by John Browne, Senior Market Strategist at Euro Pacific Capital
It is rare in recent history for precious metals to appreciate in parallel with the broader stock market. Yet, this has been the case in the two years since the stock market began crawling out of the wreckage of the 2008 financial crisis. Although metals have vastly outperformed US equities over that time frame, it is noteworthy that stocks have gone up at all. Since January 2, 2009, the S&P 500 stock index is up just about 50%. Over the same time, gold is up 68% and silver is up a staggering 267%. With rising interest rates, oil at over $100 a barrel, and the recovery running out of steam, many investors are wisely asking if the markets are set for a sharp pullback. Given the correlation that we have seen across asset classes, some are making the seemingly logical conclusion that metal prices are vulnerable.
The results of 2008 loom large in many calculations. In the second half of that year, when the extent of the financial catastrophe emerged into the light of day, the S&P 500 dropped some 31%. At the same time, gold dropped by more than 7% and silver almost 39%. Recent volatility in the shares of gold and silver mining stocks reveal that the fear of such reversals may be a growing concern among investors.
But one example does not a rule make, especially the example of a panic rush into dollars and US Treasuries. Wise long-term investors make decisions based upon fundamentals, and those for precious metals remain strong.
by Michael Pento, Senior Economist at Euro Pacific Capital (www.europac.net)
For years the Federal Reserve has told us that in order to detect inflation in the economy it is important to separate “signal from noise” by focusing on “core” inflation statistics, which exclude changes in food and energy prices. Because food and energy figure so prominently into consumer spending, this maneuver is not without controversy. But the Fed counters the criticism by pointing to the apparent volatility of the broader “headline” inflation figure, which includes food and energy. The Fed tells us that the danger lies in making a monetary policy mistake based on unreliable statistics. Being more stable (they tell us), the core is their preferred guide. Sounds reasonable…but it isn’t.
If it were truly just a question of volatility the Fed may have a point. But for headline inflation to be considered truly volatile, it must be evenly volatile both above and below the core rate of inflation over time. If such were the case, throwing out the high and the low could be a good idea. However, we have found that for more than a decade headline inflation has been consistently higher than core inflation. Once you understand this, it becomes much more plausible to argue that the Fed excludes food and energy not because those prices are volatile, but because they are high.
by Neeraj Chaudhary, Investment Consultant at Euro Pacific Capital
Recently, the Obama Administration seemed to flash a rare sign of laissez-faire thinking when it issued a report calling for the “winding down” of Fannie Mae and Freddie Mac, the two taxpayer-guaranteed institutions now responsible for backing at least 90% of the US mortgage market. In its press release, the Administration acknowledged that the private sector should be the “primary source of mortgage credit,” and that their goal is to “bring private capital back to the mortgage market.”
While such a pro-market stance is welcome, astute observers should recognize the intentions as empty rhetoric. Unfortunately, government domination of the housing sector is already a fait accompli, and any serious attempt to remove artificial support will result in the kind of political pitfalls no politician wants to face.
After decades of federal life support, the US housing market has become an invalid that is unable to fend for itself. When the absurd housing bubble finally popped in 2006, prices logically began to plummet back to earth. After national price declines of some 30%, a wave of “stimulus” dollars stopped the free-fall in mid-2009. But after less than one year of “recovery,” it looks like prices are headed south again.
While gold and silver coins are nice to look at, and there’s a certain sense of independence one gets from owning them, most purchasers buy physical precious metals with the goal of eventually spending them.
As they say, you can’t take it with you.
Unfortunately, many purchasers buy without ever knowing how to spend, and that can cause problems down the road. The reason I say “spend” instead of “sell” is that selling your coins for dollars (or euros, yen, etc.) is only one way to spend them. The other is to barter directly for goods and services. Whichever method you choose, it’s important to know all your options.
SELLING BACK TO THE DEALER
Most legitimate bullion dealers will buy back what they sell you for a few percentage points less, depending on the product, amount, supply, and demand for that product at the time of repurchase. This is called the “spread.”
by Michael Pento, Senior Economist at Euro Pacific Capital (www.europac.net)
By its very definition, fiat money is something created out of thin air: the word ”fiat” is Latin for ”let it be done” (as in, by decree). But the convenience that such a currency system offers central bankers is paid at the expense of savers. With nothing of real or lasting value on which to anchor, the value of fiat currencies can always blow away like ashes on a windy day.
For the past 40 years or so, every country on the planet has relied on fiat money. To a very large extent, this means that the national economies are far more exposed to the whims of their central bankers than they have been in the past. So, if central bankers go off their meds, the danger to the currency becomes profound. Unfortunately, at America’s Federal Reserve, it seems the inmates are now running the asylum.
We are being led to believe that falling prices are evil, and that only an increase in inflation can save our economy. From the moment the financial crisis took hold in 2008, Fed Chairman Ben Bernanke has looked to lower the dollar’s value and cause asset prices to rise – especially in real estate. But his pitch is wildly off the mark. The Fed can’t control the exact rate of inflation, nor can it direct where inflation will be distributed across the economy. In other words, inflation is like a knuckleball: once you let it loose, you’re never really sure where it’s going to go. And Bernanke’s pitches are so wild it would make Tim Wakefield jealous.
by John Browne, Senior Market Strategist at Euro Pacific Capital
While the world’s attention has been focused on the physical destruction wrought by the Japanese earthquake and tsunami, the desperate attempts to contain the fallout from the shattered Fukushima Daiichi plant, and the daunting problems that Japan faces in rebuilding its infrastructure, few have truly illustrated how long-lasting and widespread the radiation’s effects may be. There has also been little mention of how large radiological events affect economies of countries outside the immediate fallout zone. In truth, the disaster could make as much of an impact on investors in New York, London, or Sao Paolo as it makes on an investor in Tokyo.
The world’s most significant nuclear accident occurred 25 years ago at Chernobyl, Ukraine. Although its effects are now well-documented, many forget how thoroughly the damage was covered up at the time. To avoid panic, the Soviet authorities grossly downplayed the risks to those living near the plant, as well as those who lived hundreds, and even thousands, of miles away. In the months that followed, high levels of radiation were detected as far away as Scotland!
While we can hope that the present-day Japanese are more prone to candor than the Cold War-era Soviets, a series of botched and contradictory communications from Tokyo Electric Power, the operator of the plant, and the Japanese government have given us reasons to worry.
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
One of the immediate financial consequences of the catastrophic Japanese earthquake is that Japan needs to call on its huge cache of foreign exchange reserves to rebuild its shattered infrastructure. To pay for domestic projects, Japan will require yen - not dollars, euros or Swiss francs. As a result of these conversions, the yen rallied considerably after the quake struck.
But a surging yen runs counter to the macro-economic currency plans favored by most global economists. In order to maintain Japan’s position as a net-exporter of manufactured goods and net-buyer of US debt, the yen needs to stay down. So, the G-7 group of the world’s leading economies has intervened in the foreign exchange market by selling yen holdings, thereby pushing the currency down. In the short-term, their efforts appear to have been ”successful,” with the yen dropping sharply today.
Theoretically, this action is being taken to preserve export earnings, but this is only a secondary effect. Primarily, in making this move, the G7 is saying that the key to rebuilding Japan’s earthquake-ravaged economy is to raise the price of everything it needs to buy.
After all, absolute purchasing power is far more important than nominal export earnings. When the yen gains in strength, Japan earns more dollars from its exports, which could now be used to purchase the raw materials necessary to rebuild its infrastructure. However, by weakening the yen, Japan earns fewer dollars for its exports, increasing the economic burden of reconstruction.
Conventional wisdom is that a weakening currency is a boon for economic growth and exports; however, history does not support this view.
Here is video of Ron Paul’s most recent hearing on Capitol Hill on the relationship of monetary policy and rising prices. Paul begins by explaining the difference between monetary inflation (expansion of the money supply) and price inflation (rising prices). Enjoy it below.
by John Browne, Senior Market Strategist at Euro Pacific Capital
Japan is facing two meltdowns in the wake of its devastating earthquake. The first, and more critical, is the meltdown at the Fukushima I Nuclear Plant, 150 miles north of Tokyo. Surely, this is the greater near-term threat. But long-term, another threat looms, having to do with the Japanese government’s response to the former.
As the fourth largest economy in the world, behind the EU, US, and China, any major setback in Japan likely will have widespread repercussions. Japan is also the third largest holder of US Treasuries, behind the United States and China. While it is too early even to assess the Japanese damage accurately – let alone to forecast the full implications – it is possible to see the potential for a meltdown of the US Treasury market and international monetary system.
Current estimates hold that the Japanese disaster has already lowered world economic growth by a full percentage point for the year.
Leaving aside massive international aid, a complete nuclear meltdown, or other escalations, Japan already will have to spend a massive amount of money to cope with the current disaster. This raises the question: from where will such an enormous amount of money come?
by Michael Pento, Senior Economist at Euro Pacific Capital (www.europac.net)
A few months ago, the chorus sung by the recovery cheerleaders reached a crescendo when expanding consumer credit statistics and surging US trade deficits provided them with “evidence” of an economic rebound. In declaring victory, they overlooked the very nucleus of this past crisis: namely, the enormous debt levels and bubbling inflation that created fragile asset bubbles. If they had recognized the original problem, they would have remained silent. In reality, only a reduction in US debt levels or increase in the value of the dollar would have signaled a budding recovery; but, thanks to the Federal Reserve and Obama Administration, there is virtually no way those results will ever be seen.
Last week’s Flow of Funds report issued by the Federal Reserve clearly underlines the fact that we, as a country, haven’t just avoided deleveraging, but rather continue to accumulate debt. At the end of the last fiscal year, total non-financial debt (household, business, state, local, and federal) reached an all-time record high of $36.2 trillion. Not only is the nominal level of debt at a record, but also debt-to-GDP – a far more worrying statistic. In Q4:07, total non-financial debt registered 222% of GDP. In 2008 and 2009, it was 238% and 243% respectively. As of Q4:10, that figure had risen to 244% of GDP, For some perspective, look back to the turn of the millennium, when total debt-to-GDP was ‘just’ 182%. Even that level points to a sick economy, but today’s make you wonder how the patient is still breathing.
It is clear to me that the overleveraged condition which brought the economy down in 2008 still exists today – only worse. For all the suffering and displacement that has gone on, all we have accomplished is an unprecedented transfer private debt onto the Treasury’s balance sheet. Now that the Fed is (hopefully) just months away from taking the printing presses off overtime, the paramount question is how fast interest rates will climb. The Fed has been able to keep yields this low through relentless devaluation and a propaganda campaign that convinced the majority of investors that deflation was a credible threat (kinda like those phantom Iraqi WMDs).
But Washington’s ability to continue that ruse is coming to an end. The unrelenting growth of the Fed’s balance sheet, increasing monetary aggregates, surging gold and commodity prices, $100/barrel oil, soaring food prices, and trillions of dollars of new debt projected for the near future have served to vanquish the deflationists. Any echoes of those once prominent voices can barely be heard amid the thunderous roar of oncoming inflation.
Liberty Maven
by John Browne, Senior Market Strategist at Euro Pacific Capital
by Peter Schiff, CEO of Euro Pacific Precious Metals and author of the hit economic parable 
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