The analysts were confident about valuations going forward, especially long term. Company execs swore their deals didn’t need any money, while brokers and bankers alike had a gleam in their eye about the financing opportunities amid the debris — even a sense of urgency. One broker — my former business partner, actually — wondered whether the fundamentals for gold have ever been as bullish in our lives.

The answer was unambiguous. The market has answered too.

Newmont and Freeport this week filed documents in conjunction with potential underwritings by J.P. Morgan and Citigroup, in the amounts of $1.2 billion and $750 million, respectively, totaling just under $2 billion. Kinross sold UBS about $400 million worth of stock last week. Lundin’s Red Back also negotiated a bought deal worth about $150 million with a group of underwriters led by Cormark Securities and BMO last week. Earlier this month, Yamana closed a $135 million share offer and borrowed $200 million, while in December, Agnico-Eagle raised some $300 million from stock issuances after borrowing $300 million a few months earlier (in September). Where’s the deflation?!

The money is coming into the gold sector. The Canadian National Post reported last week that gold miners are “raising cash with ease… many generalist funds have jumped onto the precious metals bandwagon.”

Many juniors have also reported financings where needed. Some are turning them away. Share issues are just too dilutive down here, and any company that doesn’t need money to survive 2009 is prudent to refuse.

Asked about the ability of miners to raise cash in this environment, the analysts at the podium at the Cambridge House investment conference in Vancouver all agreed there is always funding for assets that have sound economic fundamentals. They finance themselves. In fact, in my experience, it is often better to buy the shares of companies with good assets that need cash than companies with cash and no assets, even if the latter are trading at a discount to cash breakup, and even if funding is relatively scarce. Companies with a lot of cash can sometimes get lazy and put up their feet, or insiders waste it — or even steal it, if they lack integrity. Cash itself yields nothing. It’s a depreciating good, as you know. It’s one thing to buy a company at below cash breakup and then break it up and keep the extra cash. It is another thing to invest in a company at cash breakup or less. We invest to earn profits.

If you want to buy cash at a discount, buy a T-bill or term deposit. Or else, you’re just sharing in potential losses due to debasement, negligence, debauchery or theft. That doesn’t mean you should avoid the deals that have a lot of cash — just that’s not what you’re investing in. You are investing either in the underlying asset, which yields profit (i.e., more cash in the future) or management’s abilities.

Ultimately, sound “assets” will hold their value better than idle cash in an inflationary environment.

It is obvious that through this crisis, despite some turbulence, gold prices have held up better than just about any other asset, commodity or currency (other than dollars and yen) we may imagine. From the point of view of a gold miner, this is a very good thing. Even better is that the price of oil, a significant cost input for miners, has fallen a lot relative to gold. This is bullish for margins. Also bullish for gold miners is that the slump may have freed up capital and labor for the development of gold assets, where previous scarcity drove up capex estimates so much that some projects had to be abandoned.

The combination of strong investment demand for gold and lower input costs makes gold stocks one of the only sectors poised for any growth in operating results (i.e., earnings and cash flows) in 2009.

On the other hand, the ratio of gold prices to many of the commodities, and the averages, is at more than a 10-year extreme, and it is not sustainable. As a matter of fact, I think it could be a drag on gold prices. Gold is the only commodity challenging the resistance point in its post-March 2008 downtrend.

It looks poised to break out, and the other commodities appear to be bottoming.

However, while the extremity lasts, it could cap gold prices.

My feeling is that the gold ratios (i.e., gold prices relative to other assets, commodities and currencies) are going to ebb in the short term while commodity prices catch up a little. I continue to think that this catch-up phase will include a rally in stock prices, and a general recovery in risk appetite, even if short-lived. While it lasts, it is likely to shave a few safe-haven points off gold. It hasn’t started yet.

I’m not looking for new lows in gold on this… just some backfilling and consolidation while the other commodities and assets catch up some. This could happen over the next few months. Then look out.

Regardless, however, I expect gold shares to benefit from the general return of risk appetite too.

That is, but for some ebb and flow, I expect gold shares to do well whether gold goes up or not — so long as it doesn’t go down too much. As long as it holds the $800-850 level, gold shares are a buy.

It is still a buyer’s market. Many gold shares are still factoring in a gold price of less than $800. But don’t be hasty.

Rather, be deliberate, which means don’t waver from the plan or your conviction on dips. Buy them. Try not to buy on days when everyone else is, like today, but make sure you have a shopping list and just pick away at it when you get the dip.

Investors should always wade in (and out) of their positions, rather than jumping in and out — as ole Jesse Livermore used to do. They called him the “Boy Plunger.” He made big on the way up and lost big on the way down. There are lots of folks like that on Wall Street. They’re big gamblers. You could say the Fed made them. They don’t care about the black swan, because they believe that should they lose, they will just win again tomorrow.

Keep in mind, though, you’re not buying blue chips here. Small-cap miners (and options) are extremely volatile and risky.

Remember this is for 10-20% of your financial assets — whatever you can sleep at night with. Some people can sleep with more — some can’t sleep anyway. I guess the analogy doesn’t apply to insomniacs, but you get the gist.

Good trading,

Ed Bugos
for The Daily Reckoning

Gold Ratios: Bearish for Gold Prices, Bullish for Gold Shares originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

Thus, the media jumped all over the deflation theme. Although there was only one mention of “deflation” in the entire 6,000-plus word release, it prompted headlines like this one from MarketWatch: “FOMC Members Discussed Mounting Risks of Deflation, Depression at Mid-December Meeting.”

The stock markets crumbled. Most commodities fell. And even though the dollar fell, gold prices fell $24 on the Comex in response to all this noise Wednesday, while the gold stocks were among the worst performing sectors on the board. Recovery sentiment halted in its tracks as the deflation trade came back with a vengeance. Of course, I’ve been more cautiously bullish with gold prices approaching the resistance points controlling their intermediate downtrend. But my reasoning is that the reflation trade will win out and drive up both stocks and commodities broadly, at gold’s expense, but only short term.

The bulk of the evidence supports this trade, but it has ebbed a little this week because of the news flow – none of which says anything new about the prospects of “deflation” in the Fisherine sense of a liquidation of debts and contraction in deposits. It was just more of the same drivel about falling prices and the shrinking economy, profits and employment, with commentators dragging in long-discredited concepts like velocity of money, the multiplier or even Japan’s alleged deflation during the ’90s.

Of course, as with any other “bubble” – if I am right to call it that – it implies an extent of irrational exuberance or popular delusion, and then there is the sustainability feature… bubbles simply don’t last.

In the reader comment section in response to the MarketWatch report on the minutes of the FOMC, there were example after example illustrating that people believe deflation is caused by a slowing in the economy; rising unemployment; or falling wages and prices, including asset prices… or that deflation is bad; or saving is bad; or deflation existed throughout the ’30s, despite the Fed’s efforts.

I have already dealt with most of these misunderstandings in past issues. My influence must be waning, because they’re not fading away!

Now let me take this opportunity to emphasize something. I do not mean to seem stubbornly fixed to the inflation paradigm. I’m not, in fact. I worry about the deflation possibility. I am always considering new facts and old premises as part of an analytical check to my evolving outlook. My recent tirade is not against the “possibility” of deflation – which cannot be denied. It is a reaction to the nonsense that underlies the great many bad arguments for deflation, which are either littered with factual errors about history or rely on theoretical concepts that are outdated, obsolete and have been long discredited.

The best argument for deflation, given the current monetary system, is if central banks decide that they want to take liquidity out of the system one day (i.e., run a deliberate deflation policy) or be serious enough about fighting inflation, they might overshoot. But no one is making this case.

Unlike the period 1929-33, central banks today can print “reserves” up. You can see this yourself.

There is nothing much to check this process but the will of the populace or the prudence exercised by politicians. The original deflationist, Irving Fisher, made sure of that. He scared America off the gold standard much like the deflation calls of the day have scared the Fed into ballooning its balance sheet!

Speaking of Fisher, I want to deal with one of the most ancient nonsensical theories about money that underpins the deflation scare today: the “velocity of money,” a concept that Fisher himself resurrected.

According to proponents, an increase in money supply doesn’t necessarily mean that money will lose its purchasing power if the velocity of circulation slows down, which happens if people don’t spend.

David Rosenberg, Merrill Lynch’s chief economist, recently put it this way:

“Money supply will increase, but money velocity will not. We are getting asked repeatedly these days how it is that the government debt creation we are about to see is not going to be inflationary. After all, aren’t we going to see a boom in the money supply? Well, we’re sure that the money supply is going to increase, but at the same time, we are going to see the turnover rate of that money, or what is called money velocity, decline.” [Emphasis added.]

And in a segment on CNBC Wednesday discussing the grave threat of deflation, Art Cashin said:

“Even if you walked over and gave somebody a trillion dollars and they either put it in the mattress or just in their pocket, it doesn’t help the economy. You need the velocity of money to move. You gonna give people money, they gotta go out and begin to use it. And we’re seeing some of that worry coming home to roost here in the market today. We saw Intel…” [Emphasis added.]

With people like this, big credentials and all, promoting such ideas, it’s no wonder the deflation scare has teeth, even though it can’t bite through the flesh. Contrast their words with those of former Wall Street Journal reporter and economist Henry Hazlitt, who brought the Austrian School to America:

“Monetary theory would gain immensely if the concept of an independent or causal velocity of circulation were completely abandoned. The valuation approach, and the cash holdings approach, are sufficient to explain the problems involved.”

Hazlitt wrote that in 1968 in an essay in which he demolished the velocity of money notion.

Simply put, the idea “refers to the rate at which money circulates, changes hands or turns over.” It is a very old idea, harking back to the days when the “mechanistic quantity theory” of money predominated. That is, before we understood how individual judgments determined value, this concept of velocity explained variations in the value of money that were out of proportion with the variations in its supply. Under the mechanistic quantity theory, such changes were to be proportional.

Fisher adopted the idea of velocity in his dubious formulation MV=PT (where M is the supply of money, V is its velocity of circulation, P is the general price level and T is the volume of trade).

Both the mechanistic quantity theory and Fisher’s equation have long since been refuted. No credible economist takes either of them seriously. But the idea of the velocity of money has survived, nevertheless, and today it’s a pain in the neck. Hazlitt’s insights were as follows.

First, as far as Fisher’s equation goes, velocity (V) is not an independent variable. It is always exactly equal to the volume of trade T, and is driven by trade, not vice versa – it does not drive trade:

“What we have to deal with, in the so-called circulation of money, is the exchange of money against goods. Therefore, V and T cannot be separated. Insofar as there is a causal relation, it is the volume of trade which determines the velocity of circulation of money, rather than the other way around… the velocity of circulation of money is, so to speak, merely the velocity of circulation of goods and services looked at from the other side. If the volume of trade increases, the velocity of circulation of money, other things being equal, must increase, and vice versa.”

Changes in the velocity of circulation are thus the effect, and not the cause, of changes in the demand for money and/or goods. The concept is a makeshift explanation for the factors affecting the demand for money. For example, if the price level did not change in direct proportion to the money supply, the “Fisherine quantity theorists” would explain it with reference to changes in the velocity of circulation.

Yet the statistic has no more bearing on the value of money (its purchasing power) than the concept of “inventory turnover” has on the price of the individual units of inventory. It cannot cause anything.

Second, as Ludwig von Mises explained, money doesn’t really circulate at all. Nor is it idle. It is always in someone’s possession, but ready to be exchanged (or used). It only spends a fraction of the time changing hands – i.e., without an owner. And when it is exchanged, someone else wants it for the same reason: to keep on hand for future use. It does not simply circulate on its own, as if by some unexplained force, and especially not independent of human judgments of value or expressions of the demand for money, as von Mises pointed out in his famous treatise Human Action:

“The service that money renders does not consist in its turnover. It consists in its being ready in cash holdings for any future use. The main deficiency of the velocity of circulation concept is that it does not start from the actions of individuals, but looks at the problem from the angle of the whole economic system. This concept in itself is a vicious mode of approaching the problem of prices and purchasing power. It is assumed that, other things being equal, prices must change in proportion to the changes occurring in the total supply of money available.”

Third, neither does velocity measure the willingness of people to hold or get rid of their cash, because for everyone who is rendering their cash, someone is taking it, so that at all times, Hazlitt tells us:

“Average individual cash holding must always be the total supply of money outstanding divided by the population… People who are more eager to buy goods, or more eager to get rid of money, will buy faster or sooner. But this will mean that V increases, when it does increase, because the relative value of money is falling or is expected to fall. It will not mean that the value of money is falling, or prices of goods rising, because V has increased… It is the changed valuation by individuals of either goods or money or both that causes the increased velocity of circulation as well as the price rise. The increased velocity of circulation, in other words, is largely a passive factor in the situation.”

He did find, however, that increases in money velocity corresponded with periods of intensifying speculation, whether that speculation was a bullish or bearish extreme. That is, this velocity has no directional significance even as a byproduct – it was just as likely to rise with too much speculation on the bearish side as on the bullish side. Consequently, since it is tied to the volume of speculation and trade, “velocity of circulation cannot fluctuate for long beyond a comparatively narrow range.”

In summary, I am not saying deflation is impossible – only that if the Fed is inflating, we’ll have inflation.

This truth is so simple that it is bewildering to see so many people take the other side of that bet. It is a testament to the effectiveness of the Fed’s propaganda campaign that the deflation argument tends to recruit some of its otherwise potentially most ardent critics.

Keep your eye on the ball, and in the end, you will see that the deflation bogeyman is just that – a myth – used by politicians and central bankers to fear monger the masses into allowing them to inflate.

It has never been anything more.

Irving Fisher was one of its earliest authors, and it was he who lobbied for creation of the Fed, and advised the subsequent abandonment of the gold standard. Certainly, there is no precedent for what the Fed is doing today, but that by itself is no reason to summon the deflation bogeyman.

As for why the reserves the Fed is creating have not been multiplied, the answer is simple: Interest rates are too low! If you fixed the price of oil at 50 cents per barrel, supply would run out quick too.

Good trading,

Ed Bugos
for The Daily Reckoning

January 14, 2009

Before starting up Gold & Options Trader, Ed comes straight from the North American heart of the gold market – Vancouver’s Howe Street. During the nasty commodity bear market in the ’90s, Ed still guided his clients to gold profits in Argentina Gold and Arequipa, both of which became buyout bait for Barrick. He also founded the “Bugos Gold Stock Index” which included no more than 10 stocks at any time.

Give us Madoff! Give us Madoff!

“Oil rises to $39 on Bernanke comments…”

“Asian stocks rise after Bernanke remarks…”

When they turned out the lights and closed the doors in New York last night, the Dow had lost 25 points and oil had gone down to $37.

But this morning, investors seem to be feeling better about things. What did Bernanke say to bring about the turnaround?

We find the report on the front page of the International Herald Tribune:

“More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markers,” said the main man at the Fed, speaking to an audience at the London School of Economics.

He went on to say that he didn’t necessarily like bailing out Wall Street, but it “appears unavoidable.”

Nothing particularly exciting about that. But then we turn to page 12:

“Bernanke warns that bigger bailouts needed around the world,” is the money headline.

And then, the report gets down to business. The world economy is dangerously ill, says Dr. Bernanke, or words to that effect. We’re going to have to try some experimental drugs to rescue it.

“Beyond buying troubled assets from banks, Bernanke said, another option was to provide asset guarantees under which the government would absorb part of the banks’ losses in exchange for warrants and other forms of compensation. [Of course, if the banks had any means of compensating investors they wouldn't be in this fix.]…

“Bernanke also expressed support for the idea of creating a so-called bad bank that would allow the government to buy financial assets in exchange for cash or equity.”

Here is where we laughed so hard we thought we might damage our midriff.

Create a ‘bad bank?’ Is he kidding? The world’s full of bad banks already – banks that did just what Bernanke is proposing to do; they bought financial assets, notably mortgage market derivatives, for cash. Now, they turn to the taxpayer, desperate for a handout to keep them from going under.

And the baddest bank of all? Next to the Central Bank of Zimbabwe it’s the U.S. Fed. What’s it doing? It’s buying trash and paying cash. In this way, the mistakes of rich bankers are transferred to the people…via the people’s bank – the Fed. Of course, the people don’t know what’s going on. And they won’t notice either when the Fed eventually unloads these toxic assets – in the dark of night.

We have not checked the gold market this morning. Yesterday, gold held steady at $820 and appeared ready to drop into the $700 range. If gold doesn’t go up this morning investors are not paying attention.

Let’s go back over the fundamentals. The world economy is correcting. The feds are trying to stop it. They tried their Friedmanite monetary stimulation – cutting rates to zero. And they’re sweating like Sisyphus, trying to make Keynes’ fiscal stimulus work too.

Both will fail – for the reasons we explained in these Daily Reckonings. You can’t help an alcoholic by giving him free hooch. And you don’t do a fat man any good by offering him another dessert.

If America’s leaders are going to have any success at all, they have to understand the game they’re playing…and turn to someone for leadership who knows a queen from a one-eyed jack…someone who keeps an ace up his sleeve, just in case. America needs better leadership; not these clueless jokers – Bernanke and Paulson. America is blowing up a bubble in public finance; it needs someone who understands how the public finance system works.

America needs Bernie Madoff. Reports tell us that Madoff has not been arrested. He is at home, apparently watching the news on TV and waiting to hear from the gendarmes.

Why not take advantage of his free time? Why not ask him to do some community service?

*** Colleague Chris Mayer sends us this note about what has already been penned the “Indian Enron”:

“Turns out Satyam Computer cooked its books. (Satyam, ironically, means ‘truth’ in Sanskrit). That $1.1 billion in cash on the balance sheet? Well, it really turned out to be $66 million. Those operating profits of $133 million? Uh…make that $12.6 million.

“When it rains, it pours. Another blow to the already bludgeoned Indian market.

“I visited Satyam in Hyderabad during my trip in India in 2007. Nice campus. Business seemed OK. But I never like those sorts of things for investing. Basically, they provide people on the cheap. I don’t know. It’s my own bias, but I like to own stuff. Where is the copper mine?

“I remember one of the executives complimented my sunglasses. ‘I admire your choice in sunglasses,’ he said to me. ‘Wayfarers. Once you have them, you can never go back to anything else.’ I smiled politely. Mine were knockoffs. Maybe his comment was a red flag of some kind.

“What is disturbing about Satyam is the main perpetrator was the founder of the company. B. Ramalinga Raju founded Satyam in 1987. He had many admirers. And PricewaterhouseCoopers audited the books. How could it miss $1 billion in cash that wasn’t there?

“Unfortunately, there was not much investors could’ve done in this instance. This one fooled everybody. When I was in banking, we put a lot of stock in the character of the borrower. And as an investor, I value a good owner-operator. Satyam is a reminder that there is no bulletproof way to avoid occasionally finding a bad egg.

“Having said that, I wouldn’t let the Satyam affair tarnish the whole Indian market. There are still good opportunities there, as I wrote about in my last letter to my Capital & Crisis subscribers.”

*** In a broad sense, the social welfare economies of all the advanced Western nations are nothing more than Ponzi schemes. Typical is the Social Security system of the United States of America. It survives only as long as there are enough new contributors to cover the promises made to the old ones. As in any Ponzi scheme, the first ones into the system do very well. The very first beneficiaries put in little and got a lot out – depending on how long they lived. But as time goes by, the deal goes bad. Middle-aged people today would be better off with a private pension system…and the young are unlikely to see any benefits at all.

John Law never lived to see America’s system of public finance at work. Nor did Charles Ponzi. But even without a paternity test, each would have recognized it as his own.

Bernie Madoff is still alive as of this writing. He is the world’s reigning champion…title holder in the Ponzi league. Yet, compared to America’s system of public finance, his scheme was penny ante…chickenfeed. Madoff’s swindle cost investors only about $50 billion. America’s dollar swindle will cost them trillions.

The nature of the scheme is most easily understood by looking forward rather than backward. President Obama announced last week that Americans faced “trillion dollar deficits for years to come.” Already, the estimate of the deficit for 2009 was $1.18 trillion. Some experts predict a deficit over $2 trillion. At least one guesses that it will come in over $3 trillion, if not in 2009 then the following year.

These huge deficits do not seem to disturb the sleep of the homeland bound citizens. A trillion-dollar annual deficit, over 5 years, would add about $50,000 to each family’s burden of debt. But some intuition assures Americans that they will never have to pay it. By instinct alone, they know it’s a Ponzi scheme.

The day is long past when Americans could say “we owe it to ourselves.” A large part of U.S. borrowing is taken up foreigners. There is no way these enormous deficits could be financed by domestic savings. The foreigners have to pony up the dough, or the United States will run out of money. They do so in the hope of getting the money back – with interest. But how can the United States pay back the money it borrows? It has no earnings. It has no surpluses. Instead, it must borrow more to service past borrowings. It must depend on bad money to come in so the good money can go back out. It is a scheme John Law would love; Ponzi would be proud of; and Bernie Madoff can operate.

As we write nothing is more remarkable than the credulity and gullibility of the world’s patsies. Bernie Madoff’s oldest friends would come up to him and practically beg him to take their trust funds. People joined his Palm Beach country club just so to get close enough so he could separate them from their money.

And now, investors practically stumble over one another in their eagerness to lend money to world’s biggest debtor. In all the astonishing figures now crossing the big board probably none is more amazing that the current yield on U.S. Treasury paper. At barely over 2% yield on 10-year notes, investors lend money to the feds and ask nothing in return…except their money back.

Of course, every Ponzi scheme must end. And the scheme of U.S. public finance is already reaching its conclusion. As we write, lenders have still not wised up. But they’ve gotten poorer.

Two of today’s headlines from Bloomberg tell the tale:

“China’s exports decline most in a decade…”

“Trade deficit narrows…”

Trenton no longer takes. So Tianjin no longer makes. And Tianjin’s entrepreneurs no longer turn up at the central bank with piles of dollars to exchange for yuan. Which leaves China’s central bank with fewer dollars to buy up U.S. Treasury debt.

The whole system is breaking down. Most likely, it cannot be repaired. But at least Bernie Madoff will know what to do when the end comes.

Regards,

Bill Bonner
The Daily Reckoning

Deflation Bubble Update: Debunking The Velocity Of Money Myth originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

The Long-term Outlook, Three-Five Years

My outlook for this period is very bullish. Having spent both the peace and productivity dividends of the last few decades, the current direction of government policy – increasingly interventionist – threatens to set in motion the forces of capital flight… into gold. The effect of this on the dollar will be historic. There is no more honest a measurement for this forecast.

However, it is a three-five year outlook. It may start to unwind tomorrow, or perhaps not for two or three years.

Technically, the long-term chart contains no great knowledge. I don’t put much stock in the charts of any price trend spanning more than 10 years. My calls would lag major turning points by about five years. But as far as the long-term chart goes, the gold price is still in a long-term bull market.

The last highest low in the eight-year bull trend lies at around $540, which is just above the final resistance point of the previous bear – the break out point after which the gold price accelerated in 2005…the year that Bernanke was chosen to head up the Fed. Go figure – turns out gold was right about him.

However, the more normal “primary” trend support lies at around $700.

The “primary” trend is the sequence that shows up most prominently in the five-10 year (weekly or monthly) chart.

In the case of gold, it is the trend that began back seven or eight years ago.

In a normal trend, the correction lows stop at previous highs, or resistance levels, which are at the $700 mark here. Note that the bulls bumped up against that level a few times during 2006 and 2007, before ultimately breaking out. That just makes support that much more significant at this level.

However, during a correction to the primary sequence, the normal support points might fail, and it becomes difficult to figure out whether it is still a bull market at all. In other words, it is possible to see gold prices fall to $600, or even $540, even if the general bull market is still on.

Percentagewise, a correction of just such magnitude occurred in 1975. Gold prices fell from around $200 per ounce at the 1974 peak to just above $100 a year later, before soaring to new highs, and to over $600 by 1980. So the long-term technicals tell us almost nothing, except that there is room on the downside whether or not the bull market is still on.

There are two facts, however, that argue against a correction of the same magnitude today.

One is technical, sort of, and the other is fundamental.

From a technical standpoint, it should be noted that the advance in gold prices leading up to 1975 was larger (percentagewise) than the advance from the $260 low in 2001, and occurred over a shorter time frame. I don’t know how much that may be worth, but it’s something to consider.

Fundamentally speaking, moreover, simply comparing the Federal Reserve’s policies today with those of 1973-74, when it was similarly trying to rescue the world economy from a crisis that saw a 40% decline in the Dow, it cannot be denied that the current policy is far more inflationary… more bold… more off the charts, if you will. If the Fed underestimated its contribution to the inflationary events of the ’70s, as Bernanke argued in a speech about inflation last year, what is the 2008 Fed doing?

The Medium-term Outlook, One-Two Years

My outlook for this period is also quite bullish for gold, as the positive short-term effects of the government’s current policies begin to wear off and the negative effects start to set in sometime in this time frame. I know this is counterintuitive to anyone who believes what the government is doing today is beneficial, but that is really the only way it can work. In this period, you will see asset prices recover, along with commodity prices, and maybe even a fleeting boom (bubble) somewhere, like in biotech, or public works – wherever. However, the rising tide won’t come in fast or high enough to keep all the boats rising like in other bull markets, or even in significant bear market advances.

Let me distinguish here between a recovery in the economy and reflation.

I expect significant deterioration in the economic fundamentals in the medium term. However, much of it is priced in, and the effects of monetary debasement will underpin the dollar value of the soundest assets. Indeed, only the soundest equity or real estate assets will provide real protection against the confiscatory policies of governments over this period. These include gold-related assets, and some of the other important commodities, though it isn’t certain whether gold will outperform in this time frame.

It could take a full year for inflation expectations to recover from their current trough.

Moreover, although the Fed has been a leader in the reinflation program in 2008, it had not inflated nearly as much as the other central banks between 2003-2007. This fact created the illusion of a global boom that would sustain even as the U.S. economy recessed. Now it is being liquidated.

That is one of the reasons the commodity liquidation was so excessive, and also why the dollar rallied this summer. I don’t know exactly what to expect from the dollar in the next year or two, but at best, trade should continue to be choppy.

Currency markets won’t offer much opportunity for most people until the dollar’s bear market resumes – sometime after 2009, in my judgment. However, this should not hinder gold’s performance. Moreover, my feeling is that the Fed will pursue a low interest rate policy for longer than other central banks, which will eventually be the catalyst that undermines the dollar and sets it up for the final chapter in its bear market – the one that leads to a brush with hyperinflation.

Technically, the intermediate trend (i.e., the nine-month trend) is still down. The bulls have bounced off normal primary support at $700 nicely, and October tends to herald correction lows, seasonally speaking. Most of my leading indicators, including gold shares, moreover, suggest the low is in.

The technical objective of the seven-month top formed January-July 2008 was also already achieved at $695, plus or minus, suggesting the bear leg is complete. However, until the last lowest high ($940) in the downtrend is cleared, we have to tame our enthusiasm. What’s more, the current rally has stalled at the downtrend line, which intersects the current time horizon at about $890.

If the bulls can’t make it back up to at least the $940 high of September/October before the market falls back through $830, then I would worry the market MIGHT either retest its $690 low, or go lower.

The Short-term Outlook, One-Three Months

My outlook for this period is neutral to bullish, with the possibility of one more test of support in the mid-high $700s if bullish sentiment returns to Wall Street prematurely. Although the policies governments are pursuing are fundamentally and relatively bullish for gold, it is more than possible that they engender a recovery confidence in the short term that may hinder the performance of gold.

Technically, the objective of the October-November ascending triangle (bottom) in the chart below has completed at $875-880.

The last highest low in the short-term sequence is around $830. If the market falls through this level before extending the current rally to the $940 area, as mentioned above, there is the slight risk that there is something wrong with my bullish medium-term (or intermediate) outlook above.

But this risk is not that great considering all the bullish permutations that could still take shape on the chart. Still, the most likely scenario in my mind is for a pullback to somewhere between $750-800, whether or not the current two-month sequence extends to $940 in the next few weeks.

If the pullback starts now before a higher high, I’d put it at the low end of the shaded area in the chart ($740); if it starts higher, say from $940, it could stop a little higher, like $775-800.

But until we get over $900, the $830 handle should be watched, as a break through it before a higher high could trigger the liquidation of the two-month advance and start a correction to at least $775.

Good trading,

Ed Bugos
for The Daily Reckoning
January 08, 2009

The above was taken from the latest issue of Gold & Options Trader.

Before starting up Gold & Options Trader, Ed comes straight from the North American heart of the gold market – Vancouver’s Howe Street. During the nasty commodity bear market in the ’90s, Ed still guided his clients to gold profits in Argentina Gold and Arequipa, both of which became buyout bait for Barrick. He also founded the “Bugos Gold Stock Index” which included no more than 10 stocks at any time.

Poor Adolf Merckle. The tycoon must have been down to his last billion or so. He was “broken” by the credit crunch, says the Financial Times. He wrote a farewell note and stepped in front of the 7:38 Express on its way to Munich.

As far as we know, the worldwide meltdown has claimed as much as $30 trillion dollars, according to one figure we saw, but relatively few lives. That makes it a comedy…not a tragedy.

Too bad for Herr Merckle. He didn’t appreciate the humor of it.

Yesterday was a bad day for investors. They are all expecting a recovery. Instead, the patient got sicker…the Dow fell 245 points. Oil slipped down nearly $6. And gold? Et tu AU? Yes, gold fell too – down $24.

So, here is a good place to take up our guesswork about what is going on in the world’s markets and what we should expect.

It all seemed too simple, a few days ago. It was. Too simple, that is.

The world’s markets have begun a major correction. The world’s governments – led by the United States – are determined to stop it. They want people to spend like there was no tomorrow. But people are acting like every day is tomorrow. Instead of spending, they are beginning to save.

Then comes news that vacancies in malls are at a 10-year high. Malls are places where consumers buy stuff. The days of stuff-lust are over. Ergo, less retail space is needed.

But if they buy less stuff, fewer people are needed to sell stuff…to make stuff…to move stuff…to count stuff and so forth.

“Pink slips pile higher,” reports the Associated Press. Employers cut nearly 700,000 jobs in December. The total for last year, when the final counts are made, is expected to be about 2.4 million. But the job losses have barely begun. It was only at the end of 2008 that most businesses realized they were in trouble. The real job losses will come this year.

The unemployment rate in November was about 6.7%. In December, it was said to be around 7%. If you put into the number all the people who have given up looking for work, the figure would go to about 12%. But even that will seem like full employment after the tsunami of job cuts hits this year.

Since so many Americans live without substantial reserves – savings – the pressure on Misters Obama and Bernanke to ‘do something’ will increase. What can they do? Spend money.

“US deficit set for post-war record,” reports the Financial Times. Reports today tell us that Obama says deficits will go “over $1 trillion.” One estimate put it at $1.2 trillion for ‘09. We’ve seen others at $1.5 and even $2 trillion.

What they are trying to do is two things: replace private spending with public spending…and cause consumer prices to rise.

But replacing private spending with public spending, alone, is a task that would have staggered Hercules. In the past, the U.S. consumer could be counted on as the planet’s chump of last resort. He didn’t have any money. Still, when an economy slumped, he nevertheless kept spending – buying on credit. Gradually, the whole world economy came to rely on him. But now he’s stopped borrowing; in the last 12 months net consumer lending has collapsed. With neither more income nor more credit he has had to stop buying. And without buying from the U.S. consumer, the world economy is dying in a ditch.

Of course, U.S. rescue teams are on the scene. But if the U.S. government is going to save American households, it practically has to save every gadget maker in China…every call center in India…every rubber plantation in Malaysia…all the wine makers in Bordeaux – all the industries and jobs that relied on U.S. consumers. Otherwise, prices fall.

Even the United States can’t afford a bailout of this magnitude. Trillion-dollar deficits won’t be enough. Martin Wolf, in the FT, quotes a report from Levy Economics – “even with the application of almost unbelievably large fiscal stimuli, output will not increase enough to prevent unemployment from continuing to rise through the next two years.”

With rising unemployment the pressure to ‘do something’ grows. And the feds redouble their efforts. And this is where we find the basic logic our forecast:

In the fight against the global financial illness, the feds can’t cure the patient. All they can do is to deliver larger and larger doses of their quack medicine – until the patient dies.

*** A few days ago, this seemed so obvious, we worried that it was too obvious. Mr. Market doesn’t reward people for doing the too-obvious thing. He sets them up. Then he destroys them. He always seems to find a way.

The Barron’s survey told us that Wall Street’s strategists all believe stocks will go up in ‘09. The only question is how much. The bulls think they’ll go up and keep going up. The bears think they’ll go up…and then go back down again.

And currently, there’s more money on the sidelines – waiting – than there is in the game. U.S. money market funds now exceed the amount in equity funds, for the first time in 15 years. According to the dominant view, this money is just itching to get back in the game and score a major victory. Battered in ‘08…it wants to get even in ‘09. This attitude, we hasten to point out, is not what you find at the end of a bear market…it’s what you find at the beginning of one. People still think that they will make money in stocks – it’s just a matter of time! And how much!

Will Mr. Market give these people what they expect? Or what they deserve?

We don’t know, but we see two possibilities:

The first is that there is no significant rally. Instead of going up, a torrent of bad financial news washes stocks further downstream in the first quarter. There, they will stay for the next 5, 10, or 15 years…until they give up all hope of ever making any money in the stock market.

The second possibility is that stocks do rally…strongly enough that that money now on the sidelines comes back in – just in time to get wiped out by the next major leg downwards.

*** If we were in an earlier phase of the imperial cycle – such as we were in 1920 – we would ride out the bust…liquidate the mistakes…and bounce back stronger than ever.

But this is 2009…not 1920. The empire is now old and tired. It has been burdened with so many fixes, rules, privileges and safety nets it cannot compete in many key industries. It is also heavily in debt…and running a trade deficit and a public deficit that sink it further into debt each day.

At this stage, Americans do not boldly face the future…they want protection from it. And so the feds flex every flabby muscle trying to hold it back. Of course, no one can stop the future. Birds gotta fly. Fish gotta swim. And the future’s gotta happen.

All the feds can do is to make it happen in a different way. Almost certainly a worse way. More tomorrow…as we keep thinking…

*** We also promised, yesterday, to tell you how you could escape… Americans already have a huge burden of private debt. Now, their government is adding an even huger new burden of public debt. How are you going to get out of this stalag of debt? What will happen to it? What effect will it have on your investments?

Hmmm….our answers will have to wait another 24 hours…we’re out of time for today.

*** This year marks the 50th anniversary of Cuba’s revolution. How things change! As a note in the Financial Times reminds us, a half century ago a young lawyer took charge in Havana while an old general ruled in Washington. Now a young lawyer takes charge in Washington while an old general tries to hold on in Havana.

Until tomorrow,

Bill Bonner
The Daily Reckoning

Gold Price Outlook – The Long and Short of it originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

The late November rally in gold prices wasn’t quite as spectacular as mid-September’s gain, but it was still impressive. There was good follow-through too, though the momentum softened as bulls knocked on resistance near $850.

The rally was a no-brainer. There is a strong line of support at $700, which was resistance during 2006 and the first half of 2007. Moreover, the market was, and is, oversold.

The catalyst was news that the U.S. government had to bail out Citigroup, the world’s largest bank by revenues. The event has given way to new concerns about the economy, which weighed on stocks and gold this week, or at least provided an excuse to take some profits in the latter.

The big question now is whether it was just a retracement rally that ultimately gives way to new lows or whether we have seen the bottom in gold, with this rally being only the first of many to come.

I don’t think the chart can answer that question alone. Technically, the structure of the market is healthy now, and as far as the fundamentals go, gold should not remain under $1,000 for very long.

Indeed, I sense the market is building up for a very bullish move.

Allow me to touch on some of the bullish factors coming into play.

"Notwithstanding the many developments on the bailout front during the past six weeks, The New York Times, like other media outlets, continues to quote Wall Street insiders who report" [that] "’You have a market that is frozen.’ What planet do these guys live on? It certainly is not the same one to which the Federal Reserve’s data apply. I’ve been singing this song for many weeks, but I’m going to keep singing it until somebody in the news media wakes up and realizes that these ‘frozen credit market’ tales are pure hooey. Look at the data, for crissake."

- Robert Higgs, author of Crisis and Leviathan, in a recent essay on the bailout programs

The fundamentals are significantly bullish for gold. I’d like to say they are bearish for the dollar, but in truth, they are increasingly bearish for all paper currencies. Outside of the Bank of Japan, everyone is inflating madly. In the G-7, narrow money (M1) is growing at 7-10% on a year-over-year basis in the U.S., Canada, the U.K. and Australia – more in developing countries like China. And this rate is picking up now.

October’s data are not in yet for the ECB. Its balance sheet increased by some 400 billion euros during the month, which is the first big change since the second quarter, and will probably reflect in M1. The Bank of Japan started inflating M1 again in September too, after holding it steady for most of the year.

The broader monetary aggregates (i.e., those determined by the banking system at large) are growing briskly everywhere but in the U.S. and Japan, though even the latter are still growing.

Broad money in the U.S. is growing between 5-10%, depending on whether you rely on TMS or MZM or higher, if you like M3 (I don’t).

The U.S. data are good through October. Up till the end of September, as far as we are updated, the year-over-year growth rate in broad money approached 20% in Australia, its highest rate in almost 20 years. In the U.K., the broader monetary aggregates are growing at close to 14% on a year-over-year basis, which is its highest growth in almost a decade.

These growth rates are almost as bad as China’s, which is approaching 20% year over year too, again. Given these numbers, it is no surprise to me whatsoever that the yen is the strongest currency, followed by the U.S. dollar, or that the Aussie and the pound are taking the greatest beatings, along with all the other riskier currencies.

The actions governments are taking now are bearish for stocks and bullish for inflation. But they are not just bullish for inflation – they are remarkably bullish.

I don’t mean to sound happy about it. It’s just an observation that the market has yet to come to terms with. Since September, the Fed has expanded its balance sheet a total of $1.3 trillion. Of that total, it has created about $600 billion in reserves out of thin air.

Most of that is not counted in money supply, because it excludes deposits held by depository institutions. Total money supply is about $6 trillion, if you rely on the Austrian School definition (I do). It has, nevertheless, translated into growth of about $100-200 billion in new money created by the banking system since September already. Deflation is a no-show so far, and I don’t think it will arrive at all. I think history will see this as just another scare.

The Federal Reserve just announced two new programs that commit it to another $800 billion, and that is even before President-elect Obama puts his stimulus package together.

Reuters cited Wachovia’s chief economist:

"Some, however, are worried the mounting costs of the measures, which have the potential to reach several trillion dollars, could eventually fuel a troubling inflation.

"’It may mean (a) longer-run issue with inflation and inflation concerns,’ said John Silvia, chief economist at Wachovia Securities in Charlotte, N.C. ‘It may be too much of a good thing is a bad thing.’"

Ya think?

Even more inflationary, in my opinion, is the fact that the talking heads think the Fed’s latest facilities are simply not enough. They are complaining the programs do not include direct purchases of credit card debt and mortgages in the secondary market and that the Fed isn’t going to buy mortgages with maturities of more than one year. Not long ago, the Fed never bought anything but Treasury notes.

Gold bulls are going to attempt to raid Comex’s vaults by forcing delivery on their December futures contracts (Dec. 19). Who can tell how that will go? I can’t. But it’ll be interesting to watch.

Facts: The open interest in futures contracts on the Comex has fallen to its lowest level since summer 2005, breaking a general uptrend in place since 2001. From a contrarian standpoint, the short-term bottoms in these data tend to favor the buyers over the sellers. However, the statistic went into orbit during the last half of 2007 – it broke away from the upper channel on the charts, creating a bubble in appearance. The current extremity could simply be a symmetrical reaction to that extreme.

Nevertheless, this is a bearish fact, technically speaking, if it represents a lasting new trend.

It is tempting to suggest that the threat of a raid in futures contracts is causing a short squeeze.

It is true that the commercials are liquidating their short positions promptly. But the funds are increasing their short bets, and the liquidation of longs is such that the net short ratio has hardly budged off its mid-September low – which, incidentally, is a level that has coincided with strategic buying points at seven other junctures since the bull cycle began in 2001.

However, the record of this statistic in gold is unique in that during bear markets, the commercials tend to be net long (wrong) most of the time.

So the fact that they are covering their short interests on net does not necessarily presage a rally if a bear market has set in. A bear market would mean that gold prices could fall as far back as US$500.

Fundamentally, the conditions just don’t look ripe for a bear.

I don’t believe the COTs (Commitment of Traders report published by CFTC) have any real predictive value. They tell us only whether the market is too much extended one way or another; they don’t tell us how long those conditions will last. Right now, the structure of the market is healthy. The commercials are covering their shorts, the funds are getting short and the numbers basically favor the bulls. The contraction in open interest worries me a little, but it could be explained in terms of a collapse in spread trades linked to various index products.

In its most recent report on gold demand, the World Gold Council said as much in trying to explain the drop in the gold price in the context of soaring physical demand. In its third-quarter report on gold demand, the WGC noted growth in both jewelry and investment demand across the spectrum relative to both the last quarter and the year-ago quarter. I don’t want to go into a critique of the method here, except to point out that it chronically understates investment demand and overstates jewelry demand.

The inclusion of ETFs all but proves the point.

In just one year, investment demand has grown in importance from under 15% to over 30% of total gold demand, causing the deficit (supply shortfall) to grow nearly tenfold. The WGC interprets this deficit as supply coming from speculative sources, like futures trading or changes in inventories at the various exchanges – like at Comex. Thus, it calls it "inferred investment." Formerly, it called this the "balance." But as it grew, the WGC decided it meant something. What is causing it to grow, aside from growing demand in general, is that while the WGC is "identifying" new kinds of demand, it has not kept up with the various sources of supply. Gold bugs have argued for years that the supply of gold is not limited to mine production, officialdom or scrap…that it is not like other consumable commodities.

It is more useful to assume that most of the gold ever produced is held as a reserve, or store, aboveground. And if this is true, then investment demand must be much larger than the WGC calculates, or the price would, frankly, never go up. If the WGC is smart enough to include producer hedging (or dehedging) in the equation, it should also include a measure of demand that expresses itself through all the exchanges and bring itself up to speed on all the sources that supply the market. It assumes that jewelry demand dominates the market, which is incorrect, but even if it were, it still has the wrong idea.

Jewelry demand may be price sensitive in the short term, yet it has grown every year, at successively higher prices, since the bull market began. Despite my objections, however, I am in total agreement with the council’s explanation why gold prices have fallen despite the evidence of soaring gold demand:

"Notably, the selling captured by the [inferred] investment category was mainly by investors with a short-term focus. It largely reflects the fact that gold was caught in the downdraft of other commodities and other assets – it does not reflect a questioning of gold’s value or role as a safe haven. The strong buying in the ETF and bar and coin markets during the quarter, which reflects investors with largely a longer-term focus, suggests that investor belief in gold’s role as a safe haven and store of value is stronger than ever."

No wonder the commercials are covering. The establishment is getting hot for gold.

JP Morgan’s gold analysts "urged" investors to stock up on gold this month, citing counterparty risk and tight supplies.

Citigroup’s foreign exchange group also put out a bullish tout.

Well, that’s an understatement, actually. "[Gold] continues to look like a bull market to us. We continue to believe that a move of similar percentage to that seen in the 1976-1980 bull market can be seen, which would suggest a price north of $2,000," Citigroup’s FX group said last week.

What I found particularly intriguing, besides the timing of these calls, was that they both discounted the dollar. That is, they noted, as I have in the past, that the foreign exchange value of the dollar may not be important at this stage. Morgan said, "It is not an absolute given that a rally in gold means a falling U.S. dollar," while Citigroup pointed out, as I also have, examples of just such a situation during the 1970s.

Anyway, it’s not a sure thing yet, and it all makes great fodder for the bull market in gold.

Good Trading,

Ed Bugos
for The Daily Reckoning
December 04, 2008

The above was taken from the latest issue of Gold & Options Trader.

Before starting up Gold & Options Trader, Ed comes straight from the North American heart of the gold market – Vancouver’s Howe Street. During the nasty commodity bear market in the ’90s, Ed still guided his clients to gold profits in Argentina Gold and Arequipa, both of which became buyout bait for Barrick. He also founded the "Bugos Gold Stock Index" which included no more than 10 stocks at any time.

"We’ve seen the bottom for this part of the cycle," said our old friend Issy Bacher. He took out a chart.

"See this…" He pointed to a series of undulations.

"Here’s the bottom…at 7,400 on the Dow. I don’t have a crystal ball. But the charts are showing that this is the bottom for this cycle. I don’t know how far this rally will run, but it could be very impressive and could last for quite a while."

Yesterday, the Dow rose again – up 172 points. Oil remained unchanged at $46 a barrel. The dollar went nowhere…at $1.27 per euro. And bond yields are still exceptionally, remarkably, and probably insanely, low. The U.S. 10-year T-Note yields 2.67%. Even at the lowest yields in history, people buy more of them.

And if you’re worried about inflation, you can buy the inflation-adjusted bonds – the TIPS – at an exceptionally low premium. When we looked a week or so ago, the cost of protecting yourself against inflation over the next 10 years was less than 1% per year (the nominal yield you give up in order to get the TIPS rather than a regular 10-year notes). In other words, investors expect inflation to remain below 1% for the next 10 years. How likely is that? We don’t know… But inflation protection at 1% sounds like a bargain to us…

But back to our subject…finally, we have an Obama Bounce.

How much? For how long?

We don’t know that either. But we are hoping it will retrace about half of the losses from the high. That will put the Dow back over 10,000… The big rally following the ‘29 crash lasted from November to April ‘30. It recovered 60% of the losses. Then, the bottom fell out again.

Yes, the worst is still ahead. We are only at the beginning of this correction. Stocks and commodities are the cutting edge. And it’s fun to watch Wall Street stumble. But now, we get to watch the economy bleed. The scene will turn grim.

A report from yesterday’s news tells us that the private sector hacked off 250,000 jobs in November. At that rate, 3 million jobs would be lost in a year. When people lose their jobs, life gets hard. They turn to savings. But what savings? Few people saved in the Bubble Epoque. Saving for a rainy day just didn’t seem necessary – it never rained. Why bother? Besides, in an emergency there was always a job available at McDonalds…and credit cards.

But now the monsoons have come. The drains back up…and even Mickey D is taking down his ‘Help Wanted’ sign. And credit cards? Who can afford more credit card debt?

"Nobody really likes firing people, but you have to do it," explained a colleague. "It’s a little like tossing people out of a crowded lifeboat. If you do, they drown. If you don’t, we all drown.

"But firing people now is particularly bad. Because you know there isn’t much chance that they’ll be rehired anywhere else. Most businesses are firing people as fast as they can. I don’t know any that are hiring. So, you have to figure that when you fire someone he’s going to be out of work for the duration of the recession…and how long could that be? A year? Two years?"

It might be 10 years, for all we know. These balance sheet recessions take time. Remember, people are getting fired for a very good reason: businesses need to correct their balance sheets…and redress their business models. They have to reduce expenses, because their incomes are falling. Shoppers may still be trampling people to get at half-priced CDs…and toaster ovens at 33% off…but, overall, they’re spending less money. That means lower sales…and fewer jobs.

This is just how balance sheet recessions work.

*** Stocks may have ended on a modest high note yesterday, but at the open today, the Dow, S&P and NASDAQ were all down on a flurry of negative data.

First, just ahead of tomorrow’s "Jobs Jamboree", AT&T, DuPont and a slew of other major U.S. companies announced 20,000 job cuts. You know the markets didn’t like that piece of news…

Next, weak retail sales yanked the stock indices back down, as retailers that would usually be having a good run of it this time of the year, such as Target and Abercrombie & Fitch, reported a significant fall in sales.

And finally, the Big Three are at it again. The CEOs of Chrysler, GM and Ford are back on the Hill, hands outstretched, looking for an even bigger handout.

Two weeks ago, you’ll recall, the U.S. automakers were arguing for a mere $25 billion in federal loans…but now, they want $34 billion. They are warning Congress that they could possibly run out of the money they need to run their business before the end of the year if they don’t get this bailout.

"What a coincidence," quips Addison. "The automakers showed up with their tin cans the same day monthly auto sales data was published. Sales were, umn, slow, across the board.

"Chrysler led the way this time, as November sales fell 47% year over year. GM was close behind, down 41%. The rest of the world’s major automakers were right on their heels. Ford, Honda, Nissan and Toyota all fell over 31%.

"Total new car and truck sales fell to an annual rate of 10.2 million, the lowest since 1982. Last year, Americans bought over 16 million vehicles."

*** Trying to undo some of the damage they did at their last appearance before Congress, the Big Three CEOs "drove fuel efficient hybrids to Washington, rather than flying in on corporate jets, as they did two weeks ago," reports CNN Money.com.

They are going to have to try a little harder than that to erase the negative public sentiment. Continues CNN Money.com:

"A CNN/Opinion Research Corp. poll of nearly 1,100 Americans conducted earlier this week found 61% oppose a bailout, while only 36% support it. Even in the Midwest, home to most of the automakers’ remaining plants, 53% of those polled opposed federal help.

"That was a stunning reversal of polls taken before the CEOs last trip to Capitol Hill. A poll Nov. 11 and 12 conducted by Peter D. Hart Research Associates found 55% supported federal assistance for automakers at that time, and only 30% who believed they should not get federal help."

Could it be? Have the American people finally gotten sick of the constant bailouts? We’ll have to wait and see…

*** "South Africa is a special place," began an old friend. "We’ve had the same sorts of things that you’ve had in America. People got 100% mortgages. House prices soared; they went up more than 50% in a single year. And now the bubble has popped.

"We’re largely a resource economy. Mining is very big here. So our bubble didn’t pop as soon as the bubble in the U.S. and the U.K. We kept going as long as commodity prices were going up. But that fell apart last June, and it’s been down ever since.

"And now there are some good deals in South Africa. The boom didn’t go on long enough to allow the mining companies to increase production very much, so the world is still running out of these things industrial or semi-precious metals – such as platinum and chrome. We’re going to see a huge squeeze on supplies in the years ahead. So, we have a potentially very interesting situation, in which the mining companies have sold off so much that you can get a 10% dividend from some of them…such as Impala, I believe…you get paid very well to wait for the next boom. And when it comes, it could be very big. Very big."

*** No time to do any serious thinking this morning…we’re on our way to Mumbai. Stay tuned.

Until then,

Bill Bonner
The Daily Reckoning

Gold Looks Bullish as Dust Settles originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

"Karl Marx (1818-1883) originated the idea that recurrent crises are inherent in the unhampered (free) market economy. Mises has shown that ‘the trade cycle is… on the contrary, the inevitable effect of manipulation of the money market’"
- Percy L. Greaves Jr., Mises Made Easier

Occasionally I hear the odd guest on CNBC or Bloomberg Radio who lays blame for the crisis in exactly the right place – the Federal Reserve System in the U.S….or central banking more broadly.

These extremely influential institutions ostensibly exist to regulate prices, employment and interest rates by way of control over the money supply. They do this by inflating bank reserve credit, on which the banks can pyramid, thus essentially abrogating the role of interest rate determination by the market.

That is, the central bank tries to determine interest rates as far as it can. The rationale for this policy is to attain full employment and price stability, and to otherwise manage economic affairs.

Any economist whose lenses aren’t blurred by the fatal errors of the neo-classical doctrines is immediately capable of spotting the problem with that policy foundation. Unemployment could scarcely exist on a free market, where the government did not interfere with the price of labor. Just like shortages of goods cannot really exist in a market where their price is free to adjust to the reality of existing conditions, there can be no excess labor unless the government intervenes to artificially boost its price. It’s the same principle. It is a simple economic fact – free of political considerations. Labor is an economic good primarily because it is scarce.

Moreover, whether we are talking about labor legislation or the central bank trying to manage growth, prices and interest rates, it amounts to economic management, even planning.

The apparent effect of the policy is to bring about a boom in investment and consumption… the building up of bubble companies and uneconomic enterprises relying on the continued increases in the selling prices of the goods they deal in – be it widgets, homes or securities.

These price increases are afforded by regular money debasement, which is one of the economic consequences of an increase in the supply of money in particular. So it is illusory.

In reality, as Rothbard points out, the boom "is actually a period of wasteful misinvestment. It is the time when errors are made, due to bank credit’s tampering with the free market".

So this policy, and the booms it engenders, crowds out real savings (by pushing rates below market), and investment comes to rely on the continued "stimulus" of money creation or from borrowing overseas.

Ultimately, it further lays the seeds of its own demise because the process invariably arrives at a point at which the central bank must desist if it does not want to prompt a run of confidence in its notes, leading to hyperinflation.

This is why we say the policy is "unsustainable."

Thus it tries to withdraw the stimulus or "tighten" money and credit – explaining that the overheated economy might produce inflation. The error in its thinking is that it is managing a delicate balance between price stability and growth…that it checks market failures, and can know the unknowable (the future).

In fact, almost all economists would agree, it cannot produce growth. It’s like the analogy of pushing on a string.

The Fed’s policy can only increase employment by decreasing the relative cost of labor through inflation (the expansion of money supply relative to demand). And as one of the largest of interventions conducted by government policy, it only produces more instability – i.e. the boom-bust cycle as well as interest rate and foreign exchange volatility eventually.

Technically, tampering with the rate of interest produces disequilibrium as a mismatch between consumer preferences and producers’ investment plans – during the boom phases. Effectively, it taxes long run growth, and is but a massive redistribution of wealth from savers to borrowers and speculators.

The bust, which often begins with the onset of a financial crisis, brings much pain, and threatens job losses on a wide-scale. But this is because the artificially low rate of interest produced by the previous policy, which could not be sustained, produced waste, a "cluster of error" as Rothbard called it. This "malinvestment" or uneconomic activity is essentially exposed as the subsidy is withdrawn.

In his book, America’s Great Depression, Rothbard posits the error in Marx’s reasoning,

"In the purely free and unhampered market, there will be no cluster of errors, since trained entrepreneurs will not all make errors at the same time."

What you see then is basically the widespread failure of parasitic enterprises that could not survive on their own – without the handouts and support of the central bank. This is the empirical evidence that should indict any inflation policy. But, the bust still merely represents a return to natural market ratios.

"The ‘depression’ is actually the process by which the economy adjusts to the wastes and errors of the boom, and reestablishes efficient service of consumer desires. The adjustment process consists in rapid liquidation of the wasteful investments" (Rothbard)

It follows then, that "Attempts to interfere with free and flexible prices, wage and interest rates prevent recovery and prolong the depression period" (Mises Made Easier)

Efforts to stabilize the bust with even more inflation effectively prevent the liquidation of uneconomic enterprises necessary to return the economy to equilibrium, where markets reflect actual conditions.

Now, I’m not a policy maker. I don’t want to suggest the best way to fix the world or argue why these theories are true. My chief concern is the future. And the evidence that most people would side with Marx on this (over Mises et al) is all I need to predict more inflation, war and higher gold prices.

Joe Public can’t for the life of him figure out why it matters if interest rates are 1.5% or 1%.

He cannot connect the escalating price at the pump to the process of money creation required to bring about such a modest change in the interest rate. The tech bust was the fault of irrational speculators, and greedy investment bankers. The housing bust is blamed on Wall Street’s larceny, his mortgage and real estate brokers, or the thrust toward deregulation. The painful increase in commodity prices is caused by too much growth. The growing trade deficit is caused by new competition from foreign countries. And so on.

For, Joe takes his cue not from Mises, but from the media and political classes under heavy influence by the progressive institutions.

Political leaders in Europe, meanwhile, are taking full advantage of Joe to wage a new war on capitalism from the left on grounds that American style capitalism is in dire need of more regulation.

This is the great evil of the inflation policy.

It is insidious. The great economists have all recognized this truth. It only produces the opposite of what it claims to accomplish. It also funds the growth of government and anti-capitalist sentiment, and other confused ideas that may lead, ultimately, to the general disintegration in the division of labor, the fabric of society. It promotes moral degradation and corruption, conflict, and finances wars. It is 80% of what’s wrong with the world.

But for the most part, the voices of reason that point to this cause are trampled over by the rhetoric of the larger political class, which fear mongers people into clamoring for more money and credit.

This truth is evident in the Fed’s actions. It has abandoned any remnants of conservatism, as have the other central banks worldwide. The helicopter blades are in full swing. So any enthusiasm about the world having reached this place where it is ready to turn a new leaf must be tempered by this fact.

The voices of reason, though on the beltway, are still only voices in the wilderness.

This alone suggests we are going to continue to see more inflation, taxes and government. The scary part is that this process is accelerating.

The next bubble may well be in gold.

Good trading,

Ed Bugos
for The Daily Reckoning
November 19, 2008

Before starting up Gold & Options Trader, Ed comes straight from the North American heart of the gold market – Vancouver’s Howe Street. During the nasty commodity bear market in the ’90s, Ed still guided his clients to gold profits in Argentina Gold and Arequipa, both of which became buyout bait for Barrick. He also founded the "Bugos Gold Stock Index" which included no more than 10 stocks at any time.

Yes, dear reader, we are going where no man ever went before …into the wild.

All around us is virgin territory. No one has ever been here before. But watch out, these virgins are vicious amazons. In this wild place, you can forget living it up. Don’t even think about getting rich. Riches? If you’ve got ‘em…hide ‘em. Luxury? Who needs it anyway? The best you’ll be able to do is survive. And then, maybe, years from now, we can put our financial lives back together again…and get on with things…

Never before have seen so much wealth disappear in such a short time. The latest report from MSCI shows the planet’s losses from the sell-off of equities has now reached more than $30 trillion – or more than twice the GDP of the U.S.A.!

And this is just stocks. Reported write-downs, write-offs and credit losses have reached almost a trillion. And losses of housing prices in the United States alone – the only country for which we have reliable figures – has reached about $5 trillion.

Nor have we ever seen such a rapid reaction. In the space of a few months, people have gone from believing that nothing could go wrong to thinking that there’s nothing that won’t go wrong. Where once they thought that free-market capitalism would make them rich…they now believe that the government can save them from getting poor. And where only a year ago they thought the world’s globalized economy would always give them everything they needed "just in time," they now believe they better keep a few sheckels on hand "just in case."

And just look at the bonds! A few months ago, investors stretched for yields. Now, it’s safety they reach for. They dump corporate bonds for fear they may be "toxic," and grab U.S. Treasury debt with both hands. Investors now seem to have an unqualified trust in the full faith and credit of the world’s largest debtor. Yields on 91-day T-bills have fallen to 0.11% – scarcely a tenth of one percent!

Yes, dear reader, the "Great Unwind"…the "Big Bust"…the "Great De-leveraging" – call it what you want; we’ve never seen anything like it.

The Dow rose 151 points yesterday – a limp and pathetic little attempt buck the downward trend. Gold lost $6.80…leaving it at $735.

China’s stock market had managed an 18% rebound…following the announcement of its half-trillion dollar bailout plan. But yesterday, Chinese stocks were collapsing again.

The latest news from America tells us that housing prices are still going down in 4 out of 5 cities. Homebuilders’ wives are hiding the shotguns and pouring out the whiskey; their husbands’ confidence has never been lower, according to this morning’s news report.

Big towns…little towns…in the sophisticated cities and out in bumpkin country, the story is the same. The Wall Street Journal tells us that the "fall in crop prices" is putting an end to the boom in the boonies.

U.S. producer prices fell 2.8% in October – the most they’ve ever fallen. And the Big Three automakers say that if they don’t get some help soon, the results will be "catastrophic."

Meanwhile, over on the sunny California coast, the whole state is going up in smoke…it’s not only going broke, it’s burning up.

"I have to dust the ash off my car every morning," reports daughter Maria, recently arrived in LA and hoping to make it big in the motion pictures. "It’s eerie…there’s always a little smoke and soot in the air…"

Not only is the bust unlike anything we’ve ever seen before…so is the planet-wide effort to stop it. All over the globe, the feds are going ‘into the wild’ with extraordinary measures. They’re mobilizing troops to fight the crisis in the boardrooms. They’ll fight it in the stock markets. They’ll fight it at home – with house-to-house combat to stop foreclosures and defaults. They’ll fight it abroad – the U.S. government is even loaning money to foreign governments! They’ll fight it with loans and giveaways. They’ll fight it with fiscal policy. They’ll fight it with monetary policy. They’ll fight it with every weapon available to them – including the printing press.

And they will lose.

*** To give you an idea of the wild measures undertaken by the feds, we look at what is happening at the world’s leading bank – the U.S. Federal Reserve.

The short form of how the Fed operates is this: it holds a certain amount of securities in its vault; this is the cornerstone capital – or monetary base – of the whole banking structure. How does it get this capital? It buys it, creating the money to pay for it as necessary. Naturally, the Fed doesn’t want to create too much money or the inflation rate would get out of control and economists would point their fingers accusingly. But now, people fear dandruff more than inflation. So, the Fed has gone wild.

From the day of its founding in 1913 to September 24, 2008 the Fed’s assets – the aforementioned cornerstone capital for the US financial system – grew to $1 trillion. By November 14, 2008 the amount had grown to over $2 trillion. And in a speech in Texas, the head of the Dallas branch of the Fed said he expected the total to reach $3 trillion by year-end.

For the moment, this explosion of monetary inflation is hardly noticed. Asset deflation has the headlines. People worry about having too few dollars, not about having too many.

Comes the news this morning that U.S. business chiefs are asking the up-coming Obama administration for another $500 billion ’stimulus’ program. They’ll get it. And much more. Trillions worth.

Trying to stimulate the economy with easier credit in the early 2000s, Alan Greenspan overdid it. He gave the world the credit it wanted, and created the biggest bubble in human history.

Now that bubble is collapsing and his successor – Ben Bernanke – is confronted with a new problem. Now it is cash that people want – income to pay their debts! Bernanke will give them what they want. And, most likely, he will overdo it too.

*** At a recent hearing on Treasury Department use of government assistance funds, Ron Paul, who is well-known for often calling out the Federal Reserve chairman on their liberal use of the printing press, took on Big Ben. Here is the transcript of their interaction, in case you missed the C-SPAN coverage:

Ron Paul: The Austrian free market economists had predicted all these problems would come, and they were certainly correct in everything that they said. Of course they’re not very satisfied including myself with the so-called solutions, because it looks like we’re spending a lot of energy and a lot of money trying to patch a system together that is unworkable.

So we have Congress spending a lot of money, we have Treasury very much involved in trying to pick and choose which worthless asset that we’re going to buy, and of course the Federal Reserve is involved in injecting trillions of dollars that nobody seems to be keeping track of.

But what we’re failing to do I think is to recognize that the system no longer works, but I can understand why we do this because if Congress couldn’t do this and if the Fed couldn’t do this and Treasury couldn’t do this, it would make us all irrelevant. And instead of looking at the causes of this, and then finding the solutions aren’t going to be found here, we have to make ourselves feel pretty important.

But I think there’s another reason we think we’re pretty important, it’s because in a way our interference in the market corrections that tried to come about since 1971 seem to work. I mean, the failure was established in 1971 with a system that had no way of automatically correcting the balance of payment and the current account deficits.

And that’s where the problems have been, and economists – whether they were left or right or middle – over the last several decades have always said, this current account deficit is a big problem. And now it’s totally out of hand. So here we are struggling with all these rules and shifting back and forth and really getting nowhere.

My question is directed toward, when we come to the full realization that the system is unworkable, what are we going to do, what have you thought about doing, and already we see talk in the newspapers. We see articles about a new international world reserve currency, and to me that’s pretty important, because the fiat dollar reserve system is not going to work anymore, and that’s the information that we have to accept and decide what we’re going to do in the future.

Also, this is not new in history. Currencies have failed, financial systems have failed, and generally, to restore the confidence that everybody is talking about, they usually have to go back to a currency with integrity to it, rather than just fiat money.

And, you know, the stages is there. It’s not impossible, already the central banks of the world still own 15% of all the gold that was ever mined in all of history. So they hold on to this gold for some reason, and therefore something has to give, or are we going to keep trying to waste more money and time patching this system together.

Just last week there was a report that Iran purchased 75 billion dollars worth of gold, took their reserves out of Europe, bought gold and put it in Asia. So is that a sign of the times, is that moving on?

My question is, in your meetings, and you had a meeting just recently with other central bankers, does this thought come up about a new international world reserve currency, and if so, does the subject of gold ever come up?

How do you restore the confidence? Have you recently had conversations with any central banker, and is there a move on to replace the dollar system, because the dollar system is essentially declared dead, because it’s not working, but this indeed was predictable because of these tremendous imbalances that were never allowed to be corrected, and they were always patched up. We always came in. We’d spend, we’d inflate, we would run up deficits, and since ‘71 we’ve been able to correct these problems.

Could you tell me what kind of conversations you’ve had regarding a new reserve currency?

Ben Bernanke: Yes, Congressman. I don’t think the dollar system is dead. I think the dollar remains the premier international currency. We’ve seen a good deal of appreciation in the dollar recently during the crisis precisely because there’s been a lot of interest in the safe haven and the liquidity of dollar markets.

And the Federal Reserve has been engaged in swap agreements to make sure there’s enough dollar liquidity in other countries because the need for dollars is so strong. So I think the dollar system remains quite strong.

I do agree with you very much on one point, which is about the current accounts. The current account imbalances have proved to a very serious problem. It was in fact the large capital inflows in those current accounts which created a lot of the financial imbalances we saw and have led to some of the problems we are seeing, and one of the silver linings in this huge grey cloud is that we’re seeing some improvement and greater balance in our current account deficits.

Ron Paul: But does the subject of a new regime ever come up?

Ben Bernanke: No, it doesn’t.

Ron Paul: And does the subject of gold ever come up in any of your conversations?

Ben Bernanke: Only in terms of the sales that the central banks are planning.

The I.O.U.S.A. team interviewed the Congressman for the documentary. If you didn’t have a chance to see the film when it was in theaters, now’s your chance. We are offering an exclusive package to long time DR sufferers: you can get the DVD (before it is released to the general public), the companion book and your own personal bailout package.

*** GWB – you can’t say we didn’t warn you. A top British judge has just announced that he considers the Bush administration’s attack on Iraq as a violation of international law. Years from now, George W. Bush is likely to be charged with war crimes and human rights violations. Normally, this would pose no problem. A former U.S. president could expect the protection of the U.S. government. But as Americans sink into depression they are not likely to feel kindly towards their ex-president. They will blame him for the decline of their incomes…and for the fall of their empire. They are likely to want to cooperate with the world’s new institutions…and throw over their own former commander-in-chief.

Advice to GWB: Go back to Texas. Don’t ever leave home again.

*** Colleague Patrick Cox, at Breakthrough Technology Alert offers some rare optimism into this otherwise downright gloomy market:

"Yes, we have been swindled by politicians who pushed the U.S. banking system into the shape it’s in today. The people who tried to stop the meltdown have utterly failed to explain the root of the problem to the American people. We’ve officially entered recession now and policymakers will do little to address the real problems.

"Though the hit the economy has suffered recently pales in comparison with the drain on world resources associated with that war, our situation is similar. We are at a point of incredible opportunities.

"The reason is, in a word, science. The accelerating pace of breakthrough discoveries will deliver economic benefits that few fathom today. While the entire world will gain from these discoveries, investors who understand what we are going through now will profit most and earliest. Even better, the return on these stocks will be so great that even relatively modest investments will produce fortunes.

"Let me give you a few hints about the shape of things to come. Just in the last few weeks, two groups of scientists announced the discovery of microorganisms that produce biodiesel naturally. Professor Gary Strobel from Montana State University discovered a fungus deep in the Patagonian rain forests of Argentina. This organism naturally produces the long chain hydrocarbons needed to create fuels.

"Even bigger news is coming on the medical front. I predict that real stem cell therapies will be offered offshore within the year. Currently, there is a billion-dollar industry offering stem cell snake oil, but real lifesaving and life-extending therapies are already available in the laboratory. These therapies are relatively inexpensive to produce and will revolutionize medicine. Even the FDA will come around when wealthy early adopters begin reporting true rejuvenation results. By the end of Obama’s first term, we will see SC and other therapies that will radically cut the cost of treating horrendously expensive illnesses."

Patrick has been alerting us to a breakthrough that could change the way we view modern medicine. And when news breaks – which is rumored to happen tonight – those who have gotten in on this revolutionary idea stand to make some pretty major gains.

*** We got a letter from Her Majesty’s government.

"Winter Fuel Payments…don’t miss out!"

Yes, dear reader, this is how societies collapse. People invent problems. Then, they find solutions to the problems. Then, the solutions cause more problems. And finally the cost of all the solutions brings the whole system falling down.

A news report out today tells us that the weekend will be cold. An "arctic blast" is said to be on its way.

Of course, some parts of the city already feel as though they were in a nuclear winter. London’s main industry is finance. And finance has iced up. A headline in yesterday’s paper told us that London is expected to lose 370,000 jobs over the next two years.

But thank God for the world improvers:

"Our records show that you may become eligible for a payment this winter," begins the letter.

Why? Because your editor is enrolled in the Britain’s national health service (a requirement for employment). NHS records must have revealed to the authorities that your editor turned 60 in September. Accordingly, he is eligible for 125 pounds to help him with his heating costs this winter.

Imagine the miserable bureaucrats administering this program. They have computers to program…letters to write…records to keep…internal procedures to devise, administer and respect. They have to hire people…and then support them for the rest of their lives, paying for pensions and holiday, just like any other business. Then, they have to work out internal disputes…make sure the coffee maker is working properly…and organize an annual Christmas party. It probably costs more than 125 pounds to send out each check!

And why should someone over 60 get money and not someone under 30? The older person has had 30 more years to stuff newspaper in the cracks, firewood in his garage and money in his bank account. If he’s cold this winter…it’s his own damn fault.

But if you’re going to give him money to help him keep warm, why not some extra money to help him with his eating needs? He has to eat, doesn’t he? And why doesn’t HM Government just send him a bottle of Chateau Margaux? Maybe 1985. To help him with his drinking needs.

Until tomorrow,

Bill Bonner
The Daily Reckoning

Voices of Reason Still in the Wilderness originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

Investors are sure getting their share of information overload.

In just two months, the economic landscape in America has markedly changed. It will change in the rest of the world, too. And not for the better, despite the pleasantly surprising news that the U.S. House of Representatives actually rejected the $700 billion bailout – the Treasury’s latest harebrained idea.

Maybe it demonstrates there is a limit to how much the American people will tolerate, at least from the greedy capitalists on Wall Street. After all, it is not like the plan was defeated because the public has grown tired of government interventions and schemes. It just did not like bailing out the brokers.

Still, the markets had not expected this outcome. And as you saw, there was a lot of momentum behind the bailout news.

That’s why the Dow was off some 700 points Monday. When I heard they were going to raise the money for the plan from foreign governments, as opposed to printing it, I started drafting plans for a rally on Wall Street that might produce another pullback in gold.

However, I still thought it was going through. Notwithstanding such unexpected surprises, markets are generally moving in the direction that we expected. In the end, gold shrugged off the reversals in the dollar and oil.

Now, I think that the failure of this bailout increases the probability of a more inflationary solution.

The Fed and Treasury have worked very hard to outwit us gold bugs by doing everything possible to support the boom without resorting to the "helicopter" option, right up to the final draft of the bailout.

But believe me when I tell you I feel little personal joy about that prospect.

Gold bulls gave back very little following the Sept. 17 one-day reversal. Including the following day, the market rallied $145 points from trough to peak on the news of the Lehman Bros. and AIG blunders.

In the days that followed, the market developed a bullish formation that technicians refer to as an ascending triangle – a pattern of higher lows closing in on a horizontal line of resistance highs.

We can’t say how the Fed and Treasury are going to react to this. I’m sure it hurt in the right places, and when people get hurt – wherever – their reactions are even less predictable than usual.

From my perch, in a quiet suburb on the outskirts of Vancouver, where Agora Financial hosts an annual investment conference, it looks as if they are out of ideas, or at least their best ones.

The printing press is all they’ve got (aside from the much-feared laissez-faire option). So sit tight. Gold is the safest asset class to be in right now. In the current environment, producing assets reign supreme.

In fact, I recently wrote of a buy signal in the major gold shares. This may not be what you want to hear if you are loaded up with exploration stocks. However, in the context of a fear-driven gold price advance, in which stock prices are generally in decline, the companies most likely to benefit are those that can translate the gain in gold prices most immediately to their own bottom lines. These include all producers, junior and major alike, although at first, the market will probably prefer the safer large caps.

But as they rise, the pressure will build and spread to the emerging producers and even development assets, if they are close enough to production. Exploration stocks have a life of their own. There are terrific buys in that space today too, but I believe the values in the near production stages offer just as much upside with a little less risk here. The right strategy will outperform gold and the average major gold stock over time. The million-dollar question, therefore, is which juniors offer the best risk-reward?

I’ve looked through hundreds of companies over the past two months alone.

I’ve assessed our general strategy and wondered whether to sell some of the stocks in our portfolio.

In fact, the reason this month’s issue is late is that I have gone back to the drawing board a few times in the search for the most appropriate investment strategy in this space.

Notwithstanding the shifting macro winds, I think that in light of the significantly improved gold price outlook, it makes sense to hold onto the bulk-tonnage low-grade development assets in our portfolio.

However, the demoralized level of sentiment has opened up a new window of opportunity to cherry-pick those top-quality gold stocks for which we normally must "pay up." These are the "alphas." These are companies that either can generate cash flows internally, by actually mining, or are led by people with deep pockets or credibility… companies with strong balance sheets and diversified portfolios of high-quality assets in politically secure regions… with growth potential whose premium is lost in the current slaughtering.

They are not cheap relative to their peers, but they probably never will be.

They are cheap in the context of the gold price cycle.

And this may be one of the few opportunities we get to accumulate such assets at favorable terms. The market has discounted their growth profiles and prospects for higher gold prices as it has with any others.

Regards,

Ed Bugos
for The Daily Reckoning
October 01, 2008

P.S. I’ll be rolling a good opportunity out in Gold & Options Trader within the week, so stay tuned.

Before starting up Gold & Options Trader, Ed comes straight from the North American heart of the gold market – Vancouver’s Howe Street. During the nasty commodity bear market in the ’90s, Ed still guided his clients to gold profits in Argentina Gold and Arequipa, both of which became buyout bait for Barrick. He also founded the "Bugos Gold Stock Index" which included no more than 10 stocks at any time.

During the crash of ‘29, Winston Churchill, who just happened to be in New York at the time reported:

"A gentleman cast himself down 15 storeys and was dashed to pieces."

This past weekend a London banker "haunted by the pressures of dealing with the credit crunch," according to the Daily Mail, was the first reported victim of the credit crisis. He "died in the path of a 100mph express train at the Taplow railway station," said the paper.

Churchill had a way with words:

"The United States invariably does the right thing, after having exhausted every other alternative," he said.

And yesterday, the stock market thought Churchill was right. Congress was running out of time…and alternatives. Investors figured the fix would be in soon.

The party line is that the world needs a bailout. Everyone says so. And now the Senate, in its magisterial wisdom, has vowed to get back on the case until it comes up with something. That’s probably why stocks shot up yesterday. Investors know the money’s on its way. So, the Dow went up more than 400 points. Oil went back to $100. The dollar rose against the euro.

Churchill was not a great military strategist, but when the chips were down, he had the words that Britain needed. At Britain’s finest hour, Winston Churchill led the nation. At least, that is the party line…

And now the chips are down in the world’s financial markets. And now the party line is that Congress has made a big mistake…

"The House failed to lead and the market plunged," says the lead editorial in today’s International Herald Tribune.

We looked on the facing page for our favorite columnist, Thomas L. Friedman. Amid all this doom and gloom talk, we thought Friedman’s views might give us some comic relief. Instead, we found David Brooks. Like Friedman, Brooks is a world-improver. And like Friedman, he has little curiosity about the way Homo sapiens economensis actually functions. Instead, the two of them always have some gimcrack plan for solving the world’s problems – ignoring the fact that the problems were generally caused by their last gimcrack plan.

Naturally, Brooks is for a bailout. Predictably, he cites Franklin Roosevelt as a role model. "He understood that his first job was to restore confidence…" he writes. He is surely unaware that it was too much confidence that got the United States into its present jamb. And it has probably never occurred to him that the kind of ersatz swagger you get from a scalawag politician is not exactly bankable. Nor does he seem to recognize Roosevelt’s confidence-building programs were such feebleminded claptrap that they actually retarded a recovery. What got the U.S. economy going at full speed again was the biggest public works program of all time – WWII.

Brooks calls Congressmen who voted against the bailout ‘nihilists.’ What is it with these neo-cons? Friedman calls people who object to the reckless use of U.S. military power in the Mideast "nihilists." What’s nihilistic about either group? We have no idea. We assume they mean "stupid." But can’t they think of any other pejoratives? How about meatheads…or dimwits…or goofballs? These fellows need a little of Churchill’s magic!

Brooks has no clue about the world’s financial system or how it should be managed. But he knows what he likes. And what he likes is what all political scoundrels like – authority.

"…now we have a crisis of political authority on top of the crisis of financial authority…."

We understand the words. We understand the practice. What eludes us is the theory.

Political authorities boss other people around. What do financial authorities do? Isn’t an economy a different thing…isn’t it based on persuasion rather than force…on markets rather than politics? If we think a potato is worth 50 cents. And the farmer agrees to sell it to us for 50 cents, what business does a financial authority have telling us both that the price is a dollar? The world has been down that road. The Soviets tried financial authority for 70 years – look where it got them.

At least Brooks is hip to the danger.

"What we need in this situation is authority. Not heavy-handed government regulation, but the steady and powerful hand of some public institutions that can guard against the corrupting influences of sloppy money and then prevent destructive contagions when the credit dries up."

Thus does he line up the words. One after another…leading nowhere. Again, we want to know more about the theory. What does this powerful hand do? What does it look like? And how is the fat mitt of a political appointee less susceptible to the corrupting influences than the jittery hands of a man whose own money is on the line? And where is money ever sloppier than in the public till?

But there is no point in fighting against it. The battle against a bailout is a lost cause. Yesterday’s report from Shiller/Case showed house prices are falling faster than ever – down 16.3% from a year ago. George W. Bush approved a loan to the auto industry – it too is in trouble.

Need money? Here’s a bank that can’t say no…

From a blog… "If we can socialize the banking industry, why can’t we socialize the health insurance industry? Big government is back…"

*** "Your words are too hard," said a Frenchwoman at last night’s soiree. We were celebrating the launch of our new financial magazine in France. The country is famously a graveyard for Anglo-Saxon capital. Businessmen from the United States or Britain invest millions…and usually lose it. And so the well-wishers and grave diggers were out last night, drinking champagne, and talking about the news:

"Wow…I can’t believe what is happening in world markets. And I can’t believe what is happening in the United States. To think that Congress wouldn’t pass the rescue bill! We’re on our way to a worldwide depression, for sure.

"You know…this must be the worst week in 50 years to launch a new financial magazine. Are you sure you know what you are doing…?"

Know what we are doing? Never. As near as we can tell – after 30 years of close study – the business world is a constant improvisation based on little more than guesswork, pluck and instinct. If something works, a good businessman keeps doing it – until it stops working.

How else to explain the disappearance of the whole investment banking industry – practically overnight? Ask any mother in the ’90s what she wished for her son and she’d say she wanted him to go into investment banking. That trade was a ticket to wealth and everybody knew it. During the ’90s…up until 2007…investment banking was probably the best-paid profession in the world. Whatever they were doing was working like gangbusters. So, they kept doing it…until they went broke.

As long-time Daily Reckoning sufferers already know, we are not really very interested in money or investing. What draws our attention is not the beastly subject but the strange beast himself – Homo sapiens economensis. So…we wonder what they were thinking…all those super-well educated, super-paid geniuses.

For example, Wachovia’s CEO appeared on Jim Cramer’s Mad Money show and whooped it up:

"We have a great future as an independent company," said Robert Steel. "We’re also focused on very exciting prospects when we get things right going forward…" Two weeks later, the firm had lost 90% of its capital value and was hastily sold to Citigroup for $1 a share.

Now, the lawyers are circling…arguing that he intentionally misled investors. Maybe he did. Or maybe he just didn’t know what was going on. The investment banking industry drew in some of the world’s smartest people. But few of them seemed to have any idea what business they were really in – loading the world down with debt that couldn’t be repaid. Nor did they understand that they couldn’t continue to do for very much longer. Jimmy Cayne was playing bridge when Bear Stearns went down. When Lehman went bust, Dick Fuld, who was supposed to be so shrewd, was holding $1.2 billion worth of options on the shares.

The chat forums are exploding with angry comments: "These guys should go to jail," they say. Probably some will. It is a virtue to help people make bad investments in a rising market. When the credit cycle turns, it is a crime.

Until tomorrow,

Bill Bonner
The Daily Reckoning

Time to Cherry-Pick Gold Assets originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.