It's different this time

They tell us that the Dow is at a record high even though the economy is a disaster. They tell us not to worry about rampant unemployment, the layoffs caused by Obamacare, and all of the new EPA regulations that are killing thousands of jobs each day. They tell us not to worry about all of the Fed's money-printing.

They tell us not to worry that the Dow is truly down by 50 percent if you price it in gold.


After all, it's different this time.

The Endgame for Currency Debasement: Exter's Pyramid

Where will the global race to debase currencies end? A diagram known as "Exter's Pyramid" offers us a hint:

...Before we delve into why backwardation in gold has some very unique and stark implications, let’s first take a moment to understand exactly what backwardation is.

...Backwardation is the condition where the spot price is higher than the forward price. Backwardation often exists in perishable commodities, right before the harvest. This happens because even though demand is constant throughout the year for a commodity like wheat, the harvest only happens once a year. If you demand delivery right before the harvest, it will be more expensive than taking delivery one month later, after all the grain silos are full. Backwardation is usually a fleeting phenomenon, occurring only when a particular commodity is in short supply and there is great demand for immediate delivery, not in the future.


...[But] gold is a unique commodity in that it is not consumed... it’s hoarded. Estimates of world gold supplies are north of 170,000 tons. So what would backwardation mean in the gold market? ...if and when we see gold in backwardation, it should be considered something like a fire alarm for the system. Something serious is happening. Investors would be rejecting what should be a “risk free” profit opportunity. We would like to suggest two (not mutually exclusive) causes: 1) the threat of counterparty failure and/or 2) loss of confidence in the $US Dollar.

The first implication of gold in backwardation is straightforward and easy to understand. The market is pricing in significant counterparty risk of failure to deliver gold in the future... [We] believe the second implication for gold backwardation is a collapse in confidence in the $US Dollar itself.

...So what would extended or permanent backwardation imply? According to Prof Antal Fekete, “gold going into permanent backwardation means that gold is no longer for sale at any price, whether it is quoted in dollars, yens, euros, or Swiss francs. The situation is exactly the same as is has been for years: gold is not for sale at any price quoted in Zimbabwe currency, however high the quote is. To put it differently, all offers to sell gold are being withdrawn, whether it concerns newly mined gold, scrap gold, bullion or coined gold.”

...For physical gold owners searching for clues to tightness and demand in the physical market, they would be wise to keep a sharp eye on these metrics. It is our belief that this is happening, right now. Money is moving down Exter’s pyramid and while the final denouement may be days, weeks, months or years off, we are certain it would be preferable to be years early as opposed to a day late.

But don't worry, folks. Ben Bernanke's got this.

INTERESTING CHART O' THE DAY: Inflation vs. Gold, 1915-2010

In order to pay for excessive government spending, the United States and other countries around the world are busy printing money. This practice, known as "debt monetization", is the precursor for inflation. Sometimes, in fact, the act of paying sovereign debt by printing money can lead to hyperinflation and currency collapse; the Weimar Republic and Zimbabwe's recent experience being two noteworthy examples.

I was thinking to myself how a typical investor might be able to profit from a sudden burst of inflation. After all, the printing can only go on so long before a currency becomes a joke. We also know that America's most recent bout of severe inflation took place during the Carter administration.

Knowing that gold and silver are bellwether commodities that tend to march inversely against a devaluing currency, I decided to compare those metals against CPI to determine whether any obvious trends could be discerned.

History tells us that timing a peak is well nigh impossible. Perhaps once gold and silver go parabolic it will be time to sell. And given this administration's march to currency collapse, parabolic it will go.


Hat tips: Wikipedia: Consumer Price Index by Country and MacroTrends.

NEAT STOCK MARKET GRAPH: What goes around, comes around

That much is clear from this excellent chart spotted at Above The Market:

The largest contributing factor to equity returns is the P/E ratio. The expansion or contraction of the broad market P/E ratio creates secular bull and bear markets. The chart below from Crestmont Research breaks down the components of total return for the S&P 500 for ten-year rolling periods.

Yale Professor Robert Shiller’s 10-year Average Inflation-Adjusted PE Ratio, also known as CAPE, Shiller PE or PE10, provides the best longer-term market gauge available. PE10 is the stock index price divided by the average real earnings from the previous 10 years – the time period is designed to smooth out near-term noise in the data. The basis for this approach is the finding that earnings valuation ratios provide predictive power for long-term stock market returns.

It's science, dammit! Like global warming, only real!

THAT "COMING COLLAPSE" HAS BEEN COMING FOR DECADES: What does this gold ad from 1973 really tell us?

Considering that the CAGR (compound annual growth rate) of gold since 1973 is roughly 17.2%, who's to say this ad wasn't right?

An ad from a 1973 issue of Barron's provides clear proof that feverish concerns about imminent economic collapse and a concomitant enthusiasm for precious metals has long been a theme amongst modern investors.

With the race to devalue currencies around the world -- led by Ben Bernanke's magical printer -- and unsustainable sovereign debt, it's pretty clear that a collapse will come.

The only question is whether it's two years away -- or 10. History and arithmetic both tell us it won't be longer than that.


Hat tip: BadBlue Money News.

I HOPE YOU'RE SITTING DOWN: Why Gold Is Insurance

Writing at Safe Haven, Przemyslaw Radomski offers the historical perspective on U.S. deficit spending and the price of gold.

I repeat: you should be sitting down before viewing the following graph.

While the general idea of dividing your portfolio between long-term and speculative capital (the latter is only the money you can afford to lose) is not a particularly new one, the inclusion of the insurance part in the portfolio may make it more robust to financial blow-ups. We will now focus on that - gold and silver as insurance against severe financial turmoil.

Gold may be perceived as insurance if you believe that, because of psychological reasons, it appeals to investors as a wealth-preservation vehicle. In case of financial turmoil they turn to precious metals, the increased demand causes an increase in the price and gold and silver deliver on their promise to provide an alternative to government bonds.

There is also another dimension to it: in the past gold and silver were used as money. As a matter of fact, gold had been indirectly used as money up to 1971 when U.S. president Richard Nixon officially announced that the U.S. government would cease to adhere to its promise to redeem the greenback in gold. Since that moment money has been only paper and a promise of the government to accept payments in it...

Some investors fear that excessive deficits as seen in the U.S. will result in money being printed on a large scale (which actually is already the case: open-ended QE) or even in the implosion of the dollar. The bigger the deficits, the more likely such a scenario seems. This is shown on the chart below.

...since 2000 increases in the U.S. debt have been accompanied by increases in the price of gold. This might reflect investors' fear that the U.S. government will eventually default and their belief that gold may be a safe haven in case of such a development.

The abovementioned points may lead to the conclusion that gold may in fact skyrocket if things get out of hand in the U.S. or in the European Union. The main problem here is that nobody knows when (if at all) the paper currencies will begin to visibly deteriorate or disappear completely. Precisely because of that, we suggest holding on to gold and silver at all times with a part of your portfolio.

We call this part of your portfolio "Insurance," because by holding on to gold and silver even during corrections you accept small losses in hope of enormous gains should serious economic turmoil materialize. Economic crises have the inherent quality of catching most investors off-guard. We don't want you to be among them.

If you believe that government can continue to increase its debt -- which already amounts to 550 percent of GDP (all the goods and services produced in a year) -- then by all means, ignore the advice.

Because if you believe that, you're obviously a Democrat and an Obama supporter, in which you can fend for yourself after the inevitable reboot.


Hat tip: BadBlue.com/Money.