January 30, 2008

Wall Street Journal writer Eleanor Laise delivered an exemplary piece of manipulative journalism on Tuesday. While banks and investment funds announce losses of billions of Federal Reserve Notes on a by now daily basis, Laise worries in her headline “How To Survive The New Gold Rush” on the day gold hit a new record high at $933 as investors seek shelter from the debt-hurricane engulfing the world.

The scary headline, in stocks it’s always just about “weathering the storm,” is followed by a couple of good examples where I can highlight the methods used by journalists to shape X into U.

Manipulation #1: “The New Gold Rush” The rush into the only asset class that is not somebody else’s obligation is not exactly new. Only because major banks (and MSM who believed into banks’ permanently wrong forecasts) missed the train in the first six years does not eliminate the fact that gold has gone almost fourfold since it bottomed out at $252. It has performed better than any other asset class in this period except commodities which show the true levels of inflation.

Manipulation #2: In order to keep the gold bull in the WSJ’s bear dress the admission,

“Gold has been riding its reputation as a safe haven to new highs”

is immediately followed by the unsubstantiated warning,

“But it also carries substantial risks for investors.”

Where is the substantial risk in an asset that does not depend on the future performance of somebody else? Did gold ever decline to zero like Enron and Worldcom did and which will happen to so many other former pillar of US industry in the close future? I think there are many other asset classes where the WSJ could apply the art of protecting investors by informing them with the same skepticism the paper has towards gold. To back up the unwarranted claim of risk Laise begins to mix apples and pears for her comparison, blanking out gold’s stellar performance in 2008 in order to maintain a quote a financial advisor who should check his calculator. This leads to

Manipulations #3 and #4:

“A dollar invested in gold at the beginning of 1969 would have grown to less than $20 by the end of last year, compared with nearly $50 for the S&P 500, according to the firm,”

she quotes some little-known financial advisor. Why does a daily paper quote prices from a month earlier, after using current prices earlier on? It can’t have been a problem of a lack of computing power or limited fact-checking capacity, I presume. Despite this manipulation this financial advisor and the WSJ are still plainly wrong and misleading: A 20-fold increase since 1969 would put gold at $700. But it closed 2007 at $838. So gold has gone up almost 24 times since 1969. I wonder why this beginning date was chosen? The USA was still on the gold standard then.

Gold 1975-2008

GRAPH: Gold from 1975 to 2008. Why do all gold thrashers assume that all gold investors rushed into the market at its old high? Except when applying the highly unlikely thesis that gold bugs bought then and never sold out all other investment periods now rank gold again as the best performing asset in the short, medium and long term. Chart courtesy of Kitco.

I also wonder how this financial advisor arrives at the conclusion that a rise from 100 to 1,350 points in the S&P 500 represents a 50-fold increase as it is very simply not the case. He has to overstate the performance of stocks by more than 300% in order to make gold look bad. On a general note it is very interesting that the paper asset-cheering crowd always assumes that every gold investor was so stupid to buy his gold at the old record of $875 in 1980. This was not possible either since gold spiked only intraday to this level. The official fixing prices never went higher than $760 and most physical business at that time was cash-transacted on the closing prices. I faintly remember online derivatives investing from home with funds drawn from a debt card was not an option then. Buying gold always meant feeling a heavy piece of the metal in one’s hands.

Manipulation #5: As the meteoric rise in gold cannot be hidden, the proven method of mixing apples with pears for a good biased comparison is drawn. Buying gold and buying gold stocks are two entirely different things. Again, only physical bullion is a store of value whereas mining shares come with all the risks of corporate failure as all other stocks. The story fails to back it up with data. Why? Because gold share indexes have outperformed most other industries in this millennium. The Amex GoldBugs Index has risen 13-fold since 2001 and is still more than double compared to 1998. Omitting facts is the most used method to keep a story’s spin.

Manipulation #6: In her desperation to trash gold’s out performance of everything else Ms. Laise uses the same trick the WSJ used in order to teach us in the not too distant past that record nominal oil prices were not that bad when seen inflation-adjusted. So she writes

“What’s more, gold has failed to keep pace with inflation in recent decades. The average 1980 price of gold inflated to 2007 dollars would be $1,563 an ounce, well above today’s price, says Brad Zigler, managing editor of Hardassetsinvestor.com.”

IMHO the other side of this medal is that gold is still undervalued and the gold price has always kept up with inflation in the last 3,500 years. To pick out a recent under performance in a 3,500 year old correlation is, again, one more way of manipulation. Business journalists normally love to spot undervalued investment instruments. There is also no mentioning that central banks have been selling record amounts under the central bank gold sales agreement, dumping up to 500 tons per year on the market and suppressing the gold price.

Manipulation #7: Thank god there is always the trick of the general quote. Nothing is more convenient than quoting a group of anonymous people. Here we go:

“Gold can help investors diversify and reduce their overall portfolio risk, financial advisers say, since it tends to behave differently than stocks. But at current levels, investors may be paying a high price for that diversification.”

I need help to follow this reasoning. Should I now avoid gold because it has underperformed inflation recently? Or should I shun the yellow metal because it has risen so much?

Manipulation #8: Next comes the implication that gold investors are eccentric wackos (as in stark contrast to the herd of market players that always act rational, driving shares up and down in 20% ranges these days.)
Again using the convenience to quote anonymous financial advisers, Ms. Laise presents gold bugs as a crowd one does not really wish to be associated with.

“Financial advisers also warn that since gold is considered a haven in times of crisis — and is less in demand for practical uses than other commodities such as copper and oil — it tends to attract emotional, speculative investors who can amplify its price gyrations.”

And what are the big guys on Wall Street doing these days, sending the Dow hundreds of points up and down within an hour? Maybe the WSJ will cease all mining share reporting once it finds out that gold investors (like active military personnel) would elect Ron Paul for president. And shouldn’t gold be outlawed anyway as it is also favored by Muslim and Chinese investors (driving prices up in their move out of FRN’s?) It would fit the other quirky arguments displayed in this article. No, I deny that this was polemic. And I am backed by a group of financial advisers that say so too.

Manipulation #9: If your are still not scared enough, beware of something not one analyst expects. But the WSj holds up the FRN flag, claiming “some” market watchers claim a dollar restrengthening,

“Some also see risks to gold investors in the current market. The dollar’s long decline may be near an end, some market watchers say, and if it rebounds, that’s likely to hurt gold.”

Manipulation #10: Omitting the positives for gold. Inflation, record commodity prices, new demand from China, Russia’s declining gold exports, America losing 2 wars, the real estate crisis, investors only beginning to pile into precious metals; not that the WSJ would know anything about that - or share it with its readers. That’s all worth a short sentence:

“An increasingly cloudy financial and economic picture and geopolitical tensions have also helped to spur gold to new highs.”

A simple Google search returns more positive aspects of gold investing - and would have led the WSJ writer to contacts with gold experts. She preferred not to talk to a single one, sticking to some generalists instead.

As not even such stories will slow the solid bull market in the oldest universal currency of the world I have a tip.

The next story should not miss out on the old storage costs myth. This sage is still told by uninformed financial advisers and banks certainly don’t want your assets go that way: A small size bank vault that can hold a document ledger will be sufficient to store gold with a value of more than 1,000 ounces and costs less than $150/year. Of course, the advertisers of the WSJ will not like this as they cannot lend this gold to real estate and other speculators. I assume, only the costs for a checking account are higher than that. But banks live from pushing paper and charging their clients for it, not preserving value.

To end my criticism on a friendly note I am grateful that Ms. Laise assists in keeping the gold price at artificially low levels, giving me more time to buy more cheaply. And I consider anything below $2,000 cheap, just to keep up with real price raises and not some hedonically distorted official inflation indicators for consumers who neither eat nor commute.

This demonization of gold reminds me of the times when the church told people the sun revolves around the earth.

http://seekingalpha.com/article/62283-picking-apart-the-wsj-s-manipulative-gold-reporting?source=d_email

You have worked hard. Now Its time to work smart. Learn to Diversify Your Income.

By: James Cook & Theodore Butler

(Theodore Butler is universally recognized as the world’s leading authority on silver. The following interview took place in late January between Mr. Butler and IRI president, James Cook. This interview reflects the bullish views of Mr. Butler on the future of silver. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

Cook: How will silver do if we have a recession?

Butler: That’s the question of the day! I’ll write about it soon. Over the past couple of decades, recessions have coincided with some of the best silver price rallies. A recession shouldn’t be a negative for silver.

Cook: Won’t industrial demand for silver fall off in a worldwide recession?

Butler: To some extent. But that’s only one factor.

Cook: What are the other factors?

Butler: The supply would also fall. Scrap recovery would be less. Silver is a byproduct of base metal mining and it would fall. New mines would probably be postponed. Supply would still be tight.

Cook: Anything else?

Butler: Investment demand. If people get nervous and buy assets that can’t go broke or are no one else’s liability, silver is on a very short list with gold.

Cook: Gold has always risen when interest rates have fallen. Wouldn’t silver follow?

Butler: Gold and silver have certainly been in lockstep for a long time.

Cook: Will that ever change?

Butler: Yes. I think it is inevitable.

Cook: Inflation is on the rise. Isn’t that another great argument for precious metals?

Butler: Not so much to me, but I wouldn’t argue that it would be a factor if enough people thought it was and acted on it.

Cook: Won’t people choose gold over silver?

Butler: Sure, that’s baked into the cake. There is more interest in gold than there is in silver. That’s what creates the opportunity. The average investor talks gold, but buys mostly gold mining stocks, not metal. In silver, investors buy more actual metal.

Cook: How do you know that?

Butler: The U.S. Mint bullion coin statistics. They show mediocre gold Eagle sales and very strong silver Eagle sales when compared to earlier time periods. Much more silver is being sold relative to gold. There’s also a wild card here that many overlook.

Cook: What’s that?

Butler: There is very little silver that can be bought in dollar terms. More money will flow into gold because there is more than 250 times as much gold, in dollar terms, as silver. Gold is measured in the trillions of dollars. While silver is measured in the low billions.

Cook: So what will that do?

Butler: A small amount of money flowing into silver can have a profound impact on the price.

Cook: Speaking of price, are you still wedded to the belief that silver will exceed $100 an ounce?

Butler: “Wedded” isn’t the word I would use, but that target seems a lot less far fetched than when I initially wrote about it.

Cook: What does a volatile stock market or a bear market in equities do to silver?

Butler: It makes holding silver seem more comforting.

Cook: What happens to silver if Wall Street leveraged finance continues to fall apart?

Butler: I’m not a gloom-and-doomer, as you know, but flight to quality circumstances should help, not hurt silver.

Cook: Some naysayers are talking about a general price collapse in commodities. Wouldn’t that hurt silver?

Butler: Not necessarily. Look, no one knows for sure if we will have a commodity price collapse. These naysayers have predicted a price collapse many times in the recent past and have been wrong. They could eventually be correct, but it’s not certain.

Cook: But let’s say they are correct this time. How does silver fare?

Butler: I think better than anyone expects. If supply falls faster than demand, we could be back in a big silver deficit. If investors get spooked when looking at what the alternatives are for their money, we could have an investment rush into silver. One thing we know for certain is that the world has less silver above ground than at any point in hundreds of years. Plus, we have the built-in buying power of the largest concentrated short position in the history of the world.

Cook: Are you suggesting that silver is the best thing to own in any financial environment?

Butler: Absolutely. If everything, and I do mean everything, goes to hell in a handbasket, the silver price explosion may be delayed, but I’m convinced it will be the best thing to own on a relative basis. No matter what the economic conditions in the future, silver should enhance, or at least preserve your buying power better than anything else.

Cook: That’s a pretty strong statement.

Butler: Maybe, but you can’t name anything that’s been better since I started writing for you.

Cook: You upset some people when you said silver supply and demand have recently come into balance. Where did you get that fact?

Butler: That’s straight from the accepted statistical services.

Cook: You’ve been talking about a big deficit for years that used up all the above ground silver. You mean that’s over?

Butler: Deficits may re-appear in the future, but for now it’s over.

Cook: Isn’t that why we bought silver?

Butler: It was one of the biggest reasons, but it wasn’t the only reason. Remember, the deficit did what it was supposed to do, impact the price bullishly. More importantly, the legacy of the 60 year deficit will be with us forever.

Cook: What do you mean?

Butler: That structural deficit absolutely vaporized 10 billion ounces of world silver inventory over the past 60 years. Nothing can reverse that depletion, nor its future impact on price. The deficit may be gone for now, but it will be felt forever.

Cook: How could we have the onset of huge Asian demand and not use up more than we produce the way we have for twenty years?

Butler: I said the deficit was over for now, not necessarily forever.

Cook: Excuse me, but I don’t believe the figures are necessarily correct. Do you believe them emphatically?

Butler: Well, I’m generally a skeptic about such data, so I believe very little emphatically. But please remember the data isn’t bearish.

Cook: What about investment demand? Will that cause a new deficit?

Butler: I see the problem. We have a semantics misunderstanding.

Cook: In what way?

Butler I say the industrial deficit is over temporarily, and you assume that should cause a price decline. That’s not correct. A commodity deficit can’t last forever. The fact that the industrial consumption deficit is over temporarily should have little impact on price at this point, because very little inventory remains.

Cook: You haven’t answered my question. Won’t investment buying cause a deficit?

Butler: You didn’t give me a chance to answer. Investment buying won’t create a deficit because the metal won’t be destroyed as is the case with an industrial consumption deficit. Investment buying just moves the metal from one owner to another. The metal still exists, just in someone else’s name. But it would be a mistake to understate the potential impact such investment buying can have on price.

Cook: Why?

Butler: Because such investment buying can escalate much quicker and be much bigger than industrial consumption. It can, quite literally, explode. Combine that potential with how little silver remains available and it could be like lighting a match to gasoline.

Cook: Will you admit there’s more silver around than you originally thought?

Butler: Sure. Will that make you feel better?

Cook: Just trying to keep you honest.

Butler: I have stated repeatedly that there may be as much as a billion ounces out there, and I haven’t had to retract that. More has flowed into the visible category than I thought would occur at the price increases we’ve seen.

Cook: What does that mean?

Butler: We’ve seen more come into the ETFs or COMEX. That’s bullish because it means there is less available to be shifted in the future.

Cook: You’ve warned about the huge concentrated short position in silver. Is this the most bullish factor for the metal?

Butler: It’s probably the most bullish factor, along with general investment demand. It’s certainly the most important factor in silver currently.

Cook: Does this also apply to gold?

Butler: Gold is number two. It has a larger concentrated short position than any commodity other than silver. However, nothing comes close to the concentrated short position in silver.

Cook: Why are they doing this?

Butler: I think the big silver shorts got used to dominating the market and thought they could always control it.

Cook: Is this lucrative for them?

Butler: It was, but not lately.

Cook: How do they make money going short in a rising market?

Butler: They don’t.

Cook: How did they?

Butler: They’d make money when the market dropped, especially the steep drops.

Cook: Are they trapped now?

Butler: They could be. The concentrated short position is so large and extreme that the big shorts almost have to knock the price way down and force the tech funds and others to liquidate or they will be up a creek.

Cook: What are the odds they could be overrun here?

Butler: I can’t give you the exact odds, but those odds are greater than ever before.

Cook: What happens to the price if they get overrun?

Butler: I think you live to ask me that question. We will go up in a very disorderly manner.

Cook: What would cause the shorts to buy back and cover in a more orderly fashion?

Butler: Many things could cause the shorts to buy back as prices rise, but none of them suggest an orderly move. One or more of the big shorts could run out of money and fail to meet margin calls. Or the order to cover may come from regulators or even higher ups in the clearing firm holding the shorts. As you know, the big banks and brokerages have taken terrible losses in the credit markets and they are urgently raising capital and the order may come down to the traders to close out these costly and dangerous shorts.

Cook: Do you know how much they’re out in silver?

Butler: Since the first of the year the big concentrated shorts are out more than $3 billion.

Cook: Who are these big shorts?

Butler: Banks, unfortunately, have turned into the biggest speculators of our day. They are responsible for the short position, either directly if they are short in their name or as guarantors to whatever clients are holding the short positions. As I wrote recently, even innocent and uninvolved clearing members of the NYMEX will be responsible if other clearing members go belly-up because of silver.

Cook: What would happen to the price in that case?

Butler: If the former big sellers turn buyers to limit their loss exposure, then it’s Katie, bar the door. We race to the true free market price quickly and probably overshoot it by a wide margin. The price action will look crazy to everyone.

Cook: Is this inevitable?

Butler: Absolutely. I can’t tell you the exact timetable or the precise sequence of events, but I can tell you we must get to a true free market price for silver at some point. Maybe the shorts buy back at much higher prices with great loss and honor their contractual obligations to the long contract holders, or maybe the COMEX defaults and shuts down, but this enormous and obscene short position will be resolved, one way or another.

Cook: What do you think of this big new loss of $7 billion by a rogue trader at the big French Bank, Societe Generale?

Butler: It just confirms that the big banks speculate too much. If they win, they pay themselves big bonuses. If they lose, they ask for bailouts, and still pay themselves big bonuses.

Cook: Do you see any connection to silver?

Butler: Aside from SocGen being a non-clearing member on the COMEX, a connection could be my speculation that the big concentrated short silver position could be held by a rogue trader, or that the bank or brokerage guaranteeing the trade is not fully aware of the negative potential of the position. Let’s face it, it’s not a trade that’s well thought out or is profitable. In fact, it looks like a dumb trade. Who would want to hold such a large concentrated short position in silver at this time? It certainly feels like a rogue trade, because it’s so irrational. The bet increases as it’s going against them and that could end in disaster.

Cook: Anything else?

Butler: Yes, the most important connection. This SocGen loss should drive home the issue of concentration like a Mack Truck. The losses were allegedly caused by one trader. By definition, a very large position held by one trader is as concentrated as you can get. The odds that a large concentrated position will cause problems in any market are astronomically high. That’s why I make such a big deal out of it. I’ve come to believe that concentration is the root of all evil in leveraged markets.

Cook: What can be done about it?

Butler: I wrote about it in the last newsletter. Adopt my solution of applying larger margins on extremely large and concentrated positions. This will protect the market.

Cook: Let’s change the subject. Are we going to run out of available silver soon?

Butler: I think so. The temporary end to the industrial consumption deficit doesn’t mean the day of reckoning has been eliminated.

Cook: It hasn’t?

Butler: Absolutely not. That’s what I was trying to convey earlier. The damage to inventories has been so great and has left the world with so little silver above ground, that it doesn’t matter if there’s a current deficit.

Cook: Why not?

Butler: Because, when investment demand hits in earnest, as appears to be developing, this investment demand will gobble up silver intended for industrial consumption, forcing the big users to scramble for supplies. It’s an inevitable free for all, and this is separate and distinct from the obscene short position.

Cook: You seem to be the only one writing publicly on the concentrated short position.

Butler: Yes.

Cook: Why do you think that is?

Butler: I’m not sure. Maybe it’s a bit too complicated, although I do try to explain it as simply as possible. But let me confess something.

Cook: What’s that?

Butler: It’s a dream come true for an analyst to make an extreme interpretation and to be very alone in his opinion, especially when he has taken much time and effort to explain that interpretation. It doesn’t get any better than to be proven correct in such circumstances.

Cook: The fact that only a fraction of the people in the world read your silver analysis means that those who act on it could have a huge advantage. Right?

Butler: That’s the plan.

Cook: What if you are proven wrong?

Butler: Being wrong is not a sin. It would bother me tremendously if I caused financial damage to readers. I certainly have not done that, nor do I expect to. I’m very careful about what I write, especially the extreme things, like my allegations of manipulation and impropriety by the big shorts. It’s a rare day that I don’t receive thanks from a reader who has profited from my analysis.

Cook: What have you heard from the CFTC? You complained to them time and again. Is anybody listening?

Butler: I haven’t heard anything new as of today, but was told I would be hearing from them. I don’t know if I will. I can explain the manipulation to them, but apparently I can’t make them understand it.

Cook: You once called silver a miracle metal. Why?

Butler: Because it can do more things to make life better than any other metal. The world valued silver for many centuries before the varied modern uses for this material were discovered. That’s almost miraculous by itself. I know many who took advantage of the low prices of several years ago probably think it’s been a miracle money maker, as will current investors think in the future.

Cook: Why do you like silver more than gold?

Butler: Because there is much less silver available to buy and because silver is only a fraction of the price of gold. Therefore, you get more bang for the buck. Plus, compared to gold, the silver story is unknown. All things being equal, I’d rather buy an item, or a stock, that costs $16 than one costing $900, because you stand to gain more, percentage wise, on the cheaper item. But all things are not equal in my mind. They are much more positive for silver. Please don’t misunderstand me, I’m rooting for gold to go much higher as that will be great for silver.

Cook: What do you mean when you say silver is held to a different standard than gold?

Butler: As long as there is any silver inventory, some people believe it will depress the price. That’s even with silver inventories down 95% over the past 60 years. It’s as if any silver inventories above zero are an impediment to price. There appears to be a different standard in gold because inventories do nothing but always rise, yet that is rarely mentioned. Silver inventories are the lowest in hundreds of years while gold inventories are at the highest level in history. I’m not complaining. As this fact becomes known it will prove very positive for silver prices in the future.

Cook: I wonder what the price of gold would be if the above ground supply were all used up as is the case with silver?

Butler: Good point.

Cook: What do you have to say to people who are planning to sell their silver in the $16 range?

Butler: Not much. Look, I’m an analyst, not a personal financial advisor. I try to be very clear about what I think the long-term prospects are for the price of silver, but it’s not my role to personally convince anyone to buy or sell.

Cook: You could have just as easily said it’s a bad idea. Are you bullish or aren’t you?

Butler: Of course I’m bullish. And I think it would be a mistake to sell here. But I want people to buy or sell based upon their own convictions and the greater weight of the evidence, not because I say so.

Cook: Good. What do you think of a report that suggests a surplus in the silver market?

Butler: I don’t think much of it. It’s methodology appears flawed. It makes a claim that a large amount of silver is coming from recycling. That’s not supported by the facts.

Cook: Would you say industrial demand for silver is the steadiest and strongest of any industrial commodity?

Butler: Yes, in the sense there’s growth overall and the applications for silver are worldwide and more varied than any industrial metal.

Cook: What about new uses?

Butler: There’s multiple new uses to go along with hundreds of existing crucially important applications.

Cook: Would you say industry can’t get along without silver?

Butler: So much so that I see the industrial users ultimately panicking.

Cook: What would they do then?

Butler: Attempt to stockpile silver at any price.

Cook: Do you think more people will begin to see the potential of a silver shortage?

Butler: Yes, the people who have studied the facts will hold it more closely and refuse to sell until prices are much higher.

Cook: Okay. Will you summarize the bullish case for silver and why you think it should be purchased now?

Butler: It’s greatly undervalued compared to its supply and demand fundamentals. It’s undervalued on a relative basis compared to everything else, including gold. There’s a smaller amount available for investment than at any time in hundreds of years. It’s under-owned, under-appreciated, misunderstood and overlooked by the investment world. It’s about as far away from being in a bubble as it can be, yet is a prime candidate for becoming a future bubble. It has been pre-sold (shorted) to an extent never witnessed in any other item, which guarantees it must be purchased or delivered against at some point. Institutions can easily own it for the first time. It is vital for modern life. It can’t go bankrupt or become worthless and can soar in price by many times its current price. It is easy to buy. All these statements can be verified easily and I can’t think of one valid reason why it shouldn’t be bought.

Cook: Thank you for a great interview

http://news.silverseek.com/TedButler/1201624211.php

You have worked hard. Now Its time to work smart. Learn to Diversify Your Income.

Go Terbo!
Silver Stock Report
by Jason Hommel, January 29, 2008

My gut tells me that the gold price has a good chance to go up by more than $25 in one day on Friday, February 1st, and again, another $25 in one day on Monday, February 4th, because a certain ad will come out in a Washington paper on Thursday, this week.

Why do I make such a bold statement? Because it’s not that bold when you know what GATA knows.

Also, Peter Degraaf is saying something similar:
http://news.goldseek.com/GoldSeek/1201590240.php

“For the next few weeks or months, analysts will likely refer to the latest rise in the gold price, which started today, as the GATA RALLY.”

GATA has good information about gold, that, when shared, makes the gold price move up!

Back in 2005, after GATA’s Gold Rush 21 conference informed some 100 key people about gold, the gold price was at about $430/oz. and moved up more than $10/day for the next two days, and then launched a nearly parabolic rally that only stopped at $720/oz. in May, 2006.

GATA’s conference presenters were the wisest and most informed gold analysts in the world.

Back then, there was what they called the “$6 rule” in place, where the gold price managers would come out and sell a lot of gold if ever gold was up $6 in one day, because “price action makes market commentary”, and so they were trying to cap any excitement in gold. This was one bit of information presented at the conference at goldrush21.com.

One man who attended GATA’s show was Andrey Bykov, the personal economic advisor to Russian President Vladimir Putin. I met this man. I was at the show. He said it was the best conference he had attended in his life. That show likely helped Russia to act, to buy gold.

http://www.kitco.com/ind/Murphy/aug122005.html

People buy gold when they know what is going on. When they realize the true supply/demand picture, that the central banks of the world are running out of gold after having engaged in leasing and selling their gold for years that has had a tendency to cap the price, making gold way too cheap, then people buy gold.

On Thursday, GATA will run a full page ad in the Wall Street Journal at a cost of $264,400. This ad will have to be “answered” by the gold establishment Wall Street banks, just like I had to answer Jessica Cross yesterday. But what can they say? Who will answer and how? What will they do, bring out Jessica Cross again to spew some nonsense?

If the ad is not enough to spill the beans on the gold market, then GATA’s conference in April, probably will.

The circulation of the Wall Street Journal is more than 2,000,000.

My circulation is about 68,000.

GATA’s email list is maybe about 5000 to 10,000.

http://silverstockreport.com/2008/gata.html

You have worked hard. Now Its time to work smart. Learn to Diversify Your Income.

London, England
Tuesday, 29 January 2008

The Dow rose 177 points yesterday, amid a flurry of gloomy headlines.

“New homes sales fall by record amount,” says the Associated Press , referring to the 26% drop in 2007.

In Florida, housing is in a ‘death grip,’ adds the Dallas Morning News .

And the whole U.S. economy “faces the guillotine,” is how Newsweek sums up the situation.

The big battle, as always, is between greed and fear. Greed pushes up prices. Fear drags them down.

As of yesterday, fear was winning.

“Fear stalks the markets,” says the Economist .

Yes, dear reader, fear – the force of deflation – is getting the headline coverage. Recession, say the papers, is either coming…or it is already here.

As we pointed out yesterday , when Mr. Market turns to fear…it is hard for Mr. Market Manipulator to stop him. Frightened investors have knocked down stocks – wiping out more than a trillion dollars worth of implied wealth. Frightened homeowners have sold off houses – taking nearly $2 trillion off the implied value of the U.S. housing stock. The subprime crisis is said to be taking out another half a trillion. A trillion here…a trillion there…

What can the forces of inflation do against these huge attacks? Mr. Politician has come forward with a plan to pump $150 billion back into the U.S. economy. Mr. Central Bank manager has cut rates by 75 basis points…and threatens to cut more.

But the problem, as the Financial Times so elegantly put it, is that the “credit orgy” is over. The liquor ran out. The music stopped. And someone called the cops. Bush and Bernanke show up with a few more bottles of booze, but the guests are already putting on their coats and fumbling for their car keys.

If we’re right, one of two things will follow:

If Mr. Market has his way, fear will dominate the market…and stocks will fall while gold stagnates.

If Mr. Market Manipulator prevails, greed will return…but not necessarily where he wants it. Stocks will stagnate while gold soars .

Most likely, each will have his victories and his defeats as the fortunes of this war shift back and forth.

We got a hint of which way things were going yesterday. The Dow rose, but the real action was in gold, which shot up $16, to a new record of $927. Analysts mentioned that the power went off in South Africa, putting the gold mines out of commission. But a healthy boom wouldn’t care…and investors wouldn’t have cared a few years ago. A healthy boom produces rising stock prices…leaving gold behind. This is no healthy boom at all. It is a fraudulent boom and investors know it, shifting their speculations from stocks to gold.

Thus begins a new stage in the bull market in gold . Do you remember when we were able to buy gold around $300 an ounce – 7 years ago? It rose hesitantly, often giving back gains. People wondered if gold had not been made completely obsolete by sophisticated financial instruments. We at The Daily Reckoning know better. With the decline of the dollar (and indeed the worthlessness of all paper currency) gold is one thing that will always have value .

If you’re worried about a bear market, buy some put options, said the experts. If you’re worried about depreciation of the dollar, buy euros. If you want protection against defaults, buy some swaps.

The experts could not imagine that a day would come when we’d be worried about the whole dollar-based financial structure …about the ability of the biggest banks to survive…and the capacity of the biggest Wall Street firms to make good on their obligations.

But here we are…and gold is rising. And now it goes up by $10…$15…$20 in a single day. And now people are starting to read about it in the papers. And people are starting to wonder how high the price will go…and where they can buy Krugerrands.

Yesterday, Peter Munk, CEO of the world’s largest gold miner, Barrick Gold, told the worthies at Davos that the bull market in gold had a ways to go. He said the price would go into the “$2,000 bracket” before it was over. We couldn’t agree more .

*** “The real story is the decline of America,” said David Fuller yesterday at lunch. David has been writing his Fuller Money , a careful analysis of global money trends, for as long as we can remember.

The rest of the world is in pretty good shape, economically, says David, adding that if he had to make one “buy-it and forget-it” investment for the next 10 years he’d buy stocks in India .

India (Asia generally) and much of the rest of the world have expanding economies, rising incomes, and plenty of room for growth, he says. The problems, on the other hand, are mostly concentrated in the United States.

Martin Hutchinson adds this:

“The US is currently in the position of General Motors in about 1970, splendid in its possession of a majority share of the US automobile market, and apparently invulnerable to competitive threat, yet in reality burdened with impossible welfare programs that a foolish management had negotiated during the good years. For General Motors, the future after 1970 was one of steadily slipping market share, from 60% of the US market to about 25%, of a steadily aging workforce, and of a retiree health benefit obligation that if valued appropriately is today worth far more than the value of the company itself. Had GM not undertaken its excessive pension and healthcare obligations, it would have had more capital to compete effectively, would have been less likely to lose oodles of money in every downturn, and might still retain primacy in the world automobile market today, albeit by a lesser margin than in 1970.

“For the US, the position is the same. Its workforce will be older than its competitors’ and entitled to benefits that absorb an increasing share of the national income as its relative earnings decline.”

We probably all had the same thought. Yesterday, if you were to buy a 30-year Treasury bond you would have gotten a 4.28% yield. That yield is only a few basis points from the current U.S. consumer price inflation level, as announced by the government’s own number torturers. Assuming the number is more-or-less honest, and assuming things don’t change, this means that a person who buys a long Treasury bond gives up money now for the right to receive zero return over the next 30 years. Of course, things do change. But the changes that are most likely are those that make this investment even worse. The inflation rate is likely to go up. At 10% inflation, the investor loses 5.72% per year. If the dollar falls against other major currencies, he is out even more.

The only way the bet on long bonds could work out for investors would be if the United States were to sink into such a fear-driven recession that inflation and interest rates fell substantially. Nominal prices could actually go down, for example, as they did in Japan. Real yields could rise…for a while.

But the United States of America controls the value of the currency in which the United States of America’s debts and obligations are calibrated. Even before a slump has begun, the Fed has panicked…and Washington has rushed to get the checks in the mail. A serious downturn would produce even more desperate attempts to bring prices up and the dollar down. It is the only way the feds can service their enormous debts and obligations. One way or another, they will find a way to keep inflation rates high…and sooner or later, certainly sometime with the next 30 years…they are almost sure to lose control altogether. Holders of long U.S. treasury bonds will continue receiving their coupon payments. Perhaps they will be able to buy a cup of coffee with them.

*** Colleague Horacio Pozzo in Argentina thinks investors may have gone too far in driving down prices on financial stocks. In the United States, he notes that you can buy Bank of America at prices 26% below its high…giving it a P/E of only 11. The bank has been recapitalized with $12 billion in bonds. He thinks the worst is behind it.

Citigroup, too, looks like a buy to Horacio. Its price has been cut in half and now trades at only a fraction above book value.

We were more convinced by Horacio’s pick in his own Argentina. The United States already has plenty of credit – too much of it. We can easily imagine that these U.S. financial firms will lose ground for years – like GM. We don’t see much growth…but plenty of room on the downside.

But South of the Rio Plata, the picture is upside down. North is where the sun shines. South is where the snow flies. And credit has plenty of room to expand. Nobody has much credit in Argentina. The ratio of private credit to GDP is only 12.5%…(compared to over 150% in the U.S.)…and it’s growing at 42% per year. There is not much room on the downside…and clear skies overhead.

The banking sector in Argentina has none of the threats and problems of its U.S. peers, but banking stocks have taken a beating anyway. As a result, you can now buy Banco Macro at a P/E just above 11…and its deposits are growing at 23% annually. You can read Horacio, in Spanish of course, at Moneyweekes.com.

*** Our Sunday lunch with the boys was intended to focus on education. Where was Henry going to college? Would Edward like to go to boarding school next year?

Pater Familias laid his cards on the table even before the entrée was served.

“Look, I’m almost 60. I’ve had children around the house for the last 30 years. And for at least a quarter century, my life has been tied to the school schedule; I’m ready for a change.”

“Oh…so you want me to go to boarding school, so you can do whatever you want?” Edward saw the point immediately.

“Well, yes…”

“Wait, it’s not just that,” Elizabeth entered the conversation. “We’re not sure you’re going to be able to get back into the French school in London. It would be nice to have an alternative.”

“A Plan B,” said your editor…who suspects that all Plan A’s are doomed to failure.

“Not only that,” the voice of reason returned. “I went to boarding school when I was about your age. I loved it. And I think you’re the sort of person who might like it too. The English boarding schools are very focused on sports and outdoor team-building activities. Those are the sorts of things you like. Most likely, you’ll go to the French school, but we should look at these boarding schools to see if you like them…and just in case the French school doesn’t work out.”

“But I don’t want to go to boarding school,” Edward replied. “You didn’t make any of the others go to boarding school. Why should I have to go? It’s not fair.”

“No, we’re not going to force you to go to boarding school. But you might want to go.”

“I don’t want to…”

“How do you know you don’t want to? You haven’t tried them.”

“Well, I don’t want to try…”

“Well, you might try anyway. You know, you don’t have the best grades. If you want to get into a good college, you’ll have to make yourself interesting by doing something different.”

“Maybe he should go to St. Georges in Buenos Aires,” suggested Papa. “That’s different…an English speaking boarding school in Argentina. They can’t get too many applications from there.”

“That might be over-doing it,” Momma replied. “If it’s too strange or too far off they’ll think he was a discipline problem that we wanted to get rid of.”

“Well, I wouldn’t worry about getting into a good school anyway…it doesn’t make any difference.”

“Oh no…here we go again. And you know it’s not true. People from the best universities get the best jobs.”

“Maybe…but they don’t really learn anything. Edward would be better off learning on the job. Look at this subprime crisis. Who created the crisis? It was smart guys who came out of Ivy League schools and worked in sophisticated financial firms all Wall Street. They were the ones who packaged subprime debt…who did the math and the analyses that told them this stuff wouldn’t go bad in a million years…and who also worked at the rating agencies who gave it AAA ratings…and they’re the ones who work for Citigroup and for Societe Generale. All so well educated…and so smart that they couldn’t think straight. You’re better off not getting that kind of education.”

“Maybe…but then you’d never have gotten a job at Citigroup and you wouldn’t have an expensive house on Long Island.”

Until tomorrow,

Bill Bonner
The Daily Reckoning

You have worked hard. Now Its time to work smart. Learn to Diversify Your Income.

How is the gold price doing versus the silver price. That depends on what point in time is being considered and what time period is being considered.

A period in time to look at:
At the start (about 2000-2001) of this bull market it took about 70-80 ounces of silver to buy 1 ounce of gold. Now it is taking about 50 ounces of silver to buy 1 ounce of gold.

A point in time to look at:
At the beginning of 1980 it took about 15 ounces of silver to buy 1 ounce of gold.

So, since 1980, gold has outperformed (increased its purchasing power more than) silver.
Since 2001, silver has outperformed (increased its purchasing power more than) gold.

********

Basic point:
Silver is found in the ground about 16 times more often than gold. In a free market, an ounce of silver would be worth about 1/16 an ounce of gold. Historically this is the value/price ratio between the two metals.

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The US dollar price of gold is trying to play catch up to inflation, the increase in the supply of US dollars. Same goes for silver.

US dollar supplies:
1980: M3 was about $1.8 trillion
2007: M3 is about $13+ trillion

The supply of US dollars has grown about 7.2 times (13 divided by 1.8).

1980 USD price of gold: $850
2007 USD price of gold, all other things being equal except the supply of USD, should be about $850 times 7.2 = $6120.

1980 USD price of silver: $50
2007 USD price of silver, all other things being equal except the supply of USD, should be about $50 times 7.2 = $360.

Or silver should be about the historic ratio of 16:1, or 1/16 the price that gold should be at, or $6120 divided by 16 = $383.

$6120 divided by $850 = 7.2
$370 (lets call it) divided by $15.5 = 23.9

The gold price versus silver price picture looks like silver has more outperformance of gold to do. It probably will, and more.

http://goldprice.org/bob/2008/01/gold-price-versus-silver-price.html

You have worked hard. Now Its time to work smart. Learn to Diversify Your Income.