By: The Gold Report and Sean Rakhimov

SilverStrategies.com editor Sean Rakhimov expects the economic crisis may go on for a generation even with (or because of) all the government intervention. In this exclusive interview with the Gold Report, he tells us he expects physical gold and silver to lead the parade. When picking stocks to buy now, he says investors have to decide for themselves whether a company will survive the washout; it may be tough going from here to there, but ignoring short-term market fluctuations and sticking with survivors should prove beneficial in the long run.

The Gold Report: Sean, when we last spoke, in December, there was more anxiety about the state of the market, particularly as far as determining the bottom. What’s your view now that we’ve actually had some decent financial indicators come out in the last week or so?

Sean Rakhimov: I take a much longer-term view and, basically, the way certain things — like metal prices or market bottoms — are going to react is going to depend largely on what happens elsewhere, mostly with the government. The things we’re trying to analyze are not masters of their own domains, so to speak. I think a lot of this money printing that has been taking place is starting to filter into prices and it’s showing in metal prices, it’s showing in grocery prices, it’s showing in all kinds of prices.

In terms of a market bottom for the general market, I hesitate to predict that because, again, so many things are wrong and so many things are moving or changing that it is absolutely impossible, at least for me, to predict. What I do know is the market is going to significantly underperform vs. gold. Before the end of this cycle I expect to see the Dow-to-Gold ratio to be on par. Again, if they’re going to print another few trillion dollars (and/or other currencies), the market may go up in nominal terms. All kinds of things can happen, but I do think all this money printing is already starting to show up in prices of hard assets. It’s only going to accelerate going forward.

TGR: With all the money printing already underway and the possibility of even more, how do we begin to explain the U.S. dollar’s valuation, relative to other currencies?

SR: Somebody who is a lot more proficient than I am likes to say that the U.S. dollar is the worst currency in the world, except all the others. Basically, the entire financial system is in trouble and anything can happen. For instance, reports from places like Russia say that the population is getting out of their own currency and is trying to put their savings in U.S. dollars. There is all kinds of confusion on all levels and the recent G20 meeting only proved that there is no fundamental difference in the approach or in measures they’re trying to take or proposing to take to address the situation. I don’t think they have any idea what needs to be done. If you recall, in our last interview I anticipated that that the powers that be will fail to agree on potential solutions to these issues.

TGR: Last time we spoke, you predicted three crises would occur: a debt crisis, followed by a currency crisis, then an oil crisis. Do you feel those are still what we’ll be facing and are we through any of them yet?

SR: No, I don’t think we are finished with those by any means. I think the debt crisis is underway. Perhaps it’s evolving into a currency crisis, but there are still a lot of things that need to be worked through. I think the bond market, which is a big debt market, is going to get in trouble. Many governments around the world will probably get into all kinds of trouble with their debts.

That includes the U.S. Another big issue for the average person is that municipalities will get in trouble. Then you have the corporate bonds that have been performing better on the assumption that the corporate bondholders will have priority access over the equity stakeholders to assets of struggling companies. I think that’s a false notion, in that there are not going to be any assets to be had or there are not going to be enough to go around, because those assets need to be sold in order to be distributed to bondholders, and they’re not going to be sold for much. I’m making a general statement here, but basically I don’t think the corporate bond market is going to do well. The banking sector is in trouble, the consumer is in trouble, there’s all kinds of credit card debt, and commercial real estate is another big bubble that’s going to pop.

So I don’t think the debt crisis is over yet and the way we’re addressing it, of course, is by issuing more debt. That’s not going over too well, so the governments are resorting to printing money outright. I think that’s going to continue and will eventually lead to a currency crisis, so we’ll probably have another year or two of this sort of slow sliding into a major crisis. I don’t think there’s a clear-cut beginning and end to these crises, and I don’t think the big picture has changed.

TGR: If we’re in the debt crisis, but not yet at the currency crisis, how will gold and silver react? Will it be flat until we get to the currency crisis?

SR: Probably not, because again, with these crises, there’s not a clear-cut beginning and end and in different parts of the world or in different countries or currencies they may perform differently. For instance, gold made a new high in a number of currencies, including the Canadian dollar and Australian dollar and Swiss franc. So in those countries the attention is already glued to these things and people are reacting accordingly. In the U.S. for the time being gold is doing better than silver, but it has not made a new high since 2007. In terms of the global market, it’s going to largely depend on what the governments are going to do. If tomorrow, the U.S. government announces another bailout package of, say, $10 trillion, to save the bondholders or somebody else or the municipalities, all bets are off. In that scenario, gold or silver can move up overnight. Read More…

The Fed scaled back its money-pumping efforts over the first three months of this year, which is not surprising given that it would have been almost impossible to sustain the frenetic pace achieved during the final four months of last year. But even though the Fed’s actions have become less frenzied of late, the Fed-Treasury tag team has made sure that the rate at which new money is borrowed into existence continues to exceed, by a substantial margin, the rate at which money is extinguished via debt repayment. This has mostly been accomplished via the US Government increasing its debt load at a much faster pace than the private sector de-leverages. As mentioned in previous TSI commentaries, the private-sector debt bubble is in the process of being replaced by a public-sector debt bubble.

The following chart shows the year-over-year percentage change in True Money Supply (TMS). Note that TMS does not include bank reserves. When the banks eventually start lending their excess reserves the result will be a further increase in TMS, but there is no telling when that will happen. It could, for example, happen within the next few months, but on the other hand the commercial banks could decide to sit on their excess reserves for several years. Either way there is likely to be a lot more monetary inflation over the coming 12 months for the same reason there has been a lot of monetary inflation over the past 12 months: increased government borrowing and Fed monetisation of both government and private debt.

On the above TMS chart we have identified three separate periods. Period A (mid-2001 through to mid-2004) had fast money-supply growth, Period B (early-2005 through to early-2008) had slow money-supply growth, and Period C, which began during the final quarter of 2008, has thus far been characterised by fast money-supply growth. The fast money-supply growth of Period A fueled rapid price rises in houses, housing-related debt securities and commodities, and the slow money-supply growth of Period B led to large price declines in houses, housing-related debt securities and (eventually) commodities. The fast money-supply growth of Period C WILL fuel rapid price rises SOMEWHERE in the economy.

There is nothing novel or complicated about the theory that fast money-supply growth over a prolonged period leads to substantial price rises and that a subsequent sharp slowing in the pace of money-supply growth causes prices to retrace; it is just basic supply and demand. However, the effects of monetary inflation are non-uniform and the time delays are both lengthy and variable. The challenge, therefore, lies in determining which prices will be affected the most by the money-supply changes and how much time will elapse before the effects of the money-supply changes become evident in prices. This is not only a challenge for investors; it’s also a challenge for policymakers. One of the main problems faced by policymakers (central banks and governments) in their efforts to manipulate the economy to their own best advantage is that they will always be able to inflate the money supply but they will never be able to control the effects of the inflation. Sometimes they will get lucky and the right things (stocks and real estate, for instance) will be the primary beneficiaries of the inflation, but at other times they will be unlucky and the wrong things (gold and oil, for instance) will gain the most ground in response to the inflation. We suspect that over the next few years they will be as unlucky as they can be in that gold will be by far the biggest winner.

Will the Fed eventually ’soak up’ the excess money?

Bernanke and his Fed cohorts will naturally say that they plan to remove much of the recently injected money once the economy recovers. In all likelihood they will also go as far as making preparations to drain away the “excess liquidity”; for example, getting approval for the Fed to issue its own bonds. This is all part of managing inflation expectations. However, there is almost no chance that the Fed will actually engineer a significant slowing in the rate of money-supply growth until it is way too late (until a major inflation problem is ‘baked into the cake’). The reason is that the inflationary policies implemented to date will not only fail to turn the economy around, they will very likely make things worse. To put it another way: the harder they try to stimulate the economy by creating money out of nothing the more economic damage they will do (counterfeiting money transfers wealth from productive enterprises to the counterfeiter and thus reduces the economy’s growth potential) and the longer it will take for a sustainable economic turnaround to begin.

Rather than draining away the so-called “excess liquidity” that was injected in an effort to boost the economy, it is more likely that the obvious failure of Fed-sponsored inflation and increased government spending will lead to even more of the same. After all, every good doctor knows that if a patient becomes sicker after taking a certain medicine then the correct response is to double the dosage. And if that doesn’t work, double it again.

The cost of “flexible” money

One of the most popular arguments against having gold as money is that a gold-based monetary system would be inflexible, the implication being that today’s dynamic economy requires a more flexible, or elastic, form of money. Well, if by “inflexible” it is meant that under a gold-based monetary system the supply of money could not be arbitrarily expanded by governments and banks, then yes, a gold-based monetary system would be inflexible, but such inflexibility is a consummation devoutly to be wished. In our opinion the ideal money would be as constant as the sun, enabling each of us to calculate exactly how much money we needed to save to cover our future living expenses.

Today’s official money is very flexible, and it’s not hard to see the cost of this flexibility. The following chart from http://mwhodges.home.att.net/nat-debt/debt-nat.htm reveals one method of quantifying this cost. The chart shows that the total quantity of debt in the US economy was around 185% of net national income in 1957 and was still around this level at the beginning of the 1970s. However, by 2008 the total debt had grown to about 500% of net national income. Bear in mind that the current “flexible” monetary system came into being in the early-1970s. In other words, the introduction of “flexible” money led to a veritable explosion in the quantity of debt.

Above is an excerpt from a commentary originally posted at www.speculative-investor.com on 5th April 2009.

- The Casey Files -
by Editors of BIG GOLD from Casey Research
April 8, 2009

All the hot air emanating from the participants of the just concluded G20 Summit in London has, with the help of the breathless press, made its way into our neighborhood and lifted the Gordon Brown Alert wind sock atop the Casey Research  headquarters.

A little background: Gordon Brown, Britain’s prime minister, became infamous for his, let’s say, slightly off judgment when he was still serving as chancellor of the Exchequer. Between 1999 and 2002, Brown managed to sell 400 tons or 60% of the country’s gold at the very bottom of gold’s 20-year bear market. The average price per ounce achieved at the 17 gold auctions was $275 – costing British taxpayers around $2.96 billion. This stroke of genius earned the chancellor such sterling titles as “Sold The Gold Brown” and “Bottom Brown,” among others that don’t meet our PG rating for publishing.

Incidentally, 2002 was also the breakout year for gold and the beginning of our current bull market for the metal.

A similar event in the bluster-sphere had the Alert sock flopping around again in early 2005. In February of that year, Brown was making the rounds on the press release circuit calling for a “revaluation” of the IMF’s gold ­­– that’s code for “sell the barbarous relic.”

Gold was selling for around $415/oz at the time – and within months, the second leg of gold’s bull run began. On May 11, 2006, gold peaked at an intraday high of $725 and remained in the $600 to $700 range for over a year in a consolidation that led to another sharp advance.

In January 2007, the IMF’s gold was again in the spotlight. A committee was formed to advise the IMF Executive Board how to solve the organization’s funding needs, and selling some of the IMF’s gold was part of the committee’s recommendations.

And we had something to say about it.

The following is from an article titled “About Those Proposed IMF Gold Sales” by BIG GOLD editor Doug Hornig, with an introductory comment by Casey Research Chairman Doug Casey:

As you have probably heard by now, a blue-ribbon panel recently advised the IMF to sell gold as a way of trying to clean up its finances.

The news initially spooked some weaker holders and hedge fund managers, most of whom are clueless about the overarching trends driving gold. However, as Doug Hornig makes clear in the following report, the proposed IMF sales represent much ado about nothing… other than perhaps creating a buying opportunity, that is.

Doug Casey

Doug Hornig concluded his article with:

Even if a sale does come about, will it matter?

Many feel that the IMF’s actions are not liable to have much impact on gold, arguing that the distortions of the CBGA, even at maximum 500-ton strength, have already been fully factored into the current price and its trend line.

This is not to say that there couldn’t be a short-term downdraught. Sure there could be, especially as the IMF sales are formally announced. Some holders of gold, maybe a significant number, can be expected to sell into the news.

But with countries such as China, Russia and the nations of the Middle East itching to add to their reserves, even a large dump of physical metal onto the market is certain to be absorbed in short order.

Nor will countries be the only buyers. Beverly Hills investments manager Kenneth Gerbino wrote in 2005 about a similar IMF sales speculation, saying that any additional supply “would surely be snapped up by the bullion banks and mining companies that are ‘short’ somewhere between 10,000 and 12,000 tonnes, according to some very savvy analysts.” There’s no reason to think that’s changed much in the interim.

Gerbino could have been writing about the IMF when he concluded, “Central bankers will most likely continue, as usual, to scare the price of gold down from time to time by statements of gold sales. But they are all too keenly aware of the growing number of people who realize that the gold, not paper and ink, is the real stable monetary element.”

Finally, it is important to keep the relatively miniscule amount of gold sales we are talking about in perspective. In an era where over $1 trillion in derivatives trade globally each day, $6.6 billion in sales is just not that much money when compared to potential investor demand once the U.S. dollar goes into the free fall that Doug Casey, among others, now believe is imminent.

In other words, if IMF sales do happen, and if they depress gold’s price, that’s a buying opportunity… for bullion and especially for the high-quality junior exploration stocks that pack the most punch in a rising gold market.

This insight is as valid today as it was in 2007, to which we’ll add that gold embarked on its third major up-leg of this bull market the following August, exploding from $650 to $1,000 in just seven months.

Fast forward to April 2009, and Goldfinger Brown is at it again, campaigning for IMF gold sales. What does it mean? Will he prove once again to be a contrarian indicator? We don’t know. But it doesn’t take a two-by-four to get our attention. In the meantime, we’ll keep an eye on the old Alert sock.

Excerpts from GLOBAL WATCH:
THE GOLD FORECASTER
by Julian D.W. Phillips
April 9, 2009

Russia has proposed that the  I.M.F. created, synthetic currency [Special Drawing Rights], with changes [Gold backing], be adopted by the world to replace the U.S.$ as the world’s prime reserve currency.   Both China and Russia proposed new currencies, not so much in the hope that their proposals will be accepted, but bringing to the attention of the world that the $ is losing credibility and not serving the role is should as the world’s reserve currency. At the same time the I.M.F. was boosted to a much stronger global role than ever before by the addition of nearly $1 trillion to its Balance Sheet.   It seemed appropriate to Russia then to attempt to elevate the Special Drawing Right to a real global currency from the synthetic bookkeeping role it has at present.   With the I.M.F. now placed in such an important role in the global monetary world and if such a proposal were adopted, would it work?

It didn’t before in the seventies, because there was insufficient political will for it to do so.   For it to do so now there would have to be the global political will for it to do so and we are close to that now as the I.M.F. has been allowed to issue $250 billion in S.D.R.’s to stimulate the world economy.

If the measures proposed by the G-20 conference last week do not succeed in rectifying the global monetary system the currency world will begin to break down.   As it is, once the $ retreat back to the States is complete, it looks like the € will rise strongly again against the $.   For the currency world to remain stable the exchange rate between these two currencies must remain relatively stable.   This stability remains under threat.    With potential financial mayhem just being skirted, never has the time been as pressing as now for a global solution to the world’s credit and associated crises.   Without global unity on this, there will be no solution and then it will be every trading bloc for itself!

The I.M.F has the support of the world [provided China and Russia are given a greater say in that body and the U.S. stranglehold over it is removed by lowering its voting power below 15%] to ‘manage’ the global monetary system, as we mentioned above.

With this threatening situation hanging over us,  it also looks like only the I.M.F. has the support of the world to adjust and agree any fundamental reforms to the monetary system.   This is a view confirmed at the G-20 meeting where both China and Russia called for new global reserve currencies.    While there is little chance that these proposals will be accepted, through it, China and Russia made their presence known and initiated the reformation of the monetary system.   Certainly the time has come when China cannot be ignored on such matters.   While the U.S. Treasury Secretary has said the U.S. $ will remain the global reserve currency, he was open to look at suggestions.

Now Russia has said it would favor the inclusion of gold bullion in the basket-weighting of a new world currency based on Special Drawing Rights issued by the International Monetary Fund.  With the uncertainty affecting foreign exchanges and exchange rates, such a move could add increased credibility to the currency system.   Bear in mind its price would be a reference point and the move would not involve buying gold on the open market.   However, with Bankers so resistant to gold, its inclusion in the S.D.R. may be premature?   If not, we would then expect to see central bankers remove their dislike of gold completely and let it find its own level.

Russia has been buying up gold for the last two years slowly but surely and intends to raise the gold content of its reserves to 10%.  By doing so it adds action to intention on gold as part of their monetary system.   The silent but difficult to ignore presence of gold in so many central bank vaults tells us that the return of gold in support of currencies may well be possible now?
With the U.S. still controlling the I.M.F. even the U.S. of A. may find such an additional reserve currency acceptable.   This would certainly diminish, over time, the impact of the U.S. $’s swings on global foreign exchanges, on global trade.  With the Obama administration trying to fortify the I.M.F. at the meeting of the Group of 20 now is a good time to launch the proposal and for adjustments to the I.M.F. and the S.D.R. to be made.   The I.M.F.’s view of gold continues to be one of respect of a vital reserve asset, so there should be no barrier provided it supports currencies and does not compete against it.

The G-20 will only follow such a move if gold is needed to shore up confidence in currencies, which is becoming abundantly clear to all now.   Certainly, we are not quite at that point at the moment.   But how far away from that are we?  Should major currency crises begin gold will quickly become a very visible anchor to investors be bought as such.   This may force central banks to re-recognize it as a stable foundation in extreme times.

So if the U.S. is prepared to take a lesser role in the I.M.F. it should gain the support of the world and such structural changes to the global monetary system would follow.   Sadly, as national interests, not global ones, govern international policies, we doubt whether the States would lessen its dominant role, just yet.   A little more pain may be needed first?
“The times, they are a changing”.

The present I.M.F. view of gold: -
“Gold is an undervalued asset held by the I.M.F., and provides a fundamental strength to its balance sheet.  Gold holdings provide the I.M.F. with operational maneuverability both as regards the use of its resources and through adding credibility to its precautionary balances. In these respects, the benefits of the I.M.F. ’s gold holdings are passed on to the membership at large, to both creditors and debtors.   The I.M.F. should continue to hold a relatively large amount of gold among its assets, not only for prudential reasons, but also to meet unforeseen contingencies.”

Leonard Melman, prodigious writer (The Melman Report) and leading authority in the metals and mining arenas, sees opportunity for some “really good moves” and “fabulous returns” on the horizon, citing vibrant charts on random juniors whose values have multiplied during the last six months. Also noting the possibility of some “good price pops” in the metals themselves, Leonard considers the price of the base metals as a real key to the future of the economy. On the other hand, he shares some serious concerns about the economy in this exclusive interview with The Gold Report. For example, he is alert to several “ominous red flags” that warn of the potential for devastating hyperinflation and worries that the Humpty Dumpty of savaged financial assets may be beyond repair.

The Gold Report: We’re finally seeing some good economic news. Have we hit the bottom?

Leonard Melman: As far as the general economy is concerned, I’m not exactly prepared to make a clear statement. I’ve been checking news headlines from around the world and still see a lot of dismal information. Japan’s export economy dropped by 50% this February compared to February of 2008. Their car sales have collapsed by 43%. Toyota is talking about cutting worldwide production by half, which will just drive their economy nuts. We’re getting stories out of Germany that are very negative. Czechoslovakia has just ousted its prime minister; they’re in a state of chaos. Latvia and Hungary have currency problems. Poland’s economy is contracting. I could go on and on. So while the United States is starting to report some good news, there’s still a lot of gloom and doom, so the picture is in flux.

As far as the metal side of things, I’m getting more and more encouraged. Gold is behaving beautifully. That last decline stopped at about $860, which is still well above long-term up-trends. We’re back in the $930 range again, so there is support out there. With money creation going on at the rate it is, you have to feel good about that.

Virtually every base metal—nickel, copper, zinc, lead—has risen quite dramatically since last fall’s lows. So I think there is good reason for optimism on the metal side and a balanced outlook on the economic side.

TGR: Given that scenario, what should the investors be looking at?

LM: I think there is the opportunity for some really good moves. I’ve been looking at several charts of junior companies just at random. While some still have some difficulty to overcome and they’re still fairly close to their bottoms, others quite surprisingly have doubled and tripled during the last six months. The two most widely followed mining indices, the XAU and the HUI, have broken out to relative highs for the past four to five months. So there is a chance for some very substantial gains.

TGR: So some juniors appear pretty promising.

LM: Yes, and there’s always the great advantage the junior mining shares have when it comes to the total investment picture. They’re very thinly traded in comparison, say, to a stock such as IBM or GE. It takes substantial sums to move those shares significantly, but it only takes a few thousand to move junior shares. With some of those junior shares dropping so far during the last year, say, from 80 cents down to 7 or 8 cents, it takes very few $1,000 investments to drive those shares higher. If you’re prepared to stand the risk that the scenario may not play out quite as you want, I think there are significant potential returns over the next year.

TGR: You say a few thousand shares can drive the price up; the same can be true for driving it down.

LM: Absolutely.

TGR: What are the baseline economics that this will rise over a year or two?

LM: Even though I don’t agree with the basic economic concept of all this stimulation, there is an excellent chance it will work in the sense of creating at least a boomlet—if not a full-scale boom, at least an improvement in the world’s economic picture over the rest of this year. If that happens, demand for all natural resources will go up and that specifically is going to include the base metals, which are in demand for virtually any kind of manufacturing. In turn, that could cause good price pops in the metals themselves. If that happens, of course, the metal shares would likely participate on a very leveraged basis.

My problem is whether this boomlet will create increased business activity looking out a year and a half or farther. If the increased business activity behaves as it has in the past, it will stimulate demand, stimulate price increases, and with the trillions of dollars involved in stimulative and rescue programs over the last year, inflation could heat up very quickly should business conditions improve substantially. If inflation heats up, by nature that would drive interest rates higher. And rising interest rates could cut short the boom.

So I think we’re playing with a fairly short-term timeframe when it comes to improving the economy dramatically. Beyond a year and a half, I really do get concerned about the potential for a hyperinflationary burst, which could create real economic and social disorder. But I hope that’s a long time away if it’s going to happen.

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