by The Mogambo Guru
Last Friday is now known, around here anyway, as The Day The Mogambo Finally Lost It Completely. That was the day I found out about the latest horrific happenings at the Federal Reserve. I don't remember much about it, but I do remember that my eyes felt like they exploded from their sockets, as if in an Itchy and Scratchy cartoon, when I read that Total Fed Credit went up by an astonishing $6.2 billion last week. This is literally the "money and credit from thin air" of fabled story and song, and I am sure that as good little Mogambo Scouts (MS) you have joyfully sung many, many of the campfire tunes from the Official Mogambo Scout Songbook (OMSS), such as the popular "Give control of our money to the Fed and pretty soon it's dead, cha-cha-cha", or that old favorite "The Fed killed my money and now it's killing me" which is, of course, sung as a dirge. In fact, ALL the songs in the OMSS are dirges. And the reason for that is that the consequences of creating so much credit, which becomes both a new debt and new money, is that prices will rise as all that money, that luscious, luscious money, money that I'll never have because I am lazy and stupid and have a family that tries to fill a void in their pathetic, miserable lives caused by having a distant and hateful husband or father (that they blame for everything) by buying stuff, will all seep into the prices of things, as there is (as my voice rises to a fever pitch) nothing else that can be done with money except increase demand for something by spending it on buying something!
That is why I nervously laugh the laugh of The Mogambo in full panic mode (LOTMIFPM) to glom a headline in last Friday's Wall Street Journal that read "Nikkei, Gold Hit Milestones; Dow Nears One". At first glance, it seems like such pleasant news. You think to yourself, "Ahh! People have more money! How nice for the economy!" But suddenly your blood turns cold when you read the sub-head that said "Japan's strengthening economy and market overhauls propel stock Index to close above 15,000." What? Hey! Bonehead! I just told you in the previous paragraph, and so it should be still fresh in your young grasshopper mind, that all this money that the Fed is creating, and all the money that foreign banks are creating in response and emulation, has to be spent by the government on something! If not, then why in the hell is someone borrowing the damned money in the first place? And it has to, eventually, percolate through the economy and wind up in someone's pocket, and they have to put lots of it into stocks and bonds because there is just so damned much of it!
Do Governments Buy Stocks And Bonds?
But this is not about how mysterious strangers are borrowing so much money, or how mysterious strangers are tapping my phone or lurking outside my house, but let me merely go out there with an AK-47 assault rifle and "hose down" a clump of suspicious bushes, and they will twist it all around so it is ME that gets in trouble for it! But the point is, instead, that the Japanese stock market went up for the same reason that the US market is going up, and that is because the governments are borrowing and spending enormous amounts of cash, and the Federal Reserve is creating enormous amounts of cash to buy the enormous amounts of new government debt being created. And then this money eventually seeps into pockets, and then what do you do with it? Well, what other market is so big, so huge, so complicated, so diffuse, so liquid, so secretive, so willingly compliant, that can absorb so freaking much money EXCEPT the stock market and the bond market?
And speaking of humongous mountains of money, the national debt exploded again, jumping $11 billion IN ONE FREAKING DAY on December 2. In one day! And then people want to know why I am so freaked out that I cannot eat, and I cannot sleep, and I keep screaming and shooting that damned pistol of mine at anything that moves all night long, and one of these days someone is going to get hurt and blah blah blah.
Liquidity Serves Bulls And Creditors Well
But even so, this is one hell of a lot of money being created! I mean, jeez, the $6.2 billion in increased Total Fed Credit last week alone, when translated through the reserve multiplier inherent in fractional reserve banking, means an almost infinite multiplication of that credit into an amount of credit available at the banks! The banks can now loan out lots and lots of, essentially, free money! And what can they buy with those hundreds and hundreds of billions of dollars of newly-borrowed money except stocks and bonds? And THAT is why the Japanese stock market went up! That's why the American stock market is going up and the bond market is not collapsing. Keep putting enough money into anything and it will go up! Nobody has EVER disputed this.
And speaking of things going up, actual Currency in Circulation, the kind where the kid says "Dad, may I have five dollars, please?' and you say, "hell no, you greedy little brat! Why don't you get a job? Then I can borrow money from you, you worthless parasite!" but your spouse gives her the five bucks anyway, and now there is something ELSE to yell about, was up by $3.6 billion all by itself! That's $36 more actual money for everybody that has a non-government job in America! In one week! No wonder she had five bucks to loan the damned kid! But let me ask her, you know, since she has all this extra cash and all, how about a little taste, you know, for The Mogambo? And then she lies to my face, and says "Money? I don't have any extra money, you stupid little creep!"
Government Spending Can Be A Fatal Cure
(In this paragraph, notice the extensive use of exclamation points to indicate emphasis. This means that it WILL be on the mid-term exam, young grasshopper!) So, in total, tons and tons of money are coming into the economy from government spending, which is completely off the charts in terms of historical precedence! Off the freaking charts, I tells ya! Do you really, really, REALLY believe that things are going to get better because of this? If you do, then I laugh - Ha! - in your face! Now I will insult your kids! And your parents! And then I will heap scorn on your spouse or significant other, and generally be very unpleasant, because that is the Way Of The Mogambo (WOTM) when I run across someone who is soooOOOooo stupid (audience yells out "How stupid, Mogambo?") that they could actually think that increasing government spending to the level of insanity would NOT end very, very badly! If it didn't end badly, then everybody would do it, you stupid blockhead! But they don't! So I know that it will end badly (EB)!
But nobody listens to the poor old Mogambo, sitting there on that cold bench in the police station, as I calmly and gently explain to the nice policemen (according to flimsy videotape evidence and only a few dozen eyewitnesses lying their stupid heads off on the witness stand) about the economic Armageddon that awaits us: "Let me go, you stupid, ignorant fascists! I am telling you that your money is being destroyed by the banking system! And when the purchasing power of your money is destroyed, YOU are destroyed! Can't your understand that, you morons? You should arrest everybody at the Federal Reserve! But you don't, do you? No! Don't listen to The Mogambo! No! Go ahead; ignore The Mogambo! Don't even save yourselves, you stupid pig cop Gestapo fascist goons!" What they DON'T show, because the tape was "accidentally" erased and burned and then thrown away, was when they asked me if I knew what it means for them to tell me to shut the hell up or they were going to come over here and shut me up? And I said I did, and I was real quiet from then on, too. But that doesn't change the facts about this money thing!
I even tried to lighten the mood with a joke from Irwin W. that is about this girl, see, who can't balance her checkbook, and so he says "If she can't balance her check book, she knows all there is to know about fiat currencies!" Hahahaha! I love it! But they did not laugh, and it turns out they cannot see the joke, and so I called them a stupid bunch of humorless monkeys, and that made everything worse, in case you were wondering.
Gold Cannot Be Replaced By Paper
So don't listen to me. Nobody else does, either. But maybe you will listen to the highly literate and entertaining Bill Bonner, of DailyReckoning fame, who, writing about gold, humbly said "We know nothing of the future, and very little of the past. But what we do know is that every other time mankind has tried to replace gold with paper, people ended up craving gold more than ever. We see no reason why the present experiment should produce a different result."
I jump to my feet and say "It won't, dude!" I started running like hell when he exploded "That's the last time you call me 'dude', you damned idiot Mogambo!" and leapt after me, and he probably would have caught me, too, if someone hadn't asked him "And why did they come to crave gold?" Well, I was hightailing it pretty good out of there, so I did not hear him as he stopped to answer, but I thought to myself (as I ran like the scared little coward that I am), "It's simple, you dimwitted clot! Because their paper currencies always end up just like ours is ending up; worthless! And now our economy is going to end up like all those other ones, too, and for the same damned simple reason; when you give the government the power to create as much money as it wants, it always creates too, too much, and the buying power of the money is destroyed!"
Only Gold And Silver Are Constitutional
Pretty soon I was home, hiding behind the couch, panting from the run, and there was no sign of Mr. Bonner in pursuit. After a while I finally settled down, and that was when I realized that the part that drives me absolutely freaking crazy is that the only perfect way to absolutely prevent this destruction of the money from happening is already in the Constitution! It is supposed to be the inviolable law of the land, because it was written in the Constitution, that money shall only be made of gold and silver! It says so, literally, in the actual Constitution! But in case you are young and still have a childish faith in the Supreme Court, let me inform you that the Supreme Court, in a despicable act of treason in 1933, said that FDR was right when he argued that the Constitution does NOT say what it clearly says. Money does NOT have to be of gold and silver, even though the Constitution says it must! And no subsequent Supreme Court or any Congress ever raised the issue, making them guilty of treason by aiding and abetting. The result is that now we are paying the price for letting so much credit and money be created, just like the Founding Fathers knew it would, and just like every theory of economics in history said it would. Well, that is, every theory of economics until we come to the blathering idiots of today, who preach and practice the most stupid theory of economics that has EVER been advanced outside of a lunatic asylum.
The One Wrong Thing (TOWT)
We are idiots! We ought to put it on our money! "America; a Nation of Morons!" It is inconceivable to me that every Congress since 1933 could be so inept, so ignorant, so brain-dead, so impossibly corrupt as to let these central bank jackasses get away with this! Right in front of our eyes, too! We are doing The One Wrong Thing (TOWT) that is so wrong, so horrifically wrong, so tragically wrong, that the Founding Fathers created the Constitution to try and prevent it!
And what is the awful result of TOWT? Inflation! All this money has to show up in prices. And when people start suffering from the higher prices, it is bad, so bad, so tragically bad, so nightmarishly bad that all civilized people and all intelligent governments go to great lengths to prevent inflation. Any inflation!
But yet, here we are, in 2005, with Ben "Blasphemy" Bernanke helping Alan "Easy Al" Greenspan at the controls, declaring that he is going to commit TOWT just like Greenspan alone did for at least a decade, and which we have been doing since the 60's!
In short, we are a nation of complete and utter morons to even CONTEMPLATE letting the banks get away with this crap! And yet they ARE doing it! And right in front of our eyes, too!
So, the theory says, since stock prices can now grow infinitely higher to the sky, and house prices can now grow infinitely higher, too, then, in a certain manner of speaking, so can bonds! You can keep interest rates low forever! All it takes is, appropriating a delicious phrase of Dave Barry's, "More money than the human mind can comprehend." While he was humorously talking about the cost of home improvements, I am nervously listening to Bernanke talking about the destruction of the economic system of the USA and the world, and, by extension, the economic AND financial destruction of my neighbors and family, for whom a financial tragedy will entail them all coming over here, one by one, tears in their eyes, begging "Please help us Mogambo! We heeded thee not, and thy wise words counseled us to 'Buy gold, you stupid freaking morons!', but the seeds of Mogambo wisdom (SOMW) fell on barren ground in our feeble minds, and now we suffer for our foolishness! Help us, Mogambo! Please help us!" and I, being as polite as I can in the face of their staggering, stupefying stupidity and their loathsome willing ignorance that has destroyed the America I love, have been looking for a reason to hunt them down like the diseased vermin they are.
Empire Of Debt
But Messrs. Bill Bonner and Addison Wiggin have taken a different, much more non-lethal approach, and have graciously sent a copy of their book, "Empire of Debt", to every member of Congress, with an attached note asking them to read the book, or at least the introduction. The idea, see, is that the Congresspersons will recognize the profound error of their ways, clap their hands to their foreheads, ("Oh my goodness! What have I done?"), heroically reverse course (sound of tires screeching) and bring us back from the edge of the precipice of the economic abyss that they have heretofore led us to. Whew!
I admire their boundless optimism, and I wish them the best of luck, and suggest that we all participate in this grand experiment, and contact our Congresspersons and ask them to read it, because there is just that little chance, that tiny glimmer of hope, that it will work! And then, in worshipful gratitude, our children will make a movie out of it, and we will be Hollywood heroes! A stirring story of how brave Americans saved America! Americans saved America by reading the Bonner and Wiggin book, and forcing the Congress to read it, too, and when things didn't change, the voters threw them all out of office at the very next election, and elect people who DID read the book and learned the lesson contained therein! And then everything was terrific from then on, and we look good in the history books AND on the silver screen until the end of time! But am I hopeful? Nah. But if it DOES work, I get dibs on having Brad Pitt play the role of me!
Home Equity Extraction Runs Dry
David C. sent me the Merrill Lynch Morning Call Notes by David Rosenberg, who writes "Housing starts, new home sales, mortgage applications and building permits are all negative on a year-over-year basis, and this last happened in tandem in July 2000." This is the set-up. Now he gives you the punch-line: "So we think it's pretty safe to say that the housing boom is over." Hahahaha! Who says economics can't be fun? Haha!
Anyway, he follows this dry humor with "mortgage refinancing activity is down 43% in the past four months, so something tells us that the home equity cash-out effect on spending is beginning to dry up." Hahaha! I love it the way he says it with such a straight face! Funny! But notice the way the smile is frozen on my face. The reason I am abruptly semi-catatonic is that, as he explains, "Last year this re-financing produced over $700 billion in increased consumer spending, and I am wondering what will happen if consumer spending went down by $700 billion, which is 6.4% of GDP!" I notice that YOUR eyes suddenly look a little vacant and glassy, which shows that you are in shock, because you have a deep understanding of the full, terrifying ramifications of this gigantic drop in consumer spending! Well, that's the way it hit me.
Bill Bonner notices Mr. Rosenberg slapping me to try and bring me out of my sudden coma, and pretty soon they are BOTH slapping me, and Mr. Bonner is saying that this borrowing against home equity is actually bad news beyond the debt thing, because things are really distorted. "Normally, when consumers earn extra money it comes from the businesses they work for. It is a cost to the business, reducing profits. But this new revenue comes to corporate America (when it is spent in America) without offsetting labor costs. U.S. businesses didn’t have to pay anyone a salary in order to increase consumer spending. Instead, the money came as though from heaven, and fell directly into profit margins."
Hahaha! Good one, Bill! I mean, good one, MISTER Bonner, sir! But whether or not I am allowed to call him by his first name when he is around to hear me, the fact remains, "How long do you think that we can keep THAT silly home-equity withdrawal crap up?" Hahaha!
House Prices Dipped In Real Terms
George Ure notes that if we are talking about houses, then we should listen to this! "The median price of a home was up to $231,300, up a scant 0.9% from year ago levels. The problem is that with inflation running 4% for the year to date, that means that in purchasing power terms, home prices have dipped about 3% year on year." Exactly!
Additionally, Mr. Rosenberg goes on to report that a lack of demand has pushed "unsold new housing inventory to almost five month's supply, which is at a nine-year high and the trend is clearly up." Well, if all of this is not enough to convince you that there is something amiss with the housing bubble, then perhaps you will be convinced when he says "The number of newly built homes that have yet to sell is up 20% year-on-year, the biggest increase in two decades."
And in speaking to some real estate people I know, they say that business is down about 50%, too. But I dunno if they were lying to me or not, but they were suspiciously calm about it, whereas I know that if MY income was down by 50% I would be frantic and REAL tired of my wife screaming at me to wake up and get my big, fat Mogambo butt (BFMB) out of bed and go out find a damned job, or rob a store or something, to get some damned money into this house!
Retailers Are Worried
He probably figures that a LOT of people are lazy and worthless like me, and with such lackluster performance in the housing market, he also surmises that retailers are so worried about a lack of consumer spending that "they had to rely on unprecedented discounting on Black Friday to lure consumers into the malls." In case you don't know, the day after Thanksgiving is known as Black Friday because it is the start of the Christmas shopping season, the time when the stores finally make enough profits for the year that they are now profitable (in the black), instead of making losses (in the red).
And it is not just houses that are peaking, as Jim Puplava of FinancialSense explains when he writes, "there are a number of indicators that have been sort of a warning that we were heading to a profit peak. One thing that you're going to see that is common to all these cycles is every one of them was preceded by a sharp spike in oil prices."
Inflation Figures Don't Tell The True Story
Even worse, Mr. Puplava reports that "There are calls now in Congress for increasing the minimum wage. If you start increasing the minimum wage labor contracts start going up. That is a cost factor. If you look at this overall, we've got rising energy costs, rising headline inflation, and rising interest rates, which means it's going to be more expensive to borrow. All of these things are taking place right now. "
With my red editor's pencil, I write on his otherwise great essay, "Dear Mr. Puplava, Thank you for your recent submission. We agree with you completely, but feel your manuscript is unusable in its current form. We suggest that you be more forceful in your conclusion. To that end, please rewrite your excellent submission with more punch. Perhaps we could suggest, as a starting place, ending the work with the expanded sentence 'these things are taking place right freaking now, and if you were not such a stupid jerkface halfwit moron you would be running like hell back to your mommy, cowering in fear, about what is going to happen to you and everyone you love because The Mogambo was right! We're freaking doomed!' "
Liberty Dollars Doubled In Value
To show you a living, breathing beautiful benefit of having silver as money, Bernard NotHaus of the Liberty Dollar organization announces that, because silver has gone up so high in price, the base has doubled. In essence, if you had a Liberty Dollar silver ounce with "$10" on it, representing a suggested buying power of ten bucks, the very next day you would have, instead, a silver Liberty Dollar with "$20" engraved on it! You doubled your buying power when conducting business in Liberty Dollars!
Silver Dollars Buy Same Amount Of Gas After 50 Years
He also said "But wait! I contend we do not have inflation." He sees me rising up in my seat to come up there and slap his face for saying something so stupid, so he hurriedly goes on to laughingly explain "I can remember over 50 years ago that I could buy four gallons of gasoline for a dollar. At that time the dollar was backed by silver. And that same amount of silver will still buy four gallons of gas today! That just proves silver money holds its value." Hahaha! Exactly right! Now I feel foolish for doubting him!
COMEX Raised PM Margins By A Third
Speaking of precious metals, something weird, I mean really weird, is happening, as a reader of George Ure's UrbanSurvival site notes when he writes "Just a quick note for you and your peoples. Last night the COMEX gods gave a small notice of margins being raised in our precious metals. Margins as of tonight will be 50% higher in gold, from $1,350 to $2,025. Silver will be raised to $1,363 from $2,025. "
For an explanation of what in the hell this could mean, I have no idea, and am petrified that someone would ask me what this means. Just in time, the reader saves my bacon and explains "Whenever this happens, the markets for the precious metals correct (go down). For the conspiracy theorist (me & you), it's the only way the big boys can slow down the demand. I know you don't give advice, but being a stock and commodities broker for 15 years, this little tidbit is a money saver. Get ready to buy physical gold and silver at discount prices from today's price."
And speaking of weird, the chart of gold lease rates is REALLY weird and dramatic!
Gold Still Cheap
And the best part, and this is why you should be buying gold, is that the price of gold is being held down by governments because it reflects so bad on them, giving you a bargain, as Alex Wallenwein explains in his "Euro Vs. Dollar Currency War Monitor". He writes "Gold is 'manipulated' for sure, but that's a very broad term. The US would generally like to keep it down. Europe wants it to rise, but slowly, very, very slowly. The Chinese like it cheap - and so do the Arabs. It allows them to buy more of it for less money.
"In the end, what is really happening? Europe and the US are wasting their precious resources and general confidence-capital to try and keep its price under wraps, somewhat at least - and the Chinese and Arabs are the real beneficiaries.
"Those two blocs just love gold manipulation - and they have no interest in ending it. The Arabs have benefitted from it for the longest. They've been using expensive dollars to buy cheap gold for decades now. Then come the other Asians. They still have a cultural affinity for it that has not quite been bred out of them - yet. But during the 1990s Asian Contagion currency crisis they all dutifully sold their gold to their governments and bought US treasuries instead except for the mainland Chinese. They were anecdotally reported to be buying it wherever anyone was willing to sell it: In Africa, in Europe, in the Middle East, you name it, they were there, crawling all over the place, hungry for that yellow stuff."
Who Is Gearing Up For A Gold Standard?
Now, this looks like somebody, and I am not saying who, but somebody is gearing up to declare their money to be on a gold standard, so that their currency would have instant, permanent value. And how do you say "How can I serve you, master?" in Chinese? Well, alert reader Ford C. says it is, phonetically, "Lei yiu mut yeh low see." The way things are going, our children and our grandchildren may find that phrase very handy.
But we are not here to bandy Chinese supplications about, but to listen to me run my big fat mouth about gold being suppressed. And how much is the price of gold being held down? Steve Sjuggerud writes that adjusted for inflation, gold was above $1,400 an ounce in 1980. (Editor's note: It actually was $2,150 in 2005 dollars) But notice that gold is still only selling at about a third of that! "We're in a bull market in gold," he writes. "It's a secular bull market, which is just a fancy way of saying the general uptrend will stay in place for many years. And we're only near the beginning."
Silver Set To Skyrocket
Well, what about silver, for which I have been pounding the table as the freaking Buy of the Mogambo Century (BOTMC)? Well, Jason Hommel of the SilverStockReport.com writes "About 95% of the gold ever mined in human history still exists in above ground, refined form. In contrast, about 95% of the silver ever mined has been consumed by electronics and jewelry. A silver ring or silver necklace, for example, costs about $50/oz. to $100/oz., and thus, the silver is not recoverable nor recyclable at a profit to the silver jewelry buyer until we exceed those prices. So, gold is going to skyrocket in price, due to the central banking change from selling to buying, (but) silver is going to skyrocket in price much more than gold, due to the silver shortage."
And it is not just eastern nations and foreign nationals that are buying gold. Robert M. went to Boca Raton and reports that the herding behavior has started showing up in precious metals, and the coin shop he visited was sold out of Platinum Eagles. The lady running the coin shop says "There has been riproaring business there in Palm Beach County. Those rich guys have been coming in and BUYING physical precious metals."
Dollar Set To Nosedive
Tom Griess, proprietor of the TheChartstore.com, made an appearance at FinancialSense.com by posting his essay, "Gold vs. U.S. Dollar Index," which clearly shows that the dollar has completely divorced itself from gold. His chart shows that whenever the dollar got out of line with gold, it was the dollar that corrected, not gold. In short, my bet, based on this chart alone, is that the dollar is going to take a big, big dive pretty soon, which is only appropriate for a currency as worthless as the US dollar.
And in case you were absent from class the day they went over this, if the dollar goes down, then either the price of gold must rise, or everybody else on the planet must agree that the price of gold should be down for them, too. It's a mathematical imperative. And word to the wise; not everyone in the world is as stupid as we Americans.
He finished his essay with exactly what I have been saying, namely "History wants to tell you a story." Hahaha! Perfect!
Fed Holds Only $130 Billion Bullion
Speaking of stories, there is a lot of interest in the idea that the government will confiscate people's gold again, just like the horrid FDR did in 1933. But let me tell you that that day is a long, long, long way off, if ever. Hell, the gold holdings of the Federal Reserve itself, the biggest holder of them all, is only about $130 billion! Chump change! And that is assuming that all the gold is all still there, and we still own it, which I doubt very, VERY seriously, because that would assume that bankers and governments are NOT lying thieving murderous scumbag sociopaths, and to THAT I can only laugh the nervous laugh of the fearful Mogambo in fear (NOLTFM).
But this is NOT about how the CIA is out to get me and shoots invisible thought-control rays into my wife's head so that she hears "voices" commanding her to "erase my disk drive", whatever in the hell THAT is supposed to mean. But this is, instead, about the idea of the government confiscating your gold, and I say you can relax. When gold gets to be around $500,000 an ounce, or a million dollars an ounce, then maybe they will start thinking about it. But at $500? Hahaha! For what? A few dozens of billions?
And where in the hell are they going to get the money to pay us for the gold? Hahaha! They are going to accept that much inflation in the money supply so that they can get some inconvenient physical bullion, which they are already selling on the open market to get rid of it? Hahaha! Don't make me laugh!
So set your heart and mind at ease, young grasshoppers. You may safely buy precious metals until you are blue in the face from arguing with your spouse and your relatives and your neighbors and your own bratty children (and their snotty little Child Welfare Workers with their precious "court orders") about the relative merits of spending dollars on food (which doesn't have lasting value) versus getting more gold and silver (which do.)
If you like the appeal of the theory of Americans running financial platforms, where we do all the mental jobs and under-paid slave labor in other countries does everything else, including all the work, then you will be sorely tested when you read an essay on Financial Sense entitled "Cauldron of Anxiety", by a guy who goes by the name Joe Average. He says "Signs are that China is already beginning to move up the food chain and away from being merely a source of cheap manufacturing labour. Motorola, which once contracted out manufacturing to companies like The Ningbo Bird Company, soon found this former supplier had become a serious rival in the Chinese handset market."
Hey! What the hell is going on here? Didn't anybody tell the damned Ningbo company that we're Americans and they are just stupid foreigners who must bend to our will and accept subsistence-level wages so that we can live in relative splendor? Did we just forgot to explain that to them?
The Economy In 24 Words
Well, the NEXT time somebody thinks about "platform companies" perhaps they will pause just long enough to read an explanation penned by my pal, Phil S., which he performs for us today as a marvel of brevity. "The economy in 24 words," he writes. "East makes. West takes. East lends. West spends. East saves. West consumes. East creates deflation. West creates inflation. East buys gold. West sells gold."
In an odd happenstance, Rick Ackerman of Rick's Picks has an idea about how Phil could be right to say that the "east buys gold." He innocently asks, "What could account for gold’s amazing strength over the last month? One story making the rounds is that the Saudis and some of the other oil producers have been moving into gold in a big way. That sounds superficially plausible, except for one detail: If oil revenues really were moving into gold in a big way, the rally would be far more powerful than the one we've seen. Crude oil constitutes a huge global market, gold a microscopically small one, and my unscientific guess is that even if just 10% of the oil producers' revenues in a given month were to be shifted into gold, bullion quotes would reach $1,000 in a trice."
In case you are not familiar with measuring time in trices, it is the short length of time it takes for somebody to call my wife and tell her I am at the bowling alley, making googly eyes at the one I call Darla, which is my adorable Mogambo way (AMW) of shortening "my darling cocktail waitress" to an intimate nickname. She calls me, in her funny and charming way, "Old Barf Bag" because, she says, I make her want to puke.
But this is not about my exciting social life, but about gold. For that, let us return to Mr. Ackerman as he says "If the story about the Saudis is true - and it probably is - quite a bit of OPEC flight capital could find its way into gold, pushing quotes significantly higher while the global financial system is still relatively strong and liquid. That is what I believe we are seeing now, even if it's just a trickle so far. One robust piece of evidence that supports this thesis is the relative sluggishness of mining shares. You can be sure that if the princes of Saudi Arabia and Qatar are acting to hedge their dollar exposure, they are piling up every ingot they can get their hands on, not scaling in shares of Durban Roodeport, Coeur d'Alene et al. Physical metal is, and will remain, far more desirable for their purposes - and let the rest of us scramble months or years down the road for that part of the supply that must still be gotten out of the ground." I sit, stunned and speechless. Finally, I say "Wow!"
19 Reasons For A Bear Market 2006
Russell Randall, on his AustrianEnginomics site, lists 19 reasons why the stock market will go down 30% in 2006 (before the "traditional" end-of-year rally, he says). After reading these 19 reasons, and agreeing with all of them, I marvel that that the market will only be down by that little. But even that will be plenty enough to cause a lot of money to disappear, and Ben Bernanke's dreaded deflation will be here. Ugh.
****Mogambo sez: Things are getting more and more scary every day, and that is why you should be accumulating more gold and silver and oil stocks every day, too. That's what the intelligent people in the past all did when things got like this, and it worked out really well for them, too. Things worked out pretty badly for those who didn't, however.
The Mogambu Guru's straightforward writings are made possible by The Daily Reckoning.
Richard Daughty aka The Mogambo Guru is general partner and COO of the Smith Consultant Group and can be emailed at firstname.lastname@example.org.