Gold is getting a lot of attention these days. It’s all over the media, the backlog to purchase gold coins from the U.S. Mint is years long, and one gold exchange company even ponied up for a Super Bowl ad.Many point to this and shout “Bubble!” Gold has risen too far too fast, they say, and soon the euphoria will give way to despair. We’ve been hearing this since February of last year, when gold was trading around $900. That’s more than 25 percent below where it is today.

Why didn’t the gold “bubble” burst? It could be because there isn’t a gold bubble.

The chart below compares the price performance of gold bullion during the 1970s bull market (green line) to the current price trend (red). As you can see, the price line since the start of 1999, when gold was trading just under $300, has been far less volatile than during the earlier period.

Gold remains as a safe haven during times of economic uncertainty - in the 1970s, double-digit inflation rapidly eroded wealth, and these days there is a lingering fear of higher inflation as the federal government piles more debt onto its already groaning balance sheets.

But a key difference is that gold has gained stature as a legitimate asset class for investors. During the 1970s runup, investment demand peaked around 27 million ounces, about half of what it is today. Contributing to this demand are new investment vehicles, including gold-oriented mutual funds and bullion-backed ETFs, both of which have made it easier for investors to allocate a portion of their portfolios to the yellow metal.

We also have greater affluence in the developing world, where people have traditionally turned to gold to store their wealth. Central banks in these countries, most notably China and India, have built up their gold holdings as a way to diversify their foreign reserves away from the dollar and other paper currencies.

The 1990s dot-com era was a bubble, and likewise the 2000s housing market. But gold? We don’t think so.
Investments in natural resources, emerging markets and infrastructure are subject to distinct risks as described in the funds’ prospectus.

Follow U.S. Global Investors on Twitter @USFUNDS. Become our fan on Facebook. For more research and insight from U.S. Global Investors, visit www.usfunds.com.

– Posted Tuesday, 27 April 2010 | Digg This Article | Share this article | Source: GoldSeek.com

John Pugsley’s Stealth Investor portfolio has been outperforming the major indices since its inception four years ago. In this exclusive interview with The Gold Report, John explains how focusing on companies with smaller market caps allows his portfolio to upstage the market, and why the precious metals and energy sectors offer investors unique opportunities.

The Gold Report: John, your Stealth Investor portfolio outperformed the DOW, S&P and NASDAQ. To what do you attribute your success?

John Pugsley: There are several reasons we’ve consistently outperformed the market.

First, we’re concentrating on micro-cap and nano-cap natural resource exploration and development companies with market caps usually under $50 million and sometimes under $10 million. Within this relatively large group we’ve been successful in identifying a small number of outstanding firms that are deeply undervalued simply because they are off the radar of brokers, institutions and investment newsletters. Without brokers and investment letters getting the word out to individual investors, these stocks’ share prices languish.

TGR: So why aren’t they promoted by brokers?

JP: Two or three reasons. First, the smaller companies can’t afford the registration costs to register their shares in the United States with the SEC and all of the state securities agencies. In fact, many of the companies discovered by Stealth Investor are required by law to put a notice in their press releases stating that the information should not be disseminated or the securities offered or sold in the U.S. Since it’s illegal for U.S. brokers to introduce or promote companies that aren’t fully registered, these companies don’t get exposed to the big market of U.S. investors. Of course, if an investor knows of a company, and asks a broker to buy it, the broker can place the order. The broker just can’t recommend non-U.S.-registered companies to clients. This severely limits a small company’s ability to raise capital.

Secondly, even when it’s legal for brokers to recommend a company, tiny companies are usually of little interest to brokerage firms and underwriters. There just isn’t enough “juice” to get a broker’s attention.

Third, companies with small market caps are usually of no interest to funds. There just isn’t enough float to allow a fund to take a substantial position. The big money managers are looking for opportunities to place large chunks of capital, and since it takes about the same amount of due diligence to study a small company as a big one, the funds tend to ignore the small firms.

TGR: There are a lot of stock advisory letters. Why aren’t the companies you recommend being recommended by other advisory services?

JP: Most financial newsletters have larger subscriber bases. When a letter has 2,500 or 5,000 subscribers or more, every recommendation results in a rush of buy orders. The share float of a company with a market cap of $10 million may have a float of only one or two million shares. If the price is a dollar or two, it takes very little in the way of buy orders to drive the price out of sight. When a rush of orders hits, the price immediately soars, and subscribers get disgruntled because they’re unable to get shares. The point is, letters with a larger number of readers just don’t bother to recommend nano-cap companies.

I knew from past experience that I couldn’t really exploit this niche of undervalued stocks unless my subscriber base was so small that the price of a stock wouldn’t be affected by the buying pressure from my subscribers. Consequently, I have limited the number of subscribers. I probably have the smallest number of subscribers for any letter in the industry. Small, but very successful.

TGR: How do you identify the companies that finally make it into Stealth Investor?

JP: Good question. I still have to ferret out the truly undervalued small companies out of the thousands of little natural resource companies struggling to make it. I have an advantage over some of my younger brethren. I’ve been writing about natural resources for nearly 40 years, and as a consequence have become friends with a wide range of people in the industry—geologists, engineers, successful entrepreneurs, CEOs, brokers, etc. By tapping this resource I get tips on deeply undervalued companies, as well as solid opinions on those that seem to fit our model.

The idea has worked extremely well. From our start four years ago, our portfolio is up 147%, while during the same period the S&P500 is down 5.7%. So while the subprime credit collapse drove everything down, we’ve managed to pull through, survive and make great profits. It’s all because we’re in a unique niche.

I might add that there is another element in our success: we concentrate in natural resources. When government printing presses are gushing IOUs, solid value lies in tangible goods, not in paper promises. While one can buy physical commodities like copper and gold and store them away, owning those same tangibles still in the ground is an even better hedge against inflation. Before they’re going to be tapped and brought to the surface, the price of those commodities must be high enough to yield a profit to the companies producing them. It’s automatic. By discovering and acquiring resources in the ground, we’re storing value.

TGR: In your Stealth Investor newsletter at the end of March, you talked about a paradigm shift coming in the way people look at the economy, but you also said that we shouldn’t hold our breaths. When do you see that paradigm shift happening?

JP: The ruling economic paradigm embraced by almost all of the economics profession and certainly by the politicians and bankers, is “Keynesianism.” It holds that the cure for a recession or depression is to drown it in government spending and central bank monetary expansion.

This is a recipe for stagnation and inflation, but a shift away from a belief in deficits and fiat money creation won’t happen until there’s true catastrophic decline in the world economy. In fact, the Keynesian paradigm may not be abandoned even then. The collapse and depression of 1930s, which was caused by the credit explosion that ensued after the creation of the Federal Reserve in 1913, could have turned us back to a true gold standard. Instead, Keynes came in and gave the politicians new justification for more government spending and money printing. There was such a collapse between 1929 and 1932 that one would’ve assumed that they would have gone back to 19th century classical economics and a stable monetary system. It didn’t happen.

Based on the current worldwide belief in Keynesian economics, and considering the measures that are now being pursued to deal with the credit collapse, this current depression will probably continue for another 10, or 15 years or longer. It isn’t going to end in the next few months, or few years, as the economists are suggesting, because they are trying to cure the problem with a dose of the “hair-of-the-dog,” the same drug that caused the problem in the first place.

TGR: John, as we’ve discussed, your investment strategy has been pretty successful for the past four years. How important is the particular sector, such as the precious metal sector or the alternative energy sector, when you’re making your investment decisions?

JP: Not very important. I’m looking for raw resources in the ground. I’m not looking at any one sector like gold, industrial metals, oil and gas or water. I’m trying to find companies that are searching for or developing all types of natural resources. Whether it’s gold, water, or phosphate doesn’t really make much difference in my eyes. It’s a question of how necessary is the commodity, how good is the management, what properties do they own, and how cheap the stock is.

TGR: What about the difference between companies in discovery mode versus companies in production mode? Does that have an impact?

JP: Yes, it does. Generally, companies that are producing minerals, oil, gas, etc. tend to be much bigger. It takes a lot more capital to develop and mine minerals or produce oil than it does to explore and find deposits. Our unique, under-the-radar niche consists of tiny companies in the exploration or prospect generation sector that will make discoveries and then joint venture them or sell them to larger companies. We are looking at the early stage prospect generators as the best prospects for our particular strategy.

TGR: As that alternative energy sector continues to get attention, what do you feel are going to be the key factors driving that sector forward?

JP: The driving force behind green energy is environmental activism. These “greenies” put pressure on the politicians, and the politicians subsidize the sector, both with cash subsidies, as well as regulations that force utilities to get certain percentages of their power from renewable energy sources. Thanks to government subsidy, green energy is going to be the wave of the immediate future. A lot of the green energy section is puffery. Wind and solar, for example, in most cases would be unprofitable to produced if it weren’t for government subsidies.

The green-energy industries I find attractive as an investment are low-head hydro and, of course, the biggie, geothermal. These two sources are continuous, and in unending supply, at least in those areas of the world where the resources are available. With the addition of state and federal government subsidies geothermal is a no-brainer.

TGR: Are there any pearls of wisdom you’d like to share with our readers?

JP: I think that the individual who hopes to survive financially in the near future, and in the next 10 or 20 years, should invest significant time and money in gaining a deep understanding of economics. We’re very unlikely to experience the long bull markets of the past three decades where it was possible to ride the bull and get rich. The sub-prime real estate collapse and the concomitant plunge in stock prices is not just a normal up and down cycle.

The few who understood what Greenspan and the politicians were doing to blow up the real estate and stock market balloon through credit expansion, subsidy and regulation exited real estate and the broad markets three or four years ago. To those of us who understand the fallacies of Keynesian economics, it was apparent that these markets were dangerously overvalued. Going forward, it’s not possible simply to take recommendations from brokers or investment gurus (even this one) and expect to survive. The answer is to back away from the experts, and become knowledgeable. Economics is just common sense. If somebody’s offering you something for nothing, like interest rates at 1%, and free money to buy a house you can’t afford, there’s something wrong. Self-education is the secret that will help people survive in the days ahead.

TGR: Great advice, John. We appreciate your insights.

FOR MORE. . .

John Pugsley: Exposing Some of Stealth Investing’s Energy Secrets (10/16/08)

John Pugsley: Exposing Some of Stealth Investing’s Secrets (10/28/08)

John Pugsley entered the investment business in the late 1960s, and started sharing some of what he’d learned through his first book, Common Sense Economics. The book sold more than 150,000 hardcover copies. The second book he penned—The Alpha Strategy: The Ultimate Plan of Financial Self-Defense for the Small Investor—spent nine weeks on the New York Times’ bestseller list and is considered a standard reference on stocking up on food and household goods as a hedge against inflation. He started Common Sense Viewpoint, an investment-economic newsletter covering political, economic and investment topics, in 1975 and published it for 10 years. At its peak it had over 30,000 subscribers. He then wrote and published John Pugsley’s Journal, for another decade. A popular speaker and talk show guest as well as a prolific author and successful investor, he is currently pouring his experience and energy into Stealth Investor, a weekly stock advisory that alerts subscribers to potential investments beneath the radar of the big funds and brokerage houses.

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– Posted Tuesday, 27 April 2010 | Digg This Article | Share this article | Source: GoldSeek.com

By Vincent Bressler

Some time during the next few years, the world as we know it will change dramatically.  All the fraud that is coming to light now will be purged.  Confidence in the unbacked currencies that the world runs on now will be lost.  There will be a desperate race into gold.

The progression through this troubled time is illustrated with the charts below.  Here are the signposts:

(1) The apparent supply of monetary gold is large because the public accepts unbacked paper promises of gold on par with real physical gold.
(2) The apparent supply of monetary gold decreases as the public loses confidence in unbacked paper promises of all kinds.  People begin to demand physical gold, and this drives the price of gold up, creating more demand.
(3) This is the point of the worldwide currency crisis.  Very few people who own physical gold are willing to part with it, everyone who wants to save their paper wealth demands gold.  Under this circumstance, the price of physical gold will reach absurd levels and present great opportunities for those who are prepared.
(4) A new currency system is instituted and gradually gains acceptance.
(5) A new stable price for gold is established within the new currency system.   The new price for gold is much higher than the previous price (1) because fraudulent paper promises are no longer accepted as actual gold.

Please also see the following articles:

[Dynamics of the worldwide currency crisis]
[Dynamics of the Silver Price Revolution]
[Tracking the Re-Monetization of Silver]

Vincent Bressler
vincentbressler@yahoo.com

By: Rick Ackerman, Rick’s Picks

– Posted Wednesday, 28 April 2010 | Digg This Article | Share this article | Source: GoldSeek.com

Rick’s Picks

Wednesday, April 28, 2010

“Phenomenally accurate forecasts”

Greece’s financial problems took a dramatic turn for the worse yesterday, causing stocks and bonds around the world to plummet on news that Greek bonds had been downgraded to junk by Standard & Poor’s. The rating agency’s decision was particularly unsettling for investors because just last week a $60 billion emergency credit line was extended to Greece by the IMF, Germany and other European nations. But what may have spooked the markets even more was S&P’s downgrade of Portuguese debt to A- from A+. This suggests not only that euro-contagion is spreading, but also that any large sums of money pledged to ameliorate Greece’s crisis are no longer capable of calming the markets.

Unfortunately, perceptions are everything at the moment, and it seems most doubtful that more talk, more promises and yet more loan guarantees will arrest the spread of fear. Will the uneasiness eventually come to engulf several other nations thought to be on the financial ropes, notably Spain, Italy and Ireland? This seems a foregone conclusion, since there is no remedy possible that would address, let alone fix, their respective financial problems at a fundamental level. Indeed, for the central banks, the fatal paradox is that if any nation were to get truly serious about tackling its debt problems, the result would be an economically fatal debt deflation. Under the circumstances, it’s no wonder that our political leaders have bought into the lie that untold new sums of fiscal borrowing can reverse a debt deflation. In point of fact, untold sums of new borrowing have yet to cause even a blip in the home prices that were the explicit target of Fed stimulus.

Weimar Memories

No such remedies are likely to be attempted in Europe, since they would be subject to a German veto. To say that the Weimar hyperinflation of the early 1920s made Germany fiscally conservative is to understate the extent to which the Germans have internalized their grave misgivings about printing-press money. While America and Britain have been free to experiment with the pernicious theories of Keynes every time the economy downticked for more than a quarter or two, the Germans stop short of the kind of full-bore Keynesianism that would have a government gin up trillions of new dollars to spend on who-cares-what. If Europe does not attempt a monetary blowout equal to the one that has “saved” the U.S., it seems inevitable that the fear now gripping the markets will at some point mutate into panic. And just as Bear Stearns’ troubles begat Lehman Brothers’ even bigger troubles, so must Greece’s troubles precipitate out ruinously for the whole of Europe.

Under the circumstances, we’ll put a “hold” on yesterday’s very bullish forecast for the stock market. We had projected a rally of as much as 11 percent for the Dow Industrials, and the technical factors behind that forecast remain undisturbed by yesterday’s selloff. However, the short-term picture has turned undeniably bearish, and we now see the Dow falling to at least 10914 — 78 points below yesterday’s closing price. We’ll be watching our proprietary price levels very closely in the days ahead, since the potentially decisive turn of events in Europe could be what finally kills the 14-month-old bear rally in stocks. More to the point, it could be the death knell for a supposed economic recovery that in the U.S. and elsewhere has been sustained by little more than hot air.

***

Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. There is a substantial risk of loss in futures and option trading, and even experts can, and sometimes do, lose their proverbial shirts. Rick’s Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick’s Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2009, Rick Ackerman. All Rights Reserved. www.rickackerman.com

By: Mary Anne Aden and Pamela Aden, The Aden Forecast

This month’s jump up in precious metals, resources and oil reinforces that the lows in February were likely the lows for the downward correction.

For now, the second quarter is off to a good start. The fact that gold’s decline was mild (down 13½%) is saying that the underlying bull market is strong and solid. You should now have your positions bought and in place, waiting for the bull market to further unfold.

Platinum and palladium have been strong, reaching new highs and they seem to be leading gold, silver and the metals shares in another leg up in the bull market. In fact, the new highs in many commodities reinforces this.

BIG PICTURE INVESTING BEST

Many of you know the importance we place on the big picture. The big picture is most important, and knowing where the mega and major trends lie is a key to good investing.

Our main goal has always been to invest in the major trends and to stay with them. We can’t stress this enough because over the years we have found that more money can be made this way, rather than trading the intermediate moves.

Sometimes trading works well and when it does, it’s great. But unless you’re prepared to devote a lot of time to trading, or follow the advice of a good, professional trader, then it’s easy to make mistakes. This usually happens when an investor becomes too emotionally involved.

Most frustrating is that a major move can be missed because you’re too busy trading a correction. And remember, the major moves are where your focus should be. They’re the most profitable.

The latest downward correction in the gold price provides a good example of what we mean. We called this a ‘D’ decline and they tend to be steep.

Since 2001, these recurring D declines have ranged from a loss of about 7% to nearly 30%. The November to February correction lost 13½%. This was moderate compared to the last two D declines in 2006 and 2008, which were down 22.16% and 29.80%, respectively, and were the steepest so far (see Chart 1A).

We always receive many letters regarding our leading indicators and this is one of our favorites (Chart 1B). We know that gold’s major trend is up, meaning it’s headed higher. But within this uptrend there are intermediate ups and downs, and this indicator works well in identifying these ebbs and flows within gold’s bull market.

Currently, for instance, the gold price and the leading indicators are starting to rise. This tells us that a renewed rise is beginning. But if you were waiting for further gold weakness before buying more, then the market is slipping away and you’re already missing out on part of the renewed strength.

This is why it’s best to buy during weakness when possible, but not to try and get the low. Averaging in during weakness is the ideal way to buy, and a big picture approach makes it easier to just jump in and buy at any time.

For now, gold looks ready to spring forward. Considering that just six months ago, the $1000 level was a super break out point and today it’s a major support level illustrates how gold’s slow and steady rise has been gaining momentum.

The gold price has broken above all resistance and the last remaining one is the November closing high at $1218. Once $1218 is surpassed, gold could jump up to the $1300 level before this intermediate rise is over.

GOLD’S POTENTIAL

This means that the bull market remains very strong, even though gold’s already been rising for nine years. Chart 2 shows gold’s big picture since 1967 when it began to move in the free market.

Here you can see an interesting pattern that’s been going on since 1969. Note that each major eight year low was followed by a major peak 11 years later. The only exception was the 1993 low, but in that case the low was mild within an essentially quiet market (see asterisk).

If this 11 year pattern continues, we could see gold shoot up to the $2000-$3000 level within the next two years. But since today’s economic situation is historically extreme, we could see much higher prices for a longer period of time… well beyond 2012, and more like 2017-2018.

This is precisely what we mean by staying with the major trend. It’s powerful right now and we’ll stay with it for as long as it lasts.

–

Mary Anne & Pamela Aden are well known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts and recommendations on gold, stocks, interest rates and the other major markets. For more information, go to www.adenforecast.com

By: John Browne
Senior Market Strategist, Euro Pacific Capital, Inc.

Much to the relief of jittery global markets, Greece’s chronic debt problem has been papered over in a burst of European solidarity and apparent magnanimity. But this act of mercy may cost Germany its key position of financial dominance over the European Central Bank (ECB), which, in turn, could be detrimental to the long-term health of the euro. And so even though the euro stiffened once the immediate default fears abated, the price of gold was pushed to a new all-time high in euro terms (and a five-month high in dollar terms). [i]

The euro is now second only to the U.S. dollar in importance to world commerce. It is held by most central banks and corporations as a legitimate diversification hedge against the U.S. dollar. Therefore, its stability is of key importance to international currency markets and global stability.

Increasingly, it is apparent that the Greek problem is a potential game changer for the euro. So far, the various rescue packages have failed to convince investors that Greek bonds are dependable over the long term. Despite Greece’s successful short-term debt auction on Tuesday, the premium demanded by investors to hold longer-dated Greek bonds continues to increase. Today, the yield spread between 10-year Greek and German government bonds widened to just a shade below 400 basis points. [ii]

It remains to be seen whether the latest support package offered by the EU - a three year loan of some €30 billion at around five percent interest [iii] - will suffice to cover the major economic, structural, and even attitudinal changes that are necessary. Furthermore, the potentially larger budgetary problems of many Eastern European countries and the remaining PIIGS (Spain, Portugal, Ireland and Italy) still remain to stalk the euro.

Still, there remains an even more significant threat to the euro. The eurozone finance ministers’ ’soft’ Greek rescue package, when combined with ECB Chairman Jean-Claude Trichet’s preparedness to continue accepting Greek bonds as collateral, spells the possible demise of the Germanic sound money policies underpinning the euro.

In the original formation of the euro, the Germans were prepared to give up their widely respected Deutsche Mark only if the euro would be run on a prudent and stable basis. In addition, to ensure compliance with their wishes, they demanded that the European Central Bank be based in Germany. As a sop for French support, they tolerated a plan that would eventually install a French ECB president (though the Germans made sure that ECB’s first president, the Dutchman Wim Duisenberg, supported policies favored by Berlin.).

A Frenchman, Jean-Claude Trichet, did take over the ECB in 2003 and, much like our own Alan Greenspan, moved away from the hawkish tendencies that characterized his earlier reputation. Whereas Duisenberg was made famous for his “I hear you, but I don’t listen” retort to angry politicians demanding rate cuts, Trichet has been much more willing to bow to pressure. This is causing great consternation in Germany. According to the German newspaper Handelsblatt, a former Bundesbank President remarked that, “Those who flirt with inflation, marry her. Trichet yesterday, kissed her.”

In addition to raising eyebrows among German politicians, cracks in the sound money policy of the ECB should concern international investors as well. With the euro now threatened, where should international investors turn?

The budgetary and debt problems facing the U.S. government are so severe that, despite holding reserve currency status, America is now in danger of losing its triple-A credit rating. Last week, investors watched as U.S. Treasury Secretary Tim Geithner traveled to China, where he bowed, cap in hand, to beg the Chinese to revalue their currency. This raised the question as to whether the Chinese yuan is undervalued or the U.S. dollar is overvalued. Clearly, the U.S. dollar cannot be the safe haven for the world’s savings.

The UK’s pound sterling faces the same problems as the dollar. Stronger Western currencies, like the Swiss franc, are too small to absorb the bulk of funds fleeing the threatened euro without distorting their prices well beyond fair value. Gold seems to win by process of elimination.

Gold has hovered for some months in a tight range between $1,050 and $1,100 per ounce. It has held this level despite apparently low inflation and continued concerted efforts by central banks to de-monetize the metal. It seems many international investors, including the central banks of India, Russia and China, feel that, despite soothing words from politicians, all is not well with the paper world!

With a national debt now thirteen times larger than it was in 1980, [iv] investors in U.S. dollar assets are about to pay the inevitable price demanded by the profligate policies of Washington. Who can doubt that the spiking rates now on display in Greece will soon make an appearance on our shores?

As we have said before, we feel that the severe problems we face in America have yet to be fully realized. When they are, gold may be the surest footing in a world turned upside-down.

– Posted Thursday, 15 April 2010 | Digg This Article | Source: GoldSeek.com - John Browne Senior Market Strategist, Euro Pacific Capital, Inc.

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc. Working from the firm’s Boca Raton Office, Mr. Brown is a distinguished former member of Britain’s Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher’s government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown’s advocacy, Thatcher famously pronounced that Gorbachev was a man the West “could do business with.” A graduate of the Royal Military Academy Sandhurst, Britain’s version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

In addition to careers in British politics and the military, John has a significant background, spanning some 37 years, in finance and business. After graduating from the Harvard Business School, John joined the New York firm of Morgan Stanley & Co as an investment banker. He has also worked with such firms as Barclays Bank and Citigroup. During his career he has served on the boards of numerous banks and international corporations, with a special interest in venture capital. He is a frequent guest on CNBC’s Kudlow & Co. and the former editor of NewsMax Media’s Financial Intelligence Report and Moneynews.com.

I know we were all told that it was not supposed to happen, but interest rates are rising on both U.S. government debt and mortgages. Fortunately for investors, market forces are not subjugated by media’s groupthink. Therefore, I was able to predict and profit from this nascent move up in rates, despite being vilified by those who told me that rates had already priced in the removal of government support.

But it’s not only the removal of Fed purchases of Mortgage Backed Securities (MBS) that are sending rates higher. I believe the move higher in mortgage rates presages a higher cost of money across the yield spectrum, due to rising concerns about inflation.

The Fed’s program of buying $1.25 trillion in MBS caused rates to fall to 4.71% in December of 2009. However, since their departure from the market, thirty year fixed mortgage rates have already jumped to 5.21% last week, which was the highest level in nearly eight months and up from 5.08% in the week prior.

Unfortunately, this is just the beginning of interest rate woes as we now see the warning signs of burgeoning inflation all around us.

The Institute of Supply Management’s prices paid index surged in March from 67 to 75, oil prices are up 65% in the last 12 months and gold has reached a 4 month high as it creeps back towards its all time high of just over $1,200 per ounce. Even base metals such as copper and iron ore have seen their prices surge recently. But for the Fed theses warning signs are just things to ignore. Instead of dealing with our inflation problem they are choosing to seek refuge in the stubbornly high unemployment rate and the troubles in Greece. However, people sitting home and being unproductive in the U.S. or in Greece cannot obviate the need for the Fed to eventually deal with their mandate of providing stable prices.

Unlike his counterparty in Australia Glenn Stevens, who recently raised rates to 4.25%, Ben Bernanke seems undaunted by the warning signs all around him. In a speech he made in Dallas last week he said this, “The economy has stabilized and is growing again, although we can hardly be satisfied when 1 out of every 10 U.S. workers is unemployed and family finances remain under great stress.” And if investors still need further conviction regarding the dovish mindset of Mr. Bernanke there’s this, “We have yet to see evidence of a sustained recovery in the housing market. Mortgage delinquencies…continue to rise as do foreclosures.” He is correct about the real estate market. Lender Processing Services (LPS) data released today showed mortgage delinquencies rose to 10.2% and foreclosure inventories reached a record high 3.31%!

Of course what’s most troubling is that none of Bernanke’s concerns have anything to do with inflation.

Not to be out done, New York Fed President William Dudley said on April 7th that the Fed Funds rate “needs to be exceptionally low for an extended period to contribute to easier financial conditions to support economic activity.” What these Phillips Curve thinkers believe is that a weak economy along with falling home prices equates to deflation. The truth is that those factors can lead to deflation but are not deflation in of themselves.

It is clear that the Fed isn’t moving anywhere on rates in the near term. However, market forces are taking rates up on the long end of the curve. Rates are being pushed higher by three forces; the superficial recovery in the economy-which is prompting investors to cease seeking shelter in the bond market, a tsunami of supply issuance and a credible concern of an increasing inflationary threat.

While I am concerned about a rising rate of inflation, I do not believe that inflation will become intractable in the short term. That is precisely because rising rates will have a severe and detrimental impact on our over-indebted economy. Therefore, the rise in the cost of money will be mollified by the renewed weakness in GDP. Inflation will only grow massive if and when the Fed decides to deploy a quantitative easing policy to keep government debt service manageable. The Fed must eventually decide if they will inflate our debt away or allow the economy to collapse. History has proven that they will choose the path of monetization.

Michael Pento

Senior Market Strategist

Delta Global Advisors

866-772-1198
mpento@deltaga.com
www.deltaga.com

By: Julian D. W. Phillips, Gold/Silver Forecaster - Global Watch - GoldForecaster.com

This is the first part of a two part series on the forces driving the gold price now. The second part is in the present issue of the Gold Forecaster.

We were right in believing that the € and gold will and are de-coupling. But far more than that is happening in the gold markets of the world. But the process is an ebb and flow process, with this week seeing gold move with the € and last week moving independently of both. What is becoming clearer and clearer to investors is the gold price should not move with the € or with any other currency, as there are few common denominators between gold and currencies. The erosion of confidence in currencies is far more pertinent to the gold price. Along that line of thought a look over the last year and more is relevant to the future of gold.

For over a year now, the gold price has been consolidating from above $1,200 down to $1,050, with the point of the pennant being $1,150 +. While the gold price has been reacting to the € moves against the U.S. $, and in the opposite direction to the $, during that time, just below the surface and right down to the very structure of the monetary world, something different has been going on. The words ‘decaying confidence’ seems too vague to describe it. To isolate one particular potential crisis does not do it justice either.

What is happening is similar in concept to when tributaries of a river meet the main stream and the flow becomes overwhelming. Follow the thinking of the saying, “He who sows the wind reaps the whirlwind” and you start to get the feel of where we are going with this. It has been of significant concern that the time the gold price has been moving between $1,075 and $1,150 has been so extended. Normally a consolidation period is over far quicker and there has been fairly strong moves thereafter. The Gold Forecaster called the bottom at $1,050 and emphasized this in subsequent Market Alerts in the last few months. However, as the consolidation dragged on it became clear that something far larger than a simple consolidation was underway. We are not talking about a mid-trend correction either. It is far more than that!

Falling confidence in the Monetary system itself.

Not only have banks lost their untouchable image and their position on the moral high ground, but during the last year there has been a marked change in the perception investors have of the global monetary system itself. Confidence has dropped heavily in the €, in Pound Sterling and in the U.S. $. Major surplus holders have expressed themselves strongly that they are unhappy with the state of U.S. financing, both internally and externally. Then the Eurozone lost its solid image.

Confidence in Sterling has dropped markedly as the prospect of an indecisive potentially ‘hung’ Parliament looms. The € has taken a caning because of the one very visible problem of Greece and potentially Spain Portugal, et al. The Yen remains unattractive at close to its peak, with its nearly zero interest rates. These four currencies make up the Special Drawing Right of the International Monetary Fund, which is a reflection of the world’s main currencies.

Not reflected in Exchange Rates

There is hardly any way in which this falling confidence can be reflected in the currency world as they all fall together and look relatively stable against each other. But you can be sure that surplus holders and outside investors are not buying into any idea of the system being stable. In this very divided world, decaying confidence will be expressed but how will it be expressed? We are sure that no matter how, gold buying will be one way.

Now the structural damage will extend and involve not just banks and credit but include the appearance of Capital Controls [now ‘approved’ by the I.M.F.], tensions growing between the West and East [don’t expect a revaluation of the Yuan anytime soon] even leading to a fragmentation of international trade relations, following a bout of protectionism. The Eurozone’s problems are moving to become the world’s. The difference is that there is no Maastricht Treaty governing the global currency systems. A global solution to the global monetary system must be found, if it is to remain intact.

U.S. Treasury Yields & Investment demand for gold

How close are we to such multiple crises? Previously, we discussed the concept of 10-year Treasury yields rising as a thermometer to what lies ahead. Greenspan has labelled this the “canary in the mine”. Right now long-term Treasury yields are rising strongly steepening the Yield Curve. In the climate we have described above, this is bad news. As they rise, they tell us to expect more of Treasuries [Yield] because of future rising risks [we don’t even dignify the concept thast this is a growth signal]. Such yield elevation points to international disenchantment with the prospects for $ investments.

In this scene gold will be viewed as a ‘retreat position’ in the face of considerable uncertainty. These Treasury Yields Curves are a measure of where the gold price is going, indirectly. But this time we are not talking of a growth in the gold price as we have seen in the last ten years, but a strong move from the largest of institutions into gold.

Where will the gold price go in 2010?

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This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina only and are subject to change without notice. Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.