THE GOLD MARKET
Monday, 16th April 2012
Please note that this information expresses the views and opinions of Seabridge Gold management and is not intended as investment advice. Seabridge Gold is not licensed as an investment advisor.
It sometimes seems to us that no investment attracts more negative commentary than gold. In the past six months, investors have been treated to yet another round of high-profile analyses declaring that the gold bull market is dead. Since these analysts are not on record as having predicted the gold market’s consecutive 10 year bull run and its gain of more than 600%, why would anyone listen to them? But investors do listen to this nonsense and so it needs to be addressed.
Let’s be clear that short-term chart patterns are not going to tell you if the gold price has peaked. For the gold bull market to die, we believe the dollar has to reverse its multi-year downtrend; the dollar actually has to increase its purchasing power and its reliability as a store of value, rendering gold unnecessary as an investment. A reversal in the fortunes of the dollar requires a revolution in US fiscal management, a sea-change in monetary policy and an enormously painful reset of America’s mind-boggling sovereign and consumer debt load. No doubt these things will occur at some point and then we will need to consider the end of the gold bull market. But not any time soon.
Gold is not up because it is a speculative darling. It is up because fiat currencies and the securities denominated in them are down in real terms; the alternatives are losing value measured against real things. Or as Jim Grant says (and we have been saying for at least as long), gold is a reciprocal of confidence in the world’s fiscal and monetary authorities and there is no bull market in this form of confidence. In other words, gold is up by default, a long, slow, drawn-out default in the alternatives which, in our view, will last for many more years.
Misconceptions du jour
In 2012, gold has been laboring to overcome two misconceptions: the US economy is in recovery (which means that the Federal Reserve will begin to reverse its accommodative policies); and the European debt crisis is resolved, at least for the next several years. Both are illusions.
The economic bulls point to such factors as 'slow but steady' job growth, consumer deleveraging in the real estate market and a rebound in vehicle sales as evidence that the economic recovery has underlying strength. But the latest numbers are not supportive. Consumers are once again depleting their savings to increase spending at a faster rate than growth in income. The deleveraging which is absolutely required to reduce the burden of unmanageable debt has been postponed, providing an illusion of renewed prosperity. The facts: subprime is back, supporting the car market. At one time, you only needed a pulse to buy a house in America. Now, that's all you need for a new truck. Nothing has been learned. We are still trying to re-inflate the credit bubble with more cheap credit and pretending that this is how sustainable recoveries are made. Mortgage debt is down largely due to write-offs on defaults, not pay-downs, leaving behind a smaller pool of homeowners who are still frozen in place by far too much debt. Foreclosures are on the rise again.
But the proof of a deepening recession is in the employment numbers. John Hussman's April 9, 2012 newsletter is a good place to start. He notes that since the recession officially ended in June 2009, total non-farm payrolls in the US have grown by 1.84 million jobs. However, employment of workers 55 years of age and over has increased by 2.96 million jobs while employment among workers under age 55 has actually contracted by 1.12 million jobs. This is not the message you hear from the White House.
Hussman writes: "The over-55 cohort has suffered an assault on its financial security: a difficult trifecta that includes the loss of interest income, the loss of portfolio value, and the loss of home equity. All of these have combined to provoke a delay in retirement plans and a need for these individuals to re-enter the labor force...In short, what we've observed in the employment figures is not recovery, but desperation...and explains why real disposable income has grown by only 0.3% over the past year." And what is to become of an unemployed generation of young people saddled with $1 trillion in student loans?
This was not a normal recession and it has not ended. In our view, the economy is not bouncing back. We will not return to the 'normal' of 10 years ago because that 'normal' was really an enormous debt bubble of historic proportions which will not be repeated in our lifetimes.
Does this look like a sustainable recovery?
There are 242 million working-age Americans and 100 million of them are not working. The Federal government reports that only 13 million of these people are actually unemployed. There are more than 2 million fewer Americans working full time today than there were 10 years ago.
Prior to 2008, US deficits never exceeded 4% of GDP but now they exceed 9%. This unsustainable spending gives the illusion of an economic recovery but not the savings and investment needed for real growth.
The US Federal Government borrowed $1.3 trillion last year, 36 cents for every dollar it spent. The Federal Reserve last year purchased 61% of total net Treasury issuance. (Source: The Center for Financial Stability). Washington is living on printed money.
The average annual deficit from 2000 through 2008 was $190 billion. Since 2008, the annual deficit has averaged $1.3 trillion.
The US national debt increased $5.6 trillion in the last three and a half years. It took 211 years to accumulate the first $5.6 trillion of debt.
The national debt will reach at least $20 trillion by 2015. If interest rates normalized to the same level they were in 2007 (5%), annual interest expense would be $1 trillion or 45% of current tax revenue. Interest rates cannot be allowed to rise and therefore more quantitative easing is inevitable.
The logical consequence of this fiscal nightmare is a future funding crisis for Washington. In the March 29 edition of Barron's online, Randall W. Forsyth reports on comments by Stephanie Pomboy, head of MacroMavens advisory. Noting that Uncle Sam is currently borrowing some $1.1 trillion a year of which foreign creditors are buying just $286 billion, Pomboy says "I'm no mathematician, but that seems to leave $800 billion of 'slack' (of which the Fed graciously absorbed $650 billion last year). Barring a desire to pay the government 1% after inflation, there is NO profit-oriented or even preservation-of-capital-oriented buyer for Treasuries," she writes. "For the life of me, I can't understand why NOBODY is talking about this???!!!"
The US government is addicted to its exorbitant privilege of printing the world's reserve currency and shipping it abroad for goods and services. It is a privilege that has been supported by foreign central banks buying US debt for the better part of the last 30 years and it works as long as exporting countries take the dollars and reinvest them in US capital markets. This may now be changing as Pomboy notes. Foreigners have lost interest in US Treasuries. China, the largest foreign holder of US dollars, reduced its purchases in the past year and Japan, the second largest holder, actually repatriated funds. If the Fed is also not there to buy Treasuries and fund the federal deficit, who is? That's a question Bill Gross of Pimco, the world's largest bond fund, has been asking. He expects more quantitative easing soon, as do we. A much weaker dollar lies ahead, in our opinion.
Does this look like a Greek rescue?
While investors contemplate a difficult time ahead for Spain and Italy, the real and pressing issue in the Euro Zone is...Greece. You thought it was fixed? Read on. The continuing saga of the second Greek 'bailout' provides the evidence as to why you should not trust statements from the European Union (EU). Yes, senior officials have declared the European debt crisis to be over, with their example being Greek. It is not over.
"The Second Economic Adjustment Programme for Greece, March 2012", a 195-page official document from the European Commission which describes the terms and conditions for the latest Greek bailout, contains this exact quote: "Disbursements to Greece by the EFSF and the IMF will still be conditional on compliance with conditionality". (p45, PDF version)
The first disbursement to Greece under this new arrangement was made on March 20, 2012. Disbursements are paid quarterly which means that June 20 is the date of the next disbursement. Greece was originally supposed to receive E74 billion in the first tranche (p46) but it received just E7.5 billion. To meet its cash obligations to the tiny minority of private sovereign creditors who, under the original terms of their bond purchase, were entitled to full payment under the March bond swap, the Greek government reportedly drained the accounts of the country's largest universities and regional hospitals held at the Bank of Greece -- an amount estimated by one source to total some E1.4 billion. These institutions are now effectively insolvent. The next bond swap for E450 million (issue XS0147393861) is due and payable in cash on May 15. Attempts to settle this issue for less have reportedly been rejected.
Of the E7.4 billion it received in the first tranche, a Greek government official stated that Greece would use this money to pay E4.66 billion to the European Central Bank and other Euro Zone national central banks for the capital amount of a three-year bond that expired in late March. This left E2.74 billion for the Greek government to live on for the next three months. If you believe the 1% deficit forecast for 2012 (complete nonsense on p89), Greece has a shortfall of E1.25 billion per month which consumes what remains of the first disbursement from the EU & IMF. But, alas, there are E5.2 billion in Treasury bills due in April and May. How is this sustainable? (See "Greek Government Robbed Public Iinstitutions to Complete Bond Swap" and "Crunch Time for Greece").
The most amazing aspect of this second Greek bailout is that the country's debt has INCREASED. Private holders of Greek debt were forced to take E105 billion in write-offs but with the addition of the new loan of E130 billion, gross debt has increased E25 billion. The total debt of Greece (sovereign, municipal, corporate and bank) has increased from E912 billion to E937 billion. Borrowing your way out of insolvency is never easy. With a collapsing economy and surging unemployment, more loans will surely be required.
If the EU cannot rescue tiny Greece, how can it save Spain or Italy? Greece may well prove to be the catalyst for the bursting of the global sovereign finance bubble just as Lehman was for the banks in 2008. How much bond market confidence has been lost by the fact that the European Central Bank and other EU institutions did not take a write-down on their Greek debt?
This is what real inflation looks like
In our view, Gold's highest and best use is as a store of wealth especially when compared to fiat currencies and financial assets. The physical gold supply is growing at about 1.5% per year and really can't expand any faster.Michael Pollaro estimates that money supply for the US, Europe and Japan combined is now increasing at nearly 10% annually with infinite upside from there.
Traditional measurements of money supply probably understate the problem. According to the March 30, 2012 edition of the Artemis Capital Management newsletter, "the pace of global monetary stimulus has been astounding reaching almost $9 trillion in total expansion over the past three and a half years in the greatest period of fiat money creation in human history. Let me put these numbers into perspective. Collectively global central banks have created enough fiat money (over the past three and a half years) to buy every person on earth a 55" wide-screen 3D television."
But the best evidence of inflation is the growth in US dollar-denominated claims...the supply of debt-based financial assets. Let's look at US Total Credit Market Debt. In 1980, it was $4.7 trillion. Today, US Total Credit Market Debt is $57.3 trillion, an increase of 1,119%. All of this debt is somebody's asset and sits on the books of lenders and investors. Meanwhile, the US gold reserve (282 million ounces) has increased in value by about 100% to $465 billion over the same period. It would now take a gold price of more than $203,000 per ounce for the US gold reserve to provide 100% coverage of total US debt.
We do not know how much confidence investors in US credit markets will lose and how much insurance coverage they will demand. The risks must seem rather low to them at present and there are ways to hedge other than gold...like Credit Default Swaps which are issued in vast and unregulated quantities by banks and hedge funds. But debt has grown three times faster than the economy which must service and back this debt. Too much debt has gone to support consumption and non-productive investment. Credit creation is faltering when it must continue to grow rapidly just to roll over existing debt and keep the game going. The conclusion, in our view, is default either by repudiating the debt or eroding its value through monetary debasement.
We believe credit expansion is the inflation that gold must eventually backstop in the event of a collapse of confidence in the financial system. The question is, what are the owners of $57.3 trillion in debt-based 'assets' willing to pay for the one asset that backs itself, cannot be printed and cannot default? And where do you think central banks will deploy their US$10 trillion in rapidly growing reserves when each of them is attempting to devalue the currencies they issue? (Hint: a growing number are now buying gold).
Keep your gold
As we see it, the world's fiscal and monetary authorities have done nothing to earn your confidence. Should you trust them with your savings? Do you think their paper, issued in ever greater amounts, is a safe place to be? The dollar has steadily lost value for more than a hundred years. That's what a bear market really looks like. By comparison, gold looks pretty good to us.
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THE TAX SYSTEM EXPLAINED IN BEER! (Economics Applied to Society)
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100.
If they paid their bill the way we pay our taxes, it would go something like this.
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that's what they decided to do.
The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20". Drinks for the ten men would now cost just $80.
The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free. But what about the other six men? The paying customers? How could they divide the $20 windfall so that everyone would get his fair share?
They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.
So, the bar owner suggested that it would be fair to reduce each man's bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.
And so the fifth man, like the first four, now paid nothing (100% saving).
The sixth now paid $2 instead of $3 (33% saving).
The seventh now paid $5 instead of $7 (28% saving).
The eighth now paid $9 instead of $12 (25% saving).
The ninth now paid $14 instead of $18 (22% saving).
The tenth now paid $49 instead of $59 (16% saving).
Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.
"I only got a dollar out of the $20 saving," declared the sixth man. He pointed to the tenth man, ´but he got $10!"
"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar too. It's unfair that he got ten times more benefit than me!"
"That's true!" shouted the seventh man. "Why should he get $10 back, when I got only $2? The wealthy get all the breaks!"
"Wait a minute," yelled the first four men in unison, "we didn't get anything at all. This new tax system exploits the poor!"
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn't show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!
And that, boys and girls, journalists and government ministers, is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier. Which is exactly what's beginning to occur.
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Here is a spot on comment I got from one of my readers regarding the USPS piece yesterday.
Due to our use of USPS I've followed their problems for several years. Their answer is always to increase postage, which is completely counter intuitive. Seriously, in today's age is there any mail that you couldn't wait an extra day to receive? I would hate to not receive my J Crew until Friday. Why not go to a MWF delivery model and cut 30% from the budget? Oh wait, your article hit on it, too many unions and levels of bureaucracy...
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Oh to be a secret service agent. This is one of the 20 "escorts" they paid for in Columbia.
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F**King, Austria Looks to Change Their Name
The prank calls were the last straw.
The Sun reports that residents of F--king, Austria are set to vote on whether to change their town's name.
And just to be clear, we are dashing out the "u" and "c" for the sake of our more sensitive readers. This town bears the same name as one of those words you're not supposed to mention on TV or in the classroom.
For residents of this Central European town, it's been hell -- and that should not be confused with a small hamlet in Michigan that's actually called "Hell."
The constant sign-stealing and mockery from tourists have rubbed many locals the wrong way.
"The only problem is that we need all of the F--king residents to agree to the name change," Mayor Franz Meindl told the Sun. "Everyone needs to agree for it to happen."
The Telegraph writes that the village of 104 residents was pretty much unknown until U.S. troops were stationed in the area at the end of WWII.
The paper describes how the town got its name in the first place:
Experts say the town’s name is derived from Focko, a 6th Century Bavarian nobleman, and the modern spelling was adopted in the 18th Century.
The Register reports that the town considered changing its name in 2005, but that the citizens voted against renaming the town.
"We had a vote last year on whether to rename the town, but decided to keep it as it is," then-Mayor Siegfried Hauppl said following the 2005 vote. "After all, F--king has existed for 800 years, probably when a Mr F--k or the F--k family moved into the area. The 'ing' was added as a word for settlement."
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Krieger has a new blog site. Be sure to set up to get email updates at the bottom of his site.
He said to his friend, "If the British march
By land or sea from the town tonight,
Hang a lantern aloft in the belfry arch
Of the North Church tower as a signal light,
One if by land, and two if by sea;
And I on the opposite shore will be,
Ready to ride and spread the alarm
Through every Middlesex village and farm,
For the country folk to be up and to arm."
- Henry Wadsworth Longfellow from the poem “Paul Revere’s Ride”
Welcome to My Blog: www.libertyblitzkrieg.com
The world is a very dangerous place at the moment and it is becoming more treacherous with each passing day. The reason for this is because the self-proclaimed “global elite” or TPTB, whatever you want to call them, have declared war on the rest of us. It is not just financial and economic war but it is also a moral and spiritual one. The game is being played on many levels and most of humanity remains completely unaware of it (although I would say a higher percentage of us are aware than ever before in recorded history thanks to the internet). When people look back at what has happened in the past decade or so and wonder why the welfare-warfare state continues to grow despite who sits in the Presidency the answer becomes clear. The leadership in the United States of America, and in reality pretty much every government on the planet, could care less about the advancement of their people. Back in 2008 they weren’t interested in saving the economy. They simply wanted to steal everything in sight using the government as its tool…and boy did they. The political leadership in America today (with some exceptions of course) represents the lowest common denominator of our Republic. They collectively possess a cunning political mindset coupled with a total absence of empathy and a lack of hesitation to engage in ruthless behavior to maintain power. Meanwhile, our corporate leadership (particularly now that Steve Jobs has passed) are collectively a bunch of cost-cutting, share repurchasing, quarterly EPS obsessed cowards that couldn’t and wouldn’t want to innovate themselves out of a paper bag. They surround themselves with “yes” men and with a few exceptions dare not to speak out about the crimes being committed against the citizenry by the political class for fear of losing their positions in the socio-economic structure. In short, they are cowards. Then of course there is the top of the power pyramid in today’s world. At the apex lies (pun intended) the Central Bankers (Planners) of the world. There is no group of people to whom I feel more disdain. I firmly believe they must face trial for crimes against humanity once their sick game plays out. This group of people literally control the entire global economy via their privilege to print however much currency they want whenever they want to. This is a group of insanely egotistical, mathematical robots who think they can excel model and print the world into utopia. In reality, all they are doing is transferring what is left of the middle class’ wealth into the pockets of the super rich who use 0% money to engage in leveraged speculation on financial assets and then get bailed out by the taxpayer when their bets fail.
One Million Paul Reveres
It was last night in 1775 that Paul Revere made his famous midnight ride to warn the colonists that “the British are coming.” Amongst other things, the colonists were concerned that the crown was going to disarm the citizenry and arrest John Adams and John Hancock. It is auspicious that I am launching my blog on the 237th anniversary of his legendary warning. It was late last year that in an interview I said what we need are one million Paul Reveres on the internet in order to get the word out globally and unite against the tiny minority that is doing all this harm to our species. It is as a result of my never-ending determination to win this fight that I have decided to start this blog.
With that out of the way, I want to introduce you to the site. This project is long overdue but I think the time is now right to take things to another level and provide a platform for more people to hear my thought process on a more frequent basis. I have never had my own presence on the web before and technology does not come naturally to me so this will be a gigantic learning process. Any advice or suggestions from people that have gone down this road would be greatly appreciated. This will be a work in progress and I have no idea what path it may lead me down. I am keeping all options on the table but here is how I envision it working for now.
My weekly emails will be posted to the site first and then will be emailed out later (maybe a few hours later or maybe a day later I am not sure yet). I will also be posting news items that I think are important and not being covered by other sites along with “My Two Cents”. I have already posted several examples of this on the blog. I will not be posting news all day, rather more likely two or three items a day on topics I think are worth digging into. I will also try to do a “Thought of the Day,” which will usually come out near the close of U.S. markets. That said, if there really is nothing to say on a particular day I won’t say anything. There are other things I am considering and as I decide to do them I will let everyone know. You can also set up to receive email updates when I post something new and that can be found on the right sidebar. The site also has pretty much everything I have written since 2010 and all the interviews I have done.
Winning the Lightning War
At this time, I would like to thank all of those in the struggle with me and the rest of free (and wanting to be free) humanity. In particular, I want to thank Tyler Durden and the team at www.zerohedge.com and Max Keiser and Stacy Herbert of www.maxkeiser.com for both the support they provided to my writing from the very beginning and their tireless struggle to shine some light of truth in a world filled with propaganda and nonsense.
While these are dangerous times, these are also times of great opportunity. It is only in times like these that we can change the world…for better or worse. Our enemies want increased global centralization of political and economic power. We want the opposite. We want freedom. Freedom of speech. Freedom to use whatever money we want to use not have some digit garbage they create shoved down our throats. Freedom to pick whatever job we want and the freedom to live how we want to live. Please join me in the Liberty Blitzkrieg!
www.libertyblitzkrieg.com
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