When There's No One Left to Trust

Fraud and corruption are being exposed at the highest levels of our financial markets. The integrity of our so called "free" markets has been badly damaged and rightly so. The cover up, fraud and deceit have reached biblical proportions.

When the government decides to intervene on behalf of certain market participants and ignores its own role in the previous bubble and its subsequent collapse, a dangerous precedent is set that destroys trust. When trust breaks down, paper assets become worth less in the eyes of those with money to invest and people turn to reliable asset classes like Gold instead. So far, nothing has been different this time around - history is repeating right in front of our eyes. The old shiny "barbarous relic" is the best performing asset class of the past decade with no end to the Gold bull market in sight. Gold has outperformed Buffett and Gates combined over the past decade by more than a country mile and will continue to do so.

Fannie Mae and Freddie Mac and their willful support of a housing bubble that kept housing unaffordable for most citizens, the Madoff scandal (keep in mind this guy was the chairman of the NASDAQ stock exchange and the SEC willfully ignored obvious evidence of blatant ongoing fraud), bailing out auto companies while trampling on the right of creditors and ignoring our bankruptcy laws and procedures, Hanky Paulson and his looting of the U.S. Treasury, Geithner not paying taxes he knew he owed (he ain't that stupid even though he seems like it sometimes), AIG executives partying in expensive hotels with taxpayer bailout money, the FDIC ignoring obviously insolvent banks and thus increasing taxpayer expense when they finally take over a bank, the SEC banning short selling in its favorite firms while ignoring the fact that its favored firms have illegally used naked shorting for years as a tactic to destroy small firms, etc., etc.

There will always be fraud in financial markets and government. But it has reached a feverish pitch at this time precisely because the secular credit contraction has begun and is now revealing who has been swimming naked. Unfortunately, the government is rushing to put a towel around the biggest and worst offenders, including itself. These are secular sign posts that indicate a long-term change is now well-entrenched: a lack of trust in "the powers that be."

What the government is trying to do is to delay and prolong the pain so that it can be taken over a decade or two instead of letting the chips fall where they may. The common concern is that if free markets were allowed to do their job, then the system would implode and collapse. This, of course, is ridiculous and is why the last U.S. economic depression lasted 15 years instead of 5.

But our government has gotten so large and all-encompassing that it demands to control everything. If prices go up, ban investment and chastise the speculators. If prices go down, ban and chastise the short sellers. If spending doesn't fix things, spend more then act shocked when the deficit comes in at levels higher than expected and raise taxes. If foreclosures get excessive, ban foreclosures. If industries fail, take them over and pretend you are going to make them stronger. If some firms are succeeding despite all the obstacles presented by our regulatory and taxation system, over-regulate them and increase their taxes to help out the firms that are struggling. And if none of this works, label the groups that annoy you or get in your way as "suspicious" or "unpatriotic" - maybe even throw around the "terror" word a little.

Government is a parasite on the economy. Parasites cannot succeed if they kill the host. And yet, the government is killing its economic host, the U.S. economy. The same thing happened in the 1930s in the U.S. and in Japan in the 1990s. It's not the end of the world and it's not doom and gloom, but it does create hard economic times for those not suckling on the government teat.

Stocks and corporate bonds do not thrive in such an environment. Stocks are dead for the next decade as a buy and hold investment and should be avoided unless one is a trader ready and able to play the swings. Because real estate is in a popped bubble, it is a lousy investment for at least the next 5-10 years. Commodities do poorly during a weak economy, which we undoubtedly have, unless one's thesis about rapid currency debasement is correct (i.e. the inflation vs. deflation debate).

When trust breaks down there are few places to hide. Gold and Gold stocks thrive during such times. This is not a 2-3 year general stock bear market and then we return to "the good old days" of a secular bull market for the ages (i.e. 1982-2000). This secular stock market bear has legs and needs ample time to complete. An historic 18 year stock secular bull market requires at least 12-15 years to correct. The "peek-a-boo" plunge below the 2002-3 lows in the major U.S. stock market indices was not a one time event, it was a preview of things to come.

The Dow to Gold ratio is a way to measure these "big picture" swings in the stock market from secular bull through secular bear. The Dow to Gold ratio will reach 2 and may well drop below one during this secular bear market. This is how much damage is required before people will put their trust back in paper promises made by financial markets and the government. In other words, such asset classes backed by paper will need to become this cheap before a new bull cycle in paper assets can occur. The government will fight tooth and nail to prevent this paper decline (because those backing the paper filled campaign coffers with contributions the last election cycle), which will only prolong the agony and not change the ultimate outcome.

We are now entering the hard phase of a Kondratieff Winter, a cyclical phenomenon that is alive and well. The debt must be defaulted on or paid down. The fraud must be purged. Gold must be restored to the center stage. A debt-free asset that requires no trust or economic activity, Gold is not increasing in value and never really does. It is the value of other things that fluctuate relative to Gold. Right now, paper promises and asset prices are collapsing all around Gold because those who stand behind the paper promises have lost the trust of the marketplace.

Once trust is lost, it takes a long time to restore. The only real question for those who understand such long-term cycles and don't want to trade the shorter time frames is what form of cash to hold to help weather the storm. This is the only importance of the deflation versus inflation/hyperinflation debate. Cash is king in this environment as it will outperform stocks, real estate and corporate bonds. I choose Gold as my cash because it is reliable and I live in the United States. Typically, the greatest debtor nations are at greatest risk of currency debasement/capital flight when paper promises crumble during a Kondratieff Winter. Though I could be wrong, I believe this leaves the U.S. Dollar and British Pound suspect over the longer term (I remain intermediate-term bullish and long-term bearish on the U.S. Dollar).

But in reality, the bigger overarching theme that makes this longer-term cycle just a little different than some of those in the past in the presence of an anchorless global fiat monetary system created by the U.S. when we defaulted on our Gold promise and quasi-Gold standard in 1971. I believe Gold will outperform all global currencies for the foreseeable future until this glaring monetary deficiency is corrected.

Gold will survive this mess (and the next) because it has served as money on and off for thousands of years. It will increase in value relative to stocks, corporate bonds, real estate and commodities at least until the Dow to Gold ratio reaches 2 (and quite possibly less than 1). Those betting against this long-term trend fail to understand history and why this cycle will inevitably recur. And as long as there is fiat money backed by nothing but the foul breath of costumed apparatchiks and a private, non-federal, for-profit federal reserve bank corporation, the swings in this Dow to Gold ratio will continue to get wilder and wilder.

This is why major central banks and governments around the world know to hold some Gold and keep it listed on their balance sheets as money. And this is why I recommend people invest at least some of their money in Gold stocks, as the firms that dig money out of the ground when cash is hard to come by will be handsomely rewarded. When there's no one left to trust with your money, turn to Gold.

The Party Rolls On

The Dollar breaks to new lows, the $VIX breaks to new lows and the stock market seems to have an endless supply of bulls to keep the game going. Though I know the ultimate outcome is way down for general U.S. stock indices (to new lows below the March lows), watching has not been fun for this equity bear.

When I started my campaign to "conquer the markets," I decided to put much of my money into physical Gold and use the rest to trade stocks with an emphasis on Gold stocks. Let's just say that based on my trading performance the last 6 months that I am glad I kept a large chunk of my investment money in physical Gold.

I believe the themes will be proven right but the time frames have been wrong and this has cost me a lot of money. This bear is demoralized and has been gored into submission by the bulls. I need to learn to be a better trader and improve my risk management. This is my new quest. Knowing what the markets are going to do in the longer term and making money on this knowledge are not the same thing.

My physical Gold will be held until the Dow to Gold ratio reaches 2 and probably until it reaches one (I will re-assess at 2 and see how things look). This physical Gold is a long-term investment thesis that I believe in and refuse to trade. However, I need to start accepting my limitations as a trader and improving upon them. I think going long here in anything, including Gold and senior Gold miners, is absolutely nuts. However, the next time I start a short position I need to do a better job of executing my trade, managing it and choosing the appropriate time horizon. I have been frustrated in my trading efforts lately.

I know in my heart that I should just buy Gold stocks on the next panic sell-off and hold for the longer term. The lure of "the big" bear market was irresistible to me. I still believe we are in the middle of the nastiest bear market any of us will see in our lifetimes. I still believe an S&P 500 level below 500 is not only possible, but it is the most reasonable and likely outcome.

But I had to vent and apologize to anyone following some of my shorter term charts. I also want other stock bears out there to know that they are not alone in getting creamed trying to short this market. I am uber-bearish but have strangely depleted much of my speculative capital at a time when I know it is needed most. Everyone I read and looked up to as I started to learn about markets and economics explained how difficult it is to trade a bear market. I have paid the price to learn that they were right.

Mea culpa.

"Real" Price of Gold Trying to Break Out

I am deeply indebted to Mr. Bob Hoye of Institutional Advisors (see blog link list if you want read through his free archives) for the concept of the "real" price of Gold and what it means to unhedged Gold miners. Mr. Hoye has his own proprietary index, but I use the Gold price divided by the Reuters Continuous Commodity Index ($CCI) to determine a rough "real" price of Gold.

The "real" price of Gold (as opposed to its nominal price) is how producing Gold miners make (or lose) money. When the ratio of the price of Gold to the ratio of the price of other commodities (some of which, like energy, are heavily used in mining) is rising, Gold miner profitability is increasing. When this ratio is falling, profitability is decreasing. This gets rid of currency considerations and focuses on operating margins and profitability.

The cruel irony is that this ratio most consistently rises during "hard" times, particularly in deflationary secular credit contractions. Swift upward moves in this ratio do not bode well for the price of any stocks and are usually a sign of fear and economic contraction. For example, a big spike higher in the "real" price of Gold occured during the Great Fall Panic of 2008.

It looks like this ratio is trying to break out (much like the Volatility Index [$VIX]) to the upside. This is not necessarily short-term bullish for Gold miners if it occurs, but it is definitely long-term bullish because it means Gold miners will be increasing their profits. I remain wary of the current run-up in the Gold and silver price (at the risk of incurring wrath and ridicule, I'll mention that I actually sold a big chunk of my modest physical silver hoard today). I am not a great market timer if the last 6 months is a decent guide to my skills as a trader, but I still strongly believe the U.S. Dollar is bottoming on an intermediate-term basis and I still believe a wicked bear leg down in the general stock markets is dead ahead.

These two core underlying beliefs (Dollar intermediate-term bottoming and wicked stock bear leg coming) color my thinking and, if they turn out to be wrong, I'll be kicking myself due to missed opportunities. Oh, well, such is speculation. My physical Gold will be held until the Dow to Gold ratio reaches parity.

Anyway, I am not buying miners here, but am eagerly anticipating the expected upward breakout in the Gold:CCI ratio, as it will lay the fundamental groundwork for a massive bull leg higher in the Gold mining sector. When the next stock market puke fest occurs, I will again be buying Gold miners large and small. Because the Gold miners have not yet met my criteria for a solid bottom, I am mostly watching from the sidelines right now (bummer!).

Here is a weekly candlestick chart of the "real" price of Gold over the last 18 months:



Remember that I have some core thoughts that do not align with most Gold bulls and yet I am on the same side of the trade as they are. I think we are in for deflation and cash is king during deflation, with Gold the best form of cash. Deflation is much more consistently bullish for Gold miners than inflation is. I, too, fear a currency devaluation but do not think that this will necessarily spark significant inflation overall (but is the reason Gold is my preferred form of cash). I am also not interested in investing in commodities (for now) and think they are about to get killed (again).

Real Estate - The 800,000 Pound Deflationary Gorilla

The housing market is rapidly deteriorating under the surface. A housing price collapse is a highly deflationary event because it affects so many banks and individuals. We are not close to a bottom in the real estate market and it is essentially almost impossible for it to come before the 2011-2012 time frame. If our government insists on continuing to subvert what's left of the free market system in real estate, it may take another decade to find the bottom.

Here's a recent headline for you: "Nine years worth of condos flood uptown Charlotte." This is Charlotte, North Carolina folks. We're not talking about an obvious place like southern Florida, California, or Las Vegas. We're talking about a fairly typical non-coastal American city (I mean no offense to those in Charlotte who believe they are above or below average). Nine years supply at the current sales pace while credit continues to get tighter and unemployment is still rising?!

Banks are now hiding foreclosures and refusing to list foreclosed homes on the market! Even worse, banks are allowing people who stop paying their mortgage to stay in their homes for 2 YEARS OR MORE without taking back the house.

This means that there is an absolutely huge pent-up supply of homes that will need to be sold onto the market eventually. This supply will hit right as the psychology for "investing" in real estate turns seriously south. People will be looking to rent, not buy, and yet an absolute flood of homes will need to be brought to market in this environment. By the way, the ability of people to buy (due to worsening unemployment and and ever tightening lending standards) will have decreased further as this supply eventually makes its way to the market. Many of these homes will be rented, forcing rents to decline as well (which in turn lowers the value of a home for a potential investor looking to buy a rental property).

Real estate is dead. Who can revive it? Government can (NOT). But that won't stop government from trying. "Stimulus" buying incentives trying to revive a burst bubble is a waste of people's hard-earned money and won't stop the slide in real estate prices, but it will destroy taxpayer wealth and lock unsuspecting citizens into debt on a depreciating asset.

According to an article in the Financial Times, Fannie and Freddie have "backed more than 70 per cent of new home loans since 2008." These loans, of course, will go bad in high numbers. Fannie and Freddie also have $5.5 trillion of outstanding debt and guarantees on securities and a combined $1.5 trillion of mortgages and mortgage-backed securities on their balance sheets according to the same article as well as getting heavily involved in the "loan modification" push from the current administration. The government is now backing 90% of new mortgages according to a different article in the Washington Post, since private banks are smart enough to stop making loans in this environment. So, the taxpayer will get ass-raped (again) as this house of cards is allowed to gradually collapse and implode. Anyone with any common sense can see that this is a huge pending disaster that now cannot be avoided, but I guarantee that politicians will act surprised when this causes a second (and third) real estate and fiscal crisis.

The moral hazards now in place have staggering implications. If your neighbors can live in their house for free, why should you pay the mortgage? If you're going to have to pay for the housing crisis anyway via taxes and looting of the U.S. Treasury by the banks, why not get something for yourself and/or your family by living for free and then walking away (might as well trash the place on the way out, too, just to get even and let off a little steam). I am not advising such behavior (though walking away may well be the best option for many individuals depending on state law and specific circumstances and I understand the frustration behind a "trash out"), but I am saying that such thinking and actions make sense to a significant portion of those who currently hold a mortgage. And for those who don't follow such things, this is not a subprime borrower issue (that's yesterday's news!), this is a prime borrower issue!

The housing wealth effect in reverse is also a powerful deflationary concept. People in aggregate can no longer use their homes as ATMs by taking out home equity lines of credit and other cash-out refinances to fuel consumption. Predictions that half of U.S. mortgages will be underwater by 2011 are not one crazy bear's thoughts, they are mainstream views! People who owe more on their homes than they are worth feel poorer and act accordingly (in aggregate). This decreases consumption and the consumer is needed to get "growth" back on track in the U.S.

And what about commercial real estate? Everyone knows this shoe is dropping right here and right now as retailers, restaurants and real estate-related businesses (among other types of businesses) see their sales drop off a cliff and are unable to make lease payments. Here's a brief summary of some ballpark numbers of the size of the problem, though I note with amusement that the author of this piece is already calling for a bailout (when in doubt, put it on the taxpayers' tab!).

All this real estate debt and all the pending defaults that will help lower the staggering amount of debt outstanding are highly deflationary. They will ensure a steady and high rate of bank failures for at least the next few years. To make things worse, the FDIC is essentially bankrupt already and we are just getting started with the bank failures. The FDIC is also conveniently ignoring undercapitalized banks for as long as possible (because they are broke and don't want the bad press of tapping their U.S. Treasury line of credit, which of course they are going to have to do eventually). This will end up costing taxpayers even more money when the involved banks are finally placed into receivership.

With banks unwilling and/or unable to lend (because they are scared and/or insolvent) and with citizens broke, drowning in debt and fearing a pink slip every day, the private, non-federal, for-profit federal reserve bank corporation is not going to be able to spark price inflation in asset classes like stocks, commodities or corporate bonds. And you can forget real estate. This popped bubble ain't coming back for at least a generation. Even once we hit bottom, we will scrape along the bottom for a few (several?) years.

This so-called gloom and doom is good news for savers and renters! Not only will home prices continue to fall, but rents will fall as well, so it will be cheaper and cheaper to live on a monthly expense basis and you will be able to save more money each year to buy a house in the future. This, of course, assumes that you can keep your job and income level and you put your savings in a safe place.

Consider putting some of those savings into physical Gold on the next Gold price drop, as Gold will continue to rise relative to real estate prices and provides insurance against a currency event that won't stop deflation but will devalue the U.S. Dollar significantly. Here's a chart stolen from an article by Adrian Ash at bullionvault.com (and defiled with my scribbles) that shows how much further housing prices will drop when priced in Gold before we reach "the" bottom in real estate in the U.S.:



There will be deals of a lifetime in real estate (even better than this one, which by the way shows that we have moved beyond the 1st inning in this real estate collapse) over the next decade for those who are patient and who can maintain some capital. In the mean time, the ongoing real estate bubble popping is an 800,000 pound deflationary gorilla that cannot be ignored in the inflation vs. deflation debate.

India - Could it Happen Again?

Here's the Bombay Stock Exchange 30 Sensex Index ($BSE) on a weekly 4 year chart. I'm assuming it won't repeat exactly as the last major top, but I certainly suspect we're in for something similar for this index:



We certainly seem to be setting up for an interesting fall (in the seasonal and price sense). I don't think it will be boring.

Gold is a Currency You Can Rely On

I get comments and questions from people who don't understand why Gold is money and don't understand why it has any value other than as jewelry. The two most important functions of money in my opinion is that is function as a unit of exchange and a store of value. Money should also be durable, portable, divisible, acceptable, uniform and in limited supply to function effectively.

Gold meets all of these characteristics with the exception of acceptability. It is true that you cannot use pieces of Gold to buy things in most modern settings. This is because most governments around the world have made Gold illegal for daily transactions because they do not want competition for their fiat (i.e. "by decree") paper currency. However, Gold can be exchanged for local currency almost everywhere in the world, so in a sense, it does have a limited form of widespread acceptability.

Paper money, we all know, is a terrible store of value. The U.S. Dollar has been losing value rapidly ever since we severed our link to a true Gold standard. Let me give you an example of the difference between Gold and paper money over the long haul. Let's say you had $100 worth of U.S. paper Dollars in 1930 and $100 worth of Gold at 1930 prices (Gold was fixed at $20.67/ounce back then by the government). Today, you would still have $100 in nominal U.S. Dollars, but it would buy much, much less in actual goods than it did in 1930. The Gold, however, could be traded in for slightly more than $4800 U.S. Dollars today (as of Friday's closing spot price for Gold).

But Gold hasn't changed over the years, hasn't grown, hasn't paid dividends and hasn't increased in its intrinsic value. Gold essentially has not become more valuable, paper fiat Dollars have become less valuable. Those who think steady inflation year after year is healthy are either bankers, politicians, or brainwashed by modern economic theories espoused by jokers like Paul Krugman. Up is down, right is left, and increasing debt and punishing savers is healthy!

People wonder why money can't be backed by oil or rocks or food. With rocks, the problem is the same as with paper only rocks are less portable, namely that rocks aren't scarce enough and thus inflation would be rampant under such a system. With oil, portability is also a problem. Who wants to carry around a cup of oil in their pocket? Food spoils, so durability is a problem.

Why is scarcity an important quality for money? If you don't know the answer to this question, look at what the U.S. Government and their non-federal, private, for-profit federal reserve corporation are doing. "Stimulating" the economy by printing new money and debt requires no more effort than a keystroke on their part! This leads to excessive monetary expansion, excessive debt, and rolling bubbles and collapses in asset prices.

Under a Gold standard, if the government expands its promises too far, people simply exchange their paper notes for actual Gold and deplete the government of its resources. In other words, those who hold paper exchange notes can act as a "check" on government power by redeeming them for Gold. Spendthrift governments have their Gold stores depleted, which eliminates their economic power and prevents them from pursuing their harebrained schemes. This is why Nixon had to suspend even the quasi-Gold standard in 1971 - we couldn't afford all of our social programs and our war and the rest of the world knew it!

The other issue with Gold is a long-standing history as a form of money extending on and off over thousands of years. This cannot be ignored. America as a country is so young relative to much of the world. Gold is steeped in the tradition of certain countries like India. When the shit hits the fan, Gold has always functioned as a medium of exchange and store of value. So a strong reason for its continued role as a "currency of last resort" is that it has always worked in the past.

I am not saying a Gold standard is without problems and I am not saying it is the solution to all our problems. Even if we returned to one some day, a government would come along during a crisis and just suspend it again. But keep in mind that both the United States and Britain enjoyed their greatest years of growth and steady prosperity on a Gold standard and both began to decline shortly after abandoning the Gold standard. This is not a coincidence!

Give politicians (who are trying to get elected by winning a popularity contest) a nearly unlimited ability to make promises with other people's money and they are going to continue to make promises until they destroy the system. This is how it has worked with every fiat system in history and how it will continue to work as long as human beings are in charge. What politician can resist such power? Who can resist taking the easy way out, whether citizen or politician? Who as a citizen can resist asking for more free stuff when every wish seems to be granted and seems to have no cost?

In essence, Gold meets all the criteria needed for a successful form of money except where governments have stepped in and suspended reality under threat of force (they have used this force before and will again). But when things get bad, the smarter citizens of the world will ignore their apparatchiks as they have throughout history and turn to what actually works. Economic self preservation overrides concerns over following the mandates or whims of some elected bureaucrat trying to lead his or her flock to an economic slaughter. The global fiat system we have currently is on its last legs. That doesn't mean it can't last a few more years and that doesn't mean we won't jump from one fiat system to another new one, but it does mean that every country involved in international trade is at risk for massive currency fluctuations throughout this process. When the change comes for whatever countries are involved (many are at risk), it won't be announced in advance and you won't be given time to prepare.

The United States has the most to lose if the fiat currency regime is altered, as the new system will certainly be more equitable to other nations. Though I believe the U.S. Dollar is set to rise on an intermediate-term basis while another vicious leg of asset and debt liquidation creates a bid for Dollars, I also believe Gold has a much brighter outlook as a form of money and store of value over the longer term than the U.S. Dollar. Since I believe we are in deflation and a Kondratieff Winter has begun, I prefer cash to stocks, commodities, corporate bonds and real estate.

For those who are not nimble traders and when ignoring the short-term swings, Gold will remain the best form of cash for the foreseeable future. Maybe the Dollar and Yen are better over the next few months, then the Euro may rally again, then the Aussie Dollar may run, etc. But the entire global fiat system is in a bear market relative to Gold and that bear market in paper has a ways to go.

Interest Rates - Inflation or Deflation?

I keep returning to interest rates every time I read a persuasive inflation article. I think the inflation-deflation debate is critical when looking at asset class allocation. And I am more interested in price action than high level academic discussion regarding what is deflation and what is inflation.

I am more interested in the symptoms of inflation and deflation as an investor. In other words, I am interested in predicting stock, commodity, and corporate bond prices and the value of holding cash rather than winning a theoretical academic discussion about what inflation actually is. A valid argument can be made that neither heavy inflation nor heavy deflation are healthy for stock market prices. In heavy deflation, stock and corporate bond prices get hurt in both nominal and "real" (i.e. inflation-adjusted) terms (i.e. the 1930s). In heavy inflation, stock prices may hold up relatively well in nominal terms but suffer in "real" terms (i.e. the 1970s).

Commodities are a disaster during deflation and do well during heavy inflation. Cash is a disaster during heavy inflation and a good investment during deflation. Gold is a hedge, as it is a form of cash and holds its value well during deflation but often tracks commodities during heavy inflation. I don't see a "muddle through" middle ground as a reasonable option at this point in time and all of these statements about these asset classes are obviously generalizations.

Anyway, I think the key to this debate lies with interest rates. The chart below in my mind gives a big picture overview that screams "deflation" rather than "inflation." It is a long-term monthly chart of 90 day U.S. Treasury Bill rates from 1915 thru July of this year, stolen from thechartstore.com:



I have shown this chart before, but want to stress its importance. In aggregate, the bond market is a huge and relatively sophisticated market. Why is this market not predicting inflation? All markets can be manipulated in the very short-term and can be distorted by governments, but what is the explanation for the long-term trend, which remains down for interest rates? If we are about to go thru the 1970s on steroids, why aren't interest rates rising?

I think we have entered a Kondratieff Winter and interest rates will follow the path of the 1930s. I think anyone who can manage to hold onto their money somehow will be able to buy stocks, corporate bonds, commodities and real estate at pennies on the dollar. I think peak oil and the secular oil bull market is over. I think general stock market indices in almost every country in the world are headed for new lower lows and I think the prices of real estate are going to fall much further (so far that it will shock the permabulls who are constantly looking for a bottom even though they never even saw the top coming).

Gold is my cash. I prefer Gold to U.S. Dollars because I worry about geopolitics and I also worry that politicians will find a way to devalue our currency against something (perhaps a new international trading dollar?). The Dollar may do fine and my fears may remain unfounded, but holding Gold is a risk I'm willing to take. And remember that even a one-time currency devaluation is not going to cure deflation (just like it didn't in 1934) - debt must be purged from the system before a new inflationary cycle can begin. America is drowning in debt and has reached the saturation point in aggregate.

The credit/debt markets cannot be ignored when examining inflationary factors in our "modern" fiat system and debt markets are collapsing in the private sector. Since the government does not create the primary trend, they are largely irrelevant. Gold, of course, hedges against government instability and bank holidays anyway so it offers insurance against a scenario in which the government overwhelms the private system through brute force and incompetence (not impossible...). The unconstitutional, non-federal, for-profit federal reserve bank corporation will look out for its own interests and protect its lucrative franchise - for a bank, this does not mean making reckless loans to the private sector when you know you won't get paid back.

Even if Gold declines slightly in nominal price, it will continue to rise relative to all other major asset classes and thus will increase the wealth of those who hold it. It is a better play than stocks, commodities, corporate bonds, municipal bonds and real estate in deflation. I am not saying that people should put all their money in physical Gold, but they ought to hold a little in this environment. Unfortunately, most won't acknowledge or realize this until the stock markets have made their next major lows, which will be lower than the March, 2009 lows.

Let's Get Physical With China

The recent development of the Chinese government no longer restricting Gold and silver ownership and now actively promoting it is a very, very big deal (see article reporting this here and see this clip from Chinese television promoting silver - please remember that this item would not appear on Chinese television without explicit central government approval). To quote from the linked article:

"The Chinese are being converted from being the lowest per capita [G]old consumers in the world to a nation of small precious metals investors. Now, by next year, Chinese consumption of [G]old is likely to exceed that of India, which has been for years the world's biggest [G]old market."

This will generate huge physical demand for Gold and silver. I am currently intermediate-term bearish on silver and neutral on Gold because I still believe we need another deflationary price wave of asset liquidation. However, this story is a longer term development that is wildly bullish for precious metals investors and owners.

The physical markets for Gold and silver are severely constrained. Those who say otherwise are dishonest or ignorant. Paper Gold and silver, which is not the same as Gold and silver at all, is plentiful. It is easy to buy the GLD ETF, a futures contract or some other paper proxy for actual physical Gold. I think these instruments defeat the purpose of Gold and silver investing and actually help to keep the price much lower than it should be. I do not advise paper Gold. Those who want paper investments should invest in Gold mining companies, but I think it is prudent to first secure some physical Gold as a portfolio anchor and insurance against paper defaults.

The development of the Chinese government actively encouraging physical precious metal investment is not just important because of the sheer physical demand this move will generate. It is also philosophically and politically important and is yet another sign post pointing to the end of U.S. Dollar hegemony for those who care to pay attention.

A government with a fiat currency that is backed by nothing but paper promises should be trying to get its citizens to despise Gold! Gold is the enemy of fiat currency regimes and always has been. America has been taught that Gold investing is kooky or weird and for "end of the world" types. This mantra has been repeated by the mainstream financial community over and over and Americans, in aggregate, have been brainwashed to believe it.

Why wouldn't the Chinese, who have an unbacked paper currency pegged to America's unbacked paper currency, promote saving money in Yuan to their people? Why wouldn't they tell their people how strong their banks are and how they can earn 5% or 10% on a long-term certificate of deposit? In short, why aren't they lying to their people about money as our government lies to us?

There aren't many reasonable options for this conundrum. They all center around one theme: the Chinese government wants more Gold and silver within its borders. Why would it want that? What is the point of the central government promoting an investment class that creates very few jobs and has little prospect for immediately growing the Chinese economy?

I believe China is preparing for a post-U.S. Dollar world and I believe they are planning to promote a precious metals backed currency in some form (whether their own or an international currency for trading purposes). I believe this is being done methodically and gradually by China and I believe it has grave long-term implications for the U.S. Dollar.

Though not good for the U.S. Dollar, a return to sound currency on any scale is a welcome development in my mind. Gold is money. Gold is a check on spendthrift governments that insist on Keynesian insanity. Gold stands in the way of those who believe increasing the indebtedness of a country is a way to grow or stimulate anything besides debt and increased central bank power.

While China has begun promoting real savings to their people, the United States continues to deny reality and promote toxic waste to its citizens, pretending that our Dollar is strong and our banking system is solvent. When demand for Gold and silver increases in the United States, our government conveniently stops making the retail coins they are legally bound to produce. The more popular these U.S. Mint coins become, the less our government wants to make them. Here's a previous rant on this topic.

When stepping back from the day to day price swings, this is a big picture of an emerging economy and a declining one. It is not pretty. And please don't think I'm excited by the prospect of China gaining global power - I'm not. I wish it weren't so. American citizens need to buy physical metal in much bigger quantities than they have so far. Our government should be promoting physical precious metal investment and should be falling all over themselves to provide an unlimited supply of U.S. minted Gold and other precious metal coins. But alas, up is down and right is left in a fiat world, so all I can do is scream and yell in cyberspace to let off a little steam and hopefully let a few people know what's coming so they can prepare.

As an aside, many people have asked me about how to buy and store precious metals. I am going to summarize how easy it is in one long-winded paragraph!

You can buy $10,000 worth of Gold by buying ten 1 ounce coins and it is roughly the same physical size as a $10 roll of quarters. Why are people concerned about storage? If you can't find a safe place to put an object the size of a $10 roll of quarters, then you may have to consider paying for a safety deposit box or other storage facility. If you have hundreds of thousands of dollars to invest, well that's a different story (email me - let's do lunch!). I recommend government 1 ounce coins for novice investors (e.g., American Eagles, Canadian Maple Leafs, South African Krugerrands, Austrian Philharmonics) and they can be mail ordered with minimal shipping costs (may be cheaper than using a local coin shop but there's nothing wrong with comparison shopping for such a big purchase). I would buy whichever of these 1 ounce coins has the lowest price on the day you are ready to make a purchase and avoid "rare" or "special" coins and just go for the plain Jane cheapest 1 oz. government Gold coins you can find. I have used several dealers in the past and never had a problem with any of them but I like apmex.com and gainesvillecoins.com (no financial relationship with these firms other than as a customer).

Let's get physical along with China and restore some of the wealth destroyed over the past few years by replacing it with actual debt-free savings.

Paper Gold During a Paper Promise Collapse?

I know many are excited about today's Gold, silver, and Gold and silver mining action today. It was an explosive move, to be sure, but before breaking out the champagne glasses, let's see what the move looks like in a few weeks. Remember, buy on weakness, not strength. Don't chase prices higher. If you bought precious metal investments a while ago, enjoy! If not, don't let fear of "missing out on THE big move" make you buy high only to find out in a week it was just da big boyz trying to lure you in before a big drop.

Long-term investors are just that. Traders are just that. When trying to trade, we all look for low-risk entry points to maximize our chances of success. I don't trade physical Gold, I own it. I look to buy more on weakness, not strength. I do trade the Gold miners and have had some success doing so. I would not consider adding new money to Gold miner positions here.

Anyway, rather than talk about the more obvious Gold and Silver price spikes along with the respective miner spikes, I would like to talk about paper instruments as a substitute for physical Gold. I don't like them and I think they are designed to trap the unwary. You see, Gold is the antithesis of Wall Street. Don't get me wrong, Wall Street traders are happy to trade any market they can move and make money in.

But Gold has no growth prospects, pays no dividends and really never changes. The world around Gold changes. Investing in Gold is a vote of "no confidence" in Wall Street and their sales pitches. Taking delivery of actual physical Gold rather than just buying the GLD ETF or other paper substitute is seen as "kooky."

People think it's risky to hold physical Gold but they will trust their life savings to Madoff, Goldmun Suchs or Citibank (aka Shittibank). The "paper" guarantees of the FDIC and SPIC are certainly likely to hold up for a while longer. But when it comes to Gold, you are basically betting on contraction, hard times, monetary storms and government instability. These are not rosy investment themes.

That doesn't mean these are incorrect themes for the current investment climate - actually, they are dead on accurate. What it means is that how you invest in Gold may end up being just as important as whether or not you do at all. I bring this up due to recent rumblings by the apparatchiks that commodity speculation has gotten out of hand.

The apparatchiks may be right, they are just a year late. New regulations on commodity limits have caused a double bullish ETF on oil (ticker: DXO) to be closed (here's a link with the story). I think now is a terrible time to be long commodities (Gold is not a commodity, it is money, but Gold is viewed as a commodity by those ignorant of such things like apparatchiks). However, I respect anyone's right to trade any instrument and they may end up making lots of money and I may be totally wrong about oil. My point is that DXO closed down just over 7% today while oil was flat. Not performing as advertised, eh?

Why did this anomaly happen? Because the DXO ETF is being shut down. The apparatchiks have put Deutsche Bank (the proprietors of DXO) in a position where it didn't make sense for them and/or would be illegal to keep this ETF going.

Such rule-changing actions taken unilaterally by regulators who have little to no knowledge of the markets they regulate and how they function hurt U.S. financial market credibility (as if our markets needed another blow!). These specific actions also hurt liquidity in the commodity patch, as retail investors traditionally shy away from the commodities futures markets due to leverage but were "all in" on commodities these past few years due to these new ETF-type instruments. Now, those against speculating in commodities may have some valid arguments, but it's a little late for that discussion, eh?

If Gold starts doing well while other financial products like stocks, corporate bonds and even government bonds do poorly, look out! Paper Gold is ripe for attack and "forced redemption" to be paid out in paper dollars at a discount to the "street value" of physical Gold, not a premium. Those who think they are insured may instead end up losing more than 7% on a day when Gold is flat or up - they may lose the most important part of their investment. That part is the insurance physical Gold provides against broken paper promises.

You can't eat Gold and I don't think you can have sex with it (I've never tried...), but you can hoard it as a means to preserve wealth and purchasing power. I'm not talking end-of-the-world scenarios here - not even close. I'm talking about more and more promises being broken as this credit contraction and economic depression grinds on (we're in the 1st inning here, folks!). Make sure you secure at least a little physical Gold once the price drops again if you haven't already (buy on weakness, not strength).

I love to speculate in paper, but one must be cognizant of where we are in the long-term cycle - a Kondratieff Winter is no laughing matter. As the Dow to Gold ratio continues to creep towards parity, more and more paper promises will be broken. Those who hold paper Gold don't hold Gold, they hold paper. And paper Gold is suspect right now, especially when one looks at the actual firms backing paper Gold products like the GLD ETF. Don't make the right bet and find that you are unable to collect on your winnings.

Actual physical Gold confiscation threats are unnecessary, as Wall Street and its siren song have convinced people to trust them with their paper products instead. With stocks, there is little choice - almost all the action is in the casino and even those who have secured physical stock certificates are still holding only a paper claim. But with physical Gold, you're able to keep at least a few toes outside the casino in case it catches on fire.

The Long Awaited VIX Breakout

At least long awaited by me as a bear! This should be the real deal and I believe indicates that the next leg of the bear market has begun, although markets don't move in a straight line and a rally back up to re-test the highs before a rapid fail is conceivable. Cash (including U.S. Dollars and Gold) and being short are the best trading positions right now in my opinion. If you are not short yet and want to be, remember to wait for a bounce higher first.

Here's a one year linear candlestick chart of the Volatility Index ($VIX):



The $VIX breakout corresponds with the S&P 500 breaking down out of its' terminal wedge, a not unexpected occurrence (11 month linear candlestick 60 minute intraday chart):



My tentative game plan is to stay short the silver miner Pan American Silver (ticker: PAAS) for a little longer, try to close the puts at a decent profit when things start looking oversold on a daily chart, then consider going long Goldcorp (ticker: GG) or the GDX ETF for a short-term trade if either gets whacked good and hard. In my idealized world, I will get out of the short-term Gold miner long trade, switch to going heavily short general stocks for the second deeper equity plunge, then bet the ranch going long Gold miners say around November or December. These things are all subject to change depending on market action (such is the life of a speculator, as markets rarely give us what we ask for...).

Remember, though I am wildly bullish on Gold miners in the long term, we are still in the middle of the worst cyclical general stock bear market that most of us will get to see in our investing lifetimes. I am not interesting in being loyal to Gold stocks, I am interested in trying to make money speculating. I own plenty of physical Gold as my "safe," long term cash holding, since Gold will continue to vastly outperform the stock market like it has the last 10 years. Once we are closer to the next intermediate-term bottom in general stocks, Gold stocks will start to move higher regardless of the general stock market. But we are not there yet. For now, I am short. I promise that I will shout loudly once I think we're near the bottom in Gold stocks (like I did last fall).