An orderly US recovery – ain’t gonna happen!

Posted on May 16, 2012 by Wayne Peterson

One of the primary assumptions upon which Family Business Office bases its investing strategy is that there is NO U.S. RECOVERY.  Because this assumption is so important to our investing success, we diligently watch for information that either confirms or denies it. On Monday, a relevant major data point arrived in my inbox.

Casey Research just completed its “Recovery Reality Check Summit” conference in Florida. Moderator David Galland summarized views of Casey’s conference participants, plus opinions of participants at a “Strategic Investment” conference held the following week by John Mauldin. Views were solicited from speakers at the two conferences regarding the current state of global economies and markets, with the following results.

Galland’s takeaway: “The world’s largest economies, including the US, Europe, Japan and China are speeding towards the equivalent of a brick wall. In short, I believe that before this crisis is over, we will experience the Greater Depression my dear friend and business partner Doug Casey has long anticipated.” Later in his summary, Galland included the observation that of the world’s ten largest economies, only Russia appears to have a chance to avoid disaster, due to “lots of resources and next to no government debt.”

Speakers included Marc Faber, Mohammed El-Erian, David Rosenberg, Jim Rickards, Woody Brock, Niall Ferguson, Lacy Hunt, John Williams, Porter Stansberry, Rick Rule, Harry Dent, David Stockman and 17 others – representing a broad spectrum of professional observers. Considering the general question of whether we are in a recovery, Galland said that “not a single speaker over the entire two-week period – at either event -  came out and said that we could expect a normal business cycle recovery to continue.”

The problem, of course, is massive and irreversible DEBT. Political unwillingness to cut “state-sponsored giveaway” programs provided to gain re-election has resulted in “a crisis that isn’t just that there is no mathematically possible way for the debts and obligations of the governments to be met… or that the population at large is struggling under its many debts. It is that the political systems in the larger economies structurally reward ever greater prolificacy in public finances. Which means this train is speeding up toward the wall and won’t stop until the crash.”

Our economy is not recovering. Nor do politicians seem willing to take steps that might result in a “soft landing.” Therefore a major economic crash is in our future, although it’s timing cannot be predicted because governments will fight it tooth and nail, most likely following QE and bailout programs with “exchange controls, confiscation, nationalization, punitive taxation, wage and price controls, war and even assuming dictatorial powers.”

This is what we, in my humble opinion, have to look forward to. Better get prepared!

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Market Highlights for the week ending May 11, 2012

Posted on May 14, 2012 by Wayne Peterson

Developments in Greece, France and Spain are pressuring European banks. Hinde Capital’s Ben Davies said in an interview that “Bank capital is scarce and the ECB will react with a 3rd  round of capital injection… Spanish housing will follow Ireland and fall 50% or more…” JP Morgan’s announced $2 billion loss could be much larger and “originated in JPM’s risk mitigation unit, not a risk taking one…” Gold remains in a $1550 – $1850/oz range and with gold mining costs now running $1250 – $1350, “moves lower will be short lived.”

Precious metals fell, with a lack of buying action reflecting a deflationary atmosphere. Gold tumbled $60 to $1581.00/oz, while silver dropped $1.35 to $28.93, but both remain in 4-year bullish uptrends. Paper gold sales by speculators are being countered by bullion purchases of central banks , which are very active buyers below $1600; Chinese imports this year so far are 6 times higher than last years level. Nonetheless, gold could continue to slide below $1550 and silver to $26 before the correction is over.

Bullion dealer Bill Haines said that he is seeing a level of disinterest in gold and silver that normally characterizes market bottoms, with buying now coming only from investors who are “locked into market fundamentals.” Haines is among those who believe that the Federal Reserve – whose Chairman has staked his reputation on avoiding a depression – will have to initiate some form of “QE” soon, if markets continue swooning in an election year. There is no easy way out of sovereign debt problems, if indeed there is any way out at all.

Mining stocks (XAU Index) fell another 3.5% to 151. Commodities (CCI Index), dropped 2.1% to 531, while crude slid $3 to $95.65/bbl. Money is moving out of the commodity and equity sectors and onto the sidelines.

Stocks declined – the Dow by 1.7% to 12821 and the S&P 1.1% to 1353. Lowry statistics show increased selling pressure in the US market, as buying power declines. World markets are breaking down – as the following Morgan Stanley index shows. Global demand for goods and services is slumping, even as production in Asia accelerates. The result is onrushing world deflation.

The dollar (USD Index) rose 1% to 80.26.  Bonds climbed higher, with 10-year and 30-year Treasury yields down 7 and 5 basis points to 1.84% and 3.02%, respectively. Trader Dan Norcini is focused on the 10-year bond, feeling that a drop below 1.8% will “signal bond traders around the world that we have a deflationary wave coming” and presumably cause the Fed to spring into action with additional money creation in some form.

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Another buying opportunity

Posted on May 9, 2012 by Wayne Peterson

Gold has tumbled back to test the bottom of its 7-month $1600 – $1800 trading range. As Europe disintegrates, depressing global stock and commodity markets, gold is also falling – along with silver, and especially mining stocks. Weak hands, including hedge funds scrambling to raise cash, are being ‘flushed’ from their gold positions.

CNBC’s recent “Bash Gold” barrage no doubt assisted the fall. Following Warren Buffett’s letter urging Berkshire Hathaway shareholders that despite the falling value of the dollar, running to gold is a “mistake,” sidekick Charlie Munger noted publicly that “gold is a great thing to sew onto your garments if you’re a Jewish family in Vienna in 1939 but civilized people don’t buy gold – they invest in productive businesses.” CNBC also interviewed Bill Gates, who found gold uninteresting because it “does nothing” constructive.

None of the three admit that gold is money and that the principal reason for its rise is to reach a (much higher) price level compatible with the amount of digital currency sloshing around the planet. But if you compare the performance of Berkshire Hathaway and Microsoft against gold bullion since 2000, you will understand why these gentlemen are expressing a bitterness for the yellow metal.

Jim Sinclair reiterated his belief that Alf Field is correct – that the bottom for gold is already in (at $1524, in December). Responding publicly to 3000 panicked emails, Sinclair noted at www.jsmineset.com  that “If you cannot stand the heat you must get out of the kitchen. If you can stand the heat, I firmly believe we will prevail and be rewarded in shares and gold itself.”

For every sale, there is a purchase. Ask yourself who is buying at these levels. In addition to bullion bank manipulators closing out short positions, sovereign governments and other large and sophisticated buyers are scooping up physical bullion. They know that gold must go much higher to resume its role as money and provide credibility to a future currency system.

This morning, gold has slipped below the strong $1600 buying zone. Some of the large buyers are undoubtedly waiting to see if they can get a better price; if it slips lower, we should see very active large buying down towards $1550.

Safe haven buying of gold hasn’t kicked in yet, but it will. Neither have we heard renewed rumblings of forthcoming QE, but if markets continue dropping ahead of the election, that is also in the cards. Either of these actions will send gold skyward. Which means that we are once again being presented with a very favorable buying opportunity.

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Solar activity picks up

Posted on May 2, 2012 by Wayne Peterson

As our solar system moves through an increasingly active region of space, some interesting geophysical events have been happening on the sun and on earth. Futurist John Petersen (www.arlingtoninstitute.org) cataloged the following examples of notable recent activity.

The sun has been producing huge solar storms and phenomena never before seen (like tornadoes – see video here). See a video here of a recent flare.

Massive expulsions of material and magnetic energy from the sun distorts earth’s magnetosphere which, in turn, “pressures” earth in what appears to be a direct relationship between significant solar storms and earthquakes and volcanoes which show up here 12-36 hours later. For example, there were a number of these big solar storms the day before last years big earthquake off of the coast of Japan. See this rather amazing summary of the more than 12,000 earthquakes that attended that event.

It’s not just earthquakes and volcanoes; scientists believe that all of this energy is generating the unusual sounds that are being heard at various places around the world.

Record numbers of large earthquakes are also being experienced around the world. The Indonesian quake for example should statistically have have been the one big earthquake experienced in that part of Asia in a 500 year period. However, since 2004, there have already been three quakes with a magnitude of over 8. In mid-April, four large earthquakes struck around the Pacific “ring of fire,” with one setting a record as the most powerful strike-slip quake ever recorded.

From this point, galactic energy is due to increase even further, peaking late in 2012. Stay tuned.

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Market Highlights for the week ending April 27, 2012

Posted on April 30, 2012 by Wayne Peterson

Markets reacted last week to disappointing GDP numbers. First quarter growth was reported at 2.2% annualized, well below an expected 2.6%.  Markets seemed to decide that further QE is coming; it’s just a matter of time. As long as markets anticipate a new round of QE, we can expect gold to move higher.

Gold found strong buying at $1625 and finished up $20 at $1662.30/oz, while silver plunged to $30 but bounced back, closing down 41 cents for the week at $31.28. Dan Norcini noted that long positions by hedge funds and speculators (who provide the push that drives gold upward) are at the same low level they were in 2009 – when gold was trading below $900. That means there is now plenty of firepower on the sidelines to drive gold much higher. But first, gold needs to overcome $1680 (which is a major resistance level and now also the location of its 50-day moving average) and silver must close above $32.50 to attract renewed speculative interest.

Bullion shop owner Bill Haines noted that physical buying by large investors is increasing, even as smaller investors are selling their bullion. What’s noteworthy is that larger, assumedly more sophisticated and informed buyers are continuing to purchase bullion at increasing price levels: “they are buying as strongly at $1600 as they did at $800. Their operating mode is to buy the dips.” Haines also said that “people are starting to question whether some of the world’s fiat currencies will be around for much longer.”

Mining stocks (XAU Index) climbed 1.0% to 166. Commodities (CCI Index), gained 1.1% to 564, while crude rose 63 cents to $104.59/bbl.

Stocks rose – the Dow by 1.5% to 13228 and the S&P 1.8% to 1403. Investors Intelligence reported a decline in the number of bullish recommendations (in the market letters it records), which provides a contrarian prediction that “another rally” could result.

The dollar (USD Index) slipped 0.6% to 78.71.  Bonds were essentially flat, with 10-year and 30-year Treasury yields at 1.96% and 3.12%.

Robert Wenzel of the Economic Policy Journal was invited to present his views on the economy and monetary policy at the New York Federal Reserve Bank; he informed them that “from start to finish the Fed is a failure” and gave them a refresher on Austrian business cycle theory. Wenzel concluded his talk with “Lets have one good meal here. Lets make it a feast. Then I ask you, I plead with you, I beg you all, walk out of here with me, never to come back. Its the moral and ethical thing to do. Nothing good goes on in this place. Lets lock the doors and leave the building to the spiders, moths and four-legged rats.”

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The best reason in the world to buy gold

Posted on April 26, 2012 by Wayne Peterson

Forbes.com reported Monday that China plans to avoid US financial sanctions by paying for Iranian oil with gold. Beijing’s action stems from US government attempts “to reduce Iran’s revenue from the sale of petroleum by imposing sanctions on foreign financial institutions conducting transactions with Iranian financial institutions in connection with those sales. This provision, which essentially cuts off sanctioned institutions from the US financial system, takes effect on June 28.”

This US attempt to sanction China – to control what China can and cannot do – is an outrage to them, and their reaction is easily understood. China is already on its way to becoming the world’s leading gold importer (in addition to retaining 100% of its claimed world-leading gold production within its borders). Following India’s recent admission to a plan to use gold instead of dollars to pay for Iranian oil, this news is the frosting on the cake for the gold price.

The development is in Jim Sinclair’s words “historic.” Gold has “officially been made money,” in that it is being used instead of paper currencies to pay for resources.

What will this additional demand for gold bullion do to the gold market – where massive efforts by gold paper short traders to drive gold below $1600 are being met by large buyers of physical gold, including central banks? Sinclair: ”Massive gold paper shorts are now trapped and gold could gap up to $3000.”

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Market Highlights for the week ending April 20, 2012

Posted on April 23, 2012 by Wayne Peterson

Gold and silver continued consolidating, with gold closing the week down $18 at $1642.50/oz and silver moving up 15 cents to $31.69. Markets everywhere seem frozen by indecision in Europe – caught between fear of a renewed global slowdown, and concern about the inflationary effects of renewed central bank liquidity. Martin Armstrong wrote that gold will remain effectively neutral in a range between $1480 and $1807.

Jim Rickards, author of Currency Wars, said in this 30-minute interview that the government expects gold to go up as a reciprocal of the dollar’s devaluation, but wants its rise to be “orderly.” He confirmed that central bankers, acting in concert through the Bank of International Settlements in Zurich intervened when gold hit $1900 last year and threatened to break $2000. Rickards expects gold to hit “$5000 –7000 in several years” and thinks that governments will “find a way to tax or confiscate some of it” in the future.

Mining stocks (XAU Index) fell another 2.1% to 164. The price of gold stocks has now fallen to historic lows compared to the price of gold, destroying the confidence of virtually the entire gold mining investment community. Jim Turk noted that “Years from now we are going to look back and shake our heads in disbelief at how undervalued gold stocks were in 2012.”  Commodities (CCI Index), slid 0.5% to 554, while crude settled up a dollar at $103.96/bbl.

Stocks rose – the Dow by 1.4% to 13029 and the S&P 0.6% to 1379. NYSE floor director Art Cashin said that the market seems impervious to the current European crisis, assuming that central banks will come to the rescue and print money. “Each day money is leaving Greece and it continues to leave Spain. If at some point it were to accelerate into a frenzy, then European banks would find a crisis at hand… A euro-zone breakup would be cataclysmic. There are no clear answers to solving Europe’s problem.”

The dollar (USD Index) slipped 0.9% to 79.19.  Bonds rose, with 10-year and 30-year Treasury yields down 3 and 2 basis points to 1.99% and 3.12%.

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Central bank tango

Posted on April 18, 2012 by Wayne Peterson

88-year old retired investing legend Harry Shultz made an interesting observation about current central bank strategy in a column written for the Aden Forecast (www.adenforecast.com).

“For the last two years or so I have predicted we will not see an uncoordinated crash of the euro, but rather a coordinated fall of multiple currencies – US$, Euro, Yuan, Pound, Yen.  They all are/were in big trouble, but none of them could act on their own unless they wanted to expose themselves as bankrupt.

“If they default, the banking system collapses.  If they inflate on their own, their holdings move away, so they had to find a way to inflate at the same time, so that the currency pairs don’t reveal the problem to the public & since people are convinced that inflation is about prices, it all needed to go in sync.  Now, they‘ve done the first step to coordinate their printing presses.

“Essentially all the big currencies on the planet are increasing the money supply in a linked fashion, keeping the currency pairs stable, devaluing the savings, keeping the banks afloat, keeping the system running.  If this is successful, the predictions of libertarians claiming the system will destroy itself by inflation will not come true.  We shall see.”

Meanwhile, central banks in the Orient and Mideast are covering their bets by converting foreign exchange reserve dollars and euros to gold bullion as fast as they can.

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Market Highlights for the week ending April 13, 2012

Posted on April 16, 2012 by Wayne Peterson

Gold and silver whipsawed about last week, range-bound, with gold closing up $30 at $1660.40/oz and silver closing down 28 cents at $31.54. There simply has not been enough interest to push the metals higher.

Jim Sinclair reiterated in a King World News interview that we are ultimately going to see “QE to infinity.” Sinclair noted that his knowledge comes from inside sources: “I’m half a century in the business. I’ve constantly kept up my contacts in a very unique and focused way. Quantitative easing was made clear to me, prior to Bernanke’s speech to the Washington group, prior to [the start of] quantitative easing.”

Mining stocks (XAU Index) bounced 1.4% to 167.64, remaining at deeply oversold levels.  Commodities (CCI Index) slid further, down 1.5% to 557, and crude settled down 23 cents to $102.91/bbl.

Stocks fell: the Dow was down 1.6% to 12850 and the S&P dropped 1.7% to 1370. John Gray of Investor Intelligence said that market action is reflecting “the kind of distribution we would see at a market top.” Big money is selling, but helping hands are also in evidence: last week’s comments by New York Fed President Dudley fanned the hopes of those wishing for more QE enough to push the S&P back above the technically significant 50-day moving average.

The dollar (USD Index) fell 0.9% to 79.89.  Bonds soared, with 10-year and 30-year Treasury yields plunging 17 and 18 basis points to 2.02% and 3.14%.

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Don’t worry about gold confiscation

Posted on April 12, 2012 by Wayne Peterson

Greg Hunter of USAWatchdog.com weighed-in this week on the topic of government gold confiscation.  “I feel there is little chance of this happening, and here’s why.  Gold and silver coins are predominantly held by the wealthy (especially gold).  The wealthy are not going to allow the government they support with campaign money to take their gold.”

Hunter contrasts gold holdings of the rich with “most of the rest of the population,” which have little or nothing in the way of gold or silver holdings, but instead have the “bulk of their wealth tied up in 401-K’s or IRA’s.  This may come as a surprise, but most rich people do not have 401-K’s or IRA’s.

“Around 2007, wealthy people and hedge fund folks started buying physical gold and silver.  (Gold was in the $600-$800 range.)”  A trading connection told Hunter he “would sell Gold Eagles in $100,000 orders to individuals on a routine basis.  He also told me he had ‘connected’ clients who had never bought physical gold and silver before and were buying it for the first time in their lives.  In 2008, he told me he started seeing big orders for silver coins.  For example, one order was for forty, 500 ounce boxes of Silver Eagles.  (It was shipped abroad.)  If things get tight, the government is not going to demand their bullion coins back from rich campaign donors.”

Hunter also cites movements by individual states to legalize the use of gold and silver coins as money.  “South Carolina is the latest state to approve legislation (after Utah), and at least 12 other states are proposing the same thing.  There is also legislation in Congress to allow gold and silver to be used as money.  The trend is moving towards gold and silver coming back into the monetary system, not outlawing it.”  If the federal government wanted to increase its gold supply in a hurry, it would be much easier for it to nationalize the roughly 6,000 tons of foreign gold holdings that are presently on deposit at the New York Federal Reserve bank.

At Family Business Office we try to maintain a constant vigil on the gold habits and activities of large institutions and the politically-connected.  We want to be ‘sitting on the same side of the table’ as they are.  What we are hearing right now is comforting:  continued heavy buying of gold bullion by wealthy US individuals and international interests, including governments, even as paper gold is being sold down in the US by bullion banks.

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