By: Dr. Jeffrey Lewis

Historically, the “fear index,” or the VIX, had minimal impact on the price of precious metals. However, as investors forgo treasury bonds in search of even safer investments, the VIX is correlating very well with the price of precious metals.

The Risk Spiral

With each passing recession, the appetite for risk among investors grows smaller and smaller. Previously, investors would shed equities for corporate debt, knowing full well the economy would recover and most businesses would survive and make good on their obligations.

Decades later, the growth of international banking organizations brought about new fears. With economies so interconnected, many investors feared corporate debt was not safe enough, and instead of buying bonds with liquidated stock proceeds, they fled to government debt. Thanks to an open printing press and eager-to-inflate chairmen, the printing presses ensure the debts will be repaid, albeit with less valuable currency.

Fast forward another decade, and treasury bonds are no longer safe enough. Instead, investors want hard assets. They don’t want debt – they want silver and gold!

Eying the VIX

The VIX reading is calculated with the help of historical options premiums on S&P 500 stocks. When option premiums grow larger, the market is expecting more volatility and more risk, since option traders are building in larger gray areas into their option contracts. When the premium grows smaller, the market is expecting less risk and less volatility, pricing in less room for quick changes in price ahead of option expiration.

In recent months, and ever since the financial crisis of 2008, precious metals have had a generally strong correlation with the trend in the VIX. When the VIX is up, precious metals soar. When it falls, precious metals prices contract. This is true all but in the first month following the credit crunch when fears of rampant deflation sent metals to shed 30-40% of their value.

Getting Lucky with Monetary Policy

With each new recession, the power of the central bank and Congress are diluted, evidenced by growing stimulus packages and interest rates plunging to their lowest levels ever. The US economy may have avoided or delayed the eventual burst of the largest asset bubble ever created, but don’t be fooled; next time, Congress and the Fed will have to work even harder.

Unfortunately, the problem is now that they won’t be able to make much of a difference. Congress has maxed out its credit card, and for the Fed to take interest rates even lower, it would have to PAY people to use money. The Bank of Japan tried this negative interest rate policy and has yet to recover from what was said to be a 10-year recession, even though most would argue the same recession is still continuing.

Buy on Volatility

Investors’ appetite for risk has dwindled so far that only hard assets are suitable for most investors’ portfolios, proving the natural strength that commodities have in both bull and bear markets. In the short term, until the next recession, the VIX indicator should continue on its correlation with metals. When the VIX rises, buy with both hands, and when it falls, consider cutting back on your long term purchases. Of course, with inflation assured, and the next recession sure to be ten times worse than the previous, there is plenty of room for error.

Dr. Jeffrey Lewis

www.silver-coin-investor.com

By: Stewart Dougherty

For many years, the common viewpoint has been that an inverse price relationship between the United States Dollar and gold constitutes the First Monetary Commandment, and that this Commandment is chiseled into a stone tablet before which markets must genuflect. This false and misleading “Dollar up, gold down” religion has been proselytized at enormous, covert, public expense by the best market manipulations the high priests of Dirty Money have ever been able to buy. This has been done to deceive and delude the people about the true nature of honest money, and its devious, diabolical and immoral imposters. Now, every single corrupt market fallacy is about to be blown to smithereens as the global sovereign debt crisis performs an ages-old form of creative destruction: fiat currency annihilation. The First Monetary Commandment is already being smashed upon the rocks of common sense, and is about to become a costly heresy for those who cannot face the new and radically different monetary paradigm that the future is speeding back through time to bring us, as a deliverance.

As we all know, the Dollar’s sure-to-be-ephemeral Lazarus rally is due to the Euro’s extreme distress, which has been caused not just by Europe’s hopeless fiscal problems, but by the Greek populace’s response to their country’s particular version of them. The violent Greek protests demonstrate that there is little understanding among the people about the “endgame” nature of their nation’s and the West’s fiscal, financial and economic crisis.

This is because citizens worldwide have deliberately been given by their ruling elites a World Class education in Stupidity when it comes to government budgeting and spending, national deficits, sovereign debt, citizen entitlements, government salaries, public welfare programs, government employee and military pensions, socialized health care and virtually all other fiscal matters of state. When it comes to government finance, the people are living in a state of sheer cluelessness and delusion, which is exactly what governments want. If the people truly understood how their money, financial futures and general welfare are being destroyed by governments’ fiscal lunacy, the whole world would “go Greek.”

The citizens have also been awarded, compliments of the financial Master Class, Doctorates in Ignorance in the subject of how the money elite, epitomized by Goldman Sachs, has over the past twenty years plundered the West and sucked its national economies dry. Apparently, the people, at least in Greece, believe that protests, Molotov cocktails and rage can bring back to life the parched economic Waste Land they now inhabit. But that earth has been so mercilessly scorched by the uncontained and sociopathic predations of politicians and their Money Power blood brothers that it will be years before true rehabilitation can be achieved, if the people are fortunate.

In the context of Europe’s broad and intensifying public and private financial crisis, the Dollar is now rallying in what is simplistically and repeatedly referred to by State Television’s Mouthkateers as a “flight to safety.” State Media always finds it appealing to reduce complexity and the unknowable into sculptured sound bites, so that it can act intellectually superior, condescend to the people and please its masters.

For anyone to consider the fiat Dollar a “safe” asset is monetary insanity, given that the United States is the most hopelessly indebted nation in the world. The likelihood that the federal government will control its deficits, no matter what vast new taxes might be imposed or what kind of transformational epiphany it might experience as to its criminal and treasonous fiscal negligence is roughly zero. And the probability that the nation can pay its exploding debts or fund its contingent liabilities, which now exceed $100,000,000,000,000.00 ($100 trillion), is precisely zero.

Let us repeat that last point, to be categorical and to excise any lingering, “audacious,” Sugar Plum hopes dancing in citizens’ brains: it is arithmetically impossible for the United States government to pay its debts or contingent liabilities, unless it hyperinflates the Dollar into worthlessness. The claims of various government carnival barkers, State Media spokespersons and self-serving, parasitic, bankster shills that America can “grow” its way out of its debt grave are cold, callous and cynical lies told for exactly one purpose: to falsely elevate consumer confidence, and convince people to go shopping so government can kick the fiscal time bomb down the road. (We outlined this sad reality in copious numeric detail in a previous article, entitled “America’s Impending Master Class Dictatorship.” It is available at many fine web sites, via a Google search.)

So the question becomes, “Given that America’s severe fiscal crisis undoubtedly is well-known to Big Money, why on earth is Big Money flooding into the risky fiat currency known as the Dollar?” The answer is: because Big Money does not know what else to do with itself right now. Therefore, hundreds of billions of Euros and other currencies perceived to be at-risk are flowing into what Big Money views as the “least worst” currency at the present time: the Dollar.

Consider an analogy: There is a large haunted house high on a hill. It is old and made of wood that is as dry as the Sahara. There is no fire department within 500 miles of the house, and the water well has run dry. There is a party at the house for rich and influential guests, including politicians, central bankers and money managers, who have come from all over the world to have a good time.

The house is full to the rafters with the signature arrogance, haughtiness and self-importance of these self-anointed Masters of the Universe, and soon the party is in full gusto, with the drinks and drugs flowing. And as they drone on to each other about Keynesian solutions, Quantitative Easing, nationalized health care, Davos, financial weapons of mass destruction, stimulus packages, Federal Reserve toxic asset warehousing, rescuing the housing market by federalizing Fannie Mae and Freddie Mac, and the like, it becomes clear that these people are nothing but pompous, overpaid, delusional, self-serving, immoral, parasitic idiots.

In a daze, one of the Greek guests drops a cigarette on the floor, and his bedroom catches fire. Because the house is desiccated, the fire spreads fast toward the bedrooms of the visitors from Portugal, Spain, Italy and Ireland, and it won’t be long before half the house is a raging fireball. The celebrants gather in the main hallway in a panic. “Where should we go? Where should we go?” they feverishly ask one another. Then one of them gets a great idea: “Let’s go to the other side of the house, where the Americans are staying. Surely we will be safe there.” So all the guests go racing down the hallway toward the rooms where Geithner and Bernanke reside, while the fire, inflamed by its natural prey drive, is in hot pursuit.

They stampede into the American suite and slam the door shut. “Phew! We’re safe!” they say, as they head over to the well-stocked bar to continue the party. But the fire, overhearing them, says, “Safe? I don’t think so. You haven’t seen anything yet, you puffed-up little idiot non-savants.” The fire then exhales a gust of flame down the hallway, incinerating it. The fire has the fever, and surely it won’t long before the entire structure is an inferno.

That home on the hill is The Haunted House of Fiat Currencies. It is on fire, and there is absolutely nothing that can put it out, other than water cannons drenching it with truth, common sense, honesty and reform, and washing away the plunderers and thieves who have laid waste to public and private finance through their epic power-lust and greed. Since the deployment of such water cannons would be embarrassing and inconvenient for the idiot non-savants, that solution will not be implemented. Instead, gasoline will be poured onto the fire, in the hope that maybe it will rage on forever, creating a distracting spectacle that will obscure the crimes of the arsonists who ignited it in the first place.

When the fire started, Big Money might have done the smart thing and simply left the house. Instead, Big Money stayed in the house, in the assumption that it could continue to party while sidestepping the fire by going from room to room. Big Money was so inclined to habit that it could not think “outside the house.”

In time, and not much of it, thinking outside the Haunted House is going to become a requirement for Big Money, because the whole house is burning down. Big Money is going to be forced to flee disintegrating fiat currencies, which have all been set on fire. But where can Big Money go?

Big Money could go into equities, but the conflagration at the Haunted House is going to create a Depression (look at Greece), and that is not good for stock prices. So Equity Avenue will not be a great road to travel. Big Money could go into bonds, but they are Ground Zero when it comes to fiat currency risk. And at current yields, particularly for United States debt, they are the proverbial Guaranteed Certificates of Confiscation. How about real estate? Big Money has been there and done that, and it didn’t work out very well, to which currently skyrocketing CMBS defaults testify. Maybe Big Money could show up in force at upcoming Sotheby’s and Christie’s auctions. But those auctions are infrequent, and there are never enough chairs for Big Money. Diamonds? They have certainly been a long-time friend of Big Money, but again, there aren’t enough of them. Moreover, the transaction logistics are tedious, and the buy - sell spreads are irritating. And besides, how do you front-run, flash trade, black box or algorithmicize them?  Read More…

Source: Karen Roche of The Gold Report 05/05/2010
Talking heads are waxing enthusiastic over signals that the recession is receding, but debris from the derivatives debacle won’t go away without a total financial system collapse, according to 321gold.com founder Bob Moriarty in this exclusive Gold Report interview. “Nobody and nothing is going to stop it from happening. It is as absolute as the time and tides,” he says. While folks are all hunkered down in their bunkers waiting for the apocalypse, though, he suggests investing any spare cash in resource stocks—a “slam dunk” now that they’re cheaper than they’ve been in nearly a decade.

The Gold Report: Moody’s has downgraded Portugal debt, and recently S&P downgraded the Greek debt to the status of junk bonds. As a result, we see an increase in gold. Can you give us your perspective on what’s happening here?

Bob Moriarty: Most of the time tying news to gold going up or down is absolute rubbish, but in this situation, there probably is a link. Portugal’s debt has been downgraded two notches from A+ to A-, with a negative outlook saying it could be downgraded further in the future, and as you say, Greece’s debt is now junk status.

We all follow the stock market closely, but we don’t realize that in absolute terms the bond market’s far more important. It’s 10 times bigger than the stock market. Greece is on the verge of a collapse; I’ve been predicting this for months. We’re going to have Greece, Portugal, Ireland, England, Japan and eventually the United States. The risk now is sovereign credit default.

In the case of Greece, what happened originally was Greece wanted to get into the EU and get the benefit economically of the EU. They had a lot of debt, and used derivatives to hide it. Let me give you an example from an individual’s perspective. You go down to the bank and report your $100,000 annual income. You want to borrow $50,000. The bank asks how much you owe, and you say nothing. You lease your home, your car, your airplane, your boat, so you have no debt on the books. The bank gives you the loan. But you absolutely do have obligations, and what Greece did was hide debt through the use of derivatives.

Eventually, the derivatives float to the surface and become obvious. The immovable object meets the irresistible force. Greece has a debt it cannot possibly pay, and they’re trying to borrow more money. At some point, somebody says, “Look, Greece has to get their outlays in line with their income.”

For years, derivatives have allowed the world to maintain a disconnect between how much they bring in and how much they spend. For the past 18 months we’ve been shuffling the chairs around. We’re not paying any debt off. We’re not writing any debt off. We’re simply shifting who owes it. Taxpayers in Iceland voted against bailing the banks out, and that was a very rational vote. In the United States, every American now has an obligation of about $100,000 more now than they did 18 months ago because we’ve taken all these toxic assets away from the banks and put them on the backs of the taxpayers. That is actually quite insane.

There are two problems with derivatives. First, only 10 people on earth actually understand what they are. Secondly, they allow people to confuse other people, which is a function of the first part. Goldman Sachs wants an instrument where somebody who wants to bet against it gets to say, “Okay, I want you to put all this into these pieces of trash, and then you put your name on them and sell them to people who will think you’re behind them.” Well, that’s absolutely total fraud, and I’ve been saying this for years.

TGR: But this isn’t unique to the U.S.

BM: The fraud is a function of the derivatives market. Prostitution of the political system exists everywhere to a great extent. But politicians in the United States are as bad as they’ve ever been, and the corruption level is so high it’s absurd. I simply can’t remember what part of the Constitution allows the federal government to force people to buy health insurance. This law they just passed in Arizona? You can flat guarantee it’s going to be abused. Not that I favor illegal immigration, but we’re passing laws that are blatantly unconstitutional and getting away with it.

TGR: What exactly happens when the derivatives market blows up?

BM: All these government bureaucrats and guys who have had fat salaries for the past 10 years will have to lower their salaries or not have jobs at all. Tens of millions of government employees all over the world will lose their jobs. The derivatives market is going to go into a meltdown like nobody’s ever dreamed of because nobody but me and the other nine guys actually understand exactly what $600 trillion dollars is. It’s 10 times the size of the world economy, and it’s been blowing up since June 2007 when those Bears Stearns funds went under.

TGR: Are some countries positioned to benefit?

BM: Strangely enough, everyone is in a position to benefit. We have this giant, lopsided financial system. Think of it as a rowboat with 40 people in it, all on one side of the boat so it overturns. Sometimes, the best thing is to get thrown into the water and have to climb back into the boat. Somebody says, “We went under because we were all doing the exact same stupid thing.” Maybe if one guy gets on one side of the boat and the other guy gets on the other side, the boat will float.

So, okay, we let it blow up. We need the entire system to collapse and have total chaos for six months. Then somebody will say, “If we get back in the boat and one guy gets on the left and one guy gets on the right, maybe it will float.”

TGR: Doesn’t that downplay the collateral damage?

BM: It’s what cures the problem. If you pay a guy for 99 weeks to not work, what happens to unemployment? Unemployment goes up; you do better if you’re unemployed than if you’re working. You make money for doing nothing. How much sense does that make? The way to get people to work is to kill the unemployment programs. They don’t help people; they hurt people.

TGR: Going back to the derivatives blowing up and sovereign debt defaults. . .if we catapult forward with people rioting and revolting and all these countries in chaos, what do investors do to conserve their wealth?

BM: Be as financially conservative as you can possibly be. Don’t take on additional debt; don’t spend beyond your means. Very, very bad things are coming, so prepare yourself to the extent you can. Own some gold; own some silver. That’s going to be some protection. But it is time to reflect on where we are; it’s time to head for the bunkers. If you want to speculate on stocks because the fools on TV are telling you about green shoots; if you want to invest in real estate because you think it’s hit bottom, you’re risking your financial future.

TGR: Other than holding precious metals as a hedge, is there nothing to look at in the stock market?

BM: Actually—and I’ve said the same thing for years—resource stocks will be in demand. Even though China is about to blow up, I still believe it has to transition from an agrarian society to a consumer society, and that’s where real wealth is created.

I go to the gold shows because I want a feel for what ordinary investors are thinking and saying. I met with a lot of people at PDAC (Prospectors and Developers Association of Canada) in Toronto. Americans and Canadians are quite pissed off at government. They realize government has created the problem. We can’t afford the government we’ve got now. Everybody knows that. They just don’t want to address it.

TGR: Did you sense at PDAC that regular investors felt that the market was changing for gold?

BM: And silver. PDAC was the first time I saw ordinary investors participating and asking rational investment questions. Every other gold show that I’ve been to for nine years was the same old very conservative investors who went through the Depression and believed in owning gold and silver. Silver companies were getting $1 an ounce in the ground for silver in 2004 and 2005; they get a nickel now with $18 silver. And nobody wants to buy silver companies. Excuse me? Something’s wrong there. Now, more ordinary investors have started thinking that with silver at $18, maybe it makes some sense to invest in resource companies. Resources are a slam-dunk. Peak oil is very real. You need to be investing in well-run energy companies. We’re short of water, and investing in water makes sense. And we’re short of resources; so, there’s an interest, especially in the last month—I’m getting two or three calls a day from gold and silver mining companies saying they want to advertise. They’ve been sitting on their wallets for 18 months.

TGR: If we do indeed have this blowup of the derivatives markets, doesn’t the stock market crash with it?

BM: Sure. Of course, it does. You keep saying “if,” but it’s not a question of “if”—it’s a question of “when.” In the 1930s, the stock markets closed for six months or a year; no big deal. The reason you own gold and silver and the reason you’ve been very conservative in your debt obligations is because very bad things can happen. In 2001 you couldn’t go to the bank for a year in Argentina. I think they’d give you 1% of what you had on deposit. That’s going to happen again.

TGR: As you noted not long ago on your website, gold shares are historically cheap. They’re basically where they were in 2001-2002; yet gold itself has gone up five- or six-fold. Why haven’t gold stocks gone up with the general market when many stocks are trading at historical highs now?

BM: I have followed a ratio, and you can plot it very easily by filling it in one of the charting programs; the ratio of gold stocks to gold. That’s the XAU or the HUI over gold. There used to be a band and anytime it got out of the band on the top, you had a top in gold and silver; any time it got to the lower band, you had a bottom in gold and silver. The interesting thing is that it was only a measure of psychology. It wasn’t a pure measure of gold or gold stocks; it was a measure of gold compared to gold stocks. When people are very, very optimistic, they buy gold stocks, and when they are very pessimistic, they sell gold stocks.

Well, that ratio broke down in September 2008, and we are lower now than we have ever been at any period where people traded gold stocks and gold. We have been there for a year, and I think I know why. All these hedge funds that were borrowing money because of derivatives poured tens of billions of dollars into every fleabag junior resource stock in the universe and were forced to sell because of deleveraging in 2008. That money has not come back into the market, but there are some extraordinary companies. Read More…