Ben’s Missing Puzzle Pieces

The “Man Who Saved the World,” Ben Bernanke delivered a truly incredible speech last week, stating that he was “puzzled” by the recent rise in Gold. A few of his more startling comments are below:

“Other commodity prices have fallen recently quite severely, including oil prices and food prices… So gold is out there doing something different from the rest of the commodity group.”

"I don't fully understand the movements in the gold price, but I do think that there's a great deal of uncertainty and anxiety in financial markets right now."

"Some people believe that holding gold will be a hedge against the fact that they view many other investments as being risky and hard to predict at this point."

First off, I have to applaud Chairman Bernanke for admitting he doesn’t understand something in public. The only problem is that he reserved this admission to Gold’s performance, instead of applying it to the entire US economy, financial system, derivatives, inflation, human behavior, investor psychology, and a slew of other topics that he seems completely in the dark about.

Indeed, so far the guy’s record has been 100% accurate… if you interpreted what he said as the exact opposite of reality. In the past three years he’s told us that the sub-prime mortgage Crisis was contained, that there would be no spillover into the US economy, that the financial markets were sound, and that the US economy was stronger than ever… right up until the entire financial world imploded.

Regardless, at least he’s finally admitting he doesn’t understand some things. Hopefully, this is the beginning of a new pattern in his speeches: admitting his mistakes.

Back to Gold.

Bernanke’s statements are simply extraordinary in their ignorance. Either he is flat out lying OR he has no clue about money and should not even be allowed near the Federal Reserve.

Let’s do a brief review of the “policies” he has endorsed or helped promote over the last three years.

• The Federal Reserve cutting interest rates from 5.25-0.25% (Sept ’07-today)
• The Bear Stearns deal/ Fed buys $30 billion in junk mortgages (March ’08)
• The Fed opening various lending windows to investment banks (March ’08)
• The Treasury buying Fannie/Freddie for $400 billion (Sept ’08)
• The Fed taking over AIG for $85 billion (Sept ’08)
• The Fed dishing out $25 billion for the auto makers (Sept ’08)
• The Feds’ $700 billion Troubled Assets Relief Program (TARP) (Oct ’08)
• The Fed’s commercial paper (non-bank debt) purchasing program (Oct ’08)
• The Fed’s $540 billion backstop for money market funds (Oct ’08)
• The Fed’s backstops up to $280 billion of Citigroup’s liabilities (Oct ’08).
• Another $40 billion to AIG (Nov ’08)
• The Fed backstops up to $140 billion of Bank of America’s liabilities (Jan ’09)
• The Fed’s $300 billion Quantitative Easing Program (Mar ’09)
• The $1.25 trillion I mortgage backed securities  purchases (Mar ’09-’10)
• The Fed buying $200 billion in agency debt (Mar ’09-’10)
• Opening up currency swap lines with foreign central banks (Spring ’10)

The Fed and various economists like to dress these moves up in fancy language and financial terms, but in reality they all boil down to one of three strategies:

1. Printing money
2. Letting bankrupt, failed institutions stay in business via handouts
3. Buying garbage debt no one wants at 100 cents on the Dollar from said bankrupt institutions

Now, all three of these are anti-Dollar/ pro-inflation. The fact that Bernanke can’t figure out how these policies would produce a flight from paper money (and rise in Gold prices) spells out in clear terms that he is unfit to be Fed Chairman.

Again, this is not like some guy at the food store admitting he doesn’t know where the eggs are, this is THE guy in charge of US MONETARY POLICY admitting he doesn’t understand the basic tenants of economics.

Bernanke’s explanation for why he’s puzzled is that Gold is rallying while other commodities fall in value. Of course, it wouldn’t occur to him that other commodities are falling in value because the whole world has figured out that the so-called economic “recovery” is in fact one giant accounting gimmick.

Which brings me to the second mass realization: that the only weapons the world central bankers have to counter the guaranteed double dip DEPRESSION are… more money printing, junk asset purchases, and monetary backstops.

You don’t have to be a genius to see how all of this leads investors to understand that it’s a good idea to buy Gold. After all it:

1. Cannot be printed
2. Cannot be used to prop up bankrupt banks
3. Is going up in purchasing power (compared to most paper currencies

These are the missing pieces to Ben Bernanke’s “puzzle.” Put them in place and it’s clear that everyone should own at least some bullion if for no other reason than it’s outside the scope of the Federal Reserve’s understanding/ control.

Good Investing!

Graham Summers

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Will Gold Miners Act Like Stocks or Gold During the Crash?

With stocks collapsing and Gold rallying to new all-time highs in both US Dollars and the Euro, the key question for precious metals investors is:

Will gold miners act like stocks or Gold during the Crash?

Unfortunately, there is no simple answer; it all depends on how you look at it.  Historically, when the going is good, miners act like Gold. However, when things get ugly, they tend to act like stocks.

Let me explain…

As you know, over the last ten years Gold has rallied roughly 340% from $250 to its all-time high of $1,242 yesterday. Over the same time period stocks, as measured by the S&P 500, have actually fallen some 27% in value. That’s a heck of a difference in performance.

When you add Gold miners to this mix (as measured by the HUI Gold Bugs index), you find that in the long-term, miners have not only acted like Gold, they’ve acted like Gold on steroids: since 2000, the HUI Index has rallied more than 500% compared to 340% for Gold bullion over the same time period.

So over a ten-year horizon, the answer is quite simple: miners follow Gold more than stocks. A chart plotting the three assets makes this clear:

However, very few investors only look at their portfolios every ten years. Most of us tend to look every week, if not every day. Which is why it’s important to note that anyone who invests in Gold mining companies expecting to mirror Gold’s performance needs to have an unbelievably strong stomach. Because when the going gets bad, miners have a tendency to mimic stocks.

The above chart (weekly) shows the performance of Gold vs. the S&P 500 vs. the HUI index during the 2008 Crash. As you can see, miners took it on the chin nearly as much as stocks during the collapse. In 2008, stocks fell 37%, Gold miners fell 30%, and Gold actually ROSE 5% (despite an extremely volatile year).

So the last time things got really ugly, Gold mining stocks acted more like stocks than Gold. However, if you could hold on through the gut-wrenching drops, mining stocks rebounded much more quickly than stocks (though not as quickly as Gold).

Personally, I doubt anyone has a pain threshold high enough to sit through a drop like that of Autumn 2008 without panicking and selling. However, those who did stomach the drop quickly saw their mining shares rise along with Gold, and start outperforming stocks handily.

Which brings us back to my original statement: historically, when the going is good, miners act like Gold. However, when things get ugly, they tend to act like stocks.

That is until today.

During this latest market rout started at the end of April 2010, the HUI index and Gold initially fell along with stocks. But then something odd happened: the HUI and Gold both stopped collapsing and actually began to rally while the S&P 500 continued to collapse:

Miners now appear at a crossroads. They have not yet totally decoupled from stocks, but are showing much greater relative strength compared to the S&P 500. In plain terms, we appear to be nearing a time in which mining stocks will trade almost entirely along with Gold rather than stocks. We’re not quite there yet, but it is approaching.

What does this mean? If a Crash were to hit right tomorrow, mining stocks would likely fall along with the S&P 500. However, they would fall less, rebound more quickly, and outperform the general market.

Will this always be the case? I cannot say. But if miners ever DO become totally decoupled from stocks, they’ll be a phenomenal investment. Remember, Gold only fell a mere 5% during this latest market rout. And it reclaimed ALL of its losses in roughly two weeks.

Meanwhile, stocks continue to dive.

Which asset do you want to own?

Good Investing!

Graham Summers

Ps. If you are at all concerned about the future of the stock market, I suggest signing up for my exclusive bi-weekly Private Wealth Advisory newsletter. In it I detail what's going on in the markets and provide you with specific investment ideas to profit from what's to come.

Several weeks ago, we traded the market plunge to perfection, pocketing gains of 14%, 16%, even 19% on trades that we closed within minutes of the bottom on May 25.

We've since opened seven new trades to profit from additional drops in stock prices on Friday. Already they're up 2%, 4%, even 5%.

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Why You CANNOT Re-Flate an Economy or Stock Market

I constantly receive emails asking me why I’m bearish with stocks breaking to new highs. The simple answer to this question is that I’m not bearish, I’m a realist. Stocks haven’t made a cent of money in over ten years.

I know what you’re thinking, “Graham’s just pointing out that the S&P 500 is still down from its 1999 levels.”

True, stocks haven’t made money in a decade in nominal terms. But the above chart is only half the story. Check out what happens to stocks’ performance when you measure the S&P 500’s performance in Gold:

What you’re looking at is an 80%+ loss in purchasing power if you kept your money in stocks since 2000. Now, I know that many investors will see this chart and say “So WHAT? I price my wealth in Dollars, not Gold. So stocks priced in Gold mean nothing to me.”

This viewpoint is flat out wrong. Whether or not you want to admit it, in order to calculate the WEALTH you’ve generated from investing in stocks, you HAVE to account for the Dollar’s moves as a currency.

Think of it this way. Let’s say you measured your height with a standard ruler one morning and found out that you were six feet tall. Now let’s say that during the following night your ruler magically shrank to only 10 inches (though it still claimed it measured a full 12-inch foot). The next day you’d measure yourself and discover that according to your ruler you were now over seven feet tall.

Did you REALLY grow taller in one day? Of course, not, you are merely measuring your height with a small ruler.

Well, measuring your stock portfolio in US Dollars is like claiming you’ve grown because your ruler shrinks: it is an illusion. After all, the Dollar has lost roughly 30% of its value since 2000.

This currency devaluation, when combined with the generalized flight from paper money that has occurred as illustrated by Gold’s incredible performance over the last ten years, shows quite clearly that those who remain heavily invested in the stock market have not only missed out on the best performing asset of the decade (Gold), but have actually lost some 80%+ of their wealth in terms of actual purchasing power.

This is the set-up for a serious “check-mate” to ALL of Alan Greenspan/ Ben Bernanke’s efforts to re-flate the economy/ stock market after the Tech Bubble burst. After all, if you could really create wealth by printing money and keeping interest rates below the rate of inflation, everyone in the US would be rich instead of barely scraping by.

However, the finishing move that “checkmate’s” the Fed’s policies is shown in the below chart courtesy of Nathan’s Economic Edge:

Nate explains:

This is a very simple chart. It takes the change in GDP and divides it by the change in Debt. What it shows is how much productivity is gained by infusing $1 of debt into our debt backed money system.

Back in the early 1960s a dollar of new debt added almost a dollar to the nation’s output of goods and services. As more debt enters the system the productivity gained by new debt diminishes. This produced a path that was following a diminishing line targeting ZERO in the year 2015. This meant that we could expect that each new dollar of debt added in the year 2015 would add NOTHING to our productivity.

However, as you’ll note, a funny thing has occurred in the last year: the blue line revealing ACTUAL increase in productivity per each new $1 in debt issuance suddenly tanks. The reason?

Because incomes are falling while debt issuance is soaring, we’ve officially reached the point where we cannot support our existing debt. Thus, each new $1 in debt issuance now acts as a net DRAG on the productivity of the US.

Folks, I’ve said it a thousands times, but printing money and issuing more debt CANNOT solve a debt problem. It doesn’t matter how clever your explanations or theories are: wealth CANNOT be made with the printing press.

On that note, not only has Greenspan/Bernanke’s money printing actually DESTROYED any and all wealth generation from stocks in the last ten years (again, we’re down 80% when you price stocks in a non-fiat currency), but we have now reached the point where each new dollar in debt issuance is acting as a net DRAG on the US economy.

At this point, any talk of Economic Recovery or Bull Markets is completely meaningless. I repeat, stocks are NOT UP in over ten years time. In fact, in tomorrow’s essay I’m going to show you that despite a 60-70% rally, stocks are actually LOWER in value now than they were during the Crash of 2008.

Until Then…

Good Investing!

Graham Summers

Is Gold Finally Decoupling From ALL Major Currencies?

Yesterday I detailed the situation in the US debt markets. As a brief recap I pointed out that long-term US debt was nearing a line of major significance: long-term support. I noted that if Treasuries do not bounce hard from this line, that the chart (which resembled a giant "head and shoulders" pattern) forecast a sharp decline from here.

With US Treasuries' "safe haven" status called into question, the logical extension of this concern is to look for other safe havens. The Euro has its own problems as do the Yuan, Yen, and British Pound.