That’s the trade that seems to be underway right now. Investors are dumping everything with a ticker symbol: US stocks, foreign stocks, government bonds, corporate bonds, precious metals, crude oil and almost every other commodity.

In Wednesday’s trading worldwide, not one single major stock market index moved to the upside. In fact, here in the Americas — North, South and Central — no stock market index of any kind moved to the upside. Over in Europe, the ticker tapes were equally dismal, unless you happened to be tracking the bullish action in Slovenia, Montenegro, Cyprus or Latvia.

In the commodity markets, the CRB Index of commodities stumbled 1.5% this morning, as 14 of the 19 commodities in the index slipped into the red. Only nickel and coffee managed to gain more than one percent.

The newswires blamed the worldwide downticks both on the Federal Reserve and a poor government bond auction in Spain. The Fed was to blame, said Bloomberg News, “as the Fed minutes [from the March 13 FOMC meeting] showed less urgency to add stimulus.”

Meanwhile, the Spanish government struggled to sell bonds in its first auction since the country said its public debt would surge to record this year. The Spaniards, who had been hoping to sell €3.5 billion worth of government bonds, managed to knock down the gavel on only €2.6 billion worth of bonds.

The poor auction results kicked off a steep selloff in the Spanish bond market — pushing the yield on the 10-year government bond to its highest level since January, which was immediately before the ECB “solved” the eurozone crisis.

In other words, Dear Reader, the capricious gales of bureaucratic meddling and governmental manipulations continue to buffet the financial markets. Setting a reliable course in these conditions is no easy task.

Over the long run, of course, underlying fundamentals like earnings growth and dividend yields will dictate the course of one’s investments. But over the short run, the treacherous seas of interventionist governments and too-big-to-fail crony capitalism can capsize even the most seaworthy of investment strategies.

Sure, exceptional companies will still be exceptional. But when governments are actively price-fixing the cost of credit, while selectively rescuing fatally flawed governments and enterprises, rot flourishes. And when rot flourishes, healthy organisms struggle to take root and grow.

Furthermore, no one wants to build any kind of structure on a rotting foundation. So if investors, en masse, believe that the foundations underlying their investments are corrupt and rotten, they will seek to build their wealth elsewhere — either in other jurisdictions or simply in other asset classes.

They will seek to build their wealth as far away from rotten interventionist policies as possible. That could mean anything from seeking out the safest currencies to tracking down the most compelling foreign stocks or bonds to accumulating the kinds of assets that governments cannot easily corrupt — like real estate, precious metals and other hard assets.

This little introduction brings us to the latest (and most exciting) installment of what we call the Daily Reckoning Group Research Project. We will ask you, Dear Readers, to devise a “permanent portfolio.” Here’s the context:

A few decades ago, a guy named Harry Browne devised an investment strategy he dubbed the “Permanent Portfolio.” The idea was so simple it seemed almost moronic. And yet, with the passage of time we have discovered that his idea was pure genius.

He suggested building an investment portfolio out of only four components: gold, bonds, stocks and cash.

The idea was that at any given time, two or three of these four components might underperform — but the other portfolio components would perform so strongly, you’d get an overall gain that would outpace any increase in the cost of living.

Incredibly, this simple strategy has delivered some surprisingly strong investment results. In our column “The Permanent Portfolio Revisited”, written with Addison Wiggin, we provide a bit more detail about Browne’s Permanent portfolio, followed by a few questions:

1) Is Harry Browne’s original allocation still ideal for today’s macro-economic environment?
2) If not, how would you revise his original allocation for the next 30 years?

Please read on here, then submit your own version of the Permanent Portfolio.

Eric Fry
for The Daily Reckoning

Successful Investing Strategies in a Government-Centric Market originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

A chart of the dollar index for Monday looks almost identical to the chart from last Friday. The dollar fell dramatically just after New York trading opened, and then settled into a very narrow range for the rest of the day. The fall yesterday was sparked by the one piece of data that was released here in the U.S., the NAHB Housing Market Index, which indicated the housing recovery isn’t doing quite as well as most economists expected. While this index isn’t widely followed (I had never reported on it until yesterday), this week’s data are heavily skewed toward the housing sector, and many investors felt this index was a harbinger of more disappointing numbers over the next few days.

The largest move versus the U.S. dollar was made by the Swiss franc (CHF), which appreciated through a major technical level, triggering automatic orders, which fueled a further rise. The early morning move by the franc spilled over to the euro (EUR), which rose through its 100-day moving average. Neither Chuck nor I are big technical traders, but in lighter markets like we’ve seen the past few days, a breach of a technical level can lead to a larger currency move. Yesterday, both the euro and franc moved through levels that triggered stop orders. These are orders that currency traders place to “stop” them out if trades start to move against them, or to lock in gains after a certain price is reached. Both currencies held the higher levels they attained in early trading, which could mean further appreciation in the coming days.

A report out this morning showed U.K. inflation slowed less than forecast in February, rising 3.4% from a year earlier, compared with a 3.6% rise in January. The economists had estimated a 3.3% rise, so the drop from the month earlier didn’t have as big of an impact on the currency markets as it could have. The Bank of England has forecast price increases will subside in the coming months to settle in at its 2% goal for this year. But there is a good chance the slowdown in consumer prices will be reversed by the recent gains in the price of crude oil, which surged above $108 yesterday. This could force the BOE to cut the bond-buying program, which has been keeping rates down and supplying liquidity to the U.K. bond markets. The pound sterling (GBP) reversed a decline against the euro and the U.S. dollar after the inflation data was released.

The recent rise in the price of crude oil, combined with the positive economic news out of the U.S., pushed the Canadian dollar (CAD) to its highest level in almost six months. The Canadian dollar had not participated in the recent rallies of the New Zealand (NZD) and Australian dollars (AUD), as interest rate differentials favored the higher-yielding currencies of the South Pacific. But recent data out of the U.S. have investors pricing in a possible rate increase by the Bank of Canada later this year. Yields on the benchmark 10-year Canadian bonds have followed U.S. yields higher, adding 23 basis points in the past week, to settle at 2.24%. The rise in crude oil has also helped to push the loonie higher.

But news released this morning may lead to a further sell-off in the price of oil. Saudi Arabia’s cabinet stated in a report this morning that they would work with crude consumers and producers to restore “fair” prices. Crude prices could come under additional pressure tomorrow, as a government report tomorrow may show U.S. stockpiles rose to the highest level in six months last week.

This morning, as I turned on the trading screens, I noticed the dollar had all but reversed yesterday’s drop. The move higher came after BHP Billiton Ltd., the world’s largest mining company, said China’s steel production is slowing, damping demand for commodities. As usual, the markets ran with this indication that Chinese demand would not continue to increase. Didn’t I just report yesterday that the IMF was convinced the Chinese economy is heading for a soft landing? And yes, when an economy is slowing, all facets of that economy (including steel making) will slow. But commodity and currency traders are acting as if this news of lower demand out of China is surprising.

Both the Aussie and New Zealand dollars traded lower overnight, ending a nice three-day rally. The Aussie had traded higher after the publication of central bank minutes that showed officials had decreased their concerns about downside risks to the Australian economy. The minutes released yesterday showed Reserve Bank of Australia policymakers had discussed that while downside risks “could still materialize, this seemed somewhat less likely than a few months ago. So long as inflation remained well contained, there would be ample scope for the bank to ease policy in such a scenario.” Traders had been betting the Reserve bank would be cutting rates again this year, but the odds of another cut have not been reduced.

While many of the commodity-based currencies edged lower for the first time in a few days, the Brazilian real (BRL) has been dropping versus the U.S. dollar for three consecutive days. The real was the only currency that dropped versus the dollar in trading yesterday. Currency analysts lowered their forecast for the currency’s performance in 2012. The currency will end the year at a level of 1.80 real per dollar, compared against an earlier estimate of 1.75. The Brazilian government has staged a war against currency appreciation, expanding a tax on foreign loans and intervening directly into the currency markets. Brazil’s currency has dropped over 5% this month as policymakers have stepped up their dollar purchases. Inflation in Brazil remains within the government’s tolerance levels, with consumer prices in Brazil’s largest city rising just 0.1% in the past four weeks. Most economists are predicting interest rates will continue to fall as inflation remains subdued. The central bank cut rates 75 basis points in the first week of March, and the bank has signaled it is ready to cut an additional 75 basis points later this year. Investors have been attracted to the real by the relatively high interest rates and excellent currency returns, but as Chuck pointed out late last year, the Brazilian government seems hellbent on making the currency less attractive.

New York Fed President William Dudley threw a bit of cold water on the recent equity rally with a warning that the U.S. economy is still not on solid footing. “The incoming data on the U.S. economy has been a bit more upbeat as of late, suggesting that the recovery may be getting better established,” Dudley said in a speech yesterday. “While these developments are certainly encouraging, it is far too soon to conclude that we are out of the woods in terms of generating a strong, sustainable recovery.” Dudley attributed at least some of the recent gains in the economic data to unseasonably warm weather distorting YOY comparisons. He would not comment on the possibility of additional stimulus measures, but most of the stories I read on Dudley’s speech referred to his comments as being “dovish.”

Dudley’s prepared statement also correctly pointed out that much of the recent drop in the unemployment rate has been a result of a decline in the labor force participation rate. This rate of participation has declined to 64% from around 66% in 2008. While this 2% drop may seem nominal, it equates to a fairly large move in the unemployment rate. Without this drop in the participation rate, Dudley pointed out the unemployment rate in the U.S. would still be in the double digits. I admire Dudley’s attempt to temper some of the recent excitement regarding the ‘better than expected’ numbers. But you Pfennig readers know the actual unemployment rate is not in the lower double digits, as Dudley suggested, but is really over 20%. Our friends over at Shadowstats.com have all of the “unadjusted” numbers that show a slightly more negative picture of the U.S. economy.

To recap: The U.S. dollar dropped yesterday morning, but then reversed course today. The Swiss franc was one of the largest movers, triggering stop orders that sent it even higher versus the U.S. dollar. Commodity currencies sold off due to concerns over China’s growth (didn’t we just have confirmation that China was headed for a “soft” landing?). The Brazilian government continues to try to do everything it can to keep the value of the real down. And N.Y. Fed head Dudley shared a more pessimistic view of the current U.S. economy than what we have been hearing from the mass media.

Chris Gaffney
for The Daily Reckoning

Dollar Declines, Then Reverses Course This Morning originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Gold has a strong foundation, too. And even after suffering through the shenanigans of last week, the shiny metal is off by 1.3% overnight, so the shenanigans haven’t stopped, and those of us that use pullbacks in the price of gold as an opportunity to buy at cheaper prices have to scratch our heads and wonder if the shenanigans are over — or will there be more?

Longtime readers know that I truly believe there are price manipulators in gold and silver. Well, last week, there was some interesting information being put out there for us to go through, regarding “an insider” that came clean and admitted what was going on. WOW! Of course, you can’t believe everything you read, right? Well, I believe that when the information is in a market letter, like Dennis Gartman’s, then you stop and think that it’s must be true.

OK, first of all, let me set this up for you. Dennis Gartman has long been a naysayer regarding the GATA people and people like me that say there is price manipulation going on in gold. My friends over at The 5 Min. Forecast had this to say yesterday:

“‘This was no free market,’ says a well-placed insider about why gold plummeted nearly $100 on Wednesday.

“The insider is unknown to us, but our longtime friend Dennis Gartman calls him ‘a very long-standing friend and client’ in his newsletter. The mysterious Mr. X is trusted enough that Gartman is re-examining his oft-stated vehement dismissal of the GATA positions that the metals markets are manipulated.

“‘As I have very intimate details of [Wednesday],’ says this individual, ‘I think it was, indeed, official selling. At the London fixing, an order came in to sell 3 million ounces of gold and it was explicitly ordered to be done in just a few minutes. No investor or speculator would 1) handle it this way and 2) do it at the fixing only.

“‘This [has] happened this way three times in the last year, [Wednesday] being the fourth time.’

“Concludes Gartman: ‘The market’s plunge… may have been the result of a very real effort to “manipulate” the market lower… perhaps on orders of a central bank hoping to break the market… to buy gold more cheaply after the surge of selling, or perhaps on the order of a government wishing to drive gold down for the “optics” of weaker gold prices.’”

Chuck again. Hmmm, so where’s the CFTC? Why aren’t they calling around, trying to find the mysterious Mr. X to talk to him? And the selling continues. I shake my head in disgust, utter disgust, folks, and you should, too, for this smells like, walks like, talks like and quacks like someone didn’t like the fact that the dollar was getting hammered by gold and silver), and they needed to do something about it!

I have more to talk about with gold regarding Warren Buffett’s annual letter, which leaves you scratching your head, and wondering if he really feels the way he talks about in his letter, why, then, doesn’t he own gold?

But in the interest of moving along, I’ll talk about that in more depth tomorrow.

Yesterday’s data here in the U.S. were interesting, in that the data prints were on opposite sides of the fence. First, the ISM nonmanufacturing index really pushed higher than expected, which is a good thing if you believe that to have a healthy, everlasting economy, you don’t need manufacturing jobs, and that the U.S. economy can survive being a service-only economy. I think you know where I stand on that.

The other piece of data that printed was January factory orders, which fell 1%. Oh, that’s right, we are now service-only.

On to the currencies. With gold getting hammered and all this dollar buying going on, you have to know that dollar buying in one asset class begets dollar buying in other asset classes. And that’s what’s going on in the currencies.

Every currency on the board is down versus the dollar this morning, except Japanese yen (JPY), which has eked out a very small gain versus the dollar. It’s a nasty morning for the currencies and metals. So one has to stop and ask why is all this dollar buying going on? Beats me. Stocks have dropped for the third consecutive day, and U.S. Treasuries remain with a 1.97% yield on the 10-year. So where’s the money going?

Sure, it’s tax time, and dollars are needed to pay taxes. but I doubt that it’s of the magnitude of what we’re talking about here. Not yet anyway.

The Reserve Bank of Australia (RBA) met last night and moved interest rates, but kept their foot in the door that houses rate cuts. By keeping their easing bias, the Australian dollar was hung out on a line. Hmmm… Rate cuts didn’t keep the A$ from pushing higher before, so why are the markets scared of them now? Uncertainty is the answer, folks. When the markets are uncertain about anything, they scramble to buy U.S. dollars and ride out the uncertainty.

I used to call gold the uncertainty hedge, and it still is in my opinion, but it sure is getting chinks in that title.

This dollar buying all began yesterday when the markets found out that China had lowered their target for GDP to 7.5% from 8%. After reading what I had said about this yesterday, my friend over at the Sovereign Society Jeff Opdyke sent me his two cents, and I liked them so much, here’s Jeff!

“Investors get freaked out that China’s economy is slowing, that that is somehow bad news and surprising. Alas, it is exactly what China told the world to expect last year when the country released its 12th five-year plan, the road map to social, cultural and economic growth that China draws up every, well, five years. China has a pretty good history of explicitly outlining — and generally achieving — the goals it sets out in these road maps. And in the 12th five-year plan, China specifically said it will gear down its economy to a more-sustainable growth rate of about 7.5% for the period.

“So people who freak out and scream the sky is falling because China’s growth is slowing need to spend more time understanding China and reading about China before they react to news from China. Great fortunes will be made by those who recognize what China is doing, and great fortunes will be lost by those who react to every perception of what they ‘think’ China is doing. Those who react without knowledge of the underlying context are destined to get creamed.”

Thanks, Jeff. I’ve known Jeff, first through email and then in person, for about 10 years now. He used to write for The Wall Street Journal, and he did a feature story on me and the Pfennig about two years ago in the Journal. Jeff is the king of overseas travel, and knows foreign companies and countries like the back of his hand. You can find him at the Sovereign Society website.

I’ve got a real doozy of a story for you. But before we go there, I want to highlight a story I read that plays well with my call in December that we would begin to see temporary stabilization in the eurozone. The story was in the International Financing Review (IFR) and highlights the fact that European banks’ funding costs are plummeting as bond buyers have regained their appetite for bonds issued by European banks, and even weak banks. More stabilization.

Then, from Bloomberg this morning, “Greek Government officials have disclosed information on a secret 2001 loan from Goldman Sachs, disguised as a derivative, that Greece used to conceal its ballooning sovereign debt from the European Union. Revealing the details for the first time of a contract that helped Greece mask its growing sovereign debt to meet European Union requirements, officials said they didn’t understand what it was buying and was ill-equipped to judge the risks or costs. “

There is so much more to this story, but before I give you the link to go to read the rest, I want to say that in private, it has been my opinion all along that Greece got snookered, and I have a good feeling by whom.

OK, here’s the link to the story, which I think you should read:

To recap: Dollar buying is the rage as all currencies, stocks, metals are being sold. But where’s the money going? Gold’s price drop last week may have been manipulated, according to an insider. Jeff Opdyke gives us his views on the China news this week. And the RBA left rates unchanged, but kept their easing bias, which has deep-sixed the A$.

Chuck Butler
for The Daily Reckoning

Jumping On the GATA Bandwagon originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Units of this trust were trading well above $20 a few months ago. But today, even after silver’s January rally, the units are trading below $15. That’s a 25% decline, which is in sync with the drop in the price of silver.

This recommendation isn’t intended to focus on short-term moves. The idea is to build a solid silver position for the longer term. It’s your way of building a silver play for the next couple of years, by which time we should see very healthy gains.

The Sprott Physical Silver Trust is a closed-end trust that’s entirely focused on physical silver. The intent behind the trust is to invest in and hold substantially all of its assets in silver bullion. It provides a secure, convenient means for investors to hold silver without taking personal physical delivery. The trust does NOT speculate with regard to short-term changes in silver prices.

Specifically, the trust invests in unencumbered, fully allocated London Good Delivery (LGD) silver bars. That is, it owns real silver — the metallic kind that hurts when you drop it on your foot — and not paper promises from any counterparty. About 99.8% of the trust’s current net assets are invested in physical LGD silver bars.

The trust stores its silver at the Royal Canadian Mint, a “Crown corporation” located in Ottawa, Canada. The Mint is responsible for loss or damage to silver in its custody. To ensure security, the silver bullion is subject to periodic inspections and annual audits.

The Mint is also the counterparty to the Sprott Trust, meaning that there’s no financial institution standing between the unit holder and the silver. Thus, this Sprott Trust is almost as good as keeping silver yourself (which I still recommend, in reasonable quantities). I’ll even grant that this trust is, in some respects, more convenient than buying the metal and having to store it on your own.

The trust has a unique physical redemption feature for large unit holders. Investors who hold the equivalent dollar value of 10,000 ounces of LGD silver bars, or more, may “redeem” their units for physical silver. If you do that, then the Mint will deliver the bars (almost) anywhere in the world via an armored transportation service. The trust is structured such that any physical redemptions will not dilute remaining unit holders.

Furthermore, there’s a nice tax advantage for non-corporate US investors. If you hold trust units for a minimum of one year, and timely file the appropriate forms with the IRS, the trust units are taxed at a capital gains rate of 15%, versus 28% — which is the higher rate that applies against most silver exchange-traded funds and silver coins.

I’ve seen an estimate that, over the course of history, mankind has mined and produced over 42 billion ounces of silver. If that’s true, I have no idea where most of it is. Evidently, all that silver has been used up in industrial processes or lost to corrosion and the like. The point to keep in mind is that there’s very little silver out there for investment purposes.

According to the silver scholars at Sprott, the current physical silver supply that’s available for investment, in US dollars terms, is worth less than 1% of the equivalent value for investable gold.

Looking at it another way, for every one dollar available in physical gold bullion and coins, there’s less than one cent available in investable silver. This supply discrepancy isn’t reflected in the current silver price.

What else? Among other things, we’re already seeing a slowdown in copper output due to declining industrial demand. But a copper slowdown will — as night follows day — certainly cause a slowdown in silver output. That’s because a large percentage of the world’s available silver comes as a byproduct of copper mining.

Give the copper slowdown a few months and the decline will induce a shortage of silver. This phenomenon will just plain bite the silver markets in the rear end. We may even see another sharp upward spike in silver prices a few months down the road.

I would never tell you that silver prices couldn’t fall further. In this market, anything is possible. But if silver prices do fall in the near term, this Sprott Trust is still a solid play over the long term.

The bottom line here is that the Sprott Physical Silver Trust offers a convenient and tax-efficient investment in physical silver. It’s the next best thing to buying your own bars.

Regards,

Byron King
for The Daily Reckoning

My Favorite Way to Own Silver originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

The currency guys are optimistic too, for they are willing to keep the euro above 1.31 at this point… Here’s the skinny on the whole process: Greece must repay 14.5 billion euros of bonds in March, and unless all bondholders agree to receive a haircut, a default could happen, and then default insurance contracts begin to get kicked in and things get pretty ugly from there…

So… a haircut it is… that’s fancy talk for “losses”… But since I haven’t been to someone that cuts hair in over 10 years, I find it strange. I know in my heart of hearts that Greece is going to default, sooner or later… But… if the actual default can wait for more stabilization to happen in the eurozone, then the foundation might be strong enough to withstand a default. The center is strong, but needs to get stronger. A default now would be ugly for all of us!

I know, people are going to send me notes to ask me where my “If they can’t make it, let them go bankrupt” thought that I had in 2008 go? I’m not saying bail them out anymore… and I’m not saying that the government should sell their soul to the devil… I’m just saying give it more time before defaulting…

OK… As I said above, the currency guys are allowing the euro to remain above 1.31 this morning on the Greek news… Yesterday, we saw the euro rise to 1.3160, and then fall right back down to below 1.31… But this morning, as I said, it’s back to above 1.31…

With the euro hitting all the green lights this morning, the rest of the currencies can too, and lookie there… one of my fave currencies, the Canadian dollar/loonie (CAD), is back to parity this morning! With the Fed announcing that they are keeping rates near zero for an even longer period than first announced, currencies that have even the slightest rate differential in their favor versus the dollar have really taken off to higher ground.

I just noticed that the Swiss franc/euro cross was 1.2075… That’s getting quite close to the floor level the Swiss National Bank (SNB) put in place a couple of months ago. So the “new guy” at the SNB will earn his stripes right out of the starting blocks, if he defends the 1.20 cross rate ceiling… I told you that when Philipp Hildebrand resigned there would be a pop in francs as the markets test the resolve of Hildebrand’s replacement. So all that’s happened as the franc has risen from $1.04 to $1.09… And more importantly for the SNB, the cross has risen from 1.23 to 1.20 (European-style pricing) I expect the SNB to do “something”… not sure what, but they will attempt to defend the 1.20 cross… Good luck with that SNB!

Well… commodities, and not just gold and silver, liked the sounds coming from the FOMC meeting the other day… Commodities like copper, cocoa, soybeans, sugar, cotton, cattle and lean hogs have all gained nicely since Wednesday… Just to be clear here, it wasn’t just the fact that the Fed pushed zero rates out longer. It was the Fed rhetoric that was laying the groundwork for another round of quantitative easing (QE). All ingredients to soaring inflation in the future, so investors are buying commodities now, ahead of the rush to buy them in the future… It’s the guy and the snow tires story again!

A day after Reserve Bank of New Zealand (RBNZ) Gov. Alan Bollard did his “I’ve got to say something to weaken the currency” dance, the kiwi (NZD) got a nice boost when it received a surprise: New Zealand announced last night that they had posted their first trade surplus in five months… The trade surplus for December was $278 million… Hey! It’s not China-like, but it’s better than a sharp stick in the eye. I can’t say that anymore. It’s better than the average bear!

It’s been a tough row to hoe for the kiwis as they try to recover from two earthquakes last year. But recent reports have shown some nice growth in the economy, and even Bollard, who makes a habit of talking bad about the kiwi currency, saw his RBNZ issue a report saying that the RBNZ should see a “gradual lift in activity in 2012, consistent with demolition and repairs to housing and infrastructure getting under way,” with full reconstruction to come in 2013.

I bet it just killed Bollard to have to say that! He’s known to be quite hard on the Beaver…

OK… a quick trip over the Tasman to New Zealand’s kissin’ cousin. Here in Australia, exports of raw materials and gold continue to keep the economy strong. Speaking of gold, I was reading yesterday about jewelry demand, which is the primary driver of gold demand. Yes, believe it or don’t. I was reading about this jewelry demand and how 55% of global gold jewelry demand comes from China and India.

Gold bars are a close second to jewelry demand… And again, the Asian buyers are the leaders of the pack when it comes to hoarding gold bars… I think that sometimes it pays to step back from the forest so you can see the trees.

I bet you thought how’s he going to tie this together? Here in the U.S., most people, not Pfennig readers, of course, don’t understand the bad things that come from printing money. We’re too close. But in Asia, they are away from the trees and see perfectly what’s going on. And when the U.S. begins to feel the warp speed of inflation, the rest of the world will too, and the Asians have decided to buy their snow tires now…

OK… today, the data cupboard here in the U.S. will give us a first look at fourth-quarter GDP, which will see a couple of revisions before it is finally recorded. The “experts” believe that the U.S. economy grew at 3% in the fourth quarter. And yes, for a brief time there in the fourth quarter, things did begin to look better. But think about this now and remember it later: The economy was still feeling its oats from all the pumping up that Hans and Franz did… So in other words… it was pumped up by money supply, but now things are beginning to show some signs of weakening again… If the Fed didn’t think that, they certainly wouldn’t have stayed longer with lower rates and would discuss more QE…

While 3% is a good number, it won’t be sustainable going forward into 2012. However, a 3% print today would be good for the global growth campers, and that would certainly fuel some inflation fears, and all that would be good for gold and the currencies today…

Yesterday, the weekly initial jobless claims printed at 377,000, which was 21,000 more than the previous week. Remember that during the previous week, all the media outlets were flashing the number on the screens and the government was all about pointing out the drop in unemployment claims. Yesterday, when the number rose again, there was no flashing the number, nor were there any government people talking about the number… One thing I’ve learned with this letter is that you’ve got to report the good and the bad. Otherwise, people don’t trust what you tell them. I don’t think, though, that the government cares if you trust them or not!

The other econ print we saw yesterday was new home sales for December. They were awful, and closed the worst year of new home sales in a very long time. And the thing that really points out the weakness: The inventory of New Homes rose in December from November, and the median sales price for new homes was 12.8% below its level a year ago! So there’s enough inventory, and the prices are falling, but the homes aren’t selling.

And then the good… Durable goods orders for December were very strong, up 3% versus November. That marks two consecutive months of very strong durable goods orders… I would like to think that this is a good sign… but the data tell me that December marked the second consecutive month of outsized increase in commercial aircraft… What happens when the aircraft orders end? We’ll probably go right back to where we were before the aircraft orders, which was three consecutive months of decline… Sorry, just calling it like I see it…

Then there was this… I came across a great piece by John Williams on the King World website. Most readers know him as the person I quote quite often, as he is the former government accountant that takes the cooked reports of the government and shows you what they would look like before all the hedonic adjustments… Here’s a statement that which is very strong and scary:

“The U.S. economic and systemic solvency crises of the last five years continue to deteriorate. Yet they remain just the precursors to the coming Great Collapse: a hyperinflationary great depression. The unfolding circumstance will encompass a complete loss in the purchasing power of the U.S. dollar, a collapse in the normal stream of U.S. commercial and economic activity, a collapse in the U.S. financial system as we know it and a likely realignment of the U.S. political environment.

“Outside timing on the hyperinflation remains 2014, but events of the last year have accelerated the movement toward this ultimate dollar catastrophe. Following Mr. Bernanke‘s extraordinary efforts to debase the U.S. currency in late 2010, the dollar had lost its traditional safe-haven status by early 2011. Whatever global confidence had remained behind the U.S dollar was lost in July and August.”

“That was in response to the lack of political will — shown by those who control the White House and Congress — to address the long-range insolvency of the U.S. government, and as a result of the later credit rating downgrade to U.S. Treasury debt.”

To recap: The Greeks and private lenders are back at the negotiating table this morning, and once again I’m optimistic that a deal will get done to keep Greece from defaulting, for now. This thought is ringing through the markets as the euro remains above 1.31, thus rallying the other currencies too. Gold demand continues to be strong, and John Williams gives us his thoughts on the coming hyperinflation…

Chuck Butler
for The Daily Reckoning

Commodities Take Off! originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

I’ve found many people are particularly energized about predicting a hard landing for China’s economy, but I believe the country is no sinking ship. China isn’t fast-approaching an iceberg in the dark of the night like the Titanic. Beijing has long been anticipating the ice chunks and subtly adjusting the rudder around inflation without steering the economic ship too far off course.

China’s government angled its vessel away from inflation by increasing the required reserve ratio (RRR) every month for the first six months of 2011 and raising interest rates three times. Once inflation was sufficiently under control, the country began to steer in a direction of growth again.

Recent results show how positive this easing has been. In its latest research this week, BCA Research reported that despite the policy tightening of 2011, the “most recent economic data out of China has all but confirmed that the economy remained incredibly resilient.”

One significant data point is the sharp increase in money supply. After the country hit a low level of monthly money supply growth, the three-month change in M-2 money supply climbed to record levels during the final month of the year, says Greg Weldon of Weldon Financial. He says that money supply “pegged at +6.419 trillion, easily exceeding the previous record 3-month increase, seen at the peak of the global crisis, in March of 2009.

Easing in China is expected to continue through 2012, with ISI Group anticipating a potential RRR cut after Chinese New Year celebrations in February, then possibly again in April, June and August. Also, loans “have become more readily available in recent weeks,” says ISI. This should all be bullish for commodities, such as copper, oil and gold, and also trickle down to boost share prices of natural resources equities.

Chinese Copper Inventories Increase

Base metals were the laggards among commodities last year, with copper one of the worst performers, losing 21 percent.

Global consumption of copper increased only 4 percent in 2011, which is lower than the 10 percent growth in 2010, but higher than the decade-average of around 3 percent, says Macquarie Research. China’s consumption of copper—which makes up 40 percent of the global demand—was a primary reason for decreased consumption, as the country was drawing down on its own supply throughout the year.

This can’t continue forever, Macquarie says, adding that “demand made on new supply direct from producers would need to rise, with positive implications for prices.” Europe’s largest copper fabricator agrees with that sentiment, indicating that it anticipated China’s copper demand would be strong in 2012, according to Barclays.

A recent rise in copper imports is likely the result of restocking China’s depleted copper inventories. As is typical for China, after the metal fell in price last fall, the world’s largest buyer of the metal advantageously scooped up copper to replenish its cupboard, says Barclays Capital. As shown below, copper inventories into China reached a record low in 2011, but have sharply reversed recently.

An increase in copper demand places pressure on the supply side, which continues to experience shortfalls in mine output versus forecasts. These are caused by a variety of factors, such as weather, labor strikes, or simply a poor grade deposit. While Macquarie says there’s a possibility the world’s two largest copper mines, the Los Bronces mine in Indonesia and Peru’s Escondida mine, could deliver year-over-year increases in production, it concludes “it is highly unlikely that miners will succeed in delivering this level of additional output in total.”

While Chinese demand growth for commodities is not expected to be as robust as it has been historically, demand is expected to pick up throughout 2012. As confidence returns, Macquarie says there should be “a slow gradient of recovery in the near term before gathering pace into the mid-year.”

Increasing Reliance on Energy Imports

China’s rapid growth and increasing reliance on other countries for key resources has made a powerful case for commodities over the past several years. These three charts from BCA Research illustrate that once the country shifted from exporting to importing a commodity, there was no looking back.

You can see in all three how dramatically the energy balance has shifted to an ever-increasing dependence on imports. In each major commodity, after China began importing, growth took off.

China became a net importer of crude oil in 1994, and today, is the second-largest oil importer in the world. BCA forecasts the country is expected to surpass the U.S. as the largest oil importer in only a few years.

To obtain more natural gas, China spent years building massive pipelines to transport the commodity from Russia and other western Asian counties, and since 2006, natural gas imports have “gone vertical,” says BCA.

Coal, which accounts for the majority of total energy consumption in China has also been imported since 2008, and since that time, imports rose substantially.

Even with these imports, energy consumption is only a fraction of developed countries. The China story is just getting started: Urbanization just surpassed the 50-percent mark, hitting what I believe to be the pivotal moment that dramatically shifts buying patterns, driving an enormous demand for housing, consumer staples and durable goods. You ain’t seen nothing yet!

Happy Chinese New Year!

This weekend, the world’s largest annual migration takes place. Millions of people in China head home to celebrate Chinese New Year and welcome in the Year of the Dragon. U.S. Global Investors’ research analyst and Shanghai native Xian Liang recently talked about the significance of the dragon in Chinese culture:

“Unlike its western counterpart portrayed as evil, the Chinese dragon is an imaginary, mythical creature. Its body parts are from nine animals, including the horns of a deer, mouth of an ox, nose of a dog, trunk of a snake, and claws of an eagle. It has auspicious power because it can make itself invisible or visible at any time. It can both fly and swim. It makes clouds and rain. Because of these magnificent things, the dragon is associated with royal powers as well.”

After bounding through a tough Year of the Rabbit, we anticipate the Year of the Dragon will breathe fire back into Chinese markets in 2012. Kung hei fat choy!

Regards,

Frank Holmes,
for The Daily Reckoning

P.S. For more updates on global investing from me and the U.S. Global Investors team, visit my investment blog, Frank Talk.

It May Take a Dragon to Breathe Fire Into Markets originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

At least S&P did a good job of telegraphing their moves, having placed nearly all of the Eurozone countries on credit watch. The moves still had a negative impact on the currency with the euro (EUR) losing more than 1% versus the US dollar over the weekend. But as usual, the downgrades didn’t contain any new information, so they alone won’t cause a lengthy slide in the euro. Just look how quickly the US shrugged off S&P’s downgrade of our debt last year. ECB President Mario Draghi went as far as to question why investors rely so heavily on the ratings agencies, as these agencies are typically ‘late to the game’. This may sound like sour grapes, but Chuck and I have been questioning the timeliness of the rating agencies’ calls since they missed the housing debacle which spurred the US credit crisis of a few years ago.

But the downgrades do make it clear who is running things in Europe. France wanted to believe they wielded as much power as Germany when it came to setting policy in the EU, but the downgrade by S&P will definitely be a blow to their ego. We will get to see if there are any major changes in the power dynamic when European leaders hold a summit at the end of the month.

As predicted, the euro was able to shake off the negative moves below $1.265 following the rate cuts and rebounded to trade above $1.28 this morning. The euro rose after Spanish and Greek borrowing costs fell at auctions, easing concerns these nations would struggle to fund their deficits. Spain has a plethora of debt to refinance, but they have had a surprisingly easy time finding buyers for their auctions. Greece is in a bit more precarious position as they continue to try and negotiate better terms with their creditors. These ‘discussions’ stalled last week as investors don’t want to accept large losses on a proposed debt swap. The debt crisis in Europe is definitely not over, and there could certainly be many more negative moves by the euro. It will definitely continue to be a volatile currency market in 2012, but EU leaders have to hope investors’ attention is distracted by the US elections. Just maybe the competition for the top job here in the US will give EU leaders enough breathing room to try and work on a more permanent solution to the European crisis.

Moving back across the pond, the big news last Friday here in the US was the US trade deficit which ballooned by over 10% in November. The gap expanded to $47.8 billion, the widest since June, from a $43.3 billion shortfall in October according to Commerce department figures. At $47.8 billion, the gap was wider than any of the guesses submitted by dozens of economists to Bloomberg, and it’s the first time in five months the trade deficit grew. Higher oil prices are to blame for the increase in imports, and the European debt crisis has hurt US exports to that region. It is also a sign that domestic demand here in the US is outpacing demand elsewhere, perhaps a silver lining for the US.

Global demand will continue to falter according to the latest predictions by the IMF. The International Monetary Fund cut its global economic growth estimate for 2012 according to First Deputy Managing Director David Lipton. Lipton wouldn’t share any numbers, and the official forecast will be released next week, but the IMF’s chief economist said earlier this month that European growth would be “close to zero” and would cause a ‘substantial’ cut to the most recent 2012 global expansion estimate of 4 percent. Lipton said the bright spot of the global economy would be China, which he predicts will grow at a ‘reasonable rate’.

Several economists have predicted a hard landing for China, but both Chuck and I have consistently told readers that China’s slowdown would be controlled. The ‘soft landing’ which Chinese officials are trying to maintain seems to be continuing, as GDP in the fourth quarter rose 8.9% during the 4th quarter. Economists had predicted growth would slow to 8.7%, and any reading above 8% signals the soft landing is continuing. China seems to have been able to tap the brakes without sending their economy into a sharp downward spiral. This is good news for the global economy, as China will continue to be the world’s growth engine and help to push the global economy through the rough waters caused by the European debt crisis.

We won’t get any big data releases today, but Chuck will have plenty of economic data to report to all of you as there is an absolute ton of releases shoved into the final 3 trading days of this week.

Mike Meyer and several others on the desk came in on their day off yesterday to enter some trades into our new test system. Between transaction entry, Mike and I discussed last week’s economic data and what it may mean for the US going forward. Mike made the point that the spike in weekly jobless claims was blamed mostly on part time holiday help. But couldn’t the same be said about the reports showing improvement over the past month or so? I walked through a mall with my daughter over the weekend and couldn’t help but notice all of the ‘temporary’ stores which had shuttered. Apparently retailers are figuring out that a large percentage of consumer purchases occur around the holiday months, and have taken to just opening stores for a few months. This would definitely have an impact on employment, since these stores are only open for a few months.

Another telling piece of data released last week was the advance figures for December retail sales, which disappointed. The big shopping spree in December was supposed to be a sure sign that the US economy had turned the corner. But as I reported Friday, retail sales only showed a 0.1% gain. In fact, Mike Meyer pointed out that the number was actually negative if you look at the adjusted sales figure less autos. It looks as though the record-setting Black Friday sales were exactly what Chuck and I feared — one-and-done, with no follow through during the rest of the shopping season.

Here is more from Mike Meyer: “We’ll get more revisions down the road for December sales, so who knows where they will end up; but it doesn’t look good right out of the starter blocks. Consumer confidence in the US has risen sharply, but let’s see how confident everybody feels when the credit card statements begin to arrive. By the way… Consumer credit shot through the roof, so it looks like a good portion of those holiday gifts were purchased on plastic.”

Moving back to the currency markets, risk trades seemed to be back on following the positive debt auctions in Europe and the positive news on China’s GDP. The Australian dollar (AUD) was one of the best performers overnight, advancing to the highest level since the end of October. Aussie dollars are approaching $1.05 on the positive news. The Australian dollar also benefited from their AAA rating, one of only 12 countries that can claim the highest rating from all three rating agencies. Australia also has the developed world’s second smallest debt burden. The New Zealand dollar (NZD) also advanced as all commodity-based currencies benefited from a more positive global growth outlook.

Bank of Canada Governor Mark Carney is expected to leave interest rates unchanged today because of the economic risks posed by Europe’s debt crisis. Monetary policy has been held stable by Governor Carney for the past 16 months. Interest rates are still slightly higher than here in the US, and the Canadian dollar (CAD) continued a three-day rally versus the US dollar. The Mexican peso (MXN) has been performing well versus the euro and even the US dollar. The Mexican peso is the second best performing currency in the short year, moving 3.41% higher versus the US dollar. The number one performing currency during 2012 is the Brazilian real (BRL) which is up over 5% versus the US dollar. Brazil’s President, Dilma Rousseff is now pushing for smaller budget cuts in order to achieve the goal of a budget surplus before interest payments.

Then there was this… A story in The New York Times caught my attention, and raised my ire this weekend. The FOMC release transcripts of their meetings with a 5-year delay, and the Times reported on a Fed meeting that occurred back in 2006 — about a year before the subprime mortgage crisis rocked the financial markets. Here is an excerpt from the Times:

“The officials…gave little credence to the possibility that the faltering housing market would weigh on the broader economy. ‘We just don’t see troubling signs yet of collateral damage, and we are not expecting much,’ said New York Fed chief Tim Geithner, who now afflicts us as Treasury Secretary. ‘The transcripts of the 2006 meetings, released after a standard five-year delay, clearly show some of the nation’s pre-eminent economic minds did not fully understand the basic mechanics of the economy that they were charged with shepherding. The problem was not a lack of information; it was a lack of comprehension, born in part of their deep confidence in economic forecasting models that turned out to be broken.”

I rarely agree with much of what I read in the Times editorial section, but even they had to call out our Treasury Secretary and the FOMC for wearing rose-colored glasses. What makes us believe Treasury Secretary Geithner and his comrades are any better at steering our economy now?

To recap. France lost its AAA rating, and 8 other euro-area countries were downgraded by S&P, causing a selloff in the euro. But a positive debt auction in Spain has the euro retracing some of its previous losses. The IMF lowered their economic growth prediction for 2012, but we won’t get the actual numbers until next week. Good news regarding China’s GDP has investors moving back into risk currencies. The Brazilian real is the best performer in 2012, followed by the Mexican peso and commodity currencies of Australia and New Zealand. BOC Governor Carney is expected to leave interest rates unchanged, and finally, our esteemed Treasury Secretary was totally caught off guard by the subprime debacle of 2007.

Chris Gaffney
for The Daily Reckoning

Ratings Agencies Make it Tough on European Leaders originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Don’t get us wrong, we still like gold and silver and will probably recommend jumping back into silver shortly. But you can’t pour gold into a farm tractor and use it to grow more food. You can’t pump silver into a 747 and use it to transport cargo. You can’t use gold or silver to make overall production more efficient and generate a higher standard of living. In fact, you can’t do any of these things without crude oil. This is why crude is and will continue to be the world’s most essential commodity.

5 Reasons to Buy Crude Oil Now

1) Oil supplies have peaked — oil supply lags discovery by approximately 40 years. New oil discoveries peaked in 1965. Not surprisingly, production has basically flat-lined since 2005. Despite all the press given to new deep water discoveries and North American shale supplies, new production is not keeping up with the depletion of old wells.

2) Producing nations are consuming more of their own output and exporting less. Saudi Arabia, Iran, Norway and Venezuela are exporting far less oil than they did in 2006.

3) Global population is growing rapidly and more people are growing accustomed to better, more energy-dependent lifestyles.

4) Crude oil is decoupling from the dollar. For most of 2011, crude oil was a “risk on”, short dollar play. No longer. Crude is rallying in both strong and weak dollar environments. This is bullish.

5) The odds of a preemptive strike against Iran (the 3rd largest oil producer) are the highest they’ve been in years. 33% of global tanker traffic passes through the Strait of Hormuz which Iran has threatened to close in retaliation for global trade sanctions. Expect it to make good on those threats if bombs start falling on its nuclear facilities.

Therefore, we believe crude has a better chance of doubling from its current $100 per barrel level than gold has doubling from its current levels of $1,575 per ounce. It’s not that we hate gold. We don’t. Some of the same conditions that favor crude will also favor the shiny stuff. But for “bang for the buck,” we feel crude oil is the best opportunity on the board right now.

What is the best way to play it? Energy stocks tend to underperform actual energy products during bullish price spikes. Producer/processor Exxon rose 23.3% and refiner Valero rose 54.5% during crude’s last run-up to $147 per barrel in 2008. Crude oil itself nearly tripled. Why trade crude oil producers, refiners and drillers when we can just trade crude oil itself?

I recommend using NYMEX crude oil options. NYMEX crude oil options are the most liquid (no pun intended) oil option market in the world — making buying and selling them about as easy as buying and selling most stocks. NYMEX crude options are a DIRECT PLAY on the price of the oil itself. NYMEX crude oil options also provide big leverage with fixed risk. That means we can devote a small amount of capital to our oil investment while keeping the bulk of our hard-earned dollars in safe, interest-bearing instruments.

There are many different ways to structure a bullish trade on crude oil. But I recommend the kinds of structures that provide plenty of time for the trade to succeed. Even though I expect crude to make a very strong move to the upside in 2012, I could certainly be wrong about that. So my favorite way to bet on crude oil right now is to utilize a “bull call spread” that does not expire until 2015.

This professional trading strategy may sound complicated, but it is really quite simple. And more importantly, is one of the safest options strategies that professional investors use. The bull call spread I like right now combines two different options. The first gives the investor the right to own 1,000 barrels of crude oil at $125 per barrel. The second option creates obligation to sell 1,000 barrels of crude oil at $150 per barrel.

So that means the investor has the right to buy crude oil at $125, but must also sell that crude oil at $150. Therefore, the investor can make the $25 per barrel difference, but no more. $25 times the 1,000 barrel contract size equals $25,000. Subtract the $3,000 cost of the trade to get a net potential of $22,000 — that’s a 7-to-1 maximum upside.

If the trade does not work out as hoped, the investor’s maximum possible loss would be the initial $3,000 cost of the trade. That’s the kind of risk/reward opportunity I like. Oil is a buy…maybe the very best buy in the entire commodity sector.

Regards,

Steve Belmont
for The Daily Reckoning

Crude Oil: The Best Bet for 2012 originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

But that’s exactly what’s happening.

What the heck is wrong with the precious metals?

Sure, gold has performed admirably over the last few years, but it has performed dismally over the last few weeks…and horribly over the last few days.

As the chart above shows, most major stock and commodity markets have already surrendered the huge gains they achieved after November 30th, when six central banks announced “coordinated intervention” to support distressed European banks. (Only US stocks still cling to a slight gain). But gold has been the biggest loser.

Despite the obvious inflationary implications of central bank intervention in the currency markets, gold can’t seem to get out of its own way. In the midst of a currency crisis that has seen the euro lose 9% of its value against the dollar in just three months, gold is down 17%, while US stocks are up.

Not surprisingly, gold’s numerous naysayers are wasting no time saying their “nays.”

“When it comes to investment safety, gold has near-mythical status,” writes James Mackintosh for The Financial Times. “Sadly, it has repeatedly turned out to be a myth that gold holds its value during periods of panic. Investors were reminded of that once again yesterday, when the precious metal plunged 4 per cent or $68…

“Gold is meant to be a haven, and in periods of mild fear it does rather well,” Mackintosh continues. “But just as in 2008, when times get really tough, investors prefer cash to gold — and dollar cash at that.”

The guy’s got an argument. But is it a good one?

Without a doubt, gold has delivered a disappointing performance of late. But even after yesterday’s shellacking, gold is still up 9% over the last 12 months, compared to a loss for the S&P 500 Index. Likewise, gold has greatly outpaced the S&P over the last one, three, five, ten and fifteen years! (The 20-year mark is a “dead heat.”)

Bottom line, gold has performed its job with meritorious distinction. But of course, that’s history. The future is what most of us care about. And we’d care to know if gold’s future will look anything like its illustrious past.

Over the short-term, the financial markets can fall hostage almost any form of groupthink, no matter whether that groupthink be intelligent or idiotic. But over the long-term, the markets usually escape their captors.

Free from the shackles of groupthink, good investments excel; bad investments don’t.

At the moment, gold is disappointing its fans, which begs the question: Is gold a good investment, temporarily held hostage by the groupthink that considers the dollar a safer “safe haven” asset? Or is gold genuinely a bad investment that deserves exactly what it is getting right now?

Your California editor cannot answer that question with certainty, but he can respond to it with conviction: Long-term, gold is a better safe haven than the dollar. Short-term, anything goes.

Having said that, unrequited affection is always painful. Those of us who have embraced gold as our “main squeeze,” financially speaking, are receiving nothing but backhands across the face.

No love whatsoever. In fact, the more we commit to the relationship, the greater our pain. So we’d like to know, will gold ever love us back?

Probably.

“The fragments of alarming news that fill the pages of The Wall Street Journal and The Financial Times are not unrelated,” observes James Grant, editor of Grant’s Interest Rate Observer. “They form a coherent design. The derangement of money and banking is the central organizing principle. Banks are teetering and currencies are churning because of the ideas we live by. Paper money and socialized risk-taking got us into this mess. More the same is how the central bankers seemingly intended to lead us out… The world over, governments have met, are meeting, or will soon meet financial and monetary troubles with the printing press or its digital equivalent.”

Unfortunately, Grant’s compelling long-term argument for owning gold is providing very little solace at the moment. Gold is falling…and it may continue falling, if we are to believe what the “charts are saying.” Gold fell through its 200-day moving average yesterday, which is very “bad voodoo,” according to those folks who divine future price trends from squiggles on a chart.

Furthermore, the precious metals are clearly suffering from one trend we can clearly see, and maybe one more that we can’t see.

The visible trend is the German non-response to euro crisis. So far, the Germans refuse to launch a rescue campaign that relies on printing euros. Instead, the Germans advocate a combination of austerity and tax hikes. However prudent this strategy may or may not be over the long term, near term it looks awfully deflationary, recessionary…and bearish for gold.

As for influences we can’t see, rumors are running rampant that the MF Global bankruptcy is triggering a series of forced liquidations. If true, such liquidations could easily produce steep price drops across the commodity complex — corn and wheat, as well as gold and silver. And clearly, the entire commodity complex has been in liquidation mode — a fact that lends credence to the rumors. On the other hand, it is also possible that MF Global’s bankruptcy has nothing at all to do with the selloffs.

Either way, the bull case for gold (and also for silver) has little to do with short-term noise and volatility. Rather, it is the long-term story that matters most — the story of the “derangement of money and banking.” And that’s the kind of story that could produce another spectacular run in the gold price!

Maybe the last 20 years were the “glory days” for gold, never to be seen again…at least not soon. And maybe, as Mr. Mackintosh asserts, gold is no longer a reliable “crisis asset.” Or maybe, as your editor suspects, the crisis is simply not bad enough to really terrify folks.

Eric Fry
for The Daily Reckoning

Looking Past Gold’s Poor Performance originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

You see, silver has more than 10,000 uses. It’s one of the world’s best conductors of heat and electricity. Inventors filed more patents on silver uses than any other precious metal in the world. And when silver is used for most industrial and technological purposes, it is used up forever… It simply costs too much to try to recycle the tiny bit of silver from every cell phone or casino chip.

I’m not saying industry is going to use up all the world’s silver. That simply can’t happen. But scarcity is a real issue.

Our rapid consumption of silver leaves very little to meet any uptick in demand from investors. A spike in interest will send prices spiraling higher…

Here’s a breakdown of the silver market. The table below shows the percentage of the total amount of silver consumed by each category over the past four years…

As you can see from the table above, only 12% of the silver supplied to the market made it to bullion in 2010. That means only a little more than 100 million ounces of silver became bullion for the entire investing world.

That’s a tiny fraction to sop up all the investment interest in the world.

Of that silver, about 43 million ounces went to exchange-traded funds like the iShares Silver Trust (SLV) and the Sprott Physical Silver Trust (PSLV).

That means you could buy all the extra silver bullion for about $2 billion. We could buy all the surplus silver bullion from the last four years for about $10 billion.

That’s the same as the market value of the iShares Silver Trust today. If you wanted to build another silver fund, you couldn’t. There just isn’t enough silver bullion out there to fill the order.

Even trying to amass that much physical silver would send the silver price soaring. It’s a simple market fact… When there is more demand than supply, it drives the price up.

And the economic problems confronting Europe and the United States have increased interest in precious metals… Silver gained a colossal 174% from August 2010 to April 2011.

In May 2011, however, the price collapsed 31% in just four weeks. The bull market simply ran up too far, too fast… and the decline wiped out many highly leveraged silver traders.

The big money is tiptoeing back into silver.

Last month, commodity trading advisors, pool operators, and hedge funds — the “big money” — weren’t interested in silver AT ALL…

But as they move back into the market, silver prices could soar. Let me show you what I’m talking about…

Jason Goepfert created SentimenTrader, a service that tracks investor sentiment toward various asset classes. According to Jason, silver just bounced off its most pessimistic reading in four years.

The so-called “commitment of non-commercial traders” hit 10,352. That’s incredibly low. The last time sentiment numbers were that low was in August 2007. Six months later, the price of silver was 59% higher. It rose from $12 per ounce to $19 per ounce.

I went all the way back to 2002 and found that silver sentiment bottomed near 10,000 six times… On average, the price of silver rose 33% in the next six months and 54% over the next year. This chart shows the last four times it bottomed…

Here’s how the silver price performed after each of the last four times silver sentiment bottomed out…

The best return came after Bottom No. 2, which coincided with the US banking/credit crisis. Silver soared an eye-popping 405%, including its parabolic rise in 2010.

As those numbers indicate, silver is one of the most volatile assets in the world. Over the last year, silver has seen massive price swings, including an 81% rally and two 30% drops. That forced many traders to liquidate their silver holdings in order to meet emergency short-term requirements. (Plus, the debacle at commodity broker MF Global has scared many folks out of the market.)

But the long-term drivers of gold and silver’s uptrends are still in place. Enormous and growing Asian economies like China and India are getting richer…and they have deep cultural affinities for precious metals. Plus, the Western world has lived way beyond its means for a long time…the debts and liabilities it has taken on can only be paid back with devalued, debased money. This is bullish for “real money” assets like gold and silver.

With sentiment so negative toward silver (and just beginning to turn back up), it’s a great time to take a position in this long-term bull market.

If gold and silver prices are nearly certain to rise over the next few years (and probably rise dramatically), the simplest way to play that trend is to buy bullion…real, hold-in-your-hand silver coins.

And I recommend everyone do just that… Buy some silver and store it away.

Regards,

Matt Badiali ,
for The Daily Reckoning

Buy Silver…Now! originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".