By: John Rubino

Dear Friend of GATA and Gold:

The Gold Report newsletter today interviewed Sprott Asset Management’s chief investment strategist, John Embry, who remarked that he expects gold to reach $1,500 by the end of the year as hyperinflation begins. But amid the consternation about the gold that may be missing from the Royal Canadian Mint, the interview may be most worthwhile for Embry’s reminder about the fundamentally dishonest structure of what passes for the international gold market.

“If you look at the short positions that the commercials, that the bullion banks — which are the agents of the U.S. government — are running, it’s a complete fraud,” Embry says. “Because they couldn’t possibly deliver on their paper promises if they were called by the people on the other side of the trade. The gold isn’t there to deliver.”

That is, the world’s gold is, to put it politely, grossly oversubscribed. That’s what derivatives are all about, what derivatives were invented for — to divert investment and speculative demand away from real things, where such demand would be reflected in public price indexes, into mere promises of those things, so that central banks more easily might increase the money supply and their power without being held to account for the ordinary consequences.

The British economist Peter Warburton, author of the treatise “Debt and Delusion,” was among the first to figure this out, explaining it in 2001 in his essay “The Debasement of World Currency: It Is Inflation, But Not as We Know It,” which you can find at Gold-Eagle here:

http://www.gold-eagle.com/gold_digest_01/warburton041801.html

So even government counterparties — no, especially government counterparties, the instigators of the oversubscription of the gold supply — must be regarded skeptically.

Yes, there well may be plenty of gold left at the Royal Canadian Mint, as was insisted upon, with great agitation and anxiety, by the paper gold marketer quoted in today’s Ottawa Citizen story, dispatched to you a little while ago –

http://www.ottawacitizen.com/Business/Mint+moves+halt+possible+gold/1690…

– just as there may be plenty of gold left at Fort Knox. But those are not the most compelling questions. No, the most compelling questions are: Who really owns that gold? And how many people have claims to it?

While, for example, the Federal Reserve Bank of New York sometimes offers tours of the gold vault in its basement and gold is sometimes seen there, its ownership is never specified. It is supposed to be enough that the gold at the New York Fed is understood to be mostly the gold of other countries, held for safer keeping than those countries themselves could provide. Such a practice made some sense long ago when the whole world was at war. Today this practice would seem to have other purposes.

And of course the gold purportedly kept by the U.S. government at both Fort Knox and the depository in West Point, New York, is never seen at all and never publicly audited. For all that is known by that agitated and anxious paper gold marketer quoted by the Ottawa Citizen, and for all that is known by anyone else outside the government, on Mondays an assistant secretary of the treasury may take the German ambassador to Fort Knox and show him around and say, “Take a look at your gold,” and on Tuesdays the assistant treasury secretary may take the French ambassador to Fort Knox and show him around and say, “Take a look at your gold.” Wednesdays may be reserved for the Swiss ambassador, Thursday for the Italian ambassador, and Friday for the British ambassador, who is almost surely in on the joke and just making a social call.

Last year the Federal Reserve and Treasury Department formally denied GATA’s requests to inspect their records of the U.S. gold reserve. It is impossible to imagine any good reason for those denials. They are powerful evidence that the U.S. government — the main custodial government for international gold reserves — is playing games with the gold market, games that, in fact, have been openly admitted by various authorities from time to time. (See http://www.gata.org/node/6242.)

Now the games may have reached the Royal Canadian Mint. At best the mint’s gold accounting system is badly flawed, even if the mint may be ahead of some others for having an accounting system at all. But even as the gold games multiply and become more brazen, there’s the paper gold marketer, standing outside and declaring that nothing possibly could be wrong even as he refuses every urging to try going inside. In this the paper gold marketer resembles the bumbling police detective played by Leslie Nielsen in the “Naked Gun” movies, for whom even an exploding fireworks shop presented nothing of interest:

By Frank Holmes
CEO and Chief Investment Officer, U.S. Global Investors
Jun 10, 2009

Conditions have improved for gold equities, and economic policy decisions being made in Washington could further increase the investment appeal of these mining stocks.

The charts below clearly illustrate the relationship between gold-mining stocks and the federal budget.

The top chart, below, compares the total-return performance of the S&P 500 (blue line) with that of the Toronto Gold & Precious Minerals Index* (gold line) going back to 1971, when President Nixon ended dollar convertibility into gold and deregulated the price of gold.

At that time, the United States was in the thick of the Vietnam War and was pumping billions of dollars into the financial system to pay for it. The dollar’s value dropped compared to other currencies, and the demand for gold and its price shot up. At the same time, the U.S. stock market was languishing.

The bottom chart [above] shows the federal budget, and the trend is readily noticeable - when the federal government is spending more than it takes in, gold stocks tend to outperform the broader market.

As indicated in the top chart, $100 invested in the S&P 500 at the start of 1971 underperformed the gold-stock index essentially for a quarter-century. In each of these years, the federal government engaged in deficit spending. The S&P 500 surpassed the gold-stocks in 1997, in the midst of the tech boom and budget surpluses under President Clinton.

When those surpluses reverted to widening deficits after the September 11 attacks, you can see the spread between the broad market and gold equities narrowing. At the same time, another important event occurred-China began to deregulate its precious metals markets. During that period, the S&P 500 dropped before largely leveling off, while gold stocks charged forward.

Gold stocks have delivered a 9.9 percent average annual return since 1971, while the S&P 500’s annualized return has been 9.6 percent. That $100 invested in gold stocks in 1971 would have grown to nearly $3,800 at the end of May, while the same amount in the S&P 500 Index would be worth about $3,400.

So now that we’ve established the relationship between gold stocks and the federal budget, let’s look at the current situation.

The federal government, which has spent huge amounts to save the banks and stimulate the domestic economy, is expected to see a $1.8 trillion gap between revenue and expenditure. You can see from the long blue line at the far right of the bottom chart that this is a deficit on a scale beyond what we’ve seen in the past.

If the federal budget projections are accurate, we can expect massive deficits to continue, which will likely fan inflation fears and keep downward pressure on the dollar. These large deficits, combined with China’s growing appetite for gold, create the potential for gold stocks to remain an attractive investment relative to the broader market for some time to come.

* Time series for Toronto Gold & Precious Minerals Index is a composite of this index’s returns from 1970 to 2000. Thereafter, the S&P/TSX Gold Index is used. Both series are analyzed based on their returns achieved in US dollar terms.

###

Frank Holmes

###

Frank Holmes is CEO and Chief Investment Officer at U.S. Global Investors, a Texas-based investment adviser that specializes in natural resources, emerging markets and global infrastructure. The company’s 13 mutual funds include the Global Resources Fund (PSPFX), Gold and Precious Metals Fund (USERX) and the Global MegaTrends Fund (MEGAX), a mutual fund focused on global infrastructure investments.

By: Adam Brochert

Here is a good example of Gold “crossing over” and becoming a mainstream investment, taken from a recent article on Bloomberg.com:

Northwestern Mutual Life Insurance Co., the third-largest U.S. life insurer by 2008 sales, has bought gold for the first time [in] the company’s 152-year history to hedge against further asset declines.

“Gold just seems to make sense; it’s a store of value,” Chief Executive Officer Edward Zore said in an interview…

Gold is a safety net where the government cannot provide one. Gold is money and is the strongest currency now in existence. The U.S. Dollar, Euro or Yuan are no match for a currency that cannot be created out of thin air. Gold is not an industrial commodity and does not require significant economic activity to maintain its value.

When things get bad in an economy, politicians create paper promises to pander to the proletariat. If it works, inflation results and savers are punished. If it doesn’t work, confidence evaporates. We are conditioned to accept that inflation will always occur, but it can be a question of timing and larger cycles come into play.

In the current cycle, I believe attempts to re-inflate the system will fail for a longer time than currently seems possible. A secular credit contraction is the culmination of a long-term speculative bull market and government stimulus in the past has certainly ramped up the character of the accompanying bull movements in stocks and commodities. Eventually this will be true again, but a turn for the worst in the credit markets has been reached that cannot be undone quickly merely by printing up a bunch of paper tickets and stamping “government guaranteed” on every financial market and transaction in trouble.

For those who think a determined government and central banks can always create inflation and stabilize markets, I would point you to a time in history not so long ago: The Panic of 2008. The government and central bank tried to prevent it, failed, and are now taking credit for the expected technical bounce out of the crash. The gall, the arrogance, the ignorance! Why do people trust incompetent apparatchiks to “stabilize” markets when they have never prevented a bear market or financial panic from expressing itself in the past? All government can do is re-distribute wealth, not create it or prevent it from being destroyed. In fact, governments are the greatest destroyers of wealth in history.

History teaches that at this point, policy failure is more likely than a “reflationary” success, which will result in the current heavily deflationary forces taking over until they run their course and the excess debt is squeezed from the system via painful defaults and private retrenchment and increased savings. Only then can a new cycle of inflation begin. In other words, we have entered the dark stages of a Kondratieff Winter. In such periods, Gold does well as a deflationary hedge because it is true and independent money and the government/”system” cannot be relied upon to fulfill its promises or to safeguard its currency.

Such systemic failure is historically most apparent when widespread bank failures occur, as was seen in the 1930s and as is starting to happen now. It is naïve to think our government “wouldn’t let it happen again” or even has the power to prevent it just because they created another incompetent bureaucracy known as the FDIC. If 10% of the U.S. population went to their bank tomorrow and demanded their money in physical form, the entire banking system of this country would fail immediately. The physical money doesn’t exist in the banks to fulfill this demand!

Anyone with a firm grasp of the fundamentals knows that the banking system has already failed and is now held together by tape, wire, taxpayer money, fraud and government promises. The taxpayer money is long gone and the government promises are reaching a tipping point in the global marketplace, as bonds now need to be monetized by the federal reserve because there is not enough demand to match the supply.

As the next leg down in the stock market begins, people will be looking for anything that can retain value and many will turn to Gold, as Northwestern Mutual Life Co. has done. The turning point is being reached and Gold is about to go from stealth bull market to widespread public and institutional participation. As stocks, corporate bonds, commodities and real estate continue their tail spin downwards into the abyss, people will simply want to get liquid and be in cash equivalents.

However, not all cash equivalents are equal and government actions over the past few years make their respective fiat currencies and bonds increasingly suspect, as governments are willing to go to any length in an attempt to debase the currencies they represent (you can call it stimulus if you want to). Many will be successful, although ironically, it the U.S. that should be the least successful. Regardless, a larger percentage of retail and institutional investors will now be turning to Gold as a cash equivalent. “As good as Gold” was a saying in the past, but now is the time to simply say “Get some Gold!”

Since physical Gold represents a small market relative to stocks or bonds, only a small international shift in money flows into Gold are needed to cause a significant price rise. And please avoid sham ETFs like GLD as a core holding and do not be misled to think that such vehicles are a reliable proxy for physical Gold. JP Morgan, Goldman Sachs, Morgan Stanley and other banksta investment houses are some of the custodians for the GLD ETF and the sketchy promises of these insolvent firms are no match for the integrity and worth of real physical Gold.

Though I don’t see Gold as an opportunity to get rich in this environment (that’s what Gold stocks are for…), I do see it as valuable portfolio insurance that will retain its value and rise significantly relative to traditional asset classes. Where else are you going to put your money?

Visit Adam Brochert’s blog:

http://goldversuspaper.blogspot.com/

- The Casey Files -
by Jeff Clark
Editor, BIG GOLD from Casey Research
June 3, 2009

What if deflation wins?

While we think the odds are strongly stacked against it, particularly given the government’s furious pace of money printing, the prudent investor understands – and respects – the time-tested adage, “Nothing is guaranteed.” So while our chips sit squarely on the spot marked “inflation,” what will happen to gold stocks if we’re wrong?

The Great Depression Speaks

The most notable example of what happens to gold stocks in a prolonged deflationary environment is the Great Depression. However, the United States was on a gold standard at the time, so miners had a guaranteed selling price – which was a good thing for them, because their operating costs were plummeting. So the comparability isn’t perfect, but let’s see what we can learn.

When the stock market crashed in 1929, gold stocks were part of the general wreckage (sound familiar?). The market then rallied and recovered almost 50% of its losses by April 1930, with gold shares again tagging along. It’s what happened next that gives us our first clue about deflation’s effect.

When the bear market resumed in the summer of 1930, all securities sold off again – except gold stocks. Gold shares stayed basically flat until early 1931, when they boarded the elevator and headed for the penthouse.

Let’s look at how shares of Homestake Mining, the largest gold miner in the U.S. at the time, and Dome Mines, Canada’s senior producer, performed during the Great Depression.

And the chart doesn’t show that you could have bought both stocks at half their 1929 price five years earlier, which would have led to gains of around 1,000%. And get this: both companies paid healthy and rising dividends as the depression wore on; Homestake’s dividend went from $7 to $15 per share, and Dome’s from $1 to $1.80.

Yes, volatility was high in the gold stocks throughout the depression, with occasional wild price swings, but after the 1929 crash most of the volatility was to the upside.

The bottom line is that the two largest gold producers – during a time of soup lines and falling standards of living – handed investors five and six times their money in four years.

From Homestake’s chart, you get a clear picture of what the stock did compared to the market as a whole:

You’ll notice the large spike down in both Homestake and the Dow during the 1929 crash… but then look at Homestake’s recovery immediately afterward, returning close to its old high. This is eerily similar to our recent pattern: our stocks sold off violently last October but have since doubled or more from their bottoms.

You’ll then notice that Homestake took almost two years to exceed its old high, but once it broke out, it was off to the races. The stock doubled four times in five years during a seven-year run to its peak after the ’29 crash.

The conclusion? If history is any guide, gold stocks can hold their own against deflation. And they could profit tremendously if the demand for gold as a safe haven continues to grow.

Gold vs. Deflation

On April 5, 1933, President Roosevelt issued an executive order forcing delivery (confiscation) of gold owned by private citizens to the government in exchange for compensation at the fixed price of $20.67/oz. And less than nine months later, he raised the gold price to $35, effectively diluting the dollar in every wallet 41% overnight and swindling everyone who had turned in his gold.

We don’t know exactly what an untethered gold price would have done during the depression, but given its distinction in history as a store of value, it’s likely to retain its purchasing power in a deflationary setting regardless of its nominal price. In other words, while the price of gold might not rise, or could even fall, your best protection is still gold.

But with this said, the overriding concern is that in a fiat system, any deflation will be met with an inflationary overreaction (as we’re seeing). And the worse the deflation, the more extreme the overreaction will be.

It’s for this reason that the editors of BIG GOLD urge you to own physical gold, in your possession and under your control, given its reliability as a store of value in both inflationary and deflationary environments. If you have less than our recommended one-third of your investable assets in some form of gold, check around for places to buy gold coins and bars at good premiums.

The Silver Lining

For those with an inclination toward silver, our research points to clear signs that silver is increasingly being viewed as a store of value and not just as an industrial metal.

Here’s a comparison of silver’s performance vs. base metals over the past six months (10-1-08 through 3-31-09), which includes last fall’s meltdown:

Silver +6.7%
Copper -36%
Lead -18%
Aluminum -35%
Nickel -25%
Zinc  -13%
GFMS Index* -54%

[*Based on the average equally weighted settlement price for aluminum, copper, lead, nickel, tin, and zinc.]

If silver were viewed solely as an industrial metal, the price would be off sharply.

This doesn’t mean we think silver or silver stocks can’t go temporarily lower from here, but rather that the demand for silver as a store of value metal will be growing.

Bottom line: Whether we’re served debilitating deflation or insidious inflation, holding gold (and silver), along with an appropriate allocation of precious metals stocks, offers us both a fort for protection and a canon for profit.

Buying physical gold and silver as safe-harbor assets is for many investors a no-brainer at this point. But only a few have heard of another prudent gold investment – one that has gone up more than 50% in 2008, at the exact same time when the overall stock market bombed. You don’t want to miss out on owning this “48 Karat Gold” stock… click here to learn more.

© 2009 Jeff Clark
Editor, Casey Research
Editorial Archive

by Paul Tustain, BullionVault.com | June 5, 2009

Choose your poison: the trickle of excess cash or the trickle of excess bond redemptions…

NOT FOR THE first time the Financial Times says we gold buyers are “nuts” – a word which all too often follows on from “gold” in the financial media.

I should rise above this sort of thing. What does it matter if the FT thinks me nuts? But I find I’m irritated, both for myself and on the collective behalf of successful gold investors. I don’t think we deserve to be called “nuts” after our gold has for 6 years so consistently outperformed all those other serious investment classes so diligently analysed on Wall Street and in the City.

Gold continues to strengthen against the Dollar. Faint hopes of a swift “V-shaped” recession are dwindling, which is hardly surprising. Global economic activity up to 2007 was driven by rich world consumers buying things even they couldn’t afford. In the US alone they have since lost about $12 trillion of private wealth – $120,000 per family. Judging by estimates published in The Economist this should induce a demand slump of about $500 billion per year, for 10 more years.

That means a typical family will be cutting back spending at the rate of $5,000 per year for a decade. So our economies will stay shrunk, threatening deflation.

To combat this governments are trying to engineer some inflation. Deficit spending here, quantitative easing there, and zero interest rates everywhere; with all of it geared to stimulating more production in a world already suffering over-capacity. This is where they step into dangerous territory.

Retail prices inflate in an overheating economy when there is a supply shortage of consumer goods. Because demand outstrips supply the producer has the whip hand, and he exploits it by asking more money for his goods. But look around you today and you will see there is no supply side shortage in the world economy. So if we do get inflation it’s not going to be because of overheating.

Hyper-inflation, on the other hand, has little to do with supply side shortages and overheated economies. It happens when a currency dies. Once the realization grips savers (not consumers) that their money is losing its purchasing power then they exit money and look for better stores of value.

So while ‘normal’ inflation is driven by consumer-pull for goods, hyper-inflation is driven by saver-push of money, and this explains a big qualitative difference between inflation and hyper-inflation.

Modest inflation through undersupplied goods has a negative feedback because new supply pulls prices back, bringing the economy back to equilibrium. Hyper-inflation does the opposite. Once it starts it suffers a positive feedback by encouraging more and more savers to dump cash. What starts as a trickle accelerates into an unstoppable torrent of savings pouring into circulation.

The unusual problem we now have is that after using cash rescues to protect the overcapacity in our economies we are not going to be able to create normal, controllable, supply-shortage inflation. It’s increasingly likely that the only style of modest price rises which the central banks can engineer will be the trickle which precedes a hyper-inflation.

Indeed, what caused the Financial Times to wheel out the old “gold nuts” phraseology was the strange case of last week’s bond markets. Bond prices – the best proxy for the future value of cash – were falling when they should have been rising. The markets are telling us that cash 10 years forward is becoming less valuable. This is a hint of savers losing faith in their currency.

And why wouldn’t they? Their deposits will pay them no interest for the foreseeable future. Inflation and tax will eat into their savings. The economy looks mired in recession. Governments, which are now welcoming devaluations as a trade benefit, are deep in debt and are toying with hyper-inflationary policies like quantitative easing. It all points to the inflationary transfer of the government’s enormous debt into plummeting values for depositors’ cash and investors’ bonds.

An insight – courtesy of Bill Bonner – suggests what could soon happen. There is an $11 trillion bond mountain, which is $96,000 of issued US Dollar bonds per US family. With total federal obligations now reaching above $63 trillion, this is the polar icecap of contemporary finance, and it holds the bulk of the savings of two generations, all denominated in dollars which are frozen solid until their redemption date. If the Fed gets what it wants, then a modest dose of inflation now will forestall a depression. But inflation will heat that icecap and make the bond market more jittery, and at exactly this point the Fed says it will reverse its QE policy and sell bonds back into the market, because this is how it plans to get cash back out of circulation to control the inflation it has created.

Choose your poison: The trickle of excess QE cash or the trickle of excess bond redemptions, both in a world of over-supply. It seems all roads lead to inflation. Don’t assume it will be the manageable kind.

Copyright © 2009 Paul Tustain
Editorial Archive

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Paul Tustain | London, UK | Email | Website

By Andrew Frye

June 1 (Bloomberg) — Northwestern Mutual Life Insurance Co., the third-largest U.S. life insurer by 2008 sales, has bought gold for the first time the company’s 152-year history to hedge against further asset declines.

“Gold just seems to make sense; it’s a store of value,” Chief Executive Officer Edward Zore said in an interview following his comments at a conference hosted by Standard & Poor’s in Brooklyn. “In the Depression, gold did very, very well.”

Northwestern Mutual has accumulated about $400 million in gold, and Zore said the price could double or even rise fivefold if the economy continues to weaken. Gold gained 10 percent last month, the most since November. The commodity has more than tripled since 2000, rising for eight straight years. Gold futures for August delivery slipped $4.80 to $975.50 at 4:03 p.m. in New York.

“The downside risk is limited, but the upside is large,” Zore said. “We have stocks in our portfolio that lost 95 percent.” Gold “is not going down to $90.”

Policyholder-owned Northwestern Mutual, based in Milwaukee, ranks third by 2008 life insurance premiums according to data from the National Association of Insurance Commissioners. The data excludes annuities.

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net

Last Updated: June 1, 2009 16:34 EDT