In my last post I wrote that gold and silver just look fine. On Friday a week ago, gold touched for the second time in history the USD 1,000. —price. The technical correction I mentioned in a previous post is under way. Although I might sound like a broken record, I truly believe that it is high time to buy gold especially in the case you have not done it yet. The correction might be one of those chances to accumulate. Beware of paper gold! Hold physical!
For your information the fund I will manage holding mainly physical gold and silver (for the moment being it will be approximately 60% gold and 35% silver was approved last Friday). I hope that the first trading day will be in the first week of March.
Dear reader, please be ready and prepared. March could be a very difficult month for the markets and the world economy as a whole. Wish you all the best
Tangible investments
Well dear reader you know already that I believe that in this difficult environment one should hold prime tangible investments including a geographical diversification. I hope that soon I can inform you about another excellent investment opportunity.
To gold:
In times of crisis, never forget the value of gold
The dollar is simply a piece of paper. Gold is a much better store of value and is the best insurance against future shocks
William Rees-Mogg
Last week was a bad one for bank shares; after the HBOS £8.5 billion loss, Lloyds shares fell by a third and other bank shares fell as well. Yet it was a very good week for the gold price, which closed on Friday at $935 an ounce, after reaching what was nearly a seven-month high of $953.30 on Wednesday.
Barclays Capital commented that gold prices were resuming their long-run bull trend after eight consecutive years of gains. For longer than the past eight years I have been arguing that investment in gold is an essential insurance against financial shocks. Last week was a classic example. Respectable British bank shares have now fallen by up to 90 per cent, while the gold price has risen by more than 200 per cent since Gordon Brown began selling the Bank of England's gold reserve.
I have been following the gold price since I published The Reigning Error, a short book on inflation, in 1974. I have not consistently advised people to buy gold - like all other assets, gold can become significantly overvalued, as it did in 1980. However, I have found that the movements of the gold price are one of the most useful pieces of evidence about the health of the world economy. Mr Brown's sale of gold was an avoidable error. My friend the MP Peter Tapsell repeatedly warned him in Parliament not to do it.
People buy gold when they are nervous about the economy, and they are right to do so because gold is a unique commodity. It has to a high degree two qualities that are seldom found together: liquidity and reality. It has strong liquidity; it can almost always be bought, sold or exchanged. There are other liquid assets, of which the US dollar is probably supreme, but they lack gold's quality of real value.
Dollars do not constitute a real asset, such as property or “real estate”. The dollar is simply a piece of paper. Gold has been a much better store of value than the dollar.
In 1873 one of the leading British economists, William Stanley Jevons, published a short book, Money and the Mechanism of Exchange. By 1887 it had reached its eighth edition. Unfortunately, there are few modern economists who do not suffer from the delusion that new truths make old ones obsolete.
Great mistakes could have been avoided in 2008 if bankers and politicians had studied Jevons, even though his little book was written 136 years ago. Jevons quotes Herbert Spencer as observing that “it is the grave misfortune of the moral and political sciences that they are continually discussed by those who have never laboured at the elementary grammar or the simple arithmetic of the subject”. That was true then, and it is true now. Indeed, there are still some people who believe that poverty can be abolished by the issue of printed bits of paper.
Nowadays such people usually call themselves Keynesians, though their doctrine is not to be found in the works of Maynard Keynes, a much less simplistic economist than some of his modern followers. These so-called neo-Keynesians are hostile to gold, usually for two reasons. They see gold as the natural enemy of the paper money in which they put their trust; they see gold-related systems as imposing a discipline on the unlimited issue of paper money, and they reject that.
World trade depends on the existing global system, which is one of paper currencies, separately managed and largely unconvertible. These currencies float in terms of each other, sometimes with a fixed rate in relation to a larger currency. Since President Nixon closed the gold window in 1971, there has been no fixed-rate convertibility between any of these paper currencies and gold. In the past 40 years the world exchange system has suffered from two periods of high inflation and is now suffering from the worst depression since the 1930s.
In 1873 Jevons could already write: “It is hardly requisite to tell again the well-worn tale of the over-issue of paper money which has almost always followed the removal of the legal necessity of convertibility. Hardly any civilised nation exists, which has not suffered from the scourge of paper money at one time or another... Time after time in the earlier history of New England and some of the other states now forming part of the American Union, paper money had been issued and had brought ruin.”
Daniel Webster's opinion should never be forgotten. Of paper money he says: “We have suffered more from this cause than from every other cause or calamity. It has killed more men, pervaded and corrupted the choicest interests of our country more, and done more injustice than even the arms and artifices of our enemy.”
In the 1930s some nations tried to beat the slump by competitive devaluations. In the present crisis, Britain has already experienced a very big devaluation of the pound, taking it down by a quarter against the dollar. Every country, led by the United States, has been issuing money, often in very large amounts, in order to bail out its banks. No one knows the total value of these national injections of cash into the banking systems. As the earlier injections have not restored stability to national economies, further injections inevitably will be made. All will be made in unconvertible currency, and overissue will occur.
Sooner or later the world's governments will have to reconsider Keynes's two real achievements, Britain's low inflation finance of the Second World War, and the world currency system that he negotiated at Bretton Woods.
Both Jevons and Keynes believed in the need for what Jevons called “a worldwide system of international money”. Without it, recurrent crises, such as the present one, will be inevitable. Governments need to create a new world system, in which gold, as a stabiliser, should play its part. For individuals, gold remains the best insurance against future shocks and the best store of value.
Silver; Past, Present, Future - Phoenix Silver Summit Speech
http://news.silverseek.com/TedButler/1235407708.php
Doom/Crisis
Soros sees no bottom for world financial "collapse"
NEW YORK (Reuters) - Renowned investor George Soros said on Friday the world financial system has effectively disintegrated, adding that there is yet no prospect of a near-term resolution to the crisis.
Soros said the turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union.
He said the bankruptcy of Lehman Brothers in September marked a turning point in the functioning of the market system.
Latvia's government collapses amid economic crisis
NEW YORK (MarketWatch) -- Latvia's coalition government collapsed Friday, plunging the Baltic country into political turbulence at a time when its economy is mired in a severe crisis and investors are increasingly concerned about the situation in Eastern Europe.
President Valdis Zatlers said he has accepted the resignations of Prime Minister Ivars Godmanis and his administration, according to media reports.
Godmanis said his position had become untenable after his two main coalition partners failed to support him earlier Friday, the BBC reported. The capital Riga was rocked by protests over economic policy in January, and Godmanis subsequently survived a Feb. 3 parliamentary vote of confidence, according to the report.
The government collapse in Latvia comes only weeks after Iceland's government resigned over the devastating crisis that has wrecked the island nation's economy. In Ukraine, the finance minister quit last week over economic policy disagreements with the prime minister.
http://www.marketwatch.com/news/story/latvias-government-collapses-amid-economic/story.aspx?guid={9036DEA5-4751-437A-BA5A-8FCB838D899A}&siteid=yahoomy
Which country is next? For the moment being it’d governments falling. Anarchy might be coming soon.
'There will be blood'
Harvard economic historian Niall Ferguson predicts prolonged financial hardship, even civil war, before the ‘Great Recession' ends
http://www.theglobeandmail.com/servlet/story/RTGAM.20090223.wferguson0223/BNStory/crashandrecovery/home
Newly Poor Swell Lines at Food Banks
Once a crutch for the most needy, food pantries have responded to the deepening recession by opening their doors to what Rosemary Gilmartin, who runs the Interfaith Food Pantry here, described as “the next layer of people” — a rapidly expanding roster of child-care workers, nurse’s aides, real estate agents and secretaries facing a financial crisis for the first time.
http://www.nytimes.com/2009/02/20/nyregion/20food.html?_r=1&em
Banks
February 17 – Bloomberg (Zoe Schneeweiss and Niklas Magnusson): “Moody’s… said some of Europe’s largest banks may be downgraded because of loans to eastern Europe… Moody’s sees ‘continuous downward rating pressure’ in the region as a result of worsening asset quality and western banks’ reliance on short-term funding…”
Gone in 60 Days: Citi and Bank of America Won’t Live to See May
Citigroup (C) and Bank of America (BAC) won’t live to see May. The government will take them over within the next 60 days. The announcement may come as soon as tomorrow evening.
http://www.chartingstocks.net/2009/02/gone-in-60-days-citi-and-bank-of-america-wont-live-to-see-may/
GE
How GE Compares to Other Banks
Rolfe Winkler has run the numbers on how General Electric (GE) compares to other banks (yes, GE is a bank) and has come to the conclusion that as of December 31, GE had total tangible common equity of... wait for it... $5 billion. As a result, its leverage ratio, of tangible assets divided by tangible common equity, is a whopping 140 -- the kind of number which would make Fannie or Freddie blanch.
http://seekingalpha.com/article/120924-how-ge-compares-to-other-banks
Eastern Europe’s Banks are Next in Line for a Bailout
We all know about the mess the United States, Britain, Spain and some other countries have gotten themselves into thanks to overenthusiastic housing bubbles.
Investors who have studied the global trade figures lately are no doubt also aware that East Asian countries are in an entirely separate mess since their exports have dropped 30%-40% – or even more – in the past few months, because U.S. and European consumers have stopped buying their manufactured goods.
However, there is a third global disaster, equally intractable, in Eastern Europe – and it has nothing to do with the housing bubbles, falling exports, or the massive layoffs that are becoming problems everywhere. This third global disaster is being caused by a regional balance of payments problem and a localized currency crisis.
Internationally, that disaster is this week’s worry
http://www.moneymorning.com/2009/02/20/eastern-europe-banks/
AIG
Well dear reader AIG is in dire need for more cash
AIG in talks with U.S. government sees $60 billion loss: source
http://news.yahoo.com/s/nm/20090224/bs_nm/us_aig_7
How many more times will they need cash? Well my guess is that this is a never-ending story, at least for the moment being
The same is of course true for the banks. In my humble opinion most of the big banks are in fact already bankrupt. Only accounting gimmicks allow them to make us believe that they are still alive. Without life support in the form of cash injections they would already have been gone a couple of months ago.
Therefore dear reader, once again, be careful with investments in financials. Personally I wouldn’t hold any bonds, shares or preferred shares of financial institutions.
Well last week I saw the news that the big banks get ready for a stress test. Great indeed. What kind of test will that be? What is the goal of this exercise? In fact they do not need to make the test. I think it is quite clear that the big banks cannot stand the slightest stress anymore. Therefore no test needed. But wait. There might be a good reason for doing so. What reason might it be? Well dear reader, wouldn’t it be great news if the outcome would be positive. Wouldn’t that be a great opportunity to let the public know that they can again trust these financial institutions? Although I might lose a chance to make a quick profit investing in financials in the case that the outcome of the stress test will be positive, which will be the case anyway as the government simply cannot let the world know that the financial system cannot withstand more stress, I would not invest at all in a sector that is in deep problems. Not even for a quick profit.
Big Banks Get Ready for Stress Tests
The Obama administration is getting ready to conduct "stress tests" on the nation's biggest banks to judge whether they can hold up if the recession were to worsen.
http://www.foxnews.com/politics/2009/02/25/big-banks-ready-stress-tests/
Equities
According to Dow Theory, neither the duration nor the extent of a bear market can be predicted in advance. However there are some useful hints. Most major bear markets end with stocks at "great values" or as some Dow Theorists put it, "below known values." This has meant in the past that price/earnings ratios for the Dow and the S&P have fallen to single digit numbers. It has also meant that dividend yields have moved into to the 5-6% zone.
According to the latest Barron's, the P/E ratio for the Dow is now 18.62, 17.90 for the S&P. The dividend rate for the Dow is now 3.98%, for the S&P it is 2.78%. These are hardly the kind of figures I'd expect at a great bear market low. With the bear market reconfirmed, I'd advise subscribers to be largely out of common stocks (not gold stocks) and in cash, T-bills or gold, physical gold if possible.
Commodities
Gold surged 5.4% this week to $993 (up 12.6% y-t-d), and silver jumped 5.6% to $14.39 (up 27.4% y-t-d). April Crude dropped $2.22 to $39.75 (down 11% y-t-d). March Gasoline slid 11.2% (up 1% y-t-d), and March Natural Gas deflated 9.9% (down 29% y-t-d). March Copper fell 6.1% (up 3.5% y-t-d). March Wheat declined 3.0% (down 15% y-t-d), and Corn fell 3.6% (down 14% y-t-d). The CRB index sank 5.0% (down 11.8% y-t-d). The Goldman Sachs Commodities Index (GSCI) fell 5.7% (down 9.8% y-t-d).
Oil
Well dear reader, although oil demand has fallen fast over the past month and lower oil prices are for many a great relief, I must say that low oil prices for the medium to long term are rather negative for oil and its price. Important projects are delayed. In case extraction from a very mature oil field would be stopped, it would mean that this oil field would most probably never again go online. Once the pressure cannot be kept up artificially be it with water or gas injections it will basically be impossible to get sufficient pressure needed for the production again.
Trouble Trickles From Steep Drop in Oil Prices
The precipitous fall in the price of oil in recent months, while good for consumers, has contributed to the confusion in the global economy, wreaking havoc with the budgets and economies of oil-exporting nations and putting many expensive energy projects on hold.
http://www.washingtonpost.com/wp-dyn/content/article/2009/02/19/AR2009021903434.html
Following a link with information about peak oil
Giant oil field decline rates and their influence on world oil production
http://www.tsl.uu.se/uhdsg/Publications/GOF_decline_Article.pdf
More about oil
Richard Heinberg's Museletter: The Conservation Imperative: Energy Limits to Growth and the Path to Sustainability
http://globalpublicmedia.com/richard_heinbergs_museletter_the_conservation_imperative_energy_limits_to_growth_and_the_path_to_sustainability_part_ii
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