Economics

Gold Faces Short-Term Price Trap

August 10th, 2011 10:33 pm  |  by  |  Published in Economics, Federal Reserve, gold, inflation, Money  |  Comments Off

by John Browne, Senior Market Strategist at Euro Pacific Capital

Last week Fed Chairman Bernanke raised eyebrows and denied history when he asserted in front of Congress that gold doesn’t qualify as money. Yesterday he took the unprecedented step of announcing that the Federal Reserve would keep interest rates near zero for at least the next two years. In very short order thereafter it required much more of the money that he believes in (U.S. dollars) to buy the money that he doesn’t believe in (gold).

In any event, it was beyond unusual for the Fed to make such an explicit time commitment on monetary policy. To underscore this fact, three voting members of the Federal Open Market Committee came out against the policy. Such dissent within the Fed’s ranks has not been seen in decades. But Bernanke’s shameless appeasement of market fears did interrupt, if only for a few hours, the free fall on Wall Street. Wiser investors, understanding how a more activist Federal Reserve will destroy the value of the dollar, moved to gold, pushing the metal up to north of $1,750 per ounce.

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The Center of Gravity Shifts Slowly

August 5th, 2011 10:38 pm  |  by  |  Published in Banking, Debt, Economics, government spending, inflation, Money, national debt  |  Comments Off

by Andrew Schiff, Director of Communications and Marketing at Euro Pacific Capital (www.europac.net)

To an extent not fully appreciated by the investing public, financial markets are influenced by human emotion just as much as they are by economic data, corporate earnings, and dividend yields. Of all human motivations, fear is perhaps the most powerful. When people get scared, the “fight or flight” instinct forces us to take action.

Simple dangers prompt simple responses. If we unexpectedly encounter a bear on our driveway, we immediately run into the house and call animal control (or, in the country, grab the shotgun). But it’s harder to know what to do when financial danger stalks the stock market. To be honest, most investors are clueless. Is that really a bear? Is it dangerous? What qualifies as a house?

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Gold is the True Reserve Currency

August 4th, 2011 9:46 pm  |  by  |  Published in Debt, Economics, government spending, inflation, Money, national debt  |  1

by Michael Pento, Senior Economist at Euro Pacific Capital (www.europac.net)

The reliance upon the U.S. dollar as the world’s reserve currency and “safe haven” asset has created a perverse, but deeply entrenched, mindset among global investors. In fact, many believe the major financial players have no alternatives to owning U.S. debt and dollars. They argue that the market for U.S. dollars and Treasuries is the only financial pool large enough to handle the massive liquidity that sloshes around the globe on a daily basis. This idea makes a mass exodus from U.S. debt holdings seem impossible. This provides a nice explanation why the U.S. Treasury bonds can rally even while the government openly flirts with default and ratings agencies issue downgrades. But just because an illogical event occurs habitually does not mean it is logical or tenable.

The sophomoric reasoning behind the dollar “exceptionalism” argument is like assuming a stock can never fall unless a significant portion of shareholders decide to sell. In reality, a buyers strike is all that is needed to puncture a market. If the U.S. experienced just one disastrous Treasury auction, prices could nose-dive and yields could skyrocket across the board on all U.S. debt.

But the problem doesn’t just lie with the United States. Investors around the world are finally beginning to understand that central bank’s thirst for creating inflation, in order to keep their banks and governments solvent, will never be quenched.

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Debt Deal is a Blank Check

August 1st, 2011 7:48 pm  |  by  |  Published in congress, Debt, Economics, government spending, national debt, Peter Schiff  |  Comments Off

by Peter Schiff, CEO of Euro Pacific Capital, and host of The Peter Schiff Show, broadcasting live from WSTC Norwalk CT from 10am to noon Eastern time every weekday, and streaming at www.schiffradio.com.

By supposedly compromising to raise the debt ceiling, Congress and the President have now paved the way for ever higher levels of federal spending. Although, the nation was spared the trauma of borrowing restrictions, the actual risk of default existed solely in the minds of Washington politicians.  But the real crisis is not, nor has it ever been, the debt ceiling. The crisis is the debt itself. Economic Armageddon would not have resulted from failure to raise the ceiling, but it will come because we succeeded in raising it. This outcome falls along the lines that I had forecast (See my commentary, “Don’t Be Fooled by Political Posturing” from July 9th).

Both parties are now pretending that the promised cuts in spending outweigh the increase in the debt limit. But the $900 billion in identified cuts are spread over a decade and are skewed toward the end of that period. There are an additional $1.4 trillion in cuts that the plan assumes will be identified by a bi-partisan budget committee. But similarly empowered panels in the past have almost never delivered on their mandates.

More importantly, none of these “cuts” are actually binding. There is plenty of time for future Congresses to reverse what was so laboriously agreed to over the past few weeks. My guess is renewed economic weakness will be used to justify ultimate suspension of the cuts. In addition, most of the spending reductions were already scheduled to take effect before this agreement. So what did we really get?

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Gold Faces Short-Term Price Trap

July 29th, 2011 10:42 pm  |  by  |  Published in Economics, Federal Reserve, gold, government spending, inflation, Money  |  Comments Off

by John Browne, Senior Market Strategist at Euro Pacific Capital

Although I believe gold still faces a very rosy future, an agreement in Washington that avoids default and growing concerns of a global economic slowdown could create significant near-term headwinds for gold investors.

While the dysfunction of the US government is on stark display over the debt ceiling negotiations, other areas of the world show similar policy confusion. In the European Union, great doubts exist as to how the leaders will be able to stem the tide of serious sovereign debt contagion without inviting recession and an uptick in inflation. In China, commentators seem to lack confidence that the economy can maintain its impressive growth rate if its major trading bloc partners fall back into recession. This uncertainty has created a level of financial fear that has contributed to gold’s run up to more than $1,600 per ounce. However, this also means that any weakening of these fears could lead to a pull back in gold. An agreement in Washington, however meaningless, may be such a trigger.

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Obama Demagogues Default

July 25th, 2011 7:20 pm  |  by  |  Published in Big Government, congress, Economics, government spending, Obama  |  Comments Off

by John Browne, Senior Market Strategist at Euro Pacific Capital

President Obama has continued and increased the reckless spending of the previous Administration. Now, as the federal debt reaches its statutory limit, he is spreading fear and panic in the hopes of having it raised.

Many of the key people responsible for America’s historic mess, including the President, Treasury Secretary Geithner, former NEC Director Summers, and Fed Chairman Bernanke, have pronounced publicly that a failure to lift the debt ceiling will cause a catastrophic Treasury debt default.

This is simply not true. The US Treasury has tax revenues that cover the service of its current (staggering) debt of some $14.3 trillion.

Yet, that doesn’t mean the US government won’t be forced to default in other ways. Failure to pay the
nominal interest and principal on bonds is only the narrowest definition of “default.” When a broader definition is used – which includes the use of inflation to erode the real value of US debt – the US government has in fact been in a state of continuous default for almost a century.

A 2011 dollar is worth just four cents in terms of a 1914 dollar. As that new money circulates, your dollar will lose some 53% of its purchasing power, productivity increases notwithstanding. That’s just in the last three years!

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It Ain’t Money If I Can’t Print It!

July 14th, 2011 10:42 pm  |  by  |  Published in Banking, Debt, Economics, Federal Reserve, inflation, jobs, Money, unemployment  |  2 Responses

by Peter Schiff, CEO of Euro Pacific Capital, and host of The Peter Schiff Show, broadcasting live from WSTC Norwalk CT from 10am to noon Eastern time every weekday, and streaming at www.schiffradio.com

I have been forecasting with near certainty that QE2 would not be the end of the Fed’s money-printing program. My suspicions were confirmed in both the Fed minutes on Tuesday and Fed Chairman Ben Bernanke’s semi-annual testimony to Congress yesterday. The former laid out the conditions upon which a new round of inflation would be launched, and the latter re-emphasized – in case anyone still doubted – that Mr. Bernanke has no regard for the principles of a sound currency.

Tuesday’s release of the Fed minutes contained the first indication that a third round of quantitative easing (QE3) is being considered. The notes described unanimous agreement that QE2 should be completed, along with the following comment: “depending on how economic conditions evolve, the Committee might have to consider providing additional monetary policy stimulus, especially if economic growth remained too slow to meaningfully reduce the unemployment rate in the medium run.” Since the unemployment situation is deteriorating, and by all accounts will continue to do so, the Fed is essentially pledging to keep the spigot turned on. The committee also decided to look only at current “overall inflation” in making their judgments, as opposed to “inflation trends.” Since new dollars take awhile to circulate around the economy and raise prices, this means the Fed is sure to be too late in tightening once inflation starts to run away, causing more dislocations in the American economy.

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Sovereign Debt Blows Big Holes in Big Banks

July 13th, 2011 9:51 pm  |  by  |  Published in Banking, Economics, national debt  |  1

by John Browne, Senior Market Strategist at Euro Pacific Capital

The past few days have been very bad for the world’s largest banks. American behemoths Citigroup and Bank of America are down about 7% each. Across the Atlantic, things are far worse. BNP Paribas, Barclays, and Banco Santander are all down 13% or more… and Société Générale is down an astounding 16%!

Some pundits warn of an overreaction and suggest this is a buying opportunity for the beat-up financials. I disagree. Rather, I think the financials should now be considered toxic assets. Caution is justified.

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The Psychology of Bond Investors

July 10th, 2011 3:07 am  |  by  |  Published in Debt, Economics, Federal Reserve, inflation, Money, national debt  |  Comments Off

by Michael Pento, Senior Economist at Euro Pacific Capital (www.europac.net)

Those who take issue with the outlook of Austrian economists in general, and Euro Pacific Capital in particular, have pointed to the persistence of low bond yields as proof that our philosophy does not hold water. We argue that as the United States takes on ever more debt and prints greater quantities of dollars, that buyers of our debt will demand higher rates of interest to compensate for greater risk.  In fact, our philosophy leads us to believe that rates would currently be spiking as Washington debates whether to raise the debt ceiling yet again or default on existing debt. Instead, rates are hitting close to multi-year lows. As a result, our critics have found a seemingly valid issue. However, we believe that there are strong market reasons that are holding rates low for now that do not invalidate our central thesis.

Looked at objectively, there are a litany of reasons why rates should be much higher than they are.  Official government data from the Labor Department has year over year consumer inflation rising at 3.4%. With the Ten year note offering a paltry 3.1%, negative real interest rates now extend out over a decade! At the same time, total non-financial debt as a percentage of GDP is at the highest level on record and in our view there are no credible projections that show the trend reversing anytime soon. In addition, with the end of quantitative easing, the Federal Reserve will apparently no longer be soaking up 75% of all new Treasury issuance. Given this, does it make sense that yields on Ten Year Treasuries are trading 60% lower than their 40-year average?  Forget the flowers, where have all the global bond vigilantes gone?

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Don’t be Fooled by Political Posturing

July 9th, 2011 8:58 pm  |  by  |  Published in Debt, Economics, national debt, Peter Schiff, Taxes  |  Comments Off

by Peter Schiff, CEO of Euro Pacific Capital, and host of The Peter Schiff Show, broadcasting live from WSTC Norwalk CT from 10am to noon Eastern time every weekday, and streaming at

As attention focuses intently on the negotiations to raise the debt ceiling, House Republicans have made a great show of drawing a line in the fiscal sand. They claim that they will not vote for any deal that includes tax increases to narrow the budget deficit. But we all know how the game works in Washington. With the 2012 elections looming the Republican bluster is merely a bargaining chip that they will quickly toss into the pot when they sense a political victory. In fact there are signs that such a compromise is already underway.

House Republicans already have the power to avoid tax hikes and force significant spending cuts. All they have to do is refuse to raise the debt ceiling under any circumstances. That’s it. At that point the only discussion would be where to find spending to cut.

But Republicans want to raise the debt ceiling just as much as Democrats, they just want to gain political advantage in the process. They have widely accepted the Democrat stalking horse that a failure to raise the ceiling will lead directly to economic Armageddon. No party wants to be held responsible for such an outcome. Even if the expected Armageddon does not come, the Republicans will be blamed for any problems that follow a no vote on the increase, regardless of the true cause. As a deal is in everyone’s political interest, I am convinced it will happen.

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