It could be said that wise counsel never grows out-dated, and many of the topics discussed in WCM's Bullion Market Insights are really timeless in scope.  Observations have been made on the Macro-environment in many instances, a perspective that can only change significantly over long periods of time.

January 20, 2007:  Big Surprises In Store This Year.


You have to admit that once Greenspan cranked up the liquidity machine in 2002 and beyond, things got pretty complacent in Investment Land.  The "Goldilocks Economy" was a phrase that rolled off virtually everyone's lips to include the corner shoeshine boy and the broken-English cabbie.  After stock market gains for 4 years straight from 2003 through last year, 2006, equity chasers ...... I mean, "investors", certainly have that deer-in-the-headlights look to them as they consider leaving their chips on the table in January, 2007, with the hopes and prayers that the "house" won't take all of their 4-year counter-trend winnings.  Ah, hope springs eternal in the hearts of men (and women!).  Whether their stock portfolios are higher or lower than March, 2000, I would wager the later ..... still and to a significant degree, but it is hard to break old habits; especially habits of making easy money in stocks that went virtually uninterrupted for the preceding 20-year period.  Whether or not the secular trend of positive stock gains is long overdue for a prolonged reversal to negative annual returns is seldom poised amongst these spoiled participants, but it will be before 2007 is over.

I know I sure am a cheery fellow, but I think 2007 will be a historic year of out of the blue SURPRISES.  Now they will not be surprises to you or me, since we are discussing them beforehand, but they will be sidewinder punches for the vast majority of investors and Americans.  Now if I could detail the exact timing and catalysts to these financial/economic shocks, I would be able to change my name to Nostradamus, Jr., but I think I can get close enough to the particulars of the events to make them recognizable when they occur.  The entire list may not occur in 2007 alone, but may spill over into 2008, but I don't get penalized for being right or wrong in these communications, kind of like a Wall Street economist.

Now, some of these predictions are going to be repetitive vis a vis my former ranting as 2006 wound down, but it never hurts to review them incessantly in case their probability eventually sinks into the cranial regions of the COMPLACENT out there.  So grab a beverage and here we go:


1.  Interest Rates Will Not Behave As Expected.

This is one of my favorite predictions or surprises, since it is common knowledge that when an economy enters a recession, interest rates actually decline due to the lack of borrowing demand with lessening economic activity.  Be assured, however, that there will be plenty of money available (liquidity more than ample since money creation is still very high and a 5.25% Fed Funds Rate ain't breaking anyone's back), but it will be like pushing on a string for the Federal Reserve since not many debt-gorged players are going to be very interested in going much further into debt.  And for the simple reason that until the Fed begins to pay borrowers for taking their minions' money with negative nominal interest rates, the debt service ability of most U.S. borrowers has hit the proverbial brick wall of No More, I Am Full.  

Graph is courtesy of Paul Kasriel

Now, this chart by Paul Kasriel of Northern Trust fame is so telling that I just had to reuse it this month.  The pronounced retracement of household borrowing in 2006 was a reversal that is very significant for the surprises that I see in store for 2007.  This chart confirms that we are well on our way to a retracement in profligate borrowing by Americans to a pay-down, get liquid, and stay-away-from-the-malls attitude for the remainder of 2007.  Christmas sales were the first, well-publicized indication that this trend had begun.  Without the Home Equity ATM to draw on, Americans are in somewhat of a cashflow bind to pay down existing debt, much less take on new debt; income growth, unless you are one of the privileged Goldman-Sach Gang is tepid at best for most Americans, just ask them.  And with nightly news reports of a sinking auto and housing industry in the U.S. as of 01/01/07, only a brain-dead consumer would stay on a debt binge.  The smell of recession is firmly in the air, and remember, most Americans do not pay a lot of attention to BLS statistics, and thank God that they don't because they are total garbage!  The little spurts we are getting here and there in this economic stat or that is merely the last throes of a dying fish on a hot deck.  You cannot have two major industries in recession already without the rest of the U.S. economy following suit.  Housing has represented at least 1% to 1.5% of annual GDP growth since 2002, and that contributor has gone negative on a year-to-year basis.  Has never happened and we are not in any great fiscal or financial shape as a nation OR AS A POPULACE to be able to do it this time around.
 
However, when you are dealing with a Debt-Burdened Economy such as the U.S. today with a domestic currency progressively weakening in global markets, you cannot use the common assumptions of yore.  Americans are not just consumers of debt, another staple to our voracious appetite for living large, but we are necessarily world-class SELLERS of debt to those around the globe with export-generated U.S. Dollars to spend.  And American Sovereign Debt is one of our biggest exports to the rest of the world, probably THE BIGGEST EXPORT, par none.  So while domestic demand for assimilating more debt at the consumer level will subside in 2007, I argue that the global appetite for assimilating more U.S. Debt instruments will subside also in 2007.  Debt demand at the U.S. consumer level will decline in parallel with global demand for U.S. Treasuries and Corporate Debt.  Why the latter international reduction in U.S. debt demand, and still you say that interest rates will stay firm instead of declining, if not increase in 2007???!!!

THE STINKING, SINKING U.S. DOLLAR IS WHY RATES WILL STAY FIRM TO INCREASE IN 2007.

I know I am not the only Sage Swami Guru to come up with this analysis for the landscape ahead, but it is counterintuitive that an economy with sinking domestic final demand would experience firm interest rates or even increasing interest rates.  As the Dollar continues in its bear market slide in 2007 (Dollar Index to 80, here we come), more and more foreign Central Banks will shift currency reserves away from Dollars and toward Euros, Yen, Swiss Francs, and Gold.  Now I said this would happen years ago regarding a total reversal in Central Bank gold sales for them to actually go on the Buy side, but the order I have shown these non-Dollar reserve assets is the exact order in which Central Banks are concentrating their reserve shifts.  The Japanese Yen is only taking precedent over the Swiss Franc because of the size of the underlying economies and currency market liquidity, but this is not an outright vote on the stability and prospects of Japan.  One has to question if all of the bad debt bodies in Japan have floated to the surface, and been dealt with so I am not convinced that Japan is the most fiscally and financially sound country on the planet.  They never took the harsh medicine that is required to totally emerge from a Debt Collapse and Depression.  And they are a nation of savers, not spenders like the U.S.A.; can you imagine our fate in the years ahead with a humongous external debt and not a surplus in sight.  Eventually, Swiss Francs will take precedent as the Swiss begrudgingly buy back all and more of that gold that they sold.

The 10-year Treasury Note yield has already begun to show this reality since December as foreign lenders curtail U.S. debt purchases, and we are now at 4.8% when we had been as low as 4.3% this past summer.  This is a key reversal in intermediate interest rates.  Now this is still cheap money, especially when actual inflation is running at 5% to 6% plus in the real world, 2.5% for 2006 from the BLS being total LaLaLand BS.  So we still have negative real interest rates in the U.S., hardly the stuff of tight monetary policy after 17 piddley increases in the Fed Funds Rate!  Now will America's need for financing its Federal Deficit and Trade Deficit subside in 2007 as fast as the economy subsides?  Methinks not.  Tax revenues have peaked for Uncle Sam as have corporate profits in this cycle, and the Federal Deficit with external military costs ballooning in 2007 is not going to be a pretty sight.  Let's see, Revenue Down, Costs Up.  Golly, that means the Deficit is UP!  So how does a debt addict get another fix?

BY KEEPING THE PRICE OF HIS OFFERINGS, VIA INTEREST RATES, ATTRACTIVE VIS A VIS THE REST OF THE WORLD.  THERE IS NO ROOM UNDER GOD'S BLUE SKY FOR THE FEDERAL RESERVE TO CUT INTEREST RATES IN 2007.  THERE IS NO ROOM UNDER GOD'S BLUE SKY FOR THE FEDERAL RESERVE TO CUT INTEREST RATES IN 2007.  THERE IS NO ROOM UNDER GOD'S BLUE SKY FOR THE FEDERAL RESERVE TO CUT INTEREST RATES IN 2007.  (my emphasis)

And if we have a geo-political shock in the oilfields in 2007 which has a greater than 50% probability with everyone and his uncle trying to blow each other up in the Middle East with three Civil Wars underway in Iraq, Lebanon, and Palestine, the Fed may have no choice but to raise rates slightly in 2007.  Money will still be plentiful, you can count on it.  It will just cost a little bit more, but still be cheap by historical standards and likely below the real-life rate of inflation for the majority of the year.  Since the rest of the world's Central Bankers outside of the Fed are still intent on attempting to put a lid on domestic inflation, the Fed will continue to be in competition as to the ultimate interest rate advantage that one currency carries over another.  The European Union, Japan, and Switzerland have a long way to go in monetary tightening to attempt to present themselves as inflation-fighters to the rest of the world.  So let the games begin.

Central Bankers around the world, however, are talking out of both sides of their mouths regarding their intentions to keep a lid on inflation.  They are going to increase the COST OF MONEY in this exercise, but certainly they have not nor are going to restrain the SUPPLY OF MONEY!  Hence, expect inflationary pressures to stay around much longer during this economic downturn ahead, and gold & silver to be direct beneficiaries to this smokescreen monetary activity.  In fact, this Stagflation cycle could turn into an historic Inflationary cycle even as global economic activity starts to ebb.  This excess liquidity in excess of economic growth potential has to find its way somewhere, AND TANGIBLE, NOT FINANCIAL ASSETS, WILL BE THE VENUE OF CHOICE AS 2007 PROGRESSES.  A lack of confidence will spread over financial assets as one accident after the other occurs in the years ahead.

If you have been paying attention of late, most Federal Reserve governors have been telegraphing their intentions for 2007 regarding interest rates:  Inflation is more the risk to the stability of the economy than what risk historically-still-low interest rates can pose to economic growth.  Of course, we all know that American consumers and governments are just laden with mountains of debt so even a small increase in rates can upset the applecart, but the Fed will choose to defend the Currency of the Realm, in its typical half-hearted fashion of meager adjustments.  And why this choice at this inopportune time with the 2002-on pillar of the economy, Real Estate, already collapsing?  

WITH BABY BOOMERS STARTING TO RETIRE AND CORPORATE REMITTANCES TO WASHINGTON STARTING TO EBB AS WE ENTER A RECESSION, THE FED WILL CHOOSE TO KEEP THE FOREIGN TELLERS' WINDOWS OPEN TO KEEP MONEY FLOWING INTO GOVERNMENT COFFERS THROUGH INCESSANT AND ACCELERATED BORROWINGS IN THE YEARS TO COME.

We are broke, we have just not admitted it to ourselves, yet the rest of the world already knows it.  AND THE REST OF THE WORLD, IF THEY ARE TO CONTINUE TO LEND TO US EVEN IN REDUCED QUANTITIES, IS GOING TO DEMAND A HIGHER RISK PREMIUM TO DO SO VIA HIGHER INTEREST RATES FOR U.S. DEBT INSTRUMENTS.  This is Econ 101 also.


2.  Because Of #1 Above, A Major Financial Accident Will Happen.

Okay, this is not a newsflash either for any of you that read anything but the Wall Street Journal or watch a brain-dead Financial News Network.  Since I spent so much allotted ink developing the firm-to-increased interest rate prognostication for 2007, I will not elaborate greatly on this second surprise as I have done so to some length in the past.

One or two large financial institutions and from 3 to 4 large hedge funds will either become insolvent or require some form of Federal assistance in 2007.  The "too big to fail" axiom is unlikely to go away with a Federal Reserve, Treasury, and Federal Government that seems to have no problems with financing anything under the sun; so expect more Government bailouts in the year and years immediately ahead as the Bernanke Printing Press goes into overdrive.  I previously thought the well was dry for this sort of activity, but the irresponsible monetary and fiscal policies of the last 5 years have proven to me that U.S. MONEY CREATION KNOWS NO BOUNDS.  And understanding how power is concentrated and exercised in this country, you can rest assured that the privileged insiders with direct access to decision-makers are going to be able to prevail, especially with a hotly contested general election coming up in 2008.  Campaign contributions have bought power in this country from Day One.  Fannie Mae is already on its way to bankruptcy, and of course, many sub-prime mortgage lenders are going belly-up and destined to do so.  But this is not the obvious subset of financial institutions that I am talking about here.

i am talking about the major financial institutions of this country that have chosen to play the interest rate swap derivative game too long and too big.  JP Morgan-Chase, goldman-sachs, wachovia, bank of america ....... all come within this category of being greatly exposed to being on the wrong side of the interest rate bet.  the absolute numbers are in the trillions, no joke.  A rumbling sound can already be heard.

Once again, I have covered this topic before ad nauseum, but suffice it to say that 2007 is finally going to reveal the fragility of the U.S. financial system built upon a Credit Creation Machine (CCM as in ICBM) that is little understood and extremely vulnerable to surprises.  And a CCM of a magnitude that the world has never seen.


3.  Because Of #1 and #2 Above, The Precious Metals Will Soar.

This will not be a consolidation year for Gold and Silver.  Investors' loss of confidence in our leaders and the "perceived-if-not-actual" loss of stability within our financial system will finally come into play in 2007 based on just the two surprises that I have discussed herein.  There will be more surprises in 2007 that I will discuss as the year unfolds, hopefully before they occur.  Granted, oil, copper, and other economically sensitive commodities have already gone through substantial corrections from the heady levels of late 2006, but always remember that Gold and Silver are not just commodities. 

GOLD AND SILVER ARE REAL MONEY, AND HISTORICAL SUBSTITUTES FOR THE FIAT MONEY THAT MAN HAS CREATED SINCE RECORDED TIME.  AND FIAT MONEY HAS A HISTORY OF COLLAPSING, ONE CURRENCY AFTER THE OTHER THROUGH RECORDED TIME.  Investors will flee increasingly to these money-alternatives as the Dollar continues its bear market in 2007 and a series of unsettling, confidence-rattling SURPRISES hit the airwaves.  Investors will prove to be very reactionary in 2007, at home and abroad.

I know that I have sounded like Chicken Little over the years, but I have been right more than I have been wrong (bull markets in gold and silver predicted in 1998!), and it is all about the odds when investing and attempting to preserve financial wealth.  This is going to be one HellOfA Year, 2007.  Inflation could even subside in the latter part of 2007 due to waning economic activity, but don't count on it with the growth of internal demand in China, India, and Asia, and don't count on it to matter that much to the Federal Reserve.  Credit is the lifeblood of the American economy and financial system.  Without willing domestic and foreign lenders who will have to be bribed with higher interest rates, WE ARE DOOMED TO DEPRESSION AND DEFLATION IN A MASSIVE DEBT REPUDIATION AND COLLAPSE A LA 1990 JAPANESE STYLE BUT WITHOUT SURPLUSES, ONLY MAMMOTH DEFICITS. 

Okay, laugh that it can't happen here.  It is already happening in the mortgage sector and is spreading to other sectors.  But did you buy Gold when it was less than $300 per ounce, and Silver under $7???  Many of my clients did. 

SURPRISE, SURPRISE, SURPRISE AS GOMER PYLE USED TO SAY.


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February 21, 2007:  Bernanke's Pushing-On-A String Economy.


It was a toss up this month as to what topic to discuss with my legions of loyal readers, "Surprises On 2007 Inflation" or the "Pushing-On-A-String Economy" I see in store for the new cheerleader at the Federal Reserve, Ben Bernanke.  Since we just had a higher-than-expected inflation number via the Cockeyed Pricing Indicator, a.k.a., CPI, print today, the inflation discussion would be quite timely, but I will wait a little longer before expounding on why the major components of any price index are going to be under pressure throughout the majority of 2007.  In one sentence, I could say that monetary inflation due to continued worldwide central banks' overly loose policies in addition to non-bank liquidity also still surging at tsunami heights are two sufficient reasons in themselves.  I know I write rather long sentences, and my English teachers are twitching mightily when they proofread my work, but I only put a period in a sentence when my mind has a synapse pause.  But I want everyone coming back each month in Anticipation of Immense Educational Absorption (AIEA), so I will hold off until I can spend the time to analyze the components of reported inflation and put a number on where I think the most critical ones will go this year.  As I have said on these pages over recent months, expect the economy to go into recession this year, and despite this fact, year-over-year changes in critical prices will continue to be in the overall 6% to 7% range in the real world of consumers, not politicized bureaucrats. 

WE ARE ON THE CUSP OF A LOSS OF CONFIDENCE.  I think the vote is already in concerning confidence in the overall economy ebbing, but this key ingredient to economic health for any country, CONFIDENCE, is at an historic crossroads.  Now, I am not referring to any popular survey data, though I fully support the University of Michigan methodology, because to not do so would mean a higher monetary bequest to them from my estate when I go to the Happy Writing Grounds.  It is almost like an alignment of the planets as we move through 2007, because the meteorite named, "Financial Reality", is screaming toward Earth with an initial impact zone right on the United States.  Now I am a Patriot, don't get me wrong, but we as a nation have been engaged in some very questionable activities for some time now (and I am not referring to our Foreign Policies or Military Actions!).  But the liquidity-driven, cheap-money cycle started by Greenspan in 2002 ( and basically continued to this date as we really have negative interest rates overall that are well below the real rate of inflation of 8% to 10% as my nimble digits fly across the keyboard ) has finally run out of poor and poorer credits to purchase any and all goods and services.  Enough is enough, and this Sage has been forecasting the end of the Post-WWII world since 1997, but a 10-year fudge-factor window is good enough for economists and forecasters.  I have it right and right now.

HOW WAS I TO KNOW THAT THE GREATEST CREDIT AND DEBT EXPLOSION IN THE HISTORY OF MANKIND WOULD OCCUR IN THE LAST 5 YEARS!!!

Did I mention that Gold and Silver have zoomed upward today with the news of persistent inflation in a sagging U.S. economy, that engine of spending for the rest of the world?  With Gold over $680 per ounce and Silver besting $14.35 intra-day, we will see last year's highs possibly within the next 60 days.  SOMETHING IS AFOOT, as my British ancestors would say.  Speaking of the British, their phased withdrawal from Iraq now puts the USA into the role of Davy Crockett at the Alamo, but I suspect with a much better outcome for the U.S.; don't know how the Alamo will fare, i.e., Iraq.  This is like an Ally's Vote of No-Confidence in the current U.S. mission, has increased the potential for a continued decline in the positive perception of the United States around the world, and has precipitated a massive move into the ANTI-DOLLAR called Gold.  Since the Dollar Index barely hiccupped today, these were non-Dollar denominated funds that surged into Gold.  Euros into Gold, Swiss Francs into Gold, Japanese Yen into Gold, Russian Rubles into Gold, Middle Eastern Whatevers into Gold, Chinese Yuan into Gold.  Our Foreign Owners will save the Dollar Exit for another day.  They know that the Dollar is headed south in a big way, and bought some additional insurance today.  Persistent inflation in lockstep with declining financial, economic, and political stability for a currency is never a recipe for strength.  It is a recipe for significant weakness.

Remember the fabled counting of the number of angels on the head of a pin.  Today's version would be the counting of the number of financial analysts that forecast Federal Reserve easing in 2007.  Now with that nasty statistic called INFLATION not willing to go in the "right" direction of "down", no matter how much the input numbers are massaged, the likelihood of a Fed easing of a single basis point goes down in direct proportion.  The economy is going to tank, it is already in progress.  The U.S. auto industry is firing on only 2 cylinders and the U.S. housing industry has just discovered that its unsold structures and undeveloped land are located on the Giant Sinkhole of Satiated Demand and Excessive Speculation.  And the payment of taxes in April, 2007, will not be the only unpleasant event that occurs some 54 days from now.  The printing of a preliminary GDP number that is so close to negative as to be statistically "negative" will come to a movie screen near you.  Now remember what the Sage forecast back in October, 2006, when the rest of you were busily shopping for Halloween costumes and decorations:  U.S. Economy Officially Declared in Recession by July, 2007 (October 18, 2007).  

We are right on track to hitting this timeframe, which appeared somewhat aggressive to even yours truly back then, but now appears to be right on target as economic data prints more depressed than even I imagined at this juncture into 2007.  The Spring pop in real estate is now cancelled, as this lack of confidence worm squirms its way into the doubts of everyday American Consumers.  When the house next door to you takes in tenants just to pay the mortgage and the one beyond that goes into foreclosure and your HOA charges a special assessment because 10% of homeowners are delinquent on their annual dues, WELL, THIS DOES NOT GIVE YOU THE CONFIDENCE TO GO BUY ANOTHER HOUSE OR BUILD AN ADDITION TO THE CURRENT ONE OR EVEN BUY THAT THIRD SUV.  If I were a psychologist I could quote some learned researcher in this field of human behavior, but when there are bombs going off all around you (metaphorically, since we have not retreated from Iraq), you dig the deepest foxhole that you can.  And the foxhole that Americans are going to dig in 2007 will be called that virtue of yore, long-forgotten ............... (drum roll please or pass the eggroll) ..................... SAVINGS!  Americans are going to retrench in 2007, because the events around them will shake their CONFIDENCE to the extent that to not do so would suggest a financial suicidal tendency.  Even though many Americans chose not to watch the Nightly News, there will be enough discussions at the office water cooler or over the clothesline (nah!) to disperse the news about how bad things really are on the economic front.  Stay tuned.

Since my noggin is bursting with ideas right now, here are some other Confidence Shakers for 2007:

1.)  Persistent political battles regarding the direction of the country and its domestic and foreign policies with virtually no resolution of same.
2.)  Acceleration of major employer layoffs and facility closings as wage demands increase along with healthcare costs domestically.
3.)  More revelations of fraud, embezzlement, and violations of securities laws by officers of publicly traded companies.
4.)  Increases in import prices as Dollar devaluation resumes in earnest, WalMart has to pass price increases on to consumers.
5.)  Surge in mortgage delinquencies, foreclosures, and supply of unsold homes on the market with resultant second-year hit in prices of 10% plus in most markets.
6.)  Persistently high gasoline and energy prices as a risk premium of interruption is built back into these commodities due to smoldering Middle East unrest and civil war.
7.)  The necessity for State and Local governments to increase taxes in order to plug gapping fiscal gaps.
8.)  Continued demise of the American automobile industry with one major player approaching insolvency by year-end.
9.)  Continued surge in drug, physician, and hospital costs to consumers within a healthcare system that is basically out of control and soon to be taxed even further with Baby Boomer retirements.
10.)  Loss of the Home ATM as a source of supplemental cashflow as lenders tighten standards, home values decline below outstanding mortgages, and interest rates stay stubbornly firm.
11.)  Increased water shortages across the nation as weather patterns mutate and lack of resource management for decades comes home to roost.

Whew!  Even I feel a little depressed after writing that!

And this confidence shaking laundry list gets us nicely back to this month's theme of Pushing on A String.  This expression relates directly to the Federal Reserve's efforts to re-inflate an economy that is deflating by loosening the spigots of monetary policy primarily through reductions in interest rates.  And the analogy is so graphic to suggest that Sir Bennie Bernanke (we will go ahead and knight him now since he will seek refuge in England before all is said and done!) is at the end of a very long, U.S. Economy/Consumer String and that there is no "rigidity" in the string (also known as Overall Demand and the Ability or Confidence to take on more debt).  So no matter how much Bernanke pushes with monetary ease, the net result is zero movement on the recipient's part.  The Consumer does not react because he or she does not have the Ability or Confidence to take on new debt which is what lower interest rates are intended to produce.  An the Economy, hence, does not improve because the U.S. consumer is the driving force behind it and does not have the incremental spending power or desire to spur economic growth.

So for those of you still throwing ill-spent money at the stock market, or those buying a beach-front vacation home that Al Gore tells us will be flooded by Global Warming by Spring of '08, or those of you still failing to buy precious metals at your favorite bullion dealer, DON'T LOOK FOR THE FEDERAL RESERVE TO RIDE TO YOUR RESCUE IN 2007.  AND IF BENNIE B. SPURS HIS INTEREST-RATE-REDUCTION STEED TO SALLY FORTH, IT WILL BE THE CHARGE OF THE LIGHT BRIGADE!  Monetary policy will not save the U.S. economy, consumer, or financial system in 2007.  A loss of confidence on the part of the American consumer will guarantee this forecast.

And what will be the upcoming event that will place the first worm in the subject's noggin?  The persistent and widespread failures, in a Cascading Insolvency Waterfall (CIW) reminiscent of the Southeast Asian Domino Theory of 1967, of one risk-addicted financial institution failing after the other.  Because, have you not heard?!!!  There is virtually no risk in making low document loans without income verification to prospective homeowners with dubious credit histories, no prior home ownership, and no savings in the bank to make a down-payment or weather 3 months of unemployment.  The Lending Company Collapse of 2007 (LCC07) is a giant financial meteorite that has entered the earth's atmosphere and is screaming to earth.  And it will be a direct hit upon the financial system of the U.S. all the way to the largest commercial banks that will leave a crater that we will not crawl out of for a decade or two.  The shock wave will shake Consumer Confidence to the bone as our fourth major banking crisis since World War II spreads in an expanding circle to the far reaches of the land, leaving no one untouched.  And the U.S. Dollar's status as reserve currency of the world will shatter in the ensuing financial earthquakes to follow.  IT IS ALL ABOUT CONFIDENCE.  IT ALWAYS HAS BEEN.


the prices of Gold and Silver are going to surprise everyone in the months and quarters ahead.  Because the landscape is going to surprise everyone also!  Imagine all of the craters on the moon.



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March 5, 2007, SNIPPET:  HeHeHe, Imprudent Speculators Get Whacked.


Why is it that every time that I think about "excessive risk", the name of Sir Alan Greenspan comes to mind?!!  Sir Alan's nickname could well be, "The Father of Excessive Risk" because this over-rated central banker created a mindset in global finance that no matter how much you screwed up in taking an excessively risky position, the U.S. Federal Reserve was there to turn on the monetary spigot to re-liquefy the system.  Starting on the Shanghai Index last week, risk-blind speculators have begun to see what happens to those who buy the theory of the "Greenspan Put".  Uncle Treasury or Uncle Fed cannot be in all markets at the same time, and as a bureaucracy, many more speculators will have to go splat on the global pavement before any kind of net, a.k.a. Monetary Helicopter of Emergency Liquidity (Monetary HEL), can be put out to at least break their falls.

Now since Sir Alan wants Spielberg to do an autobiographic movie about him as a action figure, he came out with a prescient prediction about a week ago about a "Possible But Not Probable Recession" in Second Half, 2007.  A PBNP Recession for all of you new to American economic forecasting is a recession that is definitely going to happen, but it is couched in Greenspan Double-Speak (GDS) that will keep Sir Alan's speaking engagements forthcoming at Bill Clinton rates.  Nobody wants to book a party-pooper.  But since Greenspan has seldom made an accurate prediction in his entire economic-forecasting lifetime, and Spielberg told him he would have to have at least ONE accurate forecast in the last 30 years, GREENSPAN MADE THE NO BRAINER.  It is kind of funny, HeHeHeHaw, that the guy so adroit at propping up financial markets while illustrious Chairman of the Fed was one of the very guys who was partially blamed for the March Madness Meltdown of 2007 last week.  My hosting service has confirmed that Greenspan has been caught visiting "Bullion Market Insights", but we will not sue him for breach of copyright laws in stealing the Sage's 2007 Recession Forecast.  I think an aged Tom Hanks would make great casting in the upcoming, "The Maestro Plays A Sour Note".

Ah, in the God-like privileges of High Finance, it is somewhat reassuring that Justice Does Prevail and the Financial Cowboys of the New Millennium are not only getting thrown from their horses, but trampled into the dust.  Us common folk that do not own 5 million-dollar-plus houses in Greenwich, CT, and vacation in the Hamptons are secretly rejoicing in the Domino Failures of Imprudent Risk-takers even as we adjust our Pampers watching the various price tickers.  But even though those of you still expecting Financial Nirvana from stocks are likely in the negative column Year-To-Date, YOU will still be the unprivileged sap picking up the tab when the fruits of the Greenspan Put continue being harvested as rotting pulps fallen to earth.  YOU will experience the ravages of higher U.S. inflation as a result of this decade's long exercise in imprudent leveraging and risk-taking.  YOU will inevitably pay the tab for a bankrupt U.S. of A in the not-too-distant future.  Unless, of course, you buy the Insurance of the Ages, GOLD AND SILVER, to counter what these speculators have done to YOU.

Now we also know that the Yen Carry Trade is finally beginning to unwind.  The Bank of Japan has seen the mobs of angry Japanese passbook savers swirling daily around its offices, tired of almost 20 years of minuscule interest rates on their earnings.  Plus, with the Japanese almost single-handedly putting the U.S. auto industry out of business (with not-insignificant assistance from excessive compensation packages for all at the U.S. Big Three coupled with dismal market research and design and QC/manufacturing), the Weak Yen Era has probably run its course since the float is so huge the Bank of Japan may no longer be able to jawbone and intervene to keep the Yen cheap.  And with more signs of glacial recovery from Japan's Two-Decade long depression, the BOJ may not feel the need to subsidize their export industry to the extent it has in the past.  BOY OH BOY, what a 1/4 point increase up to a whopping 0.5000000% can do to a supposedly risk-free trade of borrowing in super-cheap Yen and buying other assets at higher yields with the proceeds!!!

These up-to-now Financial Rocket Scientists who could enjoy at one time a 450 point spread on investing their extremely low-cost Yen borrowings in U.S. Treasuries yielding 4.5% are now being crunched from both sides of the equation.  Their borrowing costs are going up, the spread is shrinking, and the cost to obtain Yen to close the trade is going up.  The Japanese currency appreciated a whopping, whopping 4.5% just last week which meant that most of these overpaid, under-experienced Wall Street types were being put unceremoniously into a significant loss position in just 5 trading days.  In order to unwind their carry-trade positions, AND THEY ARE DOING SO EN MASSE SINCE IT DOES LOOK LIKE THE JIG IS UP IN THIS "NO-BRAINER", they would have to pay 4.5% more in U.S. Dollars to repay their Yen borrowings.  From what I can tell, we are talking about Tens of Trillions of Dollars of exposure, and that is a lot of moola trying to exit a position in a panic-shortened period of time.  While U.S. Treasuries have gone up in price over the last week due to massive, yet unguided, "Flight to Safety" buying, they can sell their bonds at a slight profit to generate Dollars to be used to buy Yen to repay their Carry-Trade debt.  BUT THE APPRECIATION OF THE YEN IS PUTTING THEIR MANSIONS ON THE VIRTUAL AUCTION BLOCK.  Need another reason to expect the Dollar to decline in 2007?!  Selling Dollars to buy Yen to unwind more and more of the Yen Carry-Trade is going to knock the stuffing's out of the Greenback on global currency markets.

AND WHAT BENEFITS WHEN THE DOLLAR GETS SOLD BIG TIME???  GOLD AND SILVER.

Oh, the Bank of Japan, U.S. Treasury, and Federal Reserve will pull every rabbit out of the hat to attempt to make the liquidation an orderly one, like last week was "orderly", but the die has been cast.  AND DO YOU THINK THAT BEN BERNANKE STILL HAS AN INTEREST RATE CUT UP HIS SLEEVE IN 2007 AT A TIME WHEN THE DOLLAR NEEDS EVERY BASIS POINT IT CAN OFFER TO NOW SCARED DOLLAR INVESTORS?!!!  Methinks not.

Now, you ask the Sage:  "Why did the ultimate safe havens in a time of financial crisis go down???"  Because there are a lot of hot-money chasers like hedge funds that were long the metals (that were on their way to intermediate highs!) that needed to raise cash in order to plug many a dike in other markets.  I don't buy the argument that in just one week's time the entire world of risk-takers have gotten religion and find any asset that can fluctuate more than 3% in a day as "Too Risky For Me".  Has anyone ever seen a bad day in the bond market?!!  Bonds are hardly a safe place to go to avoid "risk" in the form of volatility.  Not to mention the credit risk now present in United States Treasuries under the guarantee of a virtual Financial Banana Republic.  But old habits die hard, and for some demented reason, intermediate-term Treasuries are advertised as a Safe Haven in Financially Turbulent Times.  Note the use of the word, "advertised".  Ever heard of "false advertising"?!  If U.S. interest rates have to increase as U.S. dollar-denominated assets are sold by global investors due to declining American economic prospects and diminishing CONFIDENCE in our stability (fiscal, economic, and financial system stability!), bonds will decline in price.  Some "safe haven"!!!

Did the Shanghai 9% decline on February 28th start this whole ADJUSTMENT PERIOD FOR RISK RE-ASSESSMENT?  Say that one 5 times quickly while standing on one foot!  Yes and No.  See, I could run for office with that kind of answer.  The global financial markets were already RE-ASSESSING specific market's risks as Gold and Silver were headed to new multi-decade highs.  There was a true flight to safety in the precious metals already well in progress until the black-box traders on the COMEX had to meet margin calls in their currency- and debt-market positions.  And these boys are known to leverage themselves up to their eyeballs (or J.P. Morgans eyeballs!), so once non-precious-metals positions started heading South, it was a self-fulfilling trend in any market that would cop a bid.  The implosion of the U.S. mortgage market with subsequent sub-prime, ALT-A, and Jumbo Loan lenders coughing up financial hairballs on a daily basis was causing any investor with a pulse to pause and take some chips off the table by selling down financial market positions.  Regardless of the cheerleading from Bernanke and Paulson regarding how "robust" the U.S. economy IS, citizens know how bad things really are in their own backyards.  Now we hear that more and more banks have purchased lots of mortgage paper that may be only that, PAPER, subject to ballooning delinquencies, defaults, and foreclosures that will only get worse in the quarters ahead along with the sinking U.S. economy.  Emerging market debt, Junk Bond debt, and Municipal debt are all going to be RE-ASSESSED in the days and weeks ahead.  That means more yield required to find a sucker, I mean buyer, and God only knows how many Interest-Rate Swaps are going to implode in the associated derivatives markets.  How many derivative have imploded in the last week???  THE FINANCIAL ACCIDENTS ARE HAPPENING AS PREDICTED.

THE FUNDAMENTALS FOR OWNING GOLD AND SILVER HAVE JUST IMPROVED SIGNIFICANTLY AND YOU ARE ABLE TO BUY MORE AT A BETTER PRICE.

See www.shadowstats.com

HeHeHeHoorah.  When gigantic sections of the world's global financial and currency markets are experiencing THE GIANT RE-PRICING MECHANISM OF RISK RE-ASSESSMENT, also known as WATERFALL DECLINES, what better time to increase your insurance policy against financial loss.  I might just drive to the Hamptons this weekend and pick out which mansion I will be able to buy with my Gold and Silver holdings in 2010.  A snowball rolling down a hill gathers both mass and velocity as it progresses.  Welcome to the Ides of March.  BUY A GOLDEN SNOW SHOVEL WHILE THEY ARE ON SALE.  We can still have a blizzard in March, in fact, I just saw something falling out of the sky.  Oh, it was just a stockbroker.

Let's see ...... LOSS OF CONFIDENCE LEADS TO RISK RE-ASSESSMENT OR IS IT RISK RE-ASSESSMENT LEADS TO LOSS OF CONFIDENCE.  Either way, this is not Dorothy's Kansas, Toto!  

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April 18, 2007:  US. DEVALUES THE DOLLAR, GOLD GOES TO NEW HIGH.


WHAT DO YOU MEAN YOU DID NOT GET THE MEMO?!!

There was no official announcement from the U.S. Treasury or the White House, but, ipso facto, as my legal beagles like to say, the U.S. Government has propagated a covert (or even overt some would say) campaign to systemically and progressively DEVALUE THE U.S. DOLLAR.  So get out your Banana Republic flags and send them to the top of the mast!  This policy is also known in the Currency Trade as BEGGAR THY NEIGHBOR, which means that you use increasingly cheaper Dollars to pay your tab with your trading partners and service your surging external debt.  Politically, you get the benefit of attempting to bolster your export trade industries, without putting on too many protective tariffs or quotas with competing countries.  So China Bashing will become less popular with vote-hungry politicians as we just devalue the total debt that we owe China and pay them interest with cheaper and cheaper Dollars.  As a government, you look less mean-spirited.  But whether there is ever an official announcement for the CURRENT DOLLAR DEVALUATION, which likely will never come since the vaunted Reserve Status would go instantly out the window, or just an unspoken U.S. policy of currency neglect, the end result is the same:  THE U.S. DOLLAR IS IN THE PROCESS OF BEING DEVALUED ON THE WORLD CURRENCY MARKETS.


I.  Thank you Congress and Current Administration.

Since these two branches of Federal Government did not get the memo either, the OTHER MEMO THAT WE ARE TECHNICALLY BROKE, BANKRUPT, UNDERWATER FISCALLY, then we will not be too hard on them.  When $24 Billion is tacked on to a military spending bill and President Bush is finally pulling out the veto pen after over six years at the helm, you know that the Keepers of the Public Coffers are guarding the prosperity of the nation with Persistent Fiscal Largess (PFL).  There is another memo coming out soon, THE U.S. IS IN RECESSION, TAX REVENUES ARE GOING TO SLUMP, but let's not spoil the atmosphere of living in a Goldilocks Economy where the resiliency of the American consumer to spend through any level of unemployment, home equity evaporation, and record personal debt levels is the envy of the civilized world.  Not only can we Americans take the beach and beat the crapola out of our enemies, we know how to beat the crap out of the financial futures for our own current future citizens.  I guess we are ambidextrous in that respect!

It is a guaranteed forecast, a.k.a., a CERTAINTY, that both Congress and the Administration will not institute any fiscal-spending-restraint measures in a timely and sufficient fashion to prevent the U.S. Dollar from sinking further and further on the world currency markets.  With a Presidential election coming up in 2008 and the media already thick with daily/hourly news on the declared candidates (please pass the barff bag!), it is very unlikely that any necessary reduction in Federal spending will occur any time soon.  And fiscal policy is usually loose during a recession, not restrictive.

As a member of the Baby Boom generation, I know that the burden of Social Security and Medicare will be so onerous by the time I decide to attempt to collect benefits in some 13 years, that it is also guaranteed that full benefits will be pushed out future regarding recipient retirement age AND an actual cut in monthly benefits is also highly likely.  Taxes will have to be raised on the poor working stiffs forced to support a top-heavy entitlement system, and there is only so much blood you can get out of a turnip without an angry mob forming outside the Capitol.  Ah, the political concept of, "Promise Today, Paid Never".

So we step back and salute our Federal Fiscal Managers who will assist in the eventual inability of the United States to meet its entitlement obligations to a degree that smacks of DEFAULT.  Our foreign lenders know these truths to be self-evident, and have begun to adjust their purchases of U.S. assets, especially Treasuries, accordingly.  Can you say Buyers' Strike?!  Can you say, "Higher Interest Rates?!".  How are Foreign Lenders (a.k.a., Foreign Treasury Buyers) going to get paid if a country cannot even honor the purportedly inviolate obligations it has to its own citizens as mandated by Law.
(Soup kitchens will be a great place to work in the 2010's cause at least you will get free meals.)


II.  Thank you Sir Alan Greenspan and the Current Federal Reserve.

The result of irresponsible Monetary Policy since 1998 is HIGHER INFLATION IN THE U.S.  All of us with a pulse that actually purchase goods and services in the real world know that U.S. inflation is not less than 3% on a year-over-year basis.  THE REAL RATE OF INFLATION IN THE UNITED STATES IS 8% TO 10%.  It is indeed a shocking realization that our own Government would lie to us in an alleged Democracy of the People, but years and years of excessive monetary creation through the Federal Reserve System to avert one financial catastrophe after the other, not to mention excessively loose lending standards during this same period, has resulted in a confluence of factors merging to push consumer prices higher.  We now have the classic situation of too much money chasing too few goods & services, the classic definition of inflation.  Inflate the money supply for a sufficient number of years with 10% plus annual growth rates, and you cannot be surprised to see 10% inflation in the Real Inflation Rate at the consumer level.

The Greenspan Put, where excessive risk-taking in financial markets and obtuse financial instruments were actually encouraged to the extreme, has now become the Bernanke Put where the markets are frequently soothed by the Fed that all is well with both the economic and financial systems.  That interest rates will not be increased suddenly without ample warnings on MSNBC or CNN, and that the Fed under Bernanke does not want any financial types playing on the railroad tracks of speculation to get hurt, much less bring down the system.  LOTS OF LUCK, BENNIE BOY!  History is strewn with examples of government officials trying to support or manipulate massive markets that they themselves don't fully understand.  But pronouncements of a totally resilient U.S. economy, contained inflation, contained foreclosure levels, and alleged confidence that the Fed can actually influence longer term U.S. interest rates in a global marketplace do nothing but keep the citizen out in the open way too long before the Storm hits.  The Bernanke Fed, as was the Greenspan Fed, is a Tornado Siren that never sounds.  Pretty useful, huh?!

U.S. interest rates are not going down any time soon.  Even with more and more signs of actual economic retracement in the U.S. economy, the Fed is faced with rising interest rates by competing currencies at a time when U.S. rates do not even compensate holders for the local rate of inflation.  THIS IS A MAJOR DISAPPOINTMENT THAT STOCK INVESTORS HAVE NOT COME TO RECOGNIZE.  Of course, I would bet real money that either Goldman-Sachs or JP Morgan-Chase are active in intra-day futures buying or selective Dow component buying to keep the RETAIL suckers at the roulette wheel.  In time, this dirty secret will come out, but 2007 will not be a period of declining U.S. interest rates.  With just about every major currency country increasing rates to put a lid on their own domestic inflation surges, to include the Japanese begrudgingly so, the Fed cannot actively be seen as cutting the legs out from under the Dollar by entering a campaign of rate reductions.  If they will not actually increase interest rates to attempt to save the DOOMED DOLLAR, then they must employ the practice of Benign Neglect and look the other way while the Greenback slides and inflation stays stubbornly high due to the New World Order.

The fact that we import at least 35% of our domestic consumption from such emerging powers as China and India has created a world awash in U.S. Dollars that is constantly looking for a roost.  This new-found wealth overseas has allowed both China and India to improve their standards of living to the extent that they are now major consumers of raw materials and commodities.  Oil, platinum, nickel, iron, copper, phosphorus, steel, concrete, fiberglass all come to mind as many of their individual prices have set new world records in the last year.  THIS GLOBAL DEMAND-PUSH INFLATION IS NOT GOING TO SUBSIDE IN 2007 AND PROBABLY NOT EVEN DURING MOST OF 2008.

Oil is a prime example.  It is inevitable that the supply of oil to the West is going to be interrupted at some point in the not-too-distant future by geopolitical events.  The despotic leaders of most Muslim nations are under tremendous internal political pressure to punish Western countries for their war against terrorism.  This war is often presented via anti-Western, anti-American media sources as a WAR AGAINST ISLAM, and the only weapon these oil-rich countries really have is their Black Gold.  Whether it be an actual terrorist act or a reduction in Western shipments of oil by changes in the political outlook of Middle Eastern countries, the result will be the same.  Higher oil prices at a time of declining U.S. economic activity for most developed Western countries.  The tides are changing swiftly on the geopolitical shores.

One of the key ingredients to the determination of value in a country's currency is the level of inflation existing in that country at any moment.  The world is not full of fools just lending money blindly to a country (unless they are Sub-Prime Lenders!), using its domestic currency to do so, regardless of the real rate of return after inflation adjustment on those investments.

THE RECOGNITION THAT U.S. INFLATION IS 2 TO 3 TIMES THE OFFICIAL SUB-THREE PERCENT RATE IS REFLECTED IN THE CURRENT PRICE OF THE DOLLAR TODAY AND EACH DAY FORWARD.  The U.S. Federal Reserve has been the biggest protagonist in the re-emergence of American Inflation over the last 9 years the world has ever seen.  By encouraging and providing the means by which consumers could leverage themselves to record levels, the Federal Reserve has created demand that otherwise would not have existed and America has continued to pull in bought-with-debt goods from overseas at staggering levels.


III.  Thank you Instant-Gratification American Consumer.

There is certainly enough blame to go around for the in-progress devaluation of the U.S. Dollar, so I will try not to leave any culprit without Due Credit.  I am going to leave the financial types on Wall Street & Broad out of this finger-pointing for now, although they will certainly have their day in the sunlight in the not-too-distant future as to how they have separated Millions of Dollars from American retail investors for decades.

If Americans, as a group, were not such gluttons for credit, and had a proclivity to save (that four-letter word!) like the Japanese, there would not have been such an expansion of the money supply as created under a Fractional Reserve banking system.  This last argument may be hard to prove, and since I am running out of allocated time for this missive, I will wind it up here.  Record levels of mortgage debt and installment credit do not speak well of a country's financial stability because a bankrupt/financially strapped populace will put pressure on its government to JUST PRINT MONEY TO SOLVE THE PROBLEM.  No one forced American Consumers at gunpoint to take on IMPRUDENT LEVELS OF DEBT OVER THE LAST 5 YEARS.  Granted, the Federal Reserve served as the Pusher in this Greek tragedy, but the Consumer was the undeniable Addict.  If Ultra-Loose Monetary Policy (ULMP) had not found a ready borrower during this time period in Record Numbers and in Record Amounts, I would be writing about how the Fed had been "pushing on a string" to keep the economy afloat post stock market collapse in 2000.  But the American Consumer was there at the borrowing window, thinking that Cheap Money is easier to amortize to a zero balance than more expensive money.  Principal is principal, and a lot of it outstanding has begun to sink the American economy, especially in light of stagnant or sinking inflation-adjusted income gains.

There is also a psychology in this Country that has developed since WWII that it is the function of Government to attempt to be all things to all people.  Based upon the humongous size of our outstanding entitlement liabilities in America today, we have tended toward a Socialistic Society since F.D.R.'s New Deal.  And be it known, it was not the New Deal that brought us out of the Great Depression of 1929, but the record setting spending for the World War II mobilization.  When I hear Congress Persons talking about spending Billions of Dollars to bail out Sub-Prime borrowers that got themselves into trouble with steeply stepped variable rate mortgages, the very kind of instrument encouraged by Sir Alan Greenspan, I get literally nauseous.  ARE WE ALL ADULTS HERE OR ARE WE CHILDREN OF THE STATE?!!!!  If you can go out and get a driver's license to operate probably the most dangerous killing machine yet known to man, the Automobile, then you must be a very responsible person as viewed by the State.  This viewpoint that an American, hopefully one that is here legally, is entitled to be assisted in every manner imaginable is one of the reasons that Americans themselves are responsible for the debasement of their own currency.  Americans want too much, and they are not willing to obtain it with their own efforts; they no longer, as a group, have the patience to work hard and save.  Politicians, slimy as they are, are only reacting to the demands of the electorate.  So take a bow, American Consumer, for your implicit and explicit demands upon your Government to the extent that we are now on the road to fiscal bankruptcy.  And speeding down the Road of Dollar Devaluation.  I hear a lynch mob outside the door trying to get in!  Better go load the hardware.

But always remember, it is YOUR CONGRESS, YOUR PRESIDENT, YOUR FEDERAL RESERVE, AND YOUR SPENDING HABITS & EXCESSIVE DEMANDS that are directly or indirectly responsible for the Devaluation of the U.S. Dollar.  IT IS, AFTER ALL, YOUR CURRENCY OF THE REALM.  So what are you going to do about it?  While we can't throw all the bums out at the same time, we can do it in a purposeful, gradual manner.  If you put your head in the sand, and say, "What can I do about it?", "I only have one vote!", you have really missed the point of these free epistles over the last 8 years.  Take the easiest action you can first, and that is to protect yourself financially from the ruin that is going to come from a DOLLAR COLLAPSE.  You can fill in the dots as to what I am going to suggest next.  THERE IS ONLY ONE HARD CURRENCY THAT HAS WITHSTOOD THE COLLAPSE OF ALL CURRENCIES, AND THAT IS GOLD.


$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$


In 2007 alone, on a weighted-index basis where the Euro represents the major component within the index (46%), the U.S. Dollar has lost 7% of its value.  Gold, conversely is UP a mere 8% plus since the beginning of the year.  DO YOU THINK THERE IS AN INVERSE RELATIONSHIP?!!!

Gold, and its joined-at-the-hip sister, Silver, (both monetary reserve metals, just check your history books) are going to soar to new highs in the next several months.  Buy the metal, not the paper.  Both the Gold ETF and the Silver ETF are severely compromised means of attempting to parallel the bullion markets.  AND IT IS QUITE PROBABLE, READ THE PROSPECTUSES AND FILING DOCUMENTS WITH THE S.E.C., THAT THEY DO NOT PHYSICALLY HOLD THE GOLD AND SILVER THAT SAY THEY DO IN PUBLIC REPORTS.  

Paper is paper, merely a promise to pay at a later date when a physical shortage may exist in either or both metals making it impossible for these ETF's to provide physical gold or silver that they did not have in the first place.  I am now convinced that they are full of paper contracts for bullion to an extent sufficient to compromise the integrity of the Funds in fulfilling mass redemptions.  In particular, I have never seen such weasel wording of a prospectus as exists in the Silver ETF, SLV.  CAVEAT EMPTOR.

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May 17, 2007:  Buying Opportunity of the Year.


Geeze, we just can't get past $700 per ounce on Gold, the Golden Bull Market must be dead!  Precious Metals investors have all of the conviction of a 2008 Presidential Candidate.  I have told everyone who cared to listen that protecting one's financial well-being in the years ahead was not going to be a cakewalk.  One can expect and should expect, many bumps in the Yellow Brick Road to this lofty, yet attainable goal of relative financial safety with precious metals investments.

I try not to be too technical in my discussions of the bullion markets, since every black box program out there is looking at the same technical chart patterns, oscillators, and statistical data.  But if I am correct, we have been down in the $655 region for gold off of interim highs some 3 times now, and I think we just went through our last, false start higher.  Meaning, when the dust settles over the next several weeks or even days, we will spurt ahead like none of this indecisive trading ever happened.  This is how markets shake the weak hands out, and get them to either totally capitulate or force them to buy back in at much higher prices after selling in panic toward the recent lows.  Just be a long-term investor in this asset class, and these weekly/ monthly squiggles will do nothing to shake your conviction or success in a decade's or two-decade's long bull market in the precious metals.

If you look at the Big Picture of the current economic and financial landscape, you will see that an exceptionally favorable period for owning precious metals is developing over and above what has developed since 2001.  Let's go through the laundry list:


1.  U.S. and Global Inflation Rates are probably still accelerating.

It is not only the absolute level of inflation that is important to both Gold and Silver, but the direction of change and the rate at which that change is occurring.  While 8% to 10% Real World inflation is the reality for those of us who eat and use energy in our daily lives, there is no evidence whatsoever that suggests that Common Proletariat Inflation (CPI), for us men and women on the street, is subsiding in any meaningful fashion.  Quite the opposite.

I went to the gasoline station, most of which will have to hire armed guards pretty soon to prevent gasoline heists, and filled up my two 5-gallon red plastic containers for Summer '07 lawn mowing.   I had to brace myself as I almost fainted at the final tally.  Almost $29 to Keep Up With The Jones this year, but have started neighborhood pilot program using goats with Pampers to keep the neighborhood trimmed.  Have not figured out where to house the 4-legged mowing machines during off-periods, but my local politician's lawn may do just fine.

We are in for a big surprise this Summer and Fall as gasoline prices and monthly electricity bills continue to put a crimp on consumers' ability and willingness to spend on other goods and services.  Dusting off my Sage Crystal Ball (SCB) that I purchased at Woolworth's a long time ago, I see gasoline at $3.85 on a national level before Labor Day.  And I see electricity bills, adjusting for equivalent btu usage over last year, easily up 15% over Summer, 2006.  If there is a terrorist disruption of oil supplies in the Middle East sooner, just move that date up and make $4.35 gasoline the target.

And I saw a farmer from California (pronounced Cal-EE-forn-ya if you are the Governator) telling the nation that consumers could expect higher prices in the months ahead for avocadoes, almonds, lettuce, tomatoes, green beans, and other CA produce NOT BECAUSE OF RAGING BRUSH FIRES, NOT BECAUSE OF MORE EXPENSIVE AND SCARCER IRRIGATION WATER, NOT BECAUSE OF HIGHER FUEL COSTS, NOT BECAUSE OF THE SIBERIAN BLIGHT WORM, but get this ........ BECAUSE OF A SHORTAGE OF UNSKILLED, SUPER-CHEAP ILLEGAL FARM WORKERS.  Holy Moly, you mean to tell me that Immigration Services is doing its job and beginning to contain the flood of illegals across our basically unprotected southern border?!!!

Now before you start sending me hate mail about how this is the Land of the Free and the Mixing Pot of the World, I just want to remind you that my grandparents were Czech immigrants who came through Ellis Island in 1921, legally, with just what they could carry onboard a ship.  And it was not a very dignified process, I can assure you, but since my Great Grandfather sold his chocolate factory outside of Prague to finance the journey, they did not travel in steerage as we had all imagined for decades.

Why have laws if we can find excuses to allow certain groups, even if they are from one of the most corrupt and economically stratified societies on earth, NOT TO HAVE TO OBEY ALL OF THE LAWS OF THE LAND.  Okay, if you have Statutory Neglect, then change the fricking laws to reflect social reality, but enforce the laws as they are written.   Without enforcement of existing laws, we are headed for anarchy.  Enough said.  Needless to say I will not be running for President next year and Sage has rotten tomato shields (rts) up.

Anywho, food prices are going up also because of a growing shortage of underpaid, underprivileged, scared-to-death of ICE unskilled workers from You Know Where.  One more arrow in the Inflation Surge Quiver (ISQ).

See Food & Energy do have an impact on the ability of consumers to spend.

Another reason that we will have an acceleration in the rate of inflation, even at the cooked bls cpi level, is because of all of the money created by central banks over the last 7 years trying to find a place to go.  so the die is cast.  expect 12% real inflation by summer of 2008, A 20% TO 50% INCREASE FROM TODAY'S ALREADY HIGH LEVELS.  I die laughing in the aisles when I see persona like Bernanke get on the airways and have the audacity to lie to the American public about how inflation is tame and inflation is moderating.  But I have learned how to aim an RPG while laughing.

The U.S. Dollar sinking into the setting sun will add to this consumer inflation as imported goods become more and more expensive with a continual degradation in our purchasing power overseas; Americans are still hooke on imports and it will be a while before stiff prices spoil their appetites.  And a slowing, recessionary U.S. economy will not enjoy the release of price pressures normally seen during the advanced stages of an economic retrenchment because too much of total World GDP is in developing nations today that are literally booming as the USA hits a big air pocket.  So it is a good two more years of accelerating, historically high inflation before the U.S. meltdown drags the rest of the world down with it.


2.  The Wall of Worry Is Rock-Solid for the Golden Bull.


No one could accurately portray the gold or silver market in the U.S. as wildly bullish at the moment.  There is plenty of capitulating Longs, I see in it my Purchase Order/ Buyback volumes.  Many investors have made stellar profits in both gold and silver over the last 5 years, and are more than willing to convert some of those astute gains into .......... depreciating Dollars.  If you look at the premium to melt value of the 715 troy ounces of pure silver in a typical bag of 90% Junk Silver, it is currently negative by almost a full percentage point.  That means, dust off the Econ 101 textbook, that there is junk silver coming out of distributors' ears with recent selling by many holders of the last 10 to 20 years.  One spouse told the other spouse that they were tired of dusting it every week and having company tripping over it, so out the door it went.  A gender neutral observation these days!  American Eagle Gold bullion coin sales from the U.S. Mint are another indicator that sales are down from the ebullient Spring of 2006.  A necessary consolidation period for any bull market, but just that, a temporary respite from a surging bovine.

Just read today that Spain has been dis-hoarding some 80 to 100 tonnes of gold over the last several months to attempt to replenish sagging exchange reserves.  But with all of that gold coming onto the world market, how come we are just stuck in a 10% trading range and not pressured much lower to the $550 level?!!  Because no matter how many Exchequer Browns there are out there, selling at what will prove to be very imprudent price levels to the detriment of their sovereign treasuries, there are buyers lining up around the globe to take the heavy lode off their hands.  Saudi Arabia, Dubai, S. Korea, Indonesia, India, China, are just the most public nations in admitting to buying gold to diversify their national reserves out of the U.S. Dollar.  But multiply government purchases by multiples of same to come to the realization that many individual investors around the globe are happily buying gold as Americans on the Comex whack it each and every morning after the open.  Talk about a predictable price pattern!  International buyers love a sale as much as Americans do.

But U.S. investors are just a subset of total global demand for precious metals.  We are not long-term investors in many respects, tending to convert one asset for another less worthy asset at the first sign of a profit in the former.  It seems like appreciated assets literally burn a hole in our pockets.  Maybe we are so competitive, particularly amongst ourselves, that we need the self-congratulations of announcing what we made in this or that asset at the next well-lubricated social event on the calendar.  Don't know for sure, but many Americans have the bad habit of selling near an interim low, instead of near an interim high.  Probably an international fault that one, but we do seem to have a shorter attention span than many global investors who have seen their countries' currencies turn literally to mush in a matter of years.  The Dollar is mush and is getting mushier by the hour.

Touted as leading indicators for the underlying bullion, gold and silver mining stocks are languishing in their own trading ranges.  At the first sign of a problem or a missed earnings number or the scent of possible dilution with the 3rd equity offering in the last 3 days, they are thrown out with the bath water.  Did you know that toddlers in the olden days were the last to use the treasured bath water which was so murky by their turns that you almost couldn't see the baby in it???  Hence, the expression, "Don't throw the baby out with the bath water".  Just so you got some knowledge out of this month's epistle AND THERE WILL BE A QUIZ!  But back to precious metals equities, they are getting the begeebee's beaten out of them, so no sign of over- optimism there!  Just another sentiment indicator, not a recommendation to buy paper.

Buy when there is blood in the street, and sell when the shoeshine boy is giving you investment advice.  It takes total conviction and intestinal fortitude to dive into the pool when so many are crying, "shark", and are trying frantically to get out.  Grab your shark repellent and dive in!


3.  Ben Bernanke Don't Know What To Do About Rates.


Bernanke is frozen like a man doing a high-wire act that just caught a 40 mph gust of wind.  He can teeter right, and metaphorically RAISE RATES TO SHOW THE WORLD HE IS A HAWKISH INFLATION FIGHTER.  Or he can teeter left, and metaphorically LOWER RATES TO COME TO THE RESCUE OF THE ECONOMY KNOCKED SILLY BY THE HOUSING BUST.  Gosh, it is like we GoldBugs elected this guy, it couldn't get any better.

The result that has the greatest possibility of occurring vis a vis the U.S. Federal Reserve, are you ready for this ......... DO NO HARM AND DO ABSOLUTELY NUTHIN.  Yikes, why didn't I think of that unique solution to a very complex problem that will affect that Nation for years to come?!!!!!!!!

So while Nero fiddles, I mean Ben fiddles, racking up speaking engagement points that he can turn into hard cash when he retires (or gets run out of town, whichever comes first!), the fundamentals for owning Gold and Silver just get better and better.  Here is why:

a.)  5.25% Fed Funds won't do anything to put a lid on inflation because you will need a 10% to 15% rate to put the skids on the eventual effects of 7 years of excessive money creation, not only domestically, but internationally.  I would say rates would have to reach the rate of growth in money supply in many countries to put a lid on persistent price pressures in the global system.  And for those of you who actually buy stuff in our economy, you know that this current interest rate does not even compensate you for the ravages of inflation.  Rates have to match or exceed the inflation rate to put a lid on inflation, just ask Paul Volcker how he did it in 1981.  The best asset over the centuries for maintaining purchasing power against insidious inflation is that four-letter word, GOLD.

b.)  U.S. interest rates maintaining the status quo, i.e., not being raised or lowered, will do nothing to stabilize the U.S. Dollar which is an Ask looking for a Bid.  Overseas interest rates will continue to outpace the Dollar on an inflation-adjusted basis, providing positive real rates of return on sovereign debt that will continue to provide a flow of Dollars being converted into the higher yielding currencies.  The Dollar's demise is almost guaranteed in the years ahead for this and a plethora of reasons expounded upon herein ad nauseum.  Not coming to the rescue of the Dollar by actually raising rates is as bullish as it gets for Gold, the Anti-Dollar of currencies.

c.)  The failure of the Fed to respond to a rapidly declining U.S. economy by lowering rates to attempt to encourage consumer spending via additional debt accumulation will put strains on the U.S. financial system not generally perceived at this junction.  It is not just the sub-prime mortgage sector that is at risk here, but many of the major financial institutions of the land that made the rocket-scientist decisions to greatly increase real estate lending during the hay days of the housing and commercial real estate boom in 2004 and 2005.  Real estate loans as a percentage of total bank assets have never been higher in the history of this country.

Were the Fed to lower rates during the recession we are already in, it is unlikely that many Americans would have the desire or the ability to take on more debt at this time.  Call it a buyers' strike, but with the layoffs exploding throughout the U.S. auto industry, a virtual collapse of real estate sales volumes and its associated support industries, a war on terrorism that could return to our shores at any time, oil prices that make commuting to work a costly endeavor, and multiple home foreclosures right in your own neighborhood, it is hard to imagine that sufficient confidence will be there at a Fed Funds Rate of 4.00% or lower.  THE LOSS OF CONFIDENCE PART OF THE CYCLE IS HERE.  Can't go to 1% a la Sir Greenspan because a Dollar Collapse would be the immediate and irreversible result, especially with a real inflation rate of 8% plus.  A world of growing uncertainty and investor/consumer concern is a world perfect for Gold and Silver.

Note how we are at Over twice the 1930 level of credit market debt!  So how is Fed loosening of credit's price through lower interest rates going to save the U.S. economy???  This growth in Debt started to level off in the 1990's, but Big Al really got things going again by 2000/2001.  It will be a Pushing On A String economy for Bernanke!


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In closing, probably the best risk/reward quotient exists today for initiating or adding to precious metals positions.  While recent market activities, to include the schizophrenic hedge fund bullion trading and fruitless Central Bank gold sales to cap gold at $700, make it difficult to embrace the near-term prospects for Gold and Silver, it is times like these where the risk is actually lower than you may perceive.  And the reason that risk is lower is the fact that the Fundamentals for the precious metals are on a moon-shot higher.  JUST WATCH AS THE METALS REFLECT THIS GROWING REALITY.  Happy trails to you, until we meet again.  (stage instruction) As the Sage disappears over the horizon on his trusty Burro named Siegfried.



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June 12, 2007:  Bonds Creating Golden Launchpad.


Would someone please get a message to Bill Gross at PIMCO that he needs to fire the recently hired Alan Greenspan as an advisor and hire the Sage at $100 Million per half-year compensation!  Payable in gold only in a Swiss account, please, don't give me no devaluing Dollars!  The Bond Bull Market of the last 27 years has come to a fiery end, JUST AS THE SAGE PREDICTED AT THE END OF 2006.  Now I don't like to gloat but very few guru's at any rung on the compensation ladder predicted some 6 months ago that interest rates were going higher in 2007.  You see, instead of spending inordinate amounts of time trying to decorate the summer mansion in the Hamptons, the Sage takes 30 years of financial and investing experience, and actually comes up with correct forecasts.  Not always, just most of the time, which is what counts in the long run.  Okay, I am dismounting from my High Horse, and coming back to terra firma.

And before any of you Precious Metals Investors (PMI's) or Wannabe's get panicked by tales of higher interest rates being bad for Gold and Silver, come back from the ledge.  Were U.S. interest rates, adjusted for rampaging inflation in the 8% plus zone in real life, actually providing a REAL RATE OF RETURN to yield-hungry investors, both Foreign and Domestic, then this argument may have some validity, BUT NOT AT THIS NANOSECOND IN HISTORY.  Real rates, those obtained by acquiring U.S. Dollars first, are NEGATIVE in U.S. debt instruments unless one is buying the paper of a Subprime Lender, and of course, you will be papering the outhouse walls with that stuff in a few months.  Bonds at 5.2% are no competition to either Gold or Silver.  Bonds at 6.2% (my year-end forecast?) are no competition to either Gold or Silver.  Bonds at 7.2% are no competition to either Gold or Silver.  You get the point.  It would truly take 10-year Treasury yields north of 10% for money to flow into these promises to pay in lieu of either gold or silver in the quarters and years ahead and at a real rate after inflation of only a couple of percentage points, not much competition at that.

Bonds have been known to default.  The U.S. Government is already defaulting on its sovereign debt by allowing the Dollar to head toward zero on a purchasing parity basis.  Gold and Silver have never defaulted, because they are hard, tangible assets that are coveted and accepted as payment around the world and have been so for a couple of thousand years now.  They are backed fully by their intrinsic values that are established virtually every waking moment of the work-day.  You must buy U.S. Dollars to purchase U.S. Debt, but you can purchase Gold and Silver in any currency some 23-hours per day at virtually any place around the world.  And the fact that Gold and Silver can be denominated in any currency known to man, makes them the ultimate currencies that have excellent liquidity and fungibility in all major and minor financial markets around the world.  And since these precious metals are traded around the world around the clock, don't think for a minute that the Comex will have the last word in daily price setting as bond yields head higher.  Watch pre-Comex opening prices and post-Comex closing prices in the months ahead!  THE MANIPULATIVE GRIP OF THE COMEX ON BOTH GOLD AND SILVER PRICES IS COMING TO AN END.  I have said this before and it could never be more true.  Another Sage prediction that is worth much more money per hour than a Greenspan shot-in-the-dark prognostication.

THE WORLD HAS FINALLY AWAKENED TO THE SINKING VALUE OF DOLLAR-DENOMINATED DEBT, AND THEY EITHER WANT NONE OF IT, MUCH LESS OF IT, OR A LITTLE OF IT AT MUCH HIGHER INTEREST RATES.

Now Spain can sell all of its gold reserves to generate still depleting foreign currency reserves (buying too many castanets from Jersey?), but foreign buyers have stepped up to the plate and basically put a floor under the gold price.  U.S. investors, in net, have been sellers during recent swoons, a very bullish contrarian indicator, also known as the Pampers Indicator (PI).  Interesting how the British Central Banker that sold a good bit of Britain's gold reserves toward a 27-year low around $255 per ounce is going to be their new Prime Minister, but politicians were born with dancing shoes on, just ask Hillary.  Once again, supporting the argument for mega-compensation for the Sage, I predicted years ago that Precious Metals Investors (PMI's) were going to be shocked when Central Banks stopped selling gold and went on the buy side.  China, India, Russia, many Middle Eastern countries, Indonesia, to name a few, are quietly and significantly increasing their gold reserves in lieu of Dollars while Spain becomes the Exchequer of Poor Timing, 2007.  Gold sales from Central Banks are all noise and little substance anyway, because the metal is going from fickle, politically-influenced hands to long-term, very strong hands.  Nothing could be better for a sustained bull market in gold.

Higher interest rates guarantee that the current recession i