The Mogambo Guru Sees Outlandish Returns In Silver

Wednesday, March 08, 2006

I don't know what to make of it when a lunatic like the Mogambo Guru sees silver flying to the moon - while hounding everybody on earth for a fiver. But he used his weekly appointment for a detox session surprisingly wise and built a very convincing case for the metal that make it appear as if the new highs above S10 per ounce will only be the starting ramp for an unprecedented takeoff.

Silver Will Fly To The Moon
by The Mogambo Guru
The next time you hear anyone say something like "Ben Bernanke, the new chairman of the Federal Reserve, wants to be known as an inflation fighter", you have my permission to walk up to them, flash your Mogambo Junior Ranger badge (demonstrating your authority), slap their face hard, and say, with a voice dripping with caustic, contemptuous tones, "Ha! In the name of The Mogambo, I officially laugh at you and punish your stupidity, sir or madam!"
The reason for such drastic measures is
  1. that I am really grumpy this week, and
  2. Mr. Bernanke has never actually said that he has any interest in being known as someone who controlled inflation, and thus your victim's stupid remark comes at the same time as official inflation (thus, manipulated into a soothing lie) hits 4%, at the same time as the global money supply is surging at 300-400% of the growth in GDP, at the same time as houses are appreciating at 12%, year after year, at the same time as the national debt is at $8.27 trillion dollars!
I know what you are thinking. You roll your eyes and think "What in the hell does this idiot Mogambo think this old history crap has to do with anything?" Responding to the stinging rebuttal, I swallow my rage and immediately go on to note that more recently, like last freaking week for instance, we have Bernanke himself goosing Total Fed Credit another $4.95 billion. This is the famous "money out of thin air" that we have all heard about. That was last week alone. So, are you happy now? Huh? Are you? Is that recent enough for you, punk? Is it? Look at me when I am yelling at you! Good. I'm glad we got that cleared up. See? I told you I was grumpy.
Monetizing The Debt
Anyway, to make matters worse, the Fed bought up, for itself, $2.2 billion in government debt. Hahaha! What a scam! The Fed snaps its fingers and creates $2.2 billion, and then uses it to buy $2.2 billion in government debt! Hahaha! What in the hell can you do but laugh at the sheer audacity! Somehow, a government creating more and more money and spending it is not, for the first time in history, going to turn out to be a BAD thing? And especially one where the money is just paper and computer blips that they can create on a whim? Hahaha!
Of course, I sigh wearily as I note that the banks themselves are in on the scam, and they bought up another $13 billion in government debt last week, too. And foreign central banks continue to soak up government debt, and they swallowed another $7.6 billion last week, too.
After Newspeak Comes NewBank
But all that economic fraud is getting to be old hat by this time. What is tragically new is that if you are familiar with the George Orwell novel "1984" then you are familiar with concepts such as NewSpeak and NewThink, which are twisted lies and frauds with the authority of law. Along those same lines comes, except in real life and not in some terrifying novel of a fascist government gone berserk, NewBank.
Alert reader Joe S. sent notice of a NY Times article that read "A bank created to provide emergency backup for the Treasury market will be ready to operate in the next 18 months, a bond industry group is set to announce today. The so-called NewBank exists largely on paper, but like a superhero on standby, it can spring into action to stabilize the government securities market if a legal or financial disaster strikes.
"It will be set up as a limited-purpose trust company under the New York state banking laws and will also be regulated by the Federal Reserve." Anyone familiar with my extensive clinical record is not surprised that I had a "spell" when I read that, and I was soon holed up, cowering like a frightened (and raving) paranoid lunatic. I mean, this just gets weirder and weirder!
Monetary Corruption At Its Worst
And it's all in the "I Can't Freaking Believe I Am Seeing This (ICFBIAST)" category, because this is monetary corruption at its absolute worst! The government sells debt to get money to spend on their deficits, and the bank creates the money to buy the debt. Debt and money supply both expand, and it expands to create a bigger and more expensive government! And higher prices. This is economic suicide!
Now, I am not coming out of my little Mogambo rat hole in the backyard (LMRHITB), and they can't just come out of their precious little Federal Reserve offices and say, with a serious, deadpan expression, "The Mogambo is right. This really IS economic suicide!" They have to come up with something better than that! And they did: The article goes on to say "The bank is a result of a five-year effort by government and banking officials to draw up plans in the unlikely event that either J. P. Morgan Chase or the Bank of New York, the only existing clearing banks in the Treasury market, are suddenly unable to operate. The two clearing banks play an obscure but crucial role in the government securities market, processing more than $1.9 trillion of very short-term trades each day."
Hahaha! I think there was a line in a Monty Python sketch where the guy, incredulous at being told something preposterous, sticks out his leg and says "Go on! Pull the other one!"
Getting Closer To The Collapse
But this is the Federal Reserve we are talking about, and so nothing is beneath their dignity, especially now that they are getting very, very, very, very desperate. Joe himself relates this new, umm, government debt banker's bank of last resort to the incredible announcement that the Federal Reserve would mysteriously (and some say sinisterly) stop reporting the M3 money supply figure this month. M3, if you remember, is the most inclusive of all the measurements of money, and it also includes the figures in the banks' repurchase agreement (repo) market, where the action really is.
I bring this up because I am trying to get Joe S. into "Ripley's Believe It Or Not" and maybe we can both make a couple of bucks if I can get him into a freak show, as this guy has actually comprehended the enormity of the horrific ramifications of creating so much money, and I can document the exact moment in time when it destroyed his brain: The next sentence he wrote was, "They create it/then they buy it?..."
This is insane! I cannot wait to inform the Intergalactic Economic Council as to how this works out, as they are constantly asking me "Has the Earth economy collapsed yet?" and every month I report back "No, but it is getting closer!"
And for you intergalactic fans, as an example of how economics influences popular culture, our own Federal Reserve has become popularly immortalized in the Nebulon Five galaxy, as the vulgar phrase "act Fed" has replaced the long-time favorite expression, "He's got his grumkin up his gorfhole."
Silver Will Go To The Moon
If you want something to take to your spouse so that you can prove that you need, desperately need, to be buying more and more silver instead of foolishly spending the money on frivolous crap, like, for example, birthday presents for the damned kids, then Ted Butler is the man to see. In an essay entitled "Bringing the Pot to a Boil" in the James Cook Market Update newsletter at Investment Rarities.com, he writes that while the main point of his article discusses the proposed silver Exchange-Traded Fund, he later concludes that silver is going to the moon one way or the other, and that "We don't need a silver ETF to cause the price of silver to explode" which reminded me of the Mexican bandit in the movie "Treasure of the Sierra Madre" where he says "Badges? We don need no steenking badges!" Hahaha!
Not Enough Silver For Comex Short Position
Well, I though I was funny as hell, but Mr. Butler ignores me, and goes on to say "The fundamentals and the short position will result in an explosion in due course, all by themselves. There already exists a COMEX short position much larger than the amount of silver that might be bought by an ETF. That said, a silver ETF would fast-forward the fundamentals and catapult the price. The shorts would likely be forced to cover, driving the price higher and sending the big industrial users into a buying panic. Meanwhile, investors and speculators would be piling in, all the way up."
That last sentence there, "investors and speculators would be piling in, all the way up", describes bubbles in general, and how they grow, which means that it perfectly describes the current housing bubbles, and the bond bubbles, and the stock market bubbles and ALL the other bubbles in all of history. And there will almost certainly be a bubble in silver and silver mining shares.
This is one terrific scenario, and one that is certainly going to play out (to one degree or another) because silver is a chemical element, which means you can't create it out of stuff you have laying in the back yard or garage. The global supply of silver, then, is finite and fixed. Ditto gold.
Consumption Outpaces Production
Better yet, more silver is consumed than is produced by mining. Thus, this rising demand is pitted against a relatively static supply. If you were sick on Day One of Economics 101 because the night before was the night when you learned, as we all must eventually learn the hard way, that drinking tequila until you pass out is a very, very bad idea (VVBI), then let me tell you what you missed. You missed the Law of Supply and Demand, which means that if there are more buyers than there are sellers of an item, then the price of that item will rise until enough of the buyers say "Whoa! That's too much! You're a greedy little bastard!" Then they go home, all grumpy, empty-handed. The price, thusly, will stop rising at the exact point where the number of buyers equals the number of sellers to exactly clear the marketplace. It's that simple.
But when I try and explain this simple concept to my family, they squirm in their seats, whining, wanting to know if I have to scream about it so damned loud, and I tell them yes. Yes I do! And I do because it is THAT important! But to show that there is a compassionate side of The Mogambo (CSOTM), I recognize that they are but a puny Earthling and my own darling mutant children (that I call "half-breed indigenous Earth trash" behind their backs! Hahaha! Cracks me up!).
So I make the supreme Mogambo sacrifice (SMS) and calmly say, in serene, honeyed tones, "The essential point is that the price (pause) went (pause) up!" I wait awhile, to let that, hopefully, sink into their thick heads. Then I yell at them "And the point of THAT, you stupid little morons, is that that's how you make (pause) money! You are all big-time freaking experts on spending money, always whining 'Buy me some shoes! Buy me some food! Buy me my medicine!' It's always buy me, buy me, buy me with you guys, isn't it?"
I thought they would cheer, and shout out "Hooray for dad!" as I reveal how they can help out around here by finding ways for us to get more silver, instead of being a heavy millstone around my neck, dragging us down, down, down into the poorhouse. But they did not, probably because their little Earthling brains are too damned stupid to understand the basic concept or something.
Mixed Bag Of Chinese Cookies
But this ties in with, believe it or not, a nice essay on FSU with the title "Mixed Bag of Chinese Cookies" by Sean Rakhimov, who has been to China. After admitting that there is economic hustling and bustling everywhere, he reveals the darker side. "Then we learn how they are built. Apparently, a great many of those high rise buildings are empty and were built just to be built. The story goes that government (banks) provides loans to construction companies to build them. Contractors get the money up-front and have an incentive to 'save' as much money as possible on construction costs. That leads to use of cheaper 'sub-standard' materials. Builders have no interest in the future of these buildings and could not care less how they will be used, if at all. Vacancy rates in these buildings are said to be high which earned them a local nickname of 'see-through' buildings."
And he touches on the Chinese problem of the glaring male-female ratio disparity, where a lot of hormone-crazed boys and lonely old men have to somehow compete for the smaller population of women. And the massive growth is causing a LOT of pollution. "The way we see it, the best places to invest in China, aside from natural resources and energy, are healthcare and waste management."
Dan Denning, the editor of Strategic Investment newsletter, hears us talking about this, and says “I think it's all going to fly spectacularly apart in China. The Chinese have been courting ecological disaster by burning so much coal. Its huge cheap labor force is getting old and ailing with problems it doesn't have the money or the health care system to fix. China has built an energy-intensive 20th century industrial production economy on the edge of en epic collapse in global trade. They've made a grand strategic error of the first order. But what do you expect? They're still communists with a linear view of history - a determinist view."
Zapata George Blake, writing at FinancialSense, says that sheer demographics alone will produce a boom in China. "In the last 12 months, China has rescinded the one-child-policy. There will be a renewed boom in the Chinese population." That's pretty scary stuff, right there!
Whatever Else, Stay With Silver
But we are not here to talk about the Chinese! So I raise my hand to interrupt, and I rudely ask "I don't know about these other guys, but I what I want to know is how to make money. Lots of money. And the biggest, most obvious under-priced winner that I can see is silver. Silver, dude! But am I to gather from your remarks that the way to make money is to capitalize on the desperate needs of people to consume things, simply because there are more people?"
Mr. Rakhimov, perhaps by way of reply and perhaps as a way to shut me up, goes on to write "How would it be possible for the Chinese to build 17 cities the size of Chicago every year without using a commensurate amount of silver or more? And that's just China. What about the rest of the developing world? Did we suddenly switch to a 'silver-less' society, because if so, I must have missed the memo, and until I see it, I ought to assume that the developing world is using silver in ever-greater quantities."
And this rising demand for silver comes at a time when silver is, historically, cheap, as we learn when Jason Hommel of the SilverStockReport when he writes "Silver today is valued about 1/300th of the historic value it possessed when it was plentiful - and this is the opportunity. Silver is scarcer now than ever before, due to the fact that, on average, modern industrial nations have consumed about 6/10ths of an ounce of silver per person a year since 1945. That usage has consumed about 90% of the silver mined in the history of the world." So if half of the world's people are going to consume their share, then is that three billion people times 6/10ths of an ounce of silver each? Then isn't that 1.8 billion ounces of silver consumed per year? BILLION?
Silver ETFs Will Flourish
I gulp. I mean, I stand transfixed looking at the fundamentals of silver, and it seems so obvious that I can't believe what I am seeing, and wishing I had some money with which to buy more silver, and cursing myself for all the money I have spent at Miss Hoo-hoo's House of Hubba-Hubba and later buying up the inevitable incriminating photographs (plus the negatives), and I sure wish that I had that money back right now, so I could buy some silver! And maybe take a little of the money for a visit to Miss Hoo-hoo's, too! Wouldn't that be sweet right about now?
And if you are awaiting the proposed silver ETF, don't worry. You will soon have one, or two, or three, or maybe even dozens of silver ETFs. America is not the only place in the world where free enterprise exists, and there must be plenty of guys in other countries who are looking at all of this and saying to themselves "Hey, you guys! I just thought of something! We already have a big vault that is just sitting there, empty, now that that damned incompetent Mogambo bankrupted the company. Why don't WE start a silver ETF?" And then, suddenly, you will be able buy silver ETFs all over the place. That's how free enterprise works; supply meeting demand.
But we were speaking of China, and in that vein, one other commodity that seems to be an especially good play is uranium. Graham Summers of DailyWealth writes that "One pound of uranium supplies the same energy as 3 million pounds of coal. And it's much cleaner than coal. So, it's not surprising that China's President Hu Jintao recently set aside $54 billion to acquire as much uranium as possible. He also ordered the construction of 27 nuclear power plants over the next decade."
Negative Savings Rate Persists
The savings of Americans dropped to a new low, as we spent 0.7% more than we made last month (running up more debt than income) for the fifth month in a row. And who can blame them? The dollar is getting cheaper, as the Federal Reserve keeps making more and more dollars every day (monetary inflation), and the rest of the world's central banks are doing the same thing with their currencies as they feverishly try and absorb all these dollars coming into their countries via our massive trade/current account deficit.
The result is that price inflation is running officially at 4% (which means that it is running closer to 8% in reality) here in America, but whatever pitiful savings we DO have earns less than that! And it is the same, pretty much, around the world, too.
And out of that little bit of interest on your pathetic little savings that you were secretly squirreling away, you have to pay taxes on the nominal gain, even though, in reality, you took an inflation-adjusted loss! You lost buying power, and have to pay a tax for the privilege! You ended up worse off than when you started! Hahahaha! Welcome to inflation hell!
How anomalous is this, historically? I shrug my mighty Mogambo shoulders (MMS), which is my clever, non-verbal Mogambo way (CNVMW) of saying "I don't know and I don't care." Then I look at my watch, which is my CNVMW of saying "It is almost lunch time, so let's wrap this up and scarf down some pizzas!" But everyone just sat there, silent. Then, Bill Bonner of DailyReckoning pipes up and makes me look real stupid by answering the question. "Over the last 200 years," he says, "the real return from lending savings has been between 3% and 6%."
So, historically, and check your calculators to verify this, your real, (inflation-adjusted) savings should be making between 3 and 6 percent MORE than the current 4% rate of inflation? So our savings should be yielding between 7 percent and 10 percent? Wow! This current credit/savings milieu really IS anomalous!
Eurozone Has The Same Money Printing Problem
And speaking of inflation, price inflation in Euro-land is guaranteed, as we learn from Toni Straka at PrudentInvestor, who reports that the European Central Bank "released money supply figures for January, showing an acceleration of M3 to an annual rate of 7.6% whereas Eurostat reported higher inflation figures. According to the Eurostat release, Euro area consumer prices rose at an annualized rate of 2.4% in January."
He went on to tell us that "Inflation was highest in housing and transport where prices rose 5.5% year-on-year. Both key indicators for European monetary policy remain solidly above their target rates which are set at 2% for inflation and 4% for money supply." Yikes!
"Eurozone money supply M1 - cash and checking accounts - slowed to an annual growth rate of 10.2%." Then he reports "The fast growth in cash may point to an increase of the shadow economy where the preferred mode of payment is cash." I mention this as an aside, as this reference to an underground economy, people dealing in cash-settled, off-the-books, untaxed transactions is a theme that has been showing up a lot in my email lately, too, where the consensus opinion is that it is big and getting bigger.
Dollars Buy Less And Less
If you want a nice endorsement of gold and you are sick of hearing me yammering about it, then here's something from Katy Delay in her essay "Trade Deficit Bubble or Credit Bubble?" on PrudentBear. She writes that a paper dollar "can presently buy only about 2% of what it bought in 1900, as contrasted to gold, which presently purchases 150% of what it bought in 1900." Hahaha! The dollar, which the government says IS money, which means that it should also be a store of value, is obviously NOT a store of value! But gold, which the government says is NOT money, IS a store of value. What a paradox! And not only that, but with gold your purchasing power has actually increased!
George Ure at UrbanSurvival sees me talking to Katy, and apparently is really jealous, because the next thing I know, there he is, showing me up to make me look like an idiot, which he does when he says that he did the math and can show that inflation in the stock market has not even been enough to offset the fall in the value of the dollar. "In other words," he says, "on a purchasing power basis, today's Dow is at 79.74% of its purchasing power compared with the 1/14/2000 peak week." Hahaha! Chumps!
Inflation Outpaces Stock Returns
It's like I've been screaming all this time; inflation will kill your purchasing power! And inflation is the only way that everybody can put ten bucks into a tin can labeled "stock market" and everybody can come back later and take out twenty bucks! So do you STILL think that your precious 401(k) is going to help you retire? Hahaha! You will find, to your dismay, that you have "invested" a dollar's worth of buying power today to get back seventy cents worth of buying power when you retire! Or, and probably, less! Where the hell is the value in THAT? Hahaha! Put money into common stocks over the long term? Hahaha! What do I look like? An idiot?
Stephen McC. sent a quote of Claire Wolf that perfectly sums up the parlous state of the economy; "America is at that awkward stage. It is too late to work within the system," meaning that The Mogambo was right and there is no freaking hope of this thing ending well, and then she ends the pithy phrase with a reference to the resultant unruly crowds who are sick of inflation and how it is robbing them of their standards of living, grinding them down and down, and how the French took them to the guillotine, "and too early to shoot the bastards!"
Incomes Falling, Net Worth Accumulation Weakening
And to show you how that works in a real life situation, the Federal Reserve admitted in a press release that "Average incomes after adjusting for inflation actually fell from 2001 to 2004, and the growth in net worth was the weakest in a decade."
"Average family incomes," the report said "after adjusting for inflation, fell to $70,700 in 2004, a drop of 2.3 percent when compared with 2001. That was the weakest showing since a decline of 11.3 percent from 1989 to 1992, a period that also covered a recession."
The Fed admitted that "The gap between the very wealthy and other income groups widened during the period. The top 10 percent of households saw their net worth rise by 6.1 percent to an average of $3.11 million while the bottom 10 percent suffered a decline from a net worth in which their assets equaled their liabilities in 2001 to owing $1,400 more than their total assets in 2004." I am shocked! In short, poor people, who used to have nothing, now have less than nothing? They now have a negative net worth? Yow!
Drought Dangers
Breitbart.com writes that "The World Meteorological Organization (WMO) said it saw unprecedented signs pointing to a looming La Nina, a phenomenon that originates off the western coast of South America but can disrupt weather patterns in many parts of the globe. It is unprecedented in the historical record for a La Nina of substantial intensity or duration to develop so early in the year."
Now, I am no expert on weather, but I am always alert to macro-meteorological things described as "unprecedented" (twice) and "substantial intensity or duration", because once you comprehend the concept of chaos theory, and how that one butterfly flapping its wings in the Amazon jungle can alter the weather in Chicago six days later, then you know that this is one big freaking humongous butterfly.
So (and this is another classic worthless Mogambo prediction (CWMP)), I expect lots of massive disruptions of normal rain patterns all over the world, and it seems to me that agricultural problems would necessarily result, and that means commodity prices should go up, and the prices of products that use commodities should go up. But since I am paranoid about inflation and see the horrors of inflation in everything, maybe I am being too pessimistic. But I don't think so.
China Will Buy Gold From Trade Profits
Larry Edelson of Money and Markets newsletter reports "China has recently announced that it will plow at least 2.5% of its trade surplus into gold. That equates to a staggering $2.5 billion of brand-new demand for gold every year." Every year! And lest you think "Well, they can just mine more!", let me disabuse you of that notion by going on, before I was so rudely interrupted, to quote the rest of the paragraph. "According to U.S. Geological Survey, there are now less than 45,000 metric tons of proven gold reserves left in the ground worldwide."
You want to know one reason why the stock market is actually going up? You want to know why the stock market is going up, even though the P/E multiples are up at the high end of the range (meaning that the stocks are, historically, waaAAAaayyy overpriced in relation to their earnings)? You want to know how stocks can rally, even though consumers are buying less, even though interest rates are rising, and only certified morons would even THINK of putting money into the stock market at these prices? And you think I ought to say something profound about this?
Government Wants To Prop Up Market With YOUR Money
Thanks for the editorial suggestion, and I would if I could, but I was going to use this space to get into a real hissy-fit about the stupidity and desperation of Congress. But perhaps I can do both by pointing you to an article on CNN.Money.com entitled "Retirement: Ready or not? Not, apparently", written by Jeanne Sahadi, who reports that "Congress is considering legislation that would encourage all employers to offer automatic enrollment in 401(k)s and set the default contribution rate at 3 percent of pay, increasing one percentage point every year until 6 percent of pay is reached."
Hahaha! Talk about blatant market-rigging! Congress wants to force you to put money into the stock market (through automatic enrollment, unless you specifically take steps to opt out of the program). And theoretically, all this money flowing into stocks will make prices go up.
Well, it probably will. But I am here to tell you that making prices go up in the short run is a bad, bad thing (BBT) in the longer run, as all it does is cause inflation in the price of stocks, and inflation is never a good thing, anywhere you go.
But, true to their loathsome socialist bent, Congress also wants to require companies to use some of the stockholders' money to put into the stock market for the employees, too, as we learn when we read "The legislation would also encourage companies to offer a 50 percent matching contribution or contribute 2 percent of pay for all employees whether they contribute or not", which is classic communist theory, taking from the rich and giving to the poor kind of thing.
I am dumbfounded at the idiocy. And just where does Congress think all this money is going to come from? I mean, we stupid worker bees can't make ends meet now, and suddenly we are going to be taking a 6% cut in take-home pay (after deducting for the required "contribution" to the stock market)? Then isn't it axiomatic that we expendable employee proletariat trash workers will have 6% less money to spend, and thus we must buy 6% less goods and services? This is some somebody's insane idea of prosperity? This is too, too much! Maybe it is some kind of bizarre, supply-side stuff, I suppose! Hahaha!
But there is a reason for this. On SafeHaven we read an article entitled "The Plunge Protection Team Intervention Risk Indicator" by Robert McHugh of Main Line Investors. He writes "Unfortunately, we must now deal with the metamorphosing of capitalism into corporatist fascism - which simply means, what is good for corporations is right, at the expense of our nation's founding principles and individual rights. It means markets can never be allowed to drop for fear Wall Street firms' profits will shrink."
And not just Wall Street's profits! If it was just those treacherous bastards, then screw 'em! But it is much, much, much more than that, my little Mogambo buckaroos (LMB). For instance, think of all those 401(k)s, and IRAs, and retirement accounts of all kinds, and portfolios, and trust companies, and insurance companies that will shrink in value, too, some of which belong to you.
Then think of all the taxes that the governments are getting when assets are bought and sold, and bought and sold, and bought and sold, always valued at higher and higher prices, and how governments would have a lot less money to spend if asset prices went down. And then think about how the prices of everything else would sink, too, as nobody has any money anymore.
THAT is why the Fed is so scared of deflation. And you should be, too. Ugh.
****Mogambo sez: I cannot believe that gold is not soaring, and all I can conclude is that Lady Fate is waiting for somebody out there in Mogambo-land to load up on gold and silver before she lets it rip. That person will be famous as "The person who bought precious metals the day before the price soared!" Maybe that is you! And if not you, then send your money to me so that I can buy some gold and silver, because I would love for it to be me!

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 RichardSmithGroup@verizon.net.

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