolitical and economic wake of the US as well.

Of course, there will be continued diversification out of the dollar via the currency markets, and the euro and gold are obvious candidates. Norwegian plans to set up a euro-denominated oil bourse are much more likely to be a success than Iranian ones, and bilateral trade agreements like the $70 billion gas deal between China and Iran are already taking away liquidity from dollar-denominated open markets. Such deals might even use the euro as a pricing unit some day. But that will not change the nature of the game; the virtual reality of financial growth has become paramount. It seems like capitalism cannot expand in the real world anymore because geographically, it colonized all the non-commodified virgin lands a long time ago, and the inward expansion of new products and new markets got stuck in a stillborn microelectronic Kondratieff cycle. New products and markets still emerge, but do not absorb enough labor anymore because of the huge rationalization potentials the microelectronic revolution has set free. That leaves as the last frontier of growth the deceivingly limitless realm of numbers and financial engineering. If you think that's bad, be sure the deflationary shock of a gold standard would be worse.

What leads us to the ultimate mirage of Western gold bugs: the reintroduction of the gold standard. This is neither feasible nor desirable. Forget that the much-hailed age of the gold standard was not as cosy and peaceful as gold bugs perceive. After all, child labor was rampant and Western governments divided their time between policing the poor at home and killing and colonizing natives on foreign shores. Once they had consolidated their nation-states, imperialist competition between them got really ugly and finally ushered in World War I. Hardly a proof that a simple metal makes better societies; but there was low inflation, and gold bugs celebrate the period as 'freedom.' However, the main flaw in the gold bugs' view of history is that the homo oeconomicus who has expressed all his needs, relationships, and wishes in monetary quanta from time immemorial is a fiction. So is the conviction that in capitalism money is used to fulfill needs, instead of being an end in itself. These are axiomatic beliefs invented by neoclassical economists, Austrians, and other flat earthers of economic history.

Capitalist societies in the 19th century were still in a nascent stadium of development, and hardly comparable to the completely commodified ones we face nowadays. They comprised various forms of non-capitalist production (e.g. household work, agriculture), and the cold logic of accumulating abstract wealth in the "disembedded" spheres of market and state (Karl Polyani) was not yet generalized. It is hardly conceivable that capitalist societies could fit again into the tight golden corset in which they once flourished for a while when they were little babies. Thus, the gold bug's state of mind - affirming capitalism by evoking a harmonious picture of peaceful market communities and the whole 'honest money for honest work' charade - alludes to a past that never was and a future that will never be. The only thing that saved capitalism after 1929 was state intervention and monetary expansion, and the only thing that saved it after 1971 was even more monetary expansion and the advent of a brave new world of financial engineering. So let's hope that the music will continue to play for a while, because it will be difficult to grab a chair once it stops. And be careful what you wish for - or which gold bug is ready to tell the last GM worker to go home without knowing how to feed his family?

Best regards from Dubai, Eckart

-Dr. Eckart Woertz
Program Manager Economics
Gulf Research Center
P.O.Box 80758
187 Oud Metha Tower, 11th Floor
303 Sheikh Rashid Road
Dubai, UAE

Faber -Dollar is doomed!

Gold price to kick into full gear: Faber

Date : 07/05/2006

Reporter: Alan Kohler

ALAN KOHLER: Well, the death of the Greenback, gold at $US6,000 an ounce with commodity and energy prices rising vertically, spurred on by growing international tensions and war - no, that's not the background to the latest sci-fi pot boiler, but the tentative vision of one of the world's most respected contrarian economic forecasters, Marc Faber. Dr Faber must be taken seriously though because of his record in predicting, among other things, the global stock market crash of 87, Japan's collapse in 1990 and the Asian meltdown of 1997 - forecasts that earned him the moniker Dr Doom. He's also the editor and publisher of the influential The Gloom, Boom and Doom Report. And, as you'll hear, he has some very interesting views on the relative merits of the Australian and US central banks. I spoke to Marc Faber from New York this week.

Marc Faber, just to put this week's interest rate increase in Australia into a global perspective, do you think the developed world in general is in a process of increasing interest rates and reducing liquidity that has a way to run yet?

MARC FABER, 'THE GLOOM, BOOM AND DOOM REPORT': Yes, I think so because we have a global boom and interest rate increases have been very slow. In other words, in the US, we went from 1 per cent on the Fed fund rate in June 2004 to 4.75 per cent, but I think that inflation is higher than 4.75 per cent. And if you look at long growth in the US and credit market growth, then we haven't had tight money yet because if money was tight, then asset markets wouldn't rally as they do at the present time.

ALAN KOHLER: There is a lot of debate in the financial markets about whether the US will have a pause in its interest rate tightening cycle. What do you think?

MARC FABER: Well, I basically think that Mr Bernanke is a money printer and it's interesting to see that since he was appointed Fed chairman, the price of gold has risen by 42 per cent so the market is not very happy with his bias towards money printing.

ALAN KOHLER: Do you think that Mr Bernanke is losing control of the situation, in fact? I mean, I notice the markets are testing him now.

MARC FABER: I think that on his recent comments that the Fed might pause, immediately the US dollar became very weak, the bond market sold off and gold prices shot up another $20, $30, so that is a lesson for him that the market begins to see through his inflationary monetary policies.

ALAN KOHLER: What do you think of the Australian central bank and its decision this week to increase interest rates?

MARC FABER: I think actually that the Australian central bank is probably relatively better than others in the sense that they have further tightened monetary policies and so we have in Australia an interesting situation. The economy is kind of weakening, but there are some inflationary pressures and the Australian Reserve Bank has increased interest rates so I find it is actually quite courageous.

ALAN KOHLER: What do you think it means for the Australian dollar?

MARC FABER: Actually what has happened, the Australian dollar along with the New Zealand dollar was weakening recently but in the last, say, two weeks the Australian dollar has again strengthened from 70 cents to 76 cents, so I would say the Australian dollar is supported by relatively high interest rates.

ALAN KOHLER: What do you think about the length of the current commodities boom? You've written recently about firstly how the long wave of commodities could last for another 15 to 20 years and you've also talked about the impact of India on commodities, so where do you see prices of commodities going from here?

MARC FABER: Basically we had a bear market in commodities between 1980 and 2001, or 1998 and 2001, so we had more than 20 years bear market in commodities. By the late 1990s in real terms, in other words inflation-adjusted, commodity prices were at the lowest level in the history of capitalism in the last 200 years and now they have risen substantially - the price of copper from around 60 cents to over $3 a pound, the price of gold has more than doubled. But in real terms, commodities are still relatively low compared to equities and therefore, also given the length of the cycle - the cycle for commodities lasts usually 45 to 60 years peak to peak or trough to trough - in other words the upward wave in commodities lasts around 22 to 30 years and we are now in year 2006. The bull market started in 2001 so we are five years into the bull market. I do concede that the markets are overbought and there is a lot of speculation and I expect a correction but I think longer term from here onwards commodities will outperform the Dow Jones and financial assets.

ALAN KOHLER: You've been reported as predicting that the price of gold will rise to $US6,000 per ounce. Is that correct - is that what you said?

MARC FABER: What I said is that if Mr Bernanke prints money, it is entirely conceivable that the Dow Jones goes to 33,000 or 40,000 or 100,000 or 1 million. All I am saying is if the Dow Jones here goes up three times because of money printing by Mr Bernanke and we have examples in financial history where a central bank printed money and everything went up, but in this instance I think that gold would significantly outperform the Dow Jones. So if someone says to me the Dow will go to 33,000, I say yes, it's possible but it will decline against the price of gold which will go up to $US5,000, $US6,000 an ounce.

ALAN KOHLER: Did you notice that Steven Roach, the chief economist of Morgan Stanley, who has been a bear for a very long time, seems to have changed his tune now, saying he's feeling better about the world than for a long time. Do you think that the fact that Steve Roach has kind of thrown in the towel is a sell signal or do you think he's onto something?

MARC FABER: Well, Steve is a good friend of mine and he gave already a sell signal two years ago. He suddenly turned bullish about bonds and since then the bond market has been weak. And I agree with him that we are in a global boom but it doesn't change the fact that it is an imbalanced boom and it's driven largely by credit creation in the US, leading to overconsumption, leading to a growing trade deficit, current account deficit, the accumulation of reserves in Asia and a global boom. But it is nevertheless an imbalanced boom and one day there will be a problem, certainly with the US dollar. The US dollar is a doomed currency. Doomed? Doomed. Will be worthless. Actually each one of your listeners should buy one US Treasury bond and frame it - put it on the wall so they can show their grandchildren how the US dollar and how US dollar bonds became worthless as a result of monetary inflation.

ALAN KOHLER: You made at least three great calls - you warned of the 87 crash just before it happened, you warned investors to get out of Japan in 1990 and out of Asia in general in 1997. So what specifically is your call right now?

MARC FABER: I think we are in a bear market for financial assets. There's a bear market where the Dow Jones, say, would go from here - 11,000 to 33,000. It would go up in dollar terms but the dollar would collapse against, say gold or foreign currencies. That's what I think will happen with Mr Bernanke at the Fed because he has written papers and he has pronounced speeches in which he clearly says that the danger for the economy would be to have not deflation in the price of a fax machine or PC, but deflation in asset prices. And so I believe that he is a money printer. If I had been a university professor, I would not have let him pass his exams to become an economist. I would have said, "Learn an apprenticeship as a money printer."

ALAN KOHLER: (Laughs) So, a big mistake putting him in charge of the Fed then?

MARC FABER: I think it's very dangerous, very dangerous.

ALAN KOHLER: You've talked in the past about the links between the commodity price cycles and political tensions in the world and you've pointed out that when the Soviet Union collapsed, commodity prices were weak and you've said that rising commodity prices leads to the conditions for war. Now that we're in a commodities boom - which you now say is going to go for a long time - do you think that we're in for a period of rising political tension as well?

MARC FABER: Basically the way we economists have business cycles theories, the historians have war cycles theories and I don't want to go into all of them, but when commodity prices decline, countries are not concerned about getting supplies of vital commodities, whereas when commodity prices go up, it's a symptom of shortages. America needs oil for consumption and China and increasingly India need oil for their economic growth. If you are growing your industries at a production of 15 per cent per annum, as China, you need increasing quantities of oil and China was self-sufficient until 1994 and today they are the largest consumer of oil and import most of it from the Middle East. So the tensions of course arise and I can see that some people have become very powerful whereas the balance of power in the 80s and 90s shifted to the industrialised countries of the West that consume a lot of oil, now the balance of power has shifted to people like Evo Morales, Hugo Chavez in Venezuela, Mr Putin - Mr Putin is the most powerful man in the world, it's not Mr Bush because Mr Putin controls a production of oil of 10 million barrels, plus he controls all the pipelines going to Europe. And it has also shifted to Mr Ahmadinejad. Mr Ahmadinejad of Iran would be very quiet, as well as Mr Chavez, if oil prices were at $12. But at $70 they have a lot of leverage and so the tensions have also increased. It doesn't mean that it comes to war but the conditions for war have improved and I think that eventually this commodity cycle will last so long until there is a major war and during war times, the best hedge is to be low in commodities, then commodities really go up vertically.

ALAN KOHLER: Bit of a grim way to make money, I suppose?

MARC FABER: Hedge funds make money anyway. It doesn't - morals are not the most important issue.

ALAN KOHLER: Well, on that note we'll have to leave it there. Thanks very much, Marc Faber.

MARC FABER: It is my pleasure

Watch Faber

May 03, 2006

Commodity Prices High? Don't make me laugh!

((In 2001, adjusted for inflation, commodites sold for less than they did in the depts of the Great Depression. All the excitement over the high price of commodities is nothing compared to whats coming. The industrialisation and urbanisation of India and China will mean a massive increase in demand and prices will no doubt reach new highs in real terms...we have a little ways to go this missive from an old geezer in Canada demonstrates))

 We all keep hearing about new highs that the commodities are making. Lets take a look at some of them to see where the prices have been and where they are going.

What does one use as a measurement as the purchasing power of the dollar keeps dropping, how can you measure something when the yardstick keeps changing? The government numbers on inflation are taken from Alice in Wonderland or maybe from Disney World, I am not sure but they are not of the real world which most of us have to live in.

In 1973 a gallon of gas cost about 60 – 65 cents, today in Canada it is over $5.00. I bought a new pick-up for $4000.00 in 1973. My truck last year was $52,000.00 MSRP.

In 1973 I was selling starter homes for $18,000.00, today they sell for just about $200,000.00.

To keep things simple lets multiply 1973 prices for commodities by ten as most things have gone up by a factor of ten. Also remember there is a lot less of these commodities available today as compared to 1973, as we consume them [especially silver].

Link to commodity prices

Aluminum in 1973 was $582.00 per m/t or $.26 per pound
Aluminum in 2006 is about  $1.24 per pound
 Needs to double
A new high for Aluminum would be about $2.70 per pound   

Cobalt in 1973 was $6480.00 per m/t or $2.95 per pound.
Cobalt in 2006 is about $16.00 per pound.   
 Needs to double
A new high for cobalt would be about $30.00 per pound   

Copper in 1973 was $1312.00 per m/t or about 59 cents a pound
Copper in 2006 hit $3.25 per pound. 
 Needs to double
A new high for copper would have to be over $6.00 per pound.

Gold in 1973 was $3,150,000.00 per m/t or $98.00 per ounce
Gold in 2006 was up to $640.00 per ounce
A new high for gold would be about $990.00 per ounce.   
 Will be there shortly

Lead in 1973 was $359.00 per m/t or about 16 cents a pound
Lead in 2006 is about 55 cents a pound.
 Needs to triple
A new high for lead would have to be over $1.60 per pound.

Moly in 1973 was $3985.00 per m/t or about $1.81 per pound.
Moly in 2006 is about $24.00 per pound
Moly has made a new high by exceeding $18.00 per pound.

Nickel in 1973 was $3370.00 per m/t or about $1.54 per pound.
Nickel in 2006 is about $8.75 per pound.
 Needs to double
A new high for nickel would have to be over $16.00 per pound.

Silver in 1973 was $82,310.00 per m/t or about $2.55 per ounce.
Silver in 2006 was about $14.79 per ounce.
 Needs to double
A new high for silver would have to be over $26.00 per ounce.

Tin in 1973 was $5018.00 per m/t or about $2.28 per pound.
Tin in 2006 is about $9320.00 per m/t or about $4.23 per pound.
 A long way to go
A new high for Tin would have to be over $23.00 per pound.

Zinc in 1973 was $456.00 per m/t or about $.21 per pound.
Zinc in 2006 is about $3360.00 per m/t or about $1.52 per pound.
A new high for Zinc would have to be over $2.15 per pound.

Most commodities are a long way off from making new highs; I would say all that is happening is they are playing catch up. Or maybe they are losing control and the commodities are not as manipulated as they once were. When one sector of society can create money at will, while others have to trade their labor for it, how can we have free markets?

My main focus is silver, where is the price of silver heading? Higher way higher or as Bill at says TO THE MOON.

The reason silver is heading higher is supply and demand. Read Ted Butlers work at  or Jason’s at

Silver is precious, not for the price but for what it is.

The next big thing in medical research will be silver; they will rediscover all the things silver was capable of doing before the big drug companies came along.

Silver one day will be priced as high or higher than gold, because we consume silver and we store gold, so silver will become rare in the future [50 years?]. There is only so much silver in the earth’s crust.  By keeping the price low they have discouraged doing research to look for alternatives for silver.

Draw a yearly silver chart of the prices for the last 35 years with inflation factored in and the price has not moved.  All that has happened is that the purchasing power of the dollar has dropped.

If one cut a little off a yard stick each year the same as what the dollar has lost in purchasing power  we would have about a 2 inch yardstick.  Would anyone use it?  Would anyone draw a chart using a yard as a standard of measurement? No. Then why compare past dollars to today’s dollar. It is useless information.

New high’s or new lows. Where are all the new highs in the commodities??????

In 1964 one could buy a gallon of gas for 50 cents, I can still buy a gallon of gas for the same 50 cents.

The reason is that the 50 cents was silver, which in our funny money today is worth about $5.00, the cost of a gallon of gas today. Real money maintains its purchasing power.

Wm. J. [Bill] Murray
Silver Phoenix Resources Inc.

May 02, 2006

Embry Sees Trouble for Paper Money;

Embry Sees Trouble for Paper Money;
Gold Headed for US$1,000, Sprott Strategist Says

By Levi Folk 
National Post, Toronto
Monday, May 1, 2006

We are "in the early throes of paper money getting seriously
debased," warns John Embry of Sprott Asset Management, and the price
of gold is headed to US$700 this year and US$1,000
conceivably "within two to three years -- maybe quicker."

This story is finally gaining traction because of the remarkable
deterioration in the financial position of the United States, he
says. Confidence in U.S. paper money is starting to ebb, "and, boy,
when it really starts to move, you'll be shocked, I think, at how
fast the prices will move."

"I think what you've got here is a perfect storm," he concludes. The
United States has shown "very little interest in any fiscal
responsibility," and has created, in the face of declining
savings, "an enormous debt pyramid" that can be sustained only by
ever-greater credit expansion, he explains.

The supply of money is ever expanding, whereas the supply of gold is
relatively scarce, hence the "perfect storm." Insufficient
exploration for at least the last five years suggests "at best a
flat production profile" for gold, says Embry -- this in a situation
where demand already outstrips supply by roughly 1,500 tons/year.

Behind this "perfect storm" is a conspiracy theory advanced by Embry
that points to the U.S. Federal Reserve Bank doing whatever it can
to hide the truth about its debased currency. To give one subtle
example, the Fed recently stopped publishing a broad measure of the
money supply (M3) because it suggests that the money supply remains
accommodative despite the rate hikes in the United States. To take
another, central banks have been selling gold over the past decade
to make their currencies appear stronger.

The problem with conspiracy theories is that they can be used to
dismiss any evidence that does not corroborate one's view of the

For example, inflation is the smoking gun that Embry cannot find. In
fact, expected inflation, which can be calculated as the difference
between current yields on real-return bonds (Treasury Inflation-
Protected Securities in the United States) and nominal bonds,
remains muted. Embry explains this conflicting evidence by
suggesting that the bond market is also being manipulated, this time
by the U.S. Treasury.

Conspiracies aside, the fundamentals for gold and silver are strong.

"The fund has been managed on the premise that gold and silver were
going materially higher in price, and that they're going to go far
beyond what most people think is possible." Investors simply do not
understand the "upside magnitude" implied by the supply-and-demand

Other factors are kicking in to bolster gold stocks, otherwise a
high-beta play on the actual commodity. For instance, the gold
sector is witnessing a spurt in merger and acquisition activity as
the majors are snapping up juniors with proven finds.

In addition to hedge funds and futures markets fuelling speculation
in precious metals, there are also now mainstream investment
vehicles like exchange-traded funds (ETFs) that are whetting the
appetite of investors. ETFs are providing a much easier mechanism
for people to invest in precious metals, he says, potentially "a
huge positive."

Barclays Global Investors iShares Silver Trust ETF (SLV on the
American Stock Exchange) came to market Friday. Silver had been
climbing for months in anticipation of the fund's launch.

Silver, in Embry's view, is the much more interesting story. True,
there is no central-bank silver reserve, but the supply-and-demand
equation is also working in favour of silver, as the enormous above-
ground inventory has been largely depleted and new sources of demand
mushroom (e.g., in the health sciences).

For these reasons, Embry thinks we'll see silver at US$20 in the not-
too-distant future. Accordingly, the fund has a 10% allocation to
silver bullion, and a relatively high exposure to pure silver plays
such as Silver Wheaton, Western Silver and Bear Creek Mining.
Meridian Gold should be included here too, he adds, because of the
high silver content in their ore.

Beyond the above-average exposure to silver, the fund is also
characterized by an emphasis on juniors over seniors.

"The way I've made my money through the years has been to put
considerable emphasis on juniors: emerging companies, exploration
vehicles." The juniors have "much more leverage to the upside," he
explains. "They're still relatively well-priced as per ounce in the
ground" -- but that will change, he adds.

Embry also sees value in gold producers in strong-currency countries
like Canada.

"I like small producers who have really struggled to survive:
They're lean and mean to the extent they can be; and now they're in
a position to benefit, and their stock prices don't reflect it,
because they're still not making much money." This has become a
secondary theme in his stock selection.

The emphasis on juniors, however, translates into higher risk,
especially in light of today's price volatility. Embry manages this
risk by maintaining a diversified portfolio of 70 names with an
emphasis on careful selection of juniors. Among his juniors,
Southwestern Resources and Greystar Resources have consistently
played a prominent role.

Oxiana Still Favoured

 - May 02 2006

Opinion at Tolhurst Noall may be that investors should look
elsewhere for exposure to surging copper and gold prices, but
the general market view seems to be that it is stillokay to
hold a few shares of Oxiana Resources (OXR) in one's
investment portfolio.
Oxiana's shares fell dramatically on Friday, when the market
experienced a good old fright following the surprise Chinese
interest rate hike, but they bounced back swiftly on Monday.
Moreover, if UBS's latest assessments are anything to go by,
Oxiana shareholders should be in for ongoing rock'n'roll in
the medium term.
UBS raised its commodities prices forecasts substantially on
Monday and among the results of that exercise is a target
increase for Oxiana to $4.20 from $3.00. As the shares were
only rated Neutral, they obviously went up to Buy.
As the average target price ha snow climbed to $3.29
(including UBS's contribution) the obvious question that comes
to mind is: is the rest of the market going to catch up?
Oxiana shares have been trading persistently above the
experts' target price for many weeks, closing at $3.64
The UBS upgrade lifts the stock's reading on FN Arena's Market
Sentiment Indicator to 0.4. Apart from UBS, GSJB Were,
Macquarie, Credit Suisse, ABN Amro and Deutsche Bank all rate
it a Buy.
Citigroup, Merrill Lynch and JP Morgan don't want to go
further than a Neutral. Aspect Huntley has a negative rating
for many resources stocks at the moment, and Oxiana is no

April 30, 2006

What was the price of gold then

Whether as the basis for the monetary unit of a country, or in its role in comparison to the currency price of silver, the price of gold has long been a subject of great interest to both the scholar and the general public. Below are five series for determining the value of gold historically:

  • British Official Price for the years 1257 to 1945
  • U.S. Official Price for the years 1786 to 2001
  • New York Market Price for the years 1791 to 1998
  • Gold/Silver Price Ratio for the years 1687 to 1998
  • London Market Price for the years 1718 to 2001
  • April 28, 2006

    Stay Long Commodities

    Will there be commodity class corrections ahead? Sure, and some may be quite violent. But at least for now, we'd continue to view these as buying opportunities as we believe the Fed and the central bankers are trapped. They are trapped in a set of circumstances they themselves spawned. Unwilling to allow prior period misallocations of capital (stock and housing bubble) to reconcile themselves, they have implicitly committed to facilitating ever larger amounts of liquidity support to the financial markets and theoretically real economy. But it seems to us that they have worked themselves into a corner now being that the harder they push on the liquidity accelerator, the harder they will have to yet push in the future to offset the real world inflationary costs of commodity prices their hedge, prop desk and momentum trading former friends are now supporting with the very liquidity the Fed creates in the first place. The veritable Catch-22? As the data above tell us, this liquidity is now squarely finding its way into the commodity complex and that process is accelerating. Can it continue on forever? Of course not. We continue to believe that US consumers will slow ahead, especially given our viewpoint that US household financial well being is negatively correlated to commodity prices, but anticipate that the Fed will ultimately panic and up the liquidity creation ante even further as they have in the past out of fear as consumer slow, again, playing right into the expectant hands of the financial sector who has been conditioned time and again to expect this very response from the FOMC. Who is the best friend of the current commodity bull, who is for now the longer term supporter of this trend, and who in public refuses to acknowledge what is plain for the entire planet to see in terms of forward inflationary pressures? The Fed and the US credit markets. Who else? Until this changes, stay long assets that benefit from inflationary trends, particularly those assets that have not already been significantly levered. Some day the Fed will change tactics. Some day they will realize the speculative financial community has played them for the fool. But we're not their yet. For now, the hedge, prop desk and momentum trading crowd are betraying their liquidity benefactors out of natural self interest as they pile into hard assets and hard asset related investments. We can only believe the Fed and their global central banking brethren are watching this in horror. Paralyzed and reverting to the only trick left in their bag - liquidity facilitation. But after all, the hedge, prop desk and momentum traders are only doing what the Fed has taught them to do for literally years now - put the Fed into a box of being forced to create and facilitate ever larger amounts of liquidity and credit. The financial sector servant of old has now assumed the role of master. You better believe it's different this time.

    April 27, 2006

    Has Peak Gold Arrived? Lessons From The Peak Oil Debate


    Roland Watson (The New Era Investor) submits: As someone who has kept track of the “Peak Oil” movement for a few years now, it comes as no surprise that oil prices have risen nearly six fold since they hit rock bottom in the late 1990s. Does this mean Peak Oil has already arrived? Not necessarily, but we note that a final peak in global oil production needs to be preceded by a continual decrease in excess crude oil production capacity. When capacity reaches zero, then Peak Oil arrives. That capacity has been dropping now for several years.

    But what can that current debate about oil teach us about gold? Gold, like oil, has been continuously rising in price for five years. Admittedly, its performance has been poor compared to oil, but does this price mechanism also indicate the mining equivalent of reducing “excess spare capacity” and is it also a prelude to “Peak Gold”? My conclusions led me to believe that these two commodities are similar in terms of a Hubbert’s Peak analysis and in terms of the effects of a peak in global production.

    Firstly, Peak Oil based on Hubbert’s theory of oil production versus reserves states that production goes into decline at about the halfway point of remaining reserves. How does this play out for gold? Based on the United States Geological Survey’s 2006 summary for gold, about 152,000 tonnes of gold has been mined out of the ground since man first dug out those shiny yellow nuggets.

    Furthermore, the USGS estimates a remaining reserve base of 90,000 tonnes. So, from the point of view of peak being the halfway point of reserves, gold should have peaked at a remaining reserve base of 121,000 tonnes (152,000 plus 90,000 divided by 2). When was this the case? Backtracking 31,000 tonnes of global mining output gives us the year of 1993.

    However, a look at the graph below of global mining production shows that gold output merely dipped in 1993 as recession hit the Western nations and then resumed a climb to a new high in the year 2000 (which has not been exceeded since). Now, despite climbing gold demand, mine output has been in decline since then.


    Does this imply 2000 was the global peak in gold production? That would mean that out of a 4000-year time range of gold production, we have a seven-year error in estimating the peak, which doesn’t look so bad after all!

    But we have to understand that just like oil reserve figures, figuring out how much gold has ever been mined and how much remains under the ground in an inexact science. What we can be sure of is that the numbers we are using have never been more accurate as man’s knowledge of the earth has increased.

    Another evidence of a commodity production peak is falling supply in the face of rising prices and demand. In a free market, supply should increase to fulfill demand or demand has to fall. For some years now, the difference between new mine output and demand has been filled by scrap recycling and above ground stockpiles. However, this is where the peak argument gets contentious as the 1990s cutback in exploration is given as the explanation for the recent decline in production.

    A similar argument is given to partly explain the tightness in oil supplies today. Oil plummeted from $25 to $10 a barrel between 1996 and 1998. Exploration budgets were cut and we are apparently suffering the consequences today. Okay, perhaps, but that argument is beginning to wear a bit thin after seven years and prices still at all time highs. Likewise with the production of gold, how long does it take to re-open uneconomic mines and get new ones up and running? Seven years and counting and once again prices are still at multi-decade highs.

    But perhaps the most important warning sign of a commodity peak are major producing countries individually peaking before the overall global peak. In the case of oil, the USA, China, Britain, Norway and Mexico amongst a host of others are at or past their national peak of oil production. We only await the Middle East countries and Russia to join them and complete the picture.

    In the world of gold producing countries the picture is interesting if we examine a chart produced by the World Gold Council. If the reader clicks to that page and scrolls halfway down they will observe the multi-colored graphics for each major country and region.

    In summary, South Africa peaked in the 1970s at 1000 tonnes (yet is still the main producer). The USA peaked in 1998 at 366 tonnes while Australia peaked in 1997 at 314 tonnes. Canada peaked in 1991 at 177 tonnes and Brazil in 1982 at 200 tonnes and so on. These example regions when combined currently produce 40% of the world’s gold. If this 40% declines at 5% per annum then the other 60% has to increase production by 3% just to keep production flat. This is not a pretty picture - unless you hold gold.

    Just like oil, the relatively few “giants” of gold production are being replaced by a host of smaller “minnows”. Just like oil, gold explorers are finding less gold in lower grades of quality. In terms of oil, the gold Ghawars and Cantarells have long been discovered and exploited. It is now basically a mopping up operation at the edges of exploration.

    It seems to me that Peak Gold may well have arrived. When Peak Oil arrives as well, then Peak Gold will be confirmed because increasingly higher energy costs will make many mines uneconomic and gold above ground will become far more expensive than gold shut in underground. Unless, of course, gold vaults into the thousands of dollars to offset energy costs!

    This is what we call the “New Era” of investment. It is an era when hard assets will no longer be taken for granted and seen as cheap and easily accessible. They will become rarer and harder to extract and will remain so for decades to come.

    April 26, 2006

    A Long Time Coming

    By: Theodore Butler

    It has been almost eight months since I’ve been able to write about a dealer short-covering clean out in silver. It seemed like it took forever. No matter how long it has taken, the good news to the blasting to the downside we have just witnessed is that the dealers (including Mr. Big) have used the sell-off as an opportunity to buy back a large number of their shorts. Actually, it’s a little more involved than that; the dealers created the sell-off by collusively pulling their bids on the decline. (If you’re not clear on that, please read some of my previous articles.)

    Now the question becomes, is it done? Have we reached a low risk buy point? I think so, but with the tremendous volatility I can’t say it’s only dimes to the downside, the way I could at 4 or 5 or 6 dollar mark (although it may be). But I can say that there are many, many dollars to the upside, courtesy of a host of reasons not contemplated a few years ago, including the growing potential awareness of the real silver story and the prospective ETF.

    I also get the feeling, whether we have seen the bottom of this silver sell-off or not, that the dealers will be very reluctant to sell the next rally, when it comes, which I think is soon. This should free the price dramatically. I say this because I think the dealers have been taught a lesson they will not soon forget. Most of you know that the lessons you have learned in life the hard way, through adversity, are those that are most obeyed. The dealers, likewise, have suffered heavy losses as a result of the 8 month silver rally and are, in fact, covering at substantial loss for the very first time in decades. I think they are more concerned with closing out their shorts and eliminating continued exposure to the upside, than they are with the losses they have booked. I think they will be reluctant to put their heads back into the lion’s mouth by going short again.

    There are a number of good things related to the dealer silver short covering. In particular, the very recent decline in silver relative to gold, may have created a special opportunity for real gold investors who hold little or no real silver. As regular readers are aware, I have long suggested that gold only investors switch some of their gold holdings to silver (assuming no fresh funds were available for silver purchases). This is no way implied that I thought gold’s price was surely headed lower, but rather that silver would outperform gold, handily, in the future. I still feel that way and the recent gold catch-up to the silver price should give such gold only investors another good switch point.

    Although it may appear that I am suggesting doing a gold/silver ratio trade on a leveraged basis, that is not the case. I am still suggesting a cash only, fully paid for position in real silver, only with the suggestion that if one does not have cash, that the gold be the source for raising the cash. The rational for my suggestion lies in the fact that the strong rise in the price of gold over the past few years allows gold only investors the chance to buy silver at, effectively, single digit prices, compliments of the gold price rise. What matters most is what will prevail in the future and, clearly, I am of a mind that sees much higher silver prices relative to gold. After all, we are running out of silver, not gold.

    Now I would like to present an article by my friend Israel Friedman. Even though I have known him for almost 30 years, and we discuss silver every single day, I have always been able to learn something new from Izzy. I hope you have the same experience. I will offer some comments following his article.


    Crazy Izzy

    By Israel Friedman

    Before I concentrate and write about physical silver, I ‘d like to congratulate Ted Butler on the extremely good achievement he has accomplished with the articles he has written on silver. Even though he says he considers me his mentor and teacher, I must confess I think I have learned more from him. I can’t think of one important issue in silver that he hasn’t introduced and it bothers me that others steal from him.

    We can say that today many investors are very happy that they bought silver and in my private opinion those that buy today at current prices will be rewarded also. Many people have asked me where we are in the silver baseball game. I say to them that we are in the middle of the first inning and the first inning is going to end when silver prices will be at 23 to 25.

    Before you invest in silver you have to do research and decide by yourself is Crazy Izzy right, or the rational Ted Butler or the naked shorts.

    I can give you only my opinion and tell you that silver was never priced at its real value. The price is determined on the COMEX exchange and for them they trade numbers, and at any number or price they sell you a contract, and in the last 20 years they sold naked hundreds of millions of ounces and have made billion of dollars.

    You have to ask a legitimate question why the price on the COMEX doesn’t reflect true value? It is very simple – 90% of the mining companies are public and for them silver is just another product and they sell it only to survive and to make enough money to have good salaries, benefits, and to be reelected as directors.

    If these mining companies were in private hands with the knowledge of rarity and deficit of silver, today prices would be not less than $ 250. No real owner sells merchandise for less than fair value without a motivation.

    Crazy Izzy thinks that they minimum value of silver today is $600. Why $600? The answer is very simple – if the market can pay $600 for an ounce of gold when world stocks are close to 5 billion ounces, why the value of silver should be less with world stocks of half a billion ounces?

    I can give you more and more examples, but the most important thing is don’t invest in silver if you don’t think big like me. You can only make big, if you think big.

    If you decide to invest in silver or you have invested already, you have different ways to invest. In my opinion, it will not take long that we will start to have shortages in silver and slowly, slowly the price will rise to the real value. Remember today’s real value is $600; tomorrow can be only higher, never lower. Why? Every day we have less stockpile on earth and less reserves in the ground.

    You are going to ask a legitimate question – who is going to pay $600 for one ounce of silver? The answer is that the industrial user and new demand will come by the world jewelry stores who are going to start to sell silver as the main article because of big public demand.


    We have in the world hundreds of thousands of jewelry stores, who will need store inventory of at least 500 ounces per store to satisfy the coming public demand. In addition, we must have sufficient silver in the pipeline for wholesale distribution and inventory turnover by the jewelry stores and the manufacturers. All told we are talking about hundreds of millions of ounces annually in new demand.

    So you will come to the same conclusion like me that physical silver is the place to be. Some people will say it’s better on the COMEX where you have leverage. Maybe today, but in a shortage situation they can change the rules and you will have a paper contract that is worth zero instead of real silver.

    My father taught me that it is better to have one bird in hand than ten on the tree, and what is in your hand is the safest.

    We are coming to a new era when materials and commodities will do well and other assets will do less well. Lately, we are experiencing a rise in all commodity prices and in my opinion we are only in the beginning of rising prices. The only simple answer is that there is not enough materials in the world to satisfy demand for higher living standards by billions of Indians and Chinese.

    In the beginning, you will not feel too much the rising prices of commodities in finished goods. Why? The cost of a product is changing. In the past the cost of raw materials in a finished product was 20% and 80% was labor, profit, etc. In the future we are going to witness a change in the composition of costs in finished goods – 80% will be for raw materials and only 20% for the rest. Why? The labor in China costs only 5% of what labor costs in the US and Europe.

    Taking everything into consideration I can see silver as a commodity in short supply for years to come and prices higher and higher.

    I’m a crazy thinker and don’t copy me – only after you have made your homework.

    Congratulations, Mr. Butler on a fantastic job.



    Izzy Scores Again

    I thank Izzy for his kind words and especially for introducing a completely new concept, the potential coming jewelry demand for silver. While many are waiting for a replay of 1979-80, namely the dumping by households of unwanted silver objects in response to higher prices, Izzy (and I) see it different. Instead of dumping because of higher prices, we see the public actually wanting to acquire silver because of the higher prices. Please allow me to explain.

    First of all, this is not a new idea from Izzy, as I have heard him talk about it for almost 25 years. It’s just that I have never written about it before, although it always made sense to me.

    Let’s face it, the dumping scenario certainly hasn’t begun playing out yet, at all. Silver has more than tripled from its lows, and I have yet to see any evidence that even one teapot or fork has been melted because of the higher prices. You must remember that many commentators were predicting not that long ago that people would be running out of their houses clutching silver trays at 7, 8, or 9 dollars. Or that our ports would be backed up with boatloads of scrap silver from India. How much evidence do you see of that?

    If great numbers of people were selling silver household objects at current prices, I would tend to dismiss what Izzy predicts. (For the record, while he is the smartest man I have ever known, he is not perfect, and has been wrong on occasions. I say this primarily to keep his ego in check.) But I don’t see many selling silver objects, so what Izzy says is more credible.

    The key is human nature. Most of the time, people love to buy bargains in their daily lives, preferring to shop for what they need by price. But when it comes to investments and status items, price considerations often go out the window. At times, higher prices alone actually encourage more buying, witness stock and real estate bubbles, along with minor phenomenon like Beanie Babies or trading cards. This explains the mass mania that develops into bubbles, where people are sucked in only because of the continued expectation of higher prices.

    When silver prices truly explode, people will be drawn into investing in it because of the higher prices. But not just in an investment sense. What Izzy is saying is that there will be new status created about silver as a luxury item in jewelry and household objects. In my opinion, he’s right. Many people love to show off and impress others. There are many who wear a 5 or 10 thousand dollar watch because they want you to know that they can afford it. I’m not passing judgment, mind you, I’m just observing basic human nature.

    With higher silver prices, silver will take on a new respectability. It will no longer be the poor man’s gold. People will desire and wear silver jewelry with pride precisely because silver costs more. People will buy and use sterling silver flatware and display silver objects of art because it is made from an expensive material that is in the news.

    And it’s not just that people will buy silver jewelry and art objects because of higher prices, but that industry must gear up to manufacture and distribute and inventory in order to satisfy demand from the public for a new status symbol. This, as Izzy writes, could involve hundreds of millions of ounces of new silver demand at higher prices.

    As a silver analyst or an investor, the potential of new significant demand at higher prices is something to be considered and monitored. It’s something I know I will be studying. For that I thank Izzy, who’s as crazy as a fox.

    -- Posted 25 April, 2006

    Gold gains weak vis a vis Copper, Zinc and Lead.

    That gold has been so weak relative to cyclical metals tells us three important things. First, that gold's monetary premium has actually SHRUNK over the past year and is now as low as it was in Q4 2000. Second, that most people believe the commodity rally to have almost everything to do with real economic expansion (the China/India growth story in particular) and almost nothing to do with inflation. Third, that the best part of gold's bull market lies in the future because right now hardly anyone perceives a serious inflation problem.

    Silver and Gold Prices in the German Wiemar Republic

    Hyperinflation: Wiemar, Germany January 1919 to November 1923
    [Expressed in German Marks needed to buy an oz. of ag. or au.]

    Jan. 1919 Silver 12 Gold 170
    May. 1919 Silver 17 Gold 267
    Sept. 1919 Silver 31 Gold 499
    Jan. 1920 Silver 84 Gold 1,340
    May 1920 Silver 60 Gold 966
    Sept. 1921 Silver 80 Gold 2,175
    Jan. 1922 Silver 249 Gold 3,976
    May. 1922 Silver 375 Gold 6,012
    Sept. 1922 Silver 1899 Gold 30,381
    Jan. 1923 Silver 23,277 Gold 372,447
    May. 1923 Silver 44,397 Gold 710,355
    June 5, 1923 Silver 80,953 Gold 1,295,256
    July 3, 1923 Silver 207,239 Gold 3,315,831
    Aug. 7, 1923 Silver 4,273,874 Gold 68,382,000
    Sept. 4, 1923 Silver 16,839,937 Gold 269,429,000
    Oct. 2, 1923 Silver 414,484,000 Gold 6,631,749,000
    Oct. 9, 1923 Silver 1,554,309,000 Gold 24,868,950,000
    Oct. 16, 1923 Silver 5,319,567,000 Gold 84,969,072,000
    Oct. 23, 1923 Silver 7,253,460,000 Gold 1,160,552,662,000
    Oct. 30, 1923 Silver 8,419,200,000 Gold 1,347,070,000,000
    Nov. 5, 1923 Silver 54,375,000,000 Gold 8,700,000,000,000
    Nov. 13, 1923 Silver 108,750,000,000 Gold 17,400,000,000,000
    Nov. 30, 1923 Silver 543,750,000,000 Gold 87,000,000,000,000

    April 23, 2006

    Special Report: Australia soars on uranium bonanza

    The prospectors of the outback are coining it as nuclear comes back into fashion. By Paul Ham in Sydney
    AUSTRALIAN uranium miners come from tough stock. Bob Johnson’s great-great-great grandfather was a convict named Tom Askew, transported Down Under in 1819 for stealing 16 ducks to feed his starving family in Lincolnshire.
    “He was a church warden, desperately poor. He got himself a 15-year-old wife, they had six kids, and he ended up becoming a gold prospector,” said Johnson, who looked up his ancestor’s records while working for British Coal in the 1980s.

    Almost 200 years later, Askew’s descendant is also a prospector. But Johnson has joined a very different gold rush: he is looking not for gold but for yellow cake — mining speak for uranium ore. Australia has the world’s largest reserves: 40% of known deposits.

    And suddenly, the world desperately wants Australia’s yellowcake. China has just signed an agreement to buy thousands of tonnes, a deal said to be worth £40 billion. The metal will power the 28 new nuclear reactors it plans to build by 2020.

    The Australian deal was very sensitive. China has not signed the nuclear non-proliferation treaty, and the green lobby fears that enriched uranium may be used to make nuclear weapons. But the Australian government has waved aside those concerns. China, it said, has undertaken to use the uranium exclusively for nuclear power.

    China is in good company. India has announced a big investment in nuclear power, with plans to build 24 reactors. Europe, too, now sees it as a cleaner alternative to burning fossil fuels. Tony Blair’s scientific advisers have endorsed nuclear power. Sweden and France have used it for decades to electrify their countries, with no harmful results; and America has restarted its programme, with plans to build several reactors. Even some militant greens, horrified by the greenhouse gases produced by fossil fuels, have accepted the case for nuclear energy.

    The biggest beneficiaries will be Australian uranium miners, who have been extraordinarily quick to grasp this immense opportunity. Dozens of tiny uranium prospectors with little more than a drill bit between their teeth have floated on the Australian stock exchange in recent months.

    Their share prices have soared as “uranium-mania” has gripped local investors, amid analysts’ warnings of a bubble mentality. The believers point to the solid demand, chiefly Chinese, that underpins the industry — the price of uranium has risen from US$7 (£4) a pound two years ago to US$40 today. Some are steering clear, fearing a repeat of the dotcom fiasco: “The whole junior (explorer) situation has gone completely mad at the moment,” said Gavin Wendt, a resource analyst at Fat Prophets, an Australian share-tipping company.

    But the case for uranium is also underwritten by the imminent exhaustion of supplies of enriched uranium taken from obsolete, chiefly Russian, nuclear weapons, which have until recently met demand in Europe and America.

    The Australian federal government has stoked the euphoria, with explicit support from resources minister Ian Macfarlane, who said this month that local uranium miners could be shipping uranium to Asian countries within four years.

    Two of the world’s biggest mining companies, Australia’s BHP Billiton and Britain’s Rio Tinto, are best placed to exploit this opportunity. BHP Billiton owns the vast Olympic Dam mine in South Australia, which has the world’s largest untapped reserves. Rio Tinto, through its subsidiary Energy Resources Australia (ERA), is Australia’s largest exporter of uranium. It owns the Ranger and Jabiluka mines in the Northern Territory. Both companies’ cashflow has surged in recent years due to the global commodities boom.

    But investors are eyeing pure uranium stocks. They include smaller miners and explorers such as Marathon Resources, Summit Resources, Toro Energy, Paladin Resources and Alliance Resources, whose share prices have sizzled in recent weeks. Toro, which listed on March 23, has risen 504% to about $1.30. Paladin has soared 509% over the past year to about $5.40.

    Pure miners have tended to outdo explorers, because the real money is in extracting and selling the ore. But that hasn’t stopped dozens of minnows lining up to entice investors: Giralia is floating two in coming months: U308 and Gladiator Resources. Investors are queuing up; anything with uranium attached to it tends to be heavily oversubscribed.

    Uranium’s return to global favour has vindicated a few doughty Australian pioneers, mostly hard-bitten geologists, who for decades have stayed the course, dismissed the militant green hysteria about global irradiation, and are now set to become very rich indeed.

    Johnson is one of the hardiest of Australia’s uranium barons. The son of an iron-foundry worker, he is a tough, 58-year-old with degrees in geology and computer science. He invented the Maptek three-dimensional mine-planning software used by mining companies around the world. He is a founding director of Curnamona Energy, which has exploration rights over 4,300 square kilometres of the best uranium “paleo-valley sands” of South Australia.

    Curnamona has been a huge favourite with investors, partly because it uses new technology to detect uranium deposits. It was also well advanced. Floated in April 2005, money has since “just walked through the door”, said Johnson. “We saw this boom coming a couple of years ago. Everyone was negative. We realised there was a lot of uranium in the ground.”

    Curnamona, like Toro Energy, is an explorer — it has no assets, as Johnson readily admits. “We’re a speculative company, but we have a very methodical approach.”

    Like many uranium pioneers, he has little time for militant environmentalists. “The green movement has actually delayed the introduction of a safer alternative to coal. By stigmatising uranium, they have actually damaged the environment,” he said.

    Kate Hobbs is the only woman to head an Australian uranium mining company, Hindmarsh Resources, which floated this year to a thunderous reception. Yet she, too, cheerfully admits that her firm is purely an explorer, with no assets.

    Hindmarsh has a licence to explore 14,500 square kilometres in South Australia. The prospect has already attracted a buyer for the tiny company:

    Canada’s Mega Uranium will take control of Hindmarsh in the coming weeks.

    As a result, Hobbs, a 55-year-old mother of three, will be free to pursue her other mining interests. She has 1.5m share options in Hindmarsh, whose share price is at about $1.60 and rising. She speaks scornfully of the “great disservice” done to the environment by green groups that put the brakes on nuclear power.

    Greg Hall, a mining engineer, is a veteran of the uranium sector, with 27 years’ experience of extracting yellow cake and other minerals from the Australian outback.

    Hall, 47, has felt the sharp end of the environmental attack on uranium — he was mining manager of ERA’s Ranger and Jabiluka uranium mines in the Northern Territory at the height of the protests in the late 1990s and early 2000s. He now smiles at the idea of the green movement supporting nuclear power over fossil fuels.

    Between 1987 and 1992 he was responsible for the development and management of underground operations at Olympic Dam, situated in one of the earth’s most inhospitable regions. “When I first went there I lived in a caravan with my wife,” he said. “It was a bit of a shock for her — she worked in the fashion industry.”

    Last month Hall became managing director of the newly floated Toro Energy, an exploration spin-off from two mining companies, Oxiana Resources and Minotaur Exploration. Toro’s goal is to find uranium in an area covering 26,000 square kilometres in the centre of South Australia.

    Alan Eggers, founding director of Summit Resources, is equally upbeat about the prospects for uranium. A hard man of the mining sector, Eggers has suffered two setbacks in the wake of the collapse of commodities prices — the second time he was halfway through building a new home, with a wife and children.

    Summit is now largely seen as a “Queensland government play”, pinning its mining hopes in Mount Isa to the relaxation of the ban on uranium mining by the Australian Labor party. At present the Labor states of Western Australia and Queensland both ban uranium mining; but that is expected to change at the Labor party conference in April 2007. If so, Summit’s share price will hit the roof.

    Eggers holds a master’s degree with first-class honours in geology, and has staked his career on finding substantial uranium deposits in Mount Isa. Like Kalgoorlie, in Western Australia, Mount Isa is the gritty heartland of Australian mining, where generations of prospectors have made and lost their fortunes.

    In 1990 Eggers staked out an area near Mount Isa which he believed held substantial deposits of uranium; he invested A$5m in drilling. His persistence paid off: Summit announced in the mid-1990s the discovery of 35,000 tonnes of uranium, worth A$4 billion (£1.7 billion): “From my early days of pegging worthless ground we now have A$4 billion of metal,” he said.

    The Summit share price soared on the back of the discovery. Then it came crashing down when, in 1998, the new Queensland Labor government slapped a ban on uranium mining. That wiped A$70m off the company’s value, and infuriated shareholders. “I had a personal stake of $5m that went to nothing.”

    But in the past three years Summit’s price has clawed back, from 5c in 2003, to $1.65 this month, as investors cling to the hope that Summit will be given the green light.

    Eggers is worth millions of dollars on paper but, like most of Australia’s uranium barons, past experience has made him philosophical about whether he will realise it.


    April 20, 2006

    The Best little mining company in the world: Oxiana

    Listen and weep if you don't have exposure...


    by Dr. Kurt Richebächer

    In the early 2000s, Mr. Greenspan earned himself the honorable title of "serial bubble blower." Fearful of a painful burst of the equity bubble, he aided and abetted a bond bubble in order to boost the housing bubble. Measured by the mildest postwar recession, it appeared a smashing success. But taking measure of the following anemic recovery, and particularly the following dismal employment and income performance, into account, it was an utter policy failure.

    Any assessment has to further take into account that the government and Federal Reserve have supported this recovery with unprecedented fiscal and monetary lavishness. Tax cuts reduced government revenue by $870 billion, while the Federal Reserve slashed its fed funds rate to 1%, its lowest level since the Great Depression.

    The decisive failures of these policies have been in business fixed investment and in employment, both displaying a drastic shortfall in relation to reported GDP growth.

    Historical experience and economic theory leave no doubt that business fixed investment and employment play the crucial role in providing economic growth with the necessary traction to become self-sustaining. Even in its fifth year, the present U.S. economic recovery remains fully dependent on the housing bubble to drive the consumption bubble.

    The same, by the way, applies more or less to all Anglo-Saxon countries. Over the past few years, all of them have hung on the steroid of inflating house prices providing the collateral for outsized consumer borrowing-and-spending binges. Their further common features are large budget deficits (except Australia), very low savings and large trade deficits (except Canada).

    All of these economies have, in essence, become bubble economies. This means that monetary policy impacts the economy primarily through inflating asset prices, which in turn stimulate and facilitate credit-financed consumer spending.

    An important adverse feature of all asset and credit bubbles is that they inherently break an economy's pattern of growth. In all the English-speaking countries, the credit excesses have primarily inflated house prices. Using these as rising collateral, consumers have enjoyed unprecedented borrowing facilities to spend as never before in excess of their current income. What resulted were extremely unbalanced economies.

    Distorted demand over time invariably also distorts the economy's supply side. What has actually happened in all these countries is that domestic spending has increasingly outpaced domestic output. On the other hand, low domestic saving and capital investment keep a brake on output growth. The infallible result in all these countries, except Canada, is large, chronic trade deficits. Evidently, all this is structural, not cyclical.

    Essentially, the low savings, the low capital investment and the soaring trade deficits act as major drags on economic growth. Over the past few years, these drags have been offset by the rampant demand creation through the housing bubbles. But the trouble with this recipe is that it worsens the structural distortions and imbalances.

    Nevertheless, all asset and credit bubbles eventually run out of steam. Plainly, this is going on in all these bubble economies, the United States included. For us, the key question about whether there will be a hard or soft landing is the extent of the prior excesses. They are the worst in history.

    The consensus sees new momentum in the U.S. economy from strong retail sales. We focus on the inflation-adjusted monthly figures for overall consumer outlays and observe the opposite. There are sharp fluctuations in spending on durables, but with a distinct downward trend.

    As everybody knows, or ought to know, the strong monthly changes in consumer spending have their main cause in the sharp ups and downs of auto promotions. In the quarterly GDP reports, they are even annualized. But comparing the above figures, it strikes the eye that the recovery in the last three months was very much weaker than in the prior downturn.

    Any assessment of the U.S. economy's further course has to start with the recognition that the housing bubble is doomed, and in its wake the consumption bubble. Only the vigor of their slowdown is in question. Given this virtual certainty, the U.S. economy urgently needs an alternative source of growth.

    Unfortunately, there is but one possible alternative source, and that is sharply rising business fixed investment and exports. The consensus, apparently, takes a strong revival of business fixed investment for granted.

    Assessing the relevant figures, including profits, we take for granted that business investment and hiring are going to fail in the future even more than in the past. First of all, the record-sized fiscal and monetary stimulus of all times has been exhausted; second, business fixed investment in the United States, even though heavily bloated by hedonic pricing of computers, recently accounts for a record low of 11.5% of GDP, as against more than 70% for consumer spending; third, consumer demand is weakening; and fourth, nonresidential investment has slumped from double-digit growth rates in 2004 to just 2.6% in the fourth quarter of 2005, after 10% in the first half.

    Common arguments in favor of a comeback of capital investment are high business liquidity and high profits. Plainly, they have recovered from their lows, but growth has sharply slowed from 2004, when tax incentives gave a strong impetus.

    New orders for machinery are up over the year, but by far not enough to suggest a developing investment boom. Given for many years a preponderance of short-lived investments, it needs moreover large and ever-higher capital investments just to replace worn-out plant and equipment, as reflected in rising depreciations. There is every reason to assume that the rise in new orders of capital goods barely reflects rising depreciations.

    Most impressive is definitely the following chart reflecting the U.S. economy's profit performance. Since 2000, it is the greatest profit boom in the whole postwar period. Strikingly, it even compares most favorably with the profit performance during the "New Paradigm" boom years, from 1995-2000.

    Profits of the whole nonfinancial sector were $401 billion in 1995 and $413.4 billion in 2000. But from 2001 to late 2005, they have almost trebled, from $322 billion to $868.5 billion. Wall Street, of course, eagerly seizes them. For us, these numbers are so absurd as to require investigation.

    First of all, it was an extremely imbalanced profit boom reflecting an extremely imbalanced economic recovery. This recovery had literally nothing in common with the business cycle pattern of the past. Intrinsically, this shows in a radically divergent profit pattern.

    The profit boom of the last few years was narrowly centered in the category "other." The fact is that the housing bubble has been crucial not only in creating demand and GDP growth, but also in creating employment and profits.

    Most astonishing is, of course, the steep jump in profits from $534.2 billion in 2004 to $863.3 billion in 2005. Two phony causes are easily identified. One is a sharp decline in depreciations, from $804.3 billion to $668 billion. Depreciations are a business expense, of course. If a firm stops investment, it increases its profits. But this is hardly a desirable way toward higher profits. The second major cause of the sudden profit surge was a tax incentive that induced companies to repatriate a large amount of foreign profits into domestic profits.

    Leaving aside the grossly distorted profit figures for 2005, we focus on the period from 1997-2004, the former marking the U.S. economy's prior profit peak in the postwar period. Over these seven years, including the "New Paradigm" boom years, overall profits barely rose.

    The next thing to recognize is the tremendous differences in profit performance between sectors. For all sectors producing or moving goods, manufacturing and transportation, it has been seven years of profit disaster, and moreover of steady deterioration.

    In contrast, it has been seven years of profit bonanza for retail trade, wholesale trade and in particular for the branches captured under "Other." Here construction and real estate agents have been the main contributors.


    We would say that overall this is a dismal profit performance, definitely giving no reason for a booming stock market. Measured against nominal GDP, which has risen 41% between 1997-2004, it is a profit collapse.

    Very poor profits in the aggregate are the one big problem. An extremely lopsided pattern between sectors is the other. Manifestly, this lopsidedness in the profit pattern perfectly reflects the extraordinary lopsidedness of the U.S. economy's growth pattern during these years. The housing and consumption bubbles rule.

    It always amuses us when Mr. Greenspan and Mr. Bernanke criticize the government for its budget deficits. The irony is that the chronic deficit spending by the consumer, induced by their monetary looseness, is doing far greater structural damage to the economy.


    Dr. Kurt Richebächer

    for The Daily Reckoning

    Sell US Stocks

        What do I think of yesterday's stock-market bacchanalia?  I think it was and is an absolutely wonderful gift for people who have been dragging their feet in raising cash!  It's amazing, if not frightening, that any action of the nation's bumbling central bank can evoke such enthusiasm.
        On March 20th, I issued an unequivocal sell recommendation on stocks. If you wish, you may categorize the missive at hand as an unequivocal reaffirmation of the March 20th recommendation.
        After the close yesterday, I posted the following on the GRA website:
            "Can +195 points on the DJIA be a bearish development?  I think it can, and I will do my best overnight to explain why. I was hoping to use the time to catch up on some other research material, but something like today, occurring when it did and for the stated reasons, simply cannot pass without comment. The piece will be short, and I will try to have it out before the open tomorrow."  Here goes.
        Several months ago, I observed that two of the three US financial, markets -- debt and currency -- might very well have tougher sledding in a climate in which there was uncertainty about what the Fed was going to do on a forward basis, versus the one we've been in.  The climate we've been in has been one of relatively high certainty about the succession of rate hikes that commenced in June 2004.
        At the time, the above view was expressed in response to what was yet another attempt, albeit another premature attempt, by Wall Street bulls to promote into higher stock prices "the Fed is almost finished" mantra.  Yesterday, the bulls believe they finally got what they've been so arduously hoping for.  In the process, they may also wind up getting some fallout for which they had not been hoping nor will they especially enjoy.
       What they did want and get came in the minutes of the FOMC's March policy meeting, released yesterday afternoon.  Here's what put the Street into such an orgasmic mood:
            "In the Committee's discussion of monetary policy for the intermeeting period, all members favored raising the target federal funds rate 25 basis points to 4.75 percent at this meeting... Most members thought that the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy."
        The bullish camp placed inordinate emphasis on the above passage. Inordinate in that there was plenty of other material you easily could construe as being in conflict with it.  A major portion of the minutes appears in the excerpt at the conclusion of this missive, but I implore people to read the document in its entire context, which can be done at:
        Now that the Federal Reserve has wended its way through a succession of 15 rate increases over almost the last two years, I think there is a growing list of criticisms you can lodge against how this was handled and what it has accomplished.  Start with the fact the Federal Funds Rate never should have been taken to a trough of 1% to begin with.  How that came about and what took place afterwards can be laid squarely on the shoulders of Alan Greenspan and his practice of end-justifies-means leadership.  This variety of governance has now infected and corrupted, at least on an intellectual level, most of Washington.  In my view, it poses a huge threat to the well-being of the Republic!
        And has the 375 basis points in a higher Federal Funds Rate really accomplished much more than simply making everyone's cost of money a good deal more expensive?  Using money measures M2 and M3 as guides, we have more expensive money with no serious contraction in its availability:
                       Year-Over-Year Growth
             Money     ----------------------
            Measure    2/2006  2/2005  2/2004
               M2       4.7%    5.3%    4.5%
               M3       8.0%    5.0%    4.3%
        Of course, in the Greenspan/Bernanke New World Order of Fed governance, we are no longer allowed to have M3.  Do you think the above numbers might have anything to do with the real reason why?  (The "official" reasons provided by the Fed were moronic nonsense!)
        M3 is the broader, far better gauge of liquidity creation.  If you were the Fed and wanted to foster long-term trendline growth of around 3.5%, give or take, in real gross domestic product, there is no way you would be permitting M3 to grow at 8%.  Unless, of course, your motives were different than the ones publicly stated.  (A fibbing Fed? -- perish the thought!)
        And something else that bothers me -- a lot -- is that a variety of Federal Reserve communications strongly suggest that a majority of the FOMC's members are making monetary policy on the basis of actually believing the government's shoddy data, the inflation data in particular.
        Expanding and amplifying on this laundry list of criticisms is a task for another time.  What I want to emphasize here is that Federal Reserve monetary policy of years standing has created such a mess that an intended result in one area presents the major risk of unintended consequences in others.  And now that the central bank clearly is signaling its desire to throttle back on rate increases, the likely unintended consequences, at least in my opinion, will be seen in the behavior of the dollar's exchange-rate value and of open-market, longer-dated interest rates.  In my view, the behavior, on balance, will be of the negative variety.  (The possible policy shift that has been signaled is not likely to hurt the rise in prices of many commodities, though.) 
        As to the dollar and bond prices, the negative behavior already has begun!  Using the Dollar Index as a proxy, it is very close to making a multi-month low.  As to long-term interest rates, between February 9th and last Friday, the yield on the Treasury 4.50s of 2/15/2036 rose from 4.53% to 5.11%, representing a loss almost 8.9% of this issue's principal value.
        On the other hand, yesterday's release of FOMC minutes certainly gave the Fed what it wanted in stock prices.  And, yes, the Fed cares very, very much about the stock market.  Despite public protestations to the contrary, it certainly seizes on appropriate opportunities to "help" the market when possible. At a time stocks were in growing trouble, yesterday was one such opportunity, with advance billing in last week's Wall Street Journal article authored by Greg Ip.  (Leaking inside information is OK if you are a Fed official?)
        However, as it relates to the stock market and as the summary section of this missive opines, I think yesterday's rally, along with its probable follow-through into at least a portion of today if not a bit beyond, merely represents "an absolutely wonderful gift for people who have been dragging their feet in raising cash!"
          FOMC Minutes Excerpt
            "...Meeting participants saw both upside and downside risks to their outlook for expansion around the rate of growth of the economy's potential.  In the housing market, for instance, some downshift from the rapid price increases and strong activity of recent years seemed to be underway, but the magnitude of the adjustment and its effects on household spending were hard to predict.  Some participants cited stronger growth abroad and robust nonresidential investment spending as potentially contributing more to activity than expected.  It was also noted that an abrupt rise in long-term interest rates, reflecting, for example, a reversion of currently low term premiums to more typical levels, could weigh on both household and business spending.
            "Several participants noted that the labor market had continued to strengthen, with payrolls increasing at a solid pace.  The labor market was now showing some signs of tightness, consistent with a relatively low jobless rate.  There were anecdotal reports of shortages of skilled labor in a few sectors, such as health care, technology, and finance.  Still, participants expressed uncertainty about how much slack remained.  Pressures on unit labor costs appeared contained, despite rising health-care costs, amid continued robust productivity growth and still-moderate increases in several comprehensive measures of compensation growth.
            "In their discussion of prices, participants indicated that data over the intermeeting period, including measures of inflation expectations, suggested that underlying inflation was not in the process of moving higher.  Crude oil prices, though volatile, had not risen appreciably in recent months on balance, and a flattening in energy prices was beginning to damp headline inflation.  In addition, core consumer inflation was flat or even a bit lower by some measures. Some meeting participants expressed surprise at how little of the previous rise in energy prices appeared to have passed through into core inflation measures.  However, with energy prices remaining high, and prices of some other commodities continuing to rise, the risk of at least a temporary impact on core inflation remained a concern.
            "Participants noted that there were as yet few signs that any tightness in product and labor markets was adding to inflation pressures. To date, unit labor costs were not placing pressure on inflation, and high profit margins left firms a considerable buffer to absorb cost increases.  Moreover, actual and potential competition from abroad could be restraining cost and price pressures, though participants exchanged views on the extent to which conditions in foreign markets might be constraining prices domestically.  However, participants observed that there was a risk that continuing increases in resource utilization could add to inflationary pressures. Some participants held that core inflation and inflation expectations were already toward the upper end of the range that they viewed as consistent with price stability, making them particularly vigilant about upside risks to inflation, especially given how costly it might be to bring inflation expectations back down if they were to rise.
            "In the Committee's discussion of monetary policy for the intermeeting period, all members favored raising the target federal funds rate 25 basis points to 4.75 percent at this meeting.  The economy seemed to be on track to grow near a sustainable pace with core inflation remaining close to recent readings against a backdrop of financial conditions embodying an expectation of some tightening.  Since the available indicators showed that the economy could well be producing in the neighborhood of its sustainable potential and that aggregate demand remained strong, keeping rates unchanged would run an unacceptable risk of rising inflation.  Most members thought that the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy.  However, members also recognized that in current circumstances, checking upside risks to inflation was important to sustaining good economic performance. The need for further policy firming would be determined by the implications of incoming information for future activity and inflation.
            "With regard to the Committee's announcement to be released after the meeting, members expressed some difference in views about the appropriate level of detail to include in the statement.  In the end, they concurred that the statement should note that economic growth had rebounded in the current quarter but that it appeared likely to moderate to a more sustainable pace in coming quarters.  Policymakers agreed that the announcement should also highlight the favorable outlook for inflation and summarize their reasons for that assessment, but that it should reiterate that possible increases in resource utilization, along with elevated levels of commodity and energy prices, had the potential to add to inflation pressures.  Changes in the sentence on the balance of risks to the Committee's objectives were discussed.  Several members were concerned that market participants might not fully appreciate the extent to which future policy action will depend on incoming economic data, especially when an end to the tightening process seems likely to be near. Some members expressed concern that retention of the phrase 'some further policy firming may be needed to keep the risks... roughly in balance' could be misconstrued as suggesting that the Committee thought that several further tightening steps were likely to be necessary. Nonetheless, all concurred that the current risk assessment could be retained at this meeting.
            "...At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive:
            "'The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with increasing the federal funds rate to an average of around 4.75 percent.'
    The vote encompassed approval of the paragraph below for inclusion in the statement to be released shortly after the meeting:
            "'The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance.  In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.'
            "Votes for this action: Messrs. Bernanke and Geithner, Ms. Bies, Messrs. Guynn, Kohn, Kroszner, Lacker, and Olson, Ms. Pianalto, Mr. Warsh, and Ms.Yellen.
            "Vote against this action: None.
            "The meeting adjourned at 12:15 p.m."

    April 18, 2006

    More signs of rapid slowing in US housing

    Courtesy Gerard Minack
    Morgan Stanley
    Sydney Australia

    Housing's Margin Squeeze

    More evidence that US housing market has passed its peak. The National Association of Home Builders has reported that its monthly sentiment index fell to 50 in April, the lowest level (excluding the 11 September aftermath) since February 1996.

    Housing-related sentiment is now in the midst of a very sharp retrenchment. Home-buyer sentiment usually leads home-building sentiment, so there will presumably be further weakness in the NAHB index in the coming months. In turn, home-buyer sentiment is largely driven by affordability, although in this cycle sentiment has taken an unusual time to be depressed
    by falling affordability. The fact that affordability continues to deteriorate suggests that the
    improvement in home-buyer sentiment seen in April won't be sustained.

    Builders' sentiment is a reasonable lead indicator for new home starts. Exhibit 3 suggests that starts – which have pobably been boosted by unseasonably warm weather in the past few months – could be see a very sharp fall in coming months.

    The big issue, of course, is how much the turn in the housing market will affect consumer spending and saving. The bull and bear arguments on this issue are relatively well known and have been well rehearsed.

    A couple of points about this:

    First, discerning the effect of the housing market slowdown will be complicated in the near term by the payback for unsustainably strong consumer spending over the past few months. As our US Economist Dick Berner has recently outlined, the recent consumer rebound was driven in part
    by a fall in petrol prices and unusually warm winter weather. Dick expects a slowdown in coming months as the consumer faces another surge in petrol prices, higher interest rates and decelerating housing wealth. However, there will be offsets from the robust labour market, rising
    wages and non-wage income gains.

    Put another way: even if you are relatively optimistic about the outlook for the US consumer,
    there are good reasons to expect softer consumer spending in the near-term.

    The second point is to distinguish between the effect of the housing market slowdown on growth, and the effect on earnings. As I've discussed before, one of the remarkable features of the past few years has been the strength of consumer spending in the face of weak labour income. Whatever, the cause of this divergence, the simple fact is that this was a boon to corporate America: its largest single source of top-line growth (consumer spending) kept growing, even as its largest single cost (wages) were falling (as a share of GDP).

    The optimistic view looking forward is that consumer spending will be supported by rising wage payments. This suggests that the wedge in Exhibit 4 will start to close – that is, that corporate America will face a growing margin squeeze.

    As it is, I take a bearish view on the housing issue, but even if I'm wrong on that – and it looks like we'll find out relatively soon – I still think that the corporate America will face margin pressure heading into next year.

    Daily Forex Commentary

    By Jack Crooks


    She (Louise Yamada) believes the energy complex has entered a 20-year bull market cycle, which may have occasional corrections, but heads upwards nonetheless. "We think oil could go to $80 and I think over time we could see it go even higher," she says. - Louise Yamada, quoted in Barron's

    FX Trading
    Gold, oil, toil and $ trouble?

    Good TIC data and the dollar tanks on the news on Monday. From Reuters:

    Upbeat data showed more than enough capital flowed into the United States in February to offset its huge trade deficit, but that failed to stem the dollar's losses. "The sentiment is turning dollar negative - probably the biggest factor putting the dollar under pressure is the rise in oil prices and rise in gold prices," BNP Paribas senior currency strategist Ian Stannard said. "On oil - there's probably more of a risk aversion move taking place on the back of concerns with regards to supply which is a negative for the dollar," he added.
    Being of the skeptical nature as we are, we wanted to see for ourselves whether rising crude oil and gold prices were putting the dollar under pressure, so we went to the charts.

    And, sure enough, the dollar peaked when crude oil ebbed back in mid-November of last year. Gold didn't ebb much, but did put in a fresh high right around the same time mid-November after about two-months of consolidation. Is it coincidental or causal? Take a look:

    One question that comes to mind: where is the "inflation expectation cum interest rate hike cum yield differential" to support the dollar in this scenario? Maybe this all goes to the "growth thing".

    It's not a stretch to believe rising commodities prices and 15 Fed hikes might finally take a bite out of Mr US Consumer. From Jacqueline Doherty's The Trader column in Barron's this week:

    Unlike the past five years or so, liquidity is slowly draining out of the US via the Federal Reserve's 15 consecutive interest rate hikes. "Monetary policy acts with a big lag," says Ravi Malik, a senior portfolio manager at Froley Revy Investment Co. "You have to anticipate [its results] because by the time it shows up it's too late." Malik believes the results will include lower housing prices and eased consumer spending, which ultimately will slow the economy in the second half of the year from its current strength. Stocks may start to anticipate this sooner rather than later.

    Just as the US economy slows from its current red-hot pace, the Asian and European economies look set to pick up the slack and the emerging markets remain bulwarks of strength. Global markets seem to have sensed this shift. US financial assets - stocks, bonds and the dollar - are down 35% relative to the world's financial assets over the past three years, notes Bob Prince, co-chief investment officer at Bridgewater Associates.

    If this continues, it will become tougher for the US to attract the foreign investment on which it's so dependant. Then there's the potential unwinding of the yen carry trade, where investors borrow cheap money in Japan and invest it in higher-yielding markets like the US In February the Bank of Japan ended its policy of pumping excess funds into the economy and Japanese and last week the 10-year Japanese bond rose to 1.975%, the highest rate in just over five years.

    Wayne Nordberg, a senior director at Ingalls & Snyder, an investment-management firm, expects the dollar to decline 10%, which will be enough to make US assets unattractive versus those in the rest of the world. "Some time this year, in September or October, you'll see the S&P down 20%," he warns.
    Well now, isn't that just special! So back to where we started: Was the TIC data rear-view mirror stuff? Is it all downhill from here as far as US asset demand is concerned?

    We've seen the dollar doubters spew their view many times during its rally since late December 2004. Who knows, they may get it right soon or later. For now, the path of least resistance in the dollar is down. From a trading perspective, that's probably about the best we can do.

    Black Swan offers a subscription-based currency advisory service for forex and futures traders.

    Jack Crooks has actively traded in global equity, fixed income, commodity, and currency markets for more than 20 years. He is president of Black Swan Capital, a currency and commodities market advisory firm -

    McHugh’s Monday Market Briefing, April 17th 2006

    We received a third Hindenburg Omen Monday, April 17th, 2006.  This extends the risk period, as the clock continues to tick on the 73.8 percent probability that equities are about to fall over 5 percent from current levels over the next four months, on the 52 percent probability that equities will drop more than 8 percent over the next four months, on the 39 percent probability that equities will drop 10 to 14.9 percent over the next four months, and on the 26.1 percent probability that the stock market will crash — either fast or slow motion — over the next four months.  Only one out of 11.5 times does this signal fail to generate at least a 2 percent decline from current levels.  Most declines are well underway within a month of this signal.  This is only the 24th confirmed Hindenburg Omen in the past 21 years, and so far has a cluster of three signals. We got one almost exactly two years ago, on April 13th, 2004, which led to a 5.4 percent drop before the PPT stopped it cold with massive infusions of liquidity.  We got one on September 21st, 2005, which the PPT also stopped with huge chunks of M-3, that one coming along with the three devastating Hurricanes of 2005.  There has not been one major stock market decline over the past 21 years that was not first preceded by a confirmed Hindenburg Omen. Here we go again.

    As of April 177h, 2006, here are the cluster of signals (3 so far) that meet all five of the conditions required for a potential stock market crash warning:

    April 17th, 2006: There were 3,440 issues traded on the NYSE Monday, with 113 New 52 Week Highs and a rising 190 New 52 Week Lows.  The common number of new highs and lows is 113, which is 3.28 percent of total issues traded. The McClellan Oscillator came in at negative –163.12, and the 10 week NYSE Moving Average is rising. New Highs were not more than double new lows.

    April 10th, 2006:  The figures were 3,463 total issues traded on the NYSE Wednesday, with 86 New 52 Week Highs and 104 New 52 Week Lows.  The common number of new highs and lows is 86, which is 2.48 percent of total issues traded, above the minimum threshold of 2.2 percent.  The McClellan Oscillator came in at negative -135.71, and the 10 week NYSE was rising.  New highs were not more than double new lows.

    April 7th, 2006:  The figures were 3,435 total issues traded on the NYSE Wednesday, with 167 New 52 Week Highs and 103 New 52 Week Lows.  The common number of new highs and lows is 103, which is 3.00 percent of total issues traded, above the minimum threshold of 2.2 percent.  The McClellan Oscillator came in at negative -120.43, and the 10 week NYSE was rising.  New highs were not more than double new lows.

    As for the McClellan Oscillator, Monday’s change from Thursday’s was small, as was Thursday's from Wednesday’s. While not a guarantee, small changes in this indicator usually lead to large price moves within a few days.  The past three day’s readings were –163.12, -164.24, and –168.38. There are a couple of ways to label the decline since April 7th’s small degree wave 2 top: Either we have traced out five waves down — the first leg of a small wave three in process, which means we are due for a 150 point rally in the DJIA — or we are just starting a sub-degree wave three down inside the small wave three, which means we could see a couple hundred point decline over the next few days. So the EW labeling is not directionally helpful short-term. This afternoon’s out-of-the-blue rally had strong volume behind it, which suggests a possible small rally could follow.  The PPT may be getting nervous as the Dow Industrials near 11,000. In fact, CBOE put options are on the rise, hitting 105 percent of their 10 day average Monday, and the PPT Intervention Risk indicator rose a bit to minus -5.23. Any short-covering rally here is not likely to lead to a significant multi-week advance, not until our PPT indicator rises toward positive18.00.
    The Dow Industrials lost 63.87 points Monday, closing at 11,073.78.  NYSE volume was light at 85 percent of its 10 day average. Downside volume was unimpressive at 56 percent, and declining issues were a mild 55 percent. S&P 500 downside points were only 49 percent. While these figures suggest Monday was a mild down day, NYSE New 52 week Lows hit their highest level all year, and were the most since November 16th, 2005.  Our studies of New Lows indicates that we are not approaching a multi-month bottom until they rise above 300.  The higher they go, they more long-lasting the bottom. The point is, we are not near a multi-month or even multi-week sustainable bottom here.

    S&P 500 Demand Power fell 1 point and the absence of buyers was responsible for the mild decline as Supply Pressure was Flat at 398.  Selling has been slow to develop, and until it does, any decline should be mild.  Our Secondary Trend Indicator fell 3 points to minus –7, and is still within the neutral zone of minus -30 to plus +30.

    The Blue Chip indices’ key trend-finder indicators remain on “sell” signals Monday.  The DJIA 14 day Stochastic Fast measure fell to 30.00, below the Slow reading of 32.00.  It’s “sell” from April 7th remains intact.  The S&P 500/DJIA Purchasing Power Indicator fell to a new low for the decline since April 11th, at 87.59, but the decline was small and on a rounded decimal basis, this indicator was flat Monday. The NYSE Advance/Decline Line Indicator fell to minus –383, and its “sell” from April 7th remains in force.
    The Russell 2000 small caps index fell 1.64 points to 749.47.  Volume was light at 91 percent of its 10 day average, with downside volume a mild 56 percent and declining issues at 62 percent. The Russell 2000 Purchasing Power Indicator remains on its “sell” from April 10th at 106.20, and would need to rise above 109.95 to trigger a new “buy.”  The RUT’s 10 day average Advance/Decline Line Indicator dropped to minus –288, and its “sell” signal from April 10th remains in play.

    The NASDAQ 100 appeared to have a bad day on its surface, and the point loss was sharp, however our measure of underlying Demand Power and Supply Pressure indicated that both buying and selling was lackluster. Demand Power fell 1 point to 397, while Supply Pressure rose 1 point to 402. NDX volume was 96 percent of its 10 day average, with downside volume a strong 85 percent, declining issues at 77 percent, and declining points at 78 percent. What showed up to trade was primarily to the downside, we just didn't see a huge underlying push to dump stocks.

    Both NASDAQ 100 key trend-finder indicators remain on “sell” signals Monday evening.  The NDX 14 day Stochastic Fast measure comes in at 33.00, below the Slow at 46.60, and its “sell” from April 10th remains in force.  The Stochastic measures the momentum of breadth. The NDX Purchasing Power Indicator comes in at 110.82, down 3 points, to a new low for the recent decline.  It’s “sell” from April 11th remains intact. The Purchasing Power Indicator measures the net effects of supply and demand, with our Demand Power and Supply Pressure indicators a breakdown of the separate components of the PPI.

    Gold had another huge up day.  Gold is telling us inflation is out of control, is telling us the government inflation statistics are lies, is telling us money supply is rising through the roof, despite the Fed hiding the M-3 figures. The HUI Amex Gold Bugs Index rose 13.79 points, or 4.0 percent Monday, to a new high at 362.54.  Volume was strong at 109 percent of its 10 day average, with all issues advancing.  Both key trend-finder indicators remain on “buy” signals Monday evening, the HUI 30 day Stochastic Fast measure rising to 100.00, above the Slow at 95.06.  Its “buy” from March 24th remains intact.  In fact, study the HUI Purchasing Power Indicator chart from issue no. 308 last Wednesday, and take notice of the incredible correlation of moves.  This indicator is a huge money maker for those trading the HUI, or a proxy such as Newmont Mining (NEM). It does a marvelous job siphoning out any “noise” and identifying the multi-week trend. Since it generated a “buy” on March 24th, the HUI is up 48 points, or 15.3 percent. This one indicator alone is worth ten times the cost of a subscription to our newsletter. The HUI Purchasing Power Indicator rose to a new high at 235.02, and its “buy” from April 14th remains intact.  It is more sensitive to smaller corrections within the primary trend.

    Gold the metal rose a whopping $16.80 Monday, to close solidly above $600 an ounce at $613.31.  We have been on record suggesting that Gold could be headed for $800 an ounce sooner than many folks anticipate. Silver also had a bust out day, rising almost vertically to $13.50, up $0.60 on the day. Oil (WTIC) rose $1.16 a barrel to $71.98 Monday. When inflation assets rise like this, equities are in grave danger. The Dollar fell one percent, down 0.89 to 88.66.  Bonds rose a hair to 107^13.

    Bottom Line:  We are sitting in treacherous equity market waters here. Cash is good. However, don’t be surprised by a short-covering rally attempt over the next few days as a small corrective move up is possible. But perma-bull buying here is serving the useful purpose of taking stocks off the hands of the wise at or near a major market top. Caution is warranted.
                Best regards,

                 Robert McHugh, Ph.D.



    Commodities, China
    & Gold
    Interviewed by Peter Schiff, President and Chief Global Strategist

    There was a great division between me and many other analysts.
    I can remember some of the TV interviews I gave in the late 90s.
    The moderators were giggling and drooling over the latest success, just when I was saying buy commodities and
    buy China. By the end of the commodity boom, in 10 or 15
    years, everybody is going to be giggling and drooling on the
    financial TV shows, and saying “buy commodities.” Of course, if
    I am on the shows at that time, I’ll be saying it’s time to sell
    commodities. And they will would be giggling and drooling,
    saying, “Oh you old idiot, don’t you know commodities always go
    up. Don’t you know, this time things are different.” Of course,
    things will not be different. But in 2018 or so, everybody’s going
    to be shrieking about commodities. There will be shortages. And
    there well may be wars over commodities, between now and
    Exclusive Interview with Jim Rogers:
    Commodities, China & Gold
    Peter Schiff:
    In the late 1990's, most investors saw the brave new world of
    tech as the way to instant riches. You, instead, were focusing on
    commodities. Tech has collapsed, and commodities are booming.
    You were right, of course.
    Jim Rogers:
    In addition, one has to consider this: that the demise of the
    dollar is part of this problem. But overall, the commodity
    situation is not simple. It’s very complex, with many factors
    contributing to the world wide shortages. But, in the final
    analysis, there are shortages of commodities, and the shortages
    are getting worse.
    Peter Schiff:
    You always stressed the overwhelming importance of potentially
    explosive demand from China. You’ve also noted that the
    authorities there would periodically try to rein in runaway growth
    to keep things under control. It now increasingly looks like the
    overriding concern of the Chinese is in fact to keep the economy
    growing at all costs, in order to keep employment growing. What
    are your thoughts now on that score?
    Jim Rogers:
    Well, they’re still trying to keep the economy growing. But the
    main thing the Chinese ware doing is trying to avoid economic
    bubbles. For example, they have been trying to cut back on real
    estate speculation in China. They have been successful, at least
    to some extent, in real estate. Prices have weakened in many
    parts of China and some speculators have gotten into trouble.
    I’ve always said that the main part of the Chinese economy will
    continue to do well, even though speculators in Shanghai go
    broke. If you’re out there building infra-structure, or in the coal
    business or agriculture, or in many other areas of the Chinese
    economy, you will do well. Yes China is interested in increasing
    employment, and keeping the economy strong. But
    simultaneously, they are trying to keep things from overheating.
    The right sectors in China will continue to be very buoyant.
    Peter Schiff:
    Let’s talk specifically about commodities and energy. To what
    extant can technology and alternative fuels rescue us from the
    commodity and energy shortage? I’m thinking about
    nanotechnology, nuclear power, gas hydrogenation to provide
    clean-burning coal, solar energy, etc.
    Jim Rogers
    Yes, technology can help, of course. But all these new
    innovations take enormous amounts of time to be developed and
    enter the marketplace. Eventually this commodity bull market
    (which includes energy) will come to an end, Peter. If history is
    any guide, some time between 2014 and 2022, the bull market in
    commodities will come to an end. That’s based on history, that
    is not a prediction. The average commodity bull market has
    lasted about eighteen years. Something eventually causes it to
    come to an end.
    Let’s look at alternative energy sources, for example. If we all
    decided today we wanted to have wind power, we couldn’t. You
    can’t get windmills. You can’t change the world that quickly.
    And solar is not competitive right now. Eventually it might be.
    But if we all decided today, Peter, to have solar panels on our
    roofs, you can’t get them. You can’t change that quickly.
    Nuclear of course, is making a come-back. But it takes years to
    build a nuclear power plant. And remember in the mean time the
    old plants are all becoming obsolete. The power plants in
    America are thirty to forty years old. So by the time a new one
    comes on stream, those plants will be forty or fifty years old.
    There has been massive underinvestment in things like mining,
    oil exploration, and agricultural development. Agricultural land is
    left fallow. Plantations give way to real estate development.
    Renewing commodity infrastructure, finding new sources of
    commodities, new oil fields, developing new plantations takes
    lots of time…years in many cases. Only one new lead mine
    opened in the world in twenty-five years!
    Technological changes are coming, of course. But it just takes a
    long, long time. We don’t reverse these things quickly. Almost
    every oil country in the world has got declining reserves. All the
    major oil companies are quite open about the fact that they are
    not replacing their reserves, not by discoveries anyway or
    development. Maybe they’re buying other oil companies. But
    that’s not increasing the amount of oil in the world. There’s
    going to be something to cause this bull market to come to an
    end, someday, but the emphasis should be on someday, because
    someday is a long way, away.
    Peter Schiff:
    There is still a lot of money to be made by investing in these
    commodities. Which brings me to my next question: Would you
    comment about the differences between renewable commodities,
    like trees, agricultural products, solar power, on the one hand,
    and depleting categories on the other?
    Jim Rogers:
    If I were looking at commodities these days, I would look at
    things like agriculture. Because agriculture, for the most part,
    has moved up less than metals or anything. You know, cotton is
    still 50% below its all time high. Soy beans are something like
    60% from the all time high. There are fundamental changes
    taking place. The amount of acres devoted to wheat around the
    world has been declining for 30 years. The world has consumed
    more corn than it has produced for five years in a row. That’s
    never happened in recorded history. The worldwide inventories
    are low, on a historic basis. And that’s without a drought. We
    haven’t had a major drought anywhere in the world for some
    time. We used to have them all the time. Will we never have a
    drought again? I doubt it.
    And, by the way, increasing agricultural production is not as
    simple as just planting as few seeds. Take coffee, for instance. It
    takes five years for a coffee tree to mature. If you and decided
    to go into the coffee business today, it would take our plantation
    a long time to come on stream and mature. . You don’t snap your
    finger, and magically fruit tress cotton plants, soy bean bushes
    appear. And in the meantime, the price of everything those
    farmers use is skyrocketing: natural gas, diesel fuel, labor,
    insurance, etc. Everything they use to produce their products it is
    also going up in price. So it takes a high price for them to start
    bringing on marginal land to produce new and more products.
    Peter Schiff:
    Possessing valuable commodities is one thing, but that means
    little if they are located in geographically unsafe areas of the
    world. Have you tended to concentrate your investments in the
    U.S., Australia, Canada, New Zealand, for example? Are there
    any other geographic areas you like?
    Jim Rogers:
    Well, the countries that have raw materials are obviously going
    to be a better place than ones that don’t – all other things being
    equal. But remember those words, all other things being equal. COMMODITIES, CHINA & GOLD 6 - EXCLUSIVE INTERVIEW WITH JIM ROGERS
    The Congo has huge amounts of raw materials. But I am not
    investing in the Congo. I don’t think its going to be a good place
    for my money. I prefer areas with lower geopolitical risk. Canada
    has, perhaps, the soundest currency in the world right now, and
    a strong economy. If you want to invest in North America, the
    best place to invest is Canada, whether it’s directly in the
    economy, the stock market or the currency. That’s the sort of
    place you want to be focusing on in times like these.
    Peter Schiff:
    We have a lot of our clients invested Canada. It amazes me that
    the Canadian fundamentals are now so good. Don’t forget,
    Canada used to be leftist, and had so many problems. Now it is a
    far safer place to invest that the United States.
    Jim Rogers:
    One of the reasons for their problems was that commodities were
    cheap, and Canada is a commodity-based economy. So, of
    course they had huge problems. So did other countries whose
    economies were driven by commodities. Partly because of those
    problems, it forced some of the Canadian politicians to wake up.
    They have now had a balanced budget for, I think, eight years in
    a row. They have had a trade surplus for ten years in a row. And
    now of course, they have the bull market in commodities at their
    back. Because of the great long term commodity outlook, as well
    as some other reasons, Canada offers better investment
    opportunities the U.S.
    Peter Schiff:
    When it comes to investing in these commodity driven countries,
    you don’t necessarily have to be invested in just the pure
    commodity plays. Just about any investment in a commodityoriented
    country would benefit from the overall growth of that
    country’s economy. And it is probable that the country’s currency
    Jim Rogers:
    Well, there is no question that retailers in Canada or Australia or
    Brazil are going to be better than in other countries. Anybody in
    a country which has an economy that is expanding is better off.
    Peter Schiff;
    Of course, all the earnings would be more valuable, from an
    American perspective. The earnings are in a currency that is
    appreciating relative to our own.
    Jim Rogers:
    Exactly. By the way, some of the countries like Brazil, Peru,
    even Argentina, will be much better off than they were in the
    past. However, when the commodity bull market comes to an
    end in fifteen years or twenty years I wouldn’t bet that they
    don’t go back into the same old problems. But that’s a long way
    Peter Schiff:
    How do you deal with the cyclical concern that after 14 interest
    rate increases the U.S. economy may slow down later in 2006
    and into 2007. Would that have a significant downward effect on
    commodity prices in the intermediate-term?
    Jim Rogers:
    I expect the U.S. to have a decline in the economy this year and
    into next year. I don’t know how long the decline will last. We’ll
    probably have a recession. It is probably going to have an effect
    on some commodities, yes. But I would remind you, that there is
    always correction in every bull market.
    Peter Schiff:
    And I think from the American perspective, one of the big
    differences between this commodity cycle and the cycle in the
    seventies, is that then America was the world’s leading industrial
    economy: we manufactured everything. We had all the COMMODITIES, CHINA & GOLD 8 - EXCLUSIVE INTERVIEW WITH JIM ROGERS
    machines, we had a trade surplus, and we had a current account
    surplus. Now it’s the other way around. It’s Asia that is saving
    and manufacturing and producing. They’ve got the factories and
    the productivity and we’ve got no savings, a huge current
    account and a huge trade deficit and all we do is run around and
    service one another.
    Jim Rogers:
    We were an incredible nation in the seventies. We are now the
    largest debtor nation the world has ever seen. There’s another
    big difference. I don’t want you to think that there won’t be
    corrections, or there won’t be consolidation. But for the most
    part, it’s a secular bull market in commodities.
    Peter Schiff:
    Unfortunately, I think that Americans will feel the brunt of this
    commodity bull market on their standard of living much more so
    than they did in the 1970’s because of the underlying changes in
    the economy.
    Jim Rogers:
    And the currency situation makes things much worse in this bull
    market than it was in the seventies.
    Peter Schiff:
    Let me know if you agree with this observation that I have made.
    We are now seeing financial assets and commodities rising at the
    same time. I believe that it is not that everything is going up, but
    that currencies are going down. So even stocks and other
    financial assets appear to be rising, but what is really happening
    is that financial assets are losing value relative to commodities.
    Jim Rogers:
    Yes, there is no question that there is no soundness to paper
    currency anymore. There are some currencies that are sounder
    than others, but essentially there are virtually no sound paper
    Peter Schiff:
    Which brings me to my next question: your outlook on gold?
    You've always viewed gold differently from other commodities.
    Jim Rogers:
    The supply and demand dynamics for gold have been different
    from other commodities for two or three decades. I own some
    gold, but I’ve always tried to explain to people that they would
    make more money in other commodities than they would in gold,
    because of the supply and demand dynamics. Now that has been
    true for the last decade or so. For lead, in fact, you would have
    made a lot more money over the past thirty years, the past
    twenty years, the past ten years, than you would have in gold.
    But if you own gold, I still don’t expect to make as much in gold
    as I would in things like corn and soy beans. But I own it.
    Peter Schiff:
    For a while the Goldman Sachs Raw Materials ETF was the only
    commodity index fund available in that form. It has just been
    joined by a cousin, the Deutsche Bank Commodity index fund.
    More may join the party. Your thoughts?
    Jim Rogers:
    Now Merrill Lynch has a tracker fund based on my commodity
    index, The Rogers Commodity Index. The Goldman ETF has very
    serious flaws, as far as I am concerned. The Merrill Lynch Fund
    is a wonderful product, because it is the only financial instrument
    of which I am aware where you can get 100% long term capital
    gains after six months.
    Peter Schiff:
    Do you expect to see many more of these types of commodity
    Jim Rogers:
    Of course. Right now there are over 7,000 mutual funds in which
    the public can invest…there are fewer than 10 commodity funds.
    By he end of the commodity bull market there will many more
    commodity funds and products.
    Peter Schiff:
    Every good investment manager constantly asks him or herself:
    "what would cause me to change my mind?" What would cause
    you to change your mind on commodities?
    Jim Rogers
    If someone discovers a gigantic natural gas field in Spokane or
    Chicago, or the largest oil field in the world in the middle of the
    Atlantic, or a huge copper mine discovered in Tokyo, with easily
    accessible product, of course it will have an effect. If there is a
    dramatic increase in supply in a politically stable area, it will have
    an impact on prices. But even if dramatic new supplies are found,
    it takes years to bring them on stream.
    And likewise, if something dramatic happens to demand, it will
    have an effect on prices. But remember, even in bad economic
    times like the thirties and forties, commodities did a whole lot
    better than stocks and bonds – much, much better. And that
    was because the supply/demand equation was out of balance,
    like it is now. But, if we had some kind of devastation, of course,
    everything is going to suffer, at least for a while. But with that
    said, commodities from 1931 to 1953 were far, far, far and away
    a better place to be than stocks and bonds.
    Peter Schiff:
    And they certainly were a better place to be, in a recent bear
    market period, which was in the 1970’s.
    Jim Rogers:
    Peter Schiff:
    Basically then in either under a highly inflationary period or a
    recessionary period, you were better off holding commodities,
    raw material, rather than financial assets.
    Jim Rogers:
    The basic situation is when supply and demand are out of whack
    you are going to have a bull market. Whether it is inflation,
    recession, or whatever, if supply and demand are out of whack,
    prices will change. And they are seriously out of whack now and
    getting worse
    Peter Schiff:
    If you look at supply and demand, the one thing that we know is
    going to be in abundant supply is the U.S. dollar. And eventually
    the demand for the greenback is going to drop significantly.
    Because you cannot have huge demand for a currency that is so
    aggressively created. You need scarcity. So the fall in the dollar
    can be the biggest factor, from an American point of view,
    propelling the U.S. dollar price of commodities higher.
    Jim Rogers:
    That’s the icing on the cake. You can have a decline in the dollar
    and you wouldn’t necessarily have a bull market in commodities.
    Supply and demand are still the most important factors. We now
    we have supply and demand completely out of whack. These
    other things, like the dollar and war, are all icing on the cake.
    But the thing that has the biggest effect on commodity prices is
    this gigantic supply/demand imbalance. And it is definitely worse.
    Peter Schiff:
    And it comes from years and years of neglect and underinvestment
    in that area. And it is not going to change overnight.
    Well thank you very much Jim. It is always a pleasure talking
    with you, and I really appreciate the time you spent with us. I
    am sure our newsletter readers will appreciate your insights.

    April 17, 2006

    A Look at the Recent Horrors at the Longer End of the Treasury Curve

    by Douglas R. Gillespie

    On Monday, March 20th, I issued a strong, unequivocal sell recommendation on the stock market. As I explained at the time, the decision to do this was predicated on an amalgam of fundamental, technical and gut considerations. Very prominent among these was my growing bearishness on longer-dated, open-market interest rates. In turn, my bond-market views were heavily influenced by rapidly growing concerns of both a fundamental and technical nature.

    On balance, I am slightly ahead on my sell-stocks recommendation, and considering it was made going on a month ago, I feel pretty good about it. On a net basis, stocks have done little but back and fill, which means that thus far, the recommendation has worked out the way I would have hoped. To wit: people have had time to react to it in an orderly setting, without having been hurt in the process. In this regard, "hurt" means having prices move strongly against them to the upside.

    Incidentally, I would not have done this unless I thought equity prices had at least a 5% to 10% downside vulnerability from the levels prevailing at the time, with emphasis here placed on the "at least" part!

    But my pessimism on the stock market is not the subject at hand. Instead, it is what has happened to bond prices that I want to discuss.

    With the great interest-rate "conundrum" that Greenspan had been pondering for a long time, it occurred to me that many people might have forgotten the magnitude of negative price volatility of which longer-dated, fixed-rate debt obligations were capable under adverse circumstances. Therefore, on March 31st, I penned a short missive addressing the subject of bond-market total return.

    (As an aside, Greenspan and his highly, highly questionable monetary policy of recent years created the conundrum over which he so often mused. Uncle Al, Wall Street's pal, knew it, too! But as the saying goes, "timing is everything," and Greenspan got out just in time, before all hell broke loose at the longer end of the Treasury yield curve. To put icing on the cake, at least over the short run, Greenspan can blame Bernanke for what has happened. This is while Uncle Al sets out to establish his legacy, concurrently pimping huge speaking fees and a multi-million-dollar book deal!)

    When I wrote my late-March piece, the 10-year note the Treasury had auctioned as part of its February refunding operation already had sunk to a negative total return of 1.89% (comprised of an income accrual of +0.54%, netted against a loss in principal value of 2.43%.) In a world of highly leveraged hedge-fund carry trades and the like, this was pretty ugly, as well as potentially dangerous. Dangerous in the sense that large sell-offs over a short period of time ran a risk of margin calls, thereby exacerbating the sell-off.

    And while I cannot prove this is what has taken place, the additional large net decline over the last few days suggests it could have. For instance, the 10-year note (Treasury 4.50s of 2/15/2016) finished yesterday at a yield of 5.05%, a whopping 51 basis points higher than the 4.54% yield at which it was auctioned not very long ago. As for the 30-year bond auctioned in February (Treasury 4.50s of 2/15/2036), it ended yesterday at 5.11%, 58 basis points higher in yield than its February auction price. And because of the 30-year bond's much longer duration, its price has really been spanked in the open market.

    To put this in context through yesterday, the 10-year note's total return from the time it was paid for in mid-February through yesterday's close was minus 3.21% (income accrual of +72 basis points, netted against a loss in principal of 3.93%). As for the 30-year bond, its total return was a stunning minus 8.15% (income accrual of 72 basis points, netted against a loss of principal of 8.87%... Yes, you read correctly, that is minus 8.87%!).

    Is the bloodletting over? I rather doubt it, but that, too, is a discussion for a different time and place. In the meantime, the following link will take readers to my March 31st missive that helps supplement the points made here. That piece was entitled, "The Potential Horror of Fixed-Income Total Return" and can be read by following this link:

    April 16, 2006

    Bull And Bear Zoology

    by Nassim Nicholas Taleb

    The general press floods us with concepts like bullish and bearish which refer to the effect of higher (bullish) or lower (bearish) prices in the financial markets. But also we hear people saying “I am bullish on Johnny” or “I am bearish on that guy Nassim in the back who seems incomprehensible to me,” to denote the belief in the likelihood of someone’s rise in life.

    I have to say that bullish or bearish are often hollow words with no application in a world of randomness—particularly if such a world, like ours, presents asymmetric outcomes.

    When I was in the employment of the New York office of a large investment house, I was subjected on occasions to the harrying weekly “discussion meeting,” which gathered most professionals of the New York trading room.

    I do not conceal that I was not fond of such gatherings, and not only because they cut into my gym time. While the meetings included traders, that is, people who are judged on their numerical performance, it was mostly a forum for salespeople (people capable of charming customers), and the category of entertainers called Wall Street “economists” or “strategists,” who make pronouncements on the fate of the markets, but do not engage in any form of risk taking, thus having their success dependent on rhetoric rather than actually testable facts.

    During the discussion, people were supposed to present their opinions on the state of the world. To me, the meeting was pure intellectual pollution. Everyone had a story, a theory, and insights that they wanted others to share. I resent the person who, without having done much homework in libraries, thinks that he is onto something rather original and insightful on a given subject matter (and I respect people with scientific minds, like my friend Stan Jonas, who feel compelled to spend their nights reading wholesale on a subject matter, trying to figure out what was done on the subject by others before emitting an opinion—would the reader listen to the opinion of a doctor who does not read medical papers?).

    I have to confess that my optimal strategy (to soothe my boredom and allergy to confident platitudes) was to speak as much as I could, while totally avoiding listening to other people’s replies by trying to solve equations in my head. Speaking too much would help me clarify my mind, and, with a little bit of luck, I would not be “invited” back (that is, forced to attend) the following week.

    I was once asked in one of those meetings to express my views on the stock market. I stated, not without a modicum of pomp, that I believed that the market would go slightly up over the next week with a high probability. How high? “About 70%.”

    Clearly, that was a very strong opinion. But then someone interjected, “But, Nassim, you just boasted being short a very large quantity of S&P 500 futures, making a bet that the market would go down. What made you change your mind?”

    “I did not change my mind! I have a lot of faith in my bet! [Audience laughing.] As a matter of fact I now feel like selling even more!”

    The other employees in the room seemed utterly confused. “Are you bullish or are you bearish?” I was asked by the strategist.

    I replied that I could not understand the words bullish and bearish outside of their purely zoological consideration. My opinion was that the market was more likely to go up (“I would be bullish”), but that it was preferable to short it (“I would be bearish”), because, in the event of its going down, it could go down a lot. Suddenly, the few traders in the room understood my opinion and started voicing similar opinions. And I was not forced to come back to the following discussion.

    Let us assume that the reader shared my opinion, that the market over the next week had a 70% probability of going up and 30% probability of going down. However, let us say that it would go up by 1% on average, while it could go down by an average of 10%.

    What would the reader do? Is the reader bullish or bearish?

    Event Probability Outcome Expectation
    Market goes up 70% Up 1% 0.7
    Market goes down 30% Down  10% -3.00
        Total -2.3

    Accordingly, bullish or bearish are terms used by people who do not engage in practicing uncertainty, like the television commentators, or those who have no experience in handling risk. Alas, investors and businesses are not paid in probabilities; they are paid in dollars. Accordingly, it is not how likely an event is to happen that matters, it is how much is made when it happens that should be the consideration. How frequent the profit is irrelevant; it is the magnitude of the outcome that counts.

    It is a pure accounting fact that, aside from the commentators, very few people take home a check linked to how often they are right or wrong. What they get is a profit or loss. As to the commentators, their success is linked to how often they are right or wrong. This category includes the “chief strategists” of major investment banks the public can see on TV, who are nothing better than entertainers.

    They are famous, seem reasoned in their speech, plow you with numbers, but, functionally, they are there to entertain—for their predictions to have any validity they would need a statistical testing framework. Their frame is not the result of some elaborate test but rather the result of their presentation skills.

    Good trading,

    Nassim Nicholas Taleb

    From Fooled By Randomness, Copyright © 2004 by Nassim Nicholas Taleb. Reprinted by arrangement with Random House.


    Edited By Jeff Greenblatt
    April 13-16, 2006
    Since Passover and Easter happen to fall in the same period, happy holidays to all!
    This isn't reaching you on Thursday night, but then again, there's still plenty of time before the markets open on Monday, right?
    Since there are so many new readers, an explanation of my methodology is in order.  As well, this is a good time for a little advance promotion for the ebook. Those of you who have been here over the course of the past 3 years, this isn't the same dissertation you've read before.....There is a new shift in the methodology used here.
    About 5 years ago, I started having my forecasts posted in Club EWI, the Prechter chatroom.  A couple of them worked out very nicely and I was hooked. They also took notice but that's a story for another day.  When they started calling the top of the week back in 2003, I already decided to create a short term update of my own without the agenda of having to live up to a Grand Supercycle Bear Market crash.  I'm not trying to win the Nobel Peace Prize.
    I am at heart an Elliottician but those of you who are regular readers know I've been influenced along the way by people like Nison, Merriman, Gann, Wilder, Dorsey, Kaltbaum, Bill Williams, Leibovit and Mark Douglas. You have astrology, candlesticks, momentum, Delta, PnF,  volume, chaos theory, sentiment and psychology. Folks, you can never have enough tools in the shed in this business.
    Some of you are familiar with the work of Jim Sloman and Al Larson who are doing groundbreaking research in the area of how gravity and the tides affect financial markets. There is also Erman who has a formula of how the golden spiral affects price movements which differentiates his work from Elliott.  Over a half century ago Bradley figured out a complex formula for computing how the gravitational pull of the various planets affects price movements here on Earth.  Of course, the master of them all was Gann, who was able to translate most of the above in a practical way and apply it to financial markets better than anyone ever has.  Truth is most of these methods are extremely difficult for an individual to master.
    What is being done here is I've uncovered a methodology that doesn't take YEARS TO LEARN that is an improvement/enhancement of existing Elliott/Fibonacci cycles and studies.  Others have touched on the time dimension in their work but nobody works with it (especially the Lucas sequence) to the depth done here on a daily basis. When the ebook is done you will see an added dimension to technical analysis over and above price and volume which is simple to recognize once you know what to look for.  Problem is most don't know what to look for.   The beauty of this methodology lies in its simplicity. However simple it may be, don't confuse simplicity with easy.  The best part is how well it complements the technical work many of you are already doing.
    There is a small circle of you working with these time sequences who already know exactly what I'm talking about.
    If you are a support and resistance trader, these time sequences will tell you the highest probability window when price action will either reverse or break through.  This goes hand in hand with the candlesticks.
    If you are an Elliottician, these sequences confirm wave counts. Waves tend to complete on important time bars.  If you are wondering when a wave is going to end, knowing the bar count in the various degrees of trend takes much of the subjectivity out of Elliott.
    If you work with volume patterns, cup and handle patterns or anything you might read in the IBD, these time sequences navigate the highest probability window of when there will be a breakout.
    If you do point and figure, these time sequences will confirm your box reversals.  As a matter of fact time sequences are leading indicators and give you advance warning of your 3 point reversals.
    If you are into astrology, the daily counts work beautifully with Merriman's geocosmic signatures OR the Bradley Model.  As a matter of fact, we know how inconsistent Bradley can be and if your Bradley date does not cluster with a time date, there is a great chance the Bradley turn WON'T WORK. 
    If you work with MACD, stochastic or any other momentum indicator you know they can stay at extreme for some time.  However, when we get to an extreme condition usually we get the turn when the market hits the time window.
    I don't care if you work with stocks, Rydex, options, bonds, gold, futures, currencies, the European market or the Australian market.  This is a wonderful complement to WHATEVER YOU ARE DOING!  In other words, we are adding a whole new dimension to technical analysis. 
    However, you will have to decide if you are ready to incorporate something NEW into your game.  Some of you might be set in your ways and if you don't think your game needs to improve, fine!  But who can't do better?    Understand this, what we are doing here IS NOT A SYSTEM!  This is the natural order of HOW FINANCIAL MARKETS WORK. 
    You might be asking, if this is such a breakthrough, why don't we get every call in every market correct.  A good question.  The real answer is this work is a major first step in our understanding of how financial markets really work. The Wright Brothers achieved liftoff but they didn't make it to the moon.  The truth is someday, somebody is going to come out with a formula of how the various gravitational pulls of all the planets affect the tides which affects crowd psychology which affects the golden spiral which affects which Fibonacci/Lucas sequence turns the markets in the varying degrees of trend.  That will be the holy grail and somebody in the 21st century is going to figure that out. Until such time we have to be satisfied in working with the highest probability points in time of a Lucas/Fibonacci sequence turn. Until the Fibonacci Forecaster came along, nobody understood how Lucas does turn the markets.  The good news is what we do here is good enough to give anyone a HUGE EDGE without having to knock yourself out learning about planetary or ocean cycles.  Like whatever else you are doing in technical analysis, this is right there.
    What you will be seeing in the future in this column is a further departure from traditional Elliott because while the waves provide a picture of  the mood, structure and psychology of the action on any given chart something is missing. Wouldn't you agree?  With all the subjectivity in interpreting Elliott, wouldn't it be helpful to have something definitive you could sink your teeth into? We don't need to know exactly where we are in the wave count BUT WE DO KNOW WHEN NASDAQ HITS 262!!!   You know what I'm talking about.  It is these time principles that are leading the waves. Even with the time methodology, for the reasons mentioned above, there will be plenty of times where these markets are too complicated to read.  All I'm doing is helping us to have greater understanding of how these markets work in a practical and simple way. Again, don't confuse simple with easy.  However, if you could increase your understanding of how financial markets work even by 5% a month, what would that mean to your bottom line in the course of a whole year?
    It seems these holiday periods get longer all the time.  Trading slowed early Wednesday and for goodness sakes, the markets weren't closed until Friday!  As of Tuesday night, we knew the markets could have elected to bounce from either Tuesday's low which was a small degree 61% retracement or in the case of the NDX for instance, the larger one at 1678.  We know what happened.  However, Thursday was the full moon and also a potential near term cycle point.  We did not set a low there as we could have done.  My concern, as I see so many times on these charts as we enter potential turns is we end up turning early but it actually is just a SPIKE or a headfake.  To give you an idea what I'm talking about.  Thursday afternoon on the NQ we were in an intraday downtrend.  On the 5 min chart we were already down 57 bars.  At that point you can anticipate a potential low on bar 61-62.  However we hit 57...58....59 THEN WE BOUNCE up for 60...61 and a sharp spike down on 62 and then 63.  My point is when we turn early, often times it just turns how to be a SPIKE created by an inversion of the cycle.  Why this happens I HAVE NO IDEA. But it happens.  So if the full moon is the potential near term change, we turned 2 days early.
    From what I've seen so far, the biotech topped early just like it bottomed early back in 2002.  This condition was noted here weeks ago in the dissertation of market tops.  The biotech still shows no sign of a lasting bottom.  The high created by the NASDAQ as a result of the 262nd hour turn to this point is a more impressive calculation than whatever I've seen that created Tuesday's low. 
    Problem here is when I look at the SOX on an intraday basis since Tuesday's low I see absolutely nothing.  On an hourly basis or a 15min we have a virtual trendless market.  We have to go to the daily chart to pick up the trend. The bottom line is the drop we had on April 7th was the 26th bar off the last major pivot on March 2 which kicked off a small wave down.  I bring that up because if we were now in a new uptrend we likely don't drop on that bar the way we did.  The wave up in the SOX also had a squaring of time where the first leg up was 16 hours compared to the whole leg that reversed on the 16th day.   The whole move was 38.43 points which has a good Fibonacci relationship.   The bottom line to the SOX right now is the micro trend is sideways but the weight of the evidence suggests the larger trend is still down.   For now the bias is sideways to down.
    As far as the NQ or NDX is concerned, we were up 21 days and down only 3 days.  I don't think there is enough time in this leg down. The Dow hit a low in 16 days and the bounce hasn't been too impressive.
    BOTTOM LINE:  Thursday Nasdaq volume was 1.6b.  You can chalk it up to the holiday but still its a light volume bounce.  We still determine market psychology by greed and fear.  If buyers really wanted to buy they would have put up a better show.  Unless I get evidence to the contrary I'm viewing this as a B wave bounce, an inversion, whatever you want to call it.  Key resistance in the NASDAQ is 2347, NDX 1729, Dow 11221 and 1301 in the SP500. This leg up is not done and I don't think we've seen the low yet. So what I'm looking for is slightly more upside with a higher probability drop to larger support levels. 
    I think we could take a lesson from the folks down under who are on an extended holiday from trading.  Markets closed early on Thursday and correct me if I'm wrong, are closed until next Wednesday. I'm sure my friends down under will come back renewed and refreshed.  The move so far looks corrective but the big recovery day was nullified the next day.  The reversal hit in the time window we've discussed for the past 3 weeks.   Finally, trading ended earlier on Thursday so there is not anything new to add.  You will come back from the break dealing with a corrective pattern off the high which is likely not done.
    The story here is the XAU continues to lag the metal.  I'm not here to tell you why that might be from a fundamental basis.  What I do know is we've retraced 78% of the selloff and there are 2 technical schools of thought working.  First, from a pure wave basis, there is a chance we've had 5 waves up that completed to the recent high.  The other view, which I favor and explained last time is the time progression off the low.  To review, the first wave up was 29 (Lucas) hours and the next move was nearly 76 (Lucas) hours which gives us a 2.618 C or 3rd wave extension in terms of time.  The pattern off that recent high looks sideways and is setup to test the recent secondary high at 149.  That's as far as the waves reveal.
    Gold has put in another nice impulse wave off the March 10th low. If we look at this from a pure common wave relationship, the 1.61 extension point of wave one as measured from the bottom of wave 2 was back on March 30 around the 592 area.  Common sense dictates that if we didn't stop at a 1.61 extension, the chances are good we are going to get to the 2.61 extension point.  However, we've been hung up now this entire month of April at a point that traders look to take profits as previously mentioned. That would be the drop from March 2-10.  Folks, that's not an iron rule that is set in stone but there is a segment of participants that do look at things that way. We've been hung up going sideways in this general area for 2 weeks.   The first leg up off the 10th was 24 points and we hit that secondary low at 550.  A 2.618 extension is 62 points and would take us to 612 which is right in my zone for a longer term high (610-618).  To give you some kind of idea of the internals of this chart the first leg up here was 18 hours and we pulled back for 18 hours.  The next leg (which surpassed the 1.61 price extension) took a 3 day pause after going up 62 hours.  If you divide 18/62 you get .29 (Lucas).  Mind you, some of these arcane relationships are not to be traded upon but when you try to figure out what IS going on, the market supplies evidence in not so obvious ways.   At this stage of the game we've expired many time relationships that COULD have reversed this chart (like it did the XAU) but DIDN'T.  I'm looking at a sideways pattern here that will likely end up chopping its way to that 612 marker.
    Silver had conditions that could have created a bigger pullback back on day 147 of the trend last week where it put in that doji but the chart was still way too strong.  Now, Monday is day 156 of the present trend so we are very close to a potential turn window either here around day 155 or in a week when it gets to the 160-62 time frame.
    BOTTOM LINE:  You can go elsewhere to hear about the bull market as we've reached some sort of point of recognition.  Consider that after a point of recognition is reached we must be closer to the end of the wave than the beginning.  What I'm attempting to do is stay on top of points in time that could surprise people and create the reversal that seemingly comes from an invisible ceiling.  
    We may be close to a break in one direction, likely no longer than 3 trading days from here.  If we were to go down, we will be 18 days off the last pivot high by Wednesday and a downtrend will respect that pivot.  On the other hand, we are 6 days off the low and either Lucas 7 or Fibonacci 8 will cause a break north if we are respecting the lower pivot.  See how this works?  If the triangle scenario holds, we have already seen the low and should head higher.  What is interesting is I've heard quite a few analysts (including Arch Crawford) trash the dollar recently but it is hanging tough in the face of continued strength in the medal. One thing dollar bears have going in their favor is the recent low is 52 days off the January low and if we were going to break out I would have preferred to see the reversal come on an important Fibo or Lucas pivot but we didn't.  We bottomed on 18 days to the near term trend which gives me reason to believe we are not ready to break to the upside yet.  The bottom line is I'm slowly losing confidence that we have a completed triangle that is ready to break to the upside. If my analysis isn't crystal clear it is because the chart isn't crystal clear.  IS IT?
    Tuesday night we were discussing a small degree inversion and that's exactly what happened.  The discussion centered on what happens when we get close to an important set of bars.  In a continuing trend they can spike or dip into the window and keep the trend in place alive.  What happened here as opposed to a 3 day spike (bars 60-62), we spiked on day 60 but made a fresh low in day 61 which where we closed the week.  Now the momentum indicators are at least level to the point where there can be considered a slight positive divergence.  I think we are close to a bigger bounce.
    We are at the moment of truth.  A retest of the high that either creates a double top or a larger basing period that could launch a new wave of aggravation motorists everywhere.  Luckily we are in a position where we are right at a cluster of relationships THAT COULD TURN THE MARKET.  Wednesday we hit the 39th day of the trend (FBI 38.6) and Thursday we hit the 199th (Lucas) hour which set a lower high by 5 cents. There are other relationships that could reverse this market but unless we would see an overpowering black candle come in that would tell us we've definitively failed at resistance I wouldn't see it as anything more than a pullback.
    For those of who are new, this is the link you follow to get to the charts.  IF you like what you see, please vote for it at the bottom of my page once a day.
    The content in THE FIBONACCI FORECASTER is for educational and informational purposes only.  There is no offer or recommendation to buy or sell any security and no information contained here should be interpreted or construed as investment advice. Do you own due diligence as the information is the opinion of Jeff Greenblatt and subject to change without notice.   Please be advised to consult your investment advisor, attorney or tax professional before making any investment decisions.  Jeff Greenblatt will not accept any responsibility or be liable for any investment decisions based on the information discussed here.
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    Hedges Winge

    New York - Get your hankies ready: Hedge funds feel they're the
    newest victims.

    A long-simmering issue may soon come to a boil, potentially putting
    Wall Street's largest firms on the hook for billions more in
    liabilities years after the research scandal that extracted $1.4
    billion in legal fines from ten of the most influential investment

    This time, prime brokers face scrutiny for the fees they charge hedge
    fund clients, with securities lending being a particular focus.

    Attorneys at plaintiffs' firm Milberg, Weiss, Bershad & Schulmanare
    investigating securities lending fees and other practices by the
    biggest prime brokers and are considering bringing a class-action
    lawsuit on behalf of hedge funds.

    Steven Schulman, a partner at the firm, said Tuesday that it's still
    investigating the issues and declined to discuss details of any
    lawsuit. But he did say, "We're thinking about what we need to do."

    Prime brokerage is the business of catering to hedge funds,
    everything from loaning securities so funds can sell them short to
    providing office space for startup funds. The business has
    consolidated among the biggest three: Goldman Sachs Group (nyse: GS -
    news - people ), Morgan Stanley (nyse: MS - news - people ) and Bear
    Stearns Cos. (nyse: BSC - news - people ) in recent years, though
    several other banks have tried to get bigger in it, including Bank of
    America (nyse: BAC - news - people ), Credit Suisse (nyse: CSR -
    news - people ) and Merrill Lynch (nyse: MER - news - people ).

    Securities lending is among the most lucrative of prime brokerage
    services to the banks, reaping some $10 billion in annual fees, and
    the business just keeps growing as more hedge funds pop up. But it is
    also among the most opaque of businesses, with plenty of opportunity
    for abuse, lawyers unconnected with the Milberg firm say.

    Hedge funds have alleged privately for years that they are being
    overcharged for prime brokerage services or charged wrongly for
    services that haven't been performed. Most of the griping has to do
    with securities loaned but never delivered, the allegation being that
    the prime brokers are lending securities at high fees without
    actually having possession of the securities to lend in the first

    Playing by the rules, a trader can't sell short a security without
    having possession of it by the settlement date, or the trade would be
    what's called a naked short. A trade is often made while the
    settlement process continues, and most trades wind up with the
    security being delivered in ten days. Prime brokers lending
    securities to clients presumably assure their client that the
    borrowed securities will be delivered.

    The hedge fund pays a fee to borrow the shares, presumably with the
    knowledge that the delivery will occur. The allegation of fraud comes
    in when the prime broker takes the fee and never delivers the shares
    and doesn't intend to.

    The New York Stock Exchange and the Nasdaq keep lists of stocks that
    routinely fail to deliver, and some of the companies that have been
    on those lists since a new rule was enacted in January 2005 say they
    are the victims of naked short-selling. The most famous of these is (nasdaq: OSTK - news - people ), whose chairman,
    Patrick Byrne, has been on a mission to bring the issue to the
    attention of regulators and lawmakers.

    Bringing prime brokers into the loop would put the biggest firms at
    the center of yet another potentially explosive scandal. Lawyers not
    connected with the Milberg firm say a lawsuit could attract the
    attention of state attorneys general, who were instrumental in
    assessing the fines in the conflicts-of-interest scandal and in the
    mutual fund trading-abuse cases of recent years. Why? Hedge funds
    increasingly manage investments from pensions and endowments, meaning
    regular investors could be bearing the brunt of abusive fee schemes
    in the form of lower returns on their investments.

    A spokesman for New York State Attorney General Eliot Spitzer, who
    led the conflicts and mutual fund trading-abuse cases, had no
    immediate comment.

    "Some hedge funds feel they have been taken advantage of by their
    prime broker," says Josh Galper, principal at Vodia Group, a New York
    consulting firm. "Naked short-selling is an example of how pricing
    abuses can enter the market."

    April 15, 2006

    Macquarie: Are We Being Too Conservative?


    In light of the recent strong performance in the resource sector, Macquarie Research Equities (MRE) have conducted a review of their resource sector forecasts and have incorporated significant changes to a number of base metal, bulk commodity and currency estimates. Most notably, MRE have made significant upgrades to zinc and copper over the short and medium term. MRE's key picks remain BHP Billiton (BHP), Alumina Ltd (AWC), Oxiana (OXR), Jubilee Mines (JBM) and Kagara Zinc (KZL).

    Upgrading the base metals.
    Although MRE only recently completed a thorough review of their base metal price forecasts and considered themselves to be in the bullish camp, MRE have again been proven too conservative as the improving macroeconomic backdrop has shored up the demand outlook while ongoing supply disruptions continue to dampen the supply-side response. Consequently, MRE now expect metal markets to remain (in many cases) exceptionally tight and in deficit for an extended period. MRE therefore find it difficult to see the catalyst for a sustained correction in base metal markets in the short term.

    Seek terminal market exposure and plenty of it.
    The most significant change (given its importance to both the base metals complex and equities) is the ~50% increase to MRE's copper price forecasts for 2007 and 2008, which now exceeds US$2.00/lb until end 2008. In MRE's view, the consistent failure of producers to meet (lofty) expectations will necessitate broad upgrades across the market and drive strong earnings momentum for the sector.

    Zinc and copper the big movers
    Copper supply disruption maintaining the tightness- MRE continue to see a large number of supply disruptions due to strikes, mine production problems, equipment delays and lower ore grades. Those issues have had a substantial impact on MRE's production forecasts, have raised the forecast concentrates deficit, and have now swung their refined market balance forecast from surplus to deficit in 2006. With stocks already extremely low, this deficit is enough to make MRE question whether there is any justification to forecast a significant pull-back in prices this year, and MRE's conclusion is that there is not. As a result, MRE have revised up their forecast average copper price for 2006 from $2.20/lb ($4850/t) to $2.54/lb ($5590/t).

    The zinc rundown continues – In zinc, MRE have not changed their supply/demand balance significantly. MRE still see the refined zinc market in deficit by around 400,000t in 2006 – enough to run inventories down to record low levels. What has changed is the price reaction to these developments.

    Prices have reacted earlier than MRE had forecast, and have been above the levels suggested by the historical price/inventory relationship for the past six months. However, it would appear that the market is simply looking ahead to the tightness which is looming later in the year.

    MRE continue to expect virtually all of the LME zinc stocks to be run down by the end of the year, and the zinc market to be displaying all the signs of a shortage market – including prices moving to record highs. Copper is an interesting case study for those looking at possible price outcomes for zinc – in copper, prices have gone higher than we would ever have imagined – simply because there has just not been enough to go around. In zinc it is difficult to say just how high prices could go in a real shortage situation. MRE do not believe there will be significant price-related substitution out of zinc in the galvanised steel market.

    The earnings upgrade trend will continue.
    Earnings estimates for a number of MRE's favoured equity picks now comfortably exceed consensus forecasts. For example, MRE's BHP Billiton, Alumina Ltd and Zinifex forecasts are 16%, 29% and 44% ahead of the consensus in 2007 while forward earnings multiples remain at a significant discount to the market and the historical norm and are expected to ensure strong interest in the sector is retained.

    MRE's Favoured picks.
    Although MRE have upgraded their recommendation for Rio Tinto to outperform given the revised earnings outlook, MRE retain a preference for BHP Billiton given strong leverage to terminal metal markets and superior earnings growth in the medium term. Strong fundamentals for the aluminum market are expected to remain supportive of Alumina Ltd performance while Oxiana, Jubilee Mines and Kagara Zinc cannot be ignored given impressive leverage to base metal markets.

    In summary, MRE's key picks within the sector remain BHP Billiton (BHP), Alumina Ltd (AWC), Oxiana (OXR), Jubilee Mines (JBM) and Kagara Zinc (KZL).

    MRE continue to recommend an overweight position in the resources sector. In MRE's view, investors should remain acutely aware of, and not underestimate, the challenges facing the supply-side in this robust demand environment and therefore, the potential for ongoing positive (commodity) price surprise.

    Traders looking for maximum exposure to short-term movements in the above mentioned stocks should consider the following equity warrants for a high-risk, high-return strategy.

    April 14, 2006

    Faber's Latest: An Anatomy of Bear Markets

    Download file 1

     (Download PDF for charts)Market Comment: April 12, 2006 Dr. Marc Faber
    Today, I wish to address the subject of bull and bear markets. This cyclical
    movement in asset prices, investors will call, when prices are rising, “bull
    markets” and when prices are declining “bear markets”. On the surface this
    seems simple to understand. The Dow goes up, it’s a “bull market”, the Dow
    goes down it’s a “bear market”. But, in reality, bull and bear markets are far
    more complex. Let’s assume we have just five asset classes. Real estate,
    stocks, bonds, cash, and gold (or a hard currency for which money supply
    growth is kept at the rate of real GDP growth leading to stable prices). At
    present, it is clear that the Fed is printing money. So, all asset prices except
    bonds will rise in value. But, some asset prices will increase more than
    others. Since October 2002, the Dow Jones has rallied in US dollar terms,
    but against gold it has depreciated (see figure 1).

    So, we can say that, yes, the Dow has been in a bull market since October
    2002 in dollar terms, but it has been in a bear market in gold terms. This is
    an important point to understand. In case we should experience continuous
    monetary inflation, which could lift, over time, all asset prices such as
    stocks, real estate, and commodities, some asset classes will increase more
    in value than others. This means that some asset classes while rising in value
    could deflate against other asset classes, such as happened with the Dow
    against gold since year 2000. I have pointed out in earlier reports that since
    2002, all asset prices rose in value. But recently, some diverging
    performances emerged. Bonds started to decline and seem to be on the verge
    of a significant long term break down (see figure 2).

    I have also mentioned in earlier reports that, in times of monetary and credit
    inflation, such as we have now in the US, bonds are the worst possible long
    term investment.
    Another asset class, which has recently begun to depreciate against gold
    are home prices (see figure 3)

    As can be seen from figure 3, since last summer, home prices while only
    declining moderately in dollar terms, have declined significantly in terms of
    gold. So, whereas it took over 500 ounces of gold to buy a typical house in
    the US last summer, now, it only takes around 380 ounces of gold. In other
    words, home prices have declined over the last 9 months by 25% against the
    price of gold!
    What I really want every reader to understand is that bull and bear markets
    are extremely complex and an asset class, which seems to be in a bull market
    may not necessary be in a bull market when compared to a hard currency
    such as gold. In this respect the following is also important to consider.
    Conventional wisdom has it that a true market bottom, which offers a
    once-in-a-lifetime buying opportunities, only occurs after a devastating bear
    market. In this context, the following severe market declines usually spring
    to investors’ minds: the 1929–1932 bear market in US equities; the collapse
    in the US bond market between 1970 and 1981, when yields on 30-year US
    Treasuries rose from 6% in 1970 to 15.84% in September 1981 and sent
    bond prices tumbling; the 1973–1974 Hong Kong stock bear market, which
    brought the Hang Seng Index down by 90% to its December 1974 low at
    150; the great sugar bear market, which sent prices down from 70 cents per
    pound in 1973 to 2.5 cents in 1985; or the Japanese bear market post-1989,
    when the Nikkei dropped from 39,000 to less than 8,000 in April 2003.
    Moreover, major market lows are associated by investors with total despair
    and panic among market participants, depression in the asset class that was
    subjected to the bear market, bankruptcies in that sector, and overwhelming
    negative sentiment.
    But, as Russell Napier shows in his recently published book Anatomy of the
    Bear — Learning from Wall Street’s Four Great Bottoms the key element in
    undervaluation can also be a period of time “when the advance in stock
    prices has failed to keep pace with the economic and earnings growth”
    within the system (The book – an excellent read - is available from or from CLSA directly. Contact
    Napier shows, for instance, that at the market low in 1921 the Dow Jones
    Industrial Average was no higher than it had been in 1899 — 22 years
    earlier — while nominal GDP had increased by 383% and real GDP by
    88%! Similarly, by August 1982, the Dow Jones Industrial Average was no
    higher than it had been in April 1964, and was down by 70% in real or
    inflation-adjusted terms. According to Napier, August 1982 represented the
    fourth-best buying opportunity for US equities in the last century, aside from
    1921, 1932, and 1949 (see figure 4). The important message one might
    Page 4 of 9
    take from Napier’s book is that it usually takes a long time — about 14
    years — for stocks to travel from overvaluation to undervaluation, and
    that the nominal low in stock prices isn’t always the best time to buy
    equities. What is more important is the real level of equity prices and
    various valuation parameters that indicate deep undervaluation. Thus, while
    the Dow Jones bottomed out on December 9, 1974 at 570, and stood at 769
    at its August 9, 1982 low, in real terms the Dow had lost another 15% since
    the 1974 low.
    I am mentioning this because it is possible that the October 2002 lows for
    the US stock indices will hold in nominal terms. However, as I have shown
    above, the Dow has been declining in gold terms since 2000 (see figure 1)
    and is, in my opinion, likely to continue to do so for many years.
    As a side, Russell Napier has filled a void with Anatomy of the Bear,
    since, to my knowledge, it is the first book to trace the swings from
    undervaluation to overvaluation and back to undervaluation, of US stock
    prices over the past 100 years. The book also provides much food for
    thought. If equity prices swing back and forth between overvaluation and
    undervaluation, other asset markets such as real estate, commodities, and
    bonds will do the same. Thus, I suppose that, in the same way that US bonds
    were grossly overvalued in the 1940s, Japanese bonds were grossly
    overvalued in June 2003, when the yield on JGBs had declined to less than
    0.50%. At the same time, the April 2003 low for the Nikkei Index at less
    than 8,000 may have been the best buying opportunity in Japan of this
    generation. In fact, the 2003 lows in Japanese equity prices and interest rates
    have similarities to the 1940s’ lows in US equities and interest rates. After
    the 1940s, US stocks rallied into 1973, but bond prices collapsed into 1981.
    Similarly, the stock market rally in Japan, which began in 2003, could last
    for many years and be accompanied by a significant bear market in Japanese
    bonds, which would drive local institutions and Japanese households out of
    their overweight bond and cash positions, which benefited during the 1990s’
    deflation, and into equities and real estate. Moreover, if, as Napier explains,
    1921, 1932, 1949, and 1982 provided outstanding buying opportunities for
    achieving subsequent high returns that tended to last for a minimum of eight
    years (1921–1929), but usually for much longer (1982–2000), then I suppose
    that — taking the late April 2003 low of Japanese equities as a generational
    low — the bull market in Japanese equities could easily last until at least
    2010 or even longer, and in the process significantly outperform US equities.
    Another lesson from Napier’s book could very well be that other Asian
    equity markets, relative to other assets, remain grossly undervalued despite
    their post-1998 recovery. After all, many Asian stock markets, whether in
    US dollar terms or in real terms, are still down by more than 50% from the
    highs reached between 1990 and 1994.
    Lastly, if, as Napier outlines, it takes about 14 years for equities to make
    the journey from overvaluation to undervaluation, the severity of the
    commodities bear market from 1980 to the turn of the millennium — about
    20 years — is evident. Put into the proper perspective, in real terms
    (inflation-adjusted) commodity prices were, in the 1998–2001 period, at the
    lowest level in the history of capitalism (see Figure 5). And, although I
    expect some industrial commodity prices will suffer from a significant phase
    of profit taking in 2006, given the fact that commodity bull markets tend to
    last anywhere from 20 to 30 years, we may just be at the beginning of an
    extended rise in the price of natural resources.
    There is another point I should like to add to Russell Napier’s excellent
    study, which I strongly recommend investors to read. In a world of rapid
    monetary and credit expansion, an undervaluation of the Dow Jones might
    occur, with a Dow Jones at 36,000, 40,000, or 100,000 or more — a stock
    price level that was predicted by several analysts in 1999. How so?
    At present, the Dow is at around 11,000 and the price of gold is at $590.
    Let us assume that, as a result of Mr. Bernanke’s more efficient paper money
    printing machine (incidentally, a machine that has been in operation since
    the formation of the Federal Reserve Board in 1913 and which accounts for
    the dollar’s 92% loss in purchasing power since then), the Dow Jones rises
    to 36,000 in the next few years. (It won’t take another 100 years for the US
    dollar to lose another 92% of its purchasing power; more likely is 10 to 20
    years.) If this were the case, the price of gold could rise from $550 to
    $3,600, which would bring down the Dow/gold ratio from currently about 19
    to 10; or, in an extreme case, gold could rise to $36,000, which would bring
    down the Dow/gold ratio to only 1 (as was the case in 1932 and in 1980)
    Thus, in nominal terms, the Dow would have trebled from the present
    level, but lost significantly in real terms — a possibility that I regard as very
    likely. In this respect, we shouldn’t forget that during the German
    hyperinflation period between 1919 and 1923, share prices rose sharply in
    paper mark terms but tumbled in dollar terms (then a strong currency),
    because the rate of the paper mark depreciation against the US dollar
    exceeded the local share appreciation. Thus, by October 1922, an index of
    shares in local paper mark terms had increased from 100 in 1918 to 171
    billion, while in dollar terms the same index had dropped from 100 to 2.72!
    Needless to say, the 1918–1923 German hyperinflation was devastating for
    paper mark cash and bond holders.
    Now, I am not necessarily predicting that we shall soon experience
    hyperinflation rates in the US, but when the Dow Jones and the US housing
    market will decline by 10%, it is very probable that Mr. Bernanke will put
    the money printing presses into high gear in order to fight asset deflation.
    So, US asset prices including homes, stocks and bonds could depreciate in
    real terms and against precious metals.
    Still, as I indicated last month, aside from bonds, all stock and
    commodity markets seem to be now overbought and vulnerable to a
    sharp correction. In fact, whereas I am extremely negative about bonds
    in the long term, I believe that for the next three months or so, bonds
    could actually outperform equities and also commodities. From figure 6,
    we can see that equities have formed a rising wedge against bonds since
    2005. More often than not, a rising wedge leads to a sharp downside
    reversals. This would not necessarily imply that bond prices will rally much,
    but the wedge might be broken on the downside by a sharp downturn in
    For this reason, my advice remains to be extremely defensive. Most asset
    markets including stocks and commodities are extremely overbought, and
    there is far too much speculation in all investment markets. Therefore,
    Page 9 of 9
    severe downside volatility, also in precious metals, should not be
    surprising in the period directly ahead.


    Commodities still cheap as chips...


    April 13, 2006

    Shadow Statistics

    Ben Bernanke, Fed chairman, recently delivered an upbeat view of the U.S. economy. It was cheerful, optimistic...and delusional.

    However, few know the extent of the deceit. What if you learned that inflation were closer to 7% than to the official 3%? What if unemployment were closer to 12%, rather than the official 5%? What if the economy were actually contracting, as opposed to growing?  You can read all about John's work in this interview

    It was the genius of writer George Orwell that he chose to build his dystopia on the foundations of language and information - how it is used to deceive, manipulate and control. His chilling novel 1984 stands out precisely because it is only a distortion of things that are happening now and that have always happened. Orwell's dystopia is a mirror in a funhouse, as you see enough of your own world in this disturbing reflection.

    Thankfully, there are still some people doing the important work of getting at the truth behind the official statistics - piercing the veil of Newspeak, sweeping away the cobwebs of sham. John Williams is an economist dedicated to doing just that. His Shadow Government Statistics reveals the extensive rot under the floorboards of the U.S. economy.

    Let's take the official inflation rate, tracked using the consumer price index, or CPI. The idea behind the CPI is to have a fixed basket of goods and track how the prices of these things change from year to year. It only gained prominence after World War II, as a way to adjust autoworkers' labor contracts, a practice that soon spread.

    Over time, its importance grew and more people looked to it as a gauge of general price inflation - and, hence, to get a feel for the health of the economy.

    The thing is, the way the CPI is calculated changed dramatically over the years. Politicians have figured out that these statistics are useful in winning elections. Ergo, nearly every administration has altered the calculation. And always, the changes made the CPI lower. Every effort to change the CPI, by design, aims to make the economy look "better" than it looked before the changes.

    The accumulation of these changes creates a huge difference over time. It's like making a series of small changes to a ship's course in the midst of a long voyage. Soon, you wind up way off course, miles and miles from where you think you are. The chart below is from William's Web page. It shows the extent of the difference, which is just massive. The rate of inflation using only the pre-Clinton era CPI is closer to 7%!

    The "Experimental C-CPI-U" is another innovation, introduced by the Bush administration to lower the CPI yet again, once again to paint a kinder portrait of the old hag known as the U.S. economy.

    But it's about more than just making the economy look better. For example, since increases in Social Security payments link to the CPI, a lower CPI also saves the government money. According to Williams, if you used the CPI when Jimmy Carter was president, you'd get Social Security checks 70% higher than today's levels. Yes, 70% higher.

    The government also duped all those people who thought it was such a great idea to buy TIPS (Treasury inflation-protected securities). Changes in the CPI determine the interest paid on these bonds. The higher the CPI, the more interest paid to bondholders. Some people loved the idea, figuring here was a bond that would keep pace with inflation. Given the government manipulates the CPI, you can be sure the interest rate paid will not keep pace with inflation - nor has it ever.

    The manipulation of the CPI explains the great disconnect between what the man in the street feels when he pays his bills and what the confident, well-dressed Fed chiefs and politicians try to tell him. The cost of living is rising a lot more than they want you to believe. At a 7% annual rate of inflation, the cost of living would double in about 10 years. Looked at differently, the purchasing power of your dollar will fall in half.

    What about unemployment? The government, since the time of the Kennedy administration, has been changing the definition of "unemployed." Again, many small changes over time lead to dramatic end results. According to Williams, if you back out the changes, you get an unemployment number closer to 12%!

    Let's look at the federal deficit - basically, the amount of money the government is losing every year. The official deficit for 2005 was $319 billion. However, this excludes unfunded Social Security and Medicare obligations. Throw them into the mix and calculate the deficit the way a business does in its financial statements - and you get an annual deficit around $3.5 trillion.

    That's more than 10 times the so-called "official" deficit. By Williams' calculations, you could raise the tax rate to 100% - dump everyone's salaries into the U.S. Treasury - and still have a deficit.

    Years of such deficits have created a mountain of obligations for the U.S. government. As Williams says, "The fiscal 2005 statement shows that total federal obligations at the end of September were $51 trillion; over four times the level of GDP." These debts are unsustainable. The bills must go unpaid. If the U.S. government were a private corporation, its bankruptcy would be beyond dispute.

    This is why Social Security and Medicare are not going to exist in the not-too-distant future. As Williams says, "There is no way the government can pay the Social Security or Medicare it has committed to."

    Williams believes GDP is contracting now. The government reported only a 1.1% increase in the fourth quarter. Even in an election year, and despite the government's best efforts to paint a pretty face, all it could muster was a measly 1.1%. More likely, the economy actually contracted 2% in the fourth quarter. This means we are in a recession NOW.

    This is not conspiracy-theory stuff. As Williams points out, it's all disclosed in the footnotes in the government's reports. All he is doing is backing out many of the changes to more realistically compare these numbers with the numbers of the past.

    The great H.L. Mencken, a scathing attack dog of idiocy in all its forms, wrote about "damning politicians up hill and down dale for many years as rogues and vagabonds, frauds and scoundrels." We need more Menckens. In the meantime, we'll have to make do with Williams and his cogent analysis of government skulduggery.

    Oddly enough, these insights do not change our approach here in the pages of Capital & Crisis. In fact, Williams' work reinforces several things we've already covered in past letters. To wit:

    Yields on real estate investment trusts (REITs) and utilities - to say nothing about the bond market - appear even more pathetic against an inflation rate of 7%. The yield for risks taken is simply not adequate. If the slumbering bond market awoke to the reality of a 7% inflation rate, there would be a sell-off the likes of which this country has never seen. Interest rates would bolt upward like a frightened cat.

    And the U.S. dollar is a doomed currency over the long haul. Bernanke, the self-professed student of the Great Depression, accepts the mainstream view that the Fed's great mistake then was not to flood the system with dollars. He won't make that "mistake" again. Expect the printing presses to run day and night at full capacity when the trouble starts.

    Trying to pin down the economy in precise numbers is futile anyway. It's too big, too complex. All macro statistics are severely flawed. This is why I seldom write about them. Investing using macro statistics is like trying to find the nearest post office with a globe. They are so vague as to be useless.

    The basic idea I want to leave you with is this: The economy is far weaker than generally portrayed. Most investors ignore the rat's nest of risks and invest indiscriminately in stocks - without proper due diligence. As investors, we need to stick to our fundamentals more carefully than ever.

     You can read all about John's work in this interview


    John Williams' Shadow Government Statistics for April


    Gold and Oil Price Surges Foreshadow Dollar, Inflation and Political Turmoil

    Inflationary Recession Continues Its Intensification

    Both Current-Need and Systematic Manipulations Distort Key Economic Data

    The price of gold has more than doubled in the last four years, in a steady run-up to what now is $600 per ounce. That market is sending out a warning signal of extreme danger facing the U.S. dollar and of rapidly increasing risk of severe global instability. Those observing these extraordinary times ignore such warnings at their peril.

    At the same time, the political geniuses running Washington continue to fret over the latest polling numbers, while ignoring the unfolding fiscal and structural economic crises that eventually will thrust the U.S. dollar into its final tailspin and the domestic economy and financial markets into crash landings.

    There are two broad types of political manipulation of economic data, systematic and current-event, and both are at work distorting economic reports. A new example of systematic manipulation -- using methodological change or redefinition -- is noted in this month's "Reporting Focus" on the PPI. Imported goods were excluded at one point from the pricing surveys. In an era of a generally weakening dollar, that removed some inflationary pressures from a series that was supposed to measure inflationary pressures.

    The current-event manipulation, however, is what will dominate key economic figures out through the mid-term election. It involves direct political intervention in the reporting process in order to enhance the reported results. Indeed, the relatively happy news from the employment/unemployment front in March appears to have been carefully crafted by Administration manipulators. Similar efforts are likely to generate a reported surge in first-quarter GDP growth, as well as ongoing "strong" jobs data.

    Nonetheless, continued negative inflation-adjusted growth in money supply (M2), monthly declines in key components of the purchasing managers surveys, sharp downturns in annual change for housing starts and help-wanted advertising, flat to negative annual change in consumer confidence and real earnings, and a record trade deficit all continue to show faltering economic activity.

    Then there is inflation. With oil pushing $70 per barrel and gold at $600 per ounce, how can anyone talk about low and stable inflationary conditions with a straight face? Some inflation considerations are discussed in the following section on gold and in this month's "Reporting Focus" on the PPI.

    Despite all the hype and all the propaganda, the doctored data are not fooling Main Street U.S.A., and they are not fooling the gold market......

    Behind 25-Year High for Gold:Changes From Ground to Market


    Technology and Strong Demand Alter Its Odd Economics;Inside a Secret Vault Trading In Jewelry for Cash

    By E.S. Browning
    The Wall Street Journal
    Wednesday, April 12, 2006

    After gold soared above $500 an ounce a few months ago, tub after plastic tub of gold jewelry from the Middle East and India began arriving at Darren Morcombe's refinery in southern Switzerland. In a part of the world where gold jewelry is as much an investment as an adornment, consumers and jewelers had decided the shiny bracelets, necklaces and belts -- many never worn -- were suddenly too valuable to keep.

    As prices skyrocket for one of the oldest forms of money, the rules of normal economics don't apply. Fears about inflation, terrorism and a possible dollar decline are driving gold's price up. But production is down, because mining companies cut back capital investment during a 1990s price slump.

    Some central banks, the biggest gold investors, sold when the price was low, and now a few are buying when the price is high. The jewelry industry buys the bulk of each year's output, but price today is driven more than ever by a much smaller slice of the market -- professional investors -- whose appetite lately has soared. After years of being squeezed, gold miners are making fortunes, while refiners and gold bankers are getting pinched.The price, in retreat for almost two decades after peaking at $847
    in 1980, has more than doubled in the past five years, closing yesterday in New York at $595.20 a troy ounce, near a 25-year high. Purchases by investors jumped more than 25% by weight in 2005 alone.

    Gold is the only major commodity that isn't produced primarily to be consumed in the economy -- like iron, copper, pork bellies or oranges -- but simply to be owned and admired. It is too heavy, soft and rare to have many practical uses outside of electronics and
    dentistry. Yet it is one of the earth's most prized objects, valued mostly because it is considered valuable.
    A look at gold's circuitous journey from the ground to refiner to bank vault to jewelry store -- and sometimes back again -- shows how the ancient world of gold is being shaken up by both markets and technology.

    ...The Gold Chain

    At the start of the gold chain stand people like Joel Lenz. He runs two Nevada gold mines for Newmont Mining Corp., the biggest U.S.- based gold producer. Mr. Lenz works, lives and serves on a local school board in the mile-high desert of Nevada, where the bulk of U.S. gold is unearthed.

     As recently as the 1970s, 70% of the world's gold was taken from South Africa's deep underground mines. South Africa remains the world's largest producer, but its output in tons now is one-third of
    what it was, and it represents 12% of the world's expanded production. Australia and the U.S. follow with 10% each, China 9%, Peru 8% and Russia and Indonesia 7% each, according to London-based researcher GFMS Ltd.

    The gold mined in most parts of the world, including at Mr. Lenz's Lone Tree Mine, differs significantly from the stuff that lured prospectors west 150 years ago. Visible sources of gold -- gleaming mountainside veins or nuggets and powder lying in riverbeds -- are becoming rarer. The Lone Tree Mine is an open pit two miles long and almost 1,000 feet deep, a monstrous gash that some day will be turned into a large lake. The gold Mr. Lenz removes from it consists of microscopic particles laced through earth and rock.

    "I've been here for 14 years," says Mark Evatz, who supervises Lone Tree Mine's digging and transport, "and I have never seen an ounce of gold that I have mined."to find the gold, modern-day prospectors like Newmont's Wayne Trudel pore over old drilling reports, set up computer models and theorize
    about which mineral formations are likely to contain fine gold particles. The process can take years, at a cost of $19 per ounce of discovery. The geologists drill out samples from various strata and examine them under microscopes. The results are plotted on three- dimensional computerized maps that outline twisting underground gold veins. As the price of gold rises, the areas on the maps considered
    worth mining expand.

    At Lone Tree, each ounce of gold is sprinkled through 75 tons of rock and soil. Miners use Global Positioning System consoles to make sure they are digging in the right spot -- since ore-rich rock looks little different from other rock. The gold is separated from rock and other metals through a variety of technologies that employ heat, pressure, cyanide and charcoal.

    In all, Lone Tree produces about 600 ounces of gold a day, in the form of a damp, cake-like sludge that is 50% to 75% gold and also includes silver and other metals.

    World gold production peaked at 2,621 metric tons in 2001 -- just as the price was falling below $260. As prices finally rose, output actually fell. Last year, less than 2,500 tons was produced. The reason: Opening or expanding mines can take a decade of exploring, investing and seeking environmental approvals, and shell-shocked companies cut such spending heavily during the long price decline. Some were slow to invest again when prices started climbing.

    Fearing further price declines, many mining companies in the 1990s made matters worse by contracting with large banks to sell future production in advance, at then-current prices. To pay the miners, the banks borrowed gold from central bank reserves, sold it and replaced it later with the mines' output. That flooded the market with gold, depressing the price. Newmont shunned such hedging and quickly boosted capital spending when prices rose, but the cutbacks forced people to leave the high desert in search of work.

    With Lone Tree running out of ore and its jobs now slated to disappear, Mr. Lenz spent months in 2003 helping persuade Newmont to reopen the nearby Phoenix Mine. It had produced gold and copper off and on since the 1860s, and its best ore was long gone. Newmont figures it can make money from the mine if gold sells for $340 or more an ounce, and it agreed in late 2003 to reopen it after gold crossed that price threshold.

    ... Environmental Concerns

    To keep the pit from flooding, Lone Tree pumps out 45,000 gallons of water a minute, lowering the water table in an already dry area. Environmentalists say that mercury emitted when gold is separated from other metals turns up in fish, wildlife and water supplies.
    Nevada regulations adopted this year require gold miners to use advanced technologies to control mercury emissions, formalizing a voluntary program. Critics say the rules don't solve the problem.Gold miners have been accused of more severe environmental damage in developing countries. In February Newmont agreed to pay Indonesia $30 million to terminate a civil lawsuit charging it with causing disease by polluting a bay with arsenic and mercury. Newmont
    officials face a separate criminal action over the same alleged pollution, which the company denies.

    When the miners at Lone Tree in Nevada are done producing gold sludge, gun-toting guards cart it off in armored trucks. The delivery schedule is kept secret even from senior mine executives.The sludge is delivered to a Newmont plant in another mining town,
    Carlin, about an hour away. Technicians run an electrical current through the sludge, separating out more base metals. The gold is formed into 100-pound "buttons" shaped like Hershey's kisses, now finally gold-colored but tinged with red, green or black (depending on how much copper, silver or nickel remains).

    About three times a week, when 2,000 ounces to 4,000 ounces have accumulated, workers melt the buttons into 55-pound to 60-pound bars. The bars, between 60% and 95% gold, are known as "doré," a French word meaning "gilded" or "golden."

    The gold now heads toward the world of jewelry and high finance, via a refinery, where the doré bars become almost pure gold. There's an independent refinery nearby, in Utah, but Newmont sends its Nevada doré by commercial airliner (no one will say from what airports) to Valcambi SA, the Swiss plant where Mr. Morcombe is chairman, because the mining company has a major stake in that refinery.Although high gold prices make mining quite profitable, other parts of the business have become jammed with competition and margins are tight. Some countries maintain refineries for nationalistic reasons, a bit like airlines, and the excess capacity is now keeping refining charges well under a dollar an ounce. Swiss banks, which helped make Switzerland a gold-refining center after World War II, have been pulling back, including Valcambi's former owner Credit Suisse.

    At Mr. Morcombe's refinery, in Balerna, just north of the Italian border, the high price of gold is affecting business. Recycled jewelry is still pouring in the door, while gold demand from jewelers is falling since the high prices make it tough for them to turn a profit.

    Doré bars from mining operations continue to arrive. They are melted and formed into thin rectangular plates that then can be slotted into a bath of chemicals in a nearby room. Another electric current is passed through, separating the gold from other metals. Depending on its initial composition, the doré can go through that and similar processes several times until it reaches a high level of purity -- from 99.5% to 99.99%. Before long, at a new higher-tech wing, the refinery plans to produce gold as pure as 99.9999% (a rare level known as six nines).

    Once refined, gold heads to manufacturers, investors or retailers.Jewelers use more than 70% of gold supplies every year. Italy long was the leading jewelry maker. Lately, lower-cost Turkey has taken a lot of business from Italy, and even-lower-cost India is taking some of Turkey's business. The world's biggest jewelry retail chain is Wal-Mart Stores Inc. But as a nation, India is the world's largest gold-jewelry buyer.In India and elsewhere in Asia, gold jewelry is used for dowries and major gifts. When people have extra savings, they buy jewelry, which can be sold either in times of need or when prices soar."We are selling old gold because the price is high," said Hemani Shah, a customer recently in a Mumbai shop. "During the monsoons when the market goes down, we'll buy."

    Gold also is used in electronics because it is a fabulous conductor. It is present in virtually all computers. Gold's use in dentistry has been falling for years, but last year alone Americans and Canadians had a total of 34 million teeth repaired or replaced with fillings, caps, bridges, crowns and other dental appliances containing gold, according to Dentsply International Inc., a dental supply company. World-wide, dentistry eats up nearly 70 metric tons of gold a year, says GFMS, the research group. All these business uses account for another 15% of yearly gold supplies.

    Most of the remaining gold -- 12% to 15% -- goes to private or government investors. Much of that ends up as large rectangular bars weighing 27 pounds or 28 pounds each, the mainstays of government and commercial bank vaults.

    When times are good, gold seems a waste of money compared with more modern investments, such as the stocks of fast-growing companies. In troubled times, such as during the recent bear market and following the 2001 terrorist attacks, broader groups of investors stash part of their nest eggs in safer places -- and gold is often seen as such a haven. Some bearish investors, called gold bugs, tend to stick with the metal through thick and thin.

    ... Wild Card

    One wild card in the gold market is the world's central banks, which, because of gold's traditional role as a store of value, long have been the largest gold hoarders. They still own about 19% of the world's gold, according to GFMS. European central banks, however,
    have been selling gold for years. Central bank sales mounted in the late 1990s, as gold prices fell to multiyear lows. Now, faced with criticism that they sold too cheaply, some central bankers are thought to be buying again, including those of Russia and some
    Middle Eastern oil countries -- reflecting the temptation even among experienced financiers to sell low and buy high.

    The U.S. went off the gold standard under President Nixon, but it still has by far the world's largest gold reserves at more than 8,000 metric tons, valued at about $153 billion. The U.S. hasn't sold significant amounts since the Carter administration, putting off any debate about the proper role of gold in backing a currency.A pair of exchange-traded gold funds created in 2004 and 2005 are helping to drive investor interest in the metal. These funds, which are set up like mutual funds and trade on stock exchanges, allow institutional investors and even individuals an easy way to bet on gold. As more money flows into the funds -- which total about $7.3 billion today -- more gold must be purchased to back them.
    The gold from those funds, like much of the world's investment gold, is stored mainly in London, where nine secretive bullion banks finance the trade. Financial institutions that own shares in the funds occasionally ask to see the gold backing their investments, but the two banks holding the funds' gold, HSBC Bank and Bank of Nova Scotia, have a policy of refusing such requests. Investors must take the word of auditors that it actually exists.

    J.P. Morgan Securities in London, an arm of U.S. banking group J.P. Morgan Chase, is another of the nine banks. It occasionally allows visitors. Gold comes and goes from its vault with surprising frequency, moving among miners, refiners, jewelers and investors.

    It often arrives at freezing temperatures after riding in a plane's hold. The gold is fork-lifted into a cavernous vault the size of a basketball court, deep below the ground. Stacked on mundane wooden pallets are billions of dollars in gleaming gold bars.

    Even amid all this accumulated wealth, competition has eroded profit margins.

    On a recent morning, the phone rang at the desk of Peter Smith, who helps run the gold business at J.P. Morgan. A bank in Dubai needed 600 bars, each 99.9% pure and weighing 10 tolas (an Indian measure). Sitting in front of a computer with three screens, Mr. Smith phoned
    a Swiss refiner and found his client some bars. The price he quoted included a refiner's markup of 50 cents an ounce, including shipping. The 2,250-ounce order totaled well over $1 million. The bank's cut was five cents an ounce -- or just $112.

    April 12, 2006


    Edited By Jeff Greenblatt
    April 11, 2006
    There are times when reputable analysts make calls that are worth remembering. Or reviewing.  As a review I'm going to pass this along and you could do with the information as you like.  I'm going to keep it in the back of my head for the rest of the year to see if it comes to pass......
    How many of you are familiar with Arch Crawford?  I believe he has nearly a 30 year track record of accurate calls on the market.  He is very well respected on Wall Street even though his methodology (financial astrology) is not in the main stream.  I know what some of you conservative types are thinking and that's fine.  You can skip this section (or read it for your entertainment).  Remember one thing, it was JP Morgan who stated that astrology is for billionaires, not millionaires.  Any billionaires in this readership?  I know a couple of you might be aspiring billionaires so take it for what its worth....
    Friday morning on local (Phoenix) Financial News Radio 1510 KFNN, Crawford called for a STOCK MARKET CRASH THIS YEAR.  His reasoning is every time since 1915 a certain planetary cycle combination has caused a major decline in the Dow.  This is a Mars-Uranus opposition that hits on August 13, 2006.  I looked it up.  I happen to have Merriman's complete library of timing cycles and I have data back to 1966. Merriman happens to agree this signature has the potential to correlate to very large reversals.  In 9 of 23 cases studied, a 50 week or greater cycle unfolded within 15 trading days (39%).  Folks, that has better odds than an expanded flat confirming. The cycle definitions are either Merriman's or from the Foundation of Cycles.   Here are some highlights of past Mars-Uranus oppositions:
    Feb 22, 1966  Primary and Double Top to 18 year cycle crest (off by 8 trading days)
    July 21, 1973 Major Top to a sharp decline led to 22 month cycle low (off by 4 days)
    June 28, 1975 Double Top to a 50 week cycle crest (off by 11 days)
    June 1 1981 Primary Top
    May 26, 1983 Trading Top to a 50 week cycle crest (off by 15 days)
    May 14, 1987 Trading Top (off by 3 days)
    Sept 21, 1994 Primary Top which was Double Top to 4 year cycle crest.  Started big decline to 4 year cycle low.
    Aug 29, 2000 Primary Top in SP500 And Dow (off 3 and 5 days) led to big decline
    Aug 24, 2002  Led to Final decline leg in bear market (off by 3 days)
    To be sure there have been a few inversions where this signature created primary bottoms most notably in recent memory was August 18, 2004 which as many of you who were on board at that time was the August low anticipated here weeks in advance.
    This signature is in effect from August 13-March 2007.  He claims the highest probability time would be on the seasonal change on September 21-22 (which we already know is a significant time for market reversals).  However, this time there is a SOLAR ECLIPSE right on the equinox on September 22. 
    What do I think? Crawford has credibility and a good track record of success.  He is not infallible and we could always have an inversion.  But, this IS a year where we have the potential for a 4 year cycle low. The longer this thing stays up in the stratosphere, on a cycle basis, the greater chance we have for a very serious decline at some point.  Apparently, the planets are suggesting IF it IS to happen, this is WHEN IT WOULD HAPPEN.
    We'll see..........
    As a review let's go back to Thursday night so we can better understand where we are right now.  Recall I was looking for a retest of the high in the NDX and a test of the 61% retracement level in the SOX.  We were so close on both accounts logic prevailed (at least in my mind) we'd at least get those tests.  We started out higher on Friday coming within 5 points in the SOX and 11 points in the NDX.  THEN WE WERE STONED by an invisible ceiling. 
    What happened?
    On the chart I follow most closely, the NQ, we hit a high wave candle on the 321st-5min bar of this particular leg.  A high wave bar implies (small body and tails on both sides) confusion and uncertainty.  The next bar was the 322nd (Lucas) bar which started the decline we experience to this moment.   Recall on Thursday I stated that we have to be on the alert for pullbacks when legs get into the 300s?  I know that's general because it covers 8 hours.
    More importantly, the NASDAQ hit the 262nd hour off the February 13th low.  Catching this exactly on the spot as a major turn was complicated by the fact there are separate bar counts for the NASDAQ and NDX which made a lower low on March 10 which was not confirmed by the NASDAQ.  By Friday afternoon I was able to figure out why we turned.  We were also 21 days up to the current leg.  When we get a turn on the hourly and daily time frame, we need to take it seriously because we only get those several times a year. Maybe once or twice a quarter.
    What happened in the SOX was instead of a 61% retracement of the whole move down, we topped on the 61% retracement of the big secondary high.  The NDX topped on the 88.6% retracement of the drop into March.  The 88.6% level happens to be the square root of the .786 common retracement.  After we pass a 61% retracement, there is a 95% chance of testing the high in all time frames.  However in that 5% of situations, we have to deal with that rare 88.6% marker which is always the last guard at the gate to a complete retest.
    Lower probabilities, to be sure.  However, since we came so close sentiment here seems to be one of surprising disappointment as those who bought last week are already under water in many cases.  Now it will be much tougher to get back up there in the NDX because as opposed to testing just one point in time (January high) we now have a resistance zone from 1750-61.  Those who have bought in this entire period from February will be looking to break-even or not get killed.   In other words, I think this high has a shot at being a multiweek high. 
    Coming to yesterday and today, the selloff leg that took out yesterday's low violated no less than 3 decent intraday time relationships from yesterday afternoon.  Something has changed, because the past 2-3 weeks have been characterized by lows being set on the kind of time cluster THAT WAS VIOLATED SO EASILY TODAY.   Everyone has their method of technical analysis and I have mine.  What I've noticed is markets always can elect to do or not do something at the fork in the road.  However, when time clusters are taken out SO EASILY, that means something.  Yesterday the NQ hit a low on a combination of 55-15min, 29-5min as well as 161-5 min bars that ALL BOTTOMED ON THE SAME BAR.   Not to mention an ABC price setup that saw a .61/1.61 relationship.   The SOX also bounced after declining for 13 hours.
    Obviously, many of the people who bought recently all fled for the exits at the same time.
    A word about the Dow.  I put up a new Dow hourly chart so many of you can get a look and sneak preview of the kind of charts that are in the ebook.  I know many don't totally get this time stuff and I'm not in a position to put too many of them at stockcharts but here is a good example.  Off the high from March 21 (change of season) we declined for 60 hours, reversed on 61 and topped on the 89th hour.  This is how we confirm wave counts because they turn on time clusters.  This 89th hour was not only the 89 (Fibonacci) hourly bar off the  high but it was also a 29 (Lucas) hour cycle.  Look at the chart, you'll see that hourly bar created a beautiful tail making the Nison people happy that we confirmed a failure at resistance.  For added certainty, we did it right on schedule. Now the Dow is down another 21 hours so is primed for some kind of bounce.  Also, it is in danger of breaking through a trend line that has contained three lows since the October rally leg started.
    BOTTOM LINE: Turning back to the NDX we are now at a small degree 61% marker with the hourly charts down at 30 RSI.  There is a much larger degree 61% marker at 1678.  I'd look for a bounce tomorrow but the NDX has a better chance of finding a trading low one level lower. Same thing for the NASDAQ which has a 61% marker at 2290. We just were up 21 days so I doubt the selling is done after 3 days. I'd look for a low around the April Fibonacci 13th where there is a full moon.  IF we were to get a better low on Thursday we would be down 5 days which is more reasonable than here.
    I've been looking for the elusive high for the past few weeks.  Sorry I couldn't be more precise because this is a three week time window.  Right now we just started week 162 off the 2003 low.  Australia is finally showing signs of cracking.  Today you are already down 40 after dropping 40 on Monday. Thursday to Monday saw a decent looking evening star pattern on a daily chart Yesterday was a recovery but today you given right back ON THE OPEN.
    For those of you who ever take one of Nison's advanced trainings which I recommend very highly he talks about a specific candle line that now appears on the daily chart.  I'm referring to THE LAST BULLISH ENGULFING BAR.  If you look at the last 4 four bars you'll see an evening star followed by a white candle.  The last 2 bars are black, then white.  When you see that combination on a low,  if implies a potential reversal.  When you see a bullish engulfing bar AT A HIGH,  many times it is the kiss of death to the trend. Same thing would be a bearish engulfing bar near a low.  If you throw in today's drop, we have the recipe for more selling.
    We've started a corrective wave in the XAU and what is most interesting here is the time count once again.  From March 10-16th we had a leg up that covered 29 (Lucas) hours followed by a pullback.  The pullback ended on the 64th hour off the bottom and the leg up spanned from hour 65-139 counting shared bars which is roughly 75 or one shy of Lucas 76.  The relationship of 29/76 is 2.62 which is why we are so interested in the Lucas sequence here.  We had an initial leg and then a 2.62 time extension which created a turn. What is interesting about the leg since the high is we SPIKED on hourly bar 17 and dropped on 18 which is a sure sign of change of direction. We have a gap up and 38% price retracement level at 138 which is where I think we are headed.   I tend to think this could be a 4th wave but we need to stay above 132 (first wave high) to confirm that.
    We are still in the area around 597 which I discussed last week which is an important marker for traders as it is a 1.61 extension level.   I'd look for a small pullback here but since we topped 600 I'd look for a more lasting high somewhere in a zone of 610-618.   We have a negative divergence on an hourly chart dating back to March 30.  The divergence is more pronounced on a 15 minute basis.  Silver has the same type of divergence but is now up 153 days so we are coming to that 155-162 day period.  Silver looks like we started a small degree abc correction that could find a low near 1220.  IF it drops here we could see a low at 155 days and perhaps another leg up to the 160-162 day cycle.
    The dollar finally hit a low in the time frame I was anticipating last Thursday. We've started a leg up and now a small correction for the past 10 hours.  IF it is to reverse, it should do so early in tomorrow's session on a time basis and at 88.72 on a price basis. The leg up off the low looks like an impulse wave.  If the larger count (a big triangle) is correct, we've already seen the low.
    I think we've hit another false bottom. We've hit the low on the 58th day of the leg which means we have a chance to hit a small degree high by day 62 which will happen on Thursday. Here's a chance for an inversion where instead of bottoming on the 62nd bar we invert and continue the downtrend.
    We are having our retest of the high right now which just about blows the triangle count out of the water.  The good news is we are 38 days up overall and 16 days up on the latest leg.   We are also at a point on the chart where after the decline into early March we are at a 1.61 extension of the leg from February.  The implication is we could get a pullback here with bearish divergences on the various intraday time frames dating back 2 weeks.
    For those of who are new, this is the link you follow to get to the charts.  IF you like what you see, please vote for it at the bottom of my page once a day.
    The content in THE FIBONACCI FORECASTER is for educational and informational purposes only.  There is no offer or recommendation to buy or sell any security and no information contained here should be interpreted or construed as investment advice. Do you own due diligence as the information is the opinion of Jeff Greenblatt and subject to change without notice.   Please be advised to consult your investment advisor, attorney or tax professional before making any investment decisions.  Jeff Greenblatt will not accept any responsibility or be liable for any investment decisions based on the information discussed here.
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    April 11, 2006

    Copper breaks $6000 a ton

    London Metal Exchange benchmark three-month copper broke key level $6,000 a metric ton Tuesday, building on overnight momentum after Grupo Mexico SA declared force majeure, attracting more fund and speculative interest, an analyst said.

    LME copper peaked at $6,005/ton, the latest in a series of record highs. Copper has risen more than 11% since the beginning of April and 26% since the beginning of the year. Prices then dipped to $5,915/ton on profit taking, a move anticipated by most analysts.

    "The uptrend is likely to remain intact but after the hard and fast push up we could see some consolidation. The $6,000/ton level is likely to provide some resistance in the near-term," Barclays Capital analyst Ingrid Sternby said. News of Grupo Mexico declaring force majeure due to a three-week long strike at its La Caridad mine fueled copper's latest push up, channelling further fund and speculative money to the metals market, she added.

    La Caridad copper mine, in the northwestern state of Sonora, produces about 150,000 metric tons of copper concentrate a year and 250,000 tons of different refined copper products.

    Future pullbacks in copper will likely see buying on the dips while fund long position holders will seek to keep prices up, Calyon analyst Maqsood Ahmed said.

    The Easter period could also see some profit taking in order to square positions before the four-day weekend, he said.

    LME three-month zinc moved to a fresh record high of $2,985/ton, up 2.5% in line with copper's rise and on its own bullish fundamentals, brushing close to key target of $3,000/ton.

    Zinc's cash-to-three-month backwardation moves sharply out to $45 from $15.50. Backwardation is a condition where spot prices trade above dates further forward and usually indicate that a market is in short supply.

    LME nickel maintained Monday's strong gains to a two-year of $17,650/ton overnight and last traded at $17,450/ton.

    Copper's move comes amid buoyant commodities prices with oil at eight month highs and gold pushing through key psychological level of $600 a troy ounce overnight.

    Richard Russell snippet

    Dow Theory Letters
    April 11, 2006

    Extracted from the April 10, 2006 edition of Richard's Remarks

    My opinion on housing -- The Fed knows that housing MUST hold up -- a housing collapse would be a disaster, Housing has been the KEY to the US economy. To hold up housing, the Fed must keep the nation floating on liquidity. We don't know what the broad M-3 money supply is now, because the Government has taken away the figures. But I believe the precious metals are giving us the answer -- the answer is that liquidity is HUGE. The country is floating on money, and that's the way the Fed wants it.

    The cover-up to this Fed-created inflation is those mini-boosts in Fed funds. The little boosts give the false impression that the Fed is "fighting inflation." But inflation is a product of too much money chasing too few goods. Without M-3 we can't prove it, but gold is telling us that the Fed is creating huge amounts of liquidity. Above everything else, the Fed is intent on keeping housing UP.

    In my opinion, the housing bubble is still intact! If nothing else, I see it in the action of the home building stocks.

    Gold, silver, platinum. The precious metals are all in bull markets. Platinum today rose to a new record high above 1100 an ounce. The ratio of gold to silver dropped today to 47.9, meaning that one ounce of gold buys 47 ounces of silver. In January, gold would buy a large 62 ounces of silver. Thus silver is certainly outperforming gold, although both metals are rising. Rumors are that there is a short squeeze in silver. The once great silver supply is shrinking. A further bullish force for silver is that a silver Exchange Traded Fund will soon come out, meaning that investors will be able to buy a fund that is backed by actual silver.

    A question I'm often asked is, "What would happen to gold shares if the broad stock market sinks into a bear market?

    My answer is that a bear market in stocks would be basically deflationary. The Fed is mortally afraid of deflation, Therefore, in the face of deflationary action, the Fed would open the monetary spigots wide and bring rates down to 1% or even 0.5%. In other words, the Fed would move to the edge of destroying the dollar rather than deal with the forces of deflation. Under these conditions, I would expect gold to resist or outperform almost everything else, since the Fed's counter-deflationary action would place the viability of the dollar in doubt.

    The metals might not respond immediately to a bear market, but as investors realized what the Fed was doing, the metals should rise. As the metals rose, this should rub off on the metal stocks.

    Apr 10, 2006
    Richard Russell

    Chinese govt. economist includes gold in plan to slow rise in FX reserves

    BEIJING -- China should push yuan reforms, let firms hold more

    foreign currency, and raise gold reserves to help slow the rise in

    foreign exchange reserves, an influential government economist said.

    China should ideally hold about $700 billion in foreign exchange

    reserves to ensure debt repayment, finance imports and maintain

    stability, Xia Bin, head of the financial research institute at the

    cabinet's Development Research Centre, said in a research report

    seen by Reuters on Monday.

    The rapid rise in China's reserves, the world's largest at $853.6

    billion at the end of February, had made it hard for the central

    bank to control money supply and showed that China had failed to to

    keep badly needed capital at home, Xia said.

    A spokesman at the State Administration of Foreign Exchange which

    manages the reserves, declined to comment on the report.

    The reserves have soared in recent years as the People's Bank of

    China, trying to hold down the yuan, has bought most of the dollars

    generated by a growing trade surplus and the inflow of foreign

    direct investment and speculative capital.

    Investing those dollars, China has become a big buyer of U.S.

    government bonds and other dollar assets, helping to finance a heavy

    U.S. current account deficit and to keep U.S. interest rates low.

    "We cannot underestimate the possible loss to the reserves if, in

    the long run, the United States adopts a weak-dollar policy and we

    are still maintaining a high level of dollar reserves."

    China is keen to hedge risk by diversifying its reserve holdings

    away from the dollar, but economists say that fears of a collapse in

    the U.S. currency will prevent any dramatic shift.

    Xia suggested the government should consider a combination of

    measures to slow down the build-up of China's foreign exchange

    reserves, including giving the yuan more leeway to move.

    The government should also consider allowing firms to hoard more

    foreign currency and establish an investment fund to channel hard

    currency and personal investments overseas, Xia said.

    The central bank might need to raise its gold reserves, which had

    been too low in recent years, to reflect China's status as a major

    trading nation, he said.

    Part of the forex reserves could be used to recapitalise state banks

    following the injection of $60 billion into China Construction Bank

    Corp., Bank of China, and Industrial and Commercial Bank of China,

    Xia said.

    "How to effectively ease the upward pressure is vital for the yuan

    exchange rate reforms and also vital in resolving the problem of the

    runaway growth in foreign exchange reserves," Xia said.

    China must follow its own independent policy, regardless of foreign

    pressure, by letting market forces adjust the yuan's value towards

    its "equilibrium level", he said.

    The authorities should keep the yuan's crawling appreciation

    and "appropriately widen its floating band," Xia said.

    In July China revalued the yuan by 2.1 percent against the dollar

    and shifted to a managed float. The yuan has appreciated a further

    1.3 percent versus the dollar since then and the pace of rises has

    quickened in recent weeks, ahead of President Hu Jintao's visit to

    the United States.

    Commodities run turns to stampede

    The upward march in commodity prices picked up even further pace overnight as a combination of geopolitical tensions over Iran, supply concerns, fund diversification and sheer momentum drove prices higher across precious, base metal and oil markets.</ />

    New York gold futures closed above the psychologically important $US600 an ounce level for a third straight session - the highest level in a quarter century - although spot prices stopped just short of there. The precious metal has risen 16 per cent this year and more than 40 per cent in the past 12 months.

    Gold's breath-taking ascent gave further impetus to silver, which jumped 4 per cent to settle at a 23-year high at $US12.56. Silver is also being sought on expectations that the first silver exchange-traded fund will be launched soon, with the potential to boost metal demand sharply.

    In the energy markets, US crude oil futures prices gained 2 per cent on supply concerns related to tensions between Washington and Tehran over Iran's nuclear ambitions.

    "Geopolitics is playing a key role in pension/mutual funds' motivation to invest in oil. They perceive geopolitics not as trading opportunities but as risks," analysts at SG CIB said.

    The (Rude) Awakening

    While satire can be useful in pointing out the folly of America’s unprecedented borrowing and spending binge, the remedy will likely be so harsh that it precludes humor. Yet, the aspect of the effects of this credit phenomenon on the average American has long concerned me. So, with your permission, I will continue the story of the couple above, whom I’ll call Bob and Sally Smith, in my own admittedly dour way. If you are fortunate enough to be reading this article with no credit problems, you still have been, and will be, affected by this historic, reckless expansion of credit. Beyond the effects of inflation, and the probability of deflation, the consequences of our profligacy will not play out in a vacuum and will not be nearly as hygienic as an academic discussion of this problem. 
    In response to the bursting of the stock market bubble of the late ‘90s, in 2001, the Federal Reserve began slashing interest rates, from 6.5 to 1 percent by 2003, bringing rates to their lowest levels since the Great Depression. Not surprisingly, as the credit spigot was opened wide, housing prices went parabolic. The unsustainable stock prices of the late ‘90s gave way to the unsustainable real estate prices of today. In 2004 and 2005, thousands of articles warned of a real estate bust, but the bust has yet to occur. Over the last two years, like us, many have cautioned that the stock market is again nearing a significant decline, yet no such decline has unfolded.
    So, if things have been “good” for so long (three years is forever to most Americans), why do we so doggedly hold to the idea that there is a problem and that our current course is not self-sustaining? I think that we are nearing the end of this present course, and while no person can know that this is “the top” (until it is too late to do anything about it), keeping watch for “the top” has never been more crucial. So once again, this time – through the eyes of Mr. and Mrs. Smith, we will look at the line of dominoes, the first of which is teetering and appears to be starting to fall.
    The Smiths have heard stories from friends, family, and associates that are very close to their own experience. One day, Bob recognizes a common denominator and becomes concerned. He realizes that a lot of the people he knows have taken on increasing amounts of debt and ponders whether his small view of the world is a microcosm of what is happening on a much larger scale across the U.S. While they are certainly not “pessimists,” the Smiths decide to do some research on debt, which eventually leads them to a website called, There they happen upon the chart below. As they take in the size of household debt and the pace at which it’s growing, and realize that this is not a chart of a few families in their circle of friends, but a look at the 300 million people that comprise the United States, they become increasingly ill at ease.

    April 10, 2006


    PIRACICABA, Brazil — At the dawn of the automobile age, Henry Ford predicted that "ethyl alcohol is the fuel of the future." With petroleum about $65 a barrel, President Bush has now embraced that view, too. But Brazil is already there.

    Skip to next paragraph
    Lalo de Almeida for The New York Times

    Ethanol, or alcool, is popular at a São Paulo station and across Brazil because it costs less than gas.

    This country expects to become energy self-sufficient this year, meeting its growing demand for fuel by increasing production from petroleum and ethanol. Already the use of ethanol, derived in Brazil from sugar cane, is so widespread that some gas stations have two sets of pumps, marked A for alcohol and G for gas.

    In his State of the Union address in January, Mr. Bush backed financing for "cutting-edge methods of producing ethanol, not just from corn but wood chips and stalks or switch grass" with the goal of making ethanol competitive in six years.

    But Brazil's path has taken 30 years of effort, required several billion dollars in incentives and involved many missteps. While not always easy, it provides clues to the real challenges facing the United States' ambitions.

    Brazilian officials and scientists say that, in their country at least, the main barriers to the broader use of ethanol today come from outside. Brazil's ethanol yields nearly eight times as much energy as corn-based options, according to scientific data. Yet heavy import duties on the Brazilian product have limited its entry into the United States and Europe.

    Brazilian officials and scientists say sugar cane yields are likely to increase because of recent research.

    "Renewable fuel has been a fantastic solution for us," Brazil's minister of agriculture, Roberto Rodrigues, said in a recent interview in São Paulo, the capital of São Paulo State, which accounts for 60 percent of sugar production in Brazil. "And it offers a way out of the fossil fuel trap for others as well."

    Here, where Brazil has cultivated sugar cane since the 16th century, green fields of cane, stalks rippling gently in the tropical breeze, stretch to the horizon, producing a crop that is destined to be consumed not just as candy and soft drinks but also in the tanks of millions of cars.

    The use of ethanol in Brazil was greatly accelerated in the last three years with the introduction of "flex fuel" engines, designed to run on ethanol, gasoline or any mixture of the two. (The gasoline sold in Brazil contains about 25 percent alcohol, a practice that has accelerated Brazil's shift from imported oil.)

    But Brazilian officials and business executives say the ethanol industry would develop even faster if the United States did not levy a tax of 54 cents a gallon on all imports of Brazilian cane-based ethanol.

    With demand for ethanol soaring in Brazil, sugar producers recognize that it is unrealistic to think of exports to the United States now. But Brazilian leaders complain that Washington's restrictions have inhibited foreign investment, particularly by Americans.

    As a result, ethanol development has been led by Brazilian companies with limited capital. But with oil prices soaring, the four international giants that control much of the world's agribusiness — Archer Daniels Midland, Bunge and Born, Cargill and Louis Dreyfuss — have recently begun showing interest.

    Brazil says those and other outsiders are welcome. Aware that the United States and other industrialized countries are reluctant to trade their longstanding dependence on oil for a new dependence on renewable fuels, government and industry officials say they are willing to share technology with those interested in following Brazil's example.

    "We are not interested in becoming the Saudi Arabia of ethanol," said Eduardo Carvalho, director of the National Sugarcane Agro-Industry Union, a producer's group. "It's not our strategy because it doesn't produce results. As a large producer and user, I need to have other big buyers and sellers in the international market if ethanol is to become a commodity, which is our real goal."

    The ethanol boom in Brazil, which took off at the start of the decade after a long slump, is not the first. The government introduced its original "Pro-Alcohol" program in 1975, after the first global energy crisis, and by the mid-1980's, more than three

    April 06, 2006

    Farber on Commodities

    Worth a watch.

    Best Quotes of March 2006

    Ted Butler, Investment Rarities
    "If someone had asked me to devise a method, or scheme, that could propel silver prices sharply higher, I don’t think I could have dreamed up anything more potentially bullish than the Barclays ETF.

    At the heart of the silver story is the structural deficit and disappearing inventories. For more than 60 years, we have continuously consumed more silver than has been produced on a current basis, necessitating the draw down of inventories every year. As I have repeatedly stated, there is no more bullish or temporary a condition possible in any commodity than such a circumstance. In time, it guarantees a price rise sufficient to eliminate the deficit. The reason the silver deficit could exist for so many years was because so much silver had been accumulated through the ages that it took many decades to eat up those inventories. When inventories cease to be available, silver hits a brick wall. Prices must rise and the deficit end.

    What the proposed ETF promises to achieve is the acceleration of the time that available silver inventory will run out and we will smack into a brick wall…The largest single pool of investment capital in the world exists in institutional and individual retirement accounts. The total amount of capital in this category runs into the trillions and trillion of dollars. In the US, much of this giant pool of assets that covers institutional pension plans is governed by the Employee Retirement Income Security Act of 1974 (ERISA), which sets standards in how these funds should be safeguarded. Very simply stated, fiduciary responsibilities by plan administrators must be conducted by "prudent man" principles, including what type of assets could be invested in with plan funds. Again, staying simple, this meant only investing in sound securities, mainly stocks and bonds. Commodities or commodities futures contracts were strictly forbidden.

    Commodity ETFs change all that. Because they are structured as a common stock, they make it possible for investment by many types of accounts, where investment was not legal or possible before. This is what I would have never been able to imagine – someone actually came up with a way to connect or link the largest pool of investment capital in the world to the one market that could least handle (at least on an orderly pricing basis) an infusion of such funds, real silver. Just to put it into perspective, one-tenth of one percent of trillions is billions. I don’t see how billions of dollars could flow smoothly into the silver market. It’s like trying to stuff ten pounds of ice cream into a one-pound container – no matter how you do it; you’re going to make a mess. This is the other reason why I was sure the regulators would reject the silver ETF.

    By the time this silver story plays out, the $50 Hunt Brothers episode will merely be a footnote in silver history."

    Steve Saville, Speculative Investor
    "It is very unlikely, however, that the US$ will ever COLLAPSE in value relative to any other fiat currency. The reason is that ALL of these currencies are in the process of being inflated into oblivion; it's just that over the next few years the dollar is likely to move towards that ultimate destination at a modestly faster pace than some of the other major currencies."

    Jim Puplava, Financial Sense
    "Inflation can manifest itself in either of two ways. It can show up in the real economy in the price of goods and services as it is doing now or it can surface in the asset markets in the form of higher prices for assets be it bonds, stocks, commodities or real estate. Just look at the '80s and '90s for financial inflation and this new decade for hard asset inflation in the price of real estate and commodities.

    This brings me to the next reinflation effort which has now begun. Why else would M3, which has been growing at an annual rate of 8%, no longer be reported by the Fed? Monetary inflation is the reason. The U.S. is spending and borrowing too much money. Our current rate of spending is out of control and beyond balancing through tax increases, so monetary inflation through monetization is next. As the Fed goes on hold—perhaps after the Fed funds rate is taken to 5-5.25%—the dollar will begin its relentless decline."

    Puru Saxena, Money Matters
    "The absurd money-creation continues. Slowly yet surely, the "stealth" confiscation of savings is gaining momentum as money loses its value. Central banks claim that they are raising interest-rates to fight inflation. At the same time they are slipping in more rum into the punch bowl, thus creating just what they say they want to fight - inflation! Take a look at the latest year-on-year money supply growth-rates around the world:

    Australia + 9.1%
    Britain + 11.7%
    Canada + 7.7%
    Denmark + 14.7%
    US + 8.1%
    Euro area + 7.3%

    When I glance at these mind-boggling figures, at least I don't see any monetary tightening taking place! Make no mistake, this excessive liquidity is inflation that banks are creating and this inflation is destroying the purchasing power of your hard-earned money. As asset-prices continue to benefit from this monetary insanity, the wealth inequality is getting wider resulting in social unrest in several parts of the world. The ultimate truth about inflation is that it always benefits the rich who are able to ride the inflationary wave by investing in assets, whereas the poor become even more impoverished as things continue to become more expensive."

    Howard Ruff, Ruff Times
    "Silver will not be just twice as profitable as gold in the next few years, but many times more profitable--maybe ten times more profitable. Silver is in huge short supply; the inventories are gone! Unlike gold, government can’t dump the silver in the market to artificially suppress the price because they have none. Silver is still the poor-man’s gold, and the time is not far away when it will be difficult to find any silver at any price short of $100 an ounce."

    Stephen Roach, Morgan Stanley
    What happens to the world economy if the bond market conundrum is suddenly resolved and real long-term interest rates revert toward historical norms?  My guess is that this is not good news for what has been a liquidity-driven, increasingly asset-dependent global economy."

    Jim Willie, GoldenJackass
    "A return to normalcy is poppycock, never to happen! We have gone so far afield, so far from anything recognizable or rectifiable, that normalcy is not even remotely possible in the gold and crude oil markets. The USFed will tighten until they cause a crisis, then deny their role, then clean it up, probably followed by easing of interest rates. The next LTCM fiasco lies around the corner, under the surface, ready to be revealed, sure to wreck havoc. Gold and crude oil will be given a grand assist when it happens, not if. It is guaranteed since the USFed can no longer even define what “neutrality” means in its policy. Besides, what it says usually obscures its actual policy motive. My firm belief is that the Enron model was hatched from the USGovt incubator, where it continues."

    Doug Noland, Prudent Bear
    "As easy as it seems that it should have been, I don’t feel I effectively countered the absolute nonsense that our Current Account Deficit is driven by unrelenting global 'capital' inflows. And I have not even come close to shedding light on the reality that unchecked – and inevitably unwieldy and unstable - global finance has been a commanding force within what the New Paradigm crowd trumpets as virtuous free-market 'globalization.'

    Why then, you may question, do I suspect that Credit Bubble-like analysis will garner more attention going forward? Well, I believe the Fed and global central bankers may finally comprehend that they are facing a very serious problem – that Credit and speculative excesses begetting greater excess demand a true tightening of global financial conditions.  Importantly, hope that a cooling housing market will obligingly chill the Bubbling U.S. economy is fading rapidly. As the 'Flow of Funds' confirmed, the Credit system is currently firing on all cylinders and the Bubble economy has a full head of steam. The U.S. Current Account and Global Imbalances are poised to only worsen, fueled by Bubble dynamics that now command Credit systems and asset markets around the globe. Expectations for a slowing U.S. are shifting to fears of a runaway Global (Credit)."

    Reg Howe, GATA
    "Alan Greenspan confessed to the gold price suppression scheme. The European Central Bank confessed to the gold price suppression scheme.  Barrick Gold confessed to the gold price suppression scheme in U.S. District Court in New Orleans on February 28, 2003, The Reserve Bank of Australia confessed to the gold price suppression scheme in its annual report for 2003. And now the Bank for International Settlements, the central bank of the central banks, has confessed to the gold price suppression scheme by saying 'the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful.'"

    Richard Daughty, the Mogambo Guru
    "The unusual action of silver and gold here lately is the result of lots and lots of guys, businesses and banks on the hook for billions and billions of dollars in short sales, year after year after year. The rise in the prices of gold and silver means financial death for them. So buy them with confidence, perhaps even with a little malice against those creeps, as they can't keep it up for much longer, and the prices of gold and silver will shoot to the moon when they finally give up."

    James Turk, GoldMoney
    "The federal government desperately needs strong economic activity in order to generate the highest possible tax revenue to decrease its reliance on debt.  But rising interest rates dampen economic activity. Rising interest rates also have an unfavorable impact on expenditures: A 6% average interest rate on $8.2 trillion of debt results in a higher interest expense burden than a 4.6% rate.

    Thus, higher interest rates restrain tax revenue while increasing the level of expenditures. Together these factors worsen the budget deficit, which then causes the federal government to borrow even more money.  The resulting higher level of debt leads to a greater interest expense burden, further worsening the deficit.  Consequently, the federal government is rapidly moving to the point where borrowing becomes necessary to meet its interest expense obligations. This condition is not sustainable. If the vicious circle is not addressed and corrected, it will turn into a death spiral in which the dollar is destroyed." 

    John Mauldin, Thoughts From the Front Line
    "Why are home supplies rising? The simple answer is that demand is falling. The University of Michigan has an index which measures the intention of people to buy a home in the near future. It is at its lowest level in 15 years. The National Association of Homebuilders Index which tracks a number of things but includes potential buying traffic in new home developments is also dropping dramatically in the last few months.

    Bear markets begin when growth in real consumer spending peaks and beings to slow. I think I made the case above that consumer spending is going to face a real uphill battle as cash-out financing slows down, higher energy costs don't go away, higher interest rates translate into higher mortgage and credit card payments on top of legislation requiring higher minimum payments on credit card balances."

    Texas Congressman Ron Paul
    "If there were a 'housing hurricane,' it would be just like a real hurricane. You spend whatever people demand you spend and worry about it later. FANNIE MAE and FREDDIE MAC have a line of credit from the Treasury, and they would use it if they had to. And I'm sure other mortgage companies would qualify. Congress would do whatever they feel they have to do…There is no historical example where paper money has lasted for a long period of time. It works for a while until the trust in that money is totally undermined, and then it ends up in an economic calamity, for the most part, in runaway inflation or other serious dislocations."

    Paul McCulley, PIMCO
    "The end of the housing boom will come soon, we think, and when it does, sales volume in the property market will reverse wickedly. Housing prices don't crash, but volume of transactions does, as sellers refuse to face reality on pricing and buyers wait them out." 

    Peter Schiff, Euro Pacific Capital
    "This week, as statistics revealed that China has surpassed Japan as the world’s largest holder of foreign reserves, the U.S. Congress continues to threaten China with 27% tariffs on their exports to the U.S. The move, which is akin to a cornered gunman turning the pistol on himself and threatening to pull the trigger, reveals the extent to which American politicians fail to comprehend the true nature of the current Sino-U.S relationship.

    In desperate need of capital, America is hardly in a position to insult those providing it, or dictate the terms by which they do so. However, the latest tough talk on China comes shortly after Congressional action which blocked key purchases of American assets by foreign interests. Such posturing sends a very dangerous message to our creditors. If as a nation we have decided to sell off our cows to pay for imported milk, we can not complain when our trading partners actually show up to collect the animals.

    As a result of the unprecedented foreign-financed consumption binge in the U.S., it is likely that nearly every major U.S. asset will ultimately pass into foreign control, including most companies in the S&P 500 and trophy properties in major U.S. cities. As America lacks the industrial capacity necessary to redeem its IOU’s with actual consumer goods, access to capital goods and domestic assets is all that gives its currency value. Restrictions on the ability to acquire such assets will diminish foreign interest in accepting dollars in exchange for exports, and will dissuade foreign governments from holding huge reserves of dollars that they cannot hope to spend."

    Paul Kasriel,  Northern Trust Company
    "Again, so what if mortgage defaults are on the rise? No biggie except that U.S. commercial banks have a record exposure to the mortgage market. About 62% of bank earning assets are mortgage-related. (I do not have access to the data to determine what part of this mortgage exposure pertains to commercial properties). What I'm driving at here is the potential for a bust in housing to cripple the banking system. History tells us that a crippled banking system renders central banks less potent in combating economic downturns and promoting robust recoveries. In other words, if a housing bust led to large credit losses to the banking system, Chairman Bernanke could cut the fed funds rate to 1% and be surprised that a low interest rate did not have the same magic for him as it had for his predecessor."

    James Grant, Grant’s Interest Rate Observer
    "There are more values in your hotel mini-bar than in the U.S. bond market,"

    Eric Andrews, Financial Sense University
    "In 2008, the first Boomers will begin retirement and sell their stocks, bonds, and other paper promises into the market to pay for rent, health care, and gasoline. Who will buy them? The younger generation makes far less per hour, and even if their wages were equal, there are not enough of them to offset a 30-year supply of selling pressure. Worse, as their selling drives the market down, no one could buy even if they wanted to, because who would buy a stock when the tide of the market will sink for 30 years? Our Generational Transfer problem can be mostly righted by canceling Medicare and increasing the Social Security retirement age to well over 70. Not so the stock and paper markets."

    I. M. Vronsky, Gold-Eagle
    "Gold & Silver Equities' fantastic performance in the last 5 years will slowly mesmerize and galvanize investor attention to the point Gold Fever contagion will spread through the world -- as frantic investors seek to place their hard earned savings in vehicles demonstrating intrinsic value and high liquidity…like gold and silver equities."

    The Silver story

    What is the real silver story and what would it take to proclaim that most observers and commentators knew that story? In my opinion, you would have to see articles and hear commentary from the popular media that dealt in the following topics. That silver had been in a continuous consumption/production deficit for 60 years. That the US government, formerly the largest holder of silver in history, had none left. That silver had become a vital industrial commodity with more applications and uses than any other commodity, save petroleum. That the price had not risen for 20 years in spite of the structural deficit, in defiance of the very law of supply and demand. That, according to the US Geological Survey, there were fewer years of production of silver left in the ground than any other metal or mineral. That, in terms of available world inventories, silver was more rare than gold.

    If I started to hear and read stories in the popular media that included these topics, then I would conclude that the real silver story was being learned. But there is one topic that would tell me the word was really getting out, if it were to appear. That topic, of course, is the out-sized short position; principally the COMEX short position. This is the subject that first told me, more than 20 years ago, that there was something definitely wrong in silver. For two decades, I have yet to come across anyone who could take the other side of the debate, namely, to show that there was anything legitimate about the COMEX silver short position.

    The COMEX silver short position, no matter how you slice it or dice it, stands out from any other commodity. Let me count the ways. The gross COMEX short position (open interest), for futures alone, is now over 700 million ounces. This is greater than total world annual mine production and greater than any world inventory amount than I have seen published. In no other commodity can this statement be made. The net commercial COMEX silver short position is also larger, by a disproportionate amount, than any other commodity when compared to real world production and inventories. Ditto the net concentrated short position, where a handful of large traders are short more silver than in any other commodity. In the 20+ year-history of the Commitment of Traders Report (COT), COMEX silver is the only commodity where the commercial have never been net long.

    You must remember, the only reason that the Commodity Futures Trading Commission (CFTC) even compiles and reports the concentration ratios of the largest traders in all commodities is as a safeguard against manipulation. But why do they even bother? My point is that why does the CFTC go the trouble to keep and publish such concentrated positions if they don’t intend to do anything about those positions, no matter how large and concentrated they may grow?

    Currently, there is a vocal debate about the prospective Barclays silver ETF and what effect the proposed maximum filing of 130 million ounces, or any amount up to that maximum filing amount, could have on the market. But why is there no debate about the 4 largest traders on the COMEX who are already net short more than 200 million ounces and what effect that has had on prices? Or about the 8 largest traders who are already short almost 300 million ounces?

    I know that I have been in a distinct minority in harping on this silver short position. I know many ignore it or dismiss it with shallow explanations, like "there’s a long for every short, so what’s the problem?" I know that regulators and exchange officials have always denied it was the problem that I have claimed it to be. That doesn’t bother me, and I look forward to being judged on this issue in the fullness of time.

    Along with the 60-year continuous structural deficit, the depleted inventories, the paucity of below ground remaining resources, and the stunning rarity of silver compared to gold, the uneconomic short position in COMEX silver is key to the real silver story. It is the resolution of this outrageous short position that will dictate the major moves in the price of silver.

    Make no mistake; this short position must be resolved. It is not possible for a short position that is larger than all the silver in the world, or could be produced, to last indefinitely. The only question is how quickly investors of the world learn the real silver story and rush to take advantage of it.

    Hedge Funds In Drag?

    Another quarter has come and gone, and with it has come the mandatory mark-to-market for mining company’s derivatives hedge books. I’d like to review and follow up on the likely hedge results of the two companies I had highlighted previously, in an article titled, "Lessons Learned?"

    Let me emphasize, once again, that I am not intending this to be investment advice on whether to buy or sell these stocks. I don’t have, nor have I ever had, any financial interest in these companies. I write about them for information purposes only, principally because there seems to be so little written on the topic.

    It would appear that the largest derivatives loss in history just got a lot bigger. Due to the $65 per ounce increase in the price of gold during the first quarter, Barrick Gold Mining should report a $1.2 billion additional open loss on its hedge book (now combined with the recently merged Placer Dome). Combined with the $220 million dollar loss already booked early in the quarter, the loss in the quarter should come to more than $1.4 billion. The open 18.5 million ounce gold short position that Barrick holds puts the total open loss on its hedge book at well over $5 billion. As the late Senator Everett Dirksen used to remark, "a billion here and a billion there, and pretty soon you’re talking about some real money."

    I know many contend that these horrendous hedge results are not really losses, but I would dispute that. In any event, they are, at the very least, negative to shareholder wealth. It’s kind of funny how when the hedges were going in Barrick’s favor years ago, the company was quite loud and forceful about how they were a big reason for Barrick’s success. They are not so loud and forceful these days.

    Of course, I can’t know what actions Barrick may have taken on their hedge book until they report their results in a month or so, but my back-of-the-envelope calculations should prove close to the mark. I’ll let you know.

    Coincidently, on the day of the quarter’s end, March 31, Apex Silver reported its results for the 4th quarter. They reported a loss of approximately $50 million on their hedge book, principally losses on their zinc hedge. They did not close any of their hedges in the fourth quarter, and appeared to slightly increase their shorts.

    Extrapolating for the first quarter, I would estimate that Apex lost roughly another $100 million dollars through March 31, bringing the total loss on their metal shorts to around $150 million. The loss was centered around the 30 cents per pound price rise in the price of zinc for the quarter. The bulk of Apex’s hedges were established as a requirement by their banks for them receiving a $225 million loan.

    Therefore, in essence, Apex is sitting on a $150 million hedge loss (still open) only months after getting a $225 million loan, which mandated the hedge. Those are some pretty expensive loan costs. I suppose it would have been cheaper for Apex to have arranged a loan from the Sopranos and skipped the hedge. Apex managers may have had their kneecaps broken if they didn’t pay up, but at least it would have been cheaper. Perhaps management should have let shareholders vote on it.

    April 05, 2006

    Housing bubble haiku

    The bids you receive,
    The sound of one hand clapping.
    Do they sound the same?

    Poof! In an instant–
    Disappearing without trace
    –All your equity.

    Hot market blazing
    Burn rate growing, credit maxed
    –Who put the fire out?

    Your intelligence,
    Your credit, your house: all are
    Well below average…

    Paper gains, but air
    Mortgage, a lead anchor.
    Which carries more weight?

    Costs are high, hope gone.
    The lender demands –foreclose!
    And away goes house…

    Like cherry blossom
    In last days of spring, your home
    Is well past its prime.

    Above the summit
    Beyond soaring clouds, comes
    …New tax assessment!

    As small kindnesses
    Shown strangers, your upgrades too
    Go un-rewarded.

    Dark clouds approaching,
    No more buyers found –Next comes
    Vengeful ‘Silent Spring'.

    Your Realtor job seems
    Beyond your abilities.
    –Is McDonalds hiring?

    Many clouds slip by,
    Unseen, unknown; much like your
    …Prospective buyers.

    How vast the ocean
    That separates asking price
    From true house value.

    Many are the paths
    That lead to prosperity.
    Sadly, none lead here…

    Daytrader before,
    Flipper now; coming soon:
    Parking attendant.

    Stainless steel, marble
    Glistens so, like Fool's gold,
    It has no takers.

    housing bubble blog

    April 04, 2006

    Commodities: Gold may rush higher as buyers switch from bonds

     Gold may top $600 an ounce this week for the first time in 25 years as investors buy bullion instead of U.S. bonds, according to a Bloomberg News survey.
    "It's going to $600," said Duncan Cruickshank, an analyst at Commodity Warrants Australia. "People are piling in. People will make money even if they buy at these levels."
    Nineteen of 30 traders, investors and analysts surveyed worldwide late last week advised buying gold, which rose $21.20 to $586.70 an ounce last week in New York. Seven advised selling and four were neutral.
    Gold has rallied 13 percent since the end of December, outperforming the 3.7 percent gain in the Standard & Poor's 500-stock index. Holders of the benchmark 10-year U.S. Treasury note lost 2.8 percent. Gold held for exchange-traded funds linked to the price of the metal grew about 28 percent in the first quarter, reaching 14 million ounces, the producer-financed World Gold Council, based in London said.
    Demand by investment funds has fueled the rally in gold this year.
    "The key buyers are funds," said Paul McLeod, vice president for precious metals at Commerzbank Securities in New York.
    Hedge-fund managers and other large speculators increased their holdings positions in New York gold futures in the week ended March 28, government figures show.
    "No one wants to be short in this environment," Adrian Day of Adrian Day's Asset Management said, referring to bets on falling prices. "People are looking for opportunities to buy, not to sell."
    Gold may rise as central banks sell dollars and buy gold. About 75 percent of China's reserves are held in dollars. The country may buy gold to protect itself from a falling dollar, analysts said.
    "Gold and the euro are most likely the top candidates to benefit from the Chinese, United Arab Emirates and other central banks selling the U.S. dollar," said Emanuel Balarie, a senior market strategist at Wisdom Financial.
    China has 1.3 percent of its reserves in gold, or 600 tons, the World Gold Council estimates.
     SEATTLE Gold may top $600 an ounce this week for the first time in 25 years as investors buy bullion instead of U.S. bonds, according to a Bloomberg News survey.
    "It's going to $600," said Duncan Cruickshank, an analyst at Commodity Warrants Australia. "People are piling in. People will make money even if they buy at these levels."
    Nineteen of 30 traders, investors and analysts surveyed worldwide late last week advised buying gold, which rose $21.20 to $586.70 an ounce last week in New York. Seven advised selling and four were neutral.
    Gold has rallied 13 percent since the end of December, outperforming the 3.7 percent gain in the Standard & Poor's 500-stock index. Holders of the benchmark 10-year U.S. Treasury note lost 2.8 percent. Gold held for exchange-traded funds linked to the price of the metal grew about 28 percent in the first quarter, reaching 14 million ounces, the producer-financed World Gold Council, based in London said.
    Demand by investment funds has fueled the rally in gold this year.
    "The key buyers are funds," said Paul McLeod, vice president for precious metals at Commerzbank Securities in New York.
    Hedge-fund managers and other large speculators increased their holdings positions in New York gold futures in the week ended March 28, government figures show.
    "No one wants to be short in this environment," Adrian Day of Adrian Day's Asset Management said, referring to bets on falling prices. "People are looking for opportunities to buy, not to sell."
    Gold may rise as central banks sell dollars and buy gold. About 75 percent of China's reserves are held in dollars. The country may buy gold to protect itself from a falling dollar, analysts said.
    "Gold and the euro are most likely the top candidates to benefit from the Chinese, United Arab Emirates and other central banks selling the U.S. dollar," said Emanuel Balarie, a senior market strategist at Wisdom Financial.
    China has 1.3 percent of its reserves in gold, or 600 tons, the World Gold Council estimates.

    April 03, 2006

    US's turn to face a currency crisis

    As the world turns, its the US's turn to face a currency crisis
    Capuchinomics Weekly eLetter
    April 2, 2006

    In 1994, Mexico came within a hairs breadth of a complete financial meltdown. The Mexican crisis was replicated in 1997 in Malaysia, Thailand, Indonesia, the Philippines and South Korea, referred to then as the "Asian tiger" economies because of their rapid growth. The Asian tiger economies, unlike Mexico, experienced meltdowns. Nearly all these economies saw their economies devastated, currencies devalued, asset price deflation and sudden impoverishment for a wide swathe of their populations. In 1998, Russia experienced the same fate as the Asian tigers with one additional feature, sovereign debt default. In 2002, Argentina, following a familiar script experienced a crisis that catapulted it from an emerging first world nation to third world nation overnight and featured the now familiar actors of a collapsed economy: devalued currency, asset price deflation, sudden impoverishment and sovereign debt default.

    It's an astonishing and tragic catalogue of failure. Only South Korea and to a lesser extent Mexico have recovered from the devastation of these crises. In physics, Newton's third law of motion states that "For every action, there is an equal and opposite reaction." The financial variation goes "for every loser there's a winner." This set of global crises had many losers i.e. the populations of these countries that suffered sudden impoverishment and decline in living standards. The biggest beneficiary of these crises was and still is the US.

    To understand how this came about, one must understand the political and economic backdrop to the crises we listed in the first paragraph. 1989 marked the biggest upheaval in post World War II human history as communism collapsed as an organizing principle for politics, economies and societies. The immediate aftermath of this collapse caused an immense void that the West and capitalist societies were wholly unprepared for. Few had anticipated the fall of communism and fewer had prepared to rebuild the shattered societies and economies of the ex-communist countries. The void was filled by the World Bank and the International Monetary Fund that advocated a neo-classicist capitalist model irrespective of the condition of the state of these economies. To ensure compliance to their recommendations financial aid and economic assistance was doled out based on the country's compliance and adherence to this model. The goal of the IMF was to remake these countries into capitalist economies and societies instantaneously.

    Such advice was in demand, and not just from ex-communist countries but also from reforming Asian countries and South American countries. The end of the cold war had caused mini-revolutions in all these areas and politicians were eager to abandon statist models and to adopt new capitalist ones. One of the key recommendations of the IMF and World Bank that played a critical role in every crisis was the recommendation that a country's currency should be set at some fixed value to the dollar. In almost every crisis, speculators attacked these fixed values, called pegs by shorting these currencies. The central banks of these countries were advised to defend the value of their currency by purchasing it in open markets even as it declined precipitously. Ultimately, these central banks did not have sufficient reserves to defend the fixed values (pegs) that had been set. In every case, currencies succumbed to these speculative attacks, catalyzing economic depredations for its populations.

    With this background, we can now look back at the last 15 years of global finance, and see an arc of cause and effect that provides a simplified narrative for what occurred during these years. In the first phase, liberalizing economies around the world fix the value of their currency to the dollar. Next, the inflated value of these currencies lead to fiscal crises as governments and businesses take on too much debt too soon. Consequently, speculators seeing an arbitrage opportunity, launch speculative attacks on these currencies. Currency crises erupt in the countries that followed the neoclassical model without adequately comprehending its risks. Next, currency devaluations and debt defaults catalyze disastrous economic consequences for these countries. These crises decimate local economies but provide one unintended benefit: they become highly competitive in their the cost of labor.

    That brings us to the present day. Now, American companies routinely manufacture overseas to tap into these low labor costs and have shipped their production of goods to these areas. The affected countries after suffering through the devastation of the crises have learned and put into practice two important lessons. First, don't take the IMF's handouts and its accompanying advice. Second, one can never have enough reserves. As a result world central banks have accumulated reserves far beyond than what is needed to maintain liquidity and solvency for their economies and currencies.

    The US emerged out of these various crises as the financial hegemon. The dollar became the de facto currency of the world. Around the world, dollars were preferred over local currencies. These developments coincided with the internet bubble and a budget surplus, a combination that caused capital flows to move even more rapidly to the US. Even after the internet bubble burst this fund flow continued unabated. It's human nature to take all manner of precautions to address the crisis that's just passed. As a result, central banks around the world are still accumulating treasury bonds even though the US's fiscal condition now matches that of Argentina or Mexico or the Asian tigers at the point of their financial crises.

    The US by dint of the fact that it issues the world's reserve currency believes that its position cannot be challenged. However, by any reckoning, the dollar today is an emperor with no clothes. The currency features low yields, deteriorating fiscal conditions and a deteriorating investment income position. And now political forces are combining, to overthrow the arrangements that made possible the extraordinary prosperity and wealth of the last two decades catalyzed by the fall of communism and the victory of capitalism.

    What lies in store next for the global financial system? In 1989, the dollar began its road back to preeminence. This preeminence has been lost after Nixon took it off the gold standard in 1971. Thirty years later (since the Dollar peaked in 2001), the dollar came full circle, traveling from global currency villain in 1971 to hero and savior status through the various crises listed in the first paragraph. By our reckoning, the dollar is headed for another stint as global villain. Ahead then is the a period of resolution of imbalances caused by the events described above. Will these imbalance be resolved by a series of small, incremental and painless adjustments? Or are we about to see a wholesale rearrangement of the dollar oriented global financial system? Sharp moves in financial markets are suggesting that some investors have made their decision and have begun to act.

    Labour Shortage in China Emerging -Bloomberg

    SHENZHEN, China — Persistent labor shortages at hundreds of Chinese factories have led experts to conclude that the economy is undergoing a profound change that will ripple through the global market for manufactured goods.

    The shortage of workers is pushing up wages and swelling the ranks of the country's middle class, and it could make Chinese-made products less of a bargain worldwide. International manufacturers are already talking about moving factories to lower-cost countries like Vietnam.

    At the Well Brain factory here in one of China's special economic zones, the changes are clear. Over the last year, Well Brain, a midsize producer of small electric appliances like hair rollers, coffee makers and hot plates, has raised salaries, improved benefits and even dispatched a team of recruiters to find workers in the countryside.

    That kind of behavior was unheard of as recently as three years ago, when millions of young people were still flooding into booming Shenzhen searching for any type of work.

    A few years ago, "people would just show up at the door," said Liang Jian, the human resources manager at Well Brain. "Now we put up an ad looking for five people, and maybe one person shows up."

    For all the complaints of factory owners, though, the situation has a silver lining for the members of the world's largest labor force. Economists say the shortages are spurring companies to improve labor conditions and to more aggressively recruit workers with incentives and benefits.

    The changes also suggest that China may already be moving up the economic ladder, as workers see opportunities beyond simply being unskilled assemblers of the world's goods. Rising wages may also prompt Chinese consumers to start buying more products from other countries, helping to balance the nation's huge trade surpluses.

    "The next great story in China is how they are going to move out of the lower-end stuff: the toys, textiles and sporting goods equipment," said Jonathan Anderson, an economist at UBS in Hong Kong. "They're going to do different things."

    When sporadic labor shortages first appeared in late 2004, government leaders dismissed them as short-lived anomalies. But they now say the problem is likely to be a more persistent one. Experts say the shortages are arising primarily because China's economy is sizzling hot, tax cuts have helped keep people working on farms, and factories are continuing to expand even as the number of young Chinese starts to level off.

    Prosperity is also moving inland, and workers who might earlier have migrated elsewhere are staying closer to home.

    Though estimates are hard to come by, data from officials suggest that major export industries are looking for at least one million additional workers, and the real number could be much higher.

    "We're seeing an end to the golden period of extremely low-cost labor in China," said Hong Liang, a Goldman Sachs economist who has studied labor costs here. "There are plenty of workers, but the supply of uneducated workers is shrinking."

    Because of these shortages, wage levels throughout China's manufacturing ranks are rising, threatening at some point to weaken China's competitiveness on world markets.

    Li & Fung, one of the world's biggest trading companies, said recently that labor shortages and rising manufacturing costs in China were already forcing it to step up its diversification efforts and look for supplies from factories in other parts of Asia.

    "I look at China a lot differently than I did three years ago," said Bruce Rockowitz, president of Li & Fung in Hong Kong, citing the rising costs of doing business in China. "China is no longer the lowest-cost producer. There's an evolution going on. People are now going to Vietnam, and India and Bangladesh."

    The higher wages come at a time when costs are already rising sharply across the country for energy and land. On top of a strengthening Chinese currency, this is likely to mean that the cost of consumer goods shipped to the United States and Europe will rise.

    To be sure, China is not about to lose its title as factory floor of the world. And some analysts dispute the significance of the shortages.

    "Reports of a shortage of unskilled and semi-skilled factory workers are overblown," said Andy Rothman, an analyst at CLSA, an investment bank. "Companies are, however, having trouble finding experienced people to fill midlevel and senior management jobs."

    The lack of workers is most acute in two of the country's most powerful export regions: the Pearl River Delta, which feeds into Hong Kong, and the Yangtze River Delta, which funnels into the country's financial capital, Shanghai. Wages are rising significantly in both areas.

    According to government figures, minimum wages — which averaged $58 to $74 a month (not including benefits) in 2004 — have climbed about 25 percent over the past three years in big cities like Shenzhen, Beijing and Shanghai, mostly by government mandate.

    Wages at larger factories operated on behalf of multinationals — which are typically $100 to $200 a month — are also on the rise.

    Here in Shenzhen, one of the first cities to benefit from the country's economic reforms, factory operators say finding low-wage workers is harder than ever. At the Nantou Labor Market, where hordes of people used to come to find jobs, there are now mostly lonely employment agents.

    "The people coming here are fewer and fewer," said a woman named Miss Li, who works at the Xingda Employment Agency. "All the labor agencies face the same problem. A lot of young people are now going to the Yangtze River area, where there are higher salaries."

    In Guangdong Province late last year, the government said factories were short more than 500,000 workers; and in Fujian Province, there was a shortage of 300,000.

    Even north of Shenzhen, Zhejiang Province, known for its brash entrepreneurs, is short about 200,000 to 300,000 workers this year, government officials say. The Wahaha Group, a Chinese beverage maker based in the city of Hangzhou, is one of the region's rising corporate stars. But one of the company's 500-worker factories is short by 50.

    "It seems to become more and more serious year by year," said Sun Youguo, the company's human resources manager. "Because of the shortage we're paying more attention to migrant workers. We're now building a dormitory to house couples."

    Government policy is playing a role in creating the coastal labor shortages. Trying to close the yawning income gap between the urban rich and the rural poor in China, the national government last year eliminated the agricultural tax, and it also stepped up efforts to develop local economies in poor, inland and western provinces, which have mostly been left behind.

    Now, even remote areas are starting to develop — sprouting malls, housing projects, restaurants and infrastructure projects. These are creating jobs in the middle of the country and offering alternatives to many young workers who once were forced to travel thousands of miles for jobs on the coast.

    According to Goldman Sachs and other experts, the beginnings of a demographic shift have already been reducing the number of young people between the ages of 15 and 24, who make up much of the migrant labor work force. Similarly, the number of women between the ages of 18 and 35 began falling this year, according to census data.

    The women are critical because China's factories like to hire many women from the countryside, who have been willing to migrate for three-to-five-year stints to earn money as factory workers before returning home with bundles of cash and fresh hopes of finding a marriage partner.

    China's one-child policy is also aggravating the shortages. With the first generation of young people born under the one-child policy now emerging from postsecondary education, many of them see varied opportunities not available to an earlier generation.

    "When the economic reform started, migrant workers were very hard-working, and usually stayed for a long time at factory jobs, but the new generation has changed," said Chen Guanghan, a professor at Zhongshan University in Hong Kong. "They are reluctant to take factory jobs that are harsh and pay very little."

    Many are going to college to avoid the factory floor. Last year, Chinese colleges and universities enrolled over 14 million students, up from about 4.3 million in 1999.

    Workers are sharing more information about factory conditions among friends and learning to bargain and leap from job to job. They are also increasingly ambitious.

    "There's still a lot of cheap labor, but Chinese workers are getting skilled very quickly," said Ms. Hong at Goldman Sachs. "They are moving up the value chain faster than people expected."

    Economists may continue to debate the severity of the shortages, but there is little doubt that the waves of migrants who once crowded into the booming coastal provinces are diminishing.

    As a result, manufacturers are already starting to look for other places to produce goods.

    "Many companies are already moving to Wuhan, Chongqing and Hunan," Ms. Hong said, ticking off the names of inland Chinese cities. "But Vietnam and Bangladesh are also benefiting. We're bullish on Vietnam."

    April 01, 2006

    Signed, Sealed, Delivered?

    There are many positive recent developments in the silver market. The most noteworthy is the approval by the Securities and Exchange Commission (SEC) to the American Stock Exchange (AMEX) to list the silver ETF (Exchange Traded Fund). It appears that actual trading of the ETF is only a matter of time. Silver prices rose to new highs on the news.

    To say I was surprised by the approval would be an understatement. In fact, I’ll only truly believe it when I see this ETF actually trading. Certainly, the news is good for silver prices and those who expect higher prices. I question the propriety of two decidedly non-commodity institutions, the SEC and the AMEX, passing judgment on a commodity issue, namely, how much silver is available for purchase. How the Commodity Futures Trading Commission, an agency authorized by Congress to oversee commodity matters, managed to sidestep the most important decision in silver history without uttering a single public word is disturbing.

    My surprise at the approval stems from the fact of how bullish a silver ETF could be. If someone had asked me to devise a method, or scheme, that could propel silver prices sharply higher, I don’t think I could have dreamed up anything more potentially bullish than the Barclays ETF. (Not that the silver market needed a new major bullish development in order to climb in price).

    more here

    March 31, 2006

    Heads Up For Silver

    According to a reliable source, AMEX Chairman & CEO Neal Wolkoff told Bloomberg this morning that the exchange may begin offering Barclay Capital's silver ETF as soon as next week, though Barclay's petition is still pending…

    This should be regarded a rumor until a formal pronouncement.

    But, undoubtedly the anticipation of this fund has contributed to silver's spectacular 98 cent spike this week.

    The front month COMEX contract popped above US$11 yesterday and is currently trading at about US$11.66 / oz.

    Since the November '05 breakout from a 20 month triangular formation on a price chart, silver is up by almost US$4 per ounce, or a little more than 50 percent. As we had noted previously, the implied objective of this particular formation measures to about US$12; it could be extended to US$13 if we abandon some conservatism. So what's next?

    My target remains at US$12 plus or minus, probably plus (US$12.66 seems to stand out in my mind).

    But I would look for the onset of a correction not long after the ETF is approved for the simple reason that speculators are likely to sell the news that they've been anticipating for over a year. Yet the market may find good support above the US$10 level from two sources - ongoing gains in gold and the demand for silver that Barclays actually generates.

    Speculators can be right on occasion, after all.

    Vigilance is warranted, still, because there's always the risk that either the regulators balk at the petition in the last inning, or that the issuer (Barclays in this case) balks due to changes in the price of silver since initiating the ETF.

    In my view there is more value in gold than silver at least up until the day that the market's focus is on inflation and money, or in the shorter term, up until the day that the stock market rolls over or a geopolitical event occurs.

    The silver play that is a byproduct of this ETF news is a diversion that makes gold just that much more alluring.

    Precious metals bulls' answer to this week's FOMC statement was particularly encouraging. After booking some profits, they pushed gold to a new 25 year high the very next day in an exciting feat of strength. In other words, the market brushed off the Fed's hawkish overtones faster than usual. The initial breakout point was the move through the last lowest high in the Feb-March downtrend (US$572), which occurred last night; but the new and higher high today was the decisive factor. Platinum is the only metal that has yet to confirm the metals run, but it is within an earshot.

    I am cautious about Monday because April 1st makes me nervous (i.e. it's my father's birthday for one - which makes me the son of a joke!). Also, aside from the TSE index, it would be good to see the other gold stock averages confirm the breakout. The six week correction in the averages occurred mainly in the larger cap gold shares, as expected, while the silver and small cap names continued on to new highs. It is noteworthy that the corrections in most of the gold shares occurred within the context of what technical analysts refer to as bullish flags (a normal sequence of lower lows accompanied by dwindling volume), and that as of this week they are all breaking out of their flags. Of the pool of gold producers that the market considers purely gold plays, only Glamis, IAMgold and Meridian have confirmed the breakout in gold with new highs so far - all which consist in our index - but it would be nice to see confirmations from names like Anglo, Bema, Eldorado, Freeport, Gold Fields and Newmont (Goldcorp holds significant silver & copper exposure now).

    If we get past Monday I think we will. The market really looks poised to finish this sequence. And in spite of my US$633 gold target, I have a feeling this rally is going to continue at this pace until we start asking, how high can it go?

    It should be making central bankers and bond-holders nervous that the FOMC threat fell upon deaf ears!



     Donald G. M. Coxe
    Global Portfolio Strategist, BMO Financial Group

    1. Global stock markets are pricing in nothing but good times.
    Nevertheless, with the Fed, the ECB and the BOJ in tightening modes of
    varying intensity, the global liquidity flood that has been lifting most
    boats has crested. Adding heavily to equity positions at a time of rising
    geopolitical tensions and shrinking liquidity is an unsound strategy. Use
    strong rallies, particularly in US stocks, to reduce equity exposures.
    2. Remain overweight in oil and gas stocks, with heavy emphasis on
    Alberta oil sands companies. US refiners remain very cheap, and
    Washington's lawmakers, who speak with forked tongues,
    simultaneously command the oil companies to change their gasoline
    mixes (at great cost), and control their price increases. We believe they
    will achieve the first objective, but fail miserably in the second.
    3. Remain overweight the base metal producers. Every base metal except
    nickel hit alltime highs in recent weeks, but their stock prices did not.
    They remain the most attractive commodity producing group (other
    than the Alberta oil sands producers).
    4. Remain overweight the gold and silver producers. The speculation
    attendant on creation of the silver ETF has made the byproduct silver in
    the typical gold deposit more profitable. Emphasize those mines with
    the best reserve characteristics.
    5. Ben Bernanke says the flat yield curve isn't a significant indicator that
    the economy will slow down. If so, then "It's different this time" has
    become the cornerstone of Fed policy. He could be right, but if you have
    substantial US equity exposure, then your bond portfolio should be
    betting he's wrong. Increase your US bond durations and upgrade your
    portfolio quality in balanced portfolios. In bond-only portfolios, be
    alert for more signs that the economy will be softening by summer, and
    prepare to move from neutral to long duration.
    6. The dollar is getting help from those rioters in France, and from the
    market's belief that Bernanke is committed to raising rates to 5% and,
    perhaps, beyond. The French rioters will go away well before Bernanke
    stops tightening. By late this year, both those dollar props will be gone.

    March 30, 2006


    He is worth reading, but I'm putting this up a day late, sorry! 
    Edited By Jeff Greenblatt
    March 28, 2006
    It was the first week of January 2001, specifically THE SECOND TRADING DAY OF THE YEAR when I had my first REAL FED EXPERIENCE because there was real cash on the line that day.  I was short a basket of internet stocks (who wasn't) that day.  Memory fails me if that was the FIRST rate slashing of the cycle but it certainly was the first rate slashing that came at the discretion of Mr. Greenspan to act between regularly scheduled FED meetings.  That much I remember.  With no warning they lowered interest rates that day and all of my internet stocks went parabolic through the roof.  My boss, who was still vacationing in Italy, called fearing the worst which I confirmed.  I had been in Las Vegas that weekend celebrating the new millennium.  I think I should have stayed an extra couple of days.....
    I survived that experience and slowly over time Fed days improved over time for me.  What I've learned and you probably have as well is that FOMC meetings are market events to be strategically planned for, must be dealt with carefully and are each unique events where no two are exactly alike. One thing you can take from is it doesn't matter what they do, but they usually don't give the market what it wants.  If you can understand the hype and hysteria that starts leading up to one of these events 3-4 days prior you'll do well.  Understand the universal mind that is the mass crowd psychology behaves like a spoiled brat and if you understand the game that the FED is likely to scold the child or in the very least not give the child what it wants you can realize these Fed events become fairly predictable.   I've read or listened to the talking heads mention there would likely be a hike but it should be the last one.  People come to expect that and when they raise rates and announce on top of it they reserve the right to DO IT AGAIN, people get upset and the market sells off.
    One never really knows what to expect because the charts over the past few years have reacted like the Richter scale but today those who were following the intraday commentary saw we did a fairly decent job of navigating through it. To be fair, this was one of the tougher patterns leading up to the zero hour but we did not get sucked in by that spike this morning because it seemed to be TOO EARLY to be taking off.  Also, for the past four sessions, I've been using the SOX as the guiding light and as the markets were lifting off this morning, the SOX was still lagging. 
    It turned out to be one of my best FED experiences ever.  Thank you Mr. Bernanke and welcome!
    There were several of you who wanted to know why I like Jeffrey Kennedy.  Keep in mind that Prechter/Hochberg have that GSC bear market agenda but they have excellent analysts in their employment.  You can spot holes in just about any analyst's game (Kennedy and myself included) but Kennedy happens to lay out a running triangle as well as anyone I've seen.  If you can lay out a running triangle correctly, you can increase the percentage of time you will know which way a triangle will break.
    Finally, my web designer tells me the new website should be ready in July.  This is behind schedule but suits me just fine since my own personal situation has in reality set me back at least a month.   For the multitudes of new readers, you get an extended chance to test drive everything here for free until then.  However, my strength is FINALLY coming back and I'm almost at 100% so that means all of the plans to turn this embryo service into a world class product are close to being back on track.
    Last week the NDX bottomed in an area that did not allow us to rule out a bullish expanded flat pattern.  While we still have not taken out that low we still can't rule that pattern out.  However, the bullish case took a serious hit today.  Last week I devised a credible strategy of wading through the noise and simplifying what we needed to follow in order to stay one step ahead of the game.  Follow the SOX, and it certainly isn't the first time and won't be the last time this strategy takes on added importance.  There are those of you who rely upon Dow Theory to confirm bull and bear cycles but someone ought to do some hypothesis testing on the SOX and NASDAQ/NDX to determine which is the right side of the trade.  In reality, Elliotticians are supposed to follow an important chart that has the clearest wave count.  If you've looked at the Dow or SP500 the past few days you know those were next to impossible to read clearly and perhaps misreading the SP500 count is the only mistake I did make through this FED experience.  Luckily, the SP500 is not the leader of the market from one day to the next.
    We had a potential running triangle developing in the SOX and to be sure, I don't know if Jeffrey Kennedy had such a count since he follows the Futures game.   But the situation in the SOX sure looked like one.  We started out higher on  Friday.  The SOX certainly had its chance to break higher but it never did.  As a matter of fact, it never did violate the converging trend lines for that triangle either as it needed to stay under 510 or the pattern would have been negated.   Today the NASDAQ and NDX spiked but the SOX just couldn't get going, that kept me from getting overly excited this morning.  Finally, the SOX broke down as anticipated first to the lower trend line and finally below the prior low at 492.36.  By breaking THAT LOW, any bullish interpretation of that triangle is negated unless the triangle IS MUCH, MUCH LARGER and that I sincerely doubt.  The SOX also closed below a rising trend line that has supported this rally for months and is in danger of a serious drop. 
    The NASDAQ came very close to last week's high but once again FAILED AT RESISTANCE.  The Dow and SP500 are also at the upper end of their respective channels and have pulled back.  You certainly have to wonder if THIS is FINALLY the time we get that deeper pullback.  We are certainly setup for it here.  For once, social mood supports this view.  Did you notice the immigration rallies this weekend?  We don't do politics here so I'm not offering up what I think of the immigration policy but I will tell you with 100% certainty the fact they are cracking down on illegal immigration is a CONTRACTIONARY MINDSET.  Think what you will about what Congress may or may not do, but they certainly had no problem with illegal immigration in this country during the bull market years of the 80s or 90s.   Couple that with an angry crowd, (today in Phoenix students walked out of class and while marching on the state Capital building looting was reported) and you have the recipe for social mood rolling over.  Who said nobody walks in LA?  On Saturday a half million people showed up and if any of you have ever lived in LA, you know its hard to get anyone in Tinseltown too excited about ANYTHING.  On Friday there was a demonstration here in Phoenix where thousands showed up bringing traffic to a crawl all over this city.  In 16 years here I've never seen anything come close to that.  Leaving the politics of the situation out, clearly something is going on with social mood and it seems to finally be reflected in the charts.
    Whoever is running that Plunge Protection Team, you better start buying tomorrow morning or you'll be asleep at the wheel.   They wouldn't let that happen, would they?
    In reality, this might be the first time in a long time that we could pull away from the top.  I'm not stating  the final top is in place, but I think the market gave us a clue here today as it has had several chance to recover like many times in the past year but did not. 
    BOTTOM LINE:  The SOX is sitting right below important trend channels in TWO DEGREES OF TREND.  In the very least, if this was a 4th wave (or X wave) triangle we could be close to a low and there is a cluster of support in the 470-475 region.   These are numbers first discussed here two weeks ago.  However you slice it, the NASDAQ failed at resistance today.  The exact nature of the overall pattern is still not clear but if we are still going up, it likely must regroup before it makes another charge at the high again.  The NDX has a shot at the bottom of the range here which would be the February or March low again.  The Dow has a cluster of support at 11100 and the SP500 1260-70.  Before we get there, after 33 bars down on a 5min scale and 11 on the 15 min scale there is a good chance for a bounce tomorrow.  With a p/c over 1.00 we'll see what bulls can do with this. 
    The All Ords is down today after hitting a high of 5061.  Counting the reversal day in February your low to high is now 29 (Lucas) days.  What happened yesterday is what we call the NISON DOJI.  Pure dojis are where we close at the exact price point where we opened.  However, Steve Nison says the Japanese tell those of us in the west to chill out.  We are too technical and play it too close to the book.  Yesterday your open was 5045.10 and close was 5044.79.  The Nison doji is defined as a the open and close being within a buck.  You missed by 31 cents. Since you are 29 days up (a common relationship), 160 weeks up, near the top of the trend channel, put up a doji and gapped down today on the open you have a number of elements in place for a reversal.  All you need is some follow through.  I think if we continue down, you have an excellent chance of joining us. 
    The outlook here was that gold was in a B wave that was near completion.  Last Thursday it finally bottomed on the 54-55th hour of the trend which includes 18 hours up and 36 hours down.  We are now another 19 hours up but also 13 days off the low.  The two legs up are nearly equal as well as one is 24 points and the other 25.  Two legs nearly equal in terms of PRICE AND TIME.  All told we are 221 hours off the TOP back on February 2nd.  We've reached a point like other charts where we are up against a resistance zone which is the area from the March high to the February high (576-85 on the June contract).  This has the look of a larger sideways pattern and this could be the top of B right here.  So what could be going on is we've had a three leg affair down from the top for A, now a smaller 3 legs up for B and if it's going to drop, we would be close before a C wave would take it one more time to the bottom of the range.  Of course, this might not happen, but the chart has to prove it can get through resistance right here.  We are 13 days up but I'd feel much better about this outlook if for instance we were topping at 233 hours instead of 221.  We'll see, we could go sideways for 12 hours and then start a drop on the 233rd hour. 
    Silver has no such problem as it continues to make new highs.  Like the All Ords, silver is also up 29 days from a February low and has started to put in a small body candles.  However this looks like another sideways consolidation.
    The XAU put in a low with a first leg up and then a 2.61 extension bigger leg. This chart has an interesting relationship where the first leg off the bottom back on March 10 was 29 hours.  This leg from Thursday is 18 hours.  Here is a case of the Lucas series in action.  For those of you who are new, why is this important?  In terms of time 18 and 29 have that 1.61/.62 relationship so important to the Fibonacci sequence.   Recall the outlook here was for a leg to challenge intermediate resistance at 135-41.  We've done that.   Now we have a small gap at 134 we are filling but more importantly have to test if the area around 132 is going to become support by way of the polarity principle.  Overall, we have small degree time sequences that have just expired and will have to see if this next pullback cycle is benign or something more.
    We had a low a week ago Friday and upon completion of the wave a short pullback. This leg came down to intraday support but more important turned on the 46-47 hour low to low cycle off the bottom.  That is a bullish sign especially since the bars that have followed are nice looking white candles.  We really haven't had much of a retest of the low and maybe by default, we won't.  I'd now look for a retest of recent highs now as opposed to lows.
    Recall last week we had a slow moving 5 wave sequence over a 7 day period.  The outlook was for a sharp reaction in the other direction.  We achieved that on Friday but all it did was allow us to fail at recent resistance. Today we broke through important support but DID NOT CLOSE BELOW.  If we were to finally break below this support that has held up this market for the better part of 6 months.  This is a floor in the market that has held interest rates from really starting an upward spiral.  Here is another test for you conspiracy theory buffs. Interesting how the stock market and the bond market are both at key places on the chart that could really create a lasting effect on the economic outlook not only for the rest of this year but perhaps for the rest of this presidential cycle.   We are here, right now. 
    Today marks the 49th day of the current down leg in this cycle.  Sorry, but Lucas didn't bail us out of this one.  As a matter of fact, the most recent high on March 16th was the 198th trading bar off last year's top.  So this latest downtrend from the March high started on the 199th (Lucas) bar.  We may not hit a low here until the 55th bar of the current leg which is still a week away.
    We are sitting at the 61% retracement level of the down leg finally and also 28 days up.  This is another chart at a key crossroad.  Overall this pattern is very choppy so it doesn't look like it has LONG TERM UPWARD POTENTIAL but now it has to decide if it wants to make a run at the high. Due to the choppiness I'm surprised it got this far as I thought incorrectly it had a better chance of going down.  Whatever the case, tomorrow will be the key day.  We are also 139 hours up.  Tomorrow we could top at 29 days and 144 hours.  The market must make a decision.  IF not, it will continue on most likely to the 33-34 day cycle and the 162 hour cycle early next week.
    For those of who are new, this is the link you follow to get to the charts.  IF you like what you see, please vote for it at the bottom of my page once a day.
    The content in THE FIBONACCI FORECASTER is for educational and informational purposes only.  There is no offer or recommendation to buy or sell any security and no information contained here should be interpreted or construed as investment advice. Do you own due diligence as the information is the opinion of Jeff Greenblatt and subject to change without notice.   Please be advised to consult your investment advisor, attorney or tax professional before making any investment decisions.  Jeff Greenblatt will not accept any responsibility or be liable for any investment decisions based on the information discussed here.
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    March 29, 2006

    Wither Iron Ore Prices

    It all used to be so easy. The ore-mining companies, based in the major producing countries of Brazil and Australia, would sit down once a year with their main customers, the big steelmakers of Japan and Europe, to negotiate annual contract prices. The price of iron ore remained relatively stable throughout the 1990s.

    What upset this comfortable status quo was the spectacular growth of Chinese steelmaking, with its ravenous demand for imported iron ore. In turn, the pressure placed on Chinese steelmakers - which already suffer from low profits - by rising iron-ore prices has changed the structure of the price negotiations: in the current round of talks to determine annual contract prices, which will run from next month, China demanded and received a place at the negotiating table. And China is making sure its voice is heard loud and clear.

    So what's the background to all of this? Simply that over the past few years, China's increasing hunger for steel has led to an unparalleled growth in domestic steelmaking - 15 years ago China made 10% of the world's steel (80 million tonnes), while this year it will make an unprecedented 33% (about 400 million tonnes). And to make that steel requires more and more iron ore, some of it mined domestically, but with a growing proportion having to be imported, principally from Australia, Brazil and, increasingly,  India. Demand by Chinese steelmakers for imported iron ore has quadrupled from 70 million tonnes in 2000 to 275 million tonnes last year.

    It should perhaps be mentioned that not all steelmakers are beholden to the producers of iron ore. For example, electric-arc furnaces (EAFs, or mini-mills), which produce about one-third of the world's steel, use a feed of ferrous scrap and hence, for the most part, are not overly dependent on iron ore (although such scrap substitutes as directly reduced iron and pig iron are in fact ore-based). It is the integrated steelworks, using basic oxygen furnaces (BOFs), which produce about two-thirds of the world's steel, that depend on iron ore to feed the blast furnaces, which make the molten iron, which in turn feeds the BOF steelmaking plant.

    Why the Chinese rush for iron ore? The Chinese steel industry, because of indigenous coal and iron-ore deposits, is predominantly based on the iron-ore-hungry BOF steelmaking route, which produces some 85% of China's output. A further complicating factor is that China's steelmakers also use domestically produced ore. The numbers for 2006 break down as follows: China's blast furnaces will probably produce 360 million tonnes in 2006, an increase of 30 million over 2005, which will require an additional 48 million tonnes of iron ore.

    China's use of domestic ore is expected to be 528 million tonnes, which, it so happens, also represents a 48-million-tonne increase over last year, but - a big but - because local ore has a low ferrous (iron) content, this translates to only 23 million tonnes of concentrate. That leaves an ore shortfall of 25 million tonnes or so, all of which will have to be imported. So last year's record imports of 275 million tonnes of iron ore could well hit the 300-million-tonne mark in 2006.

    Another wild card is that transporting iron ore is no trivial task: the material's bulk means that amounts tied up in transit at any moment are significant, and there could be a further 30 million tonnes of iron ore tied up in Chinese seaports at the moment.

    That gets the numbers out of the way. What about the politics? First, we need to identify the key players whose actions will determine how the iron-ore crisis - if one can call it that - plays out. There are three: the ore miners, the steelmakers (writ large), and the Chinese.

    There are just three major ore suppliers: Companhia Vale do Rio Doce (CVRD) of Brazil, and the two Anglo-Australian giants Rio Tinto and BHP Billiton. Together, the three control about 70% of seaborne iron ore. So how do the mines see things?

    First and foremost, they would argue that prices must be determined by the rules of supply and demand - market forces - and at the moment, demand is strong, with spot prices currently higher than contract prices. Second, to meet the meteoric rise in ore demand, huge investment programs have been launched, and the miners argue that the levels of investment needed to meet existing and future demand can only be supported by realistic price structures. CVRD alone is investing about US$4.6 billion this year in mining and transport projects. Simply stated, if more ore is needed, then more investment is needed, and that inevitably affects the end-user prices.

    Unsurprisingly, the steel industry takes a different view. There is a feeling that the unprecedented 71.5% increase in the contract price last April was more than adequate and should be held for at least another year. Steel prices had to rise in 2004 on the back of higher raw-material costs, but fell back again in 2005 as steel demand weakened. For steelmakers to pass on higher steel prices, caused by the ore-price increases, to customers this year could be trickier - especially since EAF-produced steel, which competes directly with BOF steel for many product types, has not seen any significant increase in costs for its input material, ferrous scrap.

    Among steelmakers, who themselves are beginning to consolidate into bigger and stronger groups, there is also a growing desire not to be held to ransom, so to speak, by three giant ore producers. So 2006 is seeing a new new stubbornness in the air - which brings us back to Chinese steelmakers.

    This year, there is a new voice in the negotiations, with Chinese steelmakers, represented by Baosteel, entering the discussions for the first time. China's greater role is directly attributable to the country's overtaking Japan as the world's largest importer of iron ore.

    This year, China is expected to import a massive 43% of the world's sea-borne iron ore, probably 300 million tonnes out of a world total of 700 million tonnes. And China, having ousted Japan as the key negotiator, is feeling its way in using its huge buying power to force a settlement they deem fair. (For Japan's part, it is probably letting the Chinese take the lead in order to insist on the suppliers equaling for Japanese customers any price relief that China is able to negotiate.)

    The appointment of Baosteel to negotiate for China was highly significant, especially since it was accompanied by a government ban on negotiations by all other Chinese steel companies. In effect, the action undercuts market forces by forming the Chinese industry into a single cartel for the purpose of ore negotiations.

    From China's point of view, the clear rationale is to put greater pressure on the miners by combining the buying power of China's steelmakers. There is no question that the stakes are high for the Chinese steel sector: Morgan Stanley chief Asia economist Andy Xie noted on March 16 that "for many steel mills in China, the ore price amount could mean the difference between life and death in 2006 ... China may have to play hardball to stop the ore producers [from] bankrupting China's steel industry."

    But are the hardball tactics working? Based on reports of the negotiations so far, it appears that both sides have had to compromise. In late February, it was reported that initial negotiations between Baosteel and the miners had broken down, for exactly the reason one would expect: price. China argued that the ore producers should act with restraint, in view of the fact that some 40% of China's 80-odd large and medium-sized steelmakers reported financial losses in 2005. Chinese industry officials have also fretted publicly over the possibility of oversupply in the global iron-ore market, as the big investments of the past two years come on line.

    But such arguments cut little ice with the miners, who understand well that production declines in the Chinese steel industry, in the event negotiations failed and supply deliveries were halted, would be catastrophic for the Chinese economy. However, this is very unlikely in any case, since the custom in the industry is for the previous year's prices to be maintained if negotiations drag on beyond the usual time frame. So the ore miners have little to lose by standing fast: at worst, they will continue to be paid the same record prices they were paid last year.

    As of late this month, China was continuing to hold out for price relief, with the National Development and Reform Commission (NDRC), China's top economic planning body, saying on March 15 that Chinese steelmakers would not accept higher prices, calling the miners' profits "huge and unreasonable", and pledging to fight "unacceptable" demands in order to protect the country's steel industry. "China cannot afford a further rise in prices," the NDRC report stated flatly.

    The action might be having some effect: a March 27 Bloomberg report cited Australian analysts as saying that the miners might have to accept a 10% increase this year as opposed to the 20% they had originally wanted, and noted that the "big three" miners have all seen declines in their share prices because of the dispute.

    The question now is whether the issue of 2006 iron-ore contract prices has gone beyond the level of companies and has become a diplomatic issue, after the revelation that the Chinese government warned the country's steelmakers that ore imports may be blocked if prices are too high.

    This raises the possibility that Chinese caps on imported iron ore could be ahead; would Australia or Brazil retaliate if that step was taken? (The Australian government has already said it would be "alarmed" to see Chinese government intervention.) And what would the implications of a trade war over iron ore be for China's World Trade Organization commitments - to say nothing of the implications for its steel industry, which has become increasingly dependent on exports?

    Steve Mackrell is the operations director at the Iron and Steel Statistics Bureau (, the leading producer of steel industry statistics in the United Kingdom.

    March 27, 2006

    Juiced Numbers

    In order to get a flavor of the statistics that are manipulated, and the effects of that manipulation, we present a partial summary of an excellent interview (conducted by Kate Welling, Editor and Publisher of Welling @ Weeden), which Williams recently gave regarding the subject of government manipulation.

    Williams says that regarding “what used to be called the GNP but is now widely followed as the GDP, (and) the CPI, and the employment numbers, all have had biases built into them that result in overstating economic growth and understating inflation - - both of which are admirable political goals."

    Williams has analyzed and compared the way in which the unemployment figure was historically calculated versus the way it is calculated today. He concluded that if it “were calculated (today) the way it was during the Great Depression, it is now running at about 12%." As well, he says, "Real CPI is now running at about 8%. And the real GDP is probably in contraction." Clearly, the government’s methodologies that generated these bogus numbers are all designed to paint a more favorable picture of the economy and the markets than is the reality.

    He explains why contemporary unemployment numbers are bogus. Today, the unemployment number does not include those unemployed who have been discouraged and out of work for more than a year. So they are taken out of the work force completely automatically. This results in knocking about 5 million unemployed out of the broader measures of unemployment.

    Thus, unemployment is about 50% higher than is commonly alleged. And thus, "Today unemployment is really up around 12%," Williams notes.

    These distortions have very real, and usually adverse, consequences for citizens. Consider, Williams says, the methodology developed several years ago by Mike Boskin and Alan Greenspan for generating the Consumer Price Index. In their (erroneous in Williams' and Deepcaster's) view the CPI was supposedly overstating inflation so they "fixed" it from its prior condition of (allegedly) overstating inflation.

    And here is how they did it:

    Originally, the whole purpose of the CPI was to "measure the change in the cost of a fixed basket of goods over time." But Boskin and Greenspan said that we should allow for substitution because people can buy hamburger when the price of steak goes up.

    But, of course, "if you allow substitutions you aren't measuring a constant standard of living, you're measuring the cost of survival." Williams correctly concludes.

    But the effect of this statistical chicanery is very real and very adverse to, for example, retirees because the CPI was, and is, being used to adjust Social Security payments to compensate for increases in the cost of living.

    Today, as a result of the Boskin-Greenspan "fix," it understates those increases and therefore under-compensates retirees for those costs.

    In a similar manipulatory vein, the Bureau of Labor Statistics (BLS) during the Clinton Administration constructed and began to employ a weighting regimen whereby if the price of something went up it automatically got a lower weight in calculating the CPI, but if it went down in price it automatically got a higher weight. The result, of course, was, and still is, to further shaft those people (like Social Security recipients) whose income was dependent upon the CPI measure.

    "If the same CPI were used today as it was used when Jimmy Carter was President, Social Security checks would be 70% higher," Williams dramatically emphasizes.

    But perhaps the most outrageous aspect of the government's numbers-manufacturing business has to do with its using "hedonic pricing." ("Hedonics" is the study of how to create pleasurable sensations.) "Hedonic pricing" is the practice of creating pleasant (to the government manipulators) pricing.

    Using its hedonic method, the BLS says the price really doesn't go up for a product that has "improved" in quality because the consumer is getting greater benefit or pleasure from it. Therefore, if computer power increases by a factor of 10, but the sticker price of computers has only increased by a factor of 2, then the hedonically adjusted price would be much lower for CPI calculation purposes even though the computer is actually twice as expensive (in dollars actually paid) as it was years earlier.

    Williams also notes that sometimes data manipulation attempts are overt, such as the time during the administration of George Bush I, in which a computer industry official was approached and asked to boost his sales reports to the Bureau of Economic Analysis. Williams is careful to point out that manipulation is a bipartisan phenomenon.

    In the Clinton Administration, the manipulation resulted from the CPI numbers being re-set using weighting. "They basically reduced the number of people being surveyed in the inner cities (which had more unemployment (Ed.)) and then claimed they replaced them statistically. But the effect was immediate. You saw a drop in all the unemployment measures that would normally be influenced by inner-city surveying. Thus, of course, the statistical replacement reflected a lot less unemployment than actually existed."

    The adverse effect of this "numbers manufacturing" extends far beyond its adverse affects on any particular group such as retirees. If someone relies on these buggy statistics and invests in the stock market based on happy economic reports, they may well lose the money because of that reliance. Williams says "I am…disgusted by both parties at this point, especially because we have no one of substance taking on very severe issues, like the trade deficit and federal deficit that are going to create terrible times for people in this country if they are not addressed."

    Williams focuses on what he considers, and what Deepcaster considers, "so dangerous that if it isn't addressed - - and I am afraid maybe that even if it is addressed - - that it has gone past hope of repair; and that is the fiscal condition of the Federal Government."

    Typical statements of the budgetary condition of the government (by whatever administration is in power) do not include accrued pension and retiree benefit liabilities. Certainly this is not a small omission - - and usually results in differences between the official numbers and the real numbers.

    Williams notes "where the official federal deficit in 2004 was reported at about $412 billion and the GAAP-based deficit was around $616 billion, they said that if you added the net present valuing of the under-funding of Social Security and Medicare, the one-year deficit in 2004 was $11.1 trillion."

    In fact, the 2005 statement (of the U.S. government) shows that total downstream federal obligations at the end of September were $51 TRILLION, Williams calculated.

    Of course, foreigners are financing most of this deficit spending. Williams notes that last year alone, foreign investors bought enough federal debt to cover all the debt issuance of the U.S. Treasury. But we have no assurance that this will continue. Indeed, once this foreign buying even begins to slow, U.S. interest rates must rise to finance our debt, the interest costs on which are already running at nearly $3 billion per day.

    As Deepcaster has repeatedly noted, this process will eventually lead to a very high rate of inflation, high interest rates and a very sharp decline in the dollar, likely followed by a deflationary depression. Williams notes (consistently with Deepcaster's view): "Once the selling pressure starts it's going to be massive. You're going to see a lot of dumping of U.S. securities, particularly Treasuries."

    "To absorb them you're going to see a sharp spike in rates or the Fed will step in, provide liquidity in market………..the end result, when it does all come together, will be something akin to hyperinflation. But at the same time, you'll also have a very depressed economy." …That possibly could evolve into a hyperinflationary depression as much as I hate to use that term."

    Williams concludes by saying "so we're talking about a global crisis of unprecedented proportions. Probably one that could lead to the collapse of the current currency system."…As crazy as it sounds, I think the only thing they will be able to do is go back on some kind of gold standard." And, indeed, gold is the Bedrock Asset so far as Deepcaster is concerned. And this is why the Fed-led Cartel makes such forceful efforts to cap its price.

    Finally, Williams talks about where we are today. Indeed, he says we are already in a recession. "What I found is that if you adjust the real GDP numbers that the government releases for the myriad revisions and redefinitions…you'll find that there is a happy overstatement of growth of about 3% on a year-over-year basis. The problem very simply is this - - the consumer is the primary driving force behind economic activity and the only ways that consumers can fuel consumption growth are through rising income, debt extension, or savings liquidation, that's where he gets his cash."

    But the consumer is not really seeing any income growth. “Now this is where the playing around with numbers really gets good.” We've already talked about hedonics and all the other manipulations of the CPI. But they all pale next to the impact of imputations in the GDP that are an outgrowth of the theoretical structure of the national income accounts.

    “Any benefit a person receives has an imputed component…when the government puts all of it's imputations into income, its growth generally remains positive and has very little relation to reality."

    How do we know when the end is near? Deepcaster and Williams agree on the answer. "If I were looking for one factor to signal the onset of some really serious problems, I would watch the dollar. If you start to see a sharp sell-off, or if the selling starts to pick up a little steam and begins to look like a panic, or you start to hear talk of an Asian country dumping a little extra in the way of dollars, it will be a sign of really bad times to come."

    And Williams' excellent analysis raises a further question which Williams does not address, but which Deepcaster does address. When the resulting (and nearly inevitable) crash appears near, what "cover" or "incident" will the government leaders then-in-power, create to deflect the public’s justifiable rage away from the numbers manufacturers and manipulators themselves who caused the crisis in the first place?

    US drowning in paper and sinking toward recession

    President Bush has signed the $US 781 Billion increase in the US Treasury's debt ceiling. With US fiscal 2006 (which ends on September 30, 2006) not yet half over, the increase for the Treasury's "debt to the penny" for the year is already $US 430.8 Billion. One dollar in five the US spends is borrowed.

    No wonder that Gold did a moon shot Friday, up  $US 9.70.

    The Dow remains frozen. The yield curve on Treasury debt is again inverted.
    The US budget deficit for February $US 119.2 Billion. January trade deficit $US 68.5 Billion.

    The world is stuck with $US 11.154 TRILLION in US financial paper assets, a figure close to US GDP.

    New home sales in the US in February fell 10.5%, the biggest monthly drop in almost nine years giving the US the biggest inventory of unsold homes in more than ten years - since January 1996.

    In Australia new home starts for the last three months of 2005 were down 20% from their peak during the first quarter of 2004. New housing starts in Australia have fallen in six of seven quarters up to the end of 2005.

    Interview with John Williams

    On Thursday evening (3/23), John Williams was interviewed by Tom Jeffries of, Vancouver, British Columbia. The interview covered John's views about the serious inaccuracies contained in US government economic data, as well as thoughts about the current condition of the US economy.

    The interview runs about 25 minutes, with the audio available at "John Williams March 2006 Interview."

    And for those who are not familiar with John's highly proprietary research work, listen to Tom Jeffries' interview, then be sure to visit John Williams' Shadow Government Statistics.

    March 24, 2006


    Edited By Jeff Greenblatt
    March 23, 2006
    The email I always seem to get from people is how can they learn more about Elliott.  My answer is to learn from the best.  I spent years following every single move Hochberg made until my forecasts were posted in Club EWI and some of them actually worked out BETTER THAN WHAT THEY WERE DOING.  They took notice, but that's another story.....
    My website and ebook with the unique and original methodologies will be ready soon enough so long as I can stay out of the hospital, but until that time comes I have an idea to share with everyone.  This week is another of those FREE WEEKS at EWI.  I happen to admire great Elliotticians the way some people look at a great painting.  For the past couple of days, I've been admiring the work of Jeffrey Kennedy who happens to run the Futures desk over at EWI.  Say what you want about Prechter and their terrible forecasts over the past few years.  One thing they do have is excellent analysts on their staff.  For those of you who are new to Elliott or at an intermediate level I recommend very highly that you download ALL of Kennedy's charts.  Download the monthly Futures report then go to archives and download the past 5 daily reports which specialize in a smaller time scale.  After you do that go over ALL of his charts.  Look at how he puts the wave counts together.  It does not matter if you are interested in cattle, sugar, cocoa, etc.  This is a process that will take weeks if not months.  If you do that, I guarantee you will take your own wave understanding to the next level.
    While we are on the subject of FREE WEEK, did you see Prechter's new Theorist?  He has an interesting chart and comes clean on one of his own blunders.  He presents a chart of the Dow in terms of  gold.  On this chart he makes a case the Dow has actually lost half it's value since the all time high in 2000.  I happen to think this chart is quite good.  Those of you who are socionomic students know the President's popularity rating is generally tied to social mood and the rise and fall of the markets.  So how can Bush's rating be so low while the Dow is within a few hundred points of its all time high and the SP500 is at a 6 year high?  This chart explains it.  Unfortunately for EWI the Dow is NOT measured in gold but rather in terms of the dollar.  Prechter FINALLY comes clean after all these years to tell us the wave pattern in the Dow from 2000-2002 was corrective and there is now the possibility of an all time high yet to come.  He makes the case the 2000 high MIGHT be a 3rd wave top.  Thank you very much.  It has been stated right HERE, at least 6 months ago and perhaps as long as a year ago the Dow bear was very choppy, looked corrective and may have led us to a 5th wave extension as the bear bottom in 2002 curiously ended in the vicinity of the 1998 low which also happens to be the fourth wave of one lesser degree.  This may or may not happen as that 2000-2002 wave can still be an A wave down of a larger ABC bear market but the bear market MIGHT NOT BE OF GRAND SUPERCYCLE DEGREE as Prechter contends all of these years.
    Last time I discussed a change of stance based on a number of factors.  I also mentioned two mitigating circumstances which were a lower probability.  One of these happened to have been a potential bullish expanded flat IF THE NDX WERE TO BOTTOM near 1660.  The figure I put out was 1662 and it stopped going down at 1660.81. So as crazy and illogical as this seems, for the time being the charts have pulled a rabbit out the hat and have stopped going down EXACTLY WHERE THEY NEEDED TO. Those of you banking on this lower probability play, good luck to you.  You'll need it but the funny thing is it can't yet be ruled out.
    What happened today opened the door a bit further for your scenario as the Futures and NDX took out yesterday's low but the NASDAQ DID NOT!  One thing I've observed over time whether to the bull or bear side if the group of indices are not all on the same page the trend might poop out.   For now, the intermarket divergence has a new NDX low not being confirmed by either the NASDAQ or the SOX. 
    All is not lost for the bears either.  Check out the SOX chart.  The other day we experienced some real choppy action that I said needed time to sort out because it apparently did not make any sense.  The highest probability right now is the SOX has a developing running triangle that is not yet complete.  A running triangle is one that sets a low(high) for the trend, pushed in the opposite direction and makes yet a new price extreme for that trend that is actually just the B wave and not the 5th wave low.  IF this outlook is correct, the chart will now top between 505-510 and turn down.  Taking out the high at 510 on 3/21 would invalidate this pattern. Assuming a lot for now, if this pattern is right, the thrust measurement would take it down to the 470-475 range where there is a larger cluster of support where it could stage a bigger rally.  If it were to bottom at 471 it would have had a move of a perfect Fibonacci 89 points.  We are speculating here of course but if the SOX is in a bearish running triangle the lower probability expanded flat pattern in the NDX would ultimately fail as the SOX would take the NDX along for the ride.  This pattern has quite a butterfly effect so that will be on the top of the laundry list to watch tomorrow.
    The SP500 could be developing a sideways pattern of its own along with the Dow.  I wish I had something more interesting to tell you on that front.
    BOTTOM LINE:  We now enter the turn window of the 233rd day off the April low from last year.   With the NDX at a fresh low today, we have made a low within one day of the window.  That would be the other mitigating factor.  When this window closes we will then be in the FED ZONE which almost always brings fireworks.  For now, it appears we start off HIGHER as in any event the SOX would still need upward motion to complete that triangle but also we are dealing with that intermarket divergence.  Then we watch and see what happens.  If the SOX blows out the triangle, we will probably get a retest or new highs but if the triangle completes, we get another small degree leg down. 
    The All Ords took out 5000 which means our forecast is on track.  It looks like it has a collision course with the upper trend channel as well as the 160-62 week window.  A new YTE reader wanted to know why the short commentary.  There are times when there is much to say and other times less is better.  Those of you who are new will come to learn in time these charts have magnets attached to them.  Once they elect a path they won't stop until they come to some cluster of Fibonacci time and price points.  The point is NO momentum indicator will stop it.  Why do some charts stay seemingly overbought or sold for extended periods of time only to reverse abruptly?  When the chart hits the time window, that's it.   In this case, the waves have been hard to count as the chart keeps going but the upper trend channel line is near 5100.  Since it's already Friday we are on the cusp of the window near the top of the channel.
    I was looking for stiff resistance on the Silver chart at 1060.  We've surpassed that as we are sitting at 1068.  Silver has fulfilled the recent forecasts for continued bullish activity.  We are now hitting a cluster of relationships (3) so we'll see what happens.
    Gold is in a more complex situation as discussed on Tuesday.  The bullish candle formation that formed on Tuesday's close came to naught as we took out that low.  The wave pattern since the recent high is very choppy and why I think it is a B wave in an ABC up.  Today we turned up on the 55th hour off the low from March 10th but did not do so decisively.  We are going nowhere fast on this chart.  From where we sit right now we can get one more low before a C wave up kicks in if I've been right about this.
    XAU set the fresh low discussed on Tuesday night.  This looks to completed a small degree 5th wave low but that doesn't mean we are about to have a big rally here either.  All it really means is we can finally have the test of the 135-41 polarity area
    BOTTOM LINE:  The only change here could be the XAU could catch a breath of fresh air from the recent inertia.  There is a ton of overhead resistance and it has not proven in any shape or form it will be able to take it out, IF IT COULD GET THERE IN THE FIRST PLACE.  Gold is stuck in a very choppy progression that looks nearly complete.  It would be possible for it to break down here but out of this choppy progression I think it should resolve up as this looks corrective.
    The dollar held its 50 week moving average much as I thought it would.  Now it is taking the shape of one of those running triangles discussed previously for the SOX.    IF this is the case we are in the latter stages and could be within a couple of weeks of a resolution to a pattern that has been going on for nearly a year.  I put up a new chart that focuses on this possibility and the one of the reasons it might work out is from where I have the 3rd wave high to the C wave low is exactly 29 weeks.  Now we are sitting at 37 weeks as the trendlines converge.  If it was going to break down, it had an excellent chance  just the other day but it did not.
    We are straddling the 110.56 area in a retest of the low.  This looks to be a very slow moving pattern since last Thursday that has finally reached the 5th wave.  Tomorrow would mark 7 days down and we could get a very sharp reaction going the other way.
    Instead of retesting the low, we pulled back up and filled the gap near 65 left between Monday and last Friday.   The whole pattern over the past month is very choppy and while we remain land locked in a trading range I wouldn't be surprised if this ultimately broke to the downside but it still needs at least 3-4 more days of this type of action.
     For those of who are new, this is the link you follow to get to the charts.  IF you like what you see, please vote for it at the bottom of my page once a day.
    The content in THE FIBONACCI FORECASTER is for educational and informational purposes only.  There is no offer or recommendation to buy or sell any security and no information contained here should be interpreted or construed as investment advice. Do you own due diligence as the information is the opinion of Jeff Greenblatt and subject to change without notice.   Please be advised to consult your investment advisor, attorney or tax professional before making any investment decisions.  Jeff Greenblatt will not accept any responsibility or be liable for any investment decisions based on the information discussed here.

    Silver's Mushroom Cloud: THE FIRST MONTH (Fiction from 2001)

    By Charles Savoie (copyright 2001)

    Most of us know that a mushroom cloud is an effect seen after a nuclear blast. Silver having been subdued for virtually a generation, the time is fast approaching that low silver prices will end with an explosive termination upwards. There have been minor fireworks in silver occasionally, as the brief spike after the Buffett purchases in February 1998, and the blip up to $5.95 just after the Washington Agreement in September 1999. Due to the severe imbalance between production and consumption, which has been aggravated by powerful forces acting in concert to hold silver low in the face of the catastrophic decline in supplies, and other factors such as attempts to call in leased silver and naked short positions being impossible to cover, silver is now poised for a climb into the stratosphere---the most precipitous sustained rise in commodity history. Unlike the 1979-1980 episode, this time there will be no retreat to low prices after the big blast. Based on figures available from the Comex, Apex Silver and Personal Finance, the Comex warehouses contain only 3% of the silver necessary to rewire the U.S. power grid for superconducting power transmission, to say nothing of all the other unrelenting demands on silver consumption. Other advanced nations are also moving towards superconductivity. (The Apex 2000 annual report says one ton of silver per mile will be needed, whereas another authoritative source claims only 400 ounces. This is a case of mutual exclusion---let the reader decide who is in error. Even without superconductivity, we are still in a hole to the extent of at least 100 million ounces per annum, and when leasing stops, the unfulfilled demand is far more than sufficient to create a buying panic in silver!) What follows is a speculative account of events during the first month after the blast off in silver prices begins. It could commence in late October to December 2001 while NYSE stocks are probably in a free fall, succumbing to the same contagion factors, and a new assortment of economic negatives, which crushed the NASDAQ from over 5000 to a recent low of 1683. Against this background of economic disease and crushing public and private debt, the banking panics of the overleveraged financial system await the eruption in precious metals prices to act as the lit fuse, and, along with a dollar set to drop like a rock, will throw napalm onto the precious metals fire. No doubt the public will be called upon to bail out those involved in the gold carry trade, and as the Fed inflates the supply of dollars, inflation will reappear with unbelievable fury in gold and silver. A new confidence in precious metals as wealth and medium of exchange is soon to become prominent in the public mind, as they witnessed the severe depreciation of other assets.

    Day one: silver opens on the Comex at $5.50, having drifted up from late summer lows. After the lunch hour a major leasing source announces its silver is exhausted. Prices jump to $6.75 by the sessions close. The next morning prices continue sharply up as a short covering nightmare unfolds. Unhedged silver equities surge 150 to 425% in 2 sessions. Silver passes $8.25 by days end. Gold is over $375 and climbing; platinum and palladium are north of $550. Daredevil stock traders who could not quit while they were ahead make another handsome haul by selling into the biggest rally yet, but as they watch for a price pullback, which never comes, they are shut out of additional gains and future dividends. There is no dip available to re-enter the market at lower levels with a larger position. Silver moves up strongly on a daily basis, and attempts are made to call in silver leases, which aggravates the crisis. All leasing stops abruptly, and all hell breaks loose in the silver market. One of the meanest hornets nests in financial history is unleashed! Bullion banking goes belly up, and several members of that occupation flee to nations without extradition treaties. Limit moves daily are not news as much as the word that silver is beginning to trade in a cash only market. By the end of the second week of the crisis, many industrial users cannot get delivery of metal, and the unbridled buying panic erupts---the sun catches on fire! Its deja-vu late 1979 again, except that many market participants realize this time, the crisis is exponentially worse: prices are soaring and supplies do not exist to bring the price down, so defaults are rampant. Lawsuits are filed, and silver users mess squealing worms while raving to the CFTC and Comex officials that they have to halt the alleged speculation in the silver market, still attempting to deny that a physical shortage has finally caused the price to move. Comex officials institute the rule change which wiped out the Hunts in January 1980óthey place a freeze on buy orders for silver, but this does not stop the crisis, as the physical shortage is real, and the rule change is scrapped within 2 sessions; other meddling rule changes are contemplated, but no rule changes can cure the shortage! Shareholders of corporations dependent on silver are faced with sharply declining share prices, just like 22 years ago (New York Times, February 3, 1980, section III, page 2, column 3; and Forbes, December 10, 1979, page 124). And that, after the first shock wave of NYSE declines; rolling power blackouts, layoffs, severe winter weather in the Northeast and ominous news from overseas adds to the gloom. Employees of silver consuming manufacturers face layoffs due to the raw material shortage. Holders of short positions ride a razor blade into a pool of acid in the derivative meltdown, as they cannot conjure real silver out of thin air! Forward selling treachery on the part of management guts stockholders of heavily hedged companies; a class action lawsuit will eventually reach the Supreme Court. Australian lawmakers are besieged by devastated stockholders of short selling companies. A Senator asks the Federal Reserve and the Treasury to intervene, but they have no silver; Greenspans wrinkles look deep enough for planting watermelon seeds. Investors holding physical silver smell blood in the water and are gloating, refusing to sell as the price climbs higher. Silver is now an absolute powerhouse and dynamo of wealth! Many have the attitude of holding their metal until the Grand Canyon is gone! The skyrocketing price of silver bulldozes all opposition like General Sherman marching through Georgia! Just one small Mercury dime, 1916-D in MS-70 condition now buys a nice middle class home. As Arab oil money moves into silver (exactly as it did before, New York Times, April 19, 1980, page 29, column 6), smart money from all over the world from Asian exporters to European manufacturers scrambles in a mad frenzy to get into silver and gold, realizing the price can only move higher on a sustained basis. Platinum and palladium charge past $1,500 per ounce; rhodium surpasses $7,000. Angry protestors in a vile mood picket the Bank of England daily over the disposal of their national gold treasure at far lower prices. On the floor of the U.S. House of Representatives and in the Senate, legislation is introduced to either de-list silver from Comex trading, or to force the Comex to not interfere with a new, free market in silver prices. Officials of the CFTC, NY Mercantile Exchange, Silver Users Association, hedge funds and silver mining company executives are summoned to testify at Congressional hearings concerning the suddenly recognized silver shortages, and how years of naked short selling have deepened the crisis by choking off production. The Gold Anti-Trust Action Committee becomes widely known to Americans, and Theodore Butler is invited to testify before Congress concerning his warnings about the silver manipulation, which appear in the public record on the Internet. A panel of experts including David Morgan and Robert Chapman are invited to write a series of editorials to appear in the newsletter of a national businessmens association concerning events in silver, and their suggestions for monetary reform of America. Consumers deluge retail stores, emptying the shelves of silver based items like film and mirrors, whose prices have been hastily marked up. Jewelers are accused of price gouging as they are forced to add steep mark-ups to their gold and silver items, so as not to sell below replacement cost. Hotel and motel operators are on the alert against guests stealing mirrors. A medium scale silver user is arrested in a scandal of attempting to bribe a funeral home chain operator to steal silver amalgam fillings from the deceased. All electronic products containing silver have fat surcharges imposed by manufacturers, exactly as in the last crisis (New York Times, Sunday, February 7, 1980, section IV, page 8, column 6).

    By the middle of the third week, silvers rapidly expanding mushroom cloud tops out in the stratosphere, and casts an immense shadow over world markets. Real estate prices have started a steep decline. Distinguished professors of economics at super rich sponsored universities begin writing scholarly articles for arcane journals with tiny readership as to why the cataclysm in silver and gold prices has happened. Financial commentators for CNBC tilt their heads like bewildered puppies as they make remarks concerning how they just don't understand why precious metal should have ever appreciated. A previously unknown, self constituted expert a la Martin Armstrong will charge that Comex silver was all moved to London, where it is so abundant as to be coming out of the cracks in the pavement; yet United Kingdom manufacturers are on a rationing system. The voice warns that silver is in danger of falling below the price of manure; but the marketplace screams otherwise. (Melanie Johnson, Member of Parliament, admitted in a letter dated 11 December 1999 that the British government has no silver reserves, see Representatives of developing nations without silver resources of their own protest to the United Nations that the developed countries are soaking up all silver production. The abrupt transition to sharply increased prices fails to unleash nearly as much scrap silver going to refiners from the public as would have been thought by some, as most of that overhang was eliminated 22 years ago. Silver disposals are tiny in contrast to the fantastic demand. Investors too numerous to count already disinvested themselves of their silver before the aggressive up-tick, having thrown in the towel in the long wait for escalating prices. Mexico and Peru both announce a total embargo on export of their silver, exactly as they did in 1979, additionally becoming buyers for their central bank reserves (New York Times, October 19, 1979, page 8, column 3 and Fortune magazine, High Stakes in the Silver Game, December 17, 1979, page 57). Consensus in the Mexican senate is reached that the nation needs to begin circulating silver coins again, and going to a Silver Standard is urged throughout Latin America. With Cuba the only Marxist regime in this hemisphere and not being a silver producer, caution is urged that miners receive market prices for their metal. India, never forgetting the negligence of Union Carbide in the Bhopal poison gas disaster on December 2 and 3, 1984, which caused 16,000 deaths, thumbs its nose at the Silver Users Association, of which Union Carbide is a member. India announces it will not export silver at any price, since they need it for their own infrastructure, repeating their actions in the crisis a generation ago (Fortune, December 17, 1979, page 57). This also presents India a chance to smirk at the United States in retaliation for the sanctions imposed by the Clinton administration over Indian tests of 5 nuclear devices in May 1998. Pleas from the Bush administration for India to release quantities of its silver are rebuffed, with the Indian ambassador repeating statements made in the wake of the crisis a generation ago that it has taken India centuries to accumulate its silver, and that they will not squander it (National Geographic, September 1981, page 307). Treasury Secretary Paul O Neill, formerly a director of Eastman Kodak, finds himself powerless to influence India, Mexico and Peru to release silver. By this point silver has already exceeded $50 per ounce, and moves beyond $75 at these announcements. All this having happened within a matter of a few weeks, the investing public, which was burned badly by Nasdaq and Dow Jones price declines, begins a pay any price stampede into physical silver and silver equities, like trying to get all the water in Lake Superior through the nozzle of a squirt gun. Gold is north of $700 per ounce while silver narrows the value ratio, but average investors, millions of them, find that the selection of quality silver mining corporations is alarmingly small, and their shares are climbing like rockets in proportion to the sudden, fantastic increase in their asset base. Investors who bought while artificial low prices were still in effect are suddenly, but solidly, rich. The same analysts who hyped bloated, near worthless securities of dot-coms with no income and tiny assets and steered tens of millions of people into ruin, are now doubly recognized for the travesty of their alleged expert status, as they failed to alert the investing public to the inevitability of silver/gold wealth impending. Back in 2000 when the market cap of Cisco was $555.4 billion for a day, some of those simple minds perhaps thought that each share was going to be worth $555.4 billion in a few more trading sessions. They believed all they had to do was invest in tech and software stocks and their investment would be raised almost literally to the power of infinity! Instead they got a lot of margin calls, some even borrowing on home equity to buy shares at the zenith of the bubble now residing in apartments. Investors who bought such stocks near the top, then rode them all the way to the bottom, feel desperately sick to see the so-called barbarous relics, silver and gold, climb to such commanding heights, and wonder why they could not see it coming, in spite of the publicized actions of various billionaires moving into silver many months earlier (Forbes, August 7, 2000, page 64 and other sources). With the facts of long-term short corner manipulation becoming more widely known, consumers organizations demand to know why market participants held the price low for years, making a gradual transition to higher prices impossible, and creating end-user product shortages. With the heat on, some regulatory agency officials think how more comfortable life would be in Algeria. The Dow has wilted below 7,000; the Nasdaq has shriveled to 950. With silver prices escalating daily, holders of physical withhold their metal from sale, taking a wait and see approach to see how high the chart will go. A deliriously happy silver investor sees a billboard while driving down the highway, and thinks, thats the size chart will be needed to plot silvers rise! By holding their silver back, victorious silver investors add more pressure to the silver environment. USA Today reports the sale of a $175,000 sports car for a pile of average circulated Franklin half-dollars. National news reports a woman who sells a few thousand silver mining shares, and buys enough fine diamonds to fill Hoss Cartwrights ten-gallon hat. An investigating Senator remembers all the silver dimes, quarters and half dollars he saw as a young man, and is haunted by the memory.

    By the end of the fourth week after the silver blast-off, the Middle East blows up again, worse than before, with Israel a nonstop maelstrom of turbulence. An Islamic military alliance led by Iran invades the Saudi oilfields, having overrun Kuwait first. Petroleum stages a monumental upward spike, driving airline stocks to the ground (is this why investor David Bonderman announced his sale of 1.1 million airline shares in late August?) As happened almost 22 years ago, sharply rising precious metals prices are partly attributed to Middle East tensions and references are made to World War III (Time, January 14, 1980, page 57). We are now witnessing the most awesome price surge in commodity history! While world attention is focused on the new Middle East crisis, China bombards Taiwan with missiles for 5 hours then follows up with a massive invasion. The Reds secure control of the one time Portuguese colony just as Americans are waking up. With military tensions concerning China adding fuel to the Middle East firestorm, silver surges past $275 an ounce on the open market, and gold moves beyond $1700. Heavily hedged Australian miners are as dead as Julius Caesar! There is no more foolish talk from the Gnomes of Zurich concerning China dumping tons of silver on the world market. The Dow has plunged below 6,000 and the Nasdaq skids to 775. In contrast, certain Canadian Venture Exchange stocks, and the XAU Index, stand out like the Colossus of Rhodes! A war erupts between industrial silver users and nations withholding their silver from export. A consortium of international financing institutions offers to trade Latin American debt for silver, gold and platinum exploration rights. Shareholders of the best-positioned mining companies see their shares up a mind-blowing 60,000% due to horizontal leverage (number of ounces per share) and 25,000 buyers to every 1 seller in a global bidding war for more silver than is possibly available! Men like Gates, Soros, Kaplan, Buffett, Bacon, Fleckenstein and Tisch are vilified as vultures in some sections of the press by those who secretly envy them, and those who held silver prices below cost of production for so many years accuse the longs of engineering the crisis. Subscribers of a well-known publication want to know why it featured the viewpoint in its November 2000 issue that silver was dying as a precious metal because of alleged oversupply in the face of a well-publicized 11 years of huge deficits. Congressional hearings attended by generals, admirals and defense contractors begin concerning the depletion of silver in the U.S. Strategic Stockpile (Reuters, November 27, 2000) and why silver prices were held so low for a generation while supplies dried up, causing the crisis by making production unprofitable. Douglas Dillon, the Treasury Secretary who took the U.S. off circulating silver in 1964 after the Johnson administration denied it was going to do so, turns over in his grave. The late Treasury Secretary William Simon, of 1979-1980 Comex management, is not nominated as someone whose image should appear on silver commemorative coins. Silver rationing has been in effect for 2 weeks, with only industries vital to national defense getting it on a steady basis, plus users of medical x-ray film. A medical research team reports that silver destroys a deadly virus after antibiotics fail. In newspaper classified ads, silver based film is offered by many persons for huge premiums over what it cost a month earlier. Shareholders of highly leveraged, unhedged silver producers are gloating like a gladiator over a disemboweled opponent, as they realize that they hold title to what little silver is left in the crust of the earth, over 80% of it having been mined and consumed already (National Geographic, September 1981, page 313 and The New Boom in Silver by Jerome Smith, 1983, pages 32-34; one of the well known companies has a mine discovered in 1864 and another discovered in 1880). Management of these silver companies who avoided the mistake of being in production at or below break-even prices, suddenly has stock options collectively worth over $75 billion and surging upwards, as they are sitting on assets worth over 3,500 times the market capitalization of their companies only a few months earlier. In Vancouver and the Cayman Islands, toasts are made to the new patron saint of the silver boom, Sir Francis Drake (1540-1596), the Englishman who raided Spanish treasure galleons and plundered precious metal taken from Rio de la Plata (Silver River) on the coast of Peru. After 5 more months the gold/silver ratio has suddenly narrowed to 6 to 1 with silver leaping above $500 per ounce. The prospect is now on the horizon of silver passing gold in price! The crisis culmination of some 5,000 years of silver mining and consumption is a stunning bonanza for those who saw it coming and took positions before silver went into orbit, as the exploding world population combined with shrinking silver resources has created an opportunity for wealth unprecedented in history! Governments and individuals are forced to acknowledge that silver is not only an absolutely vital commodity in a desperate supply squeeze, but that it is indeed, along with gold, in and of itself, money, medium of exchange and currency in the truest sense of the word.

    March 23, 2006

    New high for Copper


    March 22, 2006

    getting near the end..

    ANNANDALE, Va. (MarketWatch) -- A couple of investment newsletters in recent days have drawn readers' attention to a subsurface pattern in the market that has very curious implications for where we are in the market's cycle.

    It seems that in recent months, stocks of companies with the strongest balance sheets have markedly lagged shares of firms with the weakest financials. In fact, it has not even been close.

    Late last week, for example, Richard Moroney, editor of Dow Theory Forecasts, reported that, so far in 2006, the ten percent of stocks scoring the worst according to measures of "debt levels, interest coverage, and profit margins" have gained nearly 13%, versus a less than 5% gain for the ten percent of stocks at the opposite end of the spectrum.

    Moroney reported a similar pattern when stocks are ranked according to "three- and five-year growth rates, along with return on equity, assets and investment." The 10% of stocks scoring the worst on these dimensions have gained nearly 11% so far this year, in contrast to 1.4% for the 10% with the best scores on these dimensions.

    In a similar vein, Standard and Poor's reported Monday that "stocks with average to low S&P Quality Rankings (B+, B, B-, and C) have continued to outperform those with high Quality Rankings in recent months." S&P's Quality Rankings are based on dividends and the quality of earnings.

    What does this mean? As best as I can determine, the historical pattern is for low-quality issues to outperform the high-quality issues both at the beginning of a bull market and at its end.

    Take your pick.

    Consider first what happens at the beginnings of bull markets. That's typically when the economy is just emerging from a recession and economic growth is beginning to pick up momentum. Such growth will have the most dramatic impact on companies living at or close to the financial margin, since they are the ones whose very survival was most in question during the recession.

    To be sure, it takes a while for this revived economic strength to filter its way down to companies' bottom lines. But the stock market is a discounting mechanism, and it doesn't wait for those balance sheets to improve before bidding these companies' stock prices strongly higher.

    Hence the strong relative strength at the beginning of bull markets of stocks of companies with the lowest financial quality.

    At the other end of the spectrum, consider that bull markets often come to an end in a speculative blow-off. Ironically, the companies that typically are the beneficiary, temporarily, of such speculative excesses are the lowest-quality companies. There no doubt are many reasons for this, but one is that higher-quality companies cannot possibly satisfy the demands for earnings and revenue growth demanded by an increasingly greedy investment public at that stage of the market's cycle.

    By way of example, I need only remind readers of the Internet bubble of the late 1990s and early 2000.

    Which of these two extremes is more likely to apply to today's markets? It would seem difficult to argue that we today are at the beginning of a new bull market, since by almost all counts we are in the fourth year of the bull market that began in October 2002. So by process of elimination we are left to conclude that we must be close to the end of a bull market.

    If so, then the best that the bulls can hope for right now is that the outperformance so far this year of the lowest quality issues is merely temporary and doesn't represent a meaningful trend. I interpret this to be Moroney's meaning when he writes in his latest issue: "In our view, strength in high-quality blue chips is exactly what the broad market needs."

    Are there any signs of a high quality revival? Richard Tortoriello, a quantitative equity analyst at S&P, thinks there are. He notes that the "rate of [the lowest quality issues'] outperformance has [recently] slowed."

    In other words, though the lowest quality issues are still beating the highest quality ones, they aren't beating them by as much as they were before.
    To be sure, this is not much more than a glimmer of hope at this point. But, when interpreting the marked relative strength recently of the lowest quality issues, this glimmer is about all that the bulls can point to.

    Xstrata after Oxiana?

    Copper miner Xstrata was another rumored potential predator in the sector as speculation emerged that the company is about to launch a bid for Australian copper and gold company Oxiana, according to mining analysts at Investec Securities. Oxiana closed up more than 10% in Australian trade

    March 21, 2006

    Bit of a worry...

    The discovery of huge hidden losses at General Motors' finance arm
    has raised fresh fears of bankruptcy at the world's biggest
    carmaker, sending tremors through the credit derivatives markets.

    The struggling group asked for a filing delay after admitting to an
    extra $2 billion (£1.1 billion) in accounting errors at its finance
    arm GMAC, raising total losses last year to $10.6 billion. The news
    triggered a sharp spike in the cost of default insurance on GMAC's
    bonds, rising 75 basis points overnight.

    Car-parts supplier Dana Corp. defaulted last week on $2.5 billion of
    debt, following Delphi and Tower Automotive last year.

    Concern that General Motors may now be sliding towards the brink --
    linked to an estimated $200 billion in credit derivatives -- has
    renewed fears that the overheated credit swap market could seize up
    in a crisis.

    Global investors are already jittery after the crash of the
    Icelandic krona, which sparked flight from hot assets as far afield
    as Hungary, Turkey. and New Zealand.

    There is concern that monetary tightening in Europe, Japan, and
    America in unison might drain much of the excess liquidity fuelling
    the global asset boom.

    Timothy Geithner, president of the New York Federal Reserve, warned
    in a recent speech that the $300,000 billion derivatives market had
    raced ahead of the infrastructure needed to support it.

    He said the plethora of new instruments may have led to a more
    dangerous concentration of risk.

    "They have not ended the tendency of markets to occasional periods
    of mania and panic. They have not eliminated the possibility of
    failure of a major financial intermediary. And they cannot fully
    insulate the broader financial community from the effects of such a

    "There are aspects of the latest changes in financial innovation
    that could increase systemic risk in some circumstances, by
    amplifying rather than dampening the movement in asset prices," he

    The New York Fed was caught off guard in 1998 when the Russian
    default caused global bond spreads to widen further than computer
    models had programmed.

    Long Term Capital Management -- a hedge fund with two Nobel
    laureates on its team -- was left on the wrong side of almost $100
    billion in trades on Italian, Spanish, and Portuguese bonds, among
    others, until it was rescued by the emergency rate cuts. The Fed
    said at the time the meltdown had put the entire global financial
    system at risk.

    This time Mr Geithner is demanding that the International Swaps and
    Derivatives Association clean up its act before -- not after -- any
    credit crunch. He said the "most conspicuous" problems were in the
    $12,400 billion market for credit derivatives, which has doubled in
    size every year for the last decade. A "significant" proportion of
    total trades do not even match up, he said.

    Credit derivatives are an easy way to bet on credit quality without
    having to buy actual bonds, which are less liquid. Mr Geithner said
    the risk was very heavily concentrated, with America's 10 biggest
    banks holding $600 billion in potential credit exposure (on $95,000
    billion of notional trades), equal to 175 percent of their financial

    "The same names show up in multiple types of positions. These create
    the potential for squeezes in cash markets, magnifying the risk of
    adverse market dynamics," he said.

    Market traders are scathing about such warnings, accusing the
    watchdogs of basic ignorance. "Regulators have been going on like
    this for five years now," said one veteran.

    Unconvinced by such blithe assurances, the investor Warren Buffett
    has been warning since 2003 that derivatives are a ticking "time
    bomb," although his new metaphor is New Orleans' burst levee.

    This month he was explaining it has cost Berkshire Hathaway $404
    million to extract itself from derivatives inherited through General
    Re, the reinsurance group.

    He said: "We are a canary in this business coal mine. Our experience
    should be particularly sobering because we were a better-than-
    average candidate to exit gracefully.

    "General Re has had the good fortune to unwind its supposedly liquid
    positions in a benign market. It could be a different story for
    others in the future," Mr Buffett said.


    March 20, 2006

    Oxiana Revise Net Mineral Resources

    Total Oxiana Group Mineral Resources at year end, net of mining depletion, are estimated to contain an estimated 7.1 million ounces of gold, 72 million ounces of silver, 3.7 million tonnes of copper, and 0.9 million tonnes of zinc (0.5g/t Au, 0.5% Cu, 0.5% Zn cut-off). This represents an increase of 900,000 ounces of gold, 28 million ounces of silver, 700,000 tonnes of copper, and 900,000 tonnes of zinc over 2004 estimates. This is a substantial increase in the value of Oxiana’s Resource base.
    At Sepon a reduction in oxide gold Resources of 0.9Moz of gold was due to development of more tightly constrained Resource models and to depletion. Significant mineralisation with potential to become new deposits was discovered in 2005, however insufficient drilling had been undertaken by year end for them to be fully represented in this Resource Statement. It is expected that this new material will be converted to Resources in 2006. At Prominent Hill in South Australia, 1.0Moz of gold were added through additional drilling of the eastern gold only zone and the acquisition of Golden Grove in Western Australia contributed 0.6Moz. Overall, silver Resources rose through the acquisition of Golden Grove. An additional 1.0 million tonnes of contained copper was added to the copper Resource inventory made up of approximately 700,000 tonnes from the Thengkham discoveries at Sepon and 300,000 tonnes from Golden Grove. The acquisition of Golden Grove added 903,000 tonnes of zinc and 126,000 tonnes of lead to the Resource inventory in addition to the gold, copper and silver Resources above.
    The remodelling noted above, along with the redefinition of oxide-primary gold boundaries and incomplete Resource to Reserve conversion work, resulted in gold Reserves at Sepon being reduced to 0.4 million ounces net of mining depletion. Some of the potential new deposits identified in 2005 require further drilling before being available for conversion to Resources and then Reserves.

    These Reserves are currently derived from the oxide and partial oxide Resource base. Copper Ore Reserves at the Khanong deposit were updated following the completion of grade control and limited extension drilling programs and remain essentially unchanged net of depletion from 2004.

    Contained metal in Ore Reserves at Golden Grove increased to 453,000 tonnes of zinc, 128,000 tonnes of copper, 238,000 ounces of gold, 13 million ounces of silver and 56,000 tonnes of lead. An initial Ore Reserve for Prominent Hill is anticipated mid-2006. 2006 Resource and Reserve Program.At Sepon the gold focus will be on conversion of identified Resources to Reserves along with the ongoing program to outline Resources at new discoveries and quickly convert them to Reserves. It is expected that the primary gold Resources will be available for conversion to Reserves when feasibility studies have been completed. The copper focus will be on continuing to increase the Resource and Reserve base at Thengkham and Khanong as part of the copper expansion feasibility study.

    Further conversion of Golden Grove Resources to Reserves is expected in addition to further testing of Resource potential at depth and along strike.

    At Prominent Hill an updated Resource and an initial Reserve will be announced when available as part of the Bankable Feasibility Study. This Reserve optimisation work involves an extensive Group-wide drilling and evaluation
    program which is well underway at all sites. Further intensive exploration and Resource development drilling also continues across the Company’s highly prospective property portfolio
    with up to 25 drill rigs active.

    Owen L Hegarty

    March 17, 2006

    Morning Star: Gold Stocks to avoid

    Cambior (AMEX:CBJ - News)
    Two of Cambior's three mines (one in Guyana and two in Canada) are high-cost operations. Costs at the third mine--Rosebel in Suriname--are not substantially below average. The company's extraction costs in 2005 were $305 an ounce, compared with the industry average of about $250. Cambior is also subject to a high level of operational risk due to its small number of mines. For example, milling operations were suspended at Rosebel last year due to a leakage. Because Rosebel produces about half of the company's gold, a stoppage here, even if temporary, will have a big adverse impact on overall production and revenue. Finally, Cambior's debt--at 12% of total capital--is relatively high for a gold producer. Paying down debt during flush times, like now, is considered a best practice in the mining industry. However, Cambior was only marginally profitable in 2005, and the company has not brought down its debt level. When gold prices fall and profits turn to losses, servicing this debt might become a burden the firm cannot bear, given its high operation costs.

    Bema Gold (AMEX:BGO - News)
    Bema operates two mines--one in Russia and one in South Africa. While the economics of the Russian mine are respectable with slightly below-average cash costs, the South African operation has been a drag on profits and cash flow since Bema started mining there in 2003. However, instead of improving profitability at its existing operations, the company is intent on raising production from about 290,000 ounces projected for 2005 to 1 million ounces. Given the lack of cash flow from operations, Bema has been forced to raise additional equity and debt capital to fund its exploration and expansion projects. As a result, Bema has one of the weakest balance sheets in the gold mining industry. Negative free cash flow, a weak balance sheet, and uncertain prospects make an investment in Bema little more than a speculative bet on the company's future, in our opinion.

    Hecla Mining (NYSE:HL - News)
    Given all the risks at Hecla--a relatively small production base in unattractive countries, future production not growing as much as expected, commodity prices not cooperating, as well as more financing and environmental charges--an investment in these shares remains highly speculative.

    DRDGold (NasdaqSC:DROOY - News)
    Mining gold in South Africa is a high-cost business that started more than a century ago. As more gold is mined, mines get deeper and costs generally rise. In addition, older technology and strong labor unions in South Africa also contribute significantly to the high costs prevalent in that country. Even by South African standards, DRDGold is saddled with relatively high cost and older mines. While recent efforts at operational improvements mean that DRDGold is less of a "cigar-butt investment" than before, we do not think the company is out of the woods. Even with all the improvements, we still expect the company's cash costs to be more than $300 per ounce, compared with the industry average of around $250 per ounce. For DRDGold to consistently turn a profit, gold must trade at prices comfortably above the firm's operating costs and relevant currency-exchange rates must cooperate. As a commodity producer, DRDGold has little influence over either of these factors because it is a price-taker in both the gold and the foreign-exchange markets.

    March 15, 2006

    Spot Uranium Oxide Hits US$40.00 a pound


    March 14, 2006

    China strategy on LME copper short to support prices -UBS

    Copper CatalogThe Chinese State Reserve Bureau's strategy in dealing with its substantial short copper position on the London Metal Exchange is likely to maintain market tightness for longer, UBS base metals analyst Robin Bhar said Friday.

    China's SRB is thought to be using a combination of buying back, delivering physical metal and rolling its short position estimated at 100,000-200,000 metric tons, Bhar said in a report.

    Given the tightness in the market, "buying back and/or rolling positions forward in a tight market showing large backwardations maintains upward pressure on prices," Bhar said.

    This is likely to prolong copper's backwardation, currently at $82 on the cash-to-three-month spread, offering better value further out on copper's forward curve than for long positions at high prices on nearby positions.

    Well, I thought copper would go up due to this.... 

    Late in 2005, LME copper prices rose sharply as participants added longs, betting that the Chinese government would have to buy copper to meet delivery obligations, said to fall Dec. 21.

    "Furthermore, with the market in deficit for the past three consecutive years, industry stocks are below critically low levels and the stocks-consumption ratio is forecast to remain below four weeks over the next three years and should continue to underpin strong copper prices," Bhar said.

    The absence of a squeeze on the Dec. 21 delivery date points to short positions having been rolled or borrowed to various delivery dates in 2006 and 2007 as nearby dates widened, he added.

    Meantime, stocks in LME warehouses in Asia have jumped over the past few months, with warehouses in Asia now holding almost all of 132,950 tons LME copper warehouse stocks.

    Chinese exports rose sharply in December and remained high in January, reflecting shipments by the SRB to LME warehouses.

    March 11, 2006

    Geiger counter ticks louder in uranium debate


     Richard Owen

    URANIUM re-emerged as the hot political topic during the past week with India pleading for access to Australia's bountiful reserves to feed an expanding nuclear power industry as investors swamped yet another alluring yellowcake float.

    Market reaction to the Toro Energy uranium exploration float in South Australia demonstrates just how hot the uranium sector has become amid speculation about the imminent death of Labor's anachronistic "three mines" policy.

    Joint venture vendors Minotaur Exploration and Oxiana were forced to roll down the shutters four days early after receiving applications for $52.5 million worth of stock almost three times the $18 million being sought.

    Australia hosts 30 per cent of the world's known uranium reserves and in the five years to June 2005 exported 46,600 tonnes of the stuff worth some $2.1 billion to 11 countries.

    Talk of sales to China and possibly India has prompted Queensland's three Liberal senators Russell Trood, George Brandis and Brett Mason to fly to Mt Isa next week to visit Valhalla one of the state's most promising uranium prospects held by West Australian junior Summit Resources.

    Although keen to see new uranium mines developed in Australia, the Federal Government is sticking for now to a policy of not sanctioning uranium sales to countries such as India and Pakistan, which have not signed the Nuclear Non-Proliferation Treaty.

    Canberra generated a great deal of excitement last year by taking over responsibility for approving new uranium mines in the Northern Territory, but Labor regimes running the uranium-rich states of Queensland, Western Australia and South Australia are continuing to adhere to the ALP's "three mines policy" until it is changed.

    The push is on in Queensland though for policy reform since right-wing ALP powerbroker and Australian Workers Union secretary Bill Ludwig took a lead role in urging the State Government to end its opposition to mining.

    However, Premier Peter Beattie tried to fend off the latest mid-week plea for a rethink on uranium policy from Mount Isa MP and Speaker Tony McGrady with the almost absurd suggestion that yellowcake production in Queensland would undermine the state's $11.5 billion export coal industry.

    The Queensland Resources Council quickly put paid to this argument by pointing out the majority of coal exported from Queensland was coking coal used to make steel  not thermal coal used to generate electricity.

    Summit Resources chief geologist Peter Rolley said the recent change in political sentiment toward uranium at both state and federal levels had been "most intriguing" against the background of Kyoto and the greenhouse gas debate.

    "We certainly haven't been lobbying any parliamentarians or environmental groups so we're finding it all very encouraging in that it's not just us pushing the wheelbarrow," he said.

    "It was very interesting to see Mr McGrady's comments."

    Summit needs to raise $10 million to fund a feasibility study on the viability of developing a $400 million mining operation at Valhalla just 40km from Mount Isa.

    "We are quietly confident, but we certainly can't commit to spending that sort of money which we would have to raise from our shareholders until there is a change in policy," Mr Rolley said.

    Queensland's three Liberal Party senators, he said, had arranged to inspect the potential mine site on Wednesday to get a better feel for the proposed project and publicly demonstrate their support.

    In a recent speech, QRC chief executive Michael Roche referred to uranium as "an unusual blind spot" in the Beattie Government's resource policy.

    "The State Labor Government's position on uranium is all the more difficult to fathom when not even Queensland's coal sector accepts the argument that keeping Queensland's uranium in the ground is somehow protecting the state's coal industry," he said.

    "The message from the Queensland coal industry is that there is room for the full energy source mix. The reality is that there is global demand for Australia's uranium and it seems odd that our State Government is happy for South Australia and the Northern Territory to benefit from the resultant investment, jobs and royalties."

    Queensland has not exported a pound of uranium oxide since the Rio Tinto-controlled Mary Kathleen mine near Mount Isa was shut down back in 1982 after producing almost 9000 tonnes.

    Uranium, however, is one of those commodities which punches well above its economic weight due to the broader political issues relating to safety, the potential impact of an accident on the environment and, perhaps more importantly, security.

    A quick flick through the latest Australian Bureau of Agricultural and Resource Economics report on commodities though will convince most readers that current constraints on uranium mining are hardly denying the country the immediate benefit of a new financial El Dorado.

    ABARE estimates Australia's mineral and energy export revenues will jump $7.7 billion or 8 per cent next financial year to $100.64 billion and peak at $103.8 billion three years later before edging down to $101.9 billion in 2010-11 as prices retrace.

    However, while revenue from uranium oxide exports is expected to double next financial year to $712 million due to soaring prices, this will account for less than 1 per cent of Australia's total resource sector export receipts.

    Exports from the three existing mines – Ranger (in the Northern Territory), and Beverley and Olympic Dam (both in South Australia) – are also forecast to plateau in 2008 at 11,284 tonnes before edging down to about 10,000 tonnes by 2010-11.

    To put this all in context there are now some 440 nuclear-reactors around the world which require 77,000 tonnes of uranium oxide concentrate containing 66,000 tonnes of uranium from mines (or the equivalent from stockpiles or secondary sources such as decommissioned weaponry) each year.

    There are also now plans to build over the next 15 years another 113 reactors, including 24 in India, 19 in China and 24 in South Africa. This would increase global consumption by about 25 per cent or almost 20,000 tonnes.

    The OECD's International Energy Agency also expects electricity demand to more than double by 2030, leaving plenty of scope for further growth in nuclear capacity in a greenhouse-conscious world.

    To put India's needs in context, there are now 15 reactors operating in the country and another eight under construction. A similar but less aggressive expansion story is under way in China which is negotiating for access to our uranium supply as a signatory to the non-proliferation treaty.

    India's consumption of uranium for power generation is expected to more than double from about 1334 tonnes a year to 3100 tonnes by 2010 – an extra 1800 tonnes a year worth about $200 million at current prices.

    Queensland could be in a position to meet some or all of that additional demand from Valhalla.

    Given a green light, Mr Rolley believes Summit could be exporting yellowcake from Queensland within three years and contributing royalties to help the Government fund the provision of crucial social services such as health and education.

    Summit is targeting output of at least 2500 tonnes of uranium oxide a year from Valhalla and a number of other nearby deposits estimated to contain more than 30,000 tonnes of uranium.

    In 1983, the Hawke government's election to power resulted in the deferment of plans to develop up to eight new uranium mines around the country.

    They included the Ben Lomond project near Townsville which had completed a bankable feasibility study for a 6800-tonne resource from which French company Total planned to produce 500 tonnes of uranium oxide and 250 tonnes of molybdenum a year.

    The project was recently acquired by Canada's Mega Uranium which also owns the Maureen uranium deposit near Georgetown, containing measured and indicated resources totalling 3000 tonnes.

    Mega has budgeted to spend $C100,000 ($A117,000) on Ben Lomond this year and a further $C500,000 at Maureen on drilling and an airborne survey to identify other targets.

    Another Canadian company called Larimide owns Queensland's other uranium prospect Westmoreland which boasts an inferred resource of 21,000 tonnes. Both companies are gambling on a change in ALP policy.

    There are another 15 known deposits scattered around the Northern Territory, South Australia and Western Australia – most of which are now the subject of speculative investment on the back of renewed exploration interest.

    However, BHP Billiton's plan to expand Olympic Dam and boost uranium output by as much as 10,000 tonnes to 15,000 tonnes a year is likely to ensure that the world's largest mining company emerges as the chief beneficiary of any sustained lift in global demand for yellowcake well into the future.

    Seven Pillars of Folly

    The oil exporters of the Persian Gulf are flush with cash. Some of that money is going towards acquiring P&O, the British shipping concern, thus sparking off the heated controversy over foreign control of U.S. ports. This has led people to worry that Arab petrodollars might be scared away from the U.S. In fact, unlike during the last oil boom of the late 1970s, relatively little of the current Arab oil surplus has been directly invested in U.S. assets or even deposited in the international banking system. This time much of the oil money has remained at home where a classic speculative mania is now being played out. Lawrence of Arabia took the title of his celebrated book from a passage in the Book of Proverbs: "Wisdom hath builded her house, she hath hewn out her seven pillars." In homage to Lawrence, we identify the seven pillars of folly upon which the Great Arab Boom has been weakly constructed.

    The first pillar is liquidity: OPEC members have earned around $1.3 trillion in petrodollars since 1998, according to the Bank for International Settlements. The extra liquidity injected into the Gulf economies by the oil price hike since 2002 is estimated at around $300 billion by HSBC. Some of this money has been spent on building up foreign currency reserves and on the acquisition of foreign companies, such as P&O. Arab takeovers of European and U.S. firms totaled $30 billion last year. Some money has even been invested in hedge funds and gold. However, a great deal has stayed in the Gulf region.


    This has contributed to an extraordinary explosion of bank credit in Saudi Arabia and its neighbors. Since the member countries of the Gulf Cooperation Council link their currencies to the U.S. dollar, they have also enjoyed the Federal Reserve's easy money policy. The Saudi government has recently repaid around $100 billion of outstanding debt, further contributing to domestic liquidity.

    The deposit base of Gulf commercial banks has increased by over 60% since 2000, according to a recent report from Credit Suisse. Bank loans have financed business investment, personal consumption, property development and stock margin loans, thereby boosting both the economy and asset prices.

    The second pillar is the new economy: The Gulf economies are growing rapidly, along with corporate profits. Returns on equity in the region are approaching 20%, calculates Credit Suisse. Saudi Arabia has recently joined the World Trade Organization. Kuwait is selling off some state-owned businesses. A new era of permanently high oil prices and perpetual prosperity has been hailed.


    The Gulf rulers are seeking to reduce their economies' dependence on oil. This is spurring a massive investment boom. Dubai is attempting to transform itself into a leading financial center and tourist resort. Saudi Arabia intends to become a world leader in fertilizer production. A bridge costing $3 billion is proposed to span the Red Sea. A new economy is coming into being. The current oil boom, unlike former ones, won't be followed by a bust, say the believers. This time it's different.

    The third pillar is the stock market: The recent performance of Arab stock markets makes the Nasdaq of the late 1990s look like a slouch. Since January 2002, the Egyptian, Dubai and Saudi stock markets are up respectively by over 1,100%, 630% and 600%. Only four years ago, Gulf companies were priced at around twice book value. Today they trade on an average of 44 times historic earnings and at over eight times book value. Gulf banks are valued at over nine times book value, according to Credit Suisse.


    Sabic, a Saudi conglomerate, is currently ranked among the world's 10 largest companies by market capitalization. The Saudi stock exchange has a market cap of around $750 billion. That's roughly three times the country's GDP. By comparison, the U.S. stock market reached a peak of 183% of GDP in March 2000. In fact, the relative overvaluation of the Saudi stock market is even greater than these figures suggest. Nomura analyst Tarek Fadlallah points out that as the oil industry remains in state hands, a far smaller fraction of Saudi economic activity is captured by the stock market than in the U.S.

    The fourth pillar is an IPO boom: In the late 1980s, the Japanese authorities kindled a speculative mania by floating telecom giant NTT. In unconscious imitation, the Gulf states have stimulated their mania with privatizations and IPOs at bargain prices. It is not unknown for stocks to climb 500% on the first day's trading. Applications for new issues have been oversubscribed by up to 800 times. One IPO in the United Arab Emirates attracted aggregate subscriptions greater than $100 billion, a larger sum than the UAE's GDP.


    The fifth pillar is a property boom: Dubai is the fastest-growing city in the world. Hundreds of new buildings are under construction, including what is planned to be the tallest building ever, the Burj Tower. Cynics point out that the capping of the world's highest property, from the Empire State Building to the Petronas Towers in Malaysia, has occasionally in the past coincided with economic crises. Reports suggest that the majority of new Dubai properties are being acquired for speculative purposes, with only small deposits put down. They are being flipped in the contemporary Miami manner.


    The sixth pillar is market inefficiency: Financial information in the Gulf is totally inadequate. The Saudi megacap conglomerate Sabic attracts no domestic financial analysis, says Nomura's Mr. Fadlallah. Companies report their results in a rudimentary fashion. It is against the law to sell short overpriced stocks in the Saudi market. And foreigners' financial sophistication is absent since only Gulf nationals can purchase Saudi stocks. Instead, speculators operate in an information vacuum in markets reportedly dominated by insider trading and practiced manipulation.


    The seventh pillar is the madness of crowds: Newspapers gleefully report stories of police called to protect banks from overeager IPO subscribers. A Saudi woman is said to have been divorced by her husband for no reason other than that he'd had lost money in the stock market. Up to two million of the 16 million Saudi population are said to be playing the market. Interest-free loans are commonly available. Saudi bank foyers are lined with LCD screens showing stock movements. A local TV station has started to provide stock market reports. The education minister has warned teachers to stop day-trading at schools. People are quitting their jobs to trade.


    This is a familiar tale of folly, similar in certain aspects to the global technology bubble of the late 1990s. And like the tech bubble it is set to burst. The current Gulf prosperity is a mirage created by a haze of liquidity. The Federal Reserve, which inadvertently caused the Arab bubble when it slashed interest rates in 2002, is currently mopping up that liquidity. The Gulf Arabs are likely to be rudely awoken from their speculative dreams. In fact, the Arab markets are beginning to crack: Dubai has fallen 40% from its November peak, and the Saudi market is down by around 12% in the past few days.

    There are several implications of the coming Arab crash. Speculative booms lead to capital being misallocated. Many of today's investments in the Gulf region may appear, in retrospect, as extravagant as U.S. fiber-optic expenditures in the late 1990s. As for Dubai's desire to become an international financial center, it is spookily reminiscent of Tokyo's ambition to rival New York and London in the 1980s. Japan's ambition was shattered by the collapse of its bubble economy.

    The political consequences could be more serious. Arab rulers have deliberately encouraged the boom in the hope that rising asset prices and a strong economy would distract their youthful populations from religious fundamentalism. This strategy could backfire. History teaches that when speculative bubbles burst and the public loses large sums, there is normally a political backlash. This was true of the U.S. in the 1930s, and to a lesser extent in the early 2000s, and of Japan in the 1990s. It's not hard to imagine Islamists capitalizing on a future bust with denunciations of stock-market gambling. Some of today's young Arab day-traders could well turn into tomorrow's al Qaeda recruits.


    March 10, 2006



    by Jim Rogers

    When I was one of the lone voices talking up commodities and China heading into the new millennium, I ran into much skepticism among the press. The writers, reporters, and anchors around the world, the so-called business media who ought to have known better, were more likely to raise an eyebrow or even turn hostile when I wanted to talk about oil, lead, and sugar more than about the "next big thing" in stocks.

    Occasionally, I like to tease these media types. During one breakfast interview in a Paris hotel, a congenial writer from a French business magazine who was much more eager to discuss the falling dollar and the surging euro-for obvious reasons (Vive la France!) asked me what I would recommend for an ordinary investor like her. I plucked a wrapped sugar cube from the bowl on the table and handed it to her. She looked at me as if I had gone mad. "Put this in your pocket and take it home," I advised, "because the price of sugar is going to go up five times in the next decade."

    She laughed, eyeing her sugar with skepticism. I told her that the price of sugar that day was 5.5 cents per pound, so cheap that no one in the world was even paying attention to the sugar business. I reminded her that when sugar prices last made their all-time record run-soaring more than 45 times, from 1.4 cents in 1966 to 66.5 cents in 1974-her countrymen were planting sugar all over France. She nodded-"Supply and demand," she said

    - and pocketed her sugar. But I suspect that she has not put any of her money where her mouth - or her pocket - is.

    No one had for years, which, of course, was my point. Sugar prices were so low for so long that it was the last business enterprising souls around the world would be likely to enter in the 1990s and early 2000s. If you are an ambitious young farmer in Brazil (or Germany or Australia or Thailand, also major sugar producing nations), do you choose to produce sugar at 5.5 cents a pound or soybeans, which closed 2003 near $8 a bushel, a six-year high? Even in the U.S., which has its own protected domestic sugar market at two to three times the world price, only the most efficient producers are surviving.

    Sugar has had its boom times in the past - that 1974 record, and another spike in 1981 during the last bull market in commodities. And if I'm right and we're in another long-term bull market in commodities, we're likely to see another sugar high. Historically, nearly everything goes up in every kind of bull market, whether it's company shares, commodities, or apartments on Park Avenue. And with world sugar prices at 85 percent or so below their all-time high, the chances of moving higher are strong. To those of us who have been here before, it is promising to note that similar supply and demand imbalances are shaping up that could push sugar prices upward over the next decade.

    The prices of a commodity usually move for a good reason, and the savvy commodities investor must be familiar with past trends and have an eye out for new ones, along with potential glitches, fundamental changes, and anything else that might affect the price of sugar. Between 1966 and November 1974, sugar made the astonishing climb, from 1.4 cents to 66.5 cents.

    How do sugar prices go up more than 45 times? By the end of 1972, there had been four straight sugar seasons with record crops. Yet consumption actually outpaced supplies in 1972, literally eating into sugar inventories over the next year. The 1973-74 sugar season began with extremely tight supply conditions worldwide; demand continued to rise. There was evidence that some big industry users were stockpiling sugar in anticipation of higher prices. Soon people were grabbing sugar off the shelves in armloads to offset rising prices. Others were grabbing cubes off restaurant tables for home use. Dinner guests were arriving with five-pound bags of sugar instead of the traditional bottle of wine or bouquet of flowers. Even people who had never given the sugar futures markets a moment's thought knew something was up when they walked into the local coffee shop and noticed that the sugar had vanished from the table. Quite simply, global demand for sugar had exceeded supply, and before long the price of sugar headed for the roof.

    Everyone had a theory for the high prices. Sugar traders had no idea where prices might be when the U.S.'s long-standing price supports expired at the end of 1974; some blamed the high prices on a "scarcity of cheap labor to harvest sugarcane"; others pointed to the failure of the European sugar-beet crop. Others even suspected that both the Soviet Union, which had just suffered two bad production years in a row in its own sugar crop, and "Arab oil money" (remember that oil crisis of the 1970s?) had moved into the sugar futures markets, along with a rise in speculation by others looking to make money from rising prices.

    Significant, too, was the fact that Americans had come to see cheap sugar as a birthright. Even those consumers (and food and beverage companies) who might have turned to the newest artificial sugar substitute, cyclamate, and thus decreased demand, quickly returned to the real thing when the FDA pulled cyclamate off the market in 1969 after reports that it might cause cancer.

    Over the next few years, companies put sugar back into their products, boosting demand. U.S. consumption did not slow down much until September 1974, when the reality of high prices finally kicked in. Soft-drink prices increased and candy bars got smaller. But before the White House published the "Presidential Proclamation" of 1975 protecting U.S. sugar producers with the same duty rates and establishing a global quota for sugar imports into the U.S., prices were heading back down.

    By December 1976 and January 1977, world sugar prices were ranging between 7 and 9 cents a pound-figures that were, according to the CRB Commodity Yearbook report at the time, "below their reported cost of production in some countries." And many, many Johnny-come-lately sugar speculators lost their money-proving, once again, the perils of rushing into a market where prices are rising 45 times, whether it's sugar or dot-coms. The forces of supply and demand put hysteria in its place, once again.

    While three straight bumper crops assured plenty of sugar in the world - prices averaged 7.81 cents per pound in 1978 - the next season saw a few glitches in the supply chain, as a result of events around the world.

    For the next 20 years - during a bear market in commodities - sugar remained plentiful, with bearish prices zigging and zagging at the low end with a few minor spikes, as typically happens in bear as well as bull markets. Gradually, sugar had gone from a respectable commodity that fed the world and supported entire economies to a victim of changing fashions in diet and health: sugar was bad for you; it made you fat, it made kids hyper, and it rotted their teeth. Meanwhile, in labs all over the world chemists were looking for substitutes, preferably noncarcinogens.

    In 1981, the U.S. Food and Drug Administration approved the artificial sweetener aspartame, and in a flash this newcomer replaced sugar in cookies, cakes, and other favorite snacks sold around the world. Diet colas were becoming more popular because they had less sugar, and if the sugar's competition had not become tough enough, in 1983 the major soft-drink companies started using literally millions of tons of high-fructose corn syrup to sweeten their beverages. Bad for sugar. (But good for corn, and a great example, by the way, of how researching one commodity might turn up some moneymaking possibilities in a different


    By 1985, the price of sugar had made it all the way down to 2.5 cents. No one wanted to be in the sugar business. They were giving away seats on the sugar exchange at the New York Board of Trade.

    Sugar prices stayed in a bear market for the next 19 years, and were still bearish that day in early 2004 when I was teaching the French business writer about her future as a sugar baroness. World production of raw sugar had reached a record level in the 2002-03 season, and the next season produced almost as much. Brazilian exports were also at a record high. That French writer had reason to be skeptical: The price of sugar, after all, at 5.5 cents per pound at the time was not that removed from the 1.4 cent figure of 38 years earlier and a lot closer to that 2.5 cent number of 1985. In fact, most prognosticators were saying, as one analyst for the Australian and New Zealand Banking Group put it at the end of 2003 in a brief report about the market that I read, "sugar prices were likely to remain under downward pressure."

    So why was I, a few months later, confidently telling someone to buy sugar? Supply and demand. Of course, I was already a firm believer in the fact that a bull market in commodities was under way, and if, as I've noted, the history of past bull markets tells us that nearly everything makes a new all-time high, why not sugar?

    Change is upon us

    Longtime readers of my commentaries may recall that I have been waiting for the dollar to fall while US interest rates rise at the same time. Even though it may not be intuitive that the dollar could fall while interest rates rise, I think current events in both China and Japan are setting the stage for it to happen.

    To show how significant recent announcements from both China and Japan are I am going to recap the events leading up to them. If the following is too brief, I suggest you read past commentaries on my website ( for more background.

    Since 1992 more than four trillion dollars of foreign capital have been invested in the US. This capital influx was due to a series of currency crises, beginning with the Brazilian Real in 1992. Capital, seeking a safe haven, poured into the United States. Initially, this influx of capital caused US interest rates to fall, US corporate profits to rise and consumer spending to increase. The resultant bull market in stocks and bonds was fertile ground for investor speculation and gave rise to the high-tech, or Internet bubble. When the high-tech bubble burst, the Federal Reserve reacted by artificially driving interest rates even lower, causing a real estate bubble in the US and averting the collapse of the broader US stock market.

    When the Southeast Asian currency crisis began in 1996 with the fall of the yen, the extraordinary amount of capital that flowed into the US caused an unprecedented rise in the US dollar exchange rate. This increase in the US dollar exchange rate in turn caused a decrease in the price of all things priced in dollars: oil, commodities, metals, gold and, of course, all US imports. Lower import prices in the US in turn lead to an expansion of the US trade deficit.

    At the same time we also saw the emergence of China as an economic powerhouse, with a massive shift of manufacturing capacity away from North America and Europe to China. In order to maximize the benefit of the strong US dollar, both China and Japan elected not to sell the trade dollars they were receiving back into foreign exchange markets. Instead, they bought US Treasuries with those dollars.

    Under normal circumstances, when a country such as Japan receives trade dollars due to its trade surplus with the United States, it sells those dollars in the foreign exchange markets. By selling dollars and buying yen, the trade imbalance would lower the exchange rate of the dollar and increase the exchange rate of the yen, thus increasing the cost of exports from Japan and increasing the cost of imports in the US, which would eventually neutralize the trade imbalance. But because both China and Japan (and several other Southeast Asian countries) withheld their trade dollars from foreign exchange markets, their export prices and US import prices were kept low. This caused an exacerbation of the US trade deficit, and it also kept US interest rates low since the bulk of those dollars were invested in US bonds.

    Oil and metal prices declined precipitously during the late 1990s because of the rise in the US dollar exchange rate. Declines in metal and oil prices were far less pronounced in many other currencies and, in fact, the gold price increased in some currencies even while it was falling in US dollars. I realized during the late 1990s that the gold price (in US dollars) would not sustain a rally until we saw the end of the rise in the dollar itself. Between 1999 and 2001 the dollar rally petered out and by 2002 the dollar was entrenched in a bear market as the combination of falling interest rates in the US and the trade deficit took their toll. Oil, commodities, metals and gold prices started rising.

    The increase in most metals and commodity prices were initially just a reflection of the falling US dollar exchange rate; however, because of the expansion occurring in China, among other things, some commodities and metals prices rose more than what could be accounted for by the dollar alone.

    The gold price, on the other hand, was almost exactly paired to the US dollar exchange rate up to the middle of 2005.

    Now we can evaluate the current situation with the twin deficits of the United States.

    The US trade deficit simply means that US residents buy more imports than what they export. The net result of the trade deficit is that US dollars are being sent to other countries, and, as mentioned earlier, under normal circumstances those dollars would have been sold in foreign exchange markets, putting downward pressure on the dollar. A weaker dollar would translate into higher prices for US imports and lower prices for US exports and that would in turn cause a reduction, or elimination, of the trade imbalance. Therefore, the US trade deficit will eventually cause the US dollar to decline. The only reason it has not yet done so is because China, Japan, and several other countries are not selling their US dollars, but investing them in US Treasuries instead.

    That brings us to the US fiscal deficit. A fiscal deficit arises when the government spends more than it receives from taxes. The US fiscal deficit is much larger than the budget deficit and contrary to what the media and politicians would like you to believe, the US fiscal condition is worsening, not getting better.

    The current debt limit for the US government is $8.184 trillion and if that limit is not raised by the middle of the month the government will likely go into default. All it means is that lawmakers will vote to increase the debt limit. But the amount by which they will increase the debt limit is what is interesting. The current proposal is for an increase of $781 billion. Why $781 billion? Probably because that is more or less what they expect the fiscal deficit will be for the next twelve months, or so.

    During fiscal 2005 (that ended on September 30, 2005) the government’s debt increased by $554 billion. Since then the debt has increased by $337 billion, which, when annualized, comes to $814 billion. Don’t be misled by budget deficits: politicians can budget all they like but their spendthrift ways become evident in the increase in debt.

    As an aside, the current debt of $8.27 trillion does not include unfunded liabilities of the US government, such as Social Security, Medicaid and Medicare. Including unfunded liabilities the US government is approximately $46 trillion in the hole.

    The fiscal deficit means the US government continually has to issue more and more debt to finance its spending and the issuance of debt means an increase in the supply of US bonds that will ultimately lead to lower bond prices and higher interest rates. This is where the trade deficit and the fiscal deficit meet. Just like the trade deficit implies the dollar will fall, the fiscal deficit will ultimately cause US interest rates to rise.

    Recall that China, Japan, and others were buying US Treasury debt (bonds) with their trade dollars instead of selling those dollars into foreign exchange markets. That is what kept the dollar afloat, but it is also what kept US medium to long term interest rates so low since no matter how much more debt the government issued, these nations stood ready to buy it.

    Looking at this I realized that we are going to witness an unexpected turn of events. When China and Japan decide to stop buying US Treasuries with their trade surplus dollars, the US dollar exchange rate will fall simultaneous with rising US interest rates. This is not intuitive since common dogma suggests currencies rise when interest rates rise and fall when interest rates fall. Yet I believe that the US dollar is going to fall while US interest rates rise.

    You probably already figured out how this works: When China and Japan stop buying US treasuries with their trade dollars they will no longer be supporting the US government’s debt issues, which means the US fiscal deficit and the resultant necessity to issue bonds will cause bond prices to fall and interest rates to rise. At the same time, China and Japan will have to do something with those dollars. My suspicion is that they will gradually start selling more and more trade dollars for their own currencies so that they can invest in their own economies.

    I am not suggesting that China or Japan will start selling massive amounts of dollars that are currently held in their foreign reserve accounts, merely that they will reduce the rate at which they are accumulating US dollars in their foreign reserve accounts.

    It has always been clear that China and Japan will support the US dollar only as long as it is in their interest and I have made the point that it is in their interest only while US consumption of their goods continues to grow. We have seen that US economic growth is faltering and therefore I believe we are at the end of their support of the dollar.

    In December a Chinese newspaper, called The Standard, printed an article that quoted Mr. Yu Yongding, a member of the monetary policy advisory committee to the People's Bank of China, as saying that China should weaken the link between the yuan (renminbi) and the US dollar to make the exchange rate more flexible and improve the Chinese government's ability to manage their economy. Yu suggested that the weighting of the US dollar in the basket of currencies against which the renminbi is set should be reduced, thereby reducing the impact that changes in the US dollar would have on the value of the renminbi.

    The next day Mr. Yu Yongding was quoted by the same newspaper as saying that Chinese firms should get ready for a strengthening of the yuan (renminbi) during the next one to two years. The "fuller the preparations, the better," he said. The same article mentions a research paper obtained by Reuters, wherein Mr. Yu Yongding suggested China could reduce the growth in its foreign reserves by running expansionary fiscal policies and investing in infrastructure and research and development.

    It seems to me that China is getting ready to do exactly what I expected they would do: start selling trade dollars and investing the proceeds into the Chinese economy. But if China abandons the dollar, Japan will follow, because supporting the dollar is not possible for either China or Japan alone: it requires both of them to act in concert.

    And indeed, last week we learned that Japan is considering raising interest rates. For almost ten years now Japanese interest rates have been near zero in an attempt to avoid a deflationary collapse. Such low interest rates meant little demand for Japanese bonds and hence virtually no investment demand for Japanese yen. Instead it created what is called the yen carry trade. Large investors could borrow yen at very low interest rates and invest those funds in higher yielding instruments such as US Treasuries. In the process yen are sold and dollars are bought. That keeps the yen exchange rate low relative to the dollar, especially in light of the US trade deficit with Japan.

    Higher Japanese interest rates would kill the yen carry trade and could even cause some of those positions to be unwound, since the biggest risk in the carry trade is an increase in the yen exchange rate.

    Higher Japanese interest rates do not only impact the yen carry trade, they impact US mortgage and other interest rates directly since funds that could have been invested in Japanese debt instruments have instead been invested in US debt instruments.

    So while we know that the dollar will fall and US interest rates will rise as a consequence of the US trade and fiscal deficits when China and Japan stop supporting the dollar, we also know that both the dollar and US bond prices will take a hit if Japan starts raising interest rates. These are all pieces of the same puzzle.

    Expectations of a stronger yen have already hurt the dollar. Since January the dollar has lost 1.69% against the yen.

    I mentioned earlier that the decline in the gold price during the 1990s was due to strengthening of the US dollar and that the increase in the gold price from 2001 to mid-2005 was due to weakening of the US dollar. However, since about June of last year the gold price has been on a tear that is clearly unrelated to the US dollar exchange rate. Is it possible that players in the global financial system were becoming aware of the impending changes in Chinese and Japanese policy towards the dollar? Could it be that they were positioning themselves for another, fairly dramatic decline in the US dollar by buying gold and other instruments that would benefit from weakness in the dollar?

    My expectation is that the dollar has to decline roughly by another 30% or so before balance can be achieved in international trade. That decline will not be uniform against all currencies, but will be predominantly against the renminbi, the yen, and other Southeast Asian currencies.

    Such a decline in the dollar will also cause the dollar-gold price to rise to around $850 an ounce and by the time this has all played out, inflation could add another one or two hundred dollars to the gold price.

    We will see.


    Paul van Eeden

    P.S. I will be at the Prospectors and Developers Association conference in Toronto all of this week, so there will not be a commentary on Friday.

    P.P.S. I may in future stop publishing these commentaries on Kitco so if you enjoy reading them I suggest you go to my website at and register to get them by email. Rest assured that I do not sell or rent any of my subscribers’ email addresses.

    Paul van Eeden works primarily to find investments for his own portfolio and shares his investment ideas with subscribers to his weekly investment publication. For more information please visit his website ( or contact his publisher at (800) 528-0559 or (602) 252-4477.

    March 07, 2006

    Repricing the Planet

    COMMODITIES, IF YOU HAVEN'T NOTICED, are hot. And it's not just oil and other energy items but a broad array of stuff from metals to grains. So far, it hasn't entered the general zeitgeist as in the 'Seventies or the early 'Eighties, when everybody gained a firsthand acquaintance with soaring prices while waiting in gasoline lines or watching prices get marked up before their eyes in the supermarket. Commodities were as much a part of that misbegotten era as Watergate or Jimmy Carter's cardigan, much like tech stocks in the late 'Nineties or, until recently, real estate. Of course, by the time Hollywood gloms onto a market trend, you know it's history. So by 1983, when Trading Places -- the movie in which Eddie Murphy and Dan Aykroyd implausibly made a killing in orange juice futures by getting advance word of a crop report -- the bear market in commodities was well under way.

    Commodities aren't the subject of cocktail-party chatter -- yet -- but they have been attracting serious money from institutional investors, such as pension funds and endowments. That's according to a report from Bridgewater Associates, the highly regarded institutional management firm led by Ray Dalio, who was the subject of a Barron's Q&A last year ("Bipolar Disorder," June 13). Endowments have allocated an estimated 3.6% of their $299 billion to natural resources, as of year end, while pension portfolios had 4.1% of their $6 trillion in assets in "other" investments. The key, says the Bridgewater report: While there's been a big dollar increase in institutional investments in commodities, it's still a small slice of the pie.

    But the report says the share is apt to increase, since commodities have become "respectable" as an asset class, since they help dampen the risk of a securities portfolio via diversification and since many institutions have yet to allocate a penny to commodities. Strong global growth and loose global liquidity conditions underlie the bull case for commodities, which Market Semiotics' Woody Dorsey dubs the Repricing of the Planet. We would also add that rich valuations of equities and paltry bond yields add to the attractions of commodities.

    This hasn't caught on with the man and woman in the street as it did three decades ago, but it soon may. Unless you opened a futures account, individuals' main commodity plays were related stocks or mutual funds. That is, until a month ago, when the DB Commodity Index Tracking Fund (ticker: DBC) came to market. The exchange-traded fund is based on the Deutsche Bank Liquid Commodity Index, which consists of 35% crude oil, 20% heating oil, 12.5% aluminum, 11.25% each for corn and wheat, and 10% in gold.

    So far, the ETF is off less than a buck from where it bowed, at around 23.85. But the introduction of other commodity ETFs has been a pretty good buy signal for those commodities, according to Market Intelligence Report, a North Oaks, Minn., newsletter. If you'd bought bullion when the first gold ETF was announced in 2002, you'd have ridden bullion up from $330 an ounce to $565. To back the popular streetTracks Gold Shares (GLD), its sponsors have had to buy upwards of $6 billion worth of gold -- 300 tons at an average price of $500 an ounce, or one and a half-to-two months' world gold production. That doesn't include the smaller iShares Comex Gold fund (IAU.) An even bigger hit has been the Toronto-traded Uranium Participation Corp. (U.TO), which is up a sweet 43% since it started trading last May.

    Just the anticipation of a silver ETF sent prices of that metal last week over $10 an ounce, a 22-year high. Barclays Global Investors has been seeking clearance for the fund from the SEC since mid-2005 (when silver traded around $7), but has been fighting resistance from industrial users who fear there won't be enough of the metal around if a big slug of it is locked up to back the ETF. Ironically, the prospect of such a supply squeeze can only make silver bulls' hearts beat faster.

    There's no doubt that demand from investors who heretofore had avoided the commodity pits is giving the bull market extra oomph. But they wouldn't be interested in the first place if the fundamentals weren't positive. In other words, the tail isn't really wagging the dog.

    March 06, 2006

    US Banks walk away from US Treasury Paper


    The share of the debt of the US government owned by US banks fell to 1.7 percent in 2004 from 18 percent way back in 1982. US Treasury debt is the benchmark, the best and safest debt paper in the world, backed by the "full faith and credit of the United States".  Isn't it?

    March 04, 2006

    The financial road less traveled

     I shall be telling this with a sigh
    Somewhere ages and ages hence:

    Two roads diverged in a wood, and I--
    I took the one less traveled by,
    And that has made all the difference.
    Robert Frost

    BIS Working Paper No. 193, ponders the profound question, Procyclicality in the financial system: do we need a new macrofinancial stabilisation framework? Very deep. Very serious. But, if you chip away at the big words, breaking them down to a level of tangible meaning the paper admits and then almost asks, the system is broke, should we fix it? I say almost asks because it seems to me the listed "fixes" are just variations of the same themes that created the mess in the first place. Read More.

    Baring's attracted by Glitter...

    Baring’s John Payne has positioned his £112m Global Resources fund for a rally in base and precious metals this year.


    The manager said he anticipated continuingly high global demand for iron, gold and copper, so has been selling out of his oil-related stocks and into metal mining and production companies.

    Mr Payne said he had started to reduce his weighting in energy stocks in the third quarter of 2005, putting the proceeds into base and precious metal stocks.

    At the end of October, the portfolio was 27.8% exposed to base metals with 10.8% in precious metals and 60% in energy stocks. The portfolio now has 31.5% in base metals, 22.8% in precious metals and 42.2% in energy. The benchmark MSCI World All Countries Energy and Materials Index now has a 16.5% base metals weighting, with 3.4% in precious metals and 58.6% in energy.

    Mr Payne said: “The supply and demand fundamentals for several metals – zinc, aluminium and copper – are in favour of the suppliers because of strong demand from China. We expect growth in the Chinese economy of 9.8% this year. In conjunction with this, we expect good growth in the US, improvement in Germany and Japan to grow by 1% to 2%, possibly higher.”

    Gold and other precious metals, meanwhile, had experienced a slight decline in supply in the past two years as few large new mines have come on stream, according to Mr Payne. Besides, he said gold prices had been “climbing the wall of worry”, over higher energy prices, concerns over the US deficit and rising global levels of consumer debt.

    In the past month, Mr Payne has increased his holding in Australian zinc producer Zinifex from 1% to 2% of the fund. Swedish zinc producer Boliden has also been boosted from 2% to 4%. Meanwhile, he has also bolstered South African gold miner Gold Fields from 1.5% to 4% and his holding in Australian gold miner Oxiana has also increase from 1.75% to 2.75%.

    Mr Payne has mixed views on energy and is marginally underweight oil producers, while favouring oil service companies such as US services company Halliburton and Russian oil pipeline operator Transneft.

    March 02, 2006

    Merrill Raises Copper, Zinc, Coal Price Forecast


    March 1 (Bloomberg) -- Copper, zinc and thermal coal price forecasts were increased by Merrill Lynch & Co., the world's biggest securities firm by market value, because of increasing demand and investment funds driving prices higher.

    Merrill raised its price forecasts for four base metals, including aluminum and nickel, and thermal coal by between 5 percent and 43 percent, analyst Vicky Binns said in a note today. It made its last price revision in December.

    Copper, zinc and other metals rose to records this year, bolstered by economic growth in China that fueled demand for autos, homes and appliances. As much as $200 billion of fund money is invested in commodities, with $30 billion in base metals, Citigroup Inc. said in a Jan. 25 report.

    ``We, like everyone else in the market, have been caught out by the effect of money flowing into the commodity markets and therefore need to upgrade price forecasts,'' said Sydney- based Binns. Investment demand is being backed by rising consumption from developing countries like China, and developed economies in Europe and Japan, she said.

    The price of copper, used in pipes and wires, may average $2 a pound in 2006, 21 percent higher than a previous forecast, Merrill said. The metal has averaged $4,856.60 a ton, or $2.20 a pound, this year on the London Metal Exchange.

    ``Demand has surprised on the upside in key Chinese and Indian markets,'' said Binns. ``This has combined with supply bottleneck at the smelters to switch our small surpluses in 2006 into small deficits.''

    Zinc, Thermal Coal

    Zinc, used to protect steel from corrosion, may average $1 a pound, 43 percent more than a previous forecast, Merrill said. That compares with the average price of $2154.2 a ton, or 97.7 cents a pound, this year.

    The securities firm also raised its forecast for aluminum, used in cars and planes, by 5 percent to $1.05 a pound for 2006. Aluminum has averaged $2,417.50 a ton, or $1.1 a pound this year.

    Merrill Lynch also raised its forecasts for annual thermal coal prices to $48 a ton, from $43 a ton, due to rising rates on the spot market. Thermal coal is used to generate electricity.

    ``We believe the risks are for higher prices, with coal seen as the preferred source of power in Asia and Europe and with cement production picking up in Japan,'' Binns said. ``Supply continues to experience delays, higher costs and unavailability of truck tyres.''

    Zinifex Ltd. and Oxiana Ltd. are expected to be the biggest beneficiaries of higher prices, Merrill said.

    The brokerage raised its earnings forecast for Zinifex, the world's second-largest zinc producer, for fiscal 2006 by 50 percent to A$743 million ($552 million).

    Oxiana, an Australian copper producer, will likely post 2006 profit of A$298 million, 55 percent higher than earlier predicted, Merrill said.

    Merrill Lynch also revised its profit estimates for BHP Billiton and Rio Tinto Group, the world's largest and third- largest mining companies. It raised its fiscal 2006 profit forecasts for BHP by 7 percent to $9.9 billion, and for Rio by 8 percent to $6.6 billion.


    February 28, 2006

    Newcrest lacks Midas Touch

    James Kirby
    February 26, 2006
    Australia's most disappointing company, gold miner Newcrest, has staggered over the line with another poor result - and this time investors will not have to take any more excuses from chief executive Tony Palmer.

    By the close of trade on Friday, Newcrest shares, at $20.89, had fallen more than than 10 per cent in two days and Newcrest was looking for a new boss after the unlucky Palmer announced he was hanging up his gold-plated boots to do nothing for a while.

    Newcrest is Australia's biggest gold mining stock and the gold price is trading close to a 30-year high. Newcrest should be a winner but endless production problems mean this Perth-based company is a perennial loser in the gold mining game.

    Even after the price plunge Newcrest shares remain highly valued - but it's got little to do with the company and everything to do with its gold assets and because it's a takeover target.

    It makes you wonder whether Newcrest investors might not have been better off if Palmer and his team had decided to do nothing about two years ago. They could have played golf every day instead of going to work and Newcrest's gold reserves alone would have pushed the stock price higher.

    Which goes to show that just because the underlying price of a commodity is going through the roof, it does not mean every company in the sector is going to be successful. Newcrest is probably the most spectacular example but there are dozens more gold stocks - including Lihir - that face similar challenges.

    Gold is a unique commodity because it carries a reputation as a safe haven in times of trouble. This reputation has been questioned in recent years but Michael Knox, the chief economist at ABM Amro Morgan, has determined that in the 55 years from 1950 gold really did serve as a haven. With an annualised inflation adjusted return of 2.7 per cent, gold was better than bonds.

    Many commodity experts expect gold will continue to trend upwards. After hitting $US572 an ounce it's slipped to about $US550 this month. Forecasts are widely variable, generally ranging up to $US750. I've seen one forecast for $US2000 - that's for what's known as a price spike but it's a genuine forecast and it's been made in Europe by Cheuvrex, the broking arm of respected French bank Credit Agricole.

    There are 20 different reasons why the gold price is rising - China, inflation fears and so on. But the pivotal point is that many of the world's central banks sold gold in the last boom and the gold price slumped. Will it happen again? The bears say it will, it happens every time. The bulls say "this time is different" because the central banks do not have as much gold in the vaults as they had. Needless to say the central banks aren't telling.

    Either way, there is compelling evidence gold is a sound long-term investment and gold is most likely to rise further. But don't buy those gold explorers, buy gold instead - there are index funds and pure gold funds listed on the ASX. You can even buy gold itself from the government-owned Perth Mint: at least then you won't be paying for management that might serve you better on the golf course.

    James Kirby is the editor of Eureka Report at

    Carry trade winding up..

    The cash machine that sustained a world boom is about to close, and it's going to get ugly, says Ambrose Evans-Pritchard

    One by one, the eurozone, the Swedes, the Swiss and now even the Japanese, are turning off the tap of ultra-cheap credit that has flushed the global system for the past year, keeping the ageing asset boom alive.

    The "carry trade" - as it is known - is a near limitless cash machine for banks and hedge funds. They can borrow at near zero interest rates in Japan, or 1pc in Switzerland, to re-lend anywhere in the world that offers higher yields, whether Argentine notes or US mortgage securities.

    Arguably, it has prolonged asset bubbles everywhere, blunting the efforts of the US and other central banks to restrain over-heating in their own countries.

    The Bank of International Settlements last year estimated the turnover in exchange and interest rates derivatives markets at $2,400bn a day.

    "The carry trade has pervaded every single instrument imaginable, credit spreads, bond spreads: everything is poisoned," said David Bloom, currency analyst at HSBC.

    "It's going to come to an end later this year and it's going to be ugly, even if we haven't reached the shake-out just yet," he said.

    [...] "There are several hundred billion dollars of positions in the carry trade that will be unwound as soon as they become unprofitable," said Stephen Lewis, an economist at Monument Securities. "When the Bank of Japan starts tightening we may see some spectacular effects. The world has never been through this before, so there is a high risk of mistakes."

    Toshihiko Fukui, the Japanese central bank governor, gave a fresh warning yesterday that this day is near, saying the country was pulling out of seven years of deflation. The economy grew at a 5.5pc rate in the fourth quarter of 2005.

    [...] It is an open question whether the yen, euro, Swiss franc and Swedish krona carry trades have occurred on such a scale that they have led to over-investment in Latin America and beyond, and compressed US yields, fuelling the American housing boom in 2005 despite Fed tightening.

    There are other big forces at work: huge purchases of US Treasuries by Asian central banks, and petrodollar surpluses coming back to the US credit markets. Stephen Roach, chief economist at Morgan Stanley, warns that the carry trade is itself, in all its forms, a major cause of dangerous speculative excess. "The lure of the carry trade is so compelling, it creates artificial demand for 'carryable' assets that has the potential to turn normal asset price appreciation into bubble-like proportions," he said.

    "History tells us that carry trades end when central bank tightening cycles begin," he said. Ominously, almost every bank other than the Bank of England is now tightening in unison.

    February 27, 2006

    Yenick gets it

    Cycles says: end of this counter-trend rally late Spring, about when the Greenspan Indian Summer gives way to a Bernanke Winter, driven by (a) higher short-term rates and a deeper inversion of the yield curve, (b) coupled with a clear slow-down in US consumer spending due to the cratering of real estate refinance, and (c) possible oil price spike coming from turmoil with Iran trying to switch the oil trade from the Dollar to the Euro, all leading to (d) expectations of a recession in 2007. And when that occurs in 2007, the government will begin priming the pumps looking towards the 2008 election. Coupling that with continued Chinese pumping leading into the 2008 Beijing Olympics should give us a nice mini-Bull run in 2007-2009. Not as good as that 82W5 would have been (or will be), but we'll take it anyway.

    February 26, 2006

    Here is the Hersh Report

    Evidently the US Department of Energy is interested enough in the Peak-Oil debate to commission a report on the subject. Released in February this year by Science Applications International Corporation (SAIC), and titled "Peaking of World Oil Production: Impacts, Mitigation and Risk Management," the report examines the likely consequences of the impending global peak. It was authored principally by Robert L. Hirsch. It disappeared from view. Read it here.

    Download file

    February 25, 2006

    The Paradigm Shift Is Here, Or, Everybody Must Be Stoned

    Wallace, Idaho, 23 February 2006 – If we can get through the end of next month without serious economic havoc (say, the whole planet blowing up, or a full-tilt outbreak of the bird flu pandemic in Arkansas) it might be safe to dig a few of those rat-holed Maple Leafs, Morgan dollars and Krugerrands out of that backyard coffee can and trade them out for Fednotes at your local pawnbroker or coin-dealer.But in the middle of a paradigm shift, things move very rapidly, so don’t go reaching for the shovel just yet. Barely had we begun digesting this United Arab Emirates port deal and the terrible bombing of that mosque and near-certain civil war in Iraq when Capitol Hill Blue’s Doug Thompson yesterday unearthed a Secret Service account that Dick Cheney was drunk as a skunk when he shot his lawyer-buddy on that South Texas quail hunt weekend before last. Being liquored-up when you’re handling a gun is never a good idea, but when you’re hunting in that condition it’s a felony in Texas. Doug’s stories usually show up a week or two later in Time or Newsweek, officially vetted by the MSM. Our faithful correspondent Fred Reed grabbed a jug of cheap red wine (Padre Kino) and slunk off to a corner in Mexico to try to make some sense of it all. The wine didn’t help. He wonders if psilocybin might level the playing-field of White House insanity, put things in perspective.
    Forget digesting or recovering from a day of cheap red; we were beginning to stagger like a first-round boxer after a right hook from Ali when word arrived from Chris Laird that the Yen-carry trade was about to unwind. Being unsophisticated silver slugs from Wallace, Idaho, we didn’t know there was such a thing as a Yen-carry trade, but it’s been working like this. The Bank of Japan has been charging zero interest on loans for the past 10 years to try to revive the economy. So guys were going to Japan, borrowing Yen for no interest, converting those Yen to dollars, and lending them to us by buying U.S. Treasury notes paying 3 percent interest, or wholesale home mortgages paying a little more. Nice mark-up, if you can get it. Except that the party is about to end, because three quarters of economic growth in Japan will cause its central bank to start raising the borrowing rate.
    Writes Laird: “The BOJ literally acts like a central bank of the world through the Yen carry trade, supplying liquidity that finds its way into markets everywhere. The phenomena is a decade old now for the latest manifestation. The last time this level of penetration of the Yen carry trade was reached was just prior to the LTCM collapse. Back then, when the Yen unexpectedly strengthened 20% it caused a massive move out of Borrowed Yen on the Cheap, and caused massive market sell offs world wide, and was a direct cause of the LTCM collapse, where the US FED had to act immediately to bail out banks and illiquid brokerages and financial entities with blank checks to forestall that crisis.”
    We started to run from all this chaos like Fed governors abandoning a sinking ship – the second one to do so recently, with 8 years still left in his term, Roger Ferguson, bailed this week – when Libertarian Paul Gallagher and a European think tank, LEAP E2020, simultaneously and without having chatted with each other first, warned of economic calamity within the next bloody month or two.
    March, the Europeans noted, is going to be one nasty month. LEAP E2020 “now estimates to over 80 percent the probability that the week of March 20-26, 2006 will be the beginning of the most significant political crisis the world has known since the Fall of the Iron Curtain in 1989, together with an economic and financial crisis of a scope comparable with that of 1929.” Why? Because the Iran Oil Bourse will open on the 20th, and the U.S. Fed three days later will quit reporting the M-3 figures, which most accurately reflect the actual amount of dollars floating around there at any given moment. Toss in an “intervention” by the Bush-Blair axis or by Israelis in the Iran nuke mess and the think tank’s estimate of calamity goes to 100 percent.
    Hot damn! Meantime, the dollar-denominated value of that coffee can out in the back yard slides along sides, “correcting” from recent “highs.” As David Morgan noted back on 12th December, these “highs,” in terms of 1980 Fednotes, are still half-priced. And if all the foregoing is too weird to sort out even with the help of Dago Red or psychedelic mushrooms, maybe it’s time to dig another hole, and fill up another can with metal and silver stock. There could be as little as four weeks left.

    Norwegian Bourse Director wants oil bourse - priced in euros

    by Laila Bakken and Petter Halvorsen
    Bourse Director Sven Arild Andersen is fed up with Norwegian oil having to be traded in London and wants to have a commodities and energy bourse in Norway. The Bourse Director believes that Norway already has the prerequisites for building up a Norwegian or Scandinavian energy bourse.

    "This would in such case compete with the bourse in London. Why not have the ambition to outcompete the British petroleum bourse," says Sven Arild Andersen. "Here, you could trade crude oil, natural gas contracts and establish derivatives for these products."

    "In addition, we must set up a larger financial industry around this, as important in other large markets and employ many people. And which are important for the competencies that are needed beyond the extraction itself of oil and gas," says Andersen.

    Andersen in of the opinion that Norwegian oil must be traded in Euros, which can be advantageous for international customers. "We have performed market studies and both Russia, which is a large oil exporter, as well as the countries of the Middle East have large parts of their economies in Euros. They would be able to view such a bourse as a contribution to balancing their economies in a better manner than at present, where their products are traded solely in dollars," says Andersen.

    The Bourse Director holds out the Scandinavian power bourse, Nordpool, as an example of how a successful bourse is constructed. And he believes that this ought to be included in a Norwegian or Scandinavian energy bourse.

    "We currently we have the leading power bourse in Europe. It is large, well-respected and efficient. Nordpool would be natural to consider as being important in the establishment of an oil and energy bourse," says Andersen.

    The plans have been discussed for years, but have never gone past the stage of being just talk.

    "We must get large Norwegian players onboard such as Statoil and Hydro, and even though the interest has been there, nobody has taken it further with great enthusiasm.

    "There is now talk of a fish bourse in Norway and there certainly is no doubt as to whether we thus aren't in a position to build an energy bourse that would be much, much larger and for which we possess significant requisite competence to get up and running."

    Translation from Norwegian (C) 2006 by Hugh Whinfrey, all rights waived in perpetuity.


    February 24, 2006

    Gold: Swiftly Precious in 2006


     By Roger Wiegand              
    February 23, 2006

    Gold’s freight train of positives is running over the sellers. Technically, gold wants to sell but supporting reasons simply will not allow it. In this time of purported correction and profit-taking there are few sellers or buyers. Both seem to be standing around with their hands in their pockets like little kids, looking nervous unable to choose. Cycles and seasons say look out below but energy, politics and radical Islam conspire to prop gold’s prices, instilling uncertainty and fear subduing the profit takers. Nobody wants to miss the next rally as progressively weaker thoughts of weaker gold markets persist. On the other hand traders think the correction has some time to run and worry about buying into a selling market. What should gold traders and investors be doing?

    After excellent fundamentals, high priorities for gold rallies are energy, politicians, and terror freaks. This President’s Day, George Bush is out stumping for energy policy and conservation. Since Nigerian oil pirates have effectively shut down nearly 500,000 daily barrels of high quality crude oil with their mischief, you might not wonder why Bush is doing this now. In our view, Bush has some other extremely serious Middle Eastern problems coming to flash points and they are presently unsolvable. Domestically things are quite mediocre at best. On television today, supposedly making a happy speech to a non-threatening corporate crowd, Bush seemed strident and visibly nervous. For a good ‘ol boy this is out of character for him. We sense something is very wrong. We think he is terrified of an outrageous oil price spike about to drive a stake through the heart of his “economic recovery” and currently very fragile second term presidency. A major oil spike and gold rally will not help his political friends in this fall’s coming election either. And for politicians, getting votes and getting elected is all that matters.

    Energy and gold prices often follow each other and in 2006 this rule has proven to be consistent. In other years, oil rallied and peaked into mid-April while gold had a modest rally the last week of March. Seasonal gold charts show us gold sells down to range bound prices from late February through most of August. However, in these times of maladjusted markets, timing is suspect at best.

    We think this year is different as more of the Middle East rapidly goes sour. The wrong people won the Palestinian election, Syria is killing internal and Lebanese enemies, Turkey’s Muslims are misbehaving, Egypt took an unpopular USA position, the Iraq war grinds on out of control, fighting continues in Afghanistan, and worst of all Iran is moving into the nuclear club while Israel warms up its retaliatory missiles. Making it worse, Putin antagonized Europe temporarily cutting off their natural gas and is pretending to be an Iranian mediator but secretly chuckling and doing nothing while Bush squirms. Putin has quickly reverted to his old KGB ways and is effectively nationalizing (stealing) the entire Russian energy industry and is not allowing any new bidding on precious metals leases by western mining companies. What happens to existing mining operations has not yet been addressed. Country geopolitical risks are popping up all over the globe and gold investors should be very careful and aware of these potential threats to gold miners.

    A formidable cabal of USA enemies are politically ganging up while signing new and significant energy contracts not only advantageous to themselves but deliberately disadvantageous to the United States. Further reinforcing this negative effect will be the re-pricing of oil sales in Euros, other non-USA currencies or direct barter trading of armaments, technical support and industrial goods for oil. Iran’s new leader has threatened to rally the entire Muslim world against western nations including the USA and Israel if his nuclear installations are attacked. What most are not watching is the daily violence in Pakistan where its leader has survived two assassination attempts. Western governments are holding their breath on this one. If the Pakistan leader is killed, this government and all of its ready-to-go missiles and nuclear arsenal would be in the hands of radicals. They would be passing around nuke-tipped missiles like candy to every Middle Eastern nut case who wanted one and had the money. This is way beyond Iran who is in the very early stages of building something nasty that can fly against Israel. We do not need a large oil curtailment to drive gold prices, only the impression of such a situation.

    Forthcoming gold seasonal selling in typical range bound patterns might be obviated by energy, political problems or both. Gold mine production has been down the last four years and exploration budgets have shot up the last three. Focusing on the best production and reserve locations in Canada and the USA, Nevada and Alaska have 19 major known deposits. Fifteen of those projects have over three million ounces and five projects have over five million ounces. Fundamentally, all annual production continues to slip, while physical and gold trading fund demands are rising. Jewelry fabrication for 2006 is forecast at 3312 tons and production is expected -5.6% lower providing 3,997 tons of supply. Some time ago we forecast 2006 gold demand at 4250 tons, approximately 250 tons short of estimated needs.

    All of the Asian nations seemingly without exception are promoting the purchase of gold. Indian jewelry buyers slowed down their gold purchases during the last quarter of 2005 due to higher prices. Now that gold has topped and settled back toward $550, those gold buyers are ready to load the boat when a price near $500 gold is reached. This is the best they shall get in this long rally and they know it. Understand India consumes 25% of global gold production and they need the product to keep feeding their jewelry machine. Additionally, gold fabricators are expanding in Dubai to produce jewelry for sale in the Indian markets. The jewelry gold buying in Mumbai is seemingly insatiable.

    Next, we have the new Dubai gold exchange announcing they traded 1,000 gold contracts today. Three new members have signed-up to trade and we should never under estimate the buying power of this group. We suspect if a foolish central bank put 500-600 tons of gold bullion on the auction block, somebody in Dubai would step up and write a check with no problem. We think at this juncture these rich oil sellers would rather have the gold bullion than be holding U.S Dollars diminishing in value.

    Engineering News reported 2-22-06, that The World Gold Council’s GFMS report update said gold demand hit a record of $53.6 billion in 2005 with a 26% rise in investment tonnage demand. Jewelry demand was overall, 14% higher in spite of those higher prices we just discussed. What impresses us very much is the institutional demand which means the big boys and the big money are coming into the gold game. Further, it was impressive that this forth quarter demand both absorbed a 10% year on year increase in supply and a 12% price increase. Higher prices are not going to slow gold demand but rather increase it.

    Recently, in the USA, the gold and commodity funds took the lion’s share of contract positions while physical sales were down. Thirteen commodity contracts are now collectively up to $100 billion from $25 billion in 2001. Of the seven existing ETF gold funds approved, five are currently trading. Central banks are slowing on their international bank gold sales agreement and seem to have gotten off the notion of being so anti-gold. While we do not trust their numbers, central banks claim they hold 43% of the above ground gold (stored bar bullion) with the USA having 26% and the IMF 10%. The balance is being held by others. Anti-gold forces are still very busy in collusion with central banks to suppress gold’s price in efforts to continue propping sick stock markets and fiat currencies. They are not only losing in these efforts but their dramatically huge short positions are getting worse by the day. One of the largest gold hedgers in the world is in jeopardy of bankruptcy if gold hits $850 according to one analyst. We cannot forecast a BK but we do forecast gold at $850 for fall, 2006.

    Hedging was on the wane but lately the big companies continue to de-hedge while some smaller ones are installing new hedges per lender mandates. Japan was a large physical buyer until recently when a weaker Yen curtailed some purchases. They sell gold in 7,000 Japanese 7-11 convenience stores. We showed dollar-gold comparative charts recently which graphically demonstrate gold and the dollar have decoupled. What has not decoupled but increased in velocity in our view is the oil fear premium coupled with gold. In recent days energy supplies of crude and refined products have increased in storage. This new supply with a quieter Middle East (for a few days) cut oil from $69 to $61. This week expectations are for higher crude oil. Gold may very well run right along with it, ignoring its cyclic correction. Gold bullion and crude oil cash values almost instantly revalue their underlying futures commodity product and their related stocks. This is why traders and investors should focus on weekly and monthly charts for directional guidance not trading entries. The shorter term charts including tick, 30 and 60 minute and daily charts do the shorter term work at entry time, not evaluation time.

    We suggest gold buyers are nearing a point when the junior gold stocks will have seasonally bottomed and it’s almost time to buy once again. If you own them now and want to exit, wait until fall. Senior gold stock buyers should wait for a better price. Senior gold stock option buyers are nearing a lower price where they can enter positions for fall 2006, winter 2007, and identical seasons for 2008. For this week, we suggest waiting on the buying to determine if gold prices slide from $550 to 540, 526 and possibly 507.

    In summary, gold can only go higher in price, ever faster. Technically, gold has moved into its second and largely more volatile growth sector with our forecast of $850 by late fall seemingly assured. Other major gold driving forces are at work with a soon to arrive severe stock market decline, followed by the fall 2006 selling in bonds and our dollar. Imposition of these technical weaknesses with geopolitical trouble onto advancing gold markets can only produce higher gold prices a whole lot faster. We expect some market fear when stocks cave-in this spring. Will these losers go to gold? We think they will. In addition, the institutions with their “long only” buy positions have great power to lift gold prices. They are struggling for client returns and understand gold will provide them.

    The first leg of gold’s rally was 2001 through the last fall. Now, gold has broken upper resistance moving almost vertical in price. This usually signals a top and subsequent selling, some of which we have seen. As we move toward March and a forecast gold price of $507 support, we wonder if other events will either extend the current softness sideways followed by strongly advancing prices or, will the $507 number appear right on schedule in Mid-March or the end of July.

    Seasonal gold charts show a double bottom in late July and late August. Last year, however, gold bottomed on June 1. This is fully 60 days early compared with 15 and 30 year seasonal chart dates. Should gold move another 60 days backwards from last year’s June 1, the newest gold rally would be underway April 1, 2006. Traders and investors with far out long option positions for fall 2006, and into 2007-2008 are not only safe but are buying into a lower price today. Junior gold and silver stock holders who have not exited for any reason this year should hold until fall for exits if at all possible.

    We are looking for a minimum 35% gold price advance from this spring-summer’s basing bottom to a Thanksgiving top in 2006.

    Watching little market nuances and movements among gold funds, gold stocks and far out futures can provide clues to forthcoming support and resistance for gold. An inflation adjusted gold price today would not be $550 but $1850-1950. Adjusting prices 35% beyond the $1950, it is easy to see a $2650-$2950 price range top we forecast two years ago. While forecasting three years forward is generally not a good idea, we are expecting a high for gold of $2960 with a later adjusted, correction-settled price of $1250 per ounce. Inflation is insidious and has eroded a great deal of gold’s true value relative to the $850 1979-1981 rally top. Understanding these numbers and the basis for their reference, it is no surprise gold has a very long and positive trail ahead.

    The average of commodity bull markets is 16-17 years. Since the current one began in say 2000, we have possibly ten more years of bullish gold and other commodities moving through an inflationary and volatile period of time. With each year we advance, gold prices can only go higher faster. –Trader Rog

    February 23, 2006

    Global Systemic Rupture

    EUROPE 2020 ALARM / March 20-26, 2006:
    Iran/USA - Release of global world crisis
    The Laboratoire européen d’Anticipation Politique Europe 2020 (LEAP/E2020) now estimates to over 80% the probability that the week of March 20-26, 2006 will be the beginning of the most significant political crisis the world has known since the Fall of the Iron Curtain in 1989, together with an economic and financial crisis of a scope comparable with that of 1929. This last week of March 2006 will be the turning-point of a number of critical developments, resulting in an acceleration of all the factors leading to a major crisis, disregard any American or Israeli military intervention against Iran. In case such an intervention is conducted, the probability of a major crisis to start rises up to 100%, according to LEAP/E2020.

    An Alarm based on 2 verifiable events
    The announcement of this crisis results from the analysis of decisions taken by the two key-actors of the main on-going international crisis, i.e. the United States and Iran:

    --> on the one hand there is the Iranian decision of opening the first oil bourse priced in Euros on March 20th, 2006 in Teheran, available to all oil producers of the region ;

    --> on the other hand, there is the decision of the American Federal Reserve to stop publishing M3 figures (the most reliable indicator on the amount of dollars circulating in the world) from March 23, 2006 onward [1].

    These two decisions constitute altogether the indicators, the causes and the consequences of the historical transition in progress between the order created after World War II and the new international equilibrium in gestation since the collapse of the USSR. Their magnitude as much as their simultaneity will catalyse all the tensions, weaknesses and imbalances accumulated since more than a decade throughout the international system.

    A world crisis declined in 7 sector-based crises
    LEAP/E2020's researchers and analysts thus identified 7 convergent crises that the American and Iranian decisions coming into effect during the last week of March 2006, will catalyse and turn into a total crisis, affecting the whole planet in the political, economic and financial fields, as well as in the military field most probably too:

    1. Crisis of confidence in the Dollar
    2. Crisis of US financial imbalances
    3. Oil crisis
    4. Crisis of the American leadership
    5. Crisis of the Arabo-Muslim world
    6. Global governance crisis
    7. European governance crisis

    The entire process of anticipation of this crisis will be described in detail in the coming issues of LEAP/E2020’s confidential letter – the GlobalEurope Anticipation Bulletin, and in particular in the 2nd issue to be released on February 16, 2006. These coming issues will present the detailed analysis of each of the 7 crises, together with a large set of recommendations intended for various categories of players (governments and companies, namely), as well as with a number of operational and strategic advices for the European Union.

    Decoding of the event “Creation of the Iranian Oil Bourse priced in Euros”
    However, and in order not to limit this information to decision makers solely, LEAP/E2020 has decided to circulate widely this official statement together with the following series of arguments resulting from work conducted.
    Iran's opening of an Oil Bourse priced in Euros at the end of March 2006 will be the end of the monopoly of the Dollar on the global oil market. The immediate result is likely to upset the international currency market as producing countries will be able to charge their production in Euros also. In parallel, European countries in particular will be able to buy oil directly in their own currency without going though the Dollar. Concretely speaking, in both cases this means that a lesser number of economic actors will need a lesser number of Dollars [2]. This double development will thus head to the same direction, i.e. a very significant reduction of the importance of the Dollar as the international reserve currency, and therefore a significant and sustainable weakening of the American currency, in particular compared to the Euro. The most conservative evaluations give €1 to $1,30 US Dollar by the end of 2006. But if the crisis reaches the scope anticipated by LEAP/E2020, estimates of €1 for $1,70 in 2007 are no longer unrealistic.

    Decoding of the event “End of publication of the M3 macro-economic indicator”
    The end of the publication by the American Federal Reserve of the M3 monetary aggregate (and that of other components) [3] , a decision vehemently criticized by the community of economists and financial analysts, will have as a consequence to lose transparency on the evolution of the amount of Dollars in circulation worldwide. For some months already, M3 has significantly increased (indicating that « money printing » has already speeded up in Washington), knowing that the new President of the US Federal Reserve, Matt Bernanke, is a self-acknowledged fan of « money printing » [4]. Considering that a strong fall of the Dollar would probably result in a massive sale of the US Treasury Bonds held in Asia, in Europe and in the oil-producing countries, LEAP/E2020 estimates that the American decision to stop publishing M3 aims at hiding as long as possible two US decisions, partly imposed by the political and economic choices made these last years [5]:

    . the ‘monetarisation’ of the US debt
    . the launch of a monetary policy to support US economic activity.
    … two policies to be implemented until at least the October 2006 « mid-term » elections, in order to prevent the Republican Party from being sent in reeling.
    This M3-related decision also illustrates the incapacity of the US and international monetary and financial authorities put in a situation where they will in the end prefer to remove the indicator rather than try to act on the reality.

    Decoding of the aggravating factor “The military intervention against Iran”
    Iran holds some significant geo-strategic assets in the current crisis, such as its ability to intervene easily and with a major impact on the oil provisioning of Asia and Europe (by blocking the Strait of Ormuz), on the conflicts in progress in Iraq and Afghanistan, not to mention the possible recourse to international terrorism. But besides these aspects, the growing distrust towards Washington creates a particularly problematic situation. Far from calming both Asian and European fears concerning the accession of Iran to the statute of nuclear power, a military intervention against Iran would result in an quasi-immediate dissociation of the European public opinions [6] which, in a context where Washington has lost its credibility in handling properly this type of case since the invasion of Iraq, will prevent the European governments from making any thing else than follow their public opinions. In parallel, the rising cost of oil which would follow such an intervention will lead Asian countries, China first and foremost, to oppose this option, thus forcing the United States (or Israel) to intervene on their own, without UN guarantee, therefore adding a severe military and diplomatic crisis to the economic and financial crisis.

    Relevant factors of the American economic crisis
    LEAP/E2020 anticipate that these two non-official decisions will involve the United States and the world in a monetary, financial, and soon economic crisis without precedent on a planetary scale. The ‘monetarisation’ of the US debt is indeed a very technical term describing a catastrophically simple reality: the United States undertake not to refund their debt, or more exactly to refund it in "monkey currency". LEAP/E2020 also anticipate that the process will accelerate at the end of March, in coincidence with the launching of the Iranian Oil Bourse, which can only precipitate the sales of US Treasury Bonds by their non-American holders.


    In this perspective, it is useful to contemplate the following information 7: the share of the debt of the US government owned by US banks fell down to 1,7% in 2004, as opposed to 18% in 1982. In parallel, the share of this same debt owned by foreign operators went from 17% in 1982 up to 49% in 2004.
    --> Question: How comes that US banks got rid of almost all their share of the US national debt over the last years?

     Moreover, in order to try to avoid the explosion of the "real-estate bubble" on which rests the US household consumption, and at a time when the US saving rate has become negative for the first time since 1932 and 1933 (in the middle of the "Great Depression"), the Bush administration, in partnership with the new owner of the US Federal Reserve and a follower of this monetary approach, will flood the US market of liquidities.

    Some anticipated effects of this systemic rupture
    According to LEAP/E2020, the non-accidental conjunction of the Iranian and American decisions, is a decisive stage in the release of a systemic crisis marking the end of the international order set up after World War II, and will be characterised between the end of March and the end of the year 2006 by a plunge in the dollar (possibly down to 1 Euro = 1,70 US Dollars in 2007) putting an immense upward pressure on the Euro, a significant rise of the oil price (over 100$ per barrel), an aggravation of the American and British military situations in the Middle East, a US budgetary, financial and economic crisis comparable in scope with the 1929 crisis, very serious economic and financial consequences for Asia in particular (namely China) but also for the United Kingdom [8], a sudden stop in the economic process of globalisation, a collapse of the transatlantic axis leading to a general increase of all the domestic and external political dangers all over the world.

    For individual dollar-holders, as for trans-national corporations or political and administrative decision makers, the consequences of this last week of March 2006 will be crucial. These consequences require some difficult decisions to be made as soon as possible (crisis anticipation is always a complex process since it relies on a bet) because once the crisis begins, the stampede starts and all those who chose to wait lose.
    For private individuals, the choice is clear: the US Dollar no longer is a “refuge” currency. The rising-cost of gold over the last year shows that many people have already anticipated this trend of the US currency.

     Anticipating… or being swept away by the winds of history
    For companies and governments - European ones in particular - LEAP/E2020 has developed in its confidential letter – the GlobalEurope Anticipation Bulletin -, and in particular in the next issue, a series of strategic and operational recommendations which, if integrated in today's decision-making processes, can contribute to soften significantly the "monetary, financial and economic tsunami" which will break on the planet at the end of next month. To use a simple image – by the way, one used in the political anticipation scenario « USA 2010 » [9] -, the impact of the events of the last week of March 2006 on the “Western World” we have known since 1945 will be comparable to the impact of the Fall of the Iron Curtain in 1989 on the “Soviet Block”.

    If this Alarm is so precise, it is that LEAP/E2020’s analyses concluded that all possible scenarios now lead to one single result: we collectively approach a "historical node" which is henceforth inevitable whatever the action of international or national actors. At this stage, only a direct and immediate action on the part of the US administration aimed at preventing a military confrontation with Iran on the one hand, and at giving up the idea to monetarise the US foreign debt on the other hand, could change the course of events. For LEAP/E2020 it is obvious that not only such actions will not be initiated by the current leaders in Washington, but that on the contrary they have already chosen "to force the destiny" by shirking their economic and financial problems at the expense of the rest of the world. European governments in particular should draw very quickly all the conclusions from this fact.
    For information, LEAP/E2020's original method of political anticipation has allowed several of its experts to anticipate (and publish) in particular : in 1988, the pproaching end of the Iron Curtain; in 1997, the progressive collapse in capacity of action and democratic legitimacy of the European institutional system; in 2002, the US being stuck in Iraq’s quagmire and above all the sustainable collapse of US international credibility; in 2003, the failure of the referenda on the European Constitution. Its methodology of anticipation of "systemic ruptures" now being well established, it is our duty as researchers and citizens to share it with the citizens and the European decision makers; especially because for individual or collective, private or public players, it is still time to undertake measures in order to reduce significantly the impact of this crisis on their positions whether these are economic, political or financial.

    LEAP/E2020's complete analysis, as well as its strategic and operational recommendations intended for the private and public actors, will be detailed in the next issues of the GlobalEurope Anticipation Bulletin, and more particularly in the econd one (issued February 16th, 2006).

    1. These decisions were made a few months ago already:
    . the information on the creation by the Iranian government of an oil bourse priced in Euros ( ) first appeared in Summer 2004 in the specialised press.
    . the Federal Reserve announced on November 10, 2005 that it would cease publisging the information concerning M3 from March 23, 2006 onward :

    2. By examining Table 13B of the December 2005 Securities Statistics of the Bank for International Settlements entitled International Bonds and Notes (in billions of US dollars), by currency ), one can notice that at the end of 2004 (China not-included), 37.0% of the international financial assets were labelled in USD vs 46,8% in Euros ; while in 2000, the proportion was contrary with 49,6% labelled in USD for 30,1% only in Euros. It indicates that the March 2006 decisions will most probably accelerate the trend of exit-strategy from the dollar.

    3. Monetary aggregates (M1, M2, M3, M4) are statistical economic indicators. M0 is the value of all currency - here the dollar - that exists in actual bank notes and coins. M1 is M0 + checking accounts of this currency. M2 is M1 + money market accounts and Certificates of Deposits (CD) under $100,000. M3 is M2 + all larger holdings in the dollar (Eurodollar reserves, larger instruments and most non-European nations' reserve holdings) of $100,000 and more. The key point here is that when the Fed stops reporting M3, the entire world will lose transparency on the value of reserve holdings in dollars by other nations and major financial institutions.

    4. See his eloquent speech on these aspects before the National Economists Club, Washington DC, November 21, 2002
    ( )

    5. It should be noticed that the upward trend of the Dollar in 2005 was mostly the result of an interest rate differential which was favourable for the US Dollar, and of the “tax break on foreign earnings” Law (only valid for 1 year) which brought back to the US over $200 billion in the course of 2005.
    (source : )

    6. As regards Europe, LEAP/E2020 wishes to underline that European governments are no longer in line with their opinions concerning the major topics, and in particular concerning the European collective interest. The January 2006 GlobalEurometre clearly highlighted the situation with a Tide-Legitimacy Indicator of 8% (showing that 92% of the panel consider that EU leaders no longer represent their collective interests) and a Tide-Action Indicator of 24% (showing that less than a quarter of the panel thinks EU leaders are capable of translating their own decisions into concrete actions). According to LEAP/E2020, public declarations of support to Washington coming from Paris, Berlin or London, should not hide the fact that the Europeans will quickly dissociate from the US in case of military attack (the GlobalEurometre is a monthly European opinion indicator publishing in the GlobalEurope Anticipation Bulletin 3 figures out of which 2 are public).

    7.(source : Bond Market Association, Holders of Treasury Securities: Estimated Ownership of U.S. Public Debt Securities ; )

    8. The United Kingdom indeed owns close to 3,000 billion $ of credits, that is almost three times what countries such as France or Japan hold. (source Bank of International Settlements, Table 9A, Consolidated Claims of Reporting Banks on Individual Countries )


    Lunch Near LAX

    Well, Harry was right! I wonder what he would be saying now....
    By Ron Ellison, Global View
    Blasingham and Ellison Financial Group
    Article Posted On May-24-02 14:45

    I got a call the other day from my old friend Harry. Harry is a trader. There's probably not a market in the world Harry hasn't traded. And he's been quite successful. I don't think he's had more than one or two down years in all the time that I've known him.

    Harry has a peripatetic soul. Lots of money managers brag about visiting companies. Harry visits countries. Years ago before most retail investors had ever heard of emerging markets, Harry informed me that opportunities were hardly confined by the continental U.S. borders. Harry is also a data computer junkie. He never goes to the bathroom without his laptop.

    Just before the Asian meltdown, he called one morning and said he was in Bangkok. He said he could look out his hotel window and see building cranes in every direction. He called it the positive crane sign. He said the bhat at 25 to the dollar was overvalued by 50 percent. Then, before I could get a word in, he rattled off a gob of statistics, informed me he was short the entire region and hung up.

    Another time some years ago he phoned from Bogota and launched into a 10-minute peroration about success. "Success is about consistency, not triples and homeruns," he informed me. That's the way Harry is. To say he's eccentric is to say that Tom Daschle likes to spend other peoples' money. Like all good traders Harry has strong opinions and he's contrarian to the core. I once heard him tell an audience of investors that 75 percent would probably disagree with what he was going to say. But that would make them examine their own biases about why they disagreed and probably learn something in the process. For all of his eccentricities, however, over the years Harry's views have been correct too often to be ignored.

    We agreed to meet for lunch. The restaurant was one of those little Italian joints, the kind with the red and white checkered tablecloths and the narrow milk white vases for phony long stem roses sitting in the center. It was located in a strip shopping center near LAX. In all the years I've known Harry he's always on his way to somewhere.

    It was dark inside and it took a minute before I spotted him sitting at a booth in the back with his laptop open. We exchanged greetings as I slid into the seat across from him. The waitress appeared suddenly. We ordered a bottle of super Tuscan red, pate' crostini and some penne on the side. Harry's always believed that good food compliments the wine, not the other away around.

    A lot had happened since we last chatted and I was curious to hear what was on his mind. From past discussions, however, I knew that Harry subscribed to the Hollywood school of conversation: He liked to cut straight to the economic chase.

    "If the dollar were an Olympic athlete," he offered. "It would've been busted for anabolic steroid abuse long ago."

    With that opening I realized this was probably going to end up a discussion about inflation and the current account deficit. The waitress came, the wine got poured and after a token toast, Harry warmed to his topic.

    "Treasury Secretary O'Neill has been there less than two years and he's already caught the Greenspan disease—speaking in tongues. This decade is going to look a lot more like the ‘70s and early ‘80s," he said. "And nothing like the 90s. That's what's gonna bust the back of most retail investors and the deflationary hawks you see on the tube everyday."

    "What do you mean?" I interjected.

    "The similarities with the Nixon days are getting eerie. To win some union and farms votes, Bush's slapping price controls on and ramping up the pork. From Cubans to education to lumber to unions, is there anybody this guy hasn't placated? They ought to change the name of the White House. Call it Placation Palace. Programs increased under Nixon and he devaluated the currency," he said.

    "If they send any more pork up to South Dakota, those folks will be able to give up farming and retire. I was watching bubble vision the other day, CNBC, and they were interviewing Al Gore's economic flack, Alan Blinder. He revealed he had just created a new statistical indicator that shows the capital spending trend is improving.

    "It's gone in two quarters from something like negative five to negative three. To which the commentator suggested that should be good for the market and folks' confidence. When you're worried about getting you head blown off by some jihad freak, your 401 (k) is in the toilet, and accounting guarantees you about as many correct answers as astrology, who the hell cares about cap ex?"

    "The Berlin Wall," he continued, "crumbled more than a decade ago. That created a window of opportunity that ended on 911. Fraud, terrorist threats, shrinking tax receipts, a war on something as vague as terrorism, bad times increase regulations and government interference, does that sound like a high protein meal for financial assets? You've got a real estate bubble, a huge trade deficit and a dollar that look likes it's coming down with a bad case of pernicious anemia."

    "What about inflation?" I asked

    "Most of the television types will tell you they can't find any with an electron microscope. These are for the most part the same flacks that spread the new-age gospel during the dot-com madness. I was sitting on a plane the other day next to a guy who told me he just came back from burying his mother. After the appropriate condolences, he told me he just paid $589 bucks for the exact same headstone he bought 20 years ago for $59 when he buried his father. You do the math."

    Harry finished his wine, checked his watch and closed his laptop.

    "So where are you putting money now?"

    "Outside the U.S.," he shot back. "Just returned from Japan. We started accumulating gold and silver a year ago. Energy is one. Sometime in the next three to five years, the U.S. will experience major fuel shortages compliments of the political hacks running this charade. And commodities."

    "But commodities have been in a 25-year downturn?" I probed.

    "You just made my point," he said, motioning to the waitress for the bill.

    February 20, 2006

    21st Century Commodities Boom

    By Scott Wright       
    The turn of the century has brought upon a change of guard for the financial markets. The general stock markets peaked and a new secular commodities bull was born. Even though many have had to endure the pain of a bursting stock-market bubble, the global economy has been thriving since the turn of the millennium and I suspect those in the future will look back on the 21st century and tag it as the Consumption Age.

    Globally this consumption is not necessarily that of excess or overindulgence. Rather it may be considered more or less a movement of economic progressivism. Lending part to this trend is the fact that our global population is growing at a blistering pace and will continue to do so for years to come. Many people overlooked the incredible milestone that was attained in 1999. Our enduring planet lofted above the six billion mark in total population.

    To put this growing and changing world into perspective, it was only about 200 years ago that the global population passed the one billion mark. According to the U.S. Census Bureau it only took another 118 years for the global population to double, reaching two billion in 1922. It then took 37 years to reach three billion, 15 years to reach four billion, 13 years to reach five billion and only 12 years to reach six billion.

    Today we are already past the half-way mark to the next billion. Now with 6.5 billion potential consumers living in an era in which considerable industrial and technological advances are demanding more resources than ever, it’s no wonder global demand for commodities has soared. In this high-tech world we live in, commodities are zealously sought after in order to maintain, support and develop this growing population. Because of this, commodities of all types are soaring in value as their availability and economics are continually being challenged. Simply put, supply has not been able to keep up with demand.

    This massively increasing population has contributed to an increase in consumption in virtually all goods and services, and in turn has contributed to the robust economies we are seeing today that are seemingly necessary in order to maintain status quo. Almost not surprising, GDP in the U.S. has increased ten-fold since 1972, China has seen a ten-fold since 1978 and the U.K. has seen its ten-fold since 1976. The macroeconomics we see here tell an incredible story in which commodities have and will play a large part now and in the future.

    It is important for everyone to understand why we are in the midst of a commodities craze from a socioeconomic perspective, if for no other reason than to understand how it may affect their everyday lives. It is especially important to understand this if you are an investor. Investors and speculators who have taken part in the commodities bull thus far have scored incredible gains if they have played the upside of this secular trend.

    It’s not too late though to continue to profit from this commodities bull. We are still likely in the first half of a long-term bull market. To this day commodities of all sorts are still in the midst of major economic imbalances. Global demand for both soft and hard commodities is on the rise and supply is struggling to keep up. It is the prudent investor or speculator who is able to recognize this pattern before it corrects itself and is able to leverage his capital to take advantage of the upside.

    Our task now is to determine which commodities to focus on from an investment perspective. Now depending on whom you ask and where you look, the definitions for soft and hard commodities tend to range across the board. For our purposes we will consider any commodity that can be grown or raised a soft commodity, and any commodity that you have to mine or drill for a hard commodity.

    Soft commodities tend to have a renewing characteristic. Crops can be re-grown, and typically in the same spot as the previous crop. And meat commodities are the result of animal breeding that has remarkably accurate forecasting. Softs are integral in this bull market, but are not the major player.

    Commodities such as coffee, cotton, cocoa, orange juice and hogs are examples of soft commodities and are all non-finite in nature. As long as a global ice age doesn’t miraculously strike the earth, crops will always be grown. And I surely doubt that cows, pigs and chickens will ever become extinct.

    Now there are external factors that can influence the pricing of these soft commodities and they are certainly not exempt from supply and demand pressures. Weather, disease, geopolitical unrest and labor are examples of some of these factors. But when an economic imbalance presents itself, the fact that these commodities are renewable typically avoids a pushing of the panic button.

    Even so, soft commodities continue to play a large role in the overall futures markets and are not exempt from the volatility most people associate with commodities. Farmers need to lock in prices and speculators play the game to try and capture profits.

    In come hard commodities. Hards consist mainly of energy and metals and require extensive capital expenditures in order to retrieve these commodities from the earth. These commodities are finite in nature and have limited resources. Hards have been on a tear the last four years, have captured mainstream media attention and are the major player in this secular commodities bull market.

    Precious metals, crude oil and natural gas are not the only commodities that have taken part in this bull. These commodities do command the lion’s share of attention but let’s not overlook those others that play an integral part in the global economy. Below are many of the popular hard commodities and their bull-to-date highs since the beginning of 2001.

    - Aluminum +94%
    - Gold +124%
    - Silver +142%
    - Platinum +159%
    - Zinc +220%
    - Lead +252%
    - Copper +280%
    - Crude Oil +300%
    - Nickel +302%
    - Butane +330%
    - Propane +346%
    - Heating Oil +360%
    - Gasoline +578% (+333% not including Katrina/Rita 3-day spike)
    - Natural Gas +807% (+429% not including Katrina/Rita spike)

    As you can see, these hards have had quite a run thus far and we’ll touch on them in more detail later. But in addition to these above, there are many other soft and hard commodities that trade in the futures markets. On top of analyzing each individually, it is equally important to get an overall perspective on the look and feel of this bull market in order to grasp the long-term trend of this commodities bull.

    A good way to package all these commodities together and obtain this high-level look is to turn to the flagship CRB Commodities Index. The CRB Index has long been the benchmark that many investors use in order to track the overall progress of commodities.

    Our first chart below provides an excellent representation of the development and progression of this commodities bull market. The 2001 low we see in this chart is the second bottom to a massive double-bottom in which the first in 1999 was within a point of what we see here. This bottom represents the lowest point the CRB has been since 1975.


    As you can imagine, barring the occasional bear-market rally, commodities have been out of favor for quite some time. Today’s commodities bull is finally reflecting the importance of commodities and the realization that in this growing global economy the resources that support it are not to be taken for granted.

    The CRB Index beautifully reflects this bullish trend. As you can see on this chart, the last four years display a textbook bullish footprint. The CRB Index has stayed within a relatively tight trend channel and has continued to produce higher lows and higher highs. In fact, just recently it surpassed its all-time high! In 1980 the CRB Index closed at its previous all-time high, but today’s commodities bull shattered it in recent weeks and has not looked back. Since its bottom in 2001, the CRB Index has risen 91%!

    Now that we have our baseline for the look and feel of this commodities bull, let’s revert back to our soft versus hard commodity discussion. Currently the CRB Index is comprised of 19 commodity components. Today’s mix weights 59% as what we are calling hard commodities with soft commodities capturing the remaining 41%.

    Interestingly, 9 of 19 components in the CRB Index are hard commodities, of which each is included in the list of 14 above. As mentioned previously, each of these gains are spectacular. While many hard commodities today are still hovering around their bull-to-date highs, most of the soft commodities that have actually produced gains are quite a bit off of theirs.

    The 10 components that rank as soft commodities in the CRB Index have not had as impressive of a run thus far as hards. Corn and hogs are trading at the same prices today as they were in 2001. Wheat, soy beans and orange juice are up less than 50% from their 2001 lows. Cattle and cocoa are up a meager 62% and 87% respectively from their 2001 lows. And only coffee, cotton and sugar can boast gains in excess of 100% since the inception of this bull market.

    Sugar is the truly interesting story among the softs. It has performed very well in this bull market, but for reasons that would exhibit the characteristics of a hard commodity. It recently hit a 25-year high not because more people are putting sugar in their coffee, but rather due to the huge increase in ethanol demand.

    Sugar happens to be a common compound in ethanol production with well over 50% of the global ethanol supply coming from it. Ethanol consumption has significantly increased over the years and its demand is expected to continue to rise sharply in the years to come. As more and more countries are implementing ethanol as an alternate energy source we are now faced with a supply-deficit in sugar.

    In fact, ethanol has been in such demand that both the New York Board of Trade (NYBOT) and the Chicago Board of Trade (CBOT) recently introduced futures contracts for sugar-derived ethanol. Because of this it is quite possible we may see gains in sugar that exceed the 282% we’ve seen since 2000.

    Even with sugar as the stand-out soft commodity, it is evident that hard commodities are the strongest of the group and have been pulling their weight, hoisting the overall index. As with all indexes, the CRB Index went through a revision last July in order to reflect the weightings we see above. Hard commodities now become more of a focus and the results going forward should reflect more on their performance.

    But now we look at the CRB Index, or commodities in general, and ask ourselves, why should we buy at all-time highs? But wait, are we truly experiencing all-time highs? Nominally yes, but in real terms, absolutely not! My partner Adam Hamilton penned an essay last year when the CRB Index broke 300 for the first time since 1981 and went into great detail on this topic. One of the charts he developed took a look at the inflation-adjusted CRB Index, and it revealed dramatic results.

    I’d like to update this chart and show you why commodities, reflected through the CRB Index, are still relatively cheap in today’s dollars. When analyzing long-term price trends, it is always prudent to compare apples to apples and consider the true value of a dollar. Due to the relentless rolling of presses by the inflation-crazed Federal Reserve, a dollar today has nowhere near the purchasing power it did in 1981. And we need to highly consider this when we discuss the true value of a commodity.


    If you only consider the nominal price of the CRB Index, then today’s highs are phenomenal as indicated by the blue nominal CRB line above. But when you factor inflation into the mix, as indicated by the red real CRB line, today’s prices are not as exciting as originally thought and it shows we still have a long way to go before true highs are met.

    All we did was simply factor in the conservative CPI data in order to compare the purchasing power of today’s dollar to that of it in the past. The above chart reveals the fascinating reality of the true progress of this commodities bull market. In real terms, the CRB would have to nearly triple from today’s levels in order to approach its all-time high. This is a massive 200% increase over the nominal highs we’ve seen in the past month.

    In real terms, today’s commodities prices are actually trading at the same levels they were in the early 1990s. In order to approach its real high in 1980, the CRB Index would have to rally up to over 777. And because of inflation, the 1980 nominal high is in fact not the true high as seen by the pinnacle achieved in 1974. Imagine the CRB Index trading at 1000! Well, this is what it would have to trade at in today’s dollars in order to equal its true all-time high. Commodities are still cheap!

    Now that we’ve established the fact that commodities have enormous potential even at the nominal highs we are seeing today, how does an investor jump on board and leverage his capital in order to profit from this? Believe it or not there actually is a reason why I broke down the commodity types between soft and hard. In my humble opinion softs are nowhere near as exciting as hards, but regardless of this opinion, softs are just plain more difficult to invest in.

    As an example, let’s say I saw further potential in sugar and wanted to jump on its bandwagon. Only one problem presents itself, I’m the average Joe investor, I invest in stocks, and not only do I not have a futures trading account, but I am not even interested in futures trading, way over my head!

    Well, if you look real hard you will find various hedge funds out there that have recognized sugar’s potential and have thrown capital in its direction. But ultimately for the common investor there is really not an easy way to get a piece of the pie. Soft commodities are almost exclusively traded in the futures markets. You would be hard pressed to find a publicly traded company that produces a soft commodity and is exposed to its price fluctuations.

    Hard commodities, on the other hand, offer wonderful opportunities for investors to join the party. Because of the massive capital expenditures and operating costs necessary to produce hard commodities, and because funding is always a challenge, most producers and servicers of these sorts are publicly traded in the stock markets.

    With this, we need to again keep in mind the underlying reason why the CRB Index was revised to favor hard commodities. Its custodian’s goal is to reflect the commodities that are most important and influential in today’s economy. Energy and metals are such commodities today and are currently faced with serious economic and fundamental challenges.

    Demand for these resources has reached unprecedented territory in order to service today’s global economy. And the supply that is being mined and drilled is not only slow to meet this demand, but for many of these commodities the reserves for future supply are quickly dwindling with new discoveries becoming increasingly difficult to find.

    The reason you see these immense gains in hard commodities is because of the now and future economic imbalances that present themselves. For many years capital has poured into the general stock markets with focus on tech stocks, and though commodities need significant funding in order to sustain future supply, the funds had just not made it their way. For many years exploration budgets were slashed and new discoveries were few and far between. This brazen ignorance of commodities for so long has finally commanded the world’s attention.

    It’s going to take many years for commodities producers to ramp up output in order to meet this increasing demand and even more to renew and build reserves for future sustainability. Because of this prices will most likely continue to rise as much-needed capital is directed towards these commodities producers. At Zeal we have gone into great detail analyzing the core economic fundamentals and imbalances that many hards are faced with, and I encourage you to research and discover the problem the world is grappling with today.

    Now as mentioned earlier, the wonderful thing about these hard commodities producers is that most are publicly traded companies. Investors and speculators indeed have the opportunity to leverage their capital at the epicenter of this global commodities shortage.

    Some commodities producers are more leveraged than others to their underlying product, but ultimately the stocks of these producers can be looked at as non-expiring call options in their various sectors that should continue to soar as this secular bull market in commodities climbs.

    The stocks for many of these companies have produced gains far better than those of their underlying commodities thus far. And as the prices of their products rise as we expect them to, if they are leveraged correctly so will their profits rise. The continued appreciation of their stock price will reflect such.

    So as an investor or speculator looking to invest in these stocks, which ones do you choose? There are literally hundreds upon hundreds of stocks that fall into this category. At Zeal we have had great success investing in metals and energy stocks since the very beginning of this commodities bull market. In addition to cutting-edge commodities market analysis, our monthly Zeal Intelligence newsletter updates a Watch List of over 50 of our favorite commodities related stocks and as the technicals guide we recommend some of these as trades to our subscribers.

    In our recent metals campaign we closed some of our options trades with several-hundred percent gains and our current stock trades recommended during this latest upleg are up an average of 85%. We are also currently in the midst of deploying in a new energy stock campaign and are already blessed with excellent gains thus far.

    As the short-term cycles within a long-term trend flow and ebb with upward momentum, we will continue to invest and speculate in metals and energy-related stocks. At Zeal we do extensive research and try to uncover high-probability-for-success stock trades in various commodity sectors. Join us today and subscribe to one of our newsletters so you may ride this commodities bull with us.

    The bottom line is commodities are still in the early part of a secular bull market. The global economy is starved for commodities and producers are struggling to keep up with demand. It will take many years for today’s economic imbalances to correct themselves and prices should only continue to rise.

    The best way for investors and speculators to leverage their capital in order to take advantage of this commodities bull market is to invest in the stocks of the companies that produce these commodities.

    February 19, 2006

    After the House Party Ends...

    February 18, 2006 THE defining structure of John Howard's Australia is the McMansion. The house with four or more bedrooms has been the trigger for record household debt, which is now one of the most tangible threats to the nation's longest economic expansion.

    Our obsession with bricks and mortar has been stronger than the caricatures of politics and popular culture had thought, based on the latest unpublished official tables crunched by Inquirer.

    The McMansion accounts for 60 per cent of the 1.2 million houses and apartments erected since 1995, the tables confirm. It is now the second-most common type of domestic house in the nation, behind the three-bedroom house. There are, in fact, 200,000 more McMansions than the total number of houses and apartments with one or two bedrooms.

    The rise of the McMansion has reduced the three-bedroom house to less than 50 per cent of the total dwelling cake (see tables).

    The Prime Minister and his Labor opponents of the past 10 years have assumed that the McMansion was the story of young families moving to the outer suburbs, and shedding their former working class loyalties.


    As it happens, the politicians were only half right.

    Families with one or two children were responsible for 48 per cent of the 716,554 McMansions erected between 1994-95 and 2003-04, the new Australian Bureau of Statistics tables show.

    But childless households, namely those comprising a single person or couple, are responsible for another 42 per cent of the boom.

    Kath & Kim were closer to the truth than their ABC stablemate SeaChange. Many empty-nester baby boomers have been trading up in the capital cities, not down-shifting to the coastline.

    The template for the baby boomer McMansion is when Kath and Kel are alone with their gym equipment and gadgets.

    Kath & Kim scripted their matrimonial home as a pit-stop between circuits of retail therapy.

    The problem for the real economy is the trips to Fountain Gate are becoming shorter, and less exuberant, because the owners of McMansions are now trying to pay off their mortgages.

    Reserve Bank governor Ian Macfarlane quantified the new mood in debtland in his opening address to yesterday's meeting of the federal parliamentary economics committee.

    "The risks to the economy posed by the over-heating in housing and credit markets in the period up to late 2003 have eased," Macfarlane said.

    "Households now seem to have entered a period of greater financial caution, and this may act as a restraining influence on the growth of household spending for a while tocome."

    This is a mixed blessing for the real economy, because while consumer demand has cooled, and house prices have been flat, the amount of new money borrowed is still increasing by 12 per cent a year.

    This week, the Reserve Bank revised its tables for household debt, and in doing so made Paul Keating's 17 per cent mortgage rate at the end of the 1980s seem relatively benign with the benefit of hindsight.

    As Labor treasurer, Keating pushed the repayment burden on households to 8.4 per cent in the September quarter 1989. This figure measures the share of household disposable income devoted to interest repayments for all loans - the mortgage and consumer credit.

    John Howard broke that benchmark in the June quarter 2003. By the September quarter last year, the repayment burden had reached a new high of 10.9 per cent, even though nominal interest rates are less than the half the level they were under Keating.

    The previous Reserve Bank research had put Keating's worst at 8.9 per cent and Howard's at 9.8 per cent, a difference of less than $500 a year for a household with $50,000 in disposable income. This week's report recast the gap to $1250 a year against Howard.

    The debt debate has taken on a new edge with these revisions.

    Macfarlane warned yesterday that household debt would rise further before it stabilised. "For more than a decade, household indebtedness has grown at a rate well in excess of the growth in household incomes," he said.

    "Simple rules of thumb would suggest that this cannot be sustained indefinitely.

    "Yet there are a number of reasons why these ratios may rise further.

    "In a low-inflation environment, nominal interest rates are also low, and households are able to service much higher levels of debt than they could in the past. A significant proportion of households still carry little or no debt, and in the years ahead might choose to borrow more."

    Macfarlane said community attitudes were also changing. People were "more willing to borrow against assets later in life".

    This is apparent in the Australian Bureau of Statistics tables supplied to Inquirer.

    The home ownership rate in Australia has remained stable at about 70 per cent. What has shifted in the Howard era is the share of the population with a mortgage hanging over their heads.

    In 1994-95, those who owned their homes outright were 41.8 per cent of all households, while those with a home loan were just 29.6 per cent.

    In 2003-04, there were more people with mortgages than with freehold title - 34.9 per cent of the former versus 35.1 per cent of the latter.

    Every household type, and every state and territory except the ACT have witnessed a fall in the share of who own their homes outright.

    The reasons are complex, but all lead to the same conclusion - a population that is carrying more debt than ever before. Many young families, and baby boomers have been trading up, or borrowing against their title to fund renovations.

    Also, the cost of entering the housing market is substantially higher than it was. All capital cities have seen prices jump many times faster than wages since the mid-'90s, nothwithstanding the corrections of the past two years, most notably in Sydney.

    "It is quite possible that the rise in household debt ratios could go a good distance further," Macfarlane said. "The risk, of course, is that the process goes too far and that a painful correction ensues."

    Those words "painful correction" should send a tremor through the Howard Government. The reason why Keating's interest rate regime led to the "recession we had to have" at the start of the '90s was that businesses had borrowed too much during the boom.

    Household budgets, by contrast, were in good shape going into the recession. It was only when businesses started sacking people to reduce their overheads that the community suffered.

    The roles are reversed today. Businesses are carrying significantly less debt than households, so they are less likely to begin a wave of retrenchments when the economy slows.

    One way to see the switch is to compare the household repayment burden on domestic borrowings with the interest bill on the foreign debt, as measured against export income. The foreign debt repayment burden hit 20 per cent in the September quarter 1990, which was more than double the rate that households faced at the time.

    This week's figures had business 1.6 percentage points better off than households, with the foreign debt repayment burden at 9.3per cent.

    The McMansion helped to shape the last two election victories for the Coalition. In 2001, Howard managed to revive the housing market just in time, after the indigestion of the GST the previous year. In 2004, he ran a successful interest rate scare against Labor's Mark Latham.

    Yesterday, Macfarlane played an interest rate card of his own. "It is more likely that the next move in interest rates would be up rather than down," he said.

    Expect voters to be confused if that day comes. The public understands that higher interest rates are meant to stop the economy overheating.

    But the economy as they see it is already well off the boil, because they have lost their taste for Fountain Gate.

    "The political significance of a much earlier than expected slowdown in trend growth from the 3.75 per cent average of the last 14 years to a rate around 1 percentage point less has not yet dawned on Canberra - but sooner or later it certainly will," John Edwards, a former economic adviser to Keating said yesterday.

    A weaker economy, rising interest rates and household debt setting new records virtually every quarter is a cocktail Australia has never tried before.

    But this is the legacy of the McMansion. Sooner or later, the party must end. There are only so many things to buy to fill those extra rooms before it occurs to people that they should get their household budgets in order.

    February 18, 2006

    Nigeria Suspends 380, 000 Bpd Oil Exports After Attack

    Filed at 7:51 a.m. ET

    LAGOS (Reuters) - Royal Dutch Shell (RDSa.L) suspended exports from the 380,000 barrel-a-day Forcados terminal on Saturday after militants bombed the tanker loading platform, a senior oil industry source said.

    The company is still trying to ascertain the damage to the platform, which is located three miles offshore, but has already begun shutting oilfields in the area which feed the terminal, the source added.

    ``Of course no ships can go near there now. This is going to be a major deferment,'' the senior industry source said.

    ``If we can't export, we can't produce,'' he added.

    Nigeria is the world's eighth largest oil exporter and normally pumps about 2.4 million barrels per day.

    The militant Movement for the Emancipation of the Niger Delta, which is fighting for more local control over the Niger Delta's oil wealth, claimed responsibility for Saturday's attacks, which also included the kidnapping of nine foreign workers and the bombing of two pipelines.

    President Olusegun Obasanjo has called a meeting of oil industry and security chiefs to discuss the crisis later on Saturday, the source said.

    February 16, 2006

    Looking back at the peak

    We passed the Peak Oil peak in December, 2005.
    Hubbert postulated that the rate of new oil discoveries depends on the fraction of the oil that has not yet been discovered. In the same way, the rate of oil production depends on the fraction of oil that has not yet been extracted.
    This is self evident after reflection. Consider that no matter what we measure: the frequencies of words in texts, the size of human settlements, the file size distribution of Internet traffic or the size of sand particles, meteorites or craters, the distribution pattern is the same -- commonly expressed as the "80-20 rule".
    Formally this power law is called a Pareto distribution but it is also known as the law of the vital few or the principle of factor sparsity. We shouldn’t be surprised, therefore, that oil field sizes follow the same rule.
    The February 2006 edition of the ASPO newsletter contains a history of Exxon Mobil’s discoveries and calculates total world reserves at 2.013 trillion barrels. If those estimates are accurate, and there was no reason to think they are not, world peak would happen when 1.0065 trillion barrels have been produced.
    As pointed out by Professor Kenneth S. Deffeyes, the cumulative world production at the end of 2004 was 0.9812 trillion barrels and in 2005 it reached 1.00748 trillion. Therefore we passed the halfway mark round about the middle of December. Surprise, surprise, compared to 2004, world oil production was up 0.8 percent in 2005 but this was nowhere near enough to compensate for the rise in demand of roughly 3 percent.  
    The Swedish Prime Minister, Göran Persson, has founded a non-political committee with the intent of making Sweden fossil fuel-independent by 2020 and acknowledged that peak oil was a fact. Its time we all not only acknowledged our addiction, but outlined our national 12 step program, AA style.
    Oh Lord, give me the courage to change the things I can, the serenity to accept the things I can’t, and the wisdom to know the one from the other."
    Deal with it or it will deal with you.

    February 15, 2006

    Everything you're told officially about the US economy is a lie

    On Friday, Feb. 3, the Bureau of Labor Statistics released the
    nonfarm payroll jobs report for January. New York Times reporter
    Vikas Bajaj wrote an upbeat news story, obviously based on a Labor
    Department press release rather than any study of the BLS report. If
    the rosy view of Ethan Harris, chief economist for Lehman Brothers,
    is typical, Wall Street has no more idea than Bajaj of what the jobs
    report really says.

    The export and import-competitive sectors of the U.S. economy have
    been tanking for a long time. To keep the story manageable, let's
    just go back to January 2001. The latest BLS payroll jobs report
    says that January 2006 is now the 61st month that the U.S. economy
    has been unable to create any jobs except ones in domestic non-
    tradable services, most of which are low-paid.

    Of the 194,000 private-sector jobs created in January, 46,000 were
    in construction (and most likely went to Mexican immigrants, both
    legal and illegal) and 136,000 were in domestic services: Financial
    activities (essentially credit agencies) account for 21,000.
    Administrative and waste services account for 17,600. Health care
    and social assistance account for 37,500. Waiters, waitresses and
    bartenders account for 31,000. Wholesalers account for 15,100.

    There were 7,000 new jobs in manufacturing in January, but the total
    number of manufacturing jobs in January 2006 is 48,000 less than in
    January 2005. Over the past five years, millions of manufacturing
    jobs have been lost. At the rate of 7,000 new manufacturing jobs per
    month, the lost manufacturing jobs over the past five years would
    not be regained for 34 years.

    Does anyone remember when reporters were curious? In his rosy jobs
    report, Vikas Bajaj does let it out of the bag that "economists
    estimate that the nation needs to add roughly 150,000 jobs a month
    just to keep up with population growth." That translates into
    1,800,000 new jobs per year to stay even with population. Over the
    past 61 months 9,150,000 new jobs were necessary in order to prevent
    population growth from pushing up the unemployment rate.

    How many new jobs have been created over the past five years and one
    month? According to the Bureau of Labor Statistics' latest
    revisions, a total of 1,054,000 net new private sector jobs were
    created over the past 61 months (January 2001 through January 2006).
    Add the total net government jobs created over the period for a
    total net job creation of 2,093,000 jobs over the past 61 months.

    That figure is 7,057,000 jobs short of keeping up with population

    What, then, does it mean for Bajaj to tell the Times' readers that
    the unemployment rate has fallen to 4.7 percent, a rate that
    economists consider to be essentially full employment?

    How can the economy possibly be at full employment if the economy is
    7 million jobs short of keeping up with population growth!

    The unemployment rate does not measure the millions of Americans who
    have lost their jobs to offshore outsourcing and to foreign workers
    brought into the United States on work visas. These millions of
    Americans have exhausted their unemployment benefits and severance
    benefits, and have been unable to find jobs to return to the
    workforce. Economists refer to these millions of unemployed people
    as discouraged workers who have dropped out of the workforce. As
    they have given up searching for jobs, they are not considered to be
    in the workforce and, therefore, do not count as unemployed.

    If you are an American engineer whose job has been outsourced to
    India, China or Eastern Europe, where the cost of living and
    salaries are far below U.S. standards, or you are an engineer who
    has been forced to train as your replacement an Indian engineer
    imported on a H-1B or L-1 work visa, where do you go to find a new
    engineering job? All the companies are doing the same thing.

    It is amazing to hear politicians and corporate executives blabber
    on about a shortage of engineers and scientists when there are now
    several hundred thousand unemployed American engineers. The
    corporate executives, whose own bonuses grow fat from replacing
    their American employees with foreigners who work for less, spread
    disinformation about "shortages" so that Congress will give them
    more H-1B visas. This is one of the greatest frauds ever perpetuated
    on the American people.

    If the unemployment rate is now at essentially full employment, why
    only a few days ago did 25,000 Americans apply for 325 jobs at a new
    Chicago Wal-Mart?

    Americans are not being told the truth about anything, not about
    Iraq, not about Iran, not about terrorism and not about the
    disastrous state of their economy. The information is available, but
    the people have no way of finding out about the economy if they are
    not trained economists with some knowledge of the data (except by
    watching Lou Dobbs on TV). Few economists themselves will tell them,
    because if they do they will lose their corporate and government
    grants. It is not in the corporations' interest or the Bush
    administration's interest for Americans to know what is happening to

    Washington-based economist Charles McMillion of MBG Information
    Services tells it the same way (and he has been doing so longer than
    I have). Here is his summation of the January payroll jobs
    report: "The familiar pattern continued with almost all job growth
    occurring in industries that face little or no outsourcing or import
    competition: construction, health care and social services,
    restaurants and bars, credit agencies and wholesalers."

    Gentle reader, the politicians, the media, and the corporations are
    all lying to you.

    February 14, 2006

    Year of Base Metals

    With spot metal prices having risen above their annual
    forecast for 2006 Macquarie has reviewed its estimates,
    resulting in strong upgrades to its metal price
    forecasts both this year and next year.
    The broker notes its higher forecasts reflect the
    likelihood the inflow of funds into the metals sector
    from commodity fund and index buying will continue and
    will support a higher profile for metal prices in the
    Supporting its view, the broker also notes the demand
    side of the equation remains very tight as constraints
    continue to limit any substantial supply response.
    Acknowledging the current environment is difficult for
    attempting to forecast metal prices, the broker offers
    as an example the fact its copper price estimates have
    risen by 100% in the past year or so.

     The broker has upgraded its nickel price forecast in
    2006 by 17.8% to US678c/lb, while in 2007 it has lifted
    its forecast a further 13% to US650c/lb.
    Even larger upgrades have flowed through for copper and
    zinc, the broker lifting its copper price forecast this
    year by 37.5% to US220c/lb and its zinc estimate by
    46.9% to US118c/lb, with similar increases flowing
    through in 2007.
    Lead has also been upgraded significantly, the broker`s
    2006 estimate increasing 46.7% to US55c/lb, while the
    increase for aluminium is less substantial, rising 14.3%
    to US120c/lb.
    In share terms the broker suggests there should be a
    change of focus by investors, as while last year was the
    year of the bulks given higher iron ore and coal prices,
    this year should be the year of the base metal
    The broker suggests investors remain modestly overweight
    resources and while quality plays such as BHP Billiton
    (BHP) and Rio Tinto (RIO) should still be in portfolios
    the focus should be on companies with high asset quality
    and leverage to its preferred base metals of aluminium
    and zinc.
    The broker`s preferred stocks therefore are Alumina
    (AWC) as a quality, leveraged aluminium play and Oxiana
    (OXR) and Kagara Zinc (KZL) for their copper and zinc
    Copyright Australasian Investment Review.

    The triumph of the "Gold Bugs" and a question

    Believe It or Not

    For the longest time, those who contended that the gold market was rigged [the Gold Bugs] were looked upon with disdain  almost exclusively  by the mainstream media and mainstream financial outlets alike. The Gold Bugs' claims were widely dismissed as a chimera - concoctions by aggrieved speculators with active imaginations or too much time on their hands.

    This widely held mainstream view was challenged recently when the brokerage arm of one of Europe’s most venerable institutions  Cheuvreux, the brokerage arm of French banking giant Credit Agricole - published a 56 page research report that not only outlines, but then throws its substantial support behind the central thesis of the gold bug’s conspiracy against gold” theory  that prices have long been rigged by Western Central Banks.

    It was convenient and easy for the collective mainstream to ignore the gold conspiracy arguments  so long as gold bugs were isolated, alienated or otherwise relegated to the fringes of economic thought. This conscious denial on the part of the mainstream is becoming a much trickier notion now that one of their respected members  Credit Agricole  is singing from the same hymn book.

    This is clearly a conflict, as yet to be resolved.

    Cutting Through The Fog

    To accept the Gold Bug’s assertions about the rigging of gold’s price, brings with it at least tacit acknowledgement [because it’s woven into the design of the fabric of the same argument] that inflation numbers as reported by officialdom  are misreported through understatement. After all, it was the suppression of the gold price that was intended to make the fudged” inflation numbers believable, no?

    Acceptance of this assertion creates another disturbing dilemma  one that interestingly envelopes Alan Greenspan’s infamous interest rate conundrum  that of what prudent or proper asset allocation is or should be. If inflation has been systematically under reported, then it follows that interest rates are erroneously low. Nobel Laureates have asserted that asset allocation models are built from a foundation of assumptions or truths,

    For each asset class the user forecasts an expected return, a standard deviation, and a correlation to each of the other assets. Given these inputs, the software uses mean-variance optimization to build an efficient frontier. The frontier represents the efficient set of portfolios that can be created using the selected asset classes. Each portfolio on the frontier has the maximum expected return for a given amount of risk.

    Inherent in this modeling  correlating assets - is the assumption that real interest rates are positive as evidenced by the efficient frontier always being plotted in the upper right quadrant. Under reporting of inflation has rendered this base assumption false [false data implies that the efficient frontier” is a misnomer]. Empirical evidence in the real world supports this contention  in that large capital pools [pensionable assets of large companies like GM, Ford, IBM and the airlines] invested along traditional lines  steeped in fixed income securities - are proving to be woefully inadequate to fund current obligations.

    This has created confusion that is begging for clarity.

    Clear Vision From A Disciplined Mind

    While deceptions, like those outlined above, abound - I’ve got to hand it to Mr. Llewellyn [Lew] H. Rockwell Jr. In a paper published just last week, What Economics Is Not, Rockwell the reigning chief Austrian economic academic in North America - states,

    And just as economic structures are best managed by property owners and traders, the entire society contains within itself the capacity for self-management. Any attempt to thwart its workings through the coercion of the state can only create distortions and reduce the wealth of all.

    Rockwell’s words, which mirror or embody the wisdom of Mises, go on to articulate,

    Anyone familiar with current economics texts and journals knows that this is not the view that they promote. They are still stuck in an era where bureaucrats imagined themselves as smarter than the rest of us, where central bankers believed that they could end the business cycle and inflate just enough to cause growth but not ignite inflation, where antitrust experts knew just how big businesses should be.

    Before anyone dismisses these words as unimportant meanderings by academics for academia, you’d be well served to consider,

    The most common misunderstanding about economics is that it is only about money and commerce. The next step is easy: I care about more than money, and so should everyone, so let’s leave economics to stock jobbers and money managers and otherwise dispense with its teachings. This is a fateful error, because, as Mises says, economics concerns everyone and everything. It is the very pith of civilization.

    So there you have it folks, in three short, very succinct stanzas in true Austrian form Rockwell - consciously or not - has dissected, analyzed and laid bare the essence of the Greenspan Era as chairman of the Federal Reserve.

    This is a mess which needs to be sorted out.

    Time Is Of The Essence

    The clock is ticking folks. Next month, the Federal Reserve is due to discontinue reporting M3 money supply [and related] statistics. They would have us believe that it’s their intenti

    February 13, 2006

    Classic Greenspan Animated Gif


    February 11, 2006

    The Commodity Supercycle: Will it continue

     See the charts at my site

    Are we in the ninth inning of the “Commodity Super Cycle” that has lifted the Reuters Jefferies Commodity (CRB) price index 91% higher from four years ago to its highest level in 26 years? The Reuters Jefferies CRB index of 19 commodities reached a high of 349.56 on Jan 30th and is comprised of futures in live cattle, cotton, soybeans, sugar, frozen concentrated orange juice, wheat, cocoa, corn, gold, aluminum, nickel, unleaded gasoline, crude oil, natural gas, heating oil, coffee, silver, copper and lean hogs.

    Barclays Capital said on January 5th that commodity investments might parlay another $40 billion this year up to $110 billion as pension funds and other money managers diversify from stocks and bonds. Big-money investment funds have boosted their stake in commodity indexed markets to around $70 billion in 2005, up from $45 billion by the end of 2004 and only around $15 billion at the end of 2003.

    Pension funds, as well as small, retail investors are looking to commodities as a crucial part of diversification of any investment portfolio. Although schizophrenic commodity day traders could decide to turn massive paper profits into hard cash at a moment’s notice, causing a 5% shakeout, the longer-term odds still favor a continuation of the “Commodity Super Cycle, into extra innings.

    Central bankers point the finger of blame for soaring commodity prices on China’s juggernaut economy, which has expanded at breakneck speed of 10% for each of the past three years, competing with rampant demand for basic resources from big importers like India, Japan, Germany, South Korea, and the United States. India’s booming economy expanded 8% and Korea’s by 5% last year. China bought about 22% of the global output of base metals in 2005, compared with 5% in the 1980’s, and has doubled its crude oil imports from five years ago.

    Central bankers stare at the explosive CRB rally from the sidelines with a sense of indifference or stone faced silence, though sharply higher commodity prices are telegraphing higher producer price inflation. Furthermore, China is under daily pressure from the Bush administration to revalue its yuan higher against the dollar, which in turn, would give Beijing even greater purchasing power abroad, and provide more support for a whole range of commodities from crude oil, iron ore, zinc, copper, platinum, uranium, soybeans, and ethanol.

    But perhaps, the simplest answer to explain the long term bullish outlook for global commodities boils down to one simple equation. According to the latest population count by the United Nations, the world had 6.5 billion inhabitants in 2005, 380 million more than in 2000, or a gain of 76 million persons annually. By 2050, the world is expected to house 9.1 billion persons, assuming declining fertility rates. In other words, a world of finite raw materials, along with an increasing population base, translates into higher prices.

    Until recently, the “Commodity Super Cycle” has been led by base metals such as copper, aluminum, and zinc, precious metals such as gold, silver, and platinum, and higher energy prices led by crude oil and natural gas. Recently however, commodity traders have doubled sugar prices to 24-year highs, and are moving into coffee and soybeans. Other raw materials such as iron ore rose 72% in 2005. Although China is a big exporter of steel, fears of a global supply glut could disappear rapidly, if global steel makers begin a pattern of consolidation, following in the footsteps of the gold mining industry over the past few years.

    But how did the Reuter’s CRB index reach record levels in the first place? Well consider the Chinese and Indian economies, which also account for one third of the world’s population, and the super easy money policies pursued by the big-3 central banks, the Bank of Japan, the European Central Bank, and the Federal Reserve. Both ingredients, when mixed together, make an explosive cocktail that has lifted commodity indexes into the stratosphere.

    And a trend in motion, will stay in motion, until some major outside force, knocks it off its course. So not withstanding inevitable profit-taking sessions, what major outside force is out there that could derail the CRB’s upward trajectory?

    Chinese demand for imports has soared by 330% from roughly $15.5 billion per month in early 2002 to a record $64.4 billion in December 2005. China is the world’s fifth largest importer, and bought $632 billion worth of goods in 2005. The world’s number-one miner BHP Billiton BHP.AX ran its mines and smelters at full speed in the fourth quarter to capture strong commodities prices, setting the stage for full-year profits to exceed $9 billion. Rio Tinto, RIO.AX, the world’s second largest miner pushed its operations harder to double its 2005 profit to around $5 billion.

    China's economy overtook France and the Great Britain to become the world's fourth largest last year, and will grow an estimated 9.4% this year. The European Union and Japan expect growth of 1.9% this year. Chinese Premier Wen said on December 1st that China needs to “maintain rapid and stable economic growth to raise the living standards” of the nation's 1.3 billion people, whose per capita income of $950 per year, ranks 129th in the world. Beijing is cutting taxes and raising salaries to encourage more spending on cars and household appliances.

    Exports are a key driver behind the Chinese economic miracle, with China's currency exchange controls and trade surplus with the US topping $204 billion in 2005, a 25% increase on the previous year and nearly 30% of the total US deficit. The lynchpin of Chinese exports is the low yuan /dollar exchange rate pegged at 8.11 per dollar, undervalued by 30% to 40% on a trade weighted basis.

    The People’s Bank of China increased its M2 money supply by 18.3% last year, issuing more yuan to soak up foreign currency earned through foreign trade and direct investment into Chinese factories from abroad. Explosive money supply growth, in turn, boosted domestic retail sales by 13% last year, and industrial production was 16.6% higher in November from a year earlier. China’s central bank raised its M2 money supply target to 17% in the third quarter from 15% earlier, to offset stronger demand for the yuan, and maintain the peg at 8.11 per US dollar.

    China’s crude oil imports rose 4.4% in the first 11 months of 2005, and are expected to total 130 million tons of crude (2.5 million bpd) in 2005. Crude oil production from China's biggest oil field, Daqing, fell about 3% to 44.95 million tons (900,000 bpd) last year. China, the world's second-largest oil consumer, expects to secure foreign energy supplies with foreign deals for its economy, after it turned into a major oil importer and still suffers from severe power shortages.

    China's oil giant Sinopec signed a $70 billion oil and natural gas agreement with Iran, to buy 250 million tons of liquefied natural gas over 30 years from Tehran and develop the giant Yadavaran field. Iran is also committed to export 150,000 barrels per day of crude oil to China for 25 years at market prices after commissioning of the field. Iran is China's biggest oil supplier, accounting for 14% of Chinese oil imports. In return, Tehran’s Ayatollah is demanding a Chinese veto at the UN, to shield his secret nuclear weapons program from international sanctions.

    India’s Prime Minister Manmohan Singh, wants his country to achieve 10% economic growth in the next two to three years, to create more jobs and help lift a third of the country's 1.1 billion people out of poverty. Asia's fourth-biggest economy expanded 8% in the second and third quarters of 2005. Singh's government wants industrial production, which makes up a quarter of India's economy, to grow 10% annually to boost the incomes of Indians, one in three of whom live on less than $1 a day.

    India’s industrial production grew at an annualized 8.3% rate between April and November 2005, faster than major economies like US, UK, the Euro zone, Japan, Brazil, Indonesia and Russia. Only China and Argentina recorded faster industrial production rates of 16.6%, and 9.6% respectively. On the global sphere, US industrial production grew only 2.8%, and the UK, the Euro zone, and Indonesia, saw declines of 2.4%, 0.8%, and 3.4% respectively in their overall industrial production.

    Indian economists have observed an 86% correlation between industrial production and exports. But the Indian export sector does not dominate growth in the Indian economy, such as in China and South Korea. The Indian economy is more about domestic consumer demand, which contributes nearly 70% to GDP, while exports contribute only 15% to India’s GDP. India ranked 24th among global importers purchasing $113 billion of goods in 2005, or about a sixth Chinese demand.

    Japan is also a major factor behind the rise in global commodity prices, with industrial production rising for a fifth month in December to a record, sustaining the nation's longest expansion in eight years. Japanese industrialists plan to spend 17.3% more on factories and production facilities in 2006 than last year. Overseas sales are also bolstering production and imports of raw materials from abroad. Japan imported $451 billion of goods in 2005, the seventh highest among global importers.

    Japan's exports rose 14.7% in November from a year earlier to 5.9 trillion yen ($50.2 billion), the second highest ever, on the heels of the yen’s 19% devaluation against the dollar, and 17% drop against the Chinese yuan. Shipments to China rose 12.8% and those to the US climbed 8.9 percent. Exports were up for the 23rd consecutive month while imports rose for the 20th month in a row.

    To meet strong demand from abroad, and an economic revival at home, Japanese imports of raw materials have soared 66% to 5.42 trillion yen per month from three years ago, and in turn, providing underlying support for global commodity prices. Japan paid 20% or more for nonferrous metals, crude oil and coal in 2005, which companies are expected to pass on to customers.

    Japan’s wholesale price index was 1.9% higher in November from a year earlier, and has been in positive territory for two years, but the Japanese government claims that consumer prices are just emerging from a seven year bout of deflation. But the Japanese wholesale price index tracks major trends in the Reuters Commodity price index, which has risen 91% over the past four years, for an annualized gain of 23%, much higher than the Japanese wholesale price index of 1.9% inflation.

    That would imply that Japanese manufacturers are getting squeezed by sharply higher raw material costs, and unable to pass costs along to intermediaries. Yet, large Japanese manufacturers claim their profits are expected to be 5.2% higher in 2005, and the Nikkei-225 stock index rose 40% last year to a 5-year high. If correct, then profit margins might have been inflated by a stronger dollar against the Japanese yen. That explains why the Japanese ministry of finance is jawboning or intervening in the currency markets, whenever the dollar has a rough day.

    Global commodity prices bottomed out in late 2001, soon after the Bank of Japan lowered its overnight loan rate to zero percent, and adopted quantitative easing. The central bank prints about 1.2 trillion yen ($10 billion) per month to purchase Japanese government bonds, inflating the amount of yen circulating around global money markets. More Japanese yen yielding zero percent, chasing fewer natural resources in turn, leads to sharply higher global commodity prices.

    The Japanese ruling elite are devaluing their way to prosperity, by flooding the Tokyo money markets with 32 trillion to 35 trillion yen above the liquidity requirements of local banks. The enormous supply of excess yen pushed Japan’s 3-month deposit rate below zero percent for most of 2004. With borrowing costs at zero percent or less, Japanese and foreign hedge fund traders have found the cheapest source of capital to leverage speculative positions in global commodities.

    And the Japanese ministry of Finance is not expected to grant permission to the Bank of Japan to begin mopping up some of the excess yen until the second half of 2006, at the very earliest. On January 9th, Japanese Finance Minister Sadakazu Tanigaki said, "There is a need for the BOJ to make a careful assessment of data. It should not rush things.” The BOJ is certainly not rushing things. It has kept the overnight loan rate pegged at zero percent for five long years.

    Kozo Yamamoto, the ruling LDP party chairman on monetary policy matters expressed outrage at the prospects of a BOJ policy change, saying quantitative easing must stay in place to eradicate deflation for good and to keep bond yields low to help the government trim debt servicing costs. "But if the BOJ were to ignore our view and force through the same mistake it made when it ended the zero rate policy in August 2000, ending up with a miserable outcome, we would then revise the BOJ law of independence,” he warned.

    The European Central Bank cannot ignore the Euro zone's loose monetary conditions and increased risks to price stability, said ECB chief economist Otmar Issing on December 19th. "Money growth has been high for quite some time and credit growth has continuously increased, supporting our assessment of the risks to price stability. Liquidity in the Euro area is more than ample. A central bank with the mandate to maintain price stability cannot ignore these signals," Issing added.

    Yet for two and a half years, the ECB ignored a 50% surge in commodity prices, since lowering its repo rate to 2.00% in May 2003. The Euro M3 money supply growth rate was 7.6% higher in November from a year earlier, above the central bank’s original mandate of 4.5% growth. Thus, the ECB’s quarter-point rate hike to 2.25% in December was too little, too late, to get in the way of the “Commodity Super Cycle,” with the Reuters CRB rising another 10% in its aftermath.

    Italian central banker Bini Smaghi spoke with a twisted tongue on the matter on January 25th. "If a central bank stops excess liquidity too late it has to raise rates much more strongly and that causes turbulence on the markets.” Then, casting doubt about the ECB’s resolve to combat commodity inflation, Smaghi said there are a range of risks to durable economic recovery in the Euro zone. “There are no clear signals about how strong growth really is. That's why we've got to be careful in this early stage of the recovery," Bini Smaghi said.

    For the past three years, the ECB pursued a policy of “asset targeting”, inflating its Euro M3 money supply to lift European stock markets into higher ground, and through the “wealth effect” lift the spirits of the frightened European consumer. The ECB is running into a barrage of resistance from top European finance officials to higher Euro interest rates, fearful of any action that could undermine the European stock markets. The ECB has much greater political independence than the BOJ.

    Sending a clearer signal on January 23rd, ECB economist Issing argued, "Trichet made it very clear. The December rate hike was not the first in a series of steps. But we will always act on time. The risk to price stability has increased in the context of higher oil prices," Issing said, adding that Euro zone consumer inflation, which fell to 2.2% in December, was likely to rise again.

    The ECB’s Klaus Liebscher also expressed concern that the sustained high cost of oil would feed into wages and prices for other goods and services. "Without a doubt, there is still a large danger," he said, citing the German producer price index, which rose by 5.2% in December, its fastest pace for 23 years. Traders should always trust the hard dollars and cents flowing through the commodity markets for real time indications of future inflation, and not government statistics.

    One has to question how the Japanese wholesale price index is only 1.9% higher from a year ago, or roughly 3.3% less than the German PPI, when the yen was 6% weaker than the Euro against the dollar last year. But in an age where ruling parties distort data to serve their own interests, it is hardly surprising that Japan’s financial warlords present price indices and inflation data in a manner best suited to their immediate needs. There is simply is no limit to how far the Japanese government will go to keep its borrowing costs down and to protect the interest of its exporters.

    Because most commodities are traded in US dollars, the Federal Reserve has a special role to play in the fight against commodity inflation. The Fed must protect the value of the US dollar in the foreign exchange market, with higher interest rates if necessary, to keep the Commodity Super Cycle in check. Yet the Greenspan Fed waited for the Reuters Commodity price index to rise by 45% above its 2001 low, before taking its first baby step to lift the fed funds rate by a quarter-point to 1.25%.

    The Fed has moved in predictable quarter-point moves for the past eighteen months, and has signaled that 4.50% could be the peak in the tightening campaign. The Fed is targeting US home prices, which have flattened out in recent months, and should preclude further rate hikes in 2006. Still, the Fed’s go-slow approach to combating inflation has left it far behind the “Commodity Super Cycle.”

    The Greenspan Fed produced a sizeable counter trend rally for the US dollar in 2005, pushing the greenback from 102-yen to as high as 121.50-yen, and knocking the Euro from as high as $1.3450 to a low of $1.1650. However, the Fed efforts to control commodity inflation were completely undermined by the super easy money policies of the Bank of Japan and the European Central Bank.

    How would the new Fed chief Ben Bernanke react, if commodity prices were to continue to soar further into the stratosphere? Without the life support of higher interest rate expectations, the deficit ridden US dollar could come under renewed speculative attack in 2006. Especially, after China signaled a desire to diversify an expected build-up of $200 billion of foreign currency reserves away from the US dollar this year. A weaker dollar could give commodity prices extra support.

    Fortunately for commodity bulls, Bernanke doesn’t believe there is a link between a higher CRB index and higher producer price inflation. On February 5th, 2004, Bernanke said, “rising commodity prices a variable of growth rather than inflation.” Then on May 24, 2005 Bernanke played down worries about higher energy and commodity prices. “Much of the recent price gains in energy and commodities reflect the rapid growth of the Chinese economy. Chinese authorities are now trying to slow that growth, and should help check the growth of commodity prices,” he said.

    Bernanke has also rejected opinions that the recent rise in oil prices is largely a symptom of super easy central bank monetary policies. “The consensus that emerges from this literature is that the relationship between commodity price movements and monetary policy is tenuous and unreliable at best. Moreover, recent experience doesn't support the notion that monetary policy had a substantial effect on the oil price rise,” he said.

    Then on October 25, 2005, the day after his nomination to lead the Federal Reserve, Bernanke was asked again about soaring commodity prices and their impact on the inflation outlook. "The evidence seems to be that it is primarily in energy and some raw materials and has not fed into broader inflation measures or expectations. My anticipation is that's the way it's going to stay.”

    Most likely, Bernanke would continue to ignore a surge in commodity prices, but keep a close eye on US home prices. Any sign of a significant downturn in US home prices, could quickly prompt the new Fed chief to lower the fed funds rate. Already, home re-sales in the United States fell 5.7% in December to the lowest level since March 2004, after five years of gains that shattered construction and sales records and sent prices up more than 55% nationwide. The national median sales price in December was $211,000, and down from a record high of $222,000.

    The Greenspan Fed was an “Asset Targeter” and inflated US home prices over the past few years to offset huge losses in the Nasdaq and S&P 500 stock indexes. The Fed borrowed this strategy from the Bank of England, which pioneered home price targeting in 2001. By moving in baby step quarter-point rate hikes, the Fed was careful to avoid a meaningful downturn in the housing markets, until signs of froth in home prices were sprouting in over 100 major US cities in late 2005.

    Any sign of potential weakness in the DJ home construction index towards the horizontal support at the 800-level, could be met by aggressive half-point rating cutting by the Bernanke Fed to head off an implosion of consumer wealth and confidence. A significant decline below the 800 level could signal a head and shoulders top pattern to technicians, projecting a decline to the 550-level. Fortunately, head and shoulder pattern rarely work anymore, and usually just set bear traps. Sharp rate cuts by the Fed might bring Wall Street investment bankers to the rescue of the housing sector.

    So what could derail the “Commodity Super Cycle” in 2006? Schizophrenic speculators could be tempted to lock in profits at a moment’s notice. But big time players like China, Japan, and India could provide a safety net for falling commodity markets, gratefully locking in lower prices for raw materials. Beijing is on course to reach $1 trillion of foreign currency reserves by years ahead. Base metal and precious metal dealers could be loathe to offer big discounts to cash rich Beijing.

    China is still holding a massive short position in copper futures, estimated at below 200,000 tons because of positions amassed by trader Liu Qibing. Yet there are only 140,000 tons of copper in publicly reported stockpiles worldwide, equal to about three days of global usage, and stored in warehouses monitored by the London Metals Exchange and commodity exchanges in New York and Shanghai.

    The Bank of Japan is aiming for negative interest rates by forcing the “core” inflation rate to rise above its zero percent overnight loan rate, before moving to tighten its monetary policy. Negative interest rates would actually produce an easier money policy in Japan in the short term, and possibly create a major bubble in the Nikkei-225 stock index. The ECB’s baby step rate hike campaign would probably fizzle out near 2.75%, hardly enough to scare anyone. And the Fed’s Bernanke is on guard against falling home prices.

    Crude oil is hovering near record highs, fearful that Iran’s Ayatollah might unleash the “Oil Weapon” in 2006, squeezing crude oil to $80 per barrel, if Europe and the US muster the nerve to impose economic sanctions on the Islamic regime. A battle in the Strait of Hormuz could disrupt oil supplies and the supply of commodities worldwide. But high-flying Asian and European stock markets are betting the Ayatollah will flinch at the eleventh hour to avoid a military showdown with the US and NATO, and wipe out a $10 per barrel “War Premium” for crude oil.

    Weighing all the bearish and bullish arguments however, it’s appears likely that the “Commodity Super Cycle” is bound to go deeper into extra innings and reach new frontiers in un-chartered territory.

    February 08, 2006

    Gibson's paradox


    This is the observation by the economist, J.M. Keynes, that during the period of the Gold Standard, there was a direct correlation between the long-term interest rate (Keynes used the yield on British "Consols") and the general price level. The paradox stemmed from the way it differed from the consensus view that the long-term interest was correlated with the rate of change in prices, i.e. inflation. Under Gibson's Paradox, with a gold standard, a falling price level corresponded with falling real interest rates.
    With the gold price fixed, the purchasing power of gold is obviously increasing.

    The thinking behind Gibson's Paradox can be transferred into today's world of floating gold prices and fiat money. A rising gold price equates to a falling price level (in terms of gold purchasing power) and lower real interest rates. This makes sense as falling real yields make holding financial assets less attractive, while rising real interest rates increase the opportunity cost of holding gold (which has zero or a minimal yield). In simple terms and outside of a Gold Standard, Gibson's Paradox suggests that the gold price rises as the attraction and confidence in financial/paper assets declines. This was neatly outlined by former Fed Governor, Wayne Angell, in the minutes of an
    FOMC meeting in July 1993.

    "The price of gold is pretty well determined by us… But the major impact on the price of gold is the opportunity cost of holding the US dollar… We can hold the price of gold very easily; all we have to do is to cause the opportunity cost in terms of interest rates and US Treasury bills to make it unprofitable to own gold".

    -Gibson's Paradox is a free market phenomenon. Studies have shown that it was disrupted by government intervention in the gold market after World War 1 and the London Gold Pool in the run-up to the collapse of Bretton Woods. In both of these instances, when government intervention was relaxed, the gold price rose strongly and found its correct market level. Given renewed intervention by governments in the gold market from around 1995, it seems reasonable to expect the same to occur this time.

    Our conclusion on what drives the gold market is that the gold price "comes out of hiding" as real yields on financial assets decline and especially as the risk of a financial crisis in terms inflation or deflation rises. As the risk rises, the role of gold as "true" money and a store of value reasserts itself. In essence, gold acts as a barometer of the financial attraction and confidence level of paper money.


    "Goldbugs" might be right

    Many market commentators are currently bullish on gold, but few as bullish as Cheuvreux, part of Credit Agricole.

    The UK-based company recently lifted its 2006 gold price estimate to US$900/oz from US$750/oz in this report. Cheuvreux thinks the gold price could spike to US$2,000/oz, but the reason sounds like a conspiracy theory: that the gold price has been kept low by secret central bank selling designed to preserve confidence in financial markets during periods of uncertainty and keep bond prices up and thereby improve the perception of U.S. monetary policy.


    Alan Greenspan referred to the power to manipulate the price of gold. He told the House Banking Committee in July, 1998 that "central banks stand ready to lease gold in increasing quantities should the price rise."

    While the notion that western governments would conspire to suppress the gold price has not gained widespread support, Cheuvreux suggests organizations such as GATA (Gold Anti Trust Association) mad "gold bugs" and conspiracy theorists, according to the financial mainstream, have been right all along.

    Gold is a store of value, and Cheuvreux says the metal's value soars when yields on financial assets decline and the risk of crisis increase.

    Billions of U.S. dollars do seem to be sparking commodity price inflation and Cheuvreux says that gold will eventually skyrocket due to its safe haven status. Sprott Asset Management agrees. "Start hoarding" might turn out to be very good advice.

    February 07, 2006

    Have Commodities Become the New Tech Stocks?


    Published: February 5, 2006

    RETURNING to basics has been a major theme in the markets. If investors in the late 1990's took a bold leap into the future with technology stocks — off a high ledge, as it turned out — they are now embracing age-old economic mainstays like copper, lumber, oil and gold.

    Prices for metals such as aluminum, above, are recovering from a slide in the 1990's, which had led companies like Alcoa and Reynolds to merge to improve their finances.

    A widely followed benchmark of commodity prices, the Commodity Research Bureau index, reached a record high recently after nearly doubling since late 2001. Shares of companies that supply these materials — gas pipeline operators, miners of industrial and precious metals, forest products concerns — have followed a similar trajectory, but some analysts contend that prices have risen too far, too fast.

    "There are probably some areas that offer better prospects" for investors "because commodity price expectations are very high," said Stuart Schweitzer, global markets strategist at J. P. Morgan Asset Management. "I would be surprised if the commodity-type stocks are a top-performing group in 2006."

    Commodities, especially industrial ones like copper and lumber, are a bet on economic growth. Mr. Schweitzer expects continued strength in Asian and other emerging markets — a trend that has underpinned commodity prices — but he expects growth elsewhere, especially in the United States, to be more subdued than it was in the last couple of years. "I suspect the U.S. economy will slow down somewhat this year," mired by softness in housing, he said. "If that's right, commodity demand will ease back along with it."

    Some fund managers with portfolios that specialize in commodity producers are also beginning to show concern about rapid price gains. While they maintain optimistic long-range outlooks, they express reservations about the near future.

    "We're going through a long-term recovery from stupid oversold levels," said Fred Sturm, who manages the Ivy Global Natural Resources fund. "Prices of many of these commodities were unsustainably low." In the late 1990's and early 2000's, he pointed out, gold and oil traded at nearly 20-year lows after having fallen by more than two-thirds.

    The depressed prices helped to force commodity producers to merge — Alcoa and Reynolds in aluminum, for example, and Exxon and Mobil in energy — and to take other steps to improve their finances. That drove the first move in what he expects to be a three-stage rally in commodity markets.The last stage, he predicted, will be "a true scarcity phase when Mother Nature slaps us in the face and grabs our attention and tells us we're running out of commodities like oil when people keep wanting more."

    But that's well in the future, Mr. Sturm said. Right now, "we're in a big fat middle phase where commodity prices are expected to remain above their average ranges but will not continue to trend higher," he said. "We expect them to modify from recent levels in energy and in some of the metals, including copper."

    He described his view of commodity stocks during this stable period as "persistent but moderated bullishness" and said valuations "are still very attractive, even if earnings don't continue to grow at the same supercharged pace" as in recent months.A bit more than half of Mr. Sturm's fund is invested in energy suppliers, including ChevronTexaco, Thai Oil and Massey Energy, an American coal mining company. For the last six months, he said, he has been allocating more of the fund's $2.5 billion in assets to producers of precious metals as a play on growth in developing markets.

    "Gold remains a form of money, and in much of the emerging world where they don't trust what comes out of the A.T.M. machine, people may buy an extra gold bangle and store it as money," Mr. Sturm said. He said, too, that energy producers in the Middle East and elsewhere were prone to buying gold with surplus cash, of which they have plenty these days.His bet on precious metals is also a hedge against unforeseen negative events. "Gold is the best form of insurance when you're not sure what you're insuring against," he explained. Among the miners of precious metals in his portfolios are Buenaventura in Peru and Impala Platinum in South Africa.

    John Hill, an analyst at Citigroup, says he also thinks that the rally in gold has further to go. He has told clients that prices have continued to climb against an economic backdrop often associated with weakness for the metal, including rising interest rates, controlled inflation and a stronger dollar. 

    "We continue to be positive on gold," he wrote, citing "healthy underlying supply-demand fundamentals in the form of Indian fabrication, Chinese retail investment and recycled Middle Eastern petrodollar flows."

    Citigroup's analysts have buy ratings on Newmont Mining and Barrick Gold and they are neutral on another large North American producer, Placer Dome. They also recommend buying Alcoa, United States Steel and the specialty steel maker Nucor. Other prominent components of Mr. Sturm's portfolio are Aracruz Celulose and Suzano, the Brazilian pulp and paper companies; Nalco, an American water treatment company; and Companhia Vale do Rio Doce, or CVRD, a Brazilian miner of base metals.

    Mr. Sturm highlighted one segment — chemical making — that benefits when prices of other commodities fall. Energy is a major cost in chemical production, and with energy prices due to moderate, in his opinion, the chemical makers could thrive.

    He is especially optimistic about suppliers of industrial gases. "Companies may enjoy stronger profitability and an ability to pay down debt" for the next two years as prices increase for the gases they manufacture, he said. Shares of companies like Praxair, Air Liquide and Air Products and Chemicals "are more attractive than they may appear." The outlook for Praxair appears so bright that one investor who seldom buys commodity producers, Rick Drake, co-manager of the ABN Amro Growth fund, keeps it in his portfolio.

    Mr. Drake shuns commodity stocks. "They tend to be cyclical companies," he said, "and our focus is on consistent, sustainable growth through all parts of the cycle."

    "They do well when prices skyrocket," he added, "then eventually someone comes along and builds up supply, the price comes down and companies get hurt."

    Praxair's performance is not nearly as volatile, he said. It is a basic materials company producing hydrogen, and Mr. Drake expects its use to expand. "The hydrogen business has been real strong because of oil," he said, "not because oil prices are higher, but because environmental laws are such that when you get low-grade crude oil, you need more hydrogen to refine it."

    Hydrogen also produces efficiencies in steel making, Mr. Drake noted, and is used in clean rooms for, among other things, semiconductor production. "It is more of a play on industrial production" than commodity price inflation, he said, describing Praxair as "a very steady, consistent growth company."

    STEADY growth is desirable, but investors are often willing to take a chance on companies with more volatile earnings streams if they believe they can catch the upswing. Gil Knight, a senior portfolio manager at Gartmore, contends that the rally in commodity prices is robust enough to warrant significant exposure to the sector, although he also worries that prices may have moved ahead too fast.

    Mr. Knight has long held shares of oil drilling and exploration companies, such as Halliburton, Ensco International, Southwestern Energy and Range Resources, but he warned against following his lead.

    "I wouldn't buy any of these stocks up here," he said. "They're in nosebleed territory." Still, he said, "in terms of percentage gains versus other industries, I don't think they're going to do as badly as people think."

    He finds greater opportunity in other industries. He said he added to his position in Freeport-McMoRan Copper and Gold in January, when the stock dipped slightly amid allegations that the company had inappropriate ties to the Indonesian military. Its shares have risen about 50 percent in the last six months.His other favorites include Joy Global, a manufacturer of mining equipment that he called "a fantastic little company," and two suppliers of cement and other basics, Florida Rock and Vulcan Materials.

    He agreed that commodity prices would be supported by strength in emerging economies. "If you pay attention to growth," Mr. Knight said, "you have to stick with energy stocks and probably some commodity stocks this year."

    February 01, 2006

    Ted Butler on the Silver EFT

    What about silver? Well, if an ETF bought the same percentage of annual mine production in silver as it did in gold, then the number would be 75 million ounces out of a current silver mine production of 600 million ounces. While I don’t think that there are 75 million real ounces available south of $20 per ounce, that’s only one method of calculation. Another method would be by comparing the dollar amounts in the gold ETFs and extrapolating what silver ETF investment dollar demand might be. Here, one quickly comes to hundreds of millions of ounces of new silver demand. There is as much likelihood that many hundreds of millions of ounces of silver could be bought by the silver ETF south of $100 an ounce, as me starting a Silver Users Association fan club.

    I ask you to consider something else. More than 13 million ounces, or more than 400 tons, or almost $7 billion worth of gold have been bought by the gold ETFs in a little over a years’ period of time, resulting in a 25% increase in the price of gold. This ETF buying, of course, is in addition to all the regular demand, from jewelry to regular coin and investment buying, by individuals, funds and central banks. How could gold not have gone up in price with the sudden introduction of the massive buying by the ETFs?

    January 30, 2006

    Soaring commodity prices

    Jeffrey Frankel, Professor of Economics at Harvard University, argues that U.S. monetary policy may be part of the explanation. Low real interest rates, he notes, lower the cost of carrying physical inventories and increase the attractiveness of speculating in commodities relative to holding Treasury bills. He documents an impressive historical correlation as revealed by the scatter diagram at the left: those years in which the real interest rate was lowest tended also to be years in which commodity prices were high relative to other prices.

    Peak Metals?

    New Haven, Conn. - Researchers studying supplies of copper, zinc and other metals have determined that these finite resources, even if recycled, may not meet the needs of the global population forever, according to a study published in the Proceedings of the National Academy of Sciences.
    According to the study, even the full extraction of metals from the Earth's crust and extensive recycling programs may not meet future demand if all nations begin to use the same services enjoyed in developed nations.

    The researchers - Robert Gordon and Thomas Graedel of Yale University and Marlen Bertram of the Organisation of European Aluminum Refiners - suggest that the environmental and social consequences of metals depletion became clear from studies of metal stocks-in the Earth, in use by people and lost in landfills-instead of tracking the flow of metal through the economy in a given time and region.

    "There is a direct relation between requisite stock, standard of living and technology in use at a given time," said Gordon, professor of geology and geophysics. "We offer a different approach to studying use of finite resources-one that is more directly related to environmental concerns than are the discussions found in the economics literature."

    Using copper stocks in North America as a starting point, the researchers tracked the evolution of copper mining, use and loss during the 20th century. Then the researchers applied their findings and additional data to an estimate of global demand for copper and other metals if all nations were fully developed and used modern technologies.

    According to the study, titled "Metal Stocks and Sustainability," all of the copper in ore, plus all of the copper currently in use, would be required to bring the world to the level of the developed nations for power transmission, construction and other services and products that depend on copper.

    For the entire globe, the researchers estimate that 26 percent of extractable copper in the Earth's crust is now lost in non-recycled wastes; for zinc, it is 19 percent. Current prices do not reflect those losses because supplies are still large enough to meet demand, and new methods have helped mines produce material more efficiently.

    The study suggests these metals are not at risk of depletion in the immediate future. However, the researchers believe scarce metals, such as platinum, risk depletion in this century because there is no suitable substitute for use in devices such as catalytic converters and hydrogen fuel cells. They also found that, for many metals, the average rate of use per person continues to rise. As a result, the report says, even the more plentiful metals may face similar depletion risks in the future.

    "This is looking at recycling on a broader scale," said Cynthia Ekstein, the National Science Foundation (NSF) officer who oversees the Yale award. "This is looking at the metal lifecycle from cradle to grave."

    The research emerged from collaboration among researchers funded by the NSF Biocomplexity in the Environment-Materials Use: Science, Engineering and Society program.

    Citation: Proc. Natl. Acad, Sci. USA: early online (January 23, 2006)

    January 29, 2006

    A clear and present danger to America

    George W. Bush, the out-of-control despot who thinks the Presidency of the United States is a license to lie at will, wage war on a whim and break the law without recrimination, put on his "I am in charge" face Thursday and, for all practical purposes, told anyone who thinks his powers should be subject to review or oversight to go screw themselves. Bush told reporters that he will assert his "presidential prerogatives" any damn way he pleases and will do so without apology, without question and without concern for the law, the Constitution or the rights of Americans. His press conference was a frightening study of a madman on a tear, an insane, power-mad tyrant who believes he is above the law and cannot be questioned. Sadly, it appears no one has the balls to questions his lunacy. "I'm going to continue do everything within my authority to protect the American people," Bush told reporters. That’s Bushspeak for "I’m in charge here you dumb pukes and there ain’t a damn thing you can do about it." "We'll continue our terrorist surveillance program against al Qaeda. Congress must reauthorize the Patriot Act so that our law enforcement and intelligence and homeland security officers have the tools they need to route the terrorists -- terrorists who could be planning and plotting within our borders," he said. Translation: "I’ll spy on Americans, I’m use the Constitution to wipe my ass and I’ll declare marital law and run this country like the dictator I want so desperately to be." On his illegal actions authorizing the National Security Agency to spy on Americans, Bush said "If the attempt to write law is likely to expose the nature of the program, I'll resist it." What he is saying is "I’m above the law, goddamnit, and I’ll fight every attempt to make me obey the law. On the Iraq war, Bush declared: "there is an act passed by Congress in 2001 which said that I must have the power to conduct this war using the incidents of war. In other words, we believe there's a constitutional power granted to Presidents, as well as, this case, a statutory power. And I'm intending to use that power -- Congress says, go ahead and conduct the war, we're not going to tell you how to do it. I worked on Capitol Hill for a number of years and wrote more than my share of legislation. I know a thing or two about how the government is designed to work and the checks and balances that are supposed to be built into the system. I’ve also read what Congress passed and nothing in that act or the Constitution gives Bush the authority he claims or the power he abuses.  He’s not just a liar. He’s a god-damned liar.     The arrogance surfaced often as he faced the press. His eyes darted from side to side, blinking rapidly, a textbook example of a maniac on the loose.  His temper threatened to erupt more than once because a couple of reporters actually had the gall to actually question his motives.          After too many years watching this man destroy what once was a great nation, I can only conclude that Bush is insane and his insanity is protected by a brain-dead populace and a power-mad political party that can’t possibly accept the sad fact that they helped put a madman in charge of our government and have kept him there.  I believe with all my soul that George W. Bush and the Republicans who rubber-stamp his actions represent a clear and present danger to the peace and security of the United States and all must be removed from office immediately if this nation is to survive.  And those are words I never, ever, thought I’d write about a President or other elected officials of this country. And I wish, with all my heart that I did not have to write them now. But those who love this country and put patriotism above politics must act. America, if it wishes to remain America, must remove the cancer that threatens to destroy it.
    © Copyright 2006 by Capitol Hill Blue

    January 28, 2006

    US fiscal facts of life...

    President Bush signed legislation last Friday raising the government's debt limit by $800 billion and clearing the way for Congress to send him an overdue $388 billion spending bill to finance most federal agencies. The new federal borrowing cap is $8.18 trillion; that's 70 percent the size of the entire U.S. economy, and more than $2.4 trillion higher than the debt Mr. Bush inherited upon taking office in 2001. The US government is 8.5 trilion dollars in debt and the deficit this year is 336 billion. A scary perspective... It's only a billion. A billion is a difficult number to comprehend, but one advertising agency did a good job of putting that figure into perspective in one of its releases. (

    A billion seconds ago it was 1959.
    A billion minutes ago Jesus was alive.
    A billion hours ago our ancestors were living in the Stone Age.
    A billion days ago no one walked on earth.
    A billion dollars ago was only 8 hours and 20 minutes, at the rate (the US) government spends it. Got Gold & Silver dudes....


    January 26, 2006

    New 18 year High for Silver!


     I've been investing in Silver due to its long term supply deficit, you can probably tell I'm pleased. You see, for the last 15 years, we’ve had a deficit between mine supply and global demand. In 1980 we had about 1.5 billion ounces more silver above ground than we have today, so the stockpiles have been eaten away slowly but surely. I believe the average consumption rate has been about 100 million ounces a year. And just now the best studies in the world think that there are probably about a billion ounces of total silver, and only half of that is in bullion form, meaning 500 million ounces. That means that there are only about five years’ worth left. Expect to see $50.00 Silver in a few years.

    January 25, 2006

    Peak Oil is Past

    Kenneth Deffeyes' December 1, 2005 Lauritsen Lecture at the California Institute of Technology, entitled The Peak of World Oil Production: Thanksgiving Day 2005". "The methods which M. King Hubbert used to predict the peak of United States oil production can now be applied to world production. Dr. Deffeyes's analysis places the world oil production peak on Thanksgiving Day, 2005. Severe consequences are to be expected for transportation and for agriculture. It may be too late to arrange for a soft landing; the consequences of a hard landing are not cheerful to contemplate."

    January 24, 2006

    "War of the Worlds" as a Social Barometer

    "Skirts are getting longer. Movies are getting darker. The country seems a bit on edge, as if it waiting for another shoe to drop, after 9/11. Stories abound of a real estate bubble. Bush's polls are much below where Reagan or Clinton were at this point, down to the abysmal levels of Nixon's second term. Support for Iraq is where it was for Vietnam in 1968 when the country turned against the war.  Even that icon of the bull market, Arnold Schwarzenegger, is at such low poll numbers it is doubtful if he will run for re-election. Into this comes a very different type of Spielberg sci-fi movie. A dark one, a pessimistic one. One in which the aliens come out of the blue, from beneath the ground (from China, perhaps?). What does this say about the social mood of the US?

    No where is this movies-as-a social-barometer captured better than in the history of the "War of the Worlds."  The book came out in 1898, at the peak of European Civilization, and told a cautionary tale not to fall in love with all of our marvelous machines.  The aliens in science fiction movies are of course not truly aliens, but metaphors for whomever are our enemies.  In the case of H. G. Well's book, the enemy was us.  His book presages WWI, where we turned our terrible toys on ourselves, and ripped apart society. The Orson Welles famed radio broadcast came out in 1938, as we in the US watched in horror as Europe seemed on the brink of war again.  Given we were then in a terrible bear market, it was a dark and frightening treatment of the book. The aliens suddenly invading New Jersey were the Nazi's, of course, with their new weapons of war.  Ironic then that this radio broadcast presaged Pearl Harbor, and the invaders turned out to come from a different direction.  The first movie version of the book came out in 1953 when the US was wrapped up in an inordinate fear of communism; the aliens were the Red Scare.  We had created the first super weapon, the atomic bomb; but the Russians had not only caught up, they had built even bigger ones.  Could their science suddenly bring them to our shores with technical breakthroughs we could not defeat?  The hero of that treatment was a scientist, and we were ever hopeful our science could keep us safe.  That movie presaged Sputnik, where the Russian trumped the US and created the ICBM, which could bring these terrible weapons to our shores.  The Space Race was on.  It culminated with the moon landing in 1969, and brought is a great bull market movie, "2001: A Space Odyssey," where the spaceships were antiseptic and the aliens our own creations, artificial intelligent computers.

    Spielberg has done science fiction before, with a paradigmatic bull market movie in 1982: "E.T.," where the alien was misunderstood, and friendly, and our government was the enemy.  Now he brings us a dark and different type of "War of the Worlds."  The hero is an ordinary man, divorced, self-centered, angry, and dismissive of his kids.  He does not want to save the world, just his family; and he argues with his son, who wishes to join the fight.  The treatment is all about his personal battle, not the larger war with the aliens.  A very different approach than the 1953 movie.  All of our weapons and science fail us. As a people we do not act heroically, but as a mob, or as unbalanced. In the end, one of God's creations saves humanity.

    The aliens in this movie are of course terrorists, the enemy du jour.  In the opening sequence, the initial alien destruction rains dust on our hero, reminding us of the vast dust which covered NYC after the collapse of the twin towers.  The clothes of the dead often flutter from the sky, as we saw the paper debris drifting down after the collapse of the towers.  The people fleeing the aliens put up bulletin boards looking for missing ones, as also happened in NYC after 9/11.  The movie refers to events post 9/11, in particular the invasion of Iraq.  References abound to continued resistance against the alien invaders despite their technical advantage - and thus by implication to the resistance the Iraqi insurgents against us.  Even the son's forgotten homework assignment is topical - the failure of the French occupation in Algeria.

    The aliens themselves look like the invaders in a bull market sci-fi movie, "Independence Day." Is this simply a paean to an earlier blockbuster?   In that movie, the aliens are interplanetary locusts, who come and strip a planet, and move on.  Perhaps there is more to this, given our war with Islamism.  It was once asked of a 14th Century Muslim Philosopher, why do Muslims prefer deserts?  His answer was that Muslims create deserts.  Hence an allusion to locust-like aliens is somehow fitting, if not very politically correct.  (But then, political correctness is a bull market phenomenon.  In a bear market, ethnic humor will re-emerge, from below ground, as it were.)

    But there is more to these aliens than a reflection of 9/11.  They are an event or enemy yet undefined - something that is about to happen.  In the movie, the aliens emerge inexplicably from underground, from where they lay in wait for millennia.  Perhaps presaging another terrorist attack, but perhaps something else."

    January 22, 2006

    13 Trading Rules


    R U L E # 1
    Never, ever, under any circumstance, should one add to a losing position ... not EVER!

    Averaging down into a losing trade is the only thing that will assuredly take you out of the investment business. This is what took LTCM out. This is what took Barings Brothers out; this is what took Sumitomo Copper out, and this is what takes most losing investors out. The only thing that can happen to you when you average down into a long position (or up into a short position) is that your net worth must decline. Oh, it may turn around eventually and your decision to average down may be proven fortuitous, but for every example of fortune shining we can give an example of fortune turning bleak and deadly.

    By contrast, if you buy a stock or a commodity or a currency at progressively higher prices, the only thing that can happen to your net worth is that it shall rise. Eventually, all prices tumble. Eventually, the last position you buy, at progressively higher prices, shall prove to be a loser, and it is at that point that you will have to exit your position. However, as long as you buy at higher prices, the market is telling you that you are correct in your analysis and you should continue to trade accordingly.

    R U L E # 2
    Never, ever, under any circumstance, should one add to a losing position ... not EVER!

    We trust our point is made. If "location, location, location" are the first three rules of investing in real estate, then the first two rules of trading equities, debt, commodities, currencies, and so on are these: never add to a losing position.


    R U L E # 3
    Learn to trade like a mercenary guerrilla.

    The great Jesse Livermore once said that it is not our duty to trade upon the bullish side, nor the bearish side, but upon the winning side. This is brilliance of the first order. We must indeed learn to fight/invest on the winning side, and we must be willing to change sides immediately when one side has gained the upper hand.

    Once, when Lord Keynes was appearing at a conference he had spoken to the year previous, at which he had suggested an investment in a particular stock that he was now suggesting should be shorted, a gentleman in the audience took him to task for having changed his view. This gentleman wondered how it was possible that Lord Keynes could shift in this manner and thought that Keynes was a charlatan for having changed his opinion. Lord Keynes responded in a wonderfully prescient manner when he said, "Sir, the facts have changed regarding this company, and when the facts change, I change. What do you do, Sir?" Lord Keynes understood the rationality of trading as a mercenary guerrilla, choosing to invest/fight upon the winning side. When the facts change, we must change. It is illogical to do otherwise.


    R U L E # 4
    Capital is in two varieties: Mental and Real, and, of the two, the mental capital is the most important.

    Holding on to losing positions costs real capital as one's account balance is depleted, but it can exhaust one's mental capital even more seriously as one holds to the losing trade, becoming more and more fearful with each passing minute, day and week, avoiding potentially profitable trades while one nurtures the losing position.


    R U L E # 5
    The objective of what we are after is not to buy low and to sell high, but to buy high and to sell higher, or to sell short low and to buy lower.

    We can never know what price is really "low," nor what price is really "high." We can, however, have a modest chance at knowing what the trend is and acting on that trend. We can buy higher and we can sell higher still if the trend is up. Conversely, we can sell short at low prices and we can cover at lower prices if the trend is still down. However, we've no idea how high high is, nor how low low is.

    Nortel went from approximately the split-adjusted price of $1 share back in the early 1980s, to just under $90/share in early 2000 and back to near $1 share by 2002 (where it has hovered ever since). On the way up, it looked expensive at $20, at $30, at $70, and at $85, and on the way down it may have looked inexpensive at $70, and $30, and $20--and even at $10 and $5. The lesson here is that we really cannot tell what is high and/or what is low, but when the trend becomes established, it can run far farther than the most optimistic or most pessimistic among us can foresee.

    R U L E # 6
    Sell markets that show the greatest weakness; buy markets that show the greatest strength.

    Metaphorically, when bearish we need to throw our rocks into the wettest paper sack for it will break the most readily, while in bull markets we need to ride the strongest wind for it shall carry us farther than others.

    Those in the women's apparel business understand this rule better than others, for when they carry an inventory of various dresses and designers they watch which designer's work moves off the shelf most readily and which do not. They instinctively mark down the work of those designers who sell poorly, recovering what capital then can as swiftly as they can, and use that capital to buy more works by the successful designer. To do otherwise is counterintuitive. They instinctively buy the "strongest" designers and sell the "weakest." Investors in stocks all too often and by contrast, watch their portfolio shift over time and sell out the best stocks, often deploying this capital into the shares that have lagged. They are, in essence, selling the best designers while buying more of the worst. A clothing shop owner would never do this; stock investors do it all the time and think they are wise for doing so!


    R U L E # 7
    In a Bull Market we can only be long or neutral; in a bear market we can only be bearish or neutral.

    Rule 6 addresses what might seem like a logical play: selling out of a long position after a sharp rush higher or covering a short position after a sharp break lower--and then trying to play the market from the other direction, hoping to profit from the supposedly inevitable correction, only to see the market continue on in the original direction that we had gotten ourselves exposed to. At this point, we are not only losing real capital, we are losing mental capital at an explosive rate, and we are bound to make more and more errors of judgment along the way.

    Actually, in a bull market we can be neutral, modestly long, or aggressively long--getting into the last position after a protracted bull run into which we've added to our winning position all along the way. Conversely, in a bear market we can be neutral, modestly short, or aggressively short, but never, ever can we--or should we--be the opposite way even so slightly.

    Many years ago I was standing on the top step of the CBOT bond-trading pit with an old friend Bradley Rotter, looking down into the tumult below in awe. When asked what he thought, Brad replied, "I'm flat ... and I'm nervous." That, we think, says it all...that the markets are often so terrifying that no position is a position of consequence.

    R U L E # 8
    "Markets can remain illogical far longer than you or I can remain solvent."

    I understand that it was Lord Keynes who said this first, but the first time I heard it was one morning many years ago when talking with a very good friend, and mentor, Dr. A. Gary Shilling, as he worried over a position in U.S. debt that was going against him and seemed to go against the most obvious economic fundamentals at the time. Worried about his losing position and obviously dismayed by it, Gary said over the phone, "Dennis, the markets are illogical at times, and they can remain illogical far longer than you or I can remain solvent." The University of Chicago "boys" have argued for decades that the markets are rational, but we in the markets every day know otherwise. We must learn to accept that irrationality, deal with it, and move on. There is not much else one can say. (Dr. Shilling's position shortly thereafter proved to have been wise and profitable, but not before further "mental" capital was expended.)

    R U L E # 9
    Trading runs in cycles; some are good, some are bad, and there is nothing we can do about that other than accept it and act accordingly.

    The academics will never understand this, but those of us who trade for a living know that there are times when every trade we make (even the errors) is profitable and there is nothing we can do to change that. Conversely, there are times that no matter what we do--no matter how wise and considered are our insights; no matter how sophisticated our analysis--our trades will surrender nothing other than losses. Thus, when things are going well, trade often, trade large, and try to maximize the good fortune that is being bestowed upon you. However, when trading poorly, trade infrequently, trade very small, and continue to get steadily smaller until the winds have changed and the trading "gods" have chosen to smile upon you once again. The latter usually happens when we begin following the rules of trading again. Funny how that happens!


    R U L E # 10
    To trade/invest successfully, think like a fundamentalist; trade like a technician.

    It is obviously imperative that we understand the economic fundamentals that will drive a market higher or lower, but we must understand the technicals as well. When we do, then and only then can we, or should we, trade. If the market fundamentals as we understand them are bullish and the trend is down, it is illogical to buy; conversely, if the fundamentals as we understand them are bearish but the market's trend is up, it is illogical to sell that market short. Ah, but if we understand the market's fundamentals to be bullish and if the trend is up, it is even more illogical not to trade bullishly.

    R U L E # 11
    Keep your technical systems simple.

    Over the years we have listened to inordinately bright young men and women explain the most complicated and clearly sophisticated trading systems. These are systems that they have labored over; nurtured; expended huge sums of money and time upon, but our history has shown that they rarely make money for those employing them. Complexity breeds confusion; simplicity breeds an ability to make decisions swiftly, and to admit error when wrong. Simplicity breeds elegance.

    The greatest traders/investors we've had the honor to know over the years continue to employ the simplest trading schemes. They draw simple trend lines, they see and act on simple technical signals, they react swiftly, and they attribute it to their knowledge gained over the years that complexity is the home of the young and untested.


    R U L E # 12
    In trading/investing, an understanding of mass psychology is often more important than an understanding of economics.

    Markets are, as we like to say, the sum total of the wisdom and stupidity of all who trade in them, and they are collectively given over to the most basic components of the collective psychology. The dot-com bubble was indeed a bubble, but it grew from a small group to a larger group to the largest group, collectively fed by mass mania, until it ended. The economists among us missed the bull-run entirely, but that proves only that markets can indeed remain irrational, and that economic fundamentals may eventually hold the day but in the interim, psychology holds the moment.

    And finally the most important rule of all:


    R U L E # 13
    Do more of that which is working and do less of that which is not.

    This is a simple rule in writing; this is a difficult rule to act upon. However, it synthesizes all the modest wisdom we've accumulated over thirty years of watching and trading in markets. Adding to a winning trade while cutting back on losing trades is the one true rule that holds--and it holds in life as well as in trading/investing.

    If you would go to the golf course to play a tournament and find at the practice tee that you are hitting the ball with a slight "left-to-right" tendency that day, it would be best to take that notion out to the course rather than attempt to re-work your swing. Doing more of what is working works on the golf course, and it works in investing.

    If you find that writing thank you notes, following the niceties of life that are extended to you, gets you more niceties in the future, you should write more thank you notes. If you find that being pleasant to those around you elicits more pleasantness, then be more pleasant.

    And if you find that cutting losses while letting profits run--or even more directly, that cutting losses and adding to winning trades works best of all--then that is the course of action you must take when trading/investing. Here in our offices, as we trade for our own account, we constantly ask each other, "What's working today, and what's not?" Then we try to the very best of our ability "to do more of that which is working and less of that which is not." We've no set rule on how much more or how much less we are to do, we know only that we are to do "some" more of the former and "some" less of the latter. If our long positions are up, we look at which of those long positions is doing us the most good and we do more of that. If short positions are also up, we cut back on that which is doing us the most ill. Our process is simple.

    We are certain that great--even vast--holes can and will be proven in our rules by doctoral candidates in business and economics, but we care not a whit, for they work. They've proven so through time and under pressure. We try our best to adhere to them.

    This is what I have learned about the world of investing over three decades. I try each day to stand by my rules. I fail miserably at times, for I break them often, and when I do I lose money and mental capital, until such time as I return to my rules and try my very best to hold strongly to them. The losses incurred are the inevitable tithe I must make to the markets to atone for my trading sins. I accept them, and I move on, but only after vowing that "I'll never do that again."

    January 21, 2006

    America's day as a superpower over

    Creators Syndicate
    Jan 12, 2006

    President George W. Bush has destroyed America's economy, along with America's reputation as a truthful, compassionate, peace-loving nation that values civil liberties and human rights.

    Nobel Prize-winning economist Joseph Stiglitz and Harvard University budget expert Linda Bilmes have calculated the cost to Americans of Bush's Iraq war to be between $1 trillion and $2 trillion. This figure is five to 10 times higher than the $200 billion Bush's economic adviser Larry Lindsey estimated.

    Lindsey was fired by Bush because his estimate was three times higher than the $70 billion figure that the Bush administration used to mislead Congress and the American voters about the burden of the war. You can't work in the Bush administration unless you are willing to lie for Dub-ya.

    Americans need to ask themselves if the White House is in competent hands when a $70 billion war becomes a $2 trillion war. Bush sold his war by understating its cost by a factor of 28.57. Any financial officer anywhere in the world whose project was 2,857 percent over budget would instantly be fired for utter incompetence.

    Bush's war cost almost 30 times more than he said it would because the moronic neoconservatives that he stupidly appointed to policy positions told him the invasion would be a cakewalk. Neocons promised minimal U.S. casualties. Iraq already has cost 2,200 dead Americans and 16,000 seriously wounded - and Bush's war is not over yet. The cost of lifetime care and disability payments for the thousands of U.S. troops who have suffered brain and spinal damage was not part of the unrealistic rosy picture that Bush painted.

    Stiglitz's $2 trillion estimate is OK as far as it goes. But it doesn't go far enough. My own estimate is a multiple of Stiglitz's.

    Stiglitz correctly includes the cost of lifetime care of the wounded, the economic value of destroyed and lost lives, and the opportunity cost of the resources diverted to war destruction. What he leaves out is the war's diversion of the nation's attention away from the ongoing erosion of the U.S. economy. War and the accompanying domestic police state have filled the attention span of Americans and their government. Meanwhile, the U.S. economy has been rapidly deteriorating.

    In 2005, for the first time on record, consumer, business and government spending exceeded the total income of the country.

    America can consume more than it produces only if foreigners supply the difference. China recently announced that it intends to diversify its foreign exchange holdings away from the U.S. dollar. If this is not merely a threat in order to extort even more concessions from Bush, Americans' ability to consume will be brought up short by a fall in the dollar's value, as China ceases to be a sponge that is absorbing an excessive outpouring of dollars. Oil-producing countries might follow China's lead.

    Now that Americans are dependent on imports for their clothing, manufactured goods, and even high technology products, a decline in the dollar's value will make all these products much more expensive. American living standards, which have been treading water, will sink.

    A decline in living standards is an enormous cost and will make existing debt burdens unbearable. Stiglitz did not include this cost in his estimate.

    Even more serious is the war's diversion of attention from the disappearance of middle-class jobs for university graduates. The ladders of upward mobility are being rapidly dismantled by offshore production for U.S. markets, job outsourcing and importation of foreign professionals on work visas. In almost every U.S. corporation, U.S. employees are being dismissed and replaced by foreigners who work for lower pay. Even American public school teachers and hospital nurses are being replaced by foreigners imported on work visas.

    The American Dream has become a nightmare for college graduates who cannot find meaningful work.

    This fact is made abundantly clear from the payroll jobs data over the past five years. December's numbers, released on Jan. 6, show the same pattern that I have reported each month for years. Under pressure from offshore outsourcing, the U.S. economy only creates low-productivity jobs in low-pay domestic services.

    Only a paltry number of private sector jobs were created - 94,000. Of these 94,000 jobs, 35,800 - or 38 percent - are for waitresses and bartenders. Health care and social assistance account for 28 percent of the new jobs, and temporary workers account for 10 percent. These three categories of low-tech, nontradable domestic services account for 76 percent of the new jobs. This is the jobs pattern of a poor Third World economy that consumes more than it produces.

    America's so-called First World superpower economy was only able to create in December a measly 12,000 jobs in goods-producing industries, of which 77 percent are accounted for by wood products and fabricated metal products - the furniture and roofing metal of the housing boom that has now come to an end. U.S. employment declined in machinery, electronic instruments, and motor vehicles and parts.

    Two thousand six hundred jobs were created in computer systems design and related services, depressing news for the several hundred thousand unemployed American computer and software engineers.

    When manufacturing leaves a country, engineering, R&D and innovation rapidly follow. Now that outsourcing has killed employment opportunities for U.S. citizens and even General Motors and Ford are failing, U.S. economic growth depends on how much longer the rest of the world will absorb our debt and finance our consumption.

    How much longer will it be before "the world's only remaining superpower" is universally acknowledged as a debt-ridden, hollowed-out economy desperately in need of IMF bailout?

    Paul Craig Roberts, senior research fellow at the Hoover Institution at Stanford University, writes for Creators Syndicate.

    January 20, 2006

    What the Iran 'nuclear issue' is really about

    Jan 21, 2006
    By Chris Cook

    Speaking Freely is an Asia Times Online feature that allows guest writers to have their say.

    It is said that there is the reason they give; and then there is the real reason. Nowhere is this more true, perhaps, than in Iran.

    My experience with Iran began four and a half years ago in June 2001 when, through my Iranian business partner, I wrote to the then governor of the Iranian central bank, Dr Mohsen Nourbakhsh.
    This letter was written on the basis of my experience as a former director of the International Petroleum Exchange and in the aftermath of allegations I made in relation to market manipulation on the IPE the previous year, which were dismissed by a commissioner appointed by the exchange. I still regret that I used the description "systematic" rather than "systemic" of this alleged manipulation, but that is another story.

    In this letter I pointed out that the structure of global oil markets massively favors intermediary traders and particularly investment banks, and that both consumers and producers such as Iran are adversely affected by this. I recommended that Iran consider as a matter of urgency the creation of a Middle Eastern energy exchange, and particularly a new Persian Gulf benchmark oil price.

    It is therefore with wry amusement that I have seen a myth being widely propagated on the Internet that the genesis of this "Iran bourse" project is a wish to subvert the US dollar by denominating oil pricing in euros.

    As anyone familiar with the Organization of Petroleum Exporting Countries will know, the denomination of oil sales in currencies other than the dollar is not a new subject, and as anyone familiar with economics will tell you, the denomination of oil sales is merely a transactional issue: what matters is in what assets (or, in the case of the United States, liabilities ) these proceeds are then invested.

    After a couple of years of apparent inaction, my colleague and I were invited to put together a consortium to tender for a project to create such an exchange and, after a presentation at the central bank in Tehran in May 2004, we were successful, as reported in The Guardian at the time. We subsequently learned that the delay had been due to initial opposition from the Saudis and this opposition was withdrawn after the attacks of September 11, 2001, and the subsequent US-led invasion of Iraq.

    A major feasibility study was carried out in the summer of 2004 - for which we still have not been paid by the Iranian Oil Ministry - and after this, the process became bogged down in turf battles between the Oil Ministry and the Ministry for the Economy.

    We met president Mohammad Khatami in December 2004 to resolve this problem and then spent considerable time with his close advisers, from whom we received powerful backing. Progress was made, to the extent that an exchange entity was incorporated and premises purchased on Kish Island in the Persian Gulf.

    In the second quarter of 2005 the real opposition from within the Oil Ministry - from factions opposed to shedding any light on the sales regime - was becoming apparent. However, as the battle was about to be joined, Khatami's period in office came to an end and the presidential election in August intervened.

    Neither we, nor anyone we knew, expected the result of the election, still less the events after it. Three times over a period of three months an oil minister was nominated by the new president, Mahmud Ahmadinejad, from among his trusted colleagues and three times they were turned down by the majlis (Iranian parliament), until finally an experienced insider was appointed in early December. Only now are further levels of appointments being made by the new minister.

    Ahmadinejad is on record as saying that he favors transparency in the Iranian oil market. As anyone familiar with the City of London and Wall Street will know, transparency is the enemy of private profit, and it is this factor that was behind the delays in developing the bourse project.

    However, we remain hopeful that the strategy we recommended, which is based upon (a) gradual and organic introduction of pricing built upon the neutral function of transaction registration and (b) a simple (and Islamically sound) partnership-based "clearing union" synthesis of bilateral trading and a multilateral guarantee, will in due course be taken forward.

    One of the most interesting aspects of the process was that during our brief spell of contacts with decision-makers, some insight into current Iranian policy was possible - in particular, the nuclear question. In our conversations we were left in no doubt that it suits both the US and Iran for the issue to be seen to be that of the Iranian "threat" from nuclear weapons.

    In fact the issue is a proxy for Iraq: try looking in the media prior to the events in Fallujah, Iraq, for anything more than desultory mention of this "issue". But once factions in Iran funded Muqtada al-Sadr to the tune of $50 million and the US body count started to rise, then the issue began to attain its current level of importance.

    Now that pro-Iranian Shi'ite elements are taking a primary role in the emerging government in Iraq, we see the nuclear temperature rising further.

    The realpolitik is of course that those in power in the US and Iran have the reason they give - and the real reason - for what they do: and for the US, the real reason is and has been for many years energy security above any other consideration.
    Chris Cook is a former director of the International Petroleum Exchange. He is now a strategic market consultant, entrepreneur and commentator. Reprinted with permission from

    January 19, 2006

    The Mogambo is worth quoting in full

    I knew something was wrong when I woke up Friday morning. Not only was my Wall Street Journal missing, but my wife was acting real nervous and suspicious, and the damned kid was hiding behind the couch. What the hell is going on? I soon found out, and, as obviously predicted, was highly frightened to see that Total Fed Credit actually declined by $17 billion last week! The ability, or actions, of the banks in creating money out of thin air was, gulp, lowered by $17 billion dollars? In one freaking WEEK?

    To be fair, reversing the excesses of the customary end-of-year monetary goosing by the Federal Reserve is pretty par for the course, as it happens every year about this time. But meanwhile, the money supply is still growing quite handsomely, as reported by Bill Bonner at, who writes "In the latest reported week, more than $25 billion was added to the nation’s money supply. If this were to continue, it would add more new money in 18 months than the present value of all the gold ever mined." Hahaha! The money supply is going up faster than the growth in the economy, which means that prices will increase (to absorb all that money), and the supply of money is increasing, in one lousy freaking year, more than the value of all the gold in the whole world? And now you wonder if gold is going to go up in price? Hahaha! It's not IF gold will go up, my darling little Mogambo larva (DLML), but how freaking MUCH it is going to go up in price! And I am betting gold will go up a LOT! And if it does not, then I will be surprised as hell (SAH) because this would be the first time in all of history when gold did NOT rise mightily in price when faced with the enormous economic idiocies, like the ones that currently bedevil us, especially when using a fiat currency as money!

    But we aren't here to talk about gold and how freaking much money is going to be made in gold, although it is one of my favorite things to talk about. Instead, we were talking about the money supply, and almost as if by accident I happened upon the essay "The Fed's Money Supply Armament Is Underway" by Robert McHugh, which was posted on Financial He writes that the money supply figure known as M-3 "has been launched into outer space, up another $56.3 billion last week, up $92.4 billion over the past two. This is some real horsepower. Over six weeks," he says, M-3 is "up $177.8 billion. These annualized growth rates are 28.7 percent, 23.6 percent, and 15.3 percent respectively."

    As soon as I read that, I gulped, suddenly nervous and edgy. He then soothingly adds that "Those are the seasonally adjusted figures." I think to myself "Whew! That was close! I coulda had a heart attack!" Now I am starting to relax a little, because adjusting "seasonally" and "annually" are two of my favorite statistical tricks. For example, suppose my wife starts up with that same old whining crap of hers, and says "You are a lazy, mean, worthless slob and I am sorry I married you, blah blah blah! And now I am going to make your life miserable, you smelly, horrible, disgusting creep blah blah blah."

    In the past I would have suffered the humiliation like a manly Mogambo man (MMM), as she is (I am ashamed to say) right. But nowadays, things are different! Instead, I duck into a convenient phone booth, and emerge, seconds later, masked and caped, as Mogambo Statistician Man (MSM), whereupon I cleverly cut out her diabolical, hate-filled heart by brandishing real statistical proof (RSP) that she is a lying, hateful demon from hell.

    "Wrong, hateful, lying she-devil (HLSD)!" I dramatically say. "I am NOT smelly, as I took a shower this morning! And adjusting the last few hours to an annual rate, I am thus proved to be ALWAYS fresh as a damned daisy, you hateful old crab!" If she is not soon reeling by this powerful statistical onslaught, then I hit her with my backup statistical proof, and triumphantly declare "And as for seasonally-adjusting, you nasty old biddy, since I took a shower today, historically this is very early in winter for me to be taking one. Seasonally adjusting the statistics, usually I have taken only 0.0042 baths so early in the year, and so I am waaaAAAaaayyy over trend here, so just shut the hell up! Shut up, shut up, shutupshutupshutup!" which does NOT, in case you are wondering, shut her up. Even though you just PROVED that she was an idiot who doesn't know what she is talking about! Sheesh! Women! Who can understand 'em, eh?

    But this is not about how the heroic and long-suffering Mogambo tries so hard to be a good husband and father and how he is rewarded for his magnanimous efforts by treachery, although it DOES prey on my mind. Seeing that I am temporarily distracted, suddenly Mr. McHugh springs the trap, and says "The raw, non-seasonally adjusted, figure is up $293.3 billion over the past 12 weeks, on a pace to add $1.2 trillion in money to the economy." Bam! Right between the eyes! Stunned, I had to read that sentence several times, as my mind kept refusing to comprehend what I was reading, probably because I was screaming in fear. This kind of wild increase in money and debt gives me a case of the Screaming Mogambo Willies (SMW). Then he says, calmly, "Wow." That's it. Just "wow."

    Outraged, I leap up and, utilizing my famous Mogambo Editor's Pen (MED), write in big, red letters on the wall, "Exclamation points missing! Exclamation points missing missing missing!!!" and I am angrily stabbing the wall with the pen for additional emphasis.

    In fact, now that I think about it, this will be my entry into this year's hotly-awaited contest, the "International Most Egregious Lack Of Exclamation Points Competition"! In correct Mogambo literary style (CMLS), it should have read "Wow!!!!" which, when applied to economics, is your signal to buy more gold and wear a sidearm for the next couple of weeks, just in case. I urge these precautions because this kind of incredible, profligate, unbelievable monetary inflation means that we will get a corresponding price inflation after a just a little while, and people typically go berserk ("freaking bananas") when they can't afford to even live anymore because prices are so high, and then the kids start getting hungry and whiny and crybaby boo hoo hoo, and they think that just because I am their father that I am just going to, I suppose, voluntarily pay more money for food, like I have a magical money tree in the backyard or something.

    But if you are sick of hearing me run my big, fat mouth and you want some hard, real evidence of inflation, then I can think of only two good sources. 1) Me grabbing you by the front of your shirt and screaming at you, while little drops of Mogambo spittle (LDOMS) hit you in the face, and your ears are ringing ringing ringing with the noise, and you cringe and struggle and cry, but I don’t stop until you admit that you truly believe that inflation is up dramatically, up horrifically, up destructively and you agree that "We're freaking doomed!"

    The other, less fun way, hereby denoted as 2), is to read things like the article entitled "Energy costs drive US inflation" on the website. It read, "Wholesale prices in the US rose at their fastest rate in 15 years during 2005, as the effects of soaring energy prices took their toll." The fastest rise in price inflation in fifteen freaking years? My hands shake at the prospect.

    The actual numbers are no picnic themselves, in that "The Labor Department producer price index (PPI) rose 5.4% in 2005, driven by a 23.9% hike in energy costs. For December, the PPI - which gauges price changes before they reach the customer - rose 0.9%, the biggest jump since September's 1.7%."

    Not only that, but "Food costs moved up by nearly 1% in December, following a 0.5% November gain." If you are a carnivore, then you're in better shape than those poor vegetarians, who got clobbered in December as the price of vegetables "soared 22% during the month, the biggest gain in more than a year." But even we vicious, meat-eating, super-predator omnivores are looking at inflation in food prices that are, annualized, 12% a year! This is the stuff of Nightmares on Federal Reserve Street, which is not a movie, but if it was, it would scare the hell out of you, and you would die of a heart attack just from watching the fearful effects of inflation caused by creating too much money and credit, which is why they don't make the movie.

    And speaking of rising energy costs, Doug Noland passes on the news from the Financial Times, where Carola Hoyos writes that “The oil revenues of the Organisation of the Petroleum Exporting Countries, the cartel that controls 40 per cent of the world’s oil supplies, will increase by 10 per cent to a record $522bn this year, the US Department of Energy forecasts."

    Now, I am sure that you noticed that they didn't say that OPEC was going to be pumping 10% more oil, mostly because OPEC ain't a-gonna be pumping no 10% more oil. And in fact, if Peak Oil is here, they will probably be pumping LESS oil. So the increase in "oil revenues" that OPEC will be making must, by process of elimination, be because of higher prices. Yikes! So prices are going to be 10% higher?

    Or, if you want more proof of inflation, how about Jeff Clark in the Rude Awakening column? He writes that "palladium and platinum are becoming so valuable, the St. Louis Post Dispatch reports, that they are become the target of thieves, who are stealing cars in order to extract these precious metals from catalytic converters."

    So I raise my hand and say "Hey! Here's an idea! How about starting a company that manufactures booby traps for catalytic converters, so that if somebody tries to steal it, it blows their damned arms off?" A look of horror crosses his face, and taking a few steps away from me in disgust, he hurriedly goes on to say "The fundamental argument for owning palladium is growing stronger by the day. That's because industrial demand is growing stronger by the day. (And it probably doesn't hurt that commodity funds are continuing to pour money into the precious metals sector). Palladium can perform many of the same industrial uses as its sister metal, platinum. Therefore, in the palladium market, it is important to pay attention to the price relationship between these two metals."

    "Hmmm!" I think to myself. "Is he talking about some linkage of the two metals that I can exploit? And maybe make a zillion dollars by exploiting this linkage between the two metals? And then maybe I can pay back some of the money I have borrowed from people all these years? Nah! But can I exploit the price linkage to maybe make a zillion dollars anyway?" Well, perhaps! Listen, as I did, as he explains, "Throughout the late 1990s, these two precious metals tracked each other pretty closely. But in 2000, the price of palladium spiked due to supply disruptions from Russia. As the palladium price soared, many industries began substituting other cheaper platinum group metals. So by the time Russia resumed shipping palladium, industrial demand had disappeared. The palladium price plummeted from more than $1,000 an ounce in 2000 to less than $200 an ounce by 2003. But palladium finally started inching up again late last year. This appears to be the start of something big." Why? He explains, "I expect industrial demand to continue booming, as long as the price spread between platinum and palladium remains as wide as it is currently." Oh! That's why; the linkage we were looking for, with which to make that zillion dollars! So buy palladium! I love this investing stuff because it is so easy!

    Anyway, the bottom-line upshot of all of this is that today, right now, is the perfect time to buy palladium, as he more than intimates when he says "With platinum at $1,030 per ounce and palladium at $270 per ounce, the price differential between the two has reached a record-wide spread."

    Bill Bonner abruptly comes out of his office, sniffs the air, and says "What in the hell stinks around here? Is the stupid Mogambo in the damned building again?" I pop up and say "Hi, Mr. Bonner!" and he demands to know who let me in, and I tell him we are talking about gold and palladium as I was just leaving. He looks me right in the eye and says that if you want to talk about gold, then we might be interested to learn that "The price has doubled since George W. Bush became president." Yes, that was sort interesting, but as an old-time Republican, I am ashamed and embarrassed to talk about it. Or Bush. Or neo-cons. As dispiriting as that is, my attitude is immediately improved when he goes on to say "Our guess is that it will double again before he leaves office"! Suddenly, without warning, the great grasping greed gland of The Mogambo (GGGGOTM) squirts out some hormone into my bloodstream ("squeeeshhhhh!"), and I instantly realize that 1) if the Constitution is still in force and 2) if the election goes off when planned, then 3) gold will double in a little more than two short years from now! Hahaha! And the shares of mining companies ought to, what? Triple? Quadruple? Hahaha! Bonanza! I love this investing stuff! It's so easy when central banks act so stupidly!

    - Doug Casey, in an essay on the site, gets into discussing government, and says "Frankly, I never expect anything good from government. And here I refer to the institution itself. How can you, considering that its main products are wars, pogroms, prosecutions, persecutions, taxation, regulation, inflation, and assorted idiocy?"

    As if to prove the point, Bill Bonner reports that "Senator Max Baucus of Montana, along with many others, think there is something wrong. It seems to them that China must be getting away with something. They're not sure what it is that China is doing wrong, but they're determined to put a stop to it. 'Washington may take measures,' Baucus warned the Chinese."

    Like what? Well, how about "Among the measures Washington may take is a trade tariff"? What is the effect of a tariff? It "would increase the cost of Chinese exports by nearly 30%." Hahaha! A thirty percent price inflation! Punishing the Chinese by making things more expensive for us? This idiot can't possibly be serious! I howl in my outrage! OwwwwWWWWwwww!

    Bill Bonner is much more dignified when he says "What are the poor lumpenhouseholders to do? They pay more for energy. They pay more for healthcare. Their house-as-ATM financing strategy is breaking down. And they earn less money than they did two years ago. About the only thing they have left are those Everyday Low Prices on manufactured goods from China. And now, along comes a U.S. senator with a plan to force prices up."

    But, then again, that is what government does! And it just keeps getting worse and worse because there is so much, so much, so much, so damned much government. And how big is the damned government, anyway? In a clever attempt to demonstrate with gestures, I stretch my arms out real wide and say "Bigger than this, even!" Carla Howell, writing the essay "Big Government Is Even Bigger Than You Think " on, laughs in contempt at my puny Mogambo efforts (PME), and has a better way of demonstrating how big the government is. "Federal, state, and local governments together," she writes, "directly spend a whopping $4.8 Trillion – every year." Assuming a $12 trillion dollar economy, this is 40% of GDP! Note the use of an exclamation point.

    But then there is also the "off-budget" money. She writes "Conservative estimates give us total off-the-books federal, state, and local government spending of at least $700 billion annually. Add this to the on-the-books spending, and you get government spending of $5.5 Trillion – every year!" Again assuming a $12 trillion dollar economy, this is 46% of GDP!! Note the use of the rare double exclamation points.

    "Big Government mandates – compels us to spend – another $1.5 Trillion to $3 Trillion every year. This is the externalized cost of government, i.e., the amount that governments force businesses, non-profits, and citizens to spend to comply with government regulations. Combined direct and mandated government spending may well exceed $7 Trillion." Yikes! The government spends more than half of the entire economy!!! Note the extremely rare triple exclamation points! This is big-time stuff in the category of "Economic insanity."

    So how would you describe how big government is, but without actually using numbers? She thinks about it for a moment. "Big Government in America is so huge," she says, "it boggles the mind and numbs the senses."

    And if you are thinking "What in the hell do they do with all the money?", then welcome to the club. Well, perhaps Robert B. can help enlighten us when he writes "The 10 Commandments: 179 words. The Declaration of Independence: 1,300 words. The US Government regulations on the sale of cabbage: 26,911 words. "Hahaha! Now you know what they are doing with their time!

    - There has been a lot of consternation lately about whether another "confiscation" of gold, like FDR did in 1934, is right around the corner. To be accurate, I will quickly add that no gold was actually confiscated, as the owners of bullion gold took the gold (worth $20 dollars per ounce) to the bank, and the bank took the gold and gave them twenty bucks in cash for it. Remember, the purpose of rounding up the gold in 1934 was to "free up" idle wealth (in the form of gold tucked under the mattress) and put depreciating dollars in people's pockets, so that they would (theoretically and hopefully) spend some (increasing aggregate demand), and put some in the bank (creating bank reserves).

    And another big, burning question for The Mogambo (BBQFTM) is "What about numismatic coins that are so rare that they acquire premiums over the melt value of the coin and were exempted from the FDR 'confiscation'?" The real reason that rare and valuable coins were exempted from the gold round-up was that the government would have to pay the higher prices, as the Constitution prevents the government from merely taking your coins, but has to pay full market price for them. So, paying $20 an ounce for 24K raw, bullion gold was plenty enough, but picking up one more stinking ounce in the form of a rare coin valued at $5,000 was another thing all together!

    And besides, there weren't that many rare and valuable coins, and it wasn't worth the hassle nor expense, especially since Mogambo-hardened sharpies like you, seeing that the government had boxed itself in, would have colluded beforehand to bid up the price of rare coins, selling them back and forth between us, back and forth, around and around, driving the prices to astronomical levels, which the government would be, by law, required to pay. And THAT is why valuable and rare coins were exempted.

    - I don't know why, but it struck me as real funny when Chris/Super says "That guy bringing all those gifts over the years wasn't Santa Claus, but a future bill collector wrapped in a China flag."

    Glenn K also sent me the something else that confused me. It was a news bit from Reuters that read "Increased globalization has lessened the usefulness of concepts such as output gaps or capacity restraints for monetary policy-makers, Dallas Federal Reserve Bank President Richard Fisher said on Friday. The concepts of output gaps for economists or capacity constraints ... are rendered nonexistent." Huh? I am so confused that I don't know what to think. I include it because I am not only nonplussed and, thus, at a complete loss to even vaguely comprehend what he means, but also because it seems somehow important to know that such gibberish came out of the mouth of the president of a Federal Reserve Bank.

    - Rick Ackerman of Rick's Picks actually used the phrase "global annihilation" in the context of something economic, like "We're freaking doomed to global annihilation, just like The Mogambo said we would! He is a god! Fall on your knees and worship Mogambo! All hail Mogambo!" Well, okay, truthfully, he did not, you know, actually use those EXACT words. But he DID use the phrase "global annihilation", which is bad enough!

    Anyway, then he asked "Where is Klaatu when we need him?" Hahahaha! But is it entirely coincidental that Mr. Ackerman brought up Klaatu from the movie, "The Day the Earth Stood Still"? You be the judge: It is a little-known fact that if you play the famous phrase "Klaatu barada nictu" backward, you hear "Run for your freaking life, Klaatu! These people are freaking morons!" Which could, and probably does, explain why Mr. Ackerman mentioned both "global annihilation" and Klaatu at the same time!

    - Adam Hamilton of Zeal and appearing on hears me talking about gold, and says "prices trading near 25-year highs. The core tenet of successful investing is to buy low and sell high. So if an asset is trading at a quarter-century high-water mark, then odds are its price is pretty darned high at the moment and therefore a bad buy, right?" I silently nod my head like I understood what in the hell he was talking about.

    Then he says "But gold, believe it or not, is still a great contrarian investment even at today's quarter-century nominal highs. How is this seemingly absurd thesis possible?" Everybody is suddenly looking at me to supply the answer, as if I had any freaking clue. But being the classy guy that he is, Mr. Hamilton saves my bacon and immediately goes on to say "The answer is the measuring stick for any investment pricing, the US dollar, has radically changed in the last several decades. A dollar today is worth vastly less than a dollar was 25 years ago, the last time gold closed over $550."

    He says to take a look at prices in the early 1980s. "They were almost trivial compared to what we face today," he writes. "The median home price in the US was $76k. You can hardly even buy an empty lot in suburbia for this today, let alone a house. The median American income was under $18k. Today $18k is actually below the official US poverty line for a family of four! A first-class postage stamp ran 15 ¢. The average new car was about $7k. So a quarter century ago the $550 it cost to buy an ounce of gold went a heck of lot farther in terms of buying real goods and services than it would today." Exactly, my man!

    Then, because he is such a nice person, I suppose, he sums it up by stating the truism "Anytime the money supply of a particular era or place grows faster than the supply of goods and services on which to spend it, general prices are inevitably driven relentlessly higher. This financial law is as immutable as gravity."

    So, how is gold doing in terms of gains in buying power over the intervening, inflationary years? "Gold last closed above $550 nominal on January 23rd, 1981," he says, "almost 25 years ago to the week. Yet adjusted for inflation, an ounce of gold was really worth $1266 that day in purchasing-power terms. Thus, in order to truly see the quarter-century gold highs that the financial media is wailing about, gold in today's dollars would have to head north of $1250." So gold is priced at less than HALF of its record price! Wow! What a bargain! Hahahaha! It's like oil selling for less than $30 a barrel! What a freaking bargain!

    And with the relatively-near future value of the dollar being an estimated 30% lower than it is now, then gold is so cheap (audience yells out, "How cheap, Mogambo?") that if you are NOT buying gold, then I laugh at you, and disparage the intelligence of your parents that you are so stupid, and insult your significant-other that they are so completely worthless that they have to love a stupid clot like you, because nobody with any smarts or standards would have anything to do with you or them. And it sounds like this: "Hahahaha!"

    And since we are talking about gold in terms of its buying power, he further calculates that "From the mid-1970s until the mid-1990s gold rarely went below $500 in today's dollars, so $500 gold really is historically cheap. Today gold would have to challenge $1000 before it started getting expensive and it would have to rocket up near $2200 to hit all-time real highs."

    Then, saving the best for last, he says "Assuming these growth rates are roughly correct, and compounding them for the 25 years since 1980, the world's money supply has ballooned by 5.4x. Meanwhile the global gold supply is only up 1.3x. Dividing these 25-year growth estimates yields a ratio of global-fiat-currency-supplies-to-gold-supplies of about 4.2x. Now there is 4x as much fiat paper floating around relative to gold as there was in 1980! The $850 spike high in January 1980 multiplied by this ratio yields an all-time gold high of $3570 in today's dollars."

    My ears prick up when he says $3,570 an ounce, but by this time my brain is numbed to senselessness by all these numbers whizzing about, and in a state of stunned semi-consciousness I am drooling down the front of my shirt. Disgusted at the sight, Mr. Hamilton tries to distract himself by trying to think of a way to impress upon dullards, like me, at least the bare rudimentary essence of what he was trying to say. Finally giving up, he merely says "My core thesis that gold is cheap today in real terms."

    And if you wanted yet another reason to buy gold (although I personally find it hard to stand upright under the weight of the sheer tonnage of damned good reasons to buy gold right now), then Peter Spina of the Gold Forecaster-Global Watch newsletter has one for you. He writes that the gold market is changing, "Suddenly the Exchange Traded Funds took control. StreetTRACKS Gold Trust saw its holdings jump by an enormous 10% in the year to date (2006)! These volumes are sucking in all the Central Bank Sales and some. On the other side, no one wants to sell."

    He then reports some impressive movements of gold into the Exchange Traded Funds. "The week to 2nd January saw them adding a 17.8 tonnes, followed by Wednesday, Thursday and Friday bringing another inflow of 23.5 tonnes, taking total gold holdings to 384 tonnes. This is an enormous rise." Yes, it IS enormous, Mr. Spina, and it means that demand is increasing dramatically, but since supply cannot increase, that means that the price will continue to go up and up and up as long as demand outstrips supply!

    - From Doug Noland we get the chilling news that Bloomberg News reports “Venezuelan President Hugo Chavez said he plans to increase salaries for government workers by as much as 80 percent this year.” I hate to be a stickler here, but notice the lack of an exclamation point, which one would naturally expect when the government has just announced that they are going to shoot you, and everyone in your family, with a machine gun. Oops! I mean, when the government has just announced that they are going to destroy the money and the economy, which is just about the same thing.

    The point is that if you know anybody in Venezuela, tell them that The Mogambo has put out an Important Mogambo Bulletin (IMB) that was obviously censored by the media since nobody seems to have read it, that the money of Venezuela is going to get destroyed with price inflation and government-expense inflation, and that I'll bet that smart people in Venezuela are screaming "The Mogambo was right! We're freaking doomed" and are buying gold right now, and I mean right freaking now. Anyway, that's what I would do. Ugh.

    ****Mogambo sez: Mogambo him say oil go up. Oil go up. Mogambo him say gold go up. Gold go up. Mogambo him say silver go up. Silver go up.

    Mogambo him big medicine. Mogambo now say too buy heap big oil, gold, silver.

    Richard Daughty, the angriest guy in economics
    9241 54th Street North
    Pinellas Park, FL 33782
    727 546 5568

    January 14, 2006

    Ken Lay's defence.

    He's being persecuted.

    January 11, 2006

    Time to Buy ERA.AX or other Unanium stocks? Maybe


    January 08, 2006

    The Bush Men Have "Form":

    "Form", is an Aussie term for someone who has pulled a fast
    one and gotten away with it.  Knowing this, most other Aussies
    expect the successful miscreant to try it again.  The Bush
    Administration certainly has "form".  Try this on for size.  At
    the end of fiscal 2000 (Sept. 29, 2000), shortly before Mr Bush
    was elected for the first time, US Treasury debt stood at $US 5
    TRILLION 674.1 Billion.  By December 30, 2005, that debt had
    risen to $US 8 TRILLION 170.4 Billion.  That shows that in a
    little more than five years, the "Bush Men" have added
    $US 2 TRILLION 496.4 Billion (44%) to the Treasury debt total.

    January 06, 2006

    Elliott Wave Analysis of a Leading Stock Index

    Over the last two years, absent of any long-term trends, the major US stock market indices have left technical analysts using trend-based tools dazed and confused. Pulling back to the longer term picture, and using Elliott Wave analysis provides some basis for recent market behavior, and more importantly, valuable insight into its possible future. The 3 wave advance of stock prices suggested in the Elliott Wave principle is also part of the rule books of a wide range of technical analysis methods from Dow Theory to the current successful guru, Investors Business Daily. (Stocks down. Gold up!)

    Clock is running down on 'cheap' (US) mortgages

    Fewer than 10 percent of the conventional conforming loans will reset in 2006-2007, but nearly two-thirds of sub-prime loans will. That is because a large portion of the sub-prime loans are two-year adjustables, says Berson, the Fannie Mae chief economist.

    Berson offered a typical example of what the industry calls a "2-28," an ARM in which the interest rate is fixed for the first two years and then adjusts regularly for the next 28 to whatever index the loan calls for. The average yearly cap on this loan is 2.3 percentage points per year.

    If the consumer took out this two-year ARM in December 2003, he started out paying a typical rate of 7.7 percent, Berson said.

    "You would be getting a letter from your lender this month telling you that next month, your rate would be going to 10 percent."

    Roughly speaking, a consumer's monthly bill could rise from $330 to as much as $1,425 to $1,755.

    January 03, 2006

    Let me tell you about 2006: Peak Oil is here

    There’s been only one lead mine opened in the world in over 25 years. The last lead smelter built in America was built in 1969. There’s been no great oil discovery in the world in over 35 years. Alaskan oil production is in decline now; Mexican oil production is in decline; England, which has been one of the great oil exporters in the world for the last 25 years, is now in decline – England will be importing oil within the decade – you know, the North Sea is in decline. So, as supplies dwindle, at the same time, Jim, you know what has happened in Asia,  demand has grown – in America, Europe and everywhere. So when you have demand growing and supply dwindling, that’s a bull market. And it’s always happened. And as I said, it has happened throughout history. It’s not simple, but it’s pretty basic economics and basic history.

    December 30, 2005

    Goldman Sachs says gold will see $US 640 in 2006

    Goldman Sachs said this month that the world was at the start of the second phase of a three-stage oil super-cycle that would last until 2012. The investment bank is also bullish about other commodities. It picked buying gold as one of its top foreign exchange trades for next year, and predicted that bullion prices could reach $640 an ounce in the medium term.