goldmap

Cocaine and bank liquidity flows - 5/28/11

 

"[T]he average American doesn't have a clue about what's in store for his own country. At this point, the man on the street is aggravated about the lack of job opportunities, as well as by the ongoing real estate debacle and by soaring prices at the pump. But the true disaster lurking in the big picture remains beyond his comprehension."  - John Embry - 5/6/11

 

Dear All,

I have previously written about the critical role the drug trade plays in the banking system.  Catherine Austin Fitts: Narco-Dollars for Beginners  Other than central banks, the drug cartels are likely the banking system's most significant source of liquidity. 

In the largest case of money-laundering in U.S. history Wachovia Bank (now Wells Fargo) admitted to laundering $378 billion -- one third of Mexico's GDP -- for that country's cartels from 2004 to 2007. SanFrancisoChronicle: U.S. banks' role in Mexican drug trade.  The attendant prosecutorial pressures however created critical disruption to banking system liquidity flows -- a system highly dependent on the cocaine trade for its normal functioning. The matter of the banking system's drug addiction is a subject not discussed in polite circles. In this well done and intriguing report, Max Keiser and Stacy Herbert examine the connection between the severe drug cartel liquidity flow contraction in 2007 and the ensuing global banking liquidity crash.  Keiser/Herbert: Cocaine Economy

 

The most revealing and least commented upon fact of le episode Strauss-Kahn concerns his removal from the Air-France jet at a New York gate: He was pulled out of the first-class cabin. 

First-class is the manner in which the international political class lives. FoxNews: Ex-IMF Director set to receive 'Golden Parachute' from U.S. taxpayers  Taking administrative cash from working U.S. taxpayers (The U.S. effectively controls the IMF and is its largest financial contributor) IMF elitists lead privileged lives as they rape the poor citizens of vulnerable developing nations through stealth-imperialism.*  Strauss-Kahn is an economic terrorist and bag-man for the major oil companies. What he has allegedly done to this particular maid and predecessor females is, sadly, the least of it. 

 

The press continues to portray the rebellions in North Africa and the Middle-East as calls for democracy.  They are anything but.  The populace under those regimes are hungry for food and frustrated by their deprivation of the basics of life.  They could care less what political system delivers these things to them. These are not real countries anyway -- they are tribal compilations.

 

The Federal Reserve hides its activities from the public, lies about its deeds and intentions, misleads Congress and manipulates markets. Bloomberg: Fed Gave Banks $30 billion in Secretive Loans as Low as 0.01%  Accordingly, When a former Fed governor states that gold and silver "are clearly in a bubble" and would "sell them and buy the dollar," you can be sure the dollar is going lower and precious metals higher.  The claptrap commences at 1:37:  Robert McTeer on CNBC

 

Kudos to GATA... GATA urges Paul to probe Fed's gold swaps; he tells CNBC he will

 

I realize this is hard to follow but the guy has a very active love life.   The current revelation is not to be confused with Barney's prior admission that his then live-in lover (who was on probation for both drug possession and possession of child pornography and for whom Barney admitted abusing his House privileges by attempting to interfere in the pedophile's legal proceedings) was running a prostitution ring out of Barney's apartment.  No, ma'am....different boyfriend -- different scandal.  The latest: BostonHerald: Barney Frank admits to helping boyfriend land job at Fannie Mae

 

Extreme examples often illustrate a point best. Zimbabwe has had among the worst hyper-inflations in recorded history.  Note the solution:  CommodityOnline: Zimbabwe may sell diamonds to launch gold-backed currency

 

In this January 2010 post, Anatomy of a Seizure an analysis was made of the FDIC closing of Horizon Bank, Bellingham, WA, the agency's first bank shutdown of that year.  Here is a more recent example of the rot that hasn't gone away in the banking system. On April 29th the FDIC seized Community Central Bank, Mount Clemens, MI, which reported assets of $476.3 million against deposits of $385.4 million, a margin of assets to deposits of 1.23 to 1.

(In $millions)

$   385,400.  Deposits

  - 183,200.   FDIC Estimated cost to cover deposits (asset shortfall to deposits)

     202,200.  Implied FDIC estimate of true asset value available to cover deposits  

FDIC estimated asset value / Community's deposits   202,200/ 385,400 =   52.4%

FDIC estimated asset value/ Horizon stated asset value:   202,200 / 476,300 =   42.4% **

Not much has changed in either the state of bank balance sheets or the quality of FASB financial reporting. It is difficult to comprehend how a federally regulated banking institution can be permitted to value its assets at $476 million one day and on the following day have its Supervisor value those same assets at $202 million.  But then you wouldn't understand the Federal Accounting Standards Board, a group of hookers serving the desires of the banking industry and the federal government (same thing, really) which officially endorses widespread fraud by allowing banks to assign whatever value they wish to deteriorated assets.

 

In my last post I discussed the bubble in higher education.  Just as scandalous is that colleges are preparing students for the wrong kind of jobs and in many cases, non-existent ones. NYTimes: Many College Grads Find Job Market Humbling   HuffPost: Moving Home: When College Grads Face Uncertain Futures

Perhaps the worst advice one can give the average high school student is to attend college. Rather, she would be better off learning a trade and avoiding debt she'll never be able to repay.  For those who have already started college it may well be that the smart choice would be to drop-out immediately.   A college degree is no longer a good financial investment for most Americans.  Moreover, the quality of the product has deteriorated markedly. 

The problem is not limited to colleges:  NYTimes: Is Law School a Losing Game?   NYTimes: At Well-Paying Law Firms, a Low-Paid Corner

The following is a must watch.   The administration of higher education has become a corrupt and credit-driven enterprise: College Conspiracy 

As America's college graduates find themselves on the front line of reduced job market expectations, it is part of a larger trend of lower American living standards. HuffPost: Recession Destroyed Savings of One Out Of Four Older Workers.  Unfortunately it is only the first of two waves. Lower nominal incomes will be compounded by lower real  incomes once inflation hits in earnest

 

 

The trend...

 

FORTUNE: Pimco: 'The largest position in the fund is gold' 

 

Bloomberg: Global Food Prices Extending Gains Set to Raise Costs for Tyson, Kellogg

 

WSJ: China now world's largest gold buyer

 

Take a look at this absolutely stunning chart prepared by GMO's Jeremy Grantham:

 

China's Share of World

Commodity Consumption

	CHINA %
COMMODITY	OF WORLD
Cement	53.2%
Iron Ore	47.7
Coal	46.9
Pigs	46.4
Steel	45.4
Lead	44.6
Zinc	41.3
Aluminum	40.6
Copper	38.9
Eggs	37.2
Nickel	36.3
Rice	28.1
Soybeans	24.6
Wheat	16.6
Chickens	15.6
PPP* GDP	13.6
Oil	10.3
Cattle	9.5
GDP	9.4
*Purchasing power parity Source: GMO

 

 

When you hear a politician refer to his career as a "public service" your gag reflex should kick in. The business of public service is self-enrichment.  As long as Americans continue to naively embrace the notion that there are meaningful differences between the two major political parties nothing will change for the better in the U.S. 

Participation in today's political process no longer occurs at the ballot box; Cash is what drives the system. Voting has become a quaint activity, to paraphrase Leona Helmsley, "for the little people."  United States elections have become an illusory exercise for the masses in which participants are made to feel they are practicing some sort of self-determination.  It is a grand exercise in the placebo effect. 

Elections decide only which group shall have the privilege of profiting from the machinery of government. Mencken referred to elections as "advance auctions on stolen goods." Believing they are catalysts for change, voters are disappointed when it doesn't happen and then, another election cycle begins: WashingtonExaminer: Obama skirts rule of law to reward pals, punish foes

 

Worth the read...

Justice Dept. prosecutes president of roller derby team while Wall St Execs get pass.

John Embry: Washington's tub-thumping fools no one 

This is Wall Street's modus operandi.  Absolutely nothing on Wall Street has changed: NYTimes: Joe Nocera - Was LinkedIn Scammed? 

 

Regarding gold...

I'm hearing from readers questioning my judgment as to how much upside potential remains in the prices of silver and gold.  It is the wrong question.  Gold's value is not measured by dollars or any paper currency. Gold measures currency value.  The appropriate question is: How much further deterioration in the dollar's purchasing power should we expect?   The issues reviewed here for the past two years should make it clear that the dollar is a disaster and that there is neither the political or populist will to make the tough choices in order to change its trajectory. The world's creditors have lost their appetite for U.S. debt.  Notwithstanding the bluffing, the deluge of new dollars cannot cease.  The Fed is trapped and the dollar's darkest days are ahead.  As I have stated previously, the dollar prices of both gold and silver are much closer to their bottoms than their tops. Gold is still in the early stage of its re-emergence into the monetary system.  The price it will reach within the next several years will take your breath away, but remember -- that will be a function of the dollar's deterioration.  Gold is the constant. 

If you have capital, protect it by dis-hoarding dollars and trading them for physical gold and silver bullion coins such as American Eagles, Australian Philharmonics, SA Kruggerrands or Canadian Maple Leafs.  It doesn't much matter which -- just be sure you're dealing with a reputable dealer.  For speculation and significant profit opportunity, the stocks of the right silver and gold companies are currently on sale.    

 

If you do not have capital, I'm sorry, but you're screwed.***

 

My very best,

 

Jeff

_______________

 

* The formula is rather simple: The IMF and World Bank "lend" infrastructure development money to mineral rich countries using knowingly overly-optimistic economic forecasts. Corporate interests receive lucrative development contracts.  When the countries do not generate the inflated projected economic returns and the loans become unserviceable, the IMF "restructures" the debt whereby the developing countries lose significant resources.  Those resources end up on corporate balance sheets, primarily those of international oil companies.

 

** The FDIC also entered into a loss-guarantee agreement with the acquiring institution whereby the FDIC is liable for any additional losses to the extent that asset values are ultimately below the FDIC's current estimate.

 

 *** Prepare for a drastic inflationary reduction to your dollar-denominated income and lifestyle. 

'Glad to Be Unhappy' - 5/12/11

 
"Like a straying baby lamb, with no mammy and no pappy
I'm so unhappy, but oh, so glad!"

-- Richard Rodgers / Lorenz Hart                                                                                  
   "Glad to Be Unhappy"

   ('On Your Toes,' 1936)

 

 

Dear All,

 

Why aren't the celebrity, political, and in this case -- inbred elite who engage in misguided earth-worshiping called out on their hypocrisy?   Prince Charles sees nothing wrong with his own profligacy -- carbon and otherwise -- while insisting the rest of the world make do with less: Prince Charles - Hypocrite

 

Beyond the personal toy collections (the recent Royal newlyweds were shown taking Charles's carbon-guzzling Jaguar --for a post-ceremonial spin) the Royals have no shame when it comes to the ostentatious display of their wealth.  They would undoubtedly argue that their entitled lives of monstrous excess is precisely what their subjects (from whom the entirety of their wealth was plundered) desire for them which, one must admit, is apparently the case. But for the world to be lectured by this wimp of a man -- who knows nothing of a day's labor or personal sacrifice -- about reducing carbon footprints and personal consumption while he leads a carbon-charged life of self-indulgence is a disgrace.

 

 

175,000 of April's 244,000 new jobs reported on Friday by the Labor Dept. came from "Birth-Death modeling."  Congratulations to the theoretical holders of these non-existent jobs.

 

 

 

Substitute the lofty yet misguided goal of 'home ownership for all'  with the equally flawed notion that every American should be able to attend college and you've duplicated precisely the toxic formula that cratered the U.S. housing market.  Now add in absurd quantities of government guaranteed credit and the results are interchangable.

Higher education is in a bubble.  Just as it is now recognized that housing prices were driven to unsustainable levels due to cheap and ubiquitous government guaranteed or acquired credit, it is only a matter of time before the same reality takes hold regarding college costs.  On a personal note, I am fortunate to be able to send my daughter, without financial assistance, to a top liberal arts college.  Not for a moment however do I deceive myself into believing it is a good investment.  I consider it a luxury, not a necessity -- where the social skills she derives may serve her well -- in a similar manner as did those she acquired in summer camp.  Insofar as her formal "education" is concerned however, it is a strictly low-value proposition.   With merely an internet connection she could create her own course of studies and access video lectures on virtually any subject that interests her on a multitude of sites featuring the best and the brightest in their fields. She would do so with a far more efficient use of her time and it can be had for free.  I am not knocking that college experience -- I had one too.  Nor am I suggesting there isn't value to personal interaction with teachers or dorm life.  What I point out is that these are terribly over-priced luxuries.  Recognize college for what it has become -- an over-hyped, over-priced social experience masquerading as "education," serving the interests of over-paid (tenured and otherwise) education professionals and their bloated institutions.

All institutions reflexively resist change. Today's American colleges provide a mediocre product at exhorbitant cost with all the efficiencies one would expect from 18th century delivery methods. 

Just as they were encouraged to take on mortgages they could not afford, young people and their families are being pushed to take on debt to finance the procurement of college degrees which for many of them are of questionable long-term financial value. Abundant and excessive credit is what is chiefly driving college costs upward.   Remove the government sponsored student loan system and watch how quickly college costs fall.

As the current system unwinds, students and their families paying relatively large portions of their own college expenses will realize that a very substantial portion of their expenses have been indirectly subsidizing students who have borrowed heavily, and that their own costs are being driven up by a credit system that they are only minimally a part of.  Perhaps this soon-to-be-released documentary will mark the start of growing awareness that American families are being ripped off by their children's' colleges.  'College Conspiracy'' 

 

Worthy of your time...

* In addition to serving as Secretary/Treasurer of the Gold Anti-Trust Action Committee Chris Powell is managing editor of the Journal Inquirer, in Manchester, Connecticut: Chris Powell: Biggest market rigger is government itself

 

* These two are pros: John Embry and James Turk discuss gold and silver

 

* EPA Whistleblower Criticizes Global Warming in Peer-Reviewed Study

.

* John Williams, proprietor of Shadowstats is one credible economist. He was interviewed recently by Energy Report



 * Matt Taibbi serves up another excellent piece on the Vampire Squid for Rolling Stone:  "They weren't murderers or anything; they had merely stolen more money than most people can rationally conceive of, from their own customers, in a few blinks of an eye. But then they went one step further. They came to Washington, took an oath before Congress, and lied about it..." RollingStone: The People vs. Goldman Sachs

.

* Stratégiste Global: Hoping for the best, preparing for the worst … in Japan, which includes this wonderful chart:

 

 

 

The trend...

 

FT: Mexico buys gold, a lot of it

 

 

 

Silver and gold...

   

A number of readers had questions about the goldmap Index and GOI discussed in the last post.  

  

"I understand the highs in the GOLDMAP INDEX in 2007 and now but what about the lows in it and the GOI and the history of how the Index and the GOI got to where it is?  Do you have this on a chart?"  

 

Unfortunately I don't have it charted out,  Insofar as its history, the Index barely budged during the initial "patiently waiting years" of 1998 through 2000 and was even slightly negative at times. In 2001 the Index moved into solid positive territory and then exploded higher in 2002 and 2003, peaking in 2007 at 24.  The post-2003 low in the GOI was recorded in November 2008 (in the wake of the market turmoil that commenced in September of that year with the Lehman Bros. bankruptcy) at 3.3 at which time the Index itself collapsed from 24 to 6 in the space of a year.  (You will note that the current reading of the GOI at 4.1 is barely above the post-2003 low)

 

"How much margin is in your portfolio and the Index?" 

 

I should have made it clear that the portfolio is entirely un-leveraged.  Actually, it could not serve as an index if it employed margin.  I have never used any margin debt and emphatically suggest that you not do so either.  If you choose the right silver and gold companies there is sufficient economic leverage inherent in the investments to produce outsized returns.  Using of margin ensures that you'll be forced to liquidate your stocks at precisely the times you should be adding to your positions.

.

. 

The silver and gold stock sector continues to suffer from negative sentiment.  As of this writing the goldmap Index sits at 21.1 and the GOI at 4.1

 

 

What you witnessed in the highly leveraged paper silver futures market last week was a coordinated High Frequency Trading and commodity exchange extraction of liquidity through unprecedented successive margin hikes. The intended effect was to force the price sharply down and cause "piling on" by hedge fund selling algorithms. The paper silver and gold futures market is a rigged game.  The Comex and its members view their public customers (i.e. non-insider speculators) as targets to be routinely fleeced.  The Commodity Futures Trading Commission is a sham and the statements issued by the exchange and its members which purport to support market integrity belie the fact that these are the very people intentionally de-stabilizing the natural price-discovery that is supposed to occur on their exchange.   Stay away from the Comex and other futures exchanges.  Buy physical silver and gold and/or shares of good precious metals companies.

 

The hit on silver was coupled with a formidable mainstream-media disinformation campaign alleging that silver was in a bubble and had met its inevitable fate.  There can be no bubble unless there is inordinate speculation, a condition negated by a current two-year low in silver speculative net-long positions. 

.

Bear in mind that the Fed has a hand in this too.  Commodities were broadly marked down these past couple of weeks as the central bank succeded (albeit briefly) in convincing the markets QE will end in June and with it, inflationary expectations.   The fact that this is all nonsense isn't the point.  For a few days the Fed had its way and 'risk trades' were off, the dollar bounced and commodity positions were exited. What did not follow the dollar's lead though is the bond market, which looks to me like a very sick puppy. 

 

While it is unnerving to see this type of manufactured volatility and price assassination, it is revealing of the Fed's desperation as well as that of the massive silver and gold shorts who are increasingly showing their hand.  They can make stands -- sometimes extravagantly, but they cannot stop the long term trend of higher gold and silver prices.  

 

Those of us who have been in the precious metals market for over a decade can take these setbacks in stride. There have been countless numbers of them and yet the prices of gold and silver are today close to their all-time highs.  Those who do not have a long term view do not belong in this market.  If your investment view is driven by your emotions and the weekly price action, you should re-consider your decision to be in precious metals.  Gold and silver investments are a means of opting out of the financial system.  If you're comfortable owning dollar denominated assets, perhaps you should remain in the system.  Above all, if you cannot distinguish between short term price action and the long term trend, you are doomed.  You will be whipsawed and you will bail at the wrong time.

 

That said, I will mention that some of you may be better off with physical gold and silver rather than gold and silver stocks if your temperament is not suited for short and intermediate-term non-correlation with the performance of the metals themselves.  While historically more profitable over the long-term in a bull market, the equities require great patience and discipline.

 

 

Finally, while I can't predict when or at what price level the market will stabilize, the following is a characteristic of a market bottoms:  Mark Hulbert: Gold timers finally throw in the towel.   "Consider the average recommended gold market exposure among a subset of the gold market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). Just a week ago this average stood at 73.7%, one of the highest readings for this index in several years.  Today, in contrast, it stands at just 7.0%."

 

The gold and silver fundamentals have not changed one bit and physical demand remains excellent.  While it is natural to view these paper operations with contempt, they are as well a gift.  If you have additional capital to invest, 'it's a pleasure to be sad."

 

My best,

 

Jeff

The goldmap Index and the 'GOI ' - 5/1/11

 

"As you listen to the current blather from talking heads about where gold is going, keep in mind most of them are just journalists, reporters that are parroting what they heard someone else say. And the "someone else" is usually a political apologist who works for a government. Or a hack economist who works for a bank, the IMF, or a similar institution with an interest in the status quo of the last few generations." -- Douglas Casey, 4/18/11

 

Dear All,

On the subject of blather, here is an example of the type of empty patriotic platitude -- in this case from U.S. News & World Report -- which the clueless elite love to toss about: “It has always been a bad idea to bet against America and our ability to prosper even against overwhelming difficulties. America will cut back its spending, innovate, and pay off its debts. We will earn our way out. It’s just how we do it…”

Pay off its debts?'...It's just how we do it?'   What country are they referring to?  In the first place, the United States in its entire history fully repaid its debt on only one occasion -- in 1835, under the second Jackson Administration.  The U.S. began its life with federal debt at 25% of its Gross Domestic Product immediately following the Revolutionary War. Debt peaked in 1792 at 35% of GDP and in the ensuing 43 years of fiscal responsibility, the US progressively reduced its debt until discharge in 1835.  Other than spikes following the Civil War and the two World Wars, U.S. debt levels as a percentage of GDP were subsequently relatively contained. In 1982 the debt trend accelerated and never looked back. Total U.S. debt today of $14.3 trillion now well exceeds 100% of GDP and is growing.  The numbers are actually worse than this because GDP includes government spending, making apples-to-apples debt/GDP comparisons difficult since government spending today is so significant. In 1835 for instance the federal operating deficit (the federal budget then was then almost entirely defense expenditure) was about 1.5% of GDP.  Today it is 25%.

If a major news publication cannot grasp (for public consumption, at least) the essence of where this is headed it should not be be surprising that most Americans will be blindsided by what will happen to the dollar.

 

Among the few worthwhile analyst comments following the Fed meeting and Bernanke's press conference this week were from Peter Tchir of TF Market Advisers. Referencing the obligatory parade of Fed governors making hawkish statements between FOMC meetings (Note Richard Fisher's quote from the last post), Tchir observed:

"The vote was unanimous.  I keep hearing this is a strong indication that everyone backs the policy.  To me, it just means there is no point listening to any other Fed governors speak as in the end they will all do what the Chairman wants.  If there ever was a time that the vote was meant to be a real vote that is long gone and the Fed is clearly a dictatorship at this point."

When asked about Fed policy effects on the dollar Bernanke employed the old 'It's not my job' diversion:

"I learned that the man who sets interest rates and prints dollars has nothing to do with creating a 'strong' or 'weak' dollar.  I'm still scratching my head, as I would have thought interest rates and supply of dollars had more impact on exchange rates than the Treasury Secretary saying he supports a strong dollar, but clearly I'm wrong on this."

The central bank of the United States has increased the Adjusted Monetary Base by $.55 trillion thus-far this year, an annualized rate of 82.5%. Watch what the Fed is doing -- ignore what it is saying.  The Federal Reserve will continue debasing the dollar because rhetoric notwithstanding, it has no choice.

 

 

Worth viewing...Here's a tutorial on the Fed's use of derivatives (among the variety of methods it employs) to manipulate interest rates.  It should be pointed out that selling unsecured guarantees on one's own debt is on its face, fraudulent.   The moral perversion that characterizes the U.S. Federal Reserve and the banking cabal it serves permeates the entire financial sector.  We have not had freely operating financial markets in the U.S. for quite some time.  The setting of false (low) interest rates and manipulation of asset prices with inordinate credit (not to mention direct market intervention) by central planners skews risk taking and capital allocation.  Price distortions result in every asset class. -- leading to mal-investment, bubbles, and ultimately systemic failure.*    YouTube: FRAUD: How the Fed Sells Put Options On Treasury Bonds To Drive Down Yields

 

Presented without comment...Time: Bank of America Lawyer, Consultant gave Foreclosure Probe Chief $15,000. 

 

The following story ran in the June 24, 1974 issue of TIME Magazine: TIME: Another Ice Age?  Reading the article about 'global cooling' -- the apocalypse du jour advanced by climate charlatans at the time -- your first inclination will be to laugh as it appears quaint, but that is only because you have been conditioned to accept much of the global warming "science" that has infected your intellectual sensibilities these past few years. 

"Scientists have found other indications of global cooling. For one thing there has been a noticeable expansion of the great belt of dry, high-altitude polar winds — the so-called circumpolar vortex—that sweep from west to east around the top and bottom of the world....Telltale signs are everywhere — from the unexpected persistence and thickness of pack ice in the waters around Iceland to the southward migration of a warmth-loving creature like the armadillo from the Midwest" 

Here's the April 8, 1977 TIME cover a few years later:

Earth is 4.5 billion years old and estimates of the length of its habitation by Homo sapiens range from 50,000 to  400,000 years. Yet in the space of a mere 20 recent years two entirely contradictory scientific theories emerged, each predicting eco-Armageddon by antithetical means.  Putting aside entirely the issue of which of the theories (if either) might actually have validity, what distinguishes the more recent of the two -- the global warming camp -- is not the science itself but the formidable political movement and business interests that have embraced it.  The cult of global warming is about political capital and money. Canada Free Press: Cover up - UN tries to erase failed climate refugee prediction

Six major sources have estimated that Pakistan (which I single out solely because it has the world's most unstable nuclear regime) alone possesses between 40 and 100 nuclear warheads. Should the habitable world ultimately cease to exist as a result of either freezing or melting, we should consider it a success for our not having blown each other to the heavens well before then.

 

About that "Recovery"...

McDonald’s receives over 1 million applications for 62,000 minimum wage jobs

Wal-Mart: Our shoppers are 'running out of money'

  

The trend...

IMF bombshell: Age of America nears end

Bloomberg: Texas Teacher Pension Needs 21% Return to Keep 80% Funded Ratio

MarketWatch: BRICS Make Move to Shove Dollar Aside

WashingtonPost: Top-Secret America  This is a trend that should be as disturbing as any, but how can Americans be expected to care about the fact that right out in the open, the U.S. is turning into a police state?  After all, there are Real housewives to concern themselves with:    

 

On to gold and silver...

It took him a while, but at last he sees it.  Russell is to be forgiven because he came of age when the U.S. had relatively free financial markets, a notion he apparently found difficult to accept as no longer being the case: "The action is now so blatant that it literally screams of manipulation."  MarketWatch: Russell endorses gold manipulation thesis

 

In the last post I discussed the severe under-performance of the silver and gold stocks relative to that of the metals for the past several years, and included Dan Norcini's chart reflecting this. I thought I would go a bit further and share something else that may prove worthwhile for those who have not been in the precious metals bull market from its inception.  Being in the relatively unique position of having held a precious metals stock portfolio for the entire duration of the bull market, that portfolio serves in effect as a proprietary index.  It is a managed portfolio so its not a a pure index, per se. However I consider it a fairly stable representation of the performance of a particular type of precious metals company.  Where there has been turnover in the portfolio's composition, it has been low (I estimate it at 10 - 15% % per year) and significantly -- when shares have been sold proceeds were simultaneously re-invested in alternative precious metal stocks, resulting in 100% exposure to the sector for the past 13 years.

As I do not make specific stock recommendations on this blog I will refrain as well from providing further details on the portfolio such as large cap/small cap, producers/explorers etc. The only additional information I'll share is that the average gold/silver weighting has remained at very close to a constant 60/40 ratio (favoring gold) throughout its history. Suffice it to say, I believe that it has characteristics that make it a unique and useful tool in addition to the HUI, XAU and other precious metals stock indexes. I will refer to it as "The goldmap Index." or "The Index')

The Index measures the absolute change in the portfolio's value since its 1998 inception.

The Index commenced in 1998 at a level of 1 with an ounce of gold and silver that year commanding an average price per ounce of $292. and $4.88 respectively. With gold and silver at roughly $1,560. and $48. today the Index is at 24 (This is the all-time high for the Index and the second time it has reached this level) meaning that $1. invested in the Index at inception appreciated 2,300% and is worth $24. today.

The weighted (i.e. 60/40 ratio) increase in the two metals since the inception of the index in 1998 to date is 614%. while the increase in the Index to date is 2300%. Thus, the Index has outperformed the metals themselves by a factor of 3.8 (2300/614).  We will refer to this measure of out-performance of the goldmap Index vs. the rate of price movement in the metals themselves as the goldmap Out-performance Index or "GOI."  The GOI has a current reading of 3.8. This of course is the only reason to own the stocks vs. the metals themselves -- for the potential out-performance.

The GOI measures the cumulative out-performance of the Index vs. the metals since the portfolio's 1998 Inception.  

To the point of the relative performance of the stocks vs. the metals more recently, let's examine where things stood in the fourth quarter of 2007 when the Index hit its high of 24 for the first time. Gold and silver during the quarter averaged $788. and $14.22 and the weighted appreciation in the metals since 1998 at that point was 178%.  Note then that the GOI in Q4 of 2007 also his its all-time high at 12.9 (2300/178).

In other words, although the metals since the fourth quarter of 2007 have (on a 60/40 weighted basis) increased by 154%, the goldmap Index has not appreciated at all. From Q4 2007 through the end of 2010 the Index was in fact negative for most of the period and only recently recovered to its former peak.  It would have been better to have owned the metals themselves (for the period).  You'll see a close correlation to this on the following  chart from Casey Research tracking the price of gold against the Toronto Venture Exchange Composite, whose components bear some similarity to the securities comprising the goldmap Index:

This poor relative action in the stocks vs. the metals since 2007 has reduced the current GOI to a reading of 3.8, the absolute low since the Index's inception,  while the 12.9 reached in 2007 is its all-time high.  I am of the opinion that while the GOI of 3.8 is as close to a bottom as we'll see during the bull market, we'll see it make new highs as the mania phase gets into high gear.  If the GOI were today at its historical high of 12.9, the Index would currently sit at 79.

The precious metal sector right now is a dangerous place to be short.  Short sellers are playing for fast pennies when there are dollar bills for sale on the long side.  When the sector ignites it does so with fury. If you entered the sector in 2009 or 2010 you've had a wonderful run but the best is ahead. The moves in silver and gold the next several years will send the Index and the GOI to successive new highs.  Be patient and wait for the real fireworks.

 

My best,

Jeff

 ___________

* The price distortions work both ways, of course. Therein lie the continued opportunities in silver and gold, where false paper discovery mechanisms continue to artificially suppress their prices. The free market retort is now playing out however the full reaction will be inversely proportionate -- at the least -- to the full degree of suppression, which has been in place for two decades.