THE BIG DEFLATION SCARE OF 2011

Trend ALERT!

Why is it that the biggest story of the year isn't even being discussed in the main stream media? Not only has the U.S. breached its legal debt ceiling, but in order to postpone a panic, the Treasury has started to dip into pensions. The federal government is buying some time by not putting money into government worker retirement funds, amazing isn't it? Our society is so numb to the government doing whatever it wants that we just allowed them to dip intopension funds and the American people didn't raise a finger, no union protests, no worker walkouts, just okay, that's fine. Americans have NO IDEA what is about to happen over the next few years. Mathematically a recovery, as defined by the media and government, is IMPOSSIBLE.

The U.S. will face a restructuring of its economy whether it likes it or not, the demographics just aren't there for the typical Keynesian boost. Government has interfered in our economy at every level, especially by encouraging debt. Does anyone honestly believe that the constant credit expansion that has helped drive our economy for the past thirty years will continue? Not a chance, check out this chart recently posted by economist Chris Martenson.



Martenson notes "that the most serious departure between the idealized exponential curve fit and the data occurred beginning in 2008 -- and it has not yet even remotely begun to return to its former trajectory." In our opinion, it won't and it can't. Not only do we have the largest generation (baby boomers) collapsing in spending habits, the echo boomers are jobless and already tapped out from the housing bubble with ugly credit scores.


THE BIG DEFLATION SCARE OF 2011


Let us first start off by saying we are not seeing a repeat of 2008, however, we may see '2008 light.' It will be all about QE3 or whatever they are going to have to call it. Like we have stated in previous reports, we believe it is likely that they change the name of the next round of quantitative easing, just as quantitative easing is just another name for printing currency. With the FED responsible for purchasing about 70% of U.S. treasuries and both China and Japan slowly decreasing their purchases, the treasury department will be desperate for more buying for the FED. Currently, the FED is averaging injecting about $89 billion a month by default into our economy, this of course doesn't include their zero interest rate policy and secret bailouts that no one knows about.

FutureMoneyTrends.com strongly believes that the Dow Jones and other major indexes could see a serious correction in 2011 without further quantitative easing. However, more than likely what we will see is a market scare tactic that will cause equities to fall and then the FED will come to the rescue with something even bigger than QE2. Remember, besides stocks, nothing has really recovered in the economy. In fact, things have worsened when it comes to the amount of people on unemployment, long term unemployment, 44 million on food stamps, and foreclosures expected to break records this year. The FED knows that rebounding 401ks is the only Keynesian wealth effect at play in this consumer spendingdriven economy.

Five things give us great confidence that we will see more aid from the FED:

The FED is saying it is going to end it.
The media and other economists are saying the recovery can stand on its own two feet.
Without the FED there simply isn't enough buyers to absorb 1.6 trillion dollars of annual deficits.
Ending it will cause stocks to fall.
Central banks around the world are net buyers of gold, even as everyone is talking about some sort of bubble that just burst in the precious metals markets.In fact, central banks purchased more gold in the first quarter of 2011 then they did during the first three quarters of 2010.

Remember, our current assessment is that we will have another deflationary shock prior to seeing a major currency and sovereign debt crisis.

When it comes to the precious metals and commodities, we believe they are still the best long term place to be. Even if we see an expected deflationary shock, not knowing what the FED's exact reaction will be could spin us off into a much larger inflationary shock over night. In short, we believe trying to play musical chairs with a tectonic shift in our economy and something that will be the biggest story in our lifetimes, is not something we would personally recommend.

Precious Metals Bubble? Not Even Close

As we have pointed out many times, the precious metals are showing signs of being the exact opposite of a bubble. Recently Peter Schiff, President of Euro Pacific Capitalhad this to say about junior mining shares, "A lot of these juniors are lower than they were five years ago, some of them are lower than they were ten years ago. You wouldn't even know that we are in a bull market in gold, you'd think it was still a bear market. I own a lot of them and not a single one of them has ever split. To me it doesn't sound like a bull market when you don't have any of your stocks splitting and I've owned them for ten years. You remember the internet stocks, I mean there were internet stocks splitting every week. There's no bubble activity going on in these mining stocks, hardly anybody owns them." Yet most mining companies, even as gold and silver rise, are being ignored.

Of course that is why we are always looking for companies that have yet to be discovered. If you read our article, 'Gold 1980 Vs Today,' you will see that the vast majority of public participation in the gold market is selling it, and selling it at a HUGE discount from its melt value. Recently, one of our members shared with us how their friends were excited after going to a gold party, they sold their gold, one ounce for $150, WOW what a steal (literally).

Trends To Point Out

Wal-Mart, the nation's largest retailer, said this week that high gas prices have restrained its shoppers and business. Sales at stores open for at least one year fell 1.1 percent in Q1 and overall visits to stores in the U.S. declined for the 8th straight month.
Lowe's this week said its traffic for the last quarter was down 3.4 percent, they also saw a 5.7 percent slide in profits.
MasterCard Advisors who research consumer spending, reported that gallons of gasoline pumped in the U.S. in the last month fell by 1 percent from a year ago. It appears that consumers are beginning to modify their habits with less shopping and driving.
Staples yesterday stated that they are continuing to see soft demand for office products. Not only in the U.S., but also in Canada and Europe where demand notably weakened due to higher fuel prices.
Sears moves to a loss as government appliance rebates end.

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Hyperinflation & US Dollar Collapse-John Williams Exclusive by KWN

With so many questions surrounding the U.S. dollar and rising inflation, today King World News interviewed internationally followed John Williams of Shadowstats to get his take on the U.S. dollar, Fed and hyperinflation.  When asked about the tremendous inflation globally Williams stated, “The dollar has already been a factor for the major inflation that we are seeing now, and the weakness that we have seen in the dollar up to now has primarily been as a result of the Fed’s efforts to debase the dollar.  A weaker dollar has spiked oil prices and we are seeing the highest inflation -- as the government reports it -- in the last 3 years, and it’s going to get a lot worse.”

Full Article

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End Of Euorozone?

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Raise Ceiling but Beware of 'Debt Bomb': Prince Alwaleed

Saudi Prince Alwaleed bin Talal called on US lawmakers to raise the debt ceiling, while also warning that steps must be taken to control government spending.

CNBC.com Saudi Prince Alwaleed bin Talal

The renowned investor and philanthropist, and nephew of King Abdullah, also rejected the notion that the US could delay payments on its bonds for several days as has been suggested by Rep. Paul Ryan and hedge fund manager Stanley Druckenmiller.

"We in the outside world, outside the United States, believe the United States is not giving much care and attention to this time bomb that you have right now here," bin Talal said in a CNBC interview.

"You need some structural changes in the United States," he added. "You can't go forever with $1 trillion in arrears. That's the thing."

However, the suggestion is untenable that the US could miss debt payments while it argues over the debt ceiling and works up a budget plan that addresses deficit issues, he said.

"That's gambling. This is the United States. You're leading the whole world," bin Talal said. "You cannot play games with that."

Economic growth will be slow, the prince added, believing that the trend will be closer to 2 to 3 percent. However, he said the Federal Reserve's exit from the markets with the end of the second leg of quantitative easing—QE2—next month is unlikely to have much impact.

"You're going to have some low growth for the next several years to come for sure," he said. "You have a lot of pressures—state deficits, the budget deficit—many issues coming in the United States."

One other pressure on the domestic economy has come from inflation, with prices at the pump near $4 a gallon and crude oil near $100.

The prince said oil should be in the $70 to $80 range and it is not in Saudi Arabia and OPEC's best interests for the price to be at the current elevated levels.

"Our objective is not to have the price shoot above $100 and not have the per-gallon price in the US hover around $4," he said. "It's away above breakeven."

On international issues, Alwaleed said the US needs to play an active role in peace negotiations and generally approved of President Obama's remarks Thursday that Israel-Palestinian borders should return to conditions prior to the Six Days War in 1967.

He also praised the US for killing terror leader Osama bin Laden but believes the war on terror is far from over.

"The fact that bin Laden has been taken care of and thrown in the sea, and hopefully some sharks ate him already, the world is a lot better at least psychologically," bin Talal said.

Gold Investors Choose Bars Over ETFs in Q1- World Gold Council

Investors forsook gold exchange traded funds in the first quarter in favor of coins and bars, the World Gold Council said, with buying of physical investment products helping lift overall bullion demand by 11 percent.

The WGC said ETFs recorded their first net quarterly outflow since mid-2007 in the first three months of the year, with overall holdings of the products — which issue securities backed by physical gold — falling by 55.9 tons.

Total coin and bar demand rose by 52 percent or 125.5 tons to 366.4 tons in the first quarter. Gold investment increased by 26 percent in tonnage terms to 310.5 tons, helping raise total bullion demand to 981.3 tons from 881 tons.

Eily Ong, research manager for the industry-funded WGC, said she expected this trend to persist throughout the year.

"We have had geopolitical unrest in the Middle East/North Africa region, the ongoing uncertainty and concern about sovereign debt issues (in Europe), and continuing global inflationary fears around the world," she said.

"In China and India, they are still trying to hike interest rates to combat inflation," she said. "All these provide a very suitable environment (for gold investment)."

Jewelry Buying Rises

Jewelry consumption, which recovered last year after a weak 2009, continued to rebound, with total buying up 7 percent to 556.9 tons, the largest single segment of demand.

This was geographically specific, led by Asia. China's gold Jewelry demand rose by 21 percent to 142.9 tons in the first quarter, while Indian buying climbed by 12 percent to 206.2 tons. Jewelry demand fell in the Middle East, Italy and the United States.

Relatively little scrap Jewelry was returned to the market in the first quarter, Ong said. "In the Eastern markets, they are trying to accumulate gold, so we don't see much recycling because accumulation is more of a focus for them," she said.

"But in terms of Western markets... there is a lot of information and knowledge about recycled gold, so consumers there are more aware of recycling gold."

Central banks were also major gold buyers, adding 129.3 tons to their holdings, up from 58.8 tons in the first quarter of last year. Until recent years, central banks were net suppliers of gold to the market.

The scale of central bank purchases in the quarter, coupled with a slight drop in scrap supply, pressured supply down by 4 percent to 872.2 tons in the first quarter.

Overall prices should remain underpinned this year by concerns over the global economy and geopolitical unrest, the WGC said.

Source

Credit Growth Drives Economic Growth, Until It Doesn’t

The single most important thing to understand about economics in the age of paper money is that credit growth drives economic growth. Before the breakdown of the Bretton Woods international monetary system in 1971, there was a difference between money and credit. There no longer is. Paper dollars and US treasury bonds denominated in paper dollars are just different types of government IOUs. When gold was money, the increase in the Money Supply (M1 and M2) had an extraordinary impact on the economy. Today, what matters is the increase in the total supply of credit.

The best source of information about credit and credit growth in the United States is the Flow of Funds, published quarterly on the website of the Federal Reserve. Every serious analyst of the US economy should be familiar with the Fed’s Flow of Funds. Google it.

At the end of 2010, $52.6 trillion of credit was outstanding in the United States. Table L.1 Credit Market Debt Outstanding of the Flow of Funds provides a detailed breakdown of who the debt is owed by (debtors) in the top half of the table and who the debt is held by (creditors) in the bottom half of the table. The total amount of debt is equal to the total amount of credit. Debt and credit are two sides of the same coin. The data in this breakdown extends back to the late 1940s and the historical data series can be downloaded onto Excel, making trend analysis relatively easy.

In 1971, the ratio of total credit to GDP was 150%. Now it is 354%. In other words, credit has been growing much more rapidly than the economy for the past four decades. It is easy to understand how rapid credit growth facilitates economic growth. When credit is expanding, consumers can borrow and spend more and businesses can borrow and invest more. Increasing consumption and investment creates jobs and expands income and profits. Moreover, the expansion of credit tends to cause the price of assets such as stocks and property to increase, thereby boosting the net worth of the public. Rising asset prices give the owners of assets more wealth (i.e. collateral) against which they can borrow still more. This cycle of expanding credit leading to increased spending, investment, job creation and wealth, followed by still more borrowing produces a happy upward spiral of prosperity….so long as it continues. Eventually, however, every credit-induced economic boom comes to an end when one or more important sector of the economy becomes incapable of repaying the interest on its debt.

The Flow of Funds breaks down the US credit market into three main categories: the domestic non-financial sector (69% of total debt), the domestic financial sector (27%) and the rest of the world (4%). The non-financial sector is comprised primarily of the household sector, the corporate sector and the federal government. The financial sector is comprised primarily of the Government Sponsored Enterprises (GSEs) such as Fannie Mae and Freddie Mac, the mortgage pools that the GSEs guarantee, the issuers of asset backed securities and commercial banks.

In recent decades, the financial sector has expanded its debt much more rapidly than the non-financial sector, and therefore has played the more important role in creating economic growth. In 1971, the debt of the financial sector was equivalent to 12% of GDP. It hit 100% of GDP in 2005, peaked at 121% of GDP (or roughly $17 trillion) in 2008 and is now 96% of GDP. The sharp reduction in the sector’s debt after the crisis began in 2008 was made possible by the first round of Quantitative Easing, during which the Fed printed $1.7 trillion and used it primarily to buy assets from the financial sector, thereby allowing the financial sector to reduce its leverage.

The surge in the debt of the financial sector between 1971 and 2008 was driven by two subsectors: 1) the GSEs and the mortgage pools they guaranteed and 2) the issuers of asset backed securities (ABS). The debt of the former group expanded from 4% of GDP in 1971 to a peak of 58% of GDP (or $8.1 trillion) in 2009. It has subsequently fallen to 51% of GDP. The debt of the latter group expanded from zero in 1971 to a peak of 32% of GDP (or $4.6 trillion) in 2007. It has subsequently fallen to 17% of GDP.

The GSEs and ABS issuers increased their debt by selling bonds. They used the cash they received from issuing bonds to buy mortgages (and, in the case of the ABS issuers, to also buy a smaller amount of credit card loans, auto loans, etc). By buying trillions of dollars worth of mortgages, they financed and fuelled the US property bubble. Inflating home prices allowed the American public to treat their homes as ATM machines, from which they “withdrew” equity.

Between 1971 and 2009, household sector debt increase from 43% of GDP to 98% of GDP (or to $13.9 trillion). Borrowing and spending by US households drove the US economy; and, as imports into the US exploded and the US trade deficit blew out to a previously unimaginable level, it also drove the global economy. Like every credit bubble, this one was fun while it lasted. However, when large numbers of American home owners could no longer service the interest on their mortgages in 2008, Fannie and Freddie had to be nationalized and most of the issuers of asset backed securities failed.

Over the last two years, the debt of the financial sector has contracted by $2.9 trillion (to $14.2 trillion) and the debt of the household sector has contracted by $443 billion (to $13.4 trillion). Offsetting that has been a $3 trillion increase in the debt of the federal government (to $9.4 trillion). Overall, total credit in the US increased by 0.4% or $203 billion (to $52.6 trillion). Like credit, economic growth in the United States has been essentially flat, increasingly by only 0.1% or by $19 billion between 2008 and 2010.

The $3 trillion increase in US government debt prevented a global depression over the last two years, but what sector of the economy will take on additional debt and drive the economy over the years immediately ahead? Go down the list on Table L.1. Will it be the household sector? The corporate sector? State and local government? Will Fannie and Freddie or the ABS issuers come back from the dead? No, no, no and no. The only sector of the US economy that can finance significant amounts of new debt is the federal government. Economic growth in the United States (and therefore, to a very significant extent, the world) will be determined by how much more the US government borrows and spends. Those who wish to slash government spending should bear that in mind.

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Massive Gold & Silver Demand Out of India

With gold trading near $1,500 and silver up over $1, today King World News interviewed Rick Rule Founder of Global Resource Investor, now part of the $9 billion strong Sprott Asset Management.  


When asked about the physical gold and silver markets Rule stated, “Some forecasts by the World Gold Council have to do with increasing prosperity in India, particularly in rural India and the potential impact that would have on gold and silver consumption.  For people who own gold and silver and would like to see higher prices, that will certainly make them feel good.”
“They (WGC) point out that many parts of the Indian citizenry don’t have very much trust in their own government or in their own currency.  Indian savings rates, because there is no social safety net that’s government provided, Indian savings rates are between 30% and 40% of income, and the traditional savings vehicles in India have been gold and silver bullion.

As a consequence of higher incomes...the savings rates are staying constant as a percentage of income, but the income rates are rising.  Because so much of the saving takes place in precious metals, Indian precious metals demand is increasing.

The traditional wedding present in India is gold.  Gold bullion becomes a financial asset that the bride has that’s the only financial asset that she controls.  The dowry payment that she gets is in precious metals and it becomes her sole and separate property.  Given the fact that India experiences in excess of 15 million marriages per year, that in and of itself is a substantial demand driver for gold, and this is gold that doesn’t get spent except in the most dire of all emergencies.”   

When asked if summer may not be as rough for gold and silver as we traditionally see because of the Chinese and Indian ‘puts’ under these markets Rule remarked, “I think that’s right and I also think by the way that the demand for silver in India has always been there, it’s been very difficult to quantify so Americans haven’t paid much attention to it.  If I might be cynical, which you’ve allowed me to do in the past, it’s generally difficult for Americans to comprehend.  It doesn’t sell newsletters, so American speculators haven’t been inundated with information about it, but the Indians have traditionally been the most important swing player in the physical silver market forever.”

The KWN audio interview with Rick Rule will be released shortly and you can listen by CLICKING HERE.   

Source

Call Leaked- Biggest Names Discuss Silver

David Morgan hosts a call on Saturday, May14th about silver that will be shocking to most! Includes and drive-by shooting and the Fed Reserve caught doing something illegal. Guest included, Eric Sprott, Bill Murphy, Rob Kirby, Bob Quartermain, Sean SGTReport and James Anderson in for Mike Maloney.

2011 A Volatile World

UBS_2011_A_Volatile_World

Gold Aimed at $6,500/oz, Silver... $600/oz

Get ready. We are now entering the final stages in the collapse of the U.S. dollar...
And it's not going to be pretty.
The massive increases in money supplies will tank the value of the dollar and erode the very fabric of America's economic security.
As a result, gold and silver prices are will no doubt skyrocket, despite the short-term major volatility we've recently seen.
Many investors have been rushing to me asking if it's too late to buy precious metals with gold in the $1,500/oz range and recently spiking to nearly $50/oz. I keep telling them the same thing...
Despite whatever the price of gold or silver is today, both metals will be worth more than twice as much within 12 months.
That means $3,000 gold this time next year! After that, I think gold could break $6,500 an ounce.
And as you know, silver's gains will be much greater. When the bull market is all said and done, there's no doubt we could be looking at silver prices exceeding $600 an ounce.
And we can all thank the crooks in D.C. for it...
In his first ever press conference after a policy meeting two weeks ago, Bernanke told us all the ways he has saved our economy.
What a crock!
The Federal Reserve can't prevent the coming financial meltdown.
So far this year, the U.S. Treasury has raised $293 billion in net cash by selling debt securities. And so far this year, the Federal Reserve has purchased a net $330 billion of Treasury notes and bonds.
This translates to the Fed providing 100% of the net new cash the Treasury has raised this year — plus another $37 billion needed to mop up even more mess!
But who will buy Treasuries when the Fed doesn’t? China? Germany? Japan? You? Me?
Going to Hell in a Hand Basket
We are now getting very close and even accelerating toward the end game for the U.S. dollar and the American Empire as we know it. Have your life boats ready.
It won't be much longer before people really start buying both gold and silver to protect themselves from this enviable collapse.
The only way out of our dilemma, absent very large entitlement cuts, is to default in one (or a combination) of four ways:

1. Outright via contractual abrogation (surely unthinkable)
2. Surreptitiously via accelerating and unexpectedly higher inflation (likely, but not significant in its impact)
3. Deceptively via a declining dollar (currently taking place in front of our very eyes)
4. Stealthily via policy rates and Treasury yields far below historical levels (paying savers less on their money and hoping they won’t complain)

I would bet on a combination of deception, betrayal, and trickery.

Following the Smart Money

This past month, the University of Texas bought a billion dollars' worth of gold and is having it stored in a private depository. This is huge news.
More and more, the intelligent group of our population is starting to figure things out. Unfortunately, however, the unsuspecting masses are being led perfectly by the well-oiled government/media propaganda machine like sheep to the slaughter.
This is going to be a terrible reality for so many unfortunate Americans who have no idea as to what is coming shortly down the road.
And you can rest assured the politicos in Washington will do what all politicians do when they are trapped in such a manner: lie, cheat, steal, spin the facts, cover their asses at all costs, abuse their power, and misinform on a massive scale.
But even with the help of the government-controlled media, the time of consequences can no longer be held at bay.
Free market forces will win; governments, banksters, and their power structures will come tumbling down just as we have been seeing elsewhere around the world these past six months.
The spoils will go to those who were prepared and understood the debacle years before it hit.
The precious metals and the junior mining shares will reward those who understood, and punish those who didn’t.
Yes, the precious metals market will be extremely volatile in both directions at times, but buy the dips as gold and silver will keep heading to higher and higher ground.
As long as the Fed and U.S. government follow the course of “Quantitative Easing” or anything like it, you can rest assured that gold and silver prices will soar!
If you leave your money in U.S. banks in dollars, you will lose most of the purchasing power of your money.
Use the downside volatility to buy any dips you see in the metals. Whether you bought gold at $600, $1,000, or $1,500 an ounce, it really won’t matter much when gold is trading at $6,500 an ounce or more.
The same thing can be said for silver. Don’t worry so much whether you bought at $25 or $50; silver will be priced in the hundreds of dollars an ounce, possibly $600 or more as the silver to gold ratio descends to 15 to 1, and possibly even 10 to 1.
In fact I believe silver stocks will actually be one of the biggest winners over the next 24 months.
Time is of the essence.
The lies of the Fed and the U.S. gov't are becoming bigger and more complex, their noses growing longer and longer as the fiat currency-economic-insanity comes to a head.

Source

Fed On The Run

QE3 & The US Dollar- Peter Schiff

Debt Is The Currency Of Slaves: Gold Is Currency Of Kings

The saying goes that debt is the currency of slaves.

This makes slaves of most of us, but few more so than those in the US. We all know that the US is up to its ears in debt. The official figure for the national debt is $14 trillion, which is a ridiculous number however you cut it.

Call me sceptical, but I reckon the US government's statistical department is full of it.

So, I prefer to listen to a former professional blackjack gambler from Vegas: Bill Gross. These days he is the famous MD of PIMCO, which successfully manages hundreds of billions of dollars worth of bonds.

Gross estimates the actual figure for US debt is more like $75 trillion.

This is a guy you want to listen to. He has made many fortunes for himself and his clients by carefully investing in bonds. Government bonds, municipal bonds, and corporate bonds - from the US and all over the world as well.

Recently he sold his entire holding of US treasuries. The simple reason is that the tide of inflation is rising - and that is the nemesis of the bond investor. What good is a 3% return if money is losing 4% of its purchasing power each year? To be honest, I'm surprised he stuck around as long as he did.

Again - you can chuck the government stat's on inflation in the bin. You reckon Obama would get re-elected if the people knew the government was destroying 7% of their wealth each year? Real inflation is way, way higher than what the official statistics would have you believe.

I prefer to listen to John Williams at ShadowStats for the real story. By his calculations, US inflation is closing in on 7%. This certainly makes more sense to friends of mine over in the States who are running flat out just to stand still. 

US inflation is more like 7%


Source: Shadowstats
But don't just listen to one source. Take in a few. And who could be watching it more closely than Wal-Mart, the budget convenience store to America. These guys make the skinniest margins on their goods but are profitable because they have so many shops. The CEO, Bill Simon warned this week that:

'...rising inflation is about to become serious, and that Wal-Mart was seeing cost increases starting to come through at a pretty alarming rate.'

When they sound the inflation alarm, you have to listen. We have been warning about this for ages, but it seems folks - we have arrived.

So what does Obama do?

There is talk of him raising the debt ceiling by 50% to $21 trillion.

Just stop reading for a second and take that in.

A 50 per cent raising of the debt ceiling?

If you aren't yelling at your computer, then you're not paying attention.

If this happens then we are witnessing the dollar's end game. Time to buckle up.

It would enable shenanigans that make QE2 look like some light stretching before a marathon.

So what to do?

As with most of the economic problems in this world, the solution is precious metals.

Gold, silver, and platinum group metals.

That same saying that says 'debt is the currency of slaves' actually begins with 'gold is the currency of kings, and silver is the currency of the free man'.

Never is that truer than now. As inflation gets a grip of the world's largest economy, precious metals' prices will soar.

The US-centric media doesn't seem to have noticed however that China and India are in fact the biggest markets for precious metals. And inflation is already well underway there - thanks to years of importing inflation-infected US dollars. Chinese inflation is already up to 5.3%, and Indian inflation has just hit 8.7%.

I've always recommended gold and silver. And I'm not the only one.

Bill Gross has recently launched an equities fund that has most of its $1.2 billion in gold positions.

Bill Gross...in gold?

What the!

This is the man who made his money in interest-bearing securities, and now he's got a billion dollars in gold?

It's a bit like finding out that your family GP is the biggest boozer of anyone you know. You know it makes sense - but it still comes as a bit of a shock. 

Gold has been in a bull market for 10 years, and is basically a no-brainer. Buy gold bullion, buy good gold stocks, buy gold jewellery - just buy gold!

I think the faster returns are going to be made in silver though, if you don't mind taking on some more risk. Silver's performance was a bit slow for most of the last 10 years, but seems to be making up for lost time now.
 
The price is highly volatile as we have seen recently. The price may have fallen 33% in a month, but let's not forget it is still up 100% in a year.

Why the steep rise? It is all down to the tight fundamentals of the market. Most estimates point to there being just 1.2 billion ounces of silver bullion available in the world. This makes it twice as rare as gold bullion.

So my question is then - why is silver not twice the price of gold?
I took a look at the fundamental of the silver market. Once you see just how tight the market is, it is hard to see how silver will not make some spectacular gains in the next few years.

Why else would the owner of a servo charge just 20 cents a gallon for fuel? Providing the coins have silver in them that is...

How to turn hard profits into hard money

Source: Zerohedge
Having an idea of what it might do in the short term is extremely important. And that's when having a seasoned technical trader sitting next to me comes in very handy indeed. Murray Dawes has been calling the market's recent movements to perfection. His advice helped me avoid tipping silver stocks at their peak, and instead waiting just a week to tip the silver at its recent low point. This is the way to make real profits.

Murray's current view is that silver will spend a few months settling at this current level, and could even fall to $30 first.

 Murray Dawes sees silver
consolidating for a few months

Source: Slipstream Trader
This would be a good thing for the silver market. It helps shake out short-term speculators, form a solid base, and provide a good entry point for new investors before taking off again. And take off it will.

The press may be focused on what silver ETFs are doing, but should be focused on the physical silver being bought by the truck load by Indian and Chinese investors. Between the two countries there are 2.5 billion citizens all now looking for a way to protect their wealth from the inflation flooding into their bank accounts right now.

2.5 billion people wanting to invest in just 1.2 billion ounces of silver?

There is only one direction it will go in the next few years - and it's not down.

It certainly looks as though the next month or two will be the last opportunity to take a decent position in silver or silver stocks.
After that the inflation-fuelled global demand meets the shortage of the metal, to power the next monster rally in silver.

Source

Silver to Take Out $50

With gold off the lows and silver trading higher, today King World News interviewed Peter Schiff CEO and Chief Global Strategist of Europacific Capital. When asked about the pullback in gold Schiff remarked, “I think it’s a buying opportunity...I do believe the US economy is slowing down, in fact I think it’s going to slow a lot more than people realize. But for that reason I think that quantitive easing will not end over the summer, in fact I think the Fed is going to step it up. QE3 could be even bigger than QE2 and that’s very bullish for precious metals and very bearish for the dollar.”

When asked about the Mexican central bank purchase of 100 tons of gold Schiff replied, “What surprises me is that more central banks aren’t buying even more gold. Central banks are loaded up with depreciating dollars, they need to buy gold instead. The crazy thing is that I’m even hearing talk about the US selling its gold to help fund its debts. That would be the worst thing we could do. The last thing we would want to sell is our gold, I mean if we sold that then that would be it, we would have nothing. The dollar would just become complete confetti.”

When asked about silver specifically Schiff stated, “Remember it went up to $50 from $30 almost as fast as it came down. I think if you just take a look at the long-term trajectory it’s still a big bull market. I think that $50 high is not going to hold...We are going to take that ($50 high) out and move a lot higher. We are suckering a lot of new short sellers into the market as people are comparing it to a bubble now or 1980, the Hunt Brothers. I don’t think what we’ve had so far is anywhere close to what happened in 1980. We might get to that point at some time in the future, but we’re not there yet.

We’ve created sufficient nervousness and anxiety in the market and enough shorts that we should have a nice wall of worry that we can climb, and ultimately a pretty good short covering rally. I think a lot of the people who have shorted this selloff in silver are going to lose a lot of money...We could have a dollar crisis as early as this fall and if we are having a dollar crisis then I would be expecting silver prices to be making new highs.”

Regarding mining shares Schiff had this to say, “A lot of these juniors are lower than they were five years ago, some of them are lower than they were ten years ago. You wouldn’t even know that we are in a bull market in gold, you’d think it was still a bear market. I own a lot of them and not a single one of them has ever split. To me it doesn’t sound like a bull market when you don’t have any of your stocks splitting and I’ve owned them for ten years. You remember the internet stocks, I mean there were internet stocks splitting every week. There’s no bubble activity going on in these mining stocks, hardly anybody owns them.”

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What does 1 Trillion Dollars Look Like?

With so much talk lately about Trillions of dollars, debt ceiling reached etc etc.

What does $1T dollars actually look like? While watching the video, keep in mind that the US Debt has reached it's debt ceiling of $14.29 Trillion.

Debt Ceiling Reached; Now What?

As the debt ceiling passes $14.29 trillion today, investors and world credit agencies expressed deep concerns that the US could end up in default as they seemingly head down the same path as Greece.

This just in: Debt Ceiling Reached today!

The scenario is not good for an US recovery. With the United States running a $1.6 trillion national deficit this year and over $113 trillion in future unfunded national commitments, economic conditions are worsening rapidly. With unemployment back up over 9% and inflation moving up to an annualized 3.8% basis, could we be setting the stage for future stagflation?

"Bankers and business executives warned lawmakers that default could trigger a financial crisis, sending interest rates soaring, which would make it harder for families and businesses to borrow. That's because a default would throw into question the value of U.S. Treasury securities, long considered one of the world's safest investments. Many loans and business deals are based on the value of Treasurys, and if their value eroded the impact would be felt broadly."

But what about stagflation? Stagflation is an economic term, broadly known in business circles during the late seventies when the US economy experienced both double-digit unemployment & inflation simultaneously. With the Federal Reserve continuing to print money under the auspices of QE or quantitative easing, oil prices are already up 19% over last year and a record deficit this year, stagflation could be on the horizon.

Debt Ceiling = stagflation?

Economists agree stagflation would be devastating to consumers and businesses alike. In March, the Consumer Price Index (CPI), which measures the average change in prices of goods and services over time, rose 0.5 percent. Over the past year, the CPI has risen 2.7 percent, driven primarily by energy and food prices.

The CPI's gasoline index rose 5.6 percent in March and has increased 14.4 percent over the last three months. That increase has contributed to higher prices at the gas pump. The national average price of regular unleaded gasoline is $3.96, up 32 cents from a month ago, and $1.07 from a year ago, according to AAA

CPI is a lagging economic indicator when it comes to inflation. The Producer Price Index (PPI) which measures inflation at the wholesale level was up to 6.6% on an annualized basis in May. Broken down farther, PPI for crude materials is up to 23% on an annualized basis.

The FED continues to down-play the impact of inflation as they address it in terms of core inflation as opposed to total inflation. And while this may play in uneducated circles, educated investors and global markets are deeply concerned.

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QE III Courtesy Of The Private Banks

The U.S. money supply aggregates based on the Austrian definition of the money supply, what Austrians call the True Money Supply or TMS, saw robust growth in April, with narrow TMS1 posting an annualized rate of increase of 10.7% and broad TMS2 showing an annualized rate of increases of 16.5%.  That brought the annualized three-month rate of growth on TMS1 and TMS2 to 8.0% and 13.7% respectively, up 270 and 390 basis points from the growth rates seen in March.

Turning to our longer-term twelve-month rate of growth metrics – more indicative of the underlying trends – and focusing on our preferred TMS2 measure, we find that TMS2 continues to march higher, in April growing at an annualized rate of 11.0%.  That’s up 40 basis point from March and 120 basis points from the recent low of 9.8% seen back in November 2010.  That’s also the 28^th time in the last 29 months that TMS2 posted a twelve-month rate of growth in the double digits, equating to a cumulative increase of some 35% over those 29 months.  As readers of the Monetary Watch are aware, the run-up to the now infamous housing bubble turn credit implosion turn Great Recession saw a string of 36 months of double digit growth for a cumulative increase of 48%.  So, on the heels of two massive asset monetization programs – namely QE I and QE II – the Federal Reserve has been behind a monetary largesse that, in terms of time and size, is now fully 81% and 73%, respectively of that which brought on the Great Recession.  Supported by a QE II asset purchase program likely to extend through the end of June, this means that this, our current monetary inflation cycle, is on track to produce a cumulative monetary infusion of near 40% by the time America is celebrating the 4^th of July.  Yes, not as large as the last inflation cycle, but one we think has the makings of still more to come.

To that question we now turn.  To lay the groundwork, first, as we do each month, a look at TMS2 internals…

A Look at TMS2 Internals

As we have often discussed in our Monetary Watch series, we put a lot of effort into analyzing the drivers behind the growth in the money supply, a component view we call TMS2 by Economic Category andSource.  And for the third month running, this month’s component analysis reveals just how important the Federal Reserve’s QE II asset purchase program has been to the continued double digit growth in the money supply.

For first time readers of our Monetary Watch, our component view zeroes in on the who and the how behind the ebb and flow of the money supply, reducing monetary inflation to two basic institutions and three primary venues:

• Federal Reserve, via the issuance of what Austrians callcovered money substitutes: the simultaneous issuance of on-demand bank deposit liabilities and bank reserves, created by the Federal Reserve through its purchase of assets, by writing checks on itself and later, when those checks are deposited by the sellers of those assets in their respective banks, completing the issuance by crediting those banks’ reserve balances at the Federal Reserve for the full amount of the checks.
• Private banks, via the issuance of uncovered money substitutes: the creation of on-demand bank deposit liabilities by private banks unbacked by any reserve cover, created through their issuance of loans and purchase of securities when they pyramid up those loans, securities purchases and deposit liabilities on top of their reserves.
• The Federal Reserve, via the largely passive issuance ofcurrency: the issuance of Federal Reserve notes, created when the public chooses to redeem their on-demand bank-issued deposit liabilities for currency.  In contrast to covered and uncovered money substitutes, the issuance of Federal Reserve notes is by and large neutral with respect to the total money supply, as it simply substitutes one form of money, namely covered and/or uncovered money substitutes for another, namely currency.

The combined total of covered money substitutes plus currency is what economists call the monetary base, and by definition completely under the control of the Federal Reserve.  And the issuance of covered money substitutes is more popularly known as quantitative easing or QE.

With those definitions in mind (for a more thorough discussion see True “Austrian” Money Supply Definitions, Sources, Notes and References), and again nothing new to current readers of  THE CONTRARIAN TAKE, one look at the charts below reveals exactly who has been behind the move in the money supply these past several months, really for the entire 2011 year – the Federal Reserve via the issuance of uncovered money substitutes:

Uncovered money substitutes grew at an annualized rate of 112.7% in April taking the three-month rate of growth to an annualized 258.7% and the twelve-month growth rate to 36.7%.  Such is the result when the Federal Reserve is monetizing U.S. Treasury debt at annual rates that look like this:

In contrast, private banks continue to shy away from the money creation business, the result being a three-month rate of decline in uncovered money substitutes of 15.1%, down some 4% from the start of the year.  As to those more important twelve-month rate of change metrics, while still growing at a rate of 5.5%, uncovered money substitutes are now scraping two year lows.  A look at the relative twelve-month rates of growth in uncovered versus covered money substitutes underscore the recent trends:

So, with the Federal Reserve possibly exiting the QE asset purchase business, at least for now, is that all she wrote this monetary inflation cycle?  We say maybe not.  Why’s that?

Enter…

QE III Courtesy of the Private Banks

First, the Federal Reserve may be ending its current QE II asset monetization program, but it’s not it seems looking to hike its zero to 25 basis point targeted federal funds rate any time soon.  And that means it will more than likely be having to supply at least some base money to the banking system (whether that be through Federal Reserve loans or asset purchases) to keep that federal funds rate in check. So yes, the Federal Reserve will not be juicing the money supply at any where near the roughly $75 billion per month rate that we are currently experiencing under QE II, but additions to the money supply their will likely be courtesy of the Federal Reserve.

Second, and far more important, the private banking system will by June’s end be sitting on somewhere between $1.6 and $1.7 trillion in excess reserves, meaning the fuel for the banking system to expand the money supply is in a word explosive.  Indeed, at a reserve requirement ratio of 10% (the most restrictive reserve requirement ratio currently imposed by the Federal Reserve on private banks) the private banking system – if it be willing to lend, or if it can’t find willing/able borrowers at the very least be willing to buy existing securities – is in a position to expand the money supply by a massive $17 trillion.  On a TMS2 metric that as of April 2011 stood at $7.6 trillion, we are theoretically looking at a money supply some 3.2 times higher than today.

Will these private banks do it; that is, create money by pyramiding up their reserves via the issuance of loans or purchase of securities?  As we discussed in last month’s Monetary Watch, maybe.  In fact, the end of QE II, meaning an exit by the Federal Reserve from the longer-dated end of the bond market, combined with still ultra-cheap short term funding rates, may be just what private banks need/want to get them back in the money creation business.  To quote ourselves from last month’sMonetary Watch…

What if the Federal Reserve ends its asset purchase program in June, beginning the so-called normalization of monetary policy? Will longer-term rates rise, and rise enough to induce banks to lever up their excess reserves, get them to re-enter the money creation business through the purchase of existing, now higher yielding securities?  Maybe.  With the Federal Reserve’s zero interest rate policy, short term money will still be incredibly cheap, meaning the interest rate spread between long maturities and short-term funds – like excess reserves – will become all the more appealing.  As we posited on previous occasions, ripe for the taking could be higher yielding U.S. Treasuries, even for capital deprived banks.  They’re as safe and as liquid as securities come, carrying as they do a near guaranteed put option via the Federal Reserve’s printing press.

Speculating a bit more, perhaps this is exactly what the Federal Reserve has in mind.  After all, the Federal Reserve is currently financing near 100% of the government’s borrowing needs. And the last thing the Federal Reserve (not to mention the U.S. government) wants to see is a dramatic spike in long-term interest rates if/when the Federal Reserve ends its QE II asset purchase program. Fifty bps, 100 bps, maybe even 150 bps more on the 10-year Treasury may be the least worst option.  The banks take over the money printing duties of the Federal Reserve, help contain the cost of U.S. government borrowing and the Federal Reserve gets some much needed inflation fighting credibility.  Besides, if they’re not going to lend or buy much in the way of risk assets, at least private banking institutions can continue to recapitalize their balance sheets, making them and the Federal Reserve happy.

Echoing our thoughts, in an April 29th  INTERVIEW with Eric King onKing World News, Chris Whalen, Co-founder of Institutional Risk Analytics and noted bank analyst, underscored the need for the Federal Reserve to let longer-term rates rise and for private banking institutions to try and capitalize on that rate rise, if you will to juice their profits by re-entering the money creation business.  In fact, as Chris suggests, it could be now or never:

But I don’t know how they [the Federal Reserve] can ignore what is going on with the financials… if we don’t let rates start to rise we are going to have a very serious problem with the banks because they’re not making any money.  You know their net interest margin is falling, their revenues are falling, in part because there is very little demand for credit out there. But just the reinvestment issue – you know as stuff rolls off and the banks have to go out and replace the assets – they’re getting half the cash flow they were getting on the old assets.  So it’s really hurting their profitability in the medium to long term.

Net net… with a still generally supportive Federal Reserve willing to keep interest rates at the zero bound for “an extended period of time” combined with a banking system possibly willing, indeed needing to buy existing securities enmasse, this monetary inflation cycle could be far from over.  Perhaps then, in contrast to those that say this monetary inflation cycle is over with the end of QE II, an end to QE II could very well herald in QE III courtesy of the private banks.  We agree, speculation but something we will be watching very closely.

Having said this, and building on Chris Whalen’s thesis, one final thought.  With the end of QE II, if private banks turn out to be a no show in the money creation business, a deflationary, not inflationary scare likely lies directly ahead.  You see, as the Austrians teach, once an inflationary boom begins it by necessity must end in a bust.  Indeed, unless an inflationary boom is fed with more and more inflationary credit a deflationary bust we will quickly get.  And with the first signs on an ensuing bust, a massive QE III effort courtesy of deflation hawk extraordinaire Ben Bernanke is sure to follow.  In other words, if the private banks don’t inflate, a deflationary scare first than another Federal Reserve orchestrated inflationary cycle.  In the end, QE III one way or another.

And now, some final thoughts on M2…

Mainstream Money Supply M2

M2, the mainstream’s favorite monetary aggregate, posted a year over year rate of growth of 5% in April.  And while that’s up 140 basis points from December’s 3.6% and marks the highest year over year rate of growth since November 2009, it’s up just 10 basis points from April’s 4.9% rate.  To M2 watchers, that suggests a possible slowing in the rate of monetary inflation from an already relatively modest rate of growth.  As readers of this site are aware, although THE CONTRARIAN TAKE posits M2 as a grossly misleading measure of the money supply, the mainstream does not.  They think M2 is a perfectly fine measure of the money supply, meaning the gap between the true rate of monetary inflation as measured by TMS2 and the perceived rate of monetary inflation as measured by M2 is a hefty 600 basis points.  That’s a true rate of inflation 2.2 times faster than the mainstream view.  As we discussed in The Bernanke Arbitrage, not only does this faulty M2 metric make someone like Chairman Bernanke, steward of America’s money supply, susceptible to monetary policy errors, but it could very well make currency, commodity, bond and equity investors, that include that M2 metric in their investment deliberations, prone to investment errors that down the line could cost them a great deal of money.

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