Gold history and why to buy

In January 1980 gold topped out at a price of 850 US dollars per ounce. Down goes gold -- down and down, year after year until gold reaches a low of 256 in August of 1998.

There, despised and ignored, gold sinks to its historic bear market low. From its ignominious low of 256, a new primary bull market is born. But 28 years of decline has soured the US public on gold. If they are interested at all, they abide by the wise men of the government and the Federal Reserve. "Gold is history," they are told. "Gold is a story who's time has past." "Gold is a relic from another era, a useless metal used in fancy dentistry and in jewelry.

Under a cloud of disinterest and false tales, gold starts up again. Slowly, almost surreptitiously, gold rises to 300, then to 400, to 500 and 600. Nobody is interested. Some of the old gold mining stocks move higher. They pay no dividends. Nobody is interested in them. Names from the past appear and are taken over. Dome Mines, Homestake and Campbell Red Lake. Skeletons dancing into view and then disappearing.

Gold works its way still higher. A few people remember that gold is money, and they suggest that gold be purchased. But frequent sharp declines and occasional deep corrections frighten the early buyers of gold. They take their profits. Nevertheless, the metal reaches the 700s. A small group of admirers known facetiously as "gold-bugs" urge their followers to buy gold. "It's cheap," insist the gold-bugs, "gold is as cheap as dirt -- buy it."

Then, in January 2008, gold does the impossible. It breaks out above its old 850 peak-level of 1980. After 28 years of being held back, gold bursts is chains and breaks free. Gold pushes above 850 into space never seen before by the yellow metal. It's like a prisoner who, having been held in a dungeon for 28 years, suddenly escapes from the darkness of his cell and emerges into the glare of sunlight.

Twenty-eight years of compression has been released. The advance above the 850 level is still quiet, almost eerie -- but relentless. "It's speculative nonsense," growl the analysts, "it's manipulation by a crazy element that is living in the past." But gold continues to work higher. By February gold is nearing the thousand-dollar-an-ounce mark.

In the meantime, silver, the other monetary metal is pushing towards twenty dollars an ounce. Silver, that sold as low as 23 cents an ounce in 1932, is now selling close to twenty dollars an ounce. "Lowly silver at twenty bucks a pop, I don't believe it."

In the meantime, the US is dealing with an incredibly difficult situation. The nation is straining under the onus of a potential housing collapse. The new Federal Reserve Chairman, Ben. S. Bernanke, is fearful that the housing disaster with send the nation into recession and worse -- deflation. Bernanke is well aware that the two thirds of US families own their own homes, and that consumer buying is responsible for 70 percent of the Gross Domestic Product of the US. On top of everything else, the great banks of the US are in trouble. Bernanke must save the banks and he must hold back the forces of deflation.

But good Lord, what about inflation? The Fed has made its decision. Their first task is to keep the US out of the grip of recession. This allows gold and silver to further express themselves. The lid is off 28 years of compression and imprisonment. The great bull market in precious metals pushes higher. In the background, twenty central banks from around the world print their fiat paper in an orchestrated effort to insure prosperity.

Meanwhile, the great gold bull has broken free of its chains. A strange and unprecedented union of forces has emerged. The US public is unaware of the great phenomenon that is playing out before their eyes. Somewhere ahead, the US public will enter the bull market. Will it be in 2008, in 2009, in 2010? The timing, as we might suspect, is known only to the mysterious gods of the market.

12 Steps to 'catastrophic' meltdown

February 20, 2008

Recently, Professor Roubini's scenarios have been dire enough to make the flesh creep. Now he states that there is "a rising probability of a 'catastrophic' financial and economic outcome". The characteristics of this scenario are, he argues: "A vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe."

Prof Roubini is fonder of lists. Here are his 12 steps to financial disaster.

Step one is the worst housing recession in US history. House prices will, he says, fall by 20 to 30 per cent from their peak, which would wipe out between $4,000bn and $6,000bn in household wealth. Ten million households will end up with negative equity and so with a huge incentive to put the house keys in the post and depart for greener fields. Many more home-builders will be bankrupted.

Step two would be further losses, beyond the $250bn-$300bn now estimated, for subprime mortgages. About 60 per cent of all mortgage origination between 2005 and 2007 had "reckless or toxic features", argues Prof Roubini. Goldman Sachs estimates mortgage losses at $400bn. But if home prices fell by more than 20 per cent, losses would be bigger. That would further impair the banks' ability to offer credit.

Step three would be big losses on unsecured consumer debt: credit cards, auto loans, student loans and so forth. The "credit crunch" would then spread from mortgages to a wide range of consumer credit.

Step four would be the downgrading of the monoline insurers, which do not deserve the AAA rating on which their business depends. A further $150bn writedown of asset-backed securities would then ensue.

Step five would be the meltdown of the commercial property market, while step six would be bankruptcy of a large regional or national bank.

Step seven would be big losses on reckless leveraged buy-outs. Hundreds of billions of dollars of such loans are now stuck on the balance sheets of financial institutions.

Step eight would be a wave of corporate defaults. On average, US companies are in decent shape, but a "fat tail" of companies has low profitability and heavy debt. Such defaults would spread losses in "credit default swaps", which insure such debt. The losses could be $250bn. Some insurers might go bankrupt.

Step nine would be a meltdown in the "shadow financial system". Dealing with the distress of hedge funds, special investment vehicles and so forth will be made more difficult by the fact that they have no direct access to lending from central banks.

Step 10 would be a further collapse in stock prices. Failures of hedge funds, margin calls and shorting could lead to cascading falls in prices.

Step 11 would be a drying-up of liquidity in a range of financial markets, including interbank and money markets. Behind this would be a jump in concerns about solvency.

Step 12 would be "a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices".

These, then, are 12 steps to meltdown. In all, argues Prof Roubini: "Total losses in the financial system will add up to more than $1,000bn and the economic recession will become deeper more protracted and severe." This, he suggests, is the "nightmare scenario" keeping Ben Bernanke and colleagues at the US Federal Reserve awake. It explains why, having failed to appreciate the dangers for so long, the Fed has lowered rates by 200 basis points this year. This is insurance against a financial meltdown.

Is this kind of scenario at least plausible? It is. Furthermore, we can be confident that it would, if it came to pass, end all stories about "decoupling". If it lasts six quarters, as Prof Roubini warns, offsetting policy action in the rest of the world would be too little, too late.

Can the Fed head this danger off? Prof Roubini gives eight reasons why it cannot. (He really loves lists!)

These are, in brief: US monetary easing is constrained by risks to the dollar and inflation; aggressive easing deals only with illiquidity, not insolvency; the monoline insurers will lose their credit ratings, with dire consequences; overall losses will be too large for sovereign wealth funds to deal with; public intervention is too small to stabilise housing losses; the Fed cannot address the problems of the shadow financial system; regulators cannot find a good middle way between transparency over losses and regulatory forbearance, both of which are needed; and, finally, the transactions-oriented financial system is itself in deep crisis.

The risks are indeed high and the ability of the authorities to deal with them more limited than most people hope. This is not to suggest that there are no ways out. Unfortunately, they are poisonous ones. In the last resort, governments resolve financial crises. This is an iron law. Rescues can occur via overt government assumption of bad debt, inflation, or both. Japan chose the first, much to the distaste of its ministry of finance. But Japan is a creditor country whose savers have complete confidence in the solvency of their government. The US, however, is a debtor. It must keep the trust of foreigners. Should it fail to do so, the inflationary solution becomes probable. This is quite enough to explain why gold costs $920 an ounce.

The connection between the bursting of the housing bubble and the fragility of the financial system has created huge dangers, for the US and the rest of the world. The US public sector is now coming to the rescue, led by the Fed. In the end, they will succeed. But the journey is likely to be wretchedly uncomfortable.

martin.wolf@ft.com

Economy thoughts

The entire world, it seems, is being subjected to inflation. But various areas of the world are gaining strength and others are losing strength. Classically and historically, gold gravitates toward strength. And we see that gold is moving toward Asia. While the US accumulates debt and unfunded liabilities, Asia and particularly China, accumulate gold. While Americans are spenders and consumers, Asians are accumulators and savers.

Interestingly, the picture isn't completely logical and it isn't all black and white. Americans are free and America possesses a powerful military. Wealthy and wary citizens from nations that are not so free covet a home in the US "just in case." I see it here in La Jolla. Wealthy foreigners are buying homes in La Jolla because La Jolla is "safe" and it is "free" and it's located on the ocean and it has a great climate and top medical facilities and it's, well, it's a beautiful place to live. I walk down our main street, and I hear every language under the sun. And a LOT of Asians.

So money is coming to America from overseas. And as the dollar declines against other currencies, the US has become "Bargain City" to the world. Everything in the US looks "cheap and on-sale" to people who own non-dollar currencies.

Question -- I see what you're saying, but if gold is rising and inflation is increasing, why doesn't the Fed just raise rates as Volker did and choke off inflation?"

Answer -- Good question, and the answer is that the Fed has two objectives at this time. The first is to save the big Wall Street banks. The banks MUST BE SAVED at all costs (they're the backbone of the financial system), and that means a steep yield curve and low short interest rates.

The second Fed objective is to stave off a recession. A recession can bring on deflation -- and Bernanke doesn't even want to hear the word, deflation. Bernanke is absolutely dedicated to halting any symptoms of deflation. The way to avoid deflation is -- print money (which is inflationary) and keep rates low. Remember, Bernanke is a student of the Great Depression and he's an expert on the long Japanese recession of 1989 to 2007. And Bernanke wants no part of either of these depressing phenomena.

Question --By implication are you saying that "there ain't goin' to be no stinkin' recession"?

Answer -- Yes, that's my guess. We're obviously experiencing a slow-down in many areas of the economy, but other areas (agricultural, mining) are booming. Let me put it this way -- I don't believe we're going to be dealing with an old-fashioned across-the-board recession. We're going to be dealing with an uneven economy, some areas in bad shape, some in fair shape, and other in excellent shape.

Question -- OK, so what do we do?

Answer -- Here's one answer. A third of your "wealth" should be in gold. Another third should be in a paid-up home. And that last third should be in cash in the form of T-bills. And then we wait. You and I wait. What are we waiting for? I don't know, maybe the same thing that Hillary and Obama and McCain are yammering about -- CHANGE. And believe me, change is coming.

From: Dowtheory

VIX was up to a very high 28.97. Nervousness is sky-high

It looks increasingly like the presidential race will be McCain vs. the Clintons -- or possibly vs. Obama. The significant trend -- Dems turned out in far greater numbers than did the Republicans. Meaning -- a significant number of Republicans have "had it" with the Bush administration and all it stands for. The next US President will either be Hillary or Obama.

S&P is down 9% for the year, so far this has been the worst start in the history of the S&P. What does this say for the entire year 2008? I don't think it says anything, but I do know this -- I'm more interested in how this year ends than how it begins!

Year to date: S&P down 8.9%, Dow down 7.5%, Transports up 2.2%, Utilities down 6.2%, NASDAQ down 12.9%, Russell 2000 down 8.4%, Wilshire 5000 down 8.6%.

Preferred position -- Cash (T-bills) and gold (mostly the metal).

Yesterday was a 90% down-day, meaning that we saw panic-selling. Did that clean out most of the sellers or is there still a lot more stock for sale?


The VIX was up .73 to a very high 28.97. Nervousness is sky-high.


Yesterday was a 90% down-day -- and normally after a 90% down-day there is usually a recovery-rally lasting a few days and sometimes a bit more. Therefore, today's action was not good at all, market might have ("should have") rallied but it did not. Ah well, we take what the market gives us, and the market gave us very little today.