We are staring at a startling increase in the price of gold and precious metals mining stocks. Gold will reach mind- boggling levels because the actions of our political leaders and their academic and credentialed enablers are virtually guaranteeing it with their current actions. Words: 996

So says Arnold Bock (www.FinancialArticleSummariesToday.com) in an article edited by Lorimer Wilson, editor of www.munKNEE.com  (It’s all about Money!), for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.  Bock goes on to say:

1. Currency Traders Strengthening Price of Gold
The US dollar has and continues to be pummelled by currency traders because they see the US Treasury and FED attempting to deliberately devalue the dollar in response to politicians who think that spending money the country doesn’t have on programs it doesn’t need is the answer to the continuing economic malaise. Setting interest rates at near zero percent obviously exacerbates the dollar problem.

2. Carry Trade Supporting Price of Gold
The dollar has now replaced the Japanese Yen as the favoured currency of the carry trade. Borrowing US dollars at nominal interest rates is the hedge fund manager’s most obvious go-to strategy. Currency traders will be most reluctant to allow a sudden rise in the US dollar to cut the legs from beneath the carry trade of which they are participants. Consequently, there is little reason to think a rise in the US dollar will interfere with the consistent and persistent rise in the price of gold.

3. Supply and Demand Ratio Increasing Price of Gold
The limited supply of above-ground gold and the fact that mine production has been declining year over year the inevitable consequence is demand exceeding supply resulting in gold being bid to ever higher prices.

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4. Perceived/Actual Loss of Safe-Haven Status for U.S. Dollar Supporting Price of Gold
The US dollar is no longer perceived as the automatic safe haven harbour for concerned investors around the globe. While this statement cannot be made definitively, the fact is we are already a long distance from the fall of 2008 when global investors reflexively flocked to the US dollar as a safe haven in the face of the global financial turmoil.

5. Increased U.S. Budget Debts Strenthening Price of Gold
The actions of the US administration and Congress place it on an unprecedented spending binge organized by the Treasury and FED which dishes out vast quantities of new digital dollars designed to mop up the flood of new and maturing debt. This revolting process is causing foreign central banks to rapidly lose their appetite for US Treasury bonds. The expanded FED balance sheet coupled with monetizing debt inherent in quantitative easing is the boogeyman of international finance.

6. Increased Investment Demand Maintaining Price of Gold
Gold is the only safe haven refuge of undisputed value and that is why many foreign central banks are quietly and actively accumulating it. Investment buying, especially by the big money players as represented by central banks, sovereign wealth funds and leveraged hedge funds inevitably spring into the purchase mode whenever price weakens, even modestly. They provide a floor price for the metal on its inexorable trek upward. You and I can invest with confidence knowing that major pullbacks almost certainly will not happen and that whatever pullbacks do occur will be purely a very temporary, brief and shallow phenomenon.

How High Will Precious Metals Equities and Gold Go?
My sense is that it will be in orders of magnitude far greater than most analysts allow themselves to state or believe. We frequently see price projections of 20 or 50 percent higher than today. Some even allow themselves to suggest that gold will double in price before it has reached its cycle high. We even see a rare analyst allow himself to speculate that gold prices may find and end at the $3,000 an ounce level. Of course a few discredited gold bugs suggest numbers even greater.

Why Am I So Optimistic About the Eventual Price of Gold?
It is because an affinity for and an understanding of the political mindset causes me to understand what decision makers will do…and why. Because a politician follows the political calendar, s/he only concerns himself/herself with the time horizon leading to the next election. Anything requiring decisions beyond the date of the next election will be the responsibility of whoever is on the next watch so major and difficult, but necessary, decisions are inevitably deferred. In their place spending money gives the appearance of concern and of doing something to fix the apparent problem. More cynical observers would characterize these actions by the political class and their senior bureaucratic minions as buying time hoping that something positive might magically emerge. Those who are super cynical would even conclude give-away programs are designed simply to bribe the voters in order to curry goodwill for another term at the levers of power.

There is no discipline or inclination to do anything of real value to fix the core economic and financial problems. That being the case, new programs, more spending stimulus and money creation will always be the order of the day. Hence the U. S. dollar will devalue and investors will find gold as their best safe-haven refuge.

The dollar will devalue because massive dilution caused by incessant money creation allows future obligations to become more manageable – for government – because it is the only way that it can meet its future obligations for employee pensions, accumulated debt, medicare and social security.

A nominal dollar which buys much less in the future than it does today is still a dollar. Unfortunately the holders or recipients of those devalued pieces of paper will find they are essentially fraudulent promises.

The above realities make gold the closest thing to a sure-bet investment. They are also the reasons why gold will go much higher than most of us allow ourselves to contemplate. Buckle your seatbelts and enjoy the ride ahead!

Editor’s Note:

• Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above

Bank of Canada Governor John Carney and US Federal Reserve Chairman Ben Bernanke are proudly predicting that GDP will turn positive in 2010, but much of that growth will be the result of trillions of dollars of government spending. There is only one politically acceptable way to pay for those trillions, and that is to expand the money supply at an explosive rate. That is exactly what the US Federal Reserve has been doing for the past year. History and economics tell us, unfortunately, that rapid increases in the money supply spell big trouble for investors because they set the stage for spiralling inflation. Words: 2808

In further edited excerpts from the original article* Nick Barisheff (www.bmginc.ca) goes on to say:

Below are four big reasons to worry about inflation:

1: TRILLIONS OF DOLLARS ARE BEING PRINTED OUT OF THIN AIR
The global response to this crisis has been chaotic and ad hoc. The key policy plank seems to be to throw money at the problem until it goes away. Because it is determined to ward off a deflationary spiral at any cost, the Federal Reserve is pumping trillions of dollars into the US and global economies by purchasing massive amounts of treasury bonds and mortgage-backed securities. In order to do so, the Fed has had to balloon its balance sheet to over $3 trillion in assets (from a normal level of under $1 trillion). Much of this has come from printing money out of thin air.

The inflationary implications of this action are obvious, but what is not so obvious is why they need to do it. The US economy has not been healthy for many years. A series of Fed-induced asset bubbles have masked a sobering reality: the lack of real economic growth. The toxicity in the system as a result of years of fiscal and monetary irresponsibility has not been washed away by this crisis, and if anything it has increased. The US economy’s structural imbalances remain, and misplaced monetary policy is allowing them to fester and multiply.

So why hasn’t inflation already happened? Because in order to shore up their cash reserves, the banks are hoarding most of the money being sent their way by the US Federal Reserve. Hoarding reduces the “velocity” of the money in circulation, and this lower velocity has offset increased supply. But this is a temporary phenomenon. Fed Chairman Ben Bernanke is committed to pouring as much money into the system as it takes because, as he famously stated, “under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

Once the banks start lending the money that they’re now keeping as reserves, money velocity will reverse course and accelerate rapidly, prompting economists such as Lawrence Kotlikoff to warn that US money supply will likely triple in size by the end of this year. It will be very hard for the Fed to put the lid on inflation if that happens.

Virtually every government in the world has taken the easy way out. In a recent issue of Atlantic Monthly, former IMF economist Simon Johnson expressed concern that the bankers and financiers who played the central role in creating the crisis are now using their influence “to prevent precisely the sorts of reforms that are needed.” What’s worse, the government seems helpless, or unwilling, to act against them.

2: GOVERNMENT DEBT IS AT RECORD LEVELS
Let’s examine for a moment the sorry state of US indebtedness. Due to ongoing bailouts and stimulus packages, the US will experience a record $1.75 trillion deficit in 2009. US debt (accumulated deficits), as tracked by the famous US National Debt Clock in Manhattan, stands at a staggering $11.8 trillion and counting. In 2008 alone, the government paid a staggering $451 billion in interest, according to the government’s own website, TreasuryDirect.gov. And that number is expected to rise substantially in 2009.

That figure – $11.8 trillion – is a mindboggling amount of money but it represents only a part of America’s total liabilities. If Social Security and Medicare obligations are included (which they should be), obligations rise to over $106 trillion dollars, according to the US Treasury. None of this money has been set aside, but has instead been borrowed by the government for its own use. When combined with the debt of nearly $11.8 trillion, total debt soars to an astonishing $118.6 trillion, or nearly ten times total GDP, or $300,000 per person.

Former US Treasury Secretary Henry Paulson warned about this problem just last year, noting that it “will drive government spending to unprecedented levels, consume nearly all projected federal revenues and threaten America’s future prosperity.”

Financial analyst Jim Puplava says that while the US government is funding Medicare with Medicare Trust bills tthere is nothing actually backing those bonds. Since the government will shy away from raising taxes, the answer will be to print yet more money out of thin air.

America’s massive debt and unfunded liabilities make inflation the only viable option for today’s policymakers because when the value of future dollars is diminished, future obligations in those depreciated dollars are diminished.

Investors are not just facing a future of uncomfortably high inflation; they may be facing hyperinflation if the US dollar loses its reserve currency status. Raising taxes to pay for the bailouts is political suicide, but printing money is not.

Monetary authorities have done a good job of keeping investors in the dark, and they have had help from a surprising source: the media. The overprinting of money is never discussed by the US financial mainstream press and therefore goes undetected by the majority of people. Money printing may be the ultimate stealth monetary policy tool, but it has lethal consequences.

Even famed stock investor Warren Buffett has become concerned about inflation. In March of this year, Buffett expressed concern that stimulus efforts may lead to an inflation exceeding that of the 1970s. These are not idle remarks; they emanate from one of Obama’s own (unofficial) economic advisors. Buffett knows that when massive money printing is combined with bloated government debt, it makes it exceedingly difficult for any central bank to raise interest rates. And yet, as the early 1980s so painfully taught us, that is the only policy measure that can contain inflation.

The US government and Federal Reserve are caught in a fiscal and monetary bind of their own creation. 1) Zero percent interest rates are having minimal impact on growth, yet 2) with the exception of one or two quarters, prices of goods and services are still rising. 3) Rates must rise to contain inflation when it heats up, but 4) massive and growing US debt will make it nearly impossible for policymakers to raise rates.

3: THE CPI INFLATION INDEX DOES NOT REFLECT TRUE INFLATION
In both Canada and the US, inflation is hurting our pocketbooks, but you wouldn’t know it from the Consumer Price Index (CPI). That’s because the CPI is understated by as much as 7 percent per year according to economist John Williams, who has been tracking US CPI for many years. In addition, North American investors and consumers seldom hear the “headline” inflation number. Instead, the financial media usually report only the “core” inflation number, which excludes food and energy. This was done, ostensibly, to remove volatility from the CPI but food and energy account for about 23 percent of consumer spending, so how can they be ignored? Governments have a major incentive to understate CPI because trillions of dollars’ worth of pension funds, health benefits and wage increases for public sector employees are indexed to it.

Today’s CPI is substantially understated because it is calculated using a complex re-weighting formula that is riddled with substitutions, exclusions, hedonic adjustments and geometric weighting. If we were to recreate the CPI using the original 1983 formula, we would discover that even though we have experienced asset depreciation following the credit crisis, price inflation for goods and services has not gone away. And if the monetary authorities had decided to factor home prices into the CPI, the bubble would have been far more obvious from the beginning.

CPI distortion is consistent with most investors’ first-hand experience of prices of goods and services at the ‘street view’ level. What parent has not experienced tuition shock when their children enter college? Who isn’t paying more for basics like milk, even this year?

Intelligent investment decisions can’t be made without knowing the true rate of inflation. In a world where savings rates currently average 1 percent, an inflation rate of just 2 percent is a guaranteed loss. There is nothing that governments are better at than debasing their own currency. The Canadian and US dollar have lost more than 80 percent of their value since 1970. Again, this is reflective of a concerted monetary policy that continuously drives excessive growth in the money supply. When a country’s money supply is increased faster than its rate of economic growth, the purchasing power of that country’s currency declines and prices rise.

4: OIL PRODUCTION HAS ALREADY PEAKED
The world’s central banks are printing money and running deficits. As for America, the world’s largest economy is massively in debt, its unfunded liabilities are approaching $106 trillion, its spending is out of control, there is explosive growth in its money supply, and its official CPI is blatantly distorted. All this would be more than enough to spark dramatic inflation, but there is also another inflationary factor we must deal with: Peak Oil.

Peak Oil is not someone’s pet theory. It is not a rumour spread by left-leaning conservationists. Peak Oil is supported by hard production data. Peak Oil is a field-by-field extrapolation of what has already happened to existing oil fields. As most investors know, the US has had to import ever-increasing amounts of oil as their own supplies have decreased but now the exact same thing is happening in Britain’s North Sea and in Mexico.

Oil is a finite resource, and many of the world’s largest oil fields are being rapidly depleted. The maximum rate of global petroleum extraction has peaked, and now the rate of production is entering terminal decline. The reason for the decline is, to a large extent, the lack of new discoveries. Most of the major discoveries were made in the 1950s and 1960s. Since then, the annual discoveries of oil have kept dropping to the point where, when we take oil out, we do not replace the reserves.

While it is true that as more wells are drilled and newer and better technology is installed, production initially increases, eventually a peak output is reached and oil production not only begins to decline but also becomes less cost effective. At some point in this decline, the energy it takes to extract, transport and refine a barrel of oil exceeds the energy contained in that barrel of oil. This is happening now. Simply put, the world is quickly running out of cheap oil.

Years ago, Nobel-Prize winning economist Milton Friedman explained that global inflation was a monetary phenomenon that was subject to external shocks and to unpredictable time lags. Soaring oil prices are an external shock just waiting to happen to the monetary system. Because oil is such a vital component of so many products and services we consume, higher oil prices mean higher prices for nearly everything, not just now but over the long term.

Oil is unique, more like a currency than a commodity. The price of oil directly affects the price of the Canadian and Australian dollars. It is the lifeblood of business productivity and essential to our everyday life. It is the reason America’s foreign policy designates certain areas of the world as strategic, but not others. Although Canada is a net exporter of oil, it is not energy independent. Canada imports significant quantities of energy from the US and Europe. At the same time, the Canadian and US markets for petroleum products are deeply integrated, so supply problems in the US affect not only American consumers but Canadian consumers as well.
High oil prices were forgotten when oil prices declined from $147 per barrel to a low of $30 per barrel. However, prices have rapidly risen back up to $70+ per barrel, and are poised to rise much higher. US oil production peaked in 1986, Alaskan production in 1990 and North Sea production in 2000. Global oil production is believed to have peaked in 2008.

The US is the world’s biggest oil importer, but global demand is growing rapidly, particularly in India and China. Between 2003 and 2007 China’s oil demand grew at nine times the US rate. Meanwhile, in India, less than 1 percent now own cars but sales are growing at a rate of 20 percent per year. At the same time, many countries that were exporters are retaining a greater and greater percentage of their oil for their own burgeoning consumption needs, so they have far less to export.

The International Energy Agency (IEA) estimates that three more Saudi Arabias will have to be found and brought on stream just to meet the needs of China and India.

The clearest example of collapsing oil production is Mexico’s Cantarell field, the largest oil field in the Western World. From over two million barrels per day in 2004-2005, Cantarell now produces only 700,000 barrels per day. Soon Mexico will itself become an oil importer – no longer the third-largest exporter to the US.

It is projected that in the next few years Mexico will become a net importer rather than an exporter of oil. As a result, the US will lose its third-largest supplier.

Jeff Rubin, for more than 20 years the chief economist at CIBC World Markets, makes a compelling case for oil to soon rise to $225. “It’s not that the world is running out of oil in an absolute geological sense,” he says, “but it is running out of the type of oil you and I can afford to fill your tank with.” In his recently published book, Why Your World Is About to Get a Whole Lot Smaller, he writes that a world that was built on cheap oil is about to go through a radical transformation because of high oil prices. The debate is no longer about whether costs will rise. The debate is about how society will react and cope, because the economic, social and political costs of Peak Oil will be unprecedented.

The Fed Can’t Simply Shut Off the Money Spigot at Will
Pouring money into everything that moves may end one crisis but it will surely jumpstart another far more damaging one for investors. Despite Ben Bernanke’s protestations, the money supply spigot cannot simply be turned off when inflation starts to heat up because there is a 12- to 18-month time lag between monetary policy implementation and its effect.

Investors who believe we are living in a deflationary period should ask themselves a simple question: why are grocery prices and gas prices and hairdressing prices and insurance costs continuing to rise? What investors fail to understand is that price deflation is very different from asset depreciation. Asset depreciation (stock and real estate prices falling) has a negative wealth effect, but no effect on purchasing power. Price deflation, on the other hand, has a positive purchasing power effect. None of us can say our purchasing power is increasing, despite the recent negative CPI numbers. Price deflation is nowhere to be seen at this point. Since 1971, when the world went to a pure fiat monetary system controlled by central banks, currency in all countries has lost purchasing power. In Canada and the US it is down over 80 percent.

Today’s massive and still rising unemployment will do little to dampen the inflation fires, because inflation is never caused by too much demand but rather by too much money in the system. To paraphrase the late, great economist Milton Friedman, inflation is always and everywhere a loose monetary policy phenomenon. As the stagflation era of the 1970s clearly demonstrated, if slow growth could tame inflation, we would not have suffered through years of high inflation and low growth.

Inflation hurts stock prices because inflation increases volatility and uncertainty and risk, which makes businesses more risk averse, which reduces profits, which reduces price/earnings multiples. And lower P/Es always lead to lower stock prices.

It is difficult to determine exactly where we are in the recovery process. That’s why the money spigot can’t be easily shut off. Too little money and a nascent recovery could be choked off. Too much money and inflation will be impossible to control.

If virtually all of the world’s brightest financial minds missed the telltale warning signs of a bursting credit bubble in 2008, why should we believe they have any more insight into a recovery now?

For investors, it is not a question of if but when inflation will arrive.

*http://www.financialsense.com/fsu/editorials/bms/2009/1125.html (Nick Barisheff is President and CEO of Bullion Management Group Inc., a bullion investment company that provides investors with a cost-effective, convenient way to purchase and store physical bullion. Visit www.bmginc.ca for details.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
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The US Treasury is now facing a debt spiral; a situation where it needs to issue roughly $150 billion of new debt per month while rolling over trillions in existing debt at a time when investors are willing to lend to it for shorter and shorter periods of time. The big question now is… who’s going to be buying this stuff? Words: 789

In further edited excerpts from the original article* Graham Summers (www.gainspainscapital.com) goes on to say:

Foreign Investors/Governments?
Historically, foreign investors and foreign governments were the biggest buyers of US debt. Indeed, they were the largest in 2009, buying up roughly $700 billion worth of Treasury securities, representing a 23% increase from their purchases of 2008. On the surface, this data makes it look like foreign governments haven’t lost their appetite for US debt… until you look at the data on a month-by-month basis and see that they actually became sellers of long-term US debt by October of 2009. Suffice it to say, foreign governments likely will not be stepping in to pick up the slack in the Treasury market.

The Federal Reserve?
The next biggest purchaser of US debt behind Foreign Governments in 2009 was the Federal Reserve itself via its Quantitative Easing Program. Given that unpopularity of this policy it is unlikely to be repeated (at least not in a form large enough to pick up any slack in the Treasury markets).

State/Local Governments; Pension Funds/Insurance Companies; Other Investors?
So what about state or local governments, pension funds, or insurance companies (historically decent sized buyers of US debt)? Eric Sprott of Sprott Asset Management points out that according to Treasury data these groups were either net sellers or small buyers of Treasury debt in 2009. The likelihood that these groups suddenly buy hundreds of billions of dollars of Treasuries in 2010 is minimal… the same goes for “other investors” (the third largest group of US debt buyers in 2009, buying nearly $700 billion in US debt and comprised of “Individuals, Government-Sponsored Enterprises (GSE), Brokers and Dealers, Bank Personal Trusts and Estates, Corporate and Non-Corporate Businesses, Individuals and Other Investors)… unless, of course, we have another crash in the stock market.

Buyers Have Lost Interest
Think about it. The US, if it were treated like a corporation, is effectively bankrupt. It has to issue a massive amount of new debt while rolling over trillion in old debt at the very time that most historic buyers of US debt are losing interest in lending to the US for any period longer than a few years.

How to Create Interest
So how do you create interest from historic buyers of US debt? Simple, you let the stock market collapse. The “flight to safety” that would follow would push billions if not hundreds of billions of dollars into Treasuries, soaking up the debt issuance and roll-over with little difficulty. After all, stocks have added $6 trillion to the US household “budget” and if a third of that slid into Treasuries and you would be able to cover the current US deficit for 2010 and the S&P 500 would still be at 950 or so.

Please bear in mind that I am not saying the Fed and friends will do this but given that the Fed is coming under increased scrutiny as public outrage rises, letting stocks come unhinged it perhaps the least politically controversial move the Fed could make as opposed to another Quantitative Easing Program which would really get the public upset. It would do the following:

1) End the liquidity fueled rally while bringing stocks closer to reality (the higher the rally goes the more painful the subsequent correction will be)

2) Create great demand for Treasuries (something the US desperately needs in 2010)

3) Have relatively minor political ramifications compared to another Quantitative Easing Program or more Bailouts (the public is pissed, Democrats have begun jumping ship, and we are in an election year)

Conclusion
Could the Fed be preparing another stock crash to flood the bond market with demand? Who knows but it would make plenty of sense to me.

*http://seekingalpha.com/article/181428-what-is-the-fed-planning-for-the-bond-market (www.GainsPainsCapital.com provides a free daily newsletter dedicated to providing daily insights to the stock, commodity, currency, and bond markets and telling investors the REAL story behind the moves in the financial markets.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.