We don’t have capitalism, we have “creditism”

Since the U.S. went off the gold standard, credit is the force that drives economic growth.

IMF consultant and author Richard Duncan comes right out and says that capitalism died when we took the U.S. went off the gold standard under Nixon. In its place, we got “creditism.” Credit is the force that drives economic growth, Duncan argues.

“We have to understand that our economic system now is not capitalism in the sense that it used to be in the 19th Century. Now the government is directing the economy one way or another, either through budget deficits or fiat money creation or a combination of both. And right now the Fed is in the driver’s seat. And the Fed wants asset prices to go up.”

Using that thesis, Duncan believes that the Federal Reserve is targeting 10-15 percent appreciation in the stock market over the next two years. That would push the Dow up to 20,000, and – according to his theory – stimulate “economic growth” in the U.S. through the wealth effect. Namely, Americans would start spending more because they’d feel richer when looking at their 401K statements.

That’s well and fine in the short run, but it’s got to make you nervous about America’s economic future. How deep of a hole can we dig before the walls cave in and bury us? Duncan argues we’ve got a long way to go. His reasoning? Japan’s already done it.

While U.S. debt stands at roughly 100 percent of GDP, Japan’s debt is nearly 250 percent of their GDP. “The US government has the potential to continue borrowing and spending easily for the next decade before it’s anywhere near the levels of Japan’s government debt at the moment,” Duncan says. “So, the government does have the ability to continue directing the economy through fiscal spending and quantitative easing so long as inflation doesn’t rear its ugly head.”

Let’s just hope we don’t see rampant inflation (though I’m accumulating a small position in bitcoin in case we do).

Image source: Highwing.

Absolute Proof of Gold and Silver Price Manipulation, Part 2

It’s not every day that a governmental office points out market manipulation – particularly when that manipulation involves the Federal Reserve, the LBMA and two international banking giants.

This article is a companion to another recent post: Absolute Proof of Gold Price Manipulation?

It’s not every day that a governmental office points out market manipulation – particularly when that manipulation involves the Federal Reserve, the LBMA and two international banking giants. That appears to have happened in a recent report from South Carolina’s treasurer.

In the rather innocuous-sounding Proviso 89.145, the South Carolina State Treasurer’s office is advising the South Carolina General Assembly on whether or not to invest public funds in gold and silver. The short answer is the treasurer’s office thinks gold is in a bubble, but that’s not what’s interesting about Proviso 89.145. What’s interesting is the short paragraph that starts at the bottom of page 1:

Similar to other commodities, the value of gold and silver is determined by supply and demand, as well as speculation. The Federal Reserve, The London Bullion Market Association, JP Morgan Chase, and HSBC Holdings have practiced fractional-reserve banking and engaged in naked short selling causing artificial price suppression.

“This acknowledgement will eventually have profound implications on the price of silver and gold,” writes Christian Garcia at GoldSilver.com. “As awareness grows of this manipulation and the CFTC may be forced to act. We believe the price increases ahead will be mind numbing!”

Perhaps all competent state treasurers accept the fact that there’s collusion to keep the price of gold and silver down. After all, a panicked rush out of the greenback could cause the demise of the dollar (and the world’s largest economy).

Regardless of how this plays out, I’m stashing a copy of Proviso 89.145 on our server in case it “disappears” from the sc.gov site.

Like this post? Click for one of the most incredible charts we’ve ever seen in our related story: Absolute Proof of Gold Price Manipulation?

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Silver price to hit $150 an ounce within the next 12 months?

How far will silver prices go before they peak? If we are going to hit $150 an ounce, it’ll probably happen sooner than later. Here’s why.

The steady upward march in gold and silver prices has the power to seduce investors into thinking that the trend is going to continue indefinitely. I’ll go ahead and tell you now that’s it’s not. Markets are ultimately driven by supply and demand, and what’s driving silver prices right now is the extraordinary growth in the money supply. So long as the Fed keeps pumping cash into the economy, the dollar will continue to weaken and that means higher gold and silver prices.

The most important question then is, “How far will silver prices go before they peak?” Global Investing Strategist at Money Morning, Martin Hutchinson, was brave enough to make a prediction over at MoneyMorning.com. His call? We’ll see silver prices at $150 an ounce within the next 12-18 months.

How likely is $150 silver within a year?

Since silver prices are, in large part, dictated by policies set by the Federal Reserve, we’ve got to look at the Fed’s roadmap for the next year to get an idea of where silver prices are headed. Reserve Chairman Ben Bernanke has already made it clear that interest rates will remain near-zero through at least 2013. That gives banks at least another 15 months of cheap cash to pump into the economy.

If we are going to see a mania in silver prices, it’s going to happen before the Fed raises interest rates. That means 2012 could be the sweet spot for silver prices – particularly if the Fed embarks on another round of quantitative easing (something Bernanke hasn’t ruled out).

Outside of the Fed’s actions, we can look to the gold-silver ratio for an indication of where silver prices are headed, Hutchinson argues. During the height of the silver mania in 1980, the ratio of silver to gold briefly touched 16:1. If that were the case today, silver prices would be at $113.25 an ounce. Instead, silver’s trading at $40.66 an ounce for a silver-gold ratio of 44:1.

Hutchinson believes the gold:silver ratio can’t hit the extremes of the 1980s for two main reasons: 1) The silver market was being manipulated by the Hunt brothers (see my post Silver Thursday, the Hunt Brothers, and the collapse of a precious metal for more); and 2) Industrial demand for silver declines when the silver price spikes.

Still, Hutchinson doesn’t rule out silver hitting a 25:1 ratio to gold. If that plays out, then every dollar gold goes above $2,500 an ounce, silver should climb higher than $100 an ounce. I’m convinced we’ll see gold prices above $2,000 an ounce by the end of the year (reference 10 reasons why we’ll see gold over $2,000 an ounce), and Hutchinson’s equally convinced gold will re-touch it’s inflation-adjusted high of $2,500 an ounce that was hit in 1980. He even speculates gold could approach prices near $5,000 an ounce (the 1980 peak adjusted for growth in the world’s money supply). If that happens, it’s difficult not to see silver prices north of $150 an ounce.

No matter where the price ultimately goes, it’s clear silver’s in an uptrend that should continue for at least a year and possibly as long as two years. Keep an eye on Fed policy for a barometer of just how high silver could go.

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QE3 is coming soon to an economy near you

There’s too much at stake for the Fed not to act. And that’s got me convinced we’re going to see QE3 sooner rather than later. Here’s why.

With bad economic news piling up, it’s looking more and more like QE3 is just around the corner. Federal Reserve Chairman Ben Bernanke certainly left the door open after the annual Jackson Hole symposium late last month. “(We have a) range of tools that could be used to provide additional monetary stimulus,” Mr. Bernanke.

And the speculation is that an announcement of some sort will come as soon as Sept. 21 at the conclusion of the Federal Open Market Committee (FOMC) meeting. Rather than buying up even more short-term treasuries, though, analysts believe the Fed could announce plans to sell off short-term notes to buy longer-term bonds. The move’s been dubbed “Operation Twist” (per Bloomberg) because the ultimate goal would be twisting the yield curve, so that short-term rates rise while long-term rates fall. That would drive down interest rates on big-ticket items like cars and houses.

It’s not much in the way of stimulus, and some economists believe it may just be a delay tactic by the Fed to give the impression that they’re “doing something” before a full-blown, large-scale QE3 gets announced later in the year or early next year.

The danger, of course, is that the Fed could wait too long. By then, it may be “too little, too late.” And that’s exactly what the so-called Dr. Doom economist Nouriel Roubini has been arguing. Roubini believes that once the Fed finally moves to start a full-blown intervention (QE3), it will target ailing state and local governments. He just doesn’t think it’ll be enough to prevent another recession.

My gut’s telling me that the Fed could surprise a lot of people on Sept. 21 (including Mr. Roubini) by announcing aggressive new forms of monetary easing. The bad news has just gotten too bad to ignore without watching the U.S. slip back into another recession.

Friday’s jobs report led to another sell-off in the stock market when the government showed zero job growth in August. That goose-egg for job growth shows we’re flirting not with the prospect of slow growth but a shrinking economy that could edge toward double-digit unemployment again.

It’s hard to underestimate the impact jobs have on a consumer-oriented economy. Without jobs people don’t have income to burn. And turning around the job situation is like navigating a gigantic boat with a single oar.

Mr. Bernanke himself has said in the past that it would take a year of 5 percent economic growth in the U.S. to lower the unemployment rate by a single percentage point. Since we’re a long way from 5 percent economic growth, it’s hard to believe the president and congress isn’t putting pressure on the Fed to act. There’s too much at stake. And that’s got me convinced we’re going to see QE3 sooner rather than later.

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Is this the beginning of the end for silver prices?

This could very well end up being the worst week for silver prices since 1975, but that doesn’t mean the end of the bull market in silver is near. In fact, it could mean the opposite.

It looks like you couldn’t have found much better of an investment than betting against silver this week. The white metal’s fallen 25 percent since the start of the week. According to the San Francisco Chronicle, this could very well end up being the worst week for silver since 1975!

It doesn’t look like things are going to get any better in the short-term either, though. The CME Group, which owns the Comex, announced on Wednesday that it was raising margin requirements yet again. This time to $21,600 as of the close of trading on May 9. That’s more than 80 percent higher than margin requirements just two weeks ago.

When traders are unable to come up with the extra cash to meet their margin calls, their accounts are typically liquidated. That further lowers silver futures prices and potentially triggers more margin calls for other traders.

Where do silver prices go from here?

The fundamental mood of the markets appears to be shifting. Investors grew pessimistic after a report showed an unexpectedly high number of jobless claims. All told 474,000 people applied for benefits last week. That was a jump of 43,000, and it set us back to where we were in August.

The Bloomberg Consumer Comfort Index also fell to its lowest level since the end of March, according to BusinessDay. Analysts speculate that high gas prices are to blame.

The net result, though, is a growing sense that we’re still a long way from a recovery, and if the global economy begins slowing, the demand for industrial silver could compound the price erosion we’ve already seen.

And yet, I’m still bullish on silver. Here’s why: the inflation story hasn’t changed. In fact, a worsening economy means we’re probably going to see even more reckless policy decisions come out of the Federal Reserve – a fact that will eventually push the dollar lower than the multi-year lows we’ve already seen.

I won’t deny that the plunge in silver prices doesn’t feel like a panic, but it’s important to realize that the run-up over the past two months felt like a mania. Even at $35.50 an ounce, silver’s still trading where it was just two months ago at the beginning of March.

The metal’s 18 percent higher than it was on Jan. 1. Eighteen percent is a price appreciation most mutual fund managers would kill to have over the course of a year. So long as the price of the white metal can hold above $30 an ounce, I’d look at this a temporary blip in a longer-term trend that’s pointing up.

Yes, some of the richest investors in the world – Carlos Slim, George Soros and Eric Sprott, for example – might be selling off chunks of their silver holdings, but I wouldn’t be surprised if they move back into the space in the days, weeks or months to come. After all, there aren’t many other good places to hide in the face of inflation. Until we see more fiscal responsibility out of Washington or a pronounced improvement in the U.S. economy, that’s one story that isn’t going to change.

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3 reasons the rally in gold and silver prices is far from over

Precious metals investors may be jittery, but the decade-long bull market in gold and silver far from over. Here are three reasons why investors should keep allocating cash to gold and silver.

Silver investors got a rude awakening at the start of trading yesterday. Spot prices for the metal tumbled more than 12 percent in early-morning Asian trading on Monday. We’ve heard a lot of excuses for the manic plunge, the most prominent of which is an unexpected surge in silver margin requirements on the Comex that went into effect at the close of trading on Friday.

Regardless of the reason, precious metals investors are jittery. But I’m far from convinced the decade-long bull market in gold and silver is drawing to a close. Here are three reasons why investors should consider staying the course:

1) The fundamentals haven’t changed. Everyone knows gold and silver coins and bars don’t actually do anything. They’re pretty to look at, but they don’t pay dividends and you can’t use them to pay for gas at the local Speedway (not yet anyway). The fact that they don’t do anything, though, is what makes them valuable. Precious metals are finite. The government can’t make more.

The government can, however, print more dollars. As the total number of dollars in circulation increases, the laws of supply and demand kick in. Suddenly, those greenbacks buy less gold and silver. In dollar terms, the “value” of your gold and silver goes up.

Beginning investors understand as much, but they still argue that it’d be better to hold something else, oil perhaps, or real estate. Unfortunately, there are problems inherent in oil and real estate – particularly during periods of rapid inflation.

Think back to 2008 when oil screamed up to record highs around $140 a barrel. Prices for just about everything else started rising, too, and that ultimately ground the global economic engine to a halt. Before long, oil was trading at $40.

How about real estate? If you’ve got enough cash to buy a sprawling apartment complex, I’d recommend doing so. You could get a low-interest loan, steady returns and a fair degree of insulation from inflation (so long as you have the ability to raise your rental rates every year). If you don’t have that kind of cash, though, the costs of entry in the housing market are too high and the market too illiquid to be practical for most investors.

That leaves gold and silver. The market is small, volatile and often stomach-churning, but the barriers to entry are low, and the metals are good at what they do: acting as a store of value during periods of high inflation.

Make no mistake that inflation has arrived, either. Official numbers might peg it shy of 2 percent, but if you calculate inflation the way our government did just 20 years ago, we’re already living with double-digit inflation. That means those dollars you’ve got sitting in your bank account are shrinking … and that’s not good for anyone.

2) 10 percent inflation is just the beginning. The Federal Reserve has made it clear that they’re going to see QE2 through to the bitter end. The massive bond-buying program is slated to end in June, but that’s two more months of massive capital injections. On average, the Fed is pumping $2.5 billion into the economy every day.

$2.5 billion is a vague number that’s hard to digest, but think about the fact that the Federal government nearly shutdown three weeks ago when Congress couldn’t come to an agreement on trimming a mere $39 billion from the 2011 fiscal year budget. QE2 is pumping that much cash into the economy every two weeks!

On top of that, Fed Chairman Ben Bernanke reiterated his promise to keep interest rates near zero for the “foreseeable future.” It’s all fuel for an inflationary fire that’s already smoldering. And the danger is, the Fed won’t be able to put that fire out without rapidly raising interest rates – something that would threaten to topple the U.S. into yet another recession.

3) Corrections are normal. Markets never move in a straight line. Rapid price run-ups are tempered by corrections and consolidation periods. Of course, it’s hard to remember that when you’re watching the net value of your portfolio crumple in a short-term sell-off. Rest assured, though, there are lots of long-term gold and silver bulls out there – even at the world’s biggest investment banks.

“Gold has hit our target of $1500-1600 and the long term target for next few years is $2000-3000,” Merrill Lynch analysts wrote last week (per Barron’s). “Silver should consolidate near-term as it challenges its all-time high – support is in the low $30’s. Longer-term, silver should re-challenge $50 and then target a move toward $80 (an ounce).”

What happens in the near-term is anyone’s guess. Just don’t buy the hype and get out of precious metals altogether. Gold and silver’s brightest days appear to lie ahead.

No love for gold and silver mining stocks

The next boom in gold and silver space might not be in the physical metals themselves but rather in the shares of mining companies. Silver mining stocks are up just 5 to 10 percent on average this year (per Forbes). By comparison, silver bullion’s rallied more than 43 percent since the start of the year and 171 percent over the past 12 months. Gold has trailed silver’s performance, but it’s still clocked gains of 30 percent over the past year.

Once mining companies start turning those price gains into robust earnings, sentiment toward the stocks just might change – even with all the noise and volatility in the spot market. It’s profits, after all, that do the talking. And we’d do well to listen.

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