We have liftoff...

If you click on the above image to enlarge it, you will see a side by side comparison for the closing price of silver over the past three weeks.  The first is on Friday April 8th ($40.01),  the second is on Thursday April 14th ($42.09) and finally you have closing price yesterday, Thursday, April 21st ($46.61).

What can you say other than... "Wow!" 

Last Thursday's close came after an impressive climb and this week Silver's charge continued unabated with a stunning gain for the week of more than $4.50.

But on the heels of such impressive and dynamic gains I would suggest, dear reader, that you haven't seen anything yet.

Last week I was having coffee with two colleagues in a local Tim Horton's (famous Canadian coffee/donut franchise), when our silver conversation was interupted by a patron sitting at the table next to us.  He enthusiastically gushed about the prospects for silver and gold.

This marks the first time I have observed the general public keen to not only talk about the opportunities in silver, but have Joe Q. Public actually quote the current spot price of the metal.

The next day, one of those two colleagues was at the Vancouver Bullion Exchange at Granville & Broadway to buy some silver bullion.  Silver had just surged over $40 an ounce and he was keen to purchase some physical.  He couldn't get close as there was a line-up of over 100 people eager to do the same.

This growing public awareness comes on the heels of Bank of Montreal (BMO) issuing a report talking about the "New Paradigm in Silver", which we commmented on in this post.

The BMO reports outlines the reason both investment demand and industrial demand are surging. Understanding the twin demands are essential to understand what is happening in Silver right now.  As I have often suggested,  people should take a look at this youtube video clip that, while a bit sensational, outlines the silver case quite well.

Increased industrial demand is coupling with declining supplies of silver. Both factors are coming to a head with the surging investment demand resulting from concerns about sovereign debt.

It's the perfect storm, a confluence which the commentors in mainstream media and on Financial TV have simply failed to grasp and understand.

But that dynamic has not escaped the attention of Eric Sprott of Sprott Asset Management. In his latest 'Markets at a Glance' newsletter, these factors are articulated and laid out extremely well.

• The fact remains that most commentators have failed to grasp the monetary shifts that silver is signaling today, and in doing so they’ve failed to appreciate just how high it could actually go.  The financial media’s failure to grasp the benefits of precious metals ownership continues to perplex us, and it’s not just the commentators who are prone to perpetual disbelief. The sell side analysts are equally as irresolute. According to Bloomberg, the ‘expert’ consensus silver price forecast for 2011 is $29.50, representing a 31% discount from the current spot price. This same group of analysts also predicts prices will decline another 25% in 2012 and a further 9% in 2013 to $20 an ounce.  When you consider that the silver price has appreciated by over 21% annually over the past 10 years, these forecasts suggest a very dramatic change in the long-term trend. Will this reversal come true? Probably not. These were the same analysts who predicted that spot silver prices would average $18.65 this year - so they’ve missed the mark by over 100% thus far.

Sprott notes that many are evaluating Silver with financial models that dictate equity valuations but they are ignoring the most rudimentary of economic principles – supply and demand.

This phenomenon means that Financial TV is often providing backward-looking forecasts that completely miss the mark for the future of Silver.  As the greater investment community gradualy comes to appreciate what is happening, the herd will  follow behind in due course as forecasts get ratcheted higher.

Sprott outlines why he can be so confident that the price of silver will continue on its upward trajectory while 'the Street' continues to forecast a price collapse.

One of the key indicators is the gold/silver ratio.

The last time money was synonymous with defined amounts of gold and silver, the ratio was set at 16-to-one. For most of the past millennium, one ounce of gold would have been convertible to somewhere between 10 and 16 ounces of silver - an amount roughly in line with the relative occurrence of each mineral within the earth’s crust.

For the better part of the past century, due to the world’s abandonment of bimetallism and then the gold standard, the gold/silver ratio has fluctuated widely, twice reaching lows near the 15-to-one mark and a high of 100-to-one back in the early 1990’s.

The most recent high reached in the latter part of 2009 was nearly 80-to-one. Since then the ratio has been tumbling to where it stands now at 35-to-one.  Sprott believes this ratio will continue to move lower, driven by nothing more than basic supply/demand fundamentals.

One of those fundamentals is mine production. In 2010, the world mined approximately 736 million ounces of silver and 85 million ounces of gold. The world also produced an additional 215 million ounces of silver and 53 million ounces of gold from recycled scrap. When you add both together you have a ratio of production where only 9 ounces of silver are being produced for every 1 ounce of gold. 

Interestingly, this 9-to-one ratio is very similar to the ratio of available in-situ (on-site) silver and gold reserves. The U.S. Geological Survey estimates that there are current in-situ reserves of approximately 16.4 billion ounces of silver versus 1.6 billion ounces for gold, or about a 10-to-one ratio.

It all says that mining production is not keeping pace with consumption. And when you add in the industrial demand for silver, you begin to appreciate the huge supply/demand squeeze that in being placed on silver right now.

• Last year, non-investment demand for silver (which includes industrial, photographic, and silverware demand) totaled approximately 610 million ounces. This represents approximately 64% of primary supply, leaving approximately 341 million ounces to satisfy investment demand. On the gold side, industrial usage totaled 13 million ounces, or about 10% of primary supply, leaving approximately 125 million ounces left over for investment demand. So, after netting out the industrial usage the primary supply left over for investment demand is about 2.7 times that for gold. However, if we convert those ounces to dollars at current prices, we’re left with $15 billion worth of silver available for investment versus $186 billion worth of gold, or a one-to-13 ratio of silver to gold! This means that in terms of primary supply, silver only has 8% of the capacity for investment that gold does despite having equal if not more dollars flowing into it.

Some critics note that as the Silver spot prices rises, some investors will start selling thier physical silver back into the market. But even if all the silver/gold held by investors was suddenly sold back into the market as the price leaps higher and higher, there is a  one-to-63 ratio of silver to gold inventories in the investment community. Under these conditions, Silver still remains extremely scarce.

As Sprott asks, how then is silver still priced at a 35-to-one ratio with gold?! The answer is... it can't remain at this level. Demand is going to collapse that ratio.

Current investment statistics show that there is an equal amount of money being currently being invested in Silver as there is into Gold on a dollar for dollar basis.

This is placing MASSSIVE demand on Silver, causing Sprott to observe:

• Although the price ratio of silver to gold has fallen substantially since the highs of 2009, our analysis strongly suggests that this ratio must move lower to restore a fundamental balance between supply and demand. Only time will tell how much lower it will go, but we would not be surprised to see it hit single digits before settling into a more sustainable equilibrium. 

As the Silver to Gold ratio drops to around 10:1 or less, it means that Silver, assuming that Gold doesn't rise a single penny, will hit $150/ounce as that Silver/Gold ratio narrows (Gold currently sits at $1,504/ounce).

But as we have talked about constantly on this blog, Gold’s continued appreciation vis-à-vis every currency is assured because of the great flight from fiat currency that has only just begun.

And on that note, mainstream media has been slow to comment on the latest statement from China. If you missed it, China's central bank Governor Zhou Xiaochuan made a significant statment this week.

After a speech at Tsinghua University in Beijing on Wednesday, Zhou spoke of the need to reduce an excessive accumulation of foreign-reserves as those 'reserves' have exceeded a “reasonable” level and the management and diversification of the holdings should be improved.

This, btw, is the way you diplomatically say “we are sick of the US Dollar and will be taking steps to lower our holdings.”

Remember, the US Dollar is China’s largest single holding. And China has already begun dumping Treasuries (US Debt).

This comes on the heels of China deciding (along with Russia) to trade in their own currencies, NOT the US Dollar. Not to mention the numerous warnings Chinese politicians have been issuing to the US over the last 24 months.

In simple terms, China is done playing nice and is now actively moving out of US Dollar denominated assets.

It means Gold is about to soar and the price could easily go to $2,000 an ounce. With the Silver/Gold ratio collapsing, that means Silver will not only leap up to $150/ounce, but will blast through that as Gold leaps higher. If Gold hits $2,000/ounce, Silver could well hit $200/ounce or higher.

Like Gold, Silver nvestors are now buying Silver as protection from the ravages of fiat currency debasement. Bring all the factors together and Sprott observes why you will see Silver soar over the next few months:

• When compared to gold, it is silver that offers the most attractive value proposition by virtue of the gross mispricing of its scarcity, which, we might add, has existed for many years. Thus, in our opinion, as this new bimetallic standard takes root, silver investors will continue to be justly rewarded with marked outperformance. We truly believe that this is the investment opportunity of a lifetime, and increasingly so, others are taking heed. What is clear to us is that with equal investment dollars now flowing into silver and gold, the current 35-to-one ratio is unsustainable and has only one direction to go: lower.

At just under $47/ounce, Silver is still very cheap. And with the Gold/Silver ratio closing (and the fact that, on a doller-per-dollar basis, equal amounts of money are flowing into Silver as into Gold) Silver has a much higher upside potential than Gold does. It means the foundation is being laid for some dramatic gains in Silver in the coming months and all eyes are now keenly focused on the COMEX delivery month of May.

How long before the wider investment community realizes this huge upside advantage that exists if you invest in Silver over Gold? How long before investment money, on a dollar-per-dollar basis, start flowing primarily into Silver instead of Gold?

It could be that the gains of the last two weeks are nothing compared to what may happen next month.

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Is The Federal Reserve Illegally Selling Put Options On Treasury Bonds To Drive Down Yields?

This fast-paced, well-researched, youtube video about how the Federal Reserve is selling put options to suppress long-term treasury interest rates is worth a peek.

I'll have a post on Silver for you at midnight PDT.

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Realtor decries real estate protectionism... with a little 'buy now or be priced out forever' thrown in.

In the Vancouver Sun newspaper today there is an Op Ed piece written by Cam Good, president of a local real estate sales and marketing company.

Faithful readers will recall that Good received a certain amount of notoriety a few ago when he hosted a helicopter tour of the Vancouver suburb of White Rock for a select group of Vancouver based Chinese-speaking Realtors. Our friends at VREAA documented this back on February 11th, 2011.

Today Helicoter Cam returns to the media spotlight to comment on backlash to the reports of Hot Asian Money (HAM) flowing into the Village on the Edge of the Rainforest:

• “In the last two months, we’ve sold over 700 condos in Toronto. Sixty per cent went to Mainland Chinese buyers. In meccas like Richmond, 98 per cent of the hundreds of homes we’ve sold are to buyers who are Chinese... Buyers from Mainland China are a driving force in our real estate market. The staggering truth is we’ve seen just the tip of the iceberg… A recent story in the Wall Street Journal reported that Chinese are 'stampeding to Vancouver and Toronto, two of Canada’s hottest markets.' For that, we should be grateful. Chinese have made owning real estate in Canada more rewarding than any of us expected and they have made our society distinctly richer by bringing their values and culture to Canada and sharing them with us.… But instead of gratitude, I see growing fear and resentment that foreign buyers are inflating prices and pricing 'us' and 'our children' out of the market... Let’s look at what this global trend is doing to benefit us: It’s driving demand and creating a real estate industry that is the envy of the entire world. Our land, homes and businesses have become more valuable and Chinese investment is a big reason we weathered the global economic storm as well as we did”

Good wraps up his Op Ed lecture in true R/E sales fashion with a lecture to all those who may feel left out of the real estate boom...

• “If you suffer from real estate impotence, don’t blame Chinese people. Besides, getting all worked up about it will only make it worse. Have a glass of wine. Relax. Stop feeling sorry for yourself and pick up the phone to call a realtor or a mortgage broker, either of whom will be more than happy to show you how easy it can be to get your real estate groove on. Real estate is the best investment you’ll ever make, but don’t take my word for it. Ask any of the 70% of Canadians who are already owners. Or a Chinese person.”

The message, as always, is the same.  Real estate always go up to jump on the bandwagon, assume an $800,000 mortgage debt, and 'buy now or be priced out forever'.

As Cam says, call him because he is more than willing to show you 'how easy it is' to plunge yourself into debt and follow the herd with a financial decision which could well ruin you for life when you buy at the top of the market.

Although I suspect Cam will not like that way I spun that last part.

My bad.

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The JP Morgue Bunker Video

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Inflation + Debt = Higher Interest Rates

The vicious cycle created by the Federal Reserve’s Quantitative Easing monetary policy is now kicking into high gear.

Back on October 7, 2010 I wrote that while we would have deflation in some areas, we were going to suffer a concurrent bout of inflation - producing a paradox that many have difficulty reconciling.

Last Wednesday we noted that CNBC was reporting something that we have said for over 2 years now... that if you go back to the way inflation was calculated prior to 1999/2000 (when all the important components of inflation were stripped from the calculations to hide it's true impact) that inflation is actually raging at almost 10% right now.

But now even the highly manipulated current inflation calculation method is unable to disguise what is going on.

As the Wall Street Journal notes, Canada's consumer-price index jumped by its biggest monthly increase in two decades, adding Canada to the list of major economies recently pressured by inflation.

• "The jump surprised economists and analysts here, many of whom had been comforted by so-far benign inflation pressure across Canada, much of that thanks to a strong Canadian dollar. It also raises the likelihood of an interest-rate increase by the Bank of Canada, the central bank, sooner this year rather than later. Some economists had pushed back their forecast timing of such a hike after the Bank of Canada, which kept rates steady last week, offered a less hawkish tone on future action than many had expected."

Meanwhile in the US the big news is that the ratings firm Standard & Poor’s lowered its outlook on the United States rating to negative. Although the agency did not actually lower its highest AAA rating on America's debt, it was the first time since the S.& P. started assigning outlooks in 1989 that the country was given an outlook that was something other than stable.

This has lead M&T Bank Corp. CEO Robert G. Wilmers to warn today that the United States "may be on the same calamitous path" toward an economic and government debt crisis akin to that of Ireland, Greece and Portugal if it doesn't rein it its ballooning spending and debt.

As this blog has said before, the story of this decade is going to be all about sovereign debt.  Gobs and gobs of sovereign debt.

The gridlock in American politics combined with the paltry spending cuts proposed only guarantee things are going to get worse.

Meanwhile, as Zero Hedge notes, the real beauty about waging a two front war (keeping gold from hitting the barrage of $1,500 limit spot orders; and silver from passing a dollar a day) means that the COMEX cartel has to pick its fights. Today gold loses for now, as the $1,500 spot (but not futures) price is safely defended. The same can not be said for silver. $44 was just taken out. And those who actually wish to buy American Eagles or Silver Maple Leafs can do so at the low, low price of $47.32

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Coming Into Focus

In the last post I wrote, "As I have repeated ad nausem, the interest in precious metals is simply an extension of the interest in the housing bubble in Real Estate that has been our primary focus these past two years."

And, as if on cue, weekend reading reinforces the theme.

Following news that Chinese inflation in March hit 5.4%, the PBoC has once again decided to intervene, enacting its fourth Reserve Requirement Ratio hike of 2011. The move, taking the requirement to 20.5% for the nation’s biggest lenders, came less than two weeks after the central bank boosted benchmark interest rates.

“Tightening will continue until there are signs that inflation has been effectively brought under control,” Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd.

The increase in reserve requirements was the fourth this year and has been triggering  a  plunge in Chinese real estate, as noted by a number of blogs earlier last week including our friends over at VREAA and at Zero Hedge.

“Prices of new homes in China’s capital plunged 26.7% month-on-month in March, the Beijing News reported Tuesday, citing data from the city’s Housing and Urban-Rural Development Commission... Home purchases fell 50.9% year over year and  41.5% month over month the newspaper said…  For all intents and purposes a drop of this magnitude levered even 2 times (assuming 50% or so equity down) means that China is on the verge of a complete bubble implosion.”

And as China's capital suffers it's biggest drop in real estate prices in 5 years and the nation suffers a 7% countrywide plunge, JP Morgan's Jing Ulrich has come out and said what we all know is already happening. 

Ulrich says it all means that real estate is no longer an attractive asset bubble and that the "mass affluent" Chinese will be forced to invest in gold and alternative property investments.

From Dow Jones: This group "has seen its investment options sharply affected by restrictive housing measures" such as property taxes, increases in down-payment requirements, and raised interest rates, "since these households possess sufficient capital to purchase investment property, but do not have the same degree of access to investment vehicles such as private equity funds and retail property as the super-rich,  equities, gold and alternative property investments become the key beneficiaries."

It is important you appreciate what is going on. 

The worldwide rush into Gold and Silver is only just starting. Back on  April 7th I posted this chart from Sprott Asset Management which shows how small the current investment in gold and gold mining shares is compared to large the investment has been during the previous bull market era's in Gold. 

As a % of global assets, investment in Gold in 2009 was less than 1%.

What you are going to witness over the next few years is a massive rush into precious metals.

And concrete evidence of this trend surfaced this weekend as it was revealed that the University of Texas has taken delivery of  $1 Billion in physical Gold.

With an entity as large as the University of Texas moving so solidly into Gold what have concrete proof that what you are seeing is the start of hedge funds making the move - just like they did in the years leading up to 1981, 1948, 1932 and 1921.

As this moves intensifies, the supply/demand equation for Gold/Silver will be squeezed hard... and the price will soar.

Meanwhile as the China real estate bubble collapses, the prognosis for the Vancouver market is that we will not escape the same destiny of the United States, England, Ireland, Iceland, Spain, Portugal, Greece, Italy, etc.

Foreign investors are always the last to pile into a bubble.  As the Chinese super-rich rush to join the precious metals stampede, they will dump their Vancouver real estate holdings to avoid loosing capital on real estate in the same fashion that is now playing out in China.

The writing has been on the wall for several years and it's clearly visible now to anyone who wants to see it.

If you have real estate in Vancouver, sell it and cash in on the equity at the height of the bubble while you can.  If you are in debt, get out of it ASAP. And if you have money to invest, take advantage of what are now extremely low prices for precious metals... especially silver.

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Fantasy

So this blog has talked a lot about Silver lately.

As I have repeated ad nausem, the interest in precious metals is simply an extension of the interest in the housing bubble in Real Estate that has been our primary focus these past two years.

The financial system created a housing bubble, that bubble is in the process of collapsing (although Australia and Canada have delayed the effects to date), the response to the fianancial crisis of 2008 has been Quantative Easing, QE is triggering massive currency induced cost-push inflation, and QE will also trigger a massive increase in interest rates.

QE is also nothing more than a way to continue the ponzi scheme that is government debt... hence the huge increase in Silver/Gold and the reason Silver/Gold has yet to see massive growth in values.

Those have basically been our central themes. The nadir of Real Estate as an investment is over and the next great opportunity is precious metals, especially Silver.

On the real estate front here in the Village of the Edge of the Rainforest, there have been a wave of bearish real estate articles.  We have had the Globe and Mail newspaper come out with "Signs point to a severe housing correction in Canada", the National Post commenting on how - in the midsts of a federal election campaign - "Parties are silent on possible housing bubble", more IMF warnings about "Canada's growing debt burden", Canadian Business Magazine commenting that: "Housing: Real Insanity", and a great story on VREAA about how an afternoon TV news story by Vancouver's most prominent local TV station was promoted as 'a housing bubble' feature during the noon newscast and then quickly changed to a story about 'a steady climb' in the evening news story. That station is infamous in Vancouver as being very pro-R/E.

We're at the height of denial now in Vancouver.

On the interest rate/government debt theme, I'd urge you to check out this excellent commentary on the looming spectre of rising interest rates by Charles Hugh Smith.

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Another stunning week in Silver

Last weekend we posted that Silver had broken through the $40 mark.

And as the metal climbed over $41, the Banking cartel struck HARD this week and attempted to completely crush the silver surge.

On Monday the confirmed volume of paper contracts dumped on the COMEX was an  earth shattering 132,213 contracts. Remember... each contract represents 5,000 ounces of silver.  Thus, in one day, the cartel sold 661,065,000 ounces of paper silver to the silver market!

On Tuesday the cartel attempted to smash silver again by flooding the COMEX with a totally monstrous 141,111 paper contracts.  In ounces this is 705 million oz or 100% of annual silver production.


Yesterday the confirmed volume was another huge 106,025 contracts.

As all of this paper silver was dumped on the market at the start of the week, the price of silver plummetted from around the $41.75 level to the mid $39.00 level.

But demand has been equally strong and silver keeps rebounding.

Then came some stunning news out of Bolivia today which has completely reversed the cartel's attempts to pound down silver.

Bolivian daily newspaper La-Razon reports that Bolivia's president Evo Morales is planning on expropriating zinc, silver and tin mines sold off by previous governments.

Bloomberg reports that "Morales will announce a decree May 1 to “dismantle the privatization model,” said Nicolas Fernandez, a spokesman for state mining company Corp. Minera de Bolivia, known as Comibol.

"The government is recovering all the privatized companies,” Fernandez said today in a telephone interview from La Paz. “When the decision is taken, Comibol will be ready to manage these mines.”

Among the contracts to be affected are those with Glencore International AG, Pan American Silver Corp., and most importantly, Coeur d’Alene Mines Corp., which is operator of the San Bartolome mine: the world's largest pure silver mine. Notably San

Bartolome and Sumitomo's San Cristobal account for about 83% of the nearly 1.1M tons of fine silver Bolivia produced in 2009.

Speculation is that if this privatization actually happens, the price of silver will spike significantly because 1.33 million kilograms of silver were produced in Bolivia 2009, according to the U.S. Geological Survey.

Production is expected to fall off a cliff in the utter chaos that will accrue from this unexpected nationalization.

As a result, Silver closed out the day soaring over $42 an ounce.

And when you consider what the banking cartel threw at the silver market this week, that's nothing short of astonishing.

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Website blocked?

I've received messages from a number of you that there have been difficulties this past week accessing the site.

As faithful readers have dropped by, I am told that google has blocked the page and displayed a message indicating the site is infected and may damage the viewer's computer.

This is a google hosted site so I am completely perplexed as to why this is happening.

If you have difficulties accessing the site in the future, please let us know.

Thanks,

Whisperer

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Inflation actually near 10% according to CNBC

Quick post for today.

As faithful readers know, this blog has often posted that inflation is not only coming at us hard, but is in fact already here.

Numerous times we have talked about how the methods used to calculate inflation were changed in 2000. If you calculate inflation the way it was calculated in 1999 and before, the inflation rate is well into early 1970s levels.

And today, CNBC has come out with a story saying just that.

With an article titled "Inflation Actually Near 10% Using Older Measure", CNBC confirms what the blogosphere has been saying for almost a year now.

In case it gets yanked, here is the full story:

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After former Federal Reserve Chairman Paul Volcker was appointed in 1979, the consumer price index surged into the double digits, causing the now revered Fed Chief to double the benchmark interest rate in order to break the back of inflation. Using the methodology in place at that time puts the CPI back near those levels.

Inflation, using the reporting methodologies in place before 1980, hit an annual rate of 9.6 percent in February, according to the Shadow Government Statistics newsletter.

Since 1980, the Bureau of Labor Statistics has changed the way it calculates the CPI in order to account for the substitution of products, improvements in quality (i.e. iPad 2 costing the same as original iPad) and other things. Backing out more methods implemented in 1990 by the BLS still puts inflation at a 5.5 percent rate and getting worse, according to the calculations by the newsletter’s web site, Shadowstats.com.

“Near-term circumstances generally have continued to deteriorate,” said John Williams, creator of the site, in a new note out Tuesday. “Though not yet commonly recognized, there is both an intensifying double-dip recession and a rapidly escalating inflation problem. Until such time as financial-market expectations catch up with underlying reality, reporting generally will continue to show higher-than-expected inflation and weaker-than-expected economic results in the month and months ahead.”

The pay-site and newsletter by Williams, an economic consultant for the last 30 years to companies, has gained a cult following among bloggers hungry to criticize Bernanke these days. The mission statement of the newsletter, according to the site, is to expose and analyze “flaws in current U.S. government economic data and reporting…net of financial-market and political hype.”

Investors are anxiously awaiting the release of March’s CPI reading on Friday. The consensus estimate from economists is for an annual inflation rate of 2.6 percent.

“Given ongoing inflation problems with food and the spreading impact of higher oil-related costs in the broad economy, reporting risk is to the upside of consensus expectation,” said Williams, citing a 10 percent jump in gasoline prices in March, in the note.

“While the federal government would have us believe the numbers are rather tame, our own personal gauge leads us to believe inflation is running between 5 percent to 6 percent annually,” wrote Alan Newman in his latest Crosscurrents newsletter that refers to Williams’ statistics.

Newman uses recent comments from Walmart CEO Bill Simon that inflation is going to be “serious” to back up the much higher CPI figures from him and Williams.

“Given Walmart's sales of $422 billion, we think Mr. Simon has a good idea of what’s in the pipeline,” said Newman.

To be sure, the BLS argues that the changes it has made over the last three decades more accurately reflect a true change in the cost of living. For example, in response to its hedonic adjustments, the BLS web site states, “to measure price change accurately, the CPI must be able to distinguish the portion of price change due to this quality change.

Still, going by recent strong comments from Federal Reserve officials, even members of the central bank must believe inflation is being underreported. Dallas Federal Reserve President Richard Fisher said in a speech last week that the central bank was reaching a “tipping point” as far as changing its policy so it can react to inflation. Maybe Fisher stumbled across Shadowstats.com. The voting member did, after all, mention Volcker in the same speech.

“The need to break the back of that (budgetary debt) spiral is as dire now as was the need for Paul Volcker to break the back of inflation in the 1980s,” said Fisher on April 8th. “As a result of his steadfast determination to press on with exorcising inflation, Mr. Volcker is today among the most respected living Americans and widely considered an exemplar for public servants worldwide.”

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Still Around?

Hi Gang, it has been a busy week and we've been unable to post.

Regular posting will resume tomorrow.

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Today in Silver

Two weeks ago we made a post that speculated that Silver might hit $40 by March 31st, 2011 in what was basically a buying feedback loop.

And while it failed to do so, 7 days later Silver has now broken that $40 barrier and closed going into the weekend at $40.93 with a stunning gain of $1.29 today.

ZeroHedge has come out with a great post citing a report from the Morgan Stanley metals desk explaining the stunning rise in price today:

• I was told on Wednesday that big buying went thru on Tuesday in may atm silver calls which should make the market short gamma.

• A short gamma position will become shorter as the price of the underlying asset increases. As the market rallies, you are effectively selling more and more of the underlying asset as the delta becomes more negative.

• So what that means is that the SELLER of the calls, probably bought Physical to delta hedge themselves neutral. As this market jumps just about 1-2% daily (this week alone +6.5%) they would need to now re hedge to bring themselves back to neutral by BUYING more Physical as SILVER goes higher, essentially driving the market Higher still and so the chase goes theoretically moving the market higher causing them to buy more to hedge and moving the market higher, thus buying into rallies.

• Now they could BUY puts also to create positive Gamma as well to offset some of that pain they are not bound to the Physical for their hedge. Lots of what if's but that’s the idea.

• On the other side if Silver were to gap lower, this would not help either as they would need to SELL Physical into a falling market to re-hedge themselves.

• Great in a slow steady market, nightmare in a volatile one.

As Tyler Durhan of ZH notes... Translation: ever-accelerating feedback loop (both higher and lower). Volume is about to go off the charts.

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Whoomp... there it is!

As of 9:37 pm PDT!

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Is it too late to invest in Silver?

Been busy this week, so I haven't had a chance to post a part 2 to last Sunday's post but I hope to get too it before too long.

Jeff Clark, of Casey Research, has come out with an article which it timely and addresses a subject I have been questioned about a lot lately: "As an investor, have I missed out on silver?"

 

I get this question almost every day. And with good reason... silver's performance since last August has been phenomenal, doubling in price since the dog days of summer.

So if you are just now looking to get into silver as an investment, are you making the mistake of getting in at the top?  Is the price being driven by all the same things we see in the Housing Bubble: ie. irrational exuberance and over investment?

The fact is, we haven't even begun to see silver rise in price... and you haven't missed anything yet.

One of the best ways of looking at silver is to compare the amount of money investors have invested in silver with those of other 'products'.

As Jeff Clark notes, the market cap of the silver industry is $73.1 billion.  Compare this with the market cap of other industries (see above chart). It barely registers when compared to a number of other industries.  The dying newspaper industry is over 26 times bigger. Drug manufacturers are 213 times larger. The gold market is 19 times greater.

And here’s a stunning statistic: the market cap of the entire silver market, with all its record-setting prices, represents just one-third of one percent of the oil and gas industry.

The silver market is very tiny.

And it's so tiny, that I would suggest to you that the money is just starting to flow into it.

That's why the price has risen so dramatically.

As more investors start to seek the security of precious metals in this era of governmental fiscal mismanagement and runaway debt, average investors will be tripping over themselves to join in. And when they do, silver will rise parabolically.

Consider the following chart:

At $35 silver an ounce, all exchange-traded funds backed by silver amount to $20.7 billion.

This is less than a quarter of the market cap of McDonald’s. They’re about 10% of GE, a company that still hasn’t recovered from the ’08 meltdown. Exxon Mobil is more than 20 times bigger.

And this isn’t even a proper comparison as we are comparing the entire silver ETF market to a few individual stocks.

This is even more interesting when you consider that it’s the ETF market where most of the public – especially those that are new to the market – first invest in silver. So while the metal has doubled in the past seven months, total investment in the funds is still far beneath many popular blue-chip stocks.

The fact of the matter is that money hasn't even begun to start flowing into silver.

The same can be said for Gold as this chart from Sprott Asset Management indicates.  In 2009 investment in gold and gold mining shares as a % of global assets was less than 1%.

Compare this to investment in Gold and Gold mining stocks in other big bull market years for Gold.

I am personally convinced you will see the world move substantially into Gold and Silver in the coming years repeating the periods of high investment in 1981, 1948, 1932 and 1921.

And because silver is such a small market now, when you combine the investment demand with the industrial demand - I believe silver is set to rise exponentially.

Does that mean silver won't have a pull back?  Of course not. As Clark notes "price will always ebb and flow in a bull market, and an ebb is overdue. The question, of course, is from what price level it occurs. What if a correction doesn’t ensue until, say, a month from now, and the price falls back to… where it is now? I remember some articles in January that insisted silver would fall to as low as $22, and, well, they’re still waiting and have in the meantime missed out on some huge gains. For silver to fall back to $22 now would require a 40% drop; not impossible, but I wouldn’t hold my breath."

I often suggest people check out this youtube video clip that, while a bit sensational, outlines the silver case quite well.

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Bank of Montreal declares "A New Paradigm for Silver"

Silver investing is going mainstream.

BMO Capital Markets has come out with a report that declares that there is a New Paradigm for Silver. 

The report states:

• Demand is expected to outstrip production growth. BMO Research analysis indicates silver demand & supply fundamentals should remain positive to the end of 2012E.
• The prospects of further quantitative easing combined with sovereign debt concerns, competitive ‘fiat’ currency devaluation in western economies, and the return of inflation could result in investment demand exceeding BMO Research’s projections and extending the supply deficit through 2014E.
• This shift in the supply/demand dynamic lies in contrast to the broader investment perception for silver, which is rooted in the 1990’s when the metal was in abundance, driven by the demise of the photographic industry and Chinese selling.
• The paradigm shift for silver suggests that the traditional benchmarks for silver, such as the long-term historical ratio with gold, are no longer valid.
• Accordingly, the markets are searching for a new set of criteria against which to benchmark the price of silver, with a bias to the upside.

As we have mentioned before, investment in Silver by the general public hasn't even begun. And once capital starts flowing in, the price of the metal has the potential to go parabolic.

You can read the full report here.

Silver is the investment opportunity of the next decade.

Now... the mainstream is starting to take notice.

A new paradigm indeed!

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Real Estate, debt, interest rates, monetary policy, and gold/silver - Part 1

The title of today's post is a snapshot of what this blog talks about virtually every day.

For months I have ruminated about a post that ties them all together, that shows the concerns about Real Estate and how they are tied to debt, which is tied to interest rates, which has been heavily manipulated by monetary policy, which begets the strong interest in gold/silver I talk about.

Yesterday I read another great post by the blogger Gonzalo Lira. And he has articulated a number of pertinent points which I am going to borrow on for this post.

As I have said repeatedly, we still do not fully appreciate - nor do we fully comprehend - the depth and breadth of the financial earthquake that hit us in September, 2008.

The problems that triggered that collapse, and government attempts to manage it, are merely the latest acts in a play that really got underway almost 30 years ago.

As Lira notes, you can clearly see that specific policies were implemented, decisions made and actions taken which set us on the path that brought us to where we are today.

And while some will argue that it was the very invention of the Federal Reserve back in the early 20th century that set us on the current path we are on, a serious look at the policies, decisions and actions carried out in our own lifetimes gives us a clear picture about the path we are on.

It starts in 1975 when the US Congress consistently fails to deliver a balanced budget. This is followed by the US Federal Reserve giving both the U.S. economy and the Federal government a massive subsidy by way of its artificially low interest rates, starting in 1987.

Begining in 1975, the United States has had an uninterrupted string of yearly deficits as the American Federal government has routinely spent more money than it has brought in.

Deficit spending satisfied the ideologies of both sides of the economic divide:

• For the economic Right, cutting taxes satisfied its notion that more money in the hands of the citizenry and corporations guarantees greater economic growth.
• For the economic Left, more government spending every year satisfied its notion that more money spent by the government guarantees greater economic growth.

And since 1975, both sides of the political divide have failed to resolve the US fiscal incoherence.

The economic Right wanted lower taxes. The economic Left wanted more fiscal spending. Rather than thrash out their differences and come to a compromise, they resorted to the national credit card: rather than either/or — it’s been both. Both lower taxes and higher Federal government spending — bought and paid for with fiscal debt.

And as each year passed, the Americans have resorted to issuing Treasury bonds to cover the difference. As a result the overall debt has became greater and greater.

It has become so great that total fiscal debt that exceeds 100% of GDP. Yearly deficits for the next five years will exceed 10% of GDP each year.

The US Government has been able to get away with this deficit year after year because of the cheap interest rates it has had to pay for its debt.

Enter the Federal Reserve.

The price of a good is the intersection of its supply and its demand — this is Economics 101. Money is a good like any other — and like any good, it has a price: Its interest rate. Ordinarily, the price of money is fixed by suppliers of credit—that is, banks. They create money via credit—and they sell this money to their customers, the price of this sale being the interest rate that they charge.

Starting in 1987, the Federal Reserve went beyond its mandate of price stability and full employment, and instead went into the business of goosing along the economy.

In other words, it focused on mindless growth — and focused specifically on the blunt, club-like metric of GDP growth — and goosed along the economy in order to raise that mindless metric.

It did this by usurping the role of banks, and providing cheap money by way of low interest rates; low interests rates carried out with the explicit aim of gaming the GDP.

The economy slowing down?

Cut interest rates.

Momentary market panic?

Flood the market with liquidity.

The economy (as measured strictly by GDP) slowing down again?

Cut interest rates some more.

GDP booming?

Very very very slowly and predictably raise rates — then cut ‘em again the instant the GDP looks like it’s starting to slow down.

This was, in a nutshell, what Federal Reserve Chairman Alan Greenspan did during his tenure: he subsidized money for the sake of gaming a single metric, the GDP.

Everyone knew it.

There was even a name for it: The Greenspan Put.

For such an avowed free-marketeer Greenspan was, in reality nothing of the sort. Rather than allow the market to dictate the price of money, he subsidized it like a Socialist Pricing Board. And just like a Soviet apparatchik of old, Greenspan focused on one number — GDP — irrespective of all the other subtle qualifiers that define a healthy economy.

The distortive effects that Greenspan’s money subsidy brought to the US economy are clear to all... serial bubbles. There was:

• the Dot-com bubble,
• the Tech bubble,
• the Bio-Tech bubble,
• the Collateralized Debt Obligation bubble,
• the Real Estate bubble,
• and now the Treasuries bubble

All of these serial bubbles have been blown by the Federal Reserve’s relentless subsidy of the price of money.

Now of course, if you are using the subsidized price of money to goose along an economy, there comes a moment when it doesn’t work anymore.

Enter Ben Bernanke. His Zero Interest Rate Policy (ZIRP) and Quantitative Easing 1, QE lite and QE2 are the perverted policies he has had to pursue in order to keep up the Greenspan Put.

All of The Bernank’s recent policies are aimed at shoring up the “growth” that the U.S. economy has experienced over the last 24 years.

But as Lira points out, that “growth” isn't real. It's steroid-induced bubble muscle. An illusion.

If you measure gross GDP adjusted for inflation, which has been Greenspan’s sole metric, there has been "growth".

However, if measured by median and average wages, per capita incomes adjusted for purchasing power, or any other such metric that measures the well-being of the average, and the below-average,citizen, there has been no growth whatsoever.

People are less well off. The middle class in the United States has shrunk drastically. Sure, the average income might be higher, but that’s the distortive effect you get from having tremendous, inorganic wealth disparities.

It’s not merely that the disparity between the wealthy and the rest of the population is obscene — the disparity skews the results. Remove the top 15% of the population, and the average income in the United States drops below Slovenia’s.

Furthermore the sort of growth the American economy would have experienced since 1987 without this money subsidy would likely have been very different from the growth we have actually experienced.

The growth we have experienced has been speculative. Cheap (ie. subsidized) money that Greenspan made available was set to chase returns via trading, not production.

Had money been expensive, yields that beat savings would have been harder to come by and thereby encouraged savings instead of speculation.

Expensive money would have also kept banks from the insane speculation of the real estate markets: On the one hand, expensive money would have kept low quality buyers from access to credit, and on the other, expensive money would have dissuaded banks from expanding their businesses into riskier territories, in order to reap higher returns.

In other words, risk would have been accurately priced.

In other words, there wouldn’t have been a Global Financial Crisis.

Now, obviously, it’s a fool’s game to try to go back over the 24 years since Greenspan took office and try to deduce what would have been the organic price of money without his and Bernanke’s subsidy.

But clearly, had the Greenspan Put never existed, there would likely have been less growth than has been had.

Would there have been less money for venture capital and the financing of new businesses? Yes, no question. Would those new businesses therefore never have existed? Again, yes.

However: How many ridiculous, fairy-tale businesses would have been financed, as happened during the various bubbles of the last 24 years?

Very few. Capital would have been much more efficiently allocated in a world where there was no subsidy on money. It would have been too expensive for the economy to throw away capital on clearly nonsensical businesses.

Would the solid businesses have gotten financing? The ones that actually did something for the economy, like Google, Ebay, and so on?

Clearly, it would have been tougher for them, and their growth would have been slower — but just as clearly, they would indeed have gotten financing, because they are obviously good businesses.

Anyway, even if many good businesses would have failed to raise financing in a world of more expensive credit, the good outweighs the bad: There would not have been any serial bubbles.

But most importantly... the US Federal government would not have had access to cheap financing. And it is the cheap financing which encouraged the accumulation of back-breaking debt.

Had Greenspan not subsidized money, it would have been far too expensive for the US Federal government to continue increasing its yearly deficits, and adding to the national debt.

A fiscal day of reckoning would have happened a lot sooner and therefore would have been a lot less painful.

It would have been bad (all days of reckoning are bad), but it wouldn’t have been mind-crunchingly destructive as the coming crisis will be.

We are in a world where first Greenspan, and now Bernanke, have keep money at absurdly, unsustainably low prices. The US Federal government was allowed to balloon its fiscal debt to monumental proportions: over 100% of GDP, with future yearly deficits in the +10% of GDP range as far as the eye can see.

The Federal Reserve’s subsidized money has postponed the day of reckoning, insofar as the Federal government debt is concerned. And it is making that day of reckoning much worse than it needed to be.

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What does Carney know?

For more than a year now, Bank of Canada Governor Mark Carney has been warning Canadians about interest rates.

Critics have jumped all over his warnings as hypocrisy... Carney was the one who cut them, why would he be so surprised that Canadians are taking advantage of them?

Wasn't that the whole point of lowering them to begin with?

Some suggest that Carney is a very bright mind who knows exactly what's going on. The tight rope that he has had to walk between currency, manufacturing, employment, trade balance and international economic relations is a difficult one. And the consequences of Canadians gorging on house and consumer debt are a necessary by-product of resuscitating the economy.

Some even suggest that Carney, by bringing in emergency level interest rates and staving off a housing collapse in 2009, has created an opportunity for astute Canadians to divest themselves of debt laden real estate and prepare for what is coming.

There is no doubt that Carney is fully aware many Canadians aren't making astute decisions. He has noted that while Canada’s recovery has been the envy of the Group of 7, the recovery has relied on levels of consumer spending and investment in housing that are proving unsustainable.

Last November Carney appeared on CBC's Sunday Edition and said:

• We're providing as much transparency as we can about the future path of monetary policy, as much as appropriate. The one thing we can say with high degree of certainty is that over a thirty year mortgage interest rates are not going to be at the same level as they are now, they're going to be higher, and that Canadians, individuals, should be comfortable that they can service their debt at higher interest rates, and the banks that lend to them should also be comfortable about that.

This passage caught my eye and intrigues me.

"We're providing as much transparency as we can about the future path of monetary policy, as much as appropriate."

The inner circle of Central Bankers is a tight one and some have suggested that Canada's Central Banker Carney, a former Goldman Sachs employee, is tighter with the US Federal Reserve than most Central Bankers.

And this week Carney warned that "some economies are postponing monetary tightening in the hope that old relationships will reassert. Others are resisting capital inflows. And all appear to be underestimating the scale of what's happening" is particularly chilling.

Does Carney know things that other Central Bankers do not?

This thought line intensified yesterday as the Federal Reserve finally complied with a court order to forced to disclose unredacted data on it's lending from it's discount window.

As initial scrutiny of the 25,000 or so pages of declassified information began, one glaring anomaly surfaced repeatedly.

Copious data exists about FX swap lines between the US Federal Reserve and other banks. Many critics have charged that these swaps were the means by which the Fed bailed out much of the world.

And as the information is studied, parties like Zero Hedge are looking at just what the terms were on these various borrowings.

To everyone's surprise, there was a whole lot of "NR" exemptions, aka redacted data.

What's redackted is data on par lent out, par received, net change, limit and undrawn available, which is critical to determine whether the Fed actually lost money on its FX swap transactions.

But what is even more stunning is that it appears that one Bank in particular (which everyone believes can only be the Bank Of Canada) has been purposefully and diligently redacted out of the 977 pages in the document highlighting the currency swap data.

Why?

Suddenly Carney's comments that the Bank of Canada is "providing as much transparency as we can about the future path of monetary policy, as much as appropriate," and his comment that "some economies are postponing monetary tightening in the hope that old relationships will reassert. Others are resisting capital inflows. And all appear to be underestimating the scale of what's happening" becomes even more ominious.

What is going on between the US Federal Reserve and the Bank of Canada? What does Carney know that others do not? More importantly... how wise is it to ignore his year long warnings that Canadians need to prepare for significantly higher interest rates when he appears to be privy to such inside information?

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