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International Forecaster November, 2005 (#2) - Gold, Silver, Economy + More

By: Bob Chapman, The International Forecaster

-- Posted Wednesday, 16 November 2005 | Digg This ArticleDigg It!

NOVEMBER 2005 (#2) Vol. 9 No. 11-2

P. O. Box 510518, Punta Gorda, FL 33951-0518

An international financial, economic, political and social commentary.

Published and Edited by: Bob Chapman

E-mail Address







            Will your pension be there when you are ready to collect it? The answer is maybe. For corporations in this new world of offshoring and outsourcing, pension benefits are very difficult to change, short of bankruptcy. Most corporations have not adequately funded their programs and, over the last few years, gains from stocks and bonds have been inadequate to fund these obligations. Most funds were planning on 9% to 10% returns and that for the most part hasn’t happened. In addition, workers were supposed to die between 65 and 70 years old. That is no longer true. We are living to 78 to 82 now. Pensions are a problem, a $2 trillion problem. Investors lost $8 trillion in the collapse of the stock market in 2000 and 2001. It could be they’ll lose that much again in the coming correction. $6 trillion could be lost in the coming real estate correction; $4 trillion is possible in bonds. $18 trillion is lots of money, especially for people whose earning years are over.


            Corporate and government pension plans are massively underfunded. From the corporate side there is no excuse for under funding. These corporate creeps have already put the taxpayer funded Pension Benefit Guaranty Corporation under water by $30 billion. The fund is supposed to be self-funding via corporate assessment, but that is a cruel joke. As we said often before, the S&L debacle cost taxpayers more than $500 billion, which we predicted two years before it happened, and we tell now, the pension fiasco will cost us over $1 trillion and that doesn’t include a 1/2 to 2/3 cut in Social Security benefits.


            The PBGC has created moral hazard in which the insurance may end up bankrupting the system it was intended to save. Corporate America, since the 70s, has been complicit in accommodating unions with benefits tomorrow rather than wages today. Neither corporations nor unions cared because if the financial load were too great, the taxpayer would pick up the bill.


            Recently bankruptcy declarations have put the PBGC some $30 billion in the red. As bad as the situation with corporate America is, the problem of state and local government pensions is even worse. They are under funded by at least $500 billion. Some of these problems have already begun to manifest themselves, such as in San Diego where pension abuse has bankrupted the city. Over the next several years many more public entities will follow. Soon every community will have contracted the San Diego disease. What is resulting is that both business and government want out of the pension business altogether. The Alaska legislature now denies pensions to future employees. Corporations are leaving the system, either by paying off their workers and terminating their pension plans, or by freezing their plans. Some employees are no longer accruing benefits and new employees will not participate at all.


            The modern concept of pensions began in the late 1800s in Germany as pensions began to appear for police and firemen. We are now about to reenter a pension Dark Age that people will work until they die. If they become ill, for now, there is Medicare and Medicaid, which will follow pensions into oblivion. We will then revert to a system where the family will have to take care of is own. A system that had its shortcomings, but worked well. In 1980, about 40% of the jobs in the private sector offered pensions, today it’s 20%.


            At the heart of the pension debate is the rate to use in calculating pension liabilities. The law lets corporations’ smooth changes in their asset values. If funds fall due to investment non-performance, they do not have to ante up fresh funds to compensate for the loss for five years. If that isn’t unsound accounting we do not know what is. In theory Erisa discourages under funding by requiring offenders to pay higher premiums, but loopholes render the sanction worthless. If companies over fund they can skip future contributions even if later they become under funded.


            Changes in corporate pensions are on the way, but they are more punitive toward corporations, so many more corporations will shut down pensions. It has proposed premiums to the PBGC be raised from $19 to $30 a month. Seventy percent of company ratings today are close to or are junk ratings. Many politicians want to give such companies lenience, which simply continues moral hazard. Realities have to be dealt with.


            Almost all public pension plans are underfunded, some by 80%. They are not covered by the PBGC. It will be interesting to see how these pensions are handled. Some employees after 30-years will get 90% of their final salary. For a commander in a police department that is $100,000 a year. In faltering San Diego six board members are accused of making a deal to let City Hall underfund the pension system in return to agreeing to higher benefits for themselves. Explicitly or otherwise, this is what unions and legislators have been doing all over the country. That is conflict of interest and it’s a felony.


            Governor Schwarznegger in California tried to move pensions to a 401(k)-style defined contribution plan for new employees, but the legislature refused to accommodate. Michigan has closed its pension plan to new employees. Florida, Colorado, South Carolina, Arizona, Ohio and Montana are letting employees choose between defined contributions and traditional pensions.


            As an alternative there is cash balance plans, which are portable. They can be taken from one job to another.


            Forty-four million are covered by private-sector plans and half are already retired and are collecting benefits. Only 50% of active employees support the entire system, which means in 30 years the system will die a natural death because it was actuarially unsound in the first place. Even if plans were turned into annuities there supposedly guaranteed payout is at the mercy of the vicissitudes of the market. If annuities cannot make the payout, state legislators can legally change it.


            Today the average male lives to be 78 years old and the female 82 years old. We expect those figures to be 83 and 88 within the next 10 years. There are those who believe the aging process can be slowed as well. We agree with them. That means there isn’t a hope of pension plans coping with the financial demands under the best of circumstances. The answer, of course, is no one retires and receives benefits until they are 70 years old starting with today’s 62 year olds, and that is just for starters. Each year corporations and congress will have to readdress and update the system. People had best immediately start their own retirement plans because if they don’t they’ll end up indigent. Defined benefit plans are on the way out and will be extinct in several years. Those of you over 50 will get the shaft, and those under 50 can plan for the future. If you want to retire with a $3,000 a month income you’ll have to have $500,000 in US government bonds or something that will return that safely. You are going to have to depend on yourselves. You can’t believe government and corporate promises – you have to depend upon yourself.


            Last summer Congress passed the highway bill that contained $286 billion and 6,000 pork projects, including the Alaskan $223 million bridge to nowhere. Due to endless war costs and the cost of Katrina and Rita the pork-laden bill has become a financial and political albatross, particularly for Republicans who spend like the liberals of old.


Before Sir Alan Greenspan leaves, he is making sure there is plenty of money in the system. Over the last few months he has increased flow by better than 10% and credit inflation is off the charts at somewhere around 15%. Financial claims are enormous as individuals and corporations purchase securities and real estate. Its all part of the Greenspan put. That, of course, means no one is allowed to lose money – at least not yet. You might call credit inflation a vast pyramid scheme. That is augmented by free trade and globalization, which has kept downward pressure on interest rates, savings, wages and inflation. It has created booms, busts and generally speaking, financial speculation. First we saw a Greenspan manufactured stock market boom, bust and a manufactured bear market rally that is kept alive by manipulation of all markets by the Federal Reserve and the Working Group on Financial Markets. Then other central banks followed the Fed’s lead creating lots of bubble economies. Now, due to asset inflation and the possibility of deflation in the wings, the inflationary binge has to be continued at all costs. The world is experiencing the biggest liquidity excesses in history. You can be sure eventually that the central banks will have to raise interest rates much higher than they already are. World central bankers know the longer they delay the rate normalization process, the more difficult the correction will be. We believe the central banks have lost control and just react to each new crisis. Inflation is now worldwide – its just the US leads the pack. Why wouldn’t they, as they head for a $800 billion current account deficit? The Fed missed the boat long ago. The big question is how long will it be before they really lose control? They cannot manipulate markets indefinitely.


Under the terms of the new Patriot Act, prosecutors will be able to seek the death penalty in cases where “defendants gave financial support to umbrella organizations” without realizing that so that its adherents might eventually commit violence.


The Senate Intelligence Committee is readying a bill that would allow the FBI to secretly procure any of your personal records without probable cause or a court order, giving them unchecked authority to pry into personal and business matters. As you know, they have created the National Security Service, which is now called the new SS to be our secret police – a first in our history as a Republic. It will be run directly by our President who follows in the steps of the man who led Germany to disaster in World War II. Then we have the National Clandestine Service, headed by CIA Director Porter Goss, who will share intelligence and information with state, local and tribal law enforcement. The CIA, via Executive Order, has the authority to carry out covert operations, spying, propaganda and dirty tricks in the US on the American public. Pentagon intelligence operatives can collect information on US citizens without revealing they are spies. Within two years every American driver’s license and passport will be made to federal specifications, including microchips and biometric information so they can trace the movement of every citizen. There is no more law. It is what our President, Congress and the courts want it to be even though it violates our laws and Constitution.


            Over and over in history his story – the story of man – we see the same mistakes. War, taxes, deficits lead to the failure of nations and we’ll be no exception. We now have a police state of Orwellian dimensions. Those of you who can leave do so; it won’t be long before you can’t.


            Even the Washington Post is getting the message. They are concerned that the FBI is becoming a replacement for the dreaded ex-East German STASI secret police.


We were targeted by the IRS in 1967 and endured some 15 years of audits for which we had to pay the government nothing. Our accounting and legal and accounting bills to defend ourselves cost us more than  $500,000 because of what we had to say about government irrespective of party.


The President’s tax commission has among other things recommended the end of the mortgage tax deduction. The National Association of Realtors agrees with us that housing prices could decline 15% with the loss of the deduction. If you add in declining house prices and rising interest rates, it is easy to imagine 50% drops in home prices.


The CIA says the annual budget is $44 billion but they forgot to mention their black budget of an additional $200 billion. This information obviously slipped out because for years all and sundry have tried to get their budget. In fact, the Project on Government Secrecy at the Federation of American Scientists, have sued the CIA four times for those figures unsuccessfully. Now that we have numbers and we are cutting costs to maintain our wars, why not cut the CIA budget?




            A total of 43 commercial banks have ordered 171 tons of gold from Russian producers. Last year 51 bankers ordered 194.5 tons. Russia only produced 180.5 tons last year. Production fell 7.2% year-on-year to 126.12 tons in January-September this year, and could total 183 tons as a whole.


Dehedging by gold mining companies slowed in the third quarter from the second quarter although the book fell 1.0 million ounces to 52.8 million ounces. They dehedged 1.3 million ounces in the first quarter and 2.7 million ounces in the second quarter. The leading dehedgers were in the Americas. 


            Thus far this year, Turkey’s gold imports of 244.4 tons are running 14.8% ahead of 2004. That is very good considering gold prices are much higher.


            The Shanghai Gold Exchange is launching night sessions for trading. The exchange allows only institutional investors to trade in gold.  Individuals can use commercial banks in their deposit accounts, but cannot own real gold, only paper gold. That is expected to change.


            Indian gold exports doubled this year and are expected to expend 30% next year.


            Peru produces 10% of the world’s silver, yet physical silver is impossible to find in Peru. Silver warrants on the Lima Exchange are trading at a tremendous premium to spot.


            This week platinum prices traded up to $955 an ounce to a 25 1/2-year high. Over the past 17 months prices have risen 24%. Presently net long positions rose to 73% of open interest, the highest on record for any commodity. This just shows your what unregulated hedge funds can do to markets. Prices have been rising since October 2001, having increased by 129% from a low of $415. The fundamentals are there and sales look to be 3.6% higher at 7.54 million ounces while supply should increase 4% to 7.49 million ounces. The big question next year is how vehicle sales hold up?


            The euro in terms of gold is trading at 398. A move through 400 would be tantamount to gold breaking out to $512 an ounce.


            Chinese jewelry buyers have been buying palladium jewelry as an alternative to platinum and its high price. They gobbled up a 600,000-ounce surplus this year and if demand stays at current levels there would be a 60,000-ounce deficit. These events were not foreseen by anyone. They just developed over the last year. Inventory should be exhausted in seven years.


            The gold suppression cartel is very upset that Argentina has been a gold buyer and China continues to buy. On Friday, we heard a rumor that the Central Bank of South Korea is now a buyer and the other elitist central banks are really upset. This is reflected in the gold open interest, which is not far from making new highs. Despite a stronger dollar and lower oil and gas prices, gold has moved back from $457 interday to $470 December in Friday’s aftermarket. This is remarkable. Just two weeks before it dropped from $478. Gold is not going to be stopped from achieving $512 shortly. Platinum finished the week at $965 and should break $1,000 soon. Then, the hedgies will sell and buy gold and silver with the profits.


More for subscribers....  




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-- Posted Wednesday, 16 November 2005 | Digg This Article

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