-- Posted Thursday, 29 June 2006 | Digg This Article
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THE INTERNATIONAL FORECASTER
06_29_06-MID-WEEK READING
P. O. Box 510518, Punta Gorda, FL 33951-0518
An international financial, economic, political and social commentary.
Published and Edited by: Bob Chapman
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US MARKETS
The privately owned Federal Reserve continues to print money and issue credit as interest rates rise. What subterfuge, one neutralizes the other. Interestingly no one on Wall Street or in government wants to give a balanced view of what the Fed is doing. They have a new excuse; the Fed in its enlightenment has terminated M3. Irrespective the beat goes on. The Fed continues to create money and credit out of thin air monetizing some of it as they go along. Its no wonder inflation is over 10%. We have a fractional banking system under which our money supply and credit have simply gone wild. Every day money is created out of thin air to keep a failing monetary system from collapsing. The risks created are beyond insanity. There are little or no reserves to back such creation, yet the madness continues.
As a result the cost of everything is rising, particularly commodities, at the fastest pace in years and there are no signs of it abating anytime soon. Soon we’ll get real price and wage inflation and that will further feed this insatiable monster. Across the world, domestic credit systems are firing on all cylinders. Double-digit monetary growth of money and credit now blankets all economies and the asset markets not only in the US but also worldwide. Global monetary conditions have never been so loose. Even if abruptly stopped today the inflation within the system would exert its damage for another year and one-half.
While all this is transpiring the value of the dollar is falling against other major currencies and all currencies are falling against gold.
The debts of nations and individuals continue to grow, as well as trade and current account deficits. Mortgages written in just the last year alone worth more than $3 trillion show some 30% have no equity. That means if housing prices decline more than 30% of mortgage holders could default. Already mortgage activity is at a four year low and foreclosures have risen 75% in the first quarter. New home sales have fallen from 25% to 95% dependent on the area.
Gold and other base metals fell sharply over the past five weeks. This is not surprising given the sharp appreciation over the past nine months. Such a correction although deep, is normal in a bull market.
The fundamentals though haven’t changed one bit. A massive continuance of the issuance of money and credit; relentless inflation; a weaker dollar; the emerging world’s tremendous ongoing demand for commodities and international tensions. We are five years into a gold bull market that will last 10 to 15 more years. We haven’t even completed the first of three or more phases, so there is a long way to go and great wealth to be accumulated. This bull market in ways is similar to that of the 1970s. Massive deficits, inflation, higher oil prices and guns and butter for everyone. We have the same today as we had in Vietnam. Today it’s Iraq, Iran, Afghanistan and terror. We have already spent more money on these efforts that we don’t have, then we did in Vietnam. Deficits, governmental and personnel are huge and growing fueling the greatest durational, generational bull market in gold and silver in history.
Just to catch up with inflation gold would have to rise to $1,700 an ounce – that is a given – beyond that the price will reflect further inflation and its effect on the values of society.
One of the facts that few people mention is that since the last inflationary period and runs in gold and silver in the late 1970s, there are 50% more people working on our planet, or about three billion people who can be buyers. Most come from cultures that historically and culturally have set great value in the collection of gold and silver. These formerly closed societies are now wide open and they have access to higher incomes that didn’t exist 25 years ago. From a fundamental viewpoint India is expected to purchase 33% of all gold sold this year and China is now opening up in a big way. Gold consumption in China will increase even more so as the economy slows next year and as the housing bubble along the coasts is broken. Over the next year central banks could buy 300 tons of gold and that could not only spur prices upward, but also form a very strong base under the gold price. We are facing a bull market in gold and silver that is three times stronger than what we saw in the late 70s.
Again and again we see economists and analysts who cannot think outside the box. They all know hedonics or substitutions are used in CPI and PPI figures. Yet, they still quote them as if they are real just because they are official. The government is saying one and one makes three and they are agreeing. They only started to listen to alarm bells when they recently saw that core CPI will probably rise to 2.5% in July and August. Where have they been? Sleeping. Are they devoid of individual, singular thought? Where is their inquiring curiosity? We have a fed that has had to increase interest rates while increasing monetary aggregates. Yet, conveniently no one is commenting about the massive increase in money and credit in the US as well as in other G-7 countries. Has the suppression of interest rates on long dated Treasury notes and bonds gone unnoticed? We have an inverted yield curve that forecasts recession, yet, we hear little commentary regarding this harbinger of a slowing economy, nor of the Fed’s and Working Group on Financial Market’s suppression of long-term Treasuries, to keep the mortgage market from collapsing. We see a conspiracy of silence. Those harbingers are all there, high energy prices, a negative yield curve, higher long-term bond rates, declining official leading indicators, slow disposable income growth, softer consumer spending, higher unemployment, a weakening housing picture and surely in time, a weakening in money supply and credit growth.
We saw the top of the housing market a year ago. Affordability is the lowest in 15 years and there are soaring inventories of new and existing homes. The year-to-year increase in house prices is now the lowest since 1994. Price growth was non-existent in the first 5-months of the year. Consumer expectations are the lowest since 1992. The Conference Board’s leading indicators index for May showed the annualized six-month rate of change was minus 0.4%. Of the last 14 times the annualized six-month rate of chance dropped below zero. Nine were followed by recessions and 11 by bear markets. The Fed is not fighting inflation. How can they be with money and credit expanding at a 12% clip? Worse yet, not only is the Fed entrapped but they are at least a year behind the curve – what they should have been doing but failed to do.
You know what, the Fed has lost control and the only avenue open to them is the continued creation of money and credit. That is why they terminated M3. They want to hide their impotence. They in part accomplish this by suppressing gold and silver prices. In so doing they hope at least on a short term basis to suppress prices enough to make investors think that there really isn’t any inflation problem. As time progresses their ability to manipulate markets will lessen and lessen. As a result of these factors we see a resumption of the bear market in stocks and a correction in bonds and real estate that will last for a number of years, as gold and silver reassert their value.
We mentioned the Fed being behind the curve. Once behind the curve it’s very difficult to catch up. Since 2000 we have had a very substantial expansion in non-financial debt, that is, household, business and corporate debt. It has been far greater than the increase in GDP having moved ahead at more than an 8% rate. GDP rose at about 40% of that figure. In order to offset that the Fed has to act quickly and we do not believe that will be the case, because it would guarantee recession and perhaps depression. That is why the Fed is afraid to inflect pain. Sooner or later they will have to because if they don’t they’ll have hyperinflation. The easiest way for the Fed to make it appear that they are doing something is to raise interest rates. We have called for 5-½% by summer’s end. We could easily see 6% by next June. That would put the 10-year Treasury note at 6-¼% and the 30-year fixed mortgage at 7-½%. Remember though that rising interest rates do not imply restraint, particularly in a credit bubble environment. Excess surely begets excess until there is sufficient monetary pain meted out to pop the financing and assets bubbles in the process of stopping the growth of inflation. We have bubbles and bombs out there - the global finance securities leverage bubble, derivative bubble, housing bubble, a global bubble in structured finance, M&A bubble, dollar reserve bubble, China bubble and eventually a commodities bubble. The bomb is the pension bomb. Inflation is deeply embedded and severe measures will have to be eventually taken to destroy it. That is much, much higher interest rates and a tremendous curtailment of the issuance of money and credit. It will come but it is some ways off yet. We can assure you there will be no soft landing and those who believe that will happen are living in a fairy tale land.
The public is certainly not ready for pain. Rising oil prices haven’t reduced consumption of oil and gasoline one bit and the housing slowdown hasn’t decreased consumption. We probably have to wait for a dissipation of equity so that cash out financing and equity financing end and consumption as a percentage falls from 71% back to its long term norm of 64.5%. We do not see Mr. Bernanke taking on the financial markets in any meaningful way for at least a year, if not longer. Besides, the very integration of global financial markets has become a time bomb. One goes; particularly the US, and they all go. That is another major benefit of free trade, globalization and mutual dependency. Thus, with the exception presently of gold, silver and commodities, all markets are headed down. It would be a very good idea to get your finances and investments in order.
Normally the Fed’s job is difficult, but it becomes even more difficult when the Japanese Central Bank withdraws $200 billion worth of excess liquidity from Japanese banks. That is what fueled the yen carry trade. That $200 billion was probably leveraged several times so the withdrawal amount could be $1 to $2 trillion. That means if the Fed and other G-7 central banks hope to keep the world economy floating at these levels they’ll have to inject collectively $200 billion to $2 trillion on an ongoing basis.
In that barrage of money and credit does the Fed defend the US economy and the US real estate market or does it try to control inflation and defend the dollar? We believe they’ll defend the dollar. Half of the current account deficit is financed by foreign central banks, with oil exporting nations playing a major role. OPEC holdings of Treasury notes and bonds stood at $84.9 billion in February of 2006, up from $52.7 billion just six months earlier. Over the past year British holdings of US Treasury notes and bonds have soared $100 billion to $251 billion. This is why we predicted month’s ago that Fed funds rates would go to 5-½%. Now the way things are shaping up they may have to go to 6%. The flip side is we have a recession...
GOLD, SILVER, PLATINUM, PALADIUM AND DIAMONDS
The June 20, 2006 commitments of traders report showed large commercials combined net short positions decreased by 12,130 lots to 122,271 contracts. This is the lowest commercial net short position since August 2, 2005. If you add in the short covering on Tocom you have about 50,000 short contracts that were covered, which now signals support at $550 to $560. On Friday, gold open interest dropped 5,225 contracts to 281,181 as the shorts continued their covering. On Monday, the cartel pounded gold, but it came back closing at $584.80, down 20 cents. Silver was off 27 cents at one point, but managed to cut those losses to five cents to $10.25.
Of interest as well is that Comex warehouse silver stocks are the lowest in a year and lower than the low at that time at 2,358,937 ounces.
Barclay’s silver trust saw its silver holdings go to a new high on Thursday, 6/22/06.
Silver open interest rose 186 contracts to 113,833.
For commodities it was generally a good day. Copper was up 7 cents to $3.32, oil rose 90 cents to $71.80, platinum rose $11 to $1,185, palladium up $11 to $320, and the dollar fell 35 cents to 86.10, which may well be setting the stage for a rally in gold and silver. The exploration gold and silver plays have not begun to move back up as yet, but the XAU rose 1.51 to 134.94 and the HUI climbed 3.72 to 315.40.
Last week the Gold ETF, streetTracks increased by 4.02 tons to 365.73 tons, for another record. The Silver ETF also set a new record adding 46.7 tons to 77.6 tons to 2,300.4 tons or 73,961.218 ounces. It then on Friday rose by 139.9 tons to 2,440.3 tons or 78,457,554 ounces. Obviously the pros are saying after such a correction, who needs to wait for confirmation for a new bottom.
Russia’s gold production increased by 6.7% y-o-y in the first quarter to 40.2086 tons. Placer production fell 0.6 tons in five months.
China produced 68.272 tons of gold in the first four months, up 13.3%.
The long-term outlook for the price of gold looks ever inviting. Gold reserves owned by the world’s top gold mining companies will be exhausted by 2020 if new discoveries are not made. Only grass roots exploration can add production to the industry and that is why exploration plays are the game of the future. That is why the junior mining industry will raise more than $9.5 billion this year. There has been $19 billion invested in the sector over the last three years. Get your exploration stocks now when they are still cheap...
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