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POSTED ON July 6, 2011  - POSTED IN Original Analysis

The following article was written by Mary Anne and Pamela Aden for the July 2011 edition of Peter Schiff’s Gold Letter.


The answer is no. Even though gold is currently under pressure, the major trend remains up and the fundamentals are still very positive.

POSTED ON July 3, 2011  - POSTED IN Key Gold Headlines

Crisis of Confidence in US Dollar Possible: UN
Financial Post – Ban Ki-Moon has just won a second term as UN Secretary-General. Kudos. The eroding value of his tax-exempt salary denominated in US dollars, however, is less cause for celebration. A mid-year review of the world economy by the UN’s economic division points out that a continued decline in the value of the US dollar vis-Ã -vis a basket of other major currencies could precipitate a crisis of confidence, and possibly a collapse. Such an eventuality would with certainty imperil the global financial system. Rob Vos, a senior economist who contributed to the review, explained to Reuters that the brain trust isn’t arguing that a collapse will happen tomorrow, but that the headwinds are fast compounding, and a point of no return could come sooner rather than later.
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EU Facilitates Use of Gold as Collateral
The Australian – The European Parliament’s Committee on Economic and Monetary Affairs resolved unanimously in late May to permit clearing houses to accept gold as collateral. The decision must still pass muster at the European Parliament and the Council of the EU in July. Nevertheless, the Committee’s harmony of opinion represents a significant shift in political sentiment regarding the utility of gold as a store of value. Since the 2008 financial crisis, investors and financial institutions have clamored for alternative sources of collateral. Traditional collateral assets, such as European government bonds, have seen their credit quality erode.
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Mining Chief Sees $2,000 Gold
The Australian– Richard O’Brien, Chief Executive of the world’s largest gold producer, Newmont Mining, commented on the sidelines of the World Economic Forum on East Asia that the price of gold would likely reach $2,000 within five years. Mr. O’Brien said the newfound wealth generated by China’s growing middle class and a devaluing US dollar would underpin the rise. For 2011, however, he forecast the price would likely remain in the $1,500 to $1,600 bracket. At the very least, the mining chief believes gold will remain above $1,000 an ounce for ‘the foreseeable future,’ no matter the state of global markets.
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Utah Legalizes Gold, Silver Coins as Currency
Denver Post – Utah, the rugged “Beehive State,” became the first US jurisdiction to authorize the use of gold and silver coins as currency in late May. The move exempts the sale of precious metal coins from state capital gains taxes. State lawmakers passed the bill to protest Federal Reserve monetary policy, noting that citizens are losing faith in the dollar and deserve alternatives. A groundswell of gold- and silver-backed depository accounts that offer debit-like cards that consumers can use to make purchases is expected. Minnesota, North Carolina, Idaho, and almost a dozen other states are considering similar measures.
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POSTED ON June 15, 2011  - POSTED IN Original Analysis

Michael Pento’s Market Commentary

For the better part of a century the foundations for a semi-comfortable retirement for many Americans have rested on the financial pillars of rising real estate and equity prices, positive real interest rates on savings, the continued solvency of public and private pension plans, and the reliability of national entitlement programs (Social Security, Medicaid). But in the last few years, the economic sands have fundamentally shifted and these pillars are no longer sturdy, some have cracked completely. For many Americans, the traditional idea of a comfortable retirement, filled with golf carts, cruises, and fishing trips, is going the way of the dodo bird.

Over the last decade incomes and job growth have stagnated, causing savings rates to drop. According to Jim Quinn author of the Burning Platform, 60% of retirees have less than $50,000 in savings. Such sums won’t last very long, especially when consumer prices are up 3.6%, import prices are up 12.5% and commodity prices are up 35% year over year. What’s worse, any savings placed in a bank will pay next to zero interest and will likely not even pay for the fees associated with the account. With cash savings essentially non-existent, the other pillars of income take on paramount importance. But these former bastions of financial security are being washed away by a torrent of red ink.

For years the essential Ponzi-like structures of Social Security and Medicare were concealed behind positive demographics. But once taxes collected from current payers fall short of the required distribution owed to current recipients, the ruse will be laid bare. That day is now in the foreseeable future. With insolvency a real and present danger, at least a consensus is now forming that Social Security must be structurally altered if it is to survive.

According to the Social Security Administration, in 2008, Social Security provided 50% of all income for 64% of recipients and 90% of all income for 34% of all beneficiaries. With these numbers, it’s not hard to see how even small cuts will spark big protests. Now try cutting the $20 trillion prescription drug program and the $79 trillion Medicare entitlements and watch the political sparks fly! However, given the realities, it’s hard to see how the program can escape deep cuts.

In the past many retirees could count on accumulated stock market wealth to help fund retirement. Not so much anymore. As of this writing, the S&P 500 is now no higher than it was in January of 1999. For over 12 years the major averages have gone nowhere in nominal terms and have declined significantly in real (inflation adjusted) terms. The dreams of becoming rich from investments have crashed along with and Bernie Madoff. Then there is always the supposedly safest asset of all—a retiree’s home.

Despite a misguided faith that real estate prices could never fall, they have done just that…with a vengeance. According to S&P/Case-Shiller, the National Home Price Index has declined some 30% to levels not seen since the middle of 2002. And prices are still falling, with the rate of decline accelerating. The National Index dropped 4.2% in Q1 of 2011, after dropping 3.6% during Q4 2010. This means that only those retirees who have owned their homes for at least 10 years have any hope of selling at a profit. Ownership of significantly longer periods may be needed to have built up significant equity.

That leaves public and private pension plans. But here again there are serious issues. Let’s just look at state public pension shortfalls. According to the American Enterprise Institute for Public Policy Research, “States report that their public-employee pensions are underfunded by a total of $438 billion, but a more accurate accounting demonstrates that they are actually underfunded by over $3 trillion. The accounting methods that states currently use to measure their liabilities assumes plans can earn high investment returns without risk.” Huge returns without risk? Bond yields are the lowest they have been in nearly a century! What world are these states living in? With few options, the states will undoubtedly look to the Federal government (taxpayers) for a bailout. Failing that, cuts are inevitable.

The sad facts are; Americans are broke, the real estate market is still in secular decline, stock prices are in a decade’s long morass, real incomes are falling, public pension plans are insolvent and our entitlement programs are structurally unsound. If the pillars that seniors have relied on in the past fail to miraculously regenerate (and there is certainly no reason to believe they will), all that most retirees will have will be freshly printed greenbacks that come from a never ending policy of federal deficits and an obliging Federal Reserve. Unfortunately, the inflation that will result from such a policy will sap most of the purchasing power that those notes possess. In other words, for most people retirement is now an illusion, and many Americans will find themselves working far longer, for far less real compensation, then they ever imagined. The quicker we realize this, and plan accordingly, the better off we will be.

POSTED ON June 10, 2011  - POSTED IN Original Analysis

Michael Pento’s Market Commentary

As the U.S. economy seemingly limps out of the Great Recession most analysts now assume that the Federal Reserve will soon join the tide of other central banks and bring an end to the current era of unprecedented monetary expansion. Markets expect that Fed will begin withdrawing liquidity this summer, not too long after this latest round of the quantitative easing comes to an end. But this is simply a delusion.

There are many political and economic reasons why the Fed will find it extremely difficult to absorb the liquidity that it has relentlessly pumped into the economy since the beginning of the financial crisis. But its biggest problem may be that the ammunition it carries on its balance sheet is insufficient to the task.

In order to withdraw liquidity the Fed must sell most, if not all, of the assets on its balance sheet. The questions are: what types of assets will it sell, how fast will they sell them, who will buy, and what price will the market bear?

In December 2007, before the Great Recession began the Fed had an equity ratio of around 6% on a balance sheet that totaled approximately $900 billion. The assets it held at that time were almost exclusively comprised of short term Treasury debt. This had been the norm for the vast majority of Fed history. Given the size of the Treasury market and the bankability of its short term debt, the value of such a portfolio was considered virtually bulletproof.

But beginning in late 2008, as financial institutions careened towards insolvency, the alphabet soup of Fed lending facilities (TAF, TSLF, PDCF and the CPFF just to name a few) bought all kinds of assets that the Fed never before held. Through quantitative easing efforts alone, Ben Bernanke has added $1.8 trillion of longer term GSE debt and Mortgage Backed Securities (MBS). (In fact, the Fed now holds more of these mortgage instruments than their entire balance sheet before the crash.) This has drastically changed the complexion of the assets it must now sell.

But as the size of the Fed’s balance sheet ballooned, the dollar amount of capital held at the Fed has remained fairly constant. Today, the Fed has $52.5 billion of capital backing a $2.7 trillion balance sheet. While the size of the portfolio expanded three fold (and the quality of its assets diminished), the Fed’s equity ratio plunged from 6% to just 2%. Prior to the bursting of the credit bubble, the public was shocked to learn that our biggest investment banks were levered 30 to 1. When asset values fell, those banks were quickly wiped out. But now the Fed is holding many of the same types of assets and is levered 51 to 1! If the value of their portfolio were to fall by just 2% the Fed itself would be wiped out.

The Fed acknowledged this insolvency risk on January 6th when it modified its accounting rules to ensure that it never technically runs out of capital. In a system that would make Enron jealous, the new gimmickry allows Fed losses to be booked directly as Treasury liabilities. In other words, just throw it on the deficit pile with the rest of the Federal red ink. But fictional solvency has nothing to do with its ability to successfully withdraw liquidity.

What will happen to the value of the Fed’s mortgage assets if rising inflation causes the Fed to sell in haste back to the primary dealers? In an environment of rising interest rates (that such a tightening pre-supposes) the value of the assets should fall. And, given the continued deterioration of the real estate market, there may be a weak market for low yielding mortgage debt.

If these financial institutions were forced to pay par for the Fed’s mortgage assets, Bernanke would destroy a great deal of their capital and a new breed of zombie banks would re-emerge. There is certainly no political will in the United States to force the financial industry further into the public sector. If the assets are sold at the fair market price (which will likely be far below what the Fed paid), Bernanke would burn through his balance sheet before all of the prior Fed liquidity injections were neutralized.

Recently some Fed officials announced that they will likely raise interest rates before they sell assets. The truth is that without the ability to fully withdraw prior liquidity the Fed is incapable of significantly raising interest rates. After all, the Fed can’t raise rates by fiat. It must sell assets to do so. Similarly, to support the dollar it must take money out of circulation, which is also accomplished by asset sales.

But the Fed’s arsenal is no longer stocked with high grade weaponry. Given what is has on hand, the Fed will be unable to raise interest rates and support the currency. In essence, they have become impotent in removing the inflation they have so diligently created.

In the end, any meaningful attempt to withdraw liquidity will not only bankrupt the institution but also zero out their remaining credibility. That’s why they’ll never even make an honest attempt.

POSTED ON June 10, 2011  - POSTED IN Original Analysis

By Peter Schiff

Economic data over the past weeks, punctuated by last week’s dismal employment reports, confirm the diminishing impact of the stimulus efforts orchestrated by the Obama Administration and the Federal Reserve. In what must be a huge disappointment to Keynesian enthusiasts, the record doses of both monetary and fiscal narcotics did not produce the desired results. In fact, the size and scope of the “recovery” of the past two years was weaker than would have been expected in a typical business cycle recovery without any stimulus whatsoever. Indeed our current recovery is the weakest on record, despite the biggest jolt of government stimulus ever administered.

POSTED ON June 3, 2011  - POSTED IN Key Gold Headlines

Factbox: Gold Milestones on the Way to the Summit
Reuters – On Monday, May 2nd, gold attained an all-time record high of $1,575.79/oz. In commemoration of this historic milestone, a Reuters Factbox captures some important dates in gold’s trading history since the early 1970s: August 1971, Nixon takes dollar off gold standard; January 1980, gold peaks at record $850/oz on inflation concerns; August 1999, gold bottoms at $251.70/oz as central banks dump holdings; November 2005, gold cracks $500/oz, highest level since December 1980; March 2008, gold breaks through $1,000/oz barrier only months before Lehman bankruptcy. It has been a sprint to $1,500 an ounce and beyond ever since.
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Mexican Central Bank Quietly Buys Almost 100 Tons of Gold
MarketWatch – Discreetly, Mexico’s central bank added a whopping 93.3 tons of gold bullion to its reserve holdings in February and March. The move, reported by IMF statistics, is in tune with recent net central bank buying of gold following two decades of sales, according to the World Gold Council. The majority of the Bank of Mexico’s reserves are in US dollar-denominated assets – from which it is ostensibly seeking to diversify. Russia likewise expanded its gold holdings by 18.8 tons and Thailand by 9.3 tons over the same timeframe.
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Forbes Predicts US Gold Standard Within 5 Years
Human Events – In an exclusive interview with Human Events, celebrity businessman and owner of the Forbes media group Steve Forbes predicts the US will return to a gold standard within the next five years. “What seems astonishing today could become conventional wisdom in a short period of time,” Forbes said. Forbes believes a gold standard would help America resolve a host of economic, fiscal, and monetary problems. Mandating a commodity backing could help stabilize the value of the US dollar, restore global investors’ confidence in US debt, and reign in reckless federal spending. Forbes underscores that politicians need to “get over” the conviction that the Fed can single-handedly manage the economy via monetary policy. And, he warned, “you cannot trash your money without repercussions.”
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Demand for Gold Coins Suggests Bull Market Still Charging
Financial Post– Demand for gold coins remains muscular despite a transient pullback in commodities over the past month. This month, sales of American Eagle gold coins by the US Mint are on track to set a new decade high. The first week of May sales totaled 57 percent of April sales. Since high levels of coin sales have in the past augured well for the future price of gold, this groundswell in the secondary market suggests the gold rally still has a ways to go Analysts reckon fears over sovereign debt loads and inflation continue to fuel demand for secure physical holdings, while the American Eagle coin maintains its stellar reputation worldwide.
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For Paulson, Gold Still Glitters
DealBook (NYT) – Hedge fund magnate John Paulson – who rose to wealth and fame betting against the US subprime mortgage market – continues to be faithful to gold, which netted him $5 billion in personal gains in 2010. His loyalty endures even as prices dipped over the past month and other marquee players, such as George Soros, curbed their positions in the precious metal. At a recent conference, Paulson counseled that volatility was for the meantime inevitable and should not discourage taking a stake. Paulson believes the US dollar stands to lose even more value in the coming years, and as such, gold is not in a bubble but will instead protect against inflation and appreciate.
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POSTED ON June 1, 2011  - POSTED IN Original Analysis

By Peter Schiff

My readers are familiar with my forecast that the US dollar is in terminal decline. America is tragically bankrupt, unable to pay its lenders without printing the dollars to do so, and enmeshed in an economic depression. The clock is ticking until the dollar faces a crisis of confidence like every other bubble before it. The key difference between this collapse and, say, the bursting of the housing bubble is that the US dollar is the backbone of the global economy. Its conflagration will leave a vacuum that needs to be filled.

Mainstream commentators often discuss three main contenders for the role: the euro, the yen, or China’s RMB (known colloquially as the “yuan”). These other currencies, however, each suffer from a critical flaw that makes them unready to carry the reserve currency role in time for the dollar’s collapse. When it comes to fiat alternatives, it appears the world would be going out of the frying pan and into the fire.

POSTED ON June 1, 2011  - POSTED IN Original Analysis

The following article was written by Mary Anne and Pamela Aden for the June 2011 edition of Peter Schiff’s Gold Letter.

7 Volatility infected silver in particular. As it approached its old record high, investors got nervous and it dropped some 27% in just one week. But considering silver has soared over 1,000% over the past eight years, and 450% over the past 2½ years, it wasn’t that extreme.

And as we’ve often noted, during bull markets, silver tends to overshoot on the upside and downside. It’s far more volatile than gold – and it always has been. Gold fell along with silver this month, but its decline was mild at less than 5%.

POSTED ON June 1, 2011  - POSTED IN Original Analysis

Michael Pento’s Market Commentary

The artificially engineered U.S. recovery is already starting to falter as a continuous procession of disappointing data continues to confirm the sad truth. Recent numbers on GDP, durable goods, housing, regional manufacturing, initial unemployment claims and leading economic indicators all indicate a sharp slowdown in GDP growth. Just today the ADP Employment report showed that the private sector added a paltry 38,000 jobs in May, down from 177,000 jobs in April, significantly below expectations, and the weakest number since September 2010. Just yesterday Case Shiller announced that the U.S. housing market had officially achieved a “double dip,” in that national home prices have given up the entire 5% bounce that they had achieved after the May 2009 lows. These signs of continuing malaise comes at a time when the government is contemplating ways to dramatically cut spending. But given the economic weakness, is America really ready to accept the short term consequences that a government spending cut would cause?

Free market disciples (like me) believe that government intervention is anathema to a healthy economy. In contrast, we believe genuine government stimulus comes from low taxes, stable prices, reduced regulation and low debt. Our economic policy makers have scrupulously avoided such remedies. However, in the short term, it is possible for government central-planning to artificially boost GDP. But as the short term has come and gone, Washington’s heavy hand is now inflicting lasting demand on the economy.

When a country spends in order to stimulate growth it gets the money from three sources: taxing its citizens; borrowing from the existing pool of capital, or borrowing newly created money from its central bank. All three options are economically poisonous.

The act of taxing one sector of the economy in order to redistribute wealth to another is not a net economic benefit. To think that taking money from Citizen A and giving it to Citizen B improves the outlook for both assumes that the government knows the best way to allocate resources. But everything I have ever seen tells me that this is not so.

A government could instead distribute money borrowed from the private sector’s existing pool of capital into targeted areas of the economy. But this type of “stimulus” is simply a deferred tax with interest. Any money borrowed by government could have been utilized by the private sector to expand business and grow the economy. Instead, money spent by government makes no lasting economic impact.

Some liberal economists argue that funds left in the private sector would likely be saved, rather than spent, during an economic downturn—thus exacerbating the recession. This may be true, but necessity, in the form of weak balance sheets, is the factor that usually drives the private sector to save. Any interference with that deleveraging process can have dire consequences in the long term. Government borrowing only delays the eventual pain because a significant tax increase will eventually be needed to pay down the added debt. If the private sector is prevented from paying down debt, the debts will simply be transferred, with interest, to the public ledger.

Finally, a government can acquire spending power from outside the existing domestic savings pool by borrowing newly printed money that enters the economy in the form of deficit spending. However, the inflation created by the central bank printing has its downside. At first, the economy experiences a combination of higher prices and growth. Producers raise prices as the domestic currency loses its value, while others are deceived into believing the value of money has remained unchanged; and so they increase their production and expand real GDP. However, the more the central bank prints, the less real growth and the more inflation the economy will experience.

This is precisely the recipe that we are currently following. Between 2008 and 2010, the Federal government borrowed over $3.1 trillion. It is expected to run-up another $1.5 trillion in debt this fiscal year. Meanwhile, the Federal Reserve has increased their balance sheet by nearly $2 trillion in order to accommodate the massive increase in public sector borrowing.

By borrowing printed money, the government has been able to perpetuate our consumption driven economy, while simultaneously raising most asset prices—even home prices have been prevented from falling to a level that can be supported by the free market. The Fed’s desire to create inflation and support prices has at last driven up industrial commodity prices like copper to all-time nominal highs. But once oil prices crashed through the $100 per barrel level, the Fed was forced to ratchet down its inflationary rhetoric. The question now is whether actions will follow.

The Fed and the Administration have now reached the point of diminishing returns. Whatever anemic and temporary growth that was generated by borrowing and spending printed money is now being superseded by rising prices. Any further monetary stimulation will only send aggregate price levels surging, even as GDP growth falls.

The government’s window to artificially drive real GDP growth by borrowing and spending has closed. The U.S. economy now faces another recession head-on, as the private sector deleveraging process resumes and the public sector deleveraging process begins. Alternatively, the Fed can keep expanding its balance sheet and send the economy deeper into stagflation. The only question for investors is whether the next recession will be accompanied by inflation or deflation. But only Mr. Bernanke can answer that.

POSTED ON May 20, 2011  - POSTED IN Original Analysis

Michael Pento’s Market Commentary

Based on many pronouncements by economic policy makers, reams of articles by the top financial journalists and near continuous discussion on the financial news channels, it appears that the quantitative easing juggernaut that has steamed the high seas of macroeconomics for the last three years is finally pulling into port…supposedly for the last time. According to the dominant narrative, QEI and QEII helped stabilize the economy during the Great Recession and now the Federal Reserve is ready to take the training wheels off. If so, the economy may need a helmet because there is virtually no chance that it can avoid major contractions without central banking support.

It is ironic, but there is no doubt that the proposed removal of artificial stimulus would be the best thing for the country in the long term. But very few observers understand how it will inflict short term pain. So confident is the Fed that earlier this week, St. Louis Fed President James Bullard indicated that any notion of additional quantitative easing is off the table. In fact, he said the central bank may tighten policy in 2011 by allowing its balance sheet to shrink. Investors would do well to remember that Bullard was the first Fed official to support the second round of bond purchases now known as QEII. It is likely that he will make a similar reversal if the economy shows any signs of weakening in the months ahead.

Fed policy makers like Bullard are guilty of reckless optimism if they believe the economy has truly healed. The evidence of a pending slowdown is abundant. The Empire State’s business conditions index decreased 10 points from April to just 11.9 in May. Meanwhile, the prices paid index rose sharply, with about 70% of respondents reporting price increases for inputs, and none reporting price reductions. That inflation index advanced 12 points to 69.9, its highest level since mid-2008. And things are even worse in Philadelphia. The Federal Reserve Bank of Philadelphia’s general economic index fell to 3.9 in May from 18.5 a month earlier.

Turning to the labor front, the four week moving average of initial jobless claims rose to 439,000 last week, from 437,750 in the week prior. Of course, the real estate market continues in its malaise. According to the National Association of Realtors, April existing home sales dropped to an annual rate of just 5.05 million. Prices continue to set new post crash lows, with prices down 5% YOY. Despite the fact that the government still accounts for nearly the entire mortgage market and the Fed has rates near zero percent, inventory of existing homes jumped from 3.52 to 3.87 million units and the months’ supply climbed from 8.3 to 9.2. Does it sound like the economy is ready to get up on its own two feet?

But the Fed is under pressure to do something about the growing inflation threat. Year over year increases of CPI, PPI and Import prices are 3.2%, 6.8% and 11.1%, respectively. As price increases hit middle class consumers, the Fed is facing intense pressure to push down inflation by draining the balance sheet and raising interest rates. It’s a dangerous game.

In its simplest terms quantitative easing is nothing more than the government’s attempt to boost consumption by borrowing trillions of dollars. Over the long haul this is no way to run an economy, and a sustainable recovery will be impossible as long as such borrowing continues. But in the short term, a cessation of government borrowing will lift the veil on our artificial economy, and reveal how dependent we have become. U.S. fiscal and monetary austerity will cause GDP to fall as the deleveraging process that was interrupted in 2009 returns with a vengeance. I do not believe the Fed or the Administration has the intestinal fortitude to let that happen.

A bona fide Fed exit from interest rate manipulation means that both nominal and real interest rates would rise significantly. The ten year note yield is less than half its average over the past 40 years. Normalization of rates would provide a serious headwind to markets and the economy.

The high leverage that brought on the Great Recession has not been addressed in the slightest. U.S. household, corporate and government debt as a percentage of GDP has never been greater. So, if interest rates were to rise, why should we expect a different result from what occurred in 2008?

Whether or not the Fed is bluffing has dramatic implications for investors and the country. Mr. Bernanke will eventually have to choose whether he wants another depression or more of the inflation the Fed is so adept at causing and then denying.

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