Junior Gold Mining ETF?

The folks behind the GDX ETF, Van Eck Global, are apparently planning to launch a junior Gold mining ETF. Here's a link for those interested in reading the preliminary info.

This is big news and will bring liquidity into this sector of the market. A diversified basket of miners is exactly what is needed in the junior Gold mining sector due to the high individual company risk. I think Van Eck Global is smart and is starting this fund at the right time (looks like it will take a few months for it to be available). I for one will be buying junior Gold miners in spades before the year is over and will certainly use this planned ETF if its holdings and expenses look good.

Junior Gold miners are going to become a raging bull market soon and this ETF, if it comes to fruition, will only hasten the stampede into this sector once it gets going.

Gold stock correction

Though a double-top is possible, I believe the intermediate-term bull move in senior Gold stocks is over. So the question for Gold stock bulls is when to put more money into the sector. There are two issues in gaming a correction in a bull market - time and distance.

I think both are important. If you look at previous corrections in Gold stocks, some important "pointers" can be learned. There is no question that trying to time a bull market can be fraught with hazard and you can miss out on profits and even lose money in an obvious bull market using such tactics.

However, I for one am going to continue to try. Gold stock corrections at the intermediate-term stage take a minimum of 4-6 weeks to reach the price bottom and even then they usually meander around for several months in the summer and don't get moving until the August-November time frame. "Sell in May, go away, and come back after Labor Day" is unlikely to be an unprofitable strategy this year.

I know that Gold bulls don't want to hear it, but now is not a good time to put new money into senior Gold miners unless one is truly committed to dollar cost averaging into this sector over the next several years. Junior miners and explorers are a wild card, as these are about to become lottery ticket plays and timing them is an arduous task for people far better in trading than me.

For rough guidelines, I think waiting AT LEAST 4 weeks from the June 1st top is prudent. I also believe it is HIGHLY likely that senior Gold mining indices (e.g., $HUI, $XAU, GDX) will touch their 200 day moving average on a daily chart at some point before this correction is over. I also would not buy the senior Gold stocks until the RSI on a daily chart is solidly below 40 (and preferably at or near 30). These three guidelines are probably the best recommendations I could give.

If the Gold mining indices aggressively and precipitously drop to their 200 day moving average within 2 months, then that could be a trading opportunity for a summer swing that may be good for a 30-40% bull trade (or just a good long-term buying opportunity with the understanding that a second low will likely come in later at similar levels). If the correction is shallower and choppy, it will likely last until the fall as a sleep-inducing affair until the 200 day moving average can catch up to the price.

It must be remembered that I am a short-term deflationist and the type of bear market I believe we are in for general stocks has a long way to go. If we break below the March lows in the general stock market indices (which I believe we are going to do), there is no way Gold stocks won't get caught up in a heavy and deep correction. It would be naive in my opinion to think otherwise.

However, when people are dumping Gold stocks again this summer and/or fall, just like last fall, I will be buying. Here and here are some of my real time calls to buy Gold mining stocks from last fall.

Given the heavy volatility that I expect dead ahead, my hunch is that the Gold stock correction will be violent rather than shallow. This may present two buying opportunities (i.e. a zig zag correction with one bottom coming up in the next 4-8 weeks and the second bottom in the fall) before the next leg up in Gold mining stocks. Here's a chart of GDX as a representation of a buyable Gold stock index with my thoughts:



Though I think it is too early to buy the senior Gold mining stocks right now, I remain bullish on small cap Gold royalty company Royal Gold (ticker: RGLD) and continue to hold 2010 bullish LEAP option calls on this stock. RGLD has a propensity to march to its own drummer and doesn't always follow the senior Gold stocks. It's long-term chart is much different than most senior mining stocks and it has recently undergone a long-term breakout from a mult-year trading range (see previous comments on RGLD). The fractal I am following from 2001 remains in play:



And here's a current RGLD weekly chart thru Friday's close:



I personally believe that there is more money to be made going short in general stocks right now than chasing Gold miners but for those who want to play the bull side, patience is now key in the senior Gold mining stock sector. There will be plenty of time to buy at lower levels than today to maximize profits. For now, I think being risk averse (e.g. in U.S. Dollar cash, Gold or short-term U.S. government bonds) and waiting for a better buying opportunity in Gold stocks or being short the stock market are the best options. I would not put new money into senior Gold stocks right now. I still believe Gold has a good chance of making a nominal new high in the next month after the current mini-correction is over.

Goldman Sachs - keep your eye on the pig

Fat, sassy, and the poster child for all that is wrong with Wall Street. They're sharks and tough as nails until things get rough and then they steal, cheat and cry. They have infiltrated governments and have insider information and yet they still managed to get creamed in the ongoing financial collapse.

The chart of Goldman Sachs (GS), love 'em or hate 'em, is an important bellweather for the stock market in this vicious cyclical bear market within the context of a secular bear market that is far from over. Once GS cracks good and hard, the bears will be coming out of the woodwork to short anything with a pulse. I never thought they could make it this high on the rebound and they are now at nosebleed, make-or-break levels.

I think this pig fails and takes down the stock market with it, but to the charts (an 18 month daily candlestick affair):



Here's the financial sector as a whole using the XLF ETF as a proxy (also 18 month daily chart):



And the internals are slowly crumbling using a bullish percent chart of the financial sector:



I am uber-bearish on the stock market and never though this sector would rally this high, to be sure, but here we are. The fireworks are imminent and the carnage this bear is about to reap will spare almost no company with a ticker. Once GS breaks cleanly, we're going down hard and it won't take long.

Bond yields soaring

is not always an inflationary event. The traditional teaching is that rising bond yields indicate economic recovery and/or inflation. This is true until it isn't. The problem is that the best parallel for when it ain't true is what's happening right now. Damn, this investing stuff gets complicated when you look through actual history.

Here it is in all its glory: A monthly long bond price chart from 1921-1933 (remember that a falling bond price means a rising yield):



Ok, so what gives? People flee risk at this point in a secular credit contraction/economic depression and liquidity dries up. Governments get desperate and risky at this point in the cycle, so people rush into cash, Gold and short-term government debt as the longer-term outlook becomes uncertain. As the chart below demonstrates, the fall in long bond prices in the early 1930s actually represented a great buying opportunity (chart stolen from www.thechartstore.com):



So, when the Gold bugs say that rising bond yields indicate the coming hyperinflation and when the CNBC jag-offs say the rising bond yields are due to a recovery and/or concerns regarding inflation, ask them to explain bond yields between 1931-1932. I am not saying that there won't be a coming inflation - of course there will be, eventually. But the path we have started down is deflationary, not hyperinflationary.

Eventually, all fiat currencies depreciate until they are completely worthless and subsequently abandoned. That's as safe a bet as there is! But the death throes of a fiat currency in extremis are not as easy to game as you might think. A deflationary collapse can precede hyperinflation (or just regular aggressive inflation) and holding Gold is thus the easiest no-brainer investment for the typical retail investor in this environment.

Holders of Gold will do just fine in this deflationary environment. Those who understand Gold know that Gold is money. Gold is a currency. Holding "real" cash in a deflationary depression maintains wealth and enhances it relative to one's neighbors who stay invested in stocks, commodities, corporate bonds and real estate. If you hold onto your physical Gold, you will be able to buy your neighbors' stocks, commodities, corporate bonds and real estate at pennies on the dollar in a few short years.

This is where I part company with many deflationists who think the Gold price will collapse during deflation. To assume so is to defile Gold and relegate it to commodity status when it is well known that Gold is money, not a commodity. If cash is king during deflation, then Gold is the grand emperor wizard senior king. Being no one's liability and being non-debaseable are qualities that become critical during times that create desperate central banks and governments. Why else would governments punish holders of Gold with unfair capital gains taxes and sometimes even confiscate citizens' Gold (like in 1933)?

I believe Gold will outperform every form of fiat currency, including the U.S. Dollar. I also believe Gold will trounce other commodities, including oil. Nothing like severe demand destruction to trump peak oil and export-based economies like China. Gold outperforms in a Kondratieff Winter because it requires no confidence, no economic activity and no risk taking. We all also know that the reserve status of the U.S. Dollar is in trouble and that a geopolitical event could dethrone it.

Central bankers own more Gold than anyone. Let me repeat that in case you've missed the profound implications of this basic statement: central bankers own more Gold than anyone. You think the central bankers are going to be the losers in this mess? Hahahahahahahaaaaaaaa!

Get some physical Gold. You won't regret it. When the Dow to Gold ratio gets to 2 (or lower as I personally anticipate), you can think about trading Gold for something else.

A freakin' pay czar?

Obama has just proven that he and his administration are total jackasses with no concept of their abilities (i.e. lack thereof) and no concept of history. And this is the optimistic scenario! The pessimistic scenario is that they know exactly what they are doing and are trying to make sure this is a worse economic depression than the last one, perhaps in an attempt to move towards a regional or international currency to replace the U.S. Dollar?

A pay czar?! Really? So now we just openly refer to federal government positions as czarist, as in tyrannical or perhaps related to an emperor or king?

This meddling in the affairs of business will triple the severity of this economic depression that has already begun. GM, Chrysler, the banks, AIG, pay czars, TARPs with strings, too big to fail, nationalization, increased regulation and taxation. It's all completely counterproductive, has been every time it has been tried, and I know Obama is smart enough to know it, which is why I grow more cynical every day.

Hoover did the same thing in the early 1930s. Yes, Hoover, not FDR. Revisionist history claims that Hoover did nothing and the federal reserve acted too slowly in the 1930-1932 period, which is why the last depression occurred. Forget the actual facts and events of that era, as facts are no longer relevant in the United States. Just parrot whatever is said on CNBC when you're talking about "The Great Depression," as what they say is the only truth.

And of course forget the president who enacted an insane amount of interventionist policies during the 1930-1932 time period that forced most small business owners to run for cover and close up shop. This quote is from Hoover himself on the campaign trail in the fall of 1932, referring to his term from 1929 until the day of the speech:

…we might have done nothing. That would have been utter ruin. Instead [we enacted] the most gigantic program of economic defense and counterattack ever evolved…

Some… economists urged that we should allow the liquidation to take its course… We determined that we would not follow the advice of the bitter-end liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction.

Nice spin, eh? Instead of allowing the "bitter-end liquidationists" (i.e. free market supporters and those who value the laws of contracts and consequences) to have their way, Hoover ran up staggering deficits and expanded the scope of government in a way that was unheard of at the time. This scared away investors and entrepreneurs who were no longer confident to take risks in a system rigged and run by the government that only rewarded the incompetent and those who made the largest campaign contributions.

Sound familiar? By the way, the end outcome was that the "whole body of debtors of the United States" were brought to bankruptcy and the savings of the people were brought to destruction, but Hoover piled on a whole bunch of debt and red tape on top of it to make sure all the unemployed were not able to find a non-government job for another decade.

Many in the mainstream are quick to point out that the free markets caused the economic mess and that more regulation is needed. This is one of the many big lies people are told to swallow. No, what we needed was to let the free markets work! Let AIG fail, let JP Morgan fail, let Goldman Sachs fail, let Citibank fail, let the auto industry fail, let all those who should take losses take them.

But we couldn't do that - the system would implode, right? If our system is that unstable then we need to let it implode and take the culprits who designed that system along for the ride. There are plenty of smart, hard working, honest people in this country that could pick up the pieces. Would it be bad? Of course! Would it be difficult? Of course! Would it be over in a few years? Of course!

Now, however, "we" have committed to dying a slow Japanese economic death. We will stimulate ourselves until chafed and congratulate ourselves on "our" success every time there is a bear market rally (like now). And all the debt we incur during our stimulatory exercises will prolong the economic depression, just like last time in the U.S. and just like right now in Japan.

The Keynesian economists are the bane of a society attempting to have freedom and low taxes. Their ignorant and misguided policies have never worked other than to enrich central bankers at the expense of the citizenry and move nations towards socialism. The more reliant we are on our government, the more mediocre we become as a country.

When these policies are shown for the failures that they already are, confidence will evaporate once again. The debt, however, will still be owed. And that debt, as it accelerates higher and higher, will keep our economy in a nightmare haze for decades. Japan is at 19 years and counting with no end in sight. I can only hope it takes us less than 19 years to recover.

Instead of just "Yes we can," how about adding to the end: "but we shouldn't."

Downward plunge in the stock market dead ahead.

Printing Debt not Money

We often hear and read about the government “printing money” like there’s no tomorrow. Our federal government has certainly passed out enough money to the people who got us into this mess that it seems as though hyperinflation is theoretically possible. But every US Dollar printed in our current fiat monetary system is actually a debt.

Whenever we hear the phrase “printing money” what if we substituted “printing debt” instead? What if instead of “credit” we substituted “debt”? Would we be wrong in making these substitutions?

If you are an owner of the private, unconstitutional, for-profit federal reserve central bank, then “printing money” and issuing “credit” make sense. However, if you are the U.S. government or a citizen, “printing debt” and issuing “debt” is a more precise explanation for what is actually happening to you.

You see, when the U.S. government “stimulates” the economy, they put their palm out and ask for the money from the private federal reserve corporation. The federal reserve happily gives up this money, which they print/create digitally out of thin air, but the federal reserve asks for one small favor in return. They ask for the U.S. government to issue them a bond for the amount of money given. This bond also requires interest payments to be made to the federal reserve.

These bonds are U.S. government debt, which means they are a debt owed by the citizens of the United States. Perhaps a more basic experience in our lives brings home the point in an easier-to-understand fashion, as there is no question that our monetary system is unnecessarily complex to help confuse the average individual and congress member.

"It is well enough that the people of the nation do not understand our banking and monetary system for, if they did, I believe there would be a revolution before tomorrow morning." - attributed to Henry Ford

If you take a credit card, insert it into an ATM machine and obtain a cash advance, are you “printing money out of thin air”? To me, you are incurring a debt to the credit card company (or should I say the “debt” card company?). Though it is true that if you take that money and go out and buy things you are stimulating the economy, there is a price to pay isn’t there?

But back to the analogy. If every day of every week a person just kept getting cash advances until the debt card limit was reached, then got new debt cards and maxed those out as well, eventually the end would be reached. The debt merchants would collectively cut off that person’s access to debt. The party would be over. Even if the access to debt was never cut off, a person would need to make an exponentially increasing number of ATM withdrawals each day to simply pay the minimum payments on all the other previously used cards (even if the interest rate was 0%) until the Ponzi scheme collapsed.

During a big / excessive secular (i.e. measured in decades) boom cycle there is a lot of excess debt granted to a lot of people. Towards the end of the cycle, things tend to get out of hand. Literally, those who can fog a mirror are allowed to take on an excessive amount of debt relative to their ability to pay.

There is a mathematical limit to the amount of debt that can be assigned to an economy before that economy becomes highly unstable. We have reached that limit. Once you get to that limit, printing more debt only compounds the problem.

At this theoretical debt tipping point, which we have already reached, taking on more debt only makes things worse. If someone who makes $20,000/year buys a $1 million home with a 0% teaser rate and negative amortization, does it really matter what the interest rate eventually resets to once the teaser rate ends? When the entire economy reaches this tipping point, the bankers or whoever has bought the debt from the bankers is out of luck.

In such cases, the government has historically stepped in an agreed to “help.” It is not in a politician’s nature to sit back and do nothing, especially if it is anywhere near election time or doing “something” would get a politician’s picture in the newspaper or on television. So, just like in the 1930s, the federal government is rushing around adding debt on top of the excessive debt already in the system. The private federal reserve corporation is playing the debt card company and the U.S. government is digging itself an awfully big hole by maxing out more and more debt cards.

However, when the tipping point is reached, new debt has no magical effect as with a “typical” recession. Such secular turns in the debt markets precipitate deflationary economic depressions. A new one has started. The Ponzi scheme has already collapsed and the current green shoots will turn into debt-stained crusty brown shits in the blink of an eye.

Printing debt does not effectively stimulate inflation in such a cycle, because the debt created by the government does not restore the “animal spirits” needed to fire up a new bull market in assets. Confidence evaporates (excluding short-term swings like the one that is ending now) and fear runs high in this environment, as it should. A return of capital becomes more important than a return on capital, as the largest financial institutions in the world are currently insolvent and desperate. The multiplier effect of money that causes inflation requires risk taking, leverage/new private debt issuance and good investment opportunities, all scarce in this environment.

A housing market crash that wipes out tens of trillions of dollars of paper wealth is not fixed by creating ten trillion in new government debt and paying off the bankers and investors holding those mortgage notes. A housing market crash does wipe out banks, however, as has already been happening. Bankers get fearful and refuse to extend debt to all but the most trustworthy borrowers. However, the most trustworthy borrowers realize something is wrong in the economy and begin to wait for lower prices or a more certain business environment before taking on new debt.

A vicious, although temporary (like all cyclical financial phenomenon) cycle ensues that generally lasts 15 to 25 years. It is during this time that debt must be squeezed from the system through defaults and increased savings (i.e. paying off the debts and living within one’s means). Unemployment soars as consumption and business activity contract.

By insisting on taking on new debt to replace the debt gone bad in the private sector, the government unfortunately makes the situation worse and prolongs the economic depression. Nothing has changed - the cycle is repeating according to script. It doesn’t matter whether or not we are on or off the Gold standard, it doesn’t matter what the federal reserve set discount rate is or was this month or next month and it doesn’t matter how much we “stimulate” ourselves with more debt. The Kondratieff Winter has begun and cannot be stopped by the federal reserve or U.S. government. Bureaucrats do not create or reverse the primary economic trend and never have, they simply react (and usually too late and clumsily to do anything but make things worse if they have any effect at all).

In a secular deflationary economic depression, history teaches that stocks, corporate bonds, real estate and commodities are lousy investments. Cash is actually one of the safest and only reliable long-term investments in such an environment and Gold, as the ultimate debt-free currency, is the best form of cash to hold. By maintaining wealth, one is able to purchase a much greater number of stocks, bonds, etc. when the carnage is over.

Because fear and uncertainty run high in this environment (e.g., look at the number of people starting to call for hyperinflation of the U.S. Dollar and other fiat currencies and look at the geopolitical instability being induced by this debt crisis), Gold benefits. Needless to say, Gold rarely does well when all is peachy keen in Wonderland. Get some physical Gold as an anchor to your life savings/investments (real coins or bars, not the risky GLD ETF).

Gold stocks are the go to asset class to actually make money in this environment. After an anticipated choppy sideways correction in the majority of established medium-to-large cap Gold stocks this summer and possibly into the early fall, I believe massive gains in Gold stocks will occur for at least 3 years. The first leg up in this new secular Gold stock bull market is likely over but the next leg up (and the one after that) will be even more spectacular. Now is the time to sell all general stocks and raise capital to get ready to invest in the incipient great Gold stock bull market.

Why do the "right" thing

when corporations and our government don't?

This article describes a corporation walking away from it's mortgage obligations because it feels like it.

To quote from the article:

Since Sunstone feels the W [Hotel] San Diego is now worth much less than what it owes, the company would rather turn it over to the bank than have hefty interest payments continue to drain cash from its balance sheet.

"While the company maintains more than adequate liquidity to support or repay this mortgage, we believe a conveyance of this hotel in settlement of the debt would be in the best interest of our stockholders," Chief Financial Officer Ken Cruse, said in a statement.

So, why should underwater residential mortgage holders not walk away from their mortgages instead of having "hefty interest payments" continue to drain cash from their balance sheets even if they do have "adequate liquidity" to repay their mortgage?

If they can get away with it (depending on the laws in their state and their situation), such people should walk away if it fits with their financial needs and they won't lose sleep over the decision. Businesses do this all the time. How many times has Donald Trump declared bankruptcy? How many times will banks take pity on on a retail customer when his or her health fails or he or she loses a job?

In the state of California, where residential lending laws generally favor the borrower, this is exactly what's starting to happen in big numbers. People are waking up one day after stressing about making their mortgage payments month after month and then finally saying "screw it." This is an important psychological turn in the residential real estate markets that hasn't been seen at all since the early 1990s. This, along with further increases in unemployment and the Option ARM and Alt-A mortgage explosions that have just begun, will cause housing to plunge further and longer than most can fathom right now.

The government's response to all this is to bail out the bankers who are suffering losses and take on an irresponsible debt level since its citizens are now trying to get out from under debt. God forbid we have a country that wasn't constantly striving to get further and further into debt. After all, bankers can't live the good life without riding on the backs of debt slaves!

The fabric of our society will start to tear during the next vicious leg down in the secular bear market for stocks that is not close to being over. Trust will evaporate another notch. Get some Gold.

2 charts, 1 message

Both charts stolen from www.chartoftheday.com and they have been kicking around cyberspace for awhile, but they're worth showing again:






Forget hoping for the rally to continue and forget "buy and hold" for the long term. Without earnings to support them over the next year, stocks are toast. And where are the earnings going to come from while banks are failing in increasing numbers (yes, it's getting worse not better), unemployment is rising (no, it's not stabilizing), and the residential and commercial real estate crash continue unabated (no, they're not stabilizing either)? If a business is not part of the fascist keiretsu business model that has evolved in this country, that business is likely to be in trouble. With credit drying up on the vine, 90+% of businesses are not in expansion mode, they are in survival mode.

Maybe my call for the exact top of the stock market last week will be proven right and maybe not, but you can bet a year from now people will be hoping and praying to get back to anywhere near the level the major stock market indices are at now. Get out of general stocks now, while there's still time. Forget chicken little, the sky has already fallen and it's time to batten down the hatches and get ready for reality.

And remember that Gold stocks are not immune from a correction when the stock market falls to new lows, but Gold stocks will not be making new lows again for years, as they have started a new secular bull market. Gold and Gold stocks are the only investments with a bright long term future.

Myth Busting - Gold, Deflation and Hyperinflation

There are a lot of myths and “old wives’ tales” out there about Gold and the frequently accompanying topics of inflation and deflation. In no particular order, I’d like to debunk three big ones with facts rather than universally accepted catch-phrases that prey on lazy investors and speculators.


1. “Dollar down, Gold up” or “Dollar up, Gold down”

Yes, this is often true, but it’s a far from perfect correlation. The US Dollar and Gold are two different currencies traded on exchanges around the world. Because the Gold price is denominated in US Dollars, it is generally assumed that when the US Dollar goes down in price that Gold must go up in price. There is certainly a correlation here, to be sure. But even recent history shows it’s a dangerous game to play if you’re a speculator or intermediate-term investor.

Here’s a daily 8 month price chart of the US Dollar and Gold up through June 6th, 2009:




Or how about in the 2nd half of 2005:




Gold is in a secular bull market as are Gold stocks. The US Dollar is in a cyclical bull market within the secular bear market that always characterizes all fiat currencies over time. The US Dollar has been in a secular bear market since it left the Gold standard in the early 1970s! Many savers could use a little respite from the chronic devaluation of the Dollar, even if it is only a temporary deflationary blip when viewed from a longer term perspective.

When an asset class is in a strong, long-term bull market like Gold and Gold stocks are currently, that asset class goes up because it is going up! Trying to find rational explanations for even intermediate-term moves is a fool’s game. Gold is acting as a store of value at a time when other asset classes are having their value destroyed. This will keep a bid under Gold, regardless of what the US Dollar is doing.

Also remember that the US Dollar is considered “strong” or “weak” based on a comparison to other intrinsically worthless fiat currencies like the Euro (10 years old, artificially created out of thin air, backed only by promises of rotating apparatchiks and already considered a reliable, long-term, safe alternative to the US Dollar!?) or Chinese Yuan. All fiat currencies are sinking, simply at different rates. Gold is in a secular bull market relative to all currencies used in the world right now and that bull market is not over.


2. “The government is printing money and this will stop deflation and cause heavy inflation or hyperinflation”

You want heavy “money printing” and heavy government debt loads? Try Japan! The table below is stolen from an article by PIMCO:




How many Gold bugs are calling for pending hyperinflation in Japan? If any are, when did they start calling for it? Quantitative easing was begun in Japan in 2001 and went on for 5 years before they took a break. Here’s the results, first using the Yen currency index:




Or how about those bond vigilantes stopping the Japanese government in its tracks and pushing government bond yields to astronomical highs (chart below stolen from fxthoughts.com):




Instead of thinking of things like Weimar Germany or Zimbabwe, how about thinking about bonds being debt. “Printing money” might be true if you’re a shareholder in the for-profit, non-federal, private federal reserve bank corporation (and you get paid interest for creating money out of thin air!). But for the US, Japanese and other sovereign governments around the world trying to “stimulate” themselves like subway frotteurists, they are simply “printing” debt, not money.

If every time you got in trouble as an individual you simply took on more debt to meet current obligations and expand your lifestyle, what do you think would happen after a while? Well, that’s what has happened to the United States, both the government and its average citizen.

Of course the US government would like to inflate its way out of this mess, but that doesn’t mean it can every time it wants to. To do so overly aggressively would mean to truly commit to hyperinflation and that would end the federal reserve franchise instantly. Don’t assume the people who control the federal reserve are so naïve as to welcome hyperinflation. Deflation allows those in control of the money supply to buy assets cheap and expand their power by pretending to be a friend to the United States and agreeing to “help them out.”

Once debt becomes overly burdensome, the economy withers on the vine until most of the debt can be defaulted on or re-paid. This only happens once every generation or two and causes what has been termed an economic depression or secular credit contraction. We have started one and this is only the beginning. Ten years of it would be a blessing but 15-25 years is more likely.

Of course, wars and other geopolitical events could change the currency dynamics of the globe and this is why Gold is also a good hedge. It will retain its value during heavy deflation as well as if there is a currency crisis (i.e. US Dollar dethroned as the world’s reserve currency, which would cause an immediate and significant devaluation). This is the paradox of Gold that most do not understand. When Gold is looked at as a strong, independent, non debt-based, non-debasable currency this makes sense, but many erroneously think Gold is a commodity like oil. Not so, either currently or historically.

And for those who say “this time is different” because we’re doing it more aggressively, earlier, using private assets, etc. – save it. It’s all been done before and it’s never worked. This argument is for academic Keynesian economists in a classroom and the real fallacy is believing that the government has any power to change the primary trend once it has a good head of steam. Though Greenspan kept the old trend going a little longer, it was only because there was enough room to expand debt – there’s no more room in the United States to expand private debt in aggregate regardless of what the government does. The more the government “stimulates,” the deeper and longer the economic depression will be (ask Japan, currently in the 19th year of its secular bear market).


3. “Gold and Gold stocks are lousy investments during deflation”

It is hard for traditional investors to find a good investment during deflation other than cash and cash equivalents. Stocks, corporate bonds and real estate all go down in value (sound familiar?). But Gold is cash! When this deflationary bear market started in October, 2007, Gold was about $750/ounce. In other words, it has gone up roughly 25% since the day this bear market started! The Dollar Index was at around 78 when this bear market started and thus it is up about 3% (we’ll add in some interest and say it’s up 10%).

If you want to invest in firms in the money business who produce cash (since "cash is king" during deflation), many erroneously look for corporate bonds or stocks of firms who deal in fiat money. If you think putting your money in banking stocks or Wall Street firms like JP Morgan is a good long-term investment, I wish you well but know you won’t do well. These firms are insolvent, which is what happens in economic depressions. These money changers are overleveraged and made too many bad loans, so they will bear the brunt of the turn in sentiment even with all the free money the government has given them. These stocks will be making significant new lows well before 2009 is over and some will go bankrupt and be de-listed from the stock exchanges.

Gold miners, on the other hand, are digging real money out of the ground at a time when money is becoming more valuable and costs are declining. Profit margins for producing Gold miners are set to explode to the upside. Their hard work will help to re-liquefy the global banking system and they will be rewarded with heavy profits and appreciating stock prices.

People think this time is different from the 1930s since we aren’t on a Gold standard anymore so I bring you the inflation-adjusted price of Gold from the 1873 thru 1895 “Great Depression” (chart stolen from thechartstore.com):




When the inflation-adjusted or “real” price of Gold is rising, so is Gold miner profitability. This will translate into higher Gold stock mining prices even under a fiat system. Once everyone sees Gold stocks outperforming by the end of this year, they will jump aboard the only sustainable equity sector bull market out there.



Gold fever is dead ahead and Gold bulls don't even have to pray for the destruction of their currency to profit from it.

Gold Going Mainstream

Here is a good example of Gold “crossing over” and becoming a mainstream investment, taken from a recent article on Bloomberg.com:


Northwestern Mutual Life Insurance Co., the third-largest U.S. life insurer by 2008 sales, has bought gold for the first time [in] the company’s 152-year history to hedge against further asset declines.

“Gold just seems to make sense; it’s a store of value,” Chief Executive Officer Edward Zore said in an interview...


Gold is a safety net where the government cannot provide one. Gold is money and is the strongest currency now in existence. The U.S. Dollar, Euro or Yuan are no match for a currency that cannot be created out of thin air. Gold is not an industrial commodity and does not require significant economic activity to maintain its value.

When things get bad in an economy, politicians create paper promises to pander to the proletariat. If it works, inflation results and savers are punished. If it doesn’t work, confidence evaporates. We are conditioned to accept that inflation will always occur, but it can be a question of timing and larger cycles come into play.

In the current cycle, I believe attempts to re-inflate the system will fail for a longer time than currently seems possible. A secular credit contraction is the culmination of a long-term speculative bull market and government stimulus in the past has certainly ramped up the character of the accompanying bull movements in stocks and commodities. Eventually this will be true again, but a turn for the worst in the credit markets has been reached that cannot be undone quickly merely by printing up a bunch of paper tickets and stamping “government guaranteed” on every financial market and transaction in trouble.

For those who think a determined government and central banks can always create inflation and stabilize markets, I would point you to a time in history not so long ago: The Panic of 2008. The government and central bank tried to prevent it, failed, and are now taking credit for the expected technical bounce out of the crash. The gall, the arrogance, the ignorance! Why do people trust incompetent apparatchiks to “stabilize” markets when they have never prevented a bear market or financial panic from expressing itself in the past? All government can do is re-distribute wealth, not create it or prevent it from being destroyed. In fact, governments are the greatest destroyers of wealth in history.

History teaches that at this point, policy failure is more likely than a “reflationary” success, which will result in the current heavily deflationary forces taking over until they run their course and the excess debt is squeezed from the system via painful defaults and private retrenchment and increased savings. Only then can a new cycle of inflation begin. In other words, we have entered the dark stages of a Kondratieff Winter. In such periods, Gold does well as a deflationary hedge because it is true and independent money and the government/”system” cannot be relied upon to fulfill its promises or to safeguard its currency.

Such systemic failure is historically most apparent when widespread bank failures occur, as was seen in the 1930s and as is starting to happen now. It is naïve to think our government “wouldn’t let it happen again” or even has the power to prevent it just because they created another incompetent bureaucracy known as the FDIC. If 10% of the U.S. population went to their bank tomorrow and demanded their money in physical form, the entire banking system of this country would fail immediately. The physical money doesn’t exist in the banks to fulfill this demand!

Anyone with a firm grasp of the fundamentals knows that the banking system has already failed and is now held together by tape, wire, taxpayer money, fraud and government promises. The taxpayer money is long gone and the government promises are reaching a tipping point in the global marketplace, as bonds now need to be monetized by the federal reserve because there is not enough demand to match the supply.

As the next leg down in the stock market begins, people will be looking for anything that can retain value and many will turn to Gold, as Northwestern Mutual Life Co. has done. The turning point is being reached and Gold is about to go from stealth bull market to widespread public and institutional participation. As stocks, corporate bonds, commodities and real estate continue their tail spin downwards into the abyss, people will simply want to get liquid and be in cash equivalents.

However, not all cash equivalents are equal and government actions over the past few years make their respective fiat currencies and bonds increasingly suspect, as governments are willing to go to any length in an attempt to debase the currencies they represent (you can call it stimulus if you want to). Many will be successful, although ironically, it the U.S. that should be the least successful. Regardless, a larger percentage of retail and institutional investors will now be turning to Gold as a cash equivalent. “As good as Gold” was a saying in the past, but now is the time to simply say “Get some Gold!”

Since physical Gold represents a small market relative to stocks or bonds, only a small international shift in money flows into Gold are needed to cause a significant price rise. And please avoid sham ETFs like GLD as a core holding and do not be misled to think that such vehicles are a reliable proxy for physical Gold. JP Morgan, Goldman Sachs, Morgan Stanley and other banksta investment houses are some of the custodians for the GLD ETF and the sketchy promises of these insolvent firms are no match for the integrity and worth of real physical Gold.

Though I don’t see Gold as an opportunity to get rich in this environment (that’s what Gold stocks are for…), I do see it as valuable portfolio insurance that will retain its value and rise significantly relative to traditional asset classes. Where else are you going to put your money?