Louis James: Why the Big Gold and Silver Spike Will Be Even Bigger This Time

This interview from Seeking Alpha
Part I of a two-part interview with Louis James, Senior Editor with Casey Research. James talks about the gold and silver markets, and shares his views on several interesting companies. In Part II, to be published next week, Louis discusses five more gold and silver companies he likes and why.

TGR: Where do you think gold is headed over the next 12 months?

JAMES: There are two different ways of looking at the gold market. One has to do with the fundamentals of supply and demand. The other has to do with the speculative value of gold. Regarding the first view, the supply side is easier to grasp. And right now, there are very clear signs of difficulties ahead on the supply side. Newmont Mining Corp. (NYSE: NEM) has already announced that production is going to decline by many millions of ounces. Demand is a little trickier to forecast. Silver and the base metals have industrial uses, so industry drives demand. However, the value of gold is based largely on perception — what people feel and what they fear, as opposed to what manufacturers need.

The turmoil of the last year has made it very clear that there are good reasons to hold onto gold because it has a long and established history of solid value. While weak supply and recent market turmoil may not justify the current price of gold, they certainly explain it. And those factors were not assuaged by the Fed's little rate tweak last week. I have to believe that despite some short-term fluctuations, the fundamentals of supply and demand — such as they are — are very bullish for gold, at least over the next year or two.

So that’s one side of the story. The other side has to do with the speculative value of gold. What happens when people start fearing for the value of their paper assets and their fiat currencies? It’s a totally different question than which way is gold heading, and what happens if this project or that project is successful. At Casey Research, we think that the conditions are almost, but not quite, approaching those of the late 1970’s. We think the government vastly understates inflation, and we see the kind of economic forces that drove gold prices to record highs in the 1980s converging again. They’re not obvious yet — average people on the street are not worrying too much about the value of the dollar yet, but we think it won’t be long before they start.

The average man in the street is not yet worrying about the US dollar and the economy as much as he perhaps should be. But when that happens, as it did in the late '70s, when everybody and their cousin was worried about hyperinflation, when your bartender was telling you about the gold coins he just bought, and so on—when the average person was getting into the picture— that’s when we had the real mania stage. That’s when you have a spike in gold. So far, we haven’t seen anything like this. It’s just the basics of supply and demand for gold in the current context. But the second part of the story is that we believe that big spike is still ahead, and it will be even bigger than the last time because the stakes are even higher now.

TGR: Do you want to venture a guess what that spike will be? I understand $850 price spike in 1980, adjusted for inflation, would be about $2,200 now.

JAMES: That’s about right.

TGR: Do we see a spike going beyond that?

JAMES: Actually, I am not sure we will see quite the spike we saw in 1980. It’s interesting that back then gold held over $800 for only four days, and two of those days were weekend days. I don’t actually see a spike quite like that. Things will fall apart more gradually this time. I think this time we will see more of a gathering surge that will take the price quite high. There will be a spike somewhere—who knows where? But that spike won’t be as important as the tidal surge that will easily take gold over $2,000. And if you use the shadow government’s inflation figures for what that $850 would be worth in 2007 dollars, it’s over $4,000 to even match that 1980 spike.

When will that happen? I think it’s a fool’s errand to try to call that exactly. I’m confident enough that it will be within a year or two, max three, that it makes sense to me to buy gold now. I am not at all worried about gold being close to record highs now. Not just because in inflation terms, it’s cheap, but because of where I think that surge will take the gold price. I think gold is still cheap, even in the $800 range.

TGR: Let’s talk about some companies, starting with Bravo Venture Group Inc. [TSX.V: BVG].

JAMES: One of the things to remember about Bravo it that has a management team that has done it all before. From the boardroom to the people in the field, the people are experienced. And Bravo has multiple kicks in the can. The company generated a lot of excitement over a project in Nevada that ultimately didn’t work out, which sometimes happens. Exploration is never a sure thing. But the company is pursuing the generative model very well. It has projects in different jurisdictions, different metals even, but it’s mostly focused on gold.

TGR: What do you mean by a generative model?

JAMES: It means the company generates projects that it either advances or sells. Bravo identifies a project in its early stages, then maybe polishes it up, or develops it a little before handing it off to another mining company. And the classic structure for this model is the joint venture [JV] —using other people’s money to take on the high-risk, exploration stage, which makes a lot of sense to us.

If you look at the simple odds of finding an economic gold deposit out of a prospect— I believe these are on the order of 1 in 300— it just makes sense to shift that risk onto someone else. When it comes to the big finds, I can’t think of many instances where the first company that stumbled on the scene hit it big. Most of the big projects have been owned by several companies before the big discovery was made. Even the current darling of the market, Aurelian Resources Inc. [TSX: ARU], with its big find at Fruta del Norte, didn’t know what it was looking for. That was a blind find that occurred while the company was exploring off the edges of another deposit.

Frankly, for a small company, even if the interest in the project were diluted down to 30 percent, or a major took the project all the way into production, leaving the smaller company with only 10 or 20 percent— that 10 or 20 percent of a project that is big enough to interest a major is a lot of value for a junior. The cash flow generated by that project will pay for the junior to produce all sorts of shareholder value in the future.

TGR: Does Bravo have any interesting projects right now?

JAMES: I really like the company’s Homestake Ridge project in British Columbia. It’s a very interesting project with high-grade results—the better part of a million ounces now. We also like the Woewodski Island project in Alaska, which involves a lot of very high-grade surface work. There’s no tonnage yet; there’s no ore deposit until you actually have drill holes outlining volume of rock, and that’s what’s happening now. Sure, it's speculation but it’s in a company that already has some successful projects and plenty of blue sky in other areas.

TGR: What about Eaglecrest Explorations Ltd. [EEL-TSX Venture]?

JAMES: We are not formally recommending Eaglecrest; however, I’m comfortable talking about it. I’ve visited the site, I know the people and I have gone over the technical details with them. The main concern with Eaglecrest is, of course, the politics in Bolivia. The government just formally passed, and the judiciary just put the kiss of approval upon, a new tax measure. On the one hand, it’s positive because it puts an end to all of the questions about whether Bolivia is going to be anti-mining or not. The fact that they’re putting in this tax regime shows that they do want the mining revenue. On the other hand, it's a tax increase. Although the government gives tax credits on royalties, the net result is that mining is now more expensive in Bolivia. If I were a mining company or an exploration company looking for more minerals right now, I would probably not choose Bolivia. That’s why I’m hesitant to recommend Eaglecrest right now.

That said, Eaglecrest has title to a very interesting prospect. . .I also like Eaglecrest's technical people. And that’s paramount to me. The rocks don’t excite me if I don’t think good people are working on them. Eaglecrest’s new team has persuaded me that their interpretation of the geology of this project is perhaps better than the previous interpretation. And that lends new life to the deposit.

TGR: What about the recent no-confidence vote in Venezuela?

JAMES: I like Venezuela, which like Bolivia, is very interesting geologically. But Chavez is still president and he can still rock the boat. Just look at the deal he did with the petroleum companies—50 percent, take it or leave it. And of course, the oil companies have all that infrastructure in place. If they have a choice between 50 percent and zero, they’ll take the 50 percent naturally. But a guy who can do that is not really a guy who inspires a lot of confidence. So, we’re still leery of Venezuela, but, boy, there’s a lot of geologically interesting terrain there. And it sure would be nice to see that open up more.

TGR: In some ways, Venezuela under Chavez and Bolivia under Morales are alike, aren’t they?

JAMES: That’s true. When we were in Bolivia, we spoke with people in the opposition, which controls the Senate. We spoke with people from industrial concerns, and they control the four major provinces that produce most of the revenue in the country. And, of course, Morales ticked off the judiciary, too. So, there is significant opposition; it is quite possible that the guy could be out soon. If you just look at the history of Bolivia, the average term of a president lasts only a year or two. So odds are that Morales will be out soon. But as an investor, a speculator, I am not looking for change. I’m not looking for turmoil; I’m looking for stability. I want to know there’s a working mining environment and that it’s going to stay that way. The fact that there may be a change for the better is potentially good, but it tells me I don’t want to invest now. I want to wait and see if the change is good, and then see if it’s stable, and then maybe that’s the time to start taking a financial risk.

TGR: Any thoughts on Exeter Resource Corp.(AMEX:XRA)?

JAMES: I like Exeter a lot. We’ve had an interesting history with the company. We sold it when their former flagship project, Don Sixto, in Mendoza province, ran into political trouble there. We did it a bit early, when rumors about potential trouble were just starting. The rumors proved true and we were happy to be out. However, ultimately the company did an absolutely remarkable job of recovering and bringing forward its Plan B and Plan C projects, and D, E, and F, actually.

What I really like about Exeter is it has two very highly prospective projects right now. One is the super high grade Cerro Moro project in mine-friendly Santa Cruz province, southern Patagonia. The company was very focused on a small area of that project, but there are a lot more of those high-grade showings in the area. In a recent press release, Exeter announced fresh results from a new target area at Cerro Moro that appears to be just as high grade, just as exciting. So, the hypothesis is that this one area that the company has concentrated on is just the beginning.

Then there’s Caspiche, a project in Chile. In preliminary drilling, Exeter punched a 300-meter hole with 0.9 g/t gold. All of a sudden, there’s more potential. There are a few holes in this area that were all shallow. Several of them hit good bulk tonnage grades, maybe 0.7 g/t gold or so, over a very large width. Pretty good. It isn’t a slam-dunk, but it has the hallmarks. It has the alteration area; it has a few holes; and it has one really good hole that suggests that this could be one of those really big gold targets.

Exeter is not particularly cheap right now, but if either of these two speculations works out, it will be really, really good for the company. Plus, the company has a pipeline full of other projects. And who knows? The company may even get Don Sixto, its former flagship project, back. Mendoza has a new pro-mining governor.

So, I like Exeter a lot, but I have to stress that it is highly speculative; it doesn’t have a 43-101-compliant resource right now. It will have resources soon, but the market has already given the company a lot of credit for that. If either of those two exciting projects disappoints, it would be easy to get hurt on that stock. That said, the upside potential is very good based on outstanding results so far.

TGR: Let’s move on to First Majestic Silver Corp.(FRMSF.PK).

JAMES: I like this company also. I like the people involved — the technical people on the ground in Mexico are very experienced. Keith Neumeyer, the CEO, made his name with First Quantum Minerals (FM.TO), so he has a bit of a pedigree. Of course, he wasn’t the only one behind First Quantum’s huge success. But he was part of the management team, so he’s worth risking a bet on.

First Majestic raised high expectations from the get-go about how quickly it would be able to outline a lot of ounces of silver, and how quickly it would be profitable. The company didn’t deliver as quickly as it had intended to, but it is doing what it promised, and that’s important. It’s taken them longer than we hoped on many fronts, and it hasn’t done a great job of letting the public know when it’s reached milestones. One of those milestones was the addition of a zinc circuit to its flagship mine, La Parrilla. It’s taken a while, but the company is getting the costs down to where they need to be so that hopefully this coming quarter the numbers will be quite a bit improved.

So, that base of value is starting to solidify, and First Majestic Silver does have plenty of exploration potential. The stock got whacked pretty hard a couple of years ago, when one of the company’s major exploration projects delivered some really disappointing drill results. The market gave them a 50 percent haircut.

TGR: Wasn’t that a little severe?

JAMES: Exactly. We started buying the stock with both hands because it was clear that even though this was a serious and material disappointment, it was not worth 50 percent of the company. We issued a strong buy on that low, and within two months our subscribers who followed our advice had a 100 percent return on their investment.

TGR: What about going forward?

JAMES: First Majestic has a solid base of production now that finally seems to be coming into its own. There’s still plenty of blue sky, lots of projects still to explore. I think the company has prospects for reaching its 200 million ounces of silver equivalent potential this coming year.

TGR: In general terms, how would you characterize the silver market in Mexico?

JAMES: I think the whole subsector is ripe for consolidation. And First Majestic is well positioned. It has the resources, the connections in Toronto and elsewhere to raise the funds to be a consolidator. However, if the company gets gobbled up instead, it will be at a premium for existing shareholders. So either way, there’s also an M&A

TGR: What are your thoughts on Goldcorp Inc. (GG:NYSE)?

JAMES: That’s an interesting question. For a while, Goldcorp was regarded as not the best among the majors because it was doing such a good job. It was so profitable that it didn’t have much leverage to the rising gold price. However, with recent changes in costs for major projects and the perception of profitability after the great Galore Creek fiasco (Barrick/NovaGold), a lot of people are thinking that maybe a more profitable company like Goldcorp isn’t such a bad idea after all.

TGR: So you have a favorable opinion on Goldcorp?

JAMES: Absolutely.

John Embry: Comparison shows gold underpriced by at least $400

Sprott Asset Management's chief investment strategist, John Embry, writes in Investor's Digest of Canada that traditional price relationships for gold would put its price at least $400 higher except for the central bank campaign to suppress it. But Embry adds that that campaign is losing and will be overcome. You can find his commentary, "Comparison Shows Gold Underpriced by US$400," at the Sprott site HERE...

Fed up with the Federal Reserve...

We've Been Told Not to Imagine
a World Without the Federal Reserve.
Maybe We Should.

By Alvaro Vargas Llosa
The New Republic
Wednesday, November 28, 2007

WASHINGTON -- Recently the Washington Post carried a front-page story about a federal raid on the headquarters of the National Organization for the Repeal of the Federal Reserve Act and Internal Revenue Code (Norfed). The Indiana-based company, which advocates "sound money," has been selling coins and paper certificates backed by gold and silver for years, in effect trying to compete with the dollar.

The government ignored Norfed's "Liberty Dollars" for a long time -- until the group started selling thousands of coins with Ron Paul's likeness to show support for the Republican presidential candidate. Paul also wants to abolish the Federal Reserve.

To the public at large, the activities of Norfed seem utopian, naive, and even downright fraudulent. The idea that the world's greatest economy could be run without a central bank and private parties could replace the government as issuers of currency is one that many people will find scary. With the dollar in something of a free fall and the United States in the midst of a housing and credit crisis that has sent some of the nation's top CEOs packing, Americans will be looking for financial security, not monetary adventures.

And yet it is precisely in such a financially wobbly environment that the actions of Norfed should invite a critical look at the way money is managed. Some of the country's greatest economists, including Nobel Prize winners, have been saying for years that the Federal Reserve has probably caused more problems than it has solved since its creation in 1913. Its role in the last century's boom-and-bust cycles is a matter of record; it looks as though it played a similar role in the current housing market crisis too.

While the creation of the Federal Reserve was essentially a response to a series of bank runs, those crises were mild compared to the ones that were to follow. In 1913 the United States was under the gold standard. Although the government issued currency, the fact that currency was tied to gold meant that the authorities could not manipulate the money supply easily. The Fed's initial mission was to guarantee the convertibility of deposits into currency on demand. A few decades later the United States abandoned the gold standard and the Federal Reserve became the country's most powerful economic institution, exercising its monopoly in issuing currency based on the discretionary power of its board of governors.

All in all, financial instability has been far greater since the creation of the Federal Reserve. What did the Great Depression teach us? Essentially that even with the best of intentions, it is impossible for the authorities to manage the supply of money in accordance with the exact needs of the economy.

A country's economy is the sum of millions of people making decisions that no single individual is in a position to anticipate. As the economist Murray Rothbard showed in his book "America's Great Depression," in the 1920s the Federal Reserve pumped up the money supply, expanding credit by more than 60 percent. Because the economy was very productive, this monetary expansion did not show up in the regular inflation figures. But, as is always the case with inflation, many resources went to the wrong kind of investments -- until the crisis hit.

The late Milton Friedman showed how the Fed made things worse by not providing the system with enough liquidity once the Depression was obvious.

The current housing market and debt market crises are in good part the children of the Federal Reserve. By cutting rates 13 times between 2001 and 2003 and then keeping them very low for years, monetary policy contributed to the housing bubble. That is not to say that other factors -- including financial instruments that made it difficult to see that the underlying foundation was not as solid as it seemed -- did not play a part too. But once again the Fed has turned out to be a factor of financial instability.

In this context, Norfed's attempt to prove to the Fed that the market is ready to trust private currency backed by gold is a welcome occasion to take a second look at some of the economic institutions we take for granted. Naive and utopian? You bet. But that is probably because of how far the world has moved from the time when money was too important to be left to the politicians.

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Silver Owl: Silver stock dwindling?

SILVER OWL (ΑΡΓΥΡΗ ΓΛΑΥΞ): Silver stock dwindling?

James Turk: Print, Print, Print

GoldMoney founder, Freemarket Gold & Money Report editor, and GATA consultant James Turk remarks in his latest essay that the European Central Bank's conjuring of the equivalent of a half trillion dollars overnight is a flashing neon sign on the road back to Weimarism.

Print, Print, Print

In case you missed this news, the European Central Bank yesterday created 348 billion euros. That's equal to about one-half trillion dollars. Presto! Like magic, one-half trillion dollars of so-called "liquidity" appeared out of thin air.

It really isn't liquidity though. Let's call it what it really is. It's just newly 'printed' currency, created not with a printing press, but rather, with a simple book entry on the ECB's balance sheet.

Let's flash back to Weimar Germany in 1923. As that country's monetary problems worsened, the central bank, the Reichsbank, in the misguided thinking of that day printed one-half trillion of Reichsmarks. It also had the aim to provide liquidity.

Is there anything essentially different between what the Reichsbank did and what the ECB just did? Absolutely not.

Last week I wrote the following for one of my regular commentaries on the Kitco website, responding to the $40 billion of new currency that had just been 'printed' in an instant by the Federal Reserve: "Creating money this way is a barbaric process because it further debases the dollar, but is hailed by the banking insiders and their apologists as a brilliant maneuver to fight the worsening liquidity crunch. Of course it is a view of those with vested interests, and bluntly, is just their selling pitch to the masses."

We are in a monetary crisis, not unlike the one that plagued Weimar Germany. It is a crisis of fiat currency, where 'money' can be created out of thin air in an instant and in any quantity, which are actions that cause people to distrust the money. This lowers the demand for the debased money, and eventually leads to a flight from it. The demand for the Reichsmark was declining for years before its collapse, just like the demand for the dollar, euro and other fiat currencies is now declining as people seek safe alternatives.

Over the past few weeks John Rubino and I have been updating our book, The Coming Collapse of the Dollar, for a new paperback version that Doubleday plans to release in January. Not only has the content been updated, but Doubleday wants to update the title too. The proposed new title is: "The Collapse of the Dollar", to reflect the downward path of the dollar since writing our book back in 2004. The following is from the introduction to this new version:

"The stage is set, in short, for not just a further decline in the value of the dollar, but a collapse. Which means the turmoil-and profit opportunities-of the past few years were just a taste of what's coming. But note that despite the title of this book, it's not only the dollar that's headed for the trash heap of history. The real problem isn't U.S. economic mismanagement, but the whole concept of fiat currencies. Put simply, when politicians have the ability to buy votes by printing money, they do so. This lack of monetary discipline leads to an oversupply of currency which causes its value to decline until most citizens give up on it altogether. In the past this has happened to one country at a time, but today it's happening everywhere, with the world's dominant currency, the dollar, leading the way. The inevitable result will be a tumultuous few years in which the world discovers that fiat currencies -i.e., government-created-and-controlled currencies with no externally-imposed discipline on the printing press-are inherently flawed, and abandons them en mass."

As 2007 comes to an end, it is time to think about what lays ahead in the New Year. My conclusion is that the present crisis is going to get much worse and then end badly. How badly?

Well, no one of course can predict the future, but when you are on a road, you can obviously see where you are going. The dollar, euro and the other national currencies are on a road that is well traveled. We know where it is going. It's the same road the Reichsmark was traveling.
It's the road to the fiat currency graveyard.

Citing Liberty Dollar, Rep. Paul offers Free Competition in Currency Act

Statement by U.S. Rep. Ron Paul
U.S. House of Representatives, Washington, D.C.
Thursday, December 13, 2007

Statement Introducing the Free Competition in Currency Act

Madame Speaker, I rise to introduce the Free Competition in Currency Act. This act would eliminate two sections of US Code that, although ostensibly intended to punish counterfeiters, have instead been used by the government to shut down private mints. As anti-counterfeiting measures, these sections are superfluous, as 18 USC 485, 490, and 491 already grant sufficient authority to punish counterfeiters.

The two sections this bill repeals, 18 USC 486 and 489, are so broadly written as to effectively restrict any form of private coinage from competing with the products of the United States Mint. Allowing such statutes to remain in force as a catch-all provision merely encourages prosecutorial abuse. One particular egregious recent example is that of the Liberty Dollar, in which federal agents seized millions of dollars worth of private currency held by a private mint on behalf of thousands of people across the country.

Due to nearly a century of inflationary monetary policy on the part of the Federal Reserve, the US dollar stands at historically low levels. Investors around the world are shunning the dollar, and millions of Americans see their salaries, savings accounts, and pensions eroded away by rising inflation. We stand on the precipice of an unprecedented monetary collapse, and as a result many people have begun to look for alternatives to the dollar.

As a proponent of competition in currencies, I believe that the American people should be free to choose the type of currency they prefer to use. The ability of consumers to adopt alternative currencies can help to keep the government and the Federal Reserve honest, as the threat that further inflation will cause more and more people to opt out of using the dollar may restrain the government from debasing the currency. As monopolists, however, the Federal Reserve and the Mint fear competition, and would rather force competitors out using the federal court system and the threat of asset forfeiture than compete in the market.

A free society should shun this type of strong-arm action, and the Free Competition in Currency Act would take the necessary first steps to freeing the market for competing currencies. I urge my colleagues to support this bill.

Deepcaster Letter details how U.S. govt. manipulates major markets

The Deepcaster Fortress Assets Letter has just published a brilliant and comprehensive analysis of U.S. government intervention in the stock, bond, currency, oil, and gold markets. Deepcaster's analysis specifies the mechanisms being used for the manipulation, draws heavily on GATA's work and that of its consultants Reginald Howe and Michael Bolser, and closely reflects GATA's thinking.
You can read it in Word.doc format HERE

Your morning ...Crunch!

James Turk: Liquidity won't help insolvency

"The Federal Reserve today announced a new scheme to inject more liquidity into the money markets. It cobbled together a partnership arrangement, as the Canadian, UK and European central banks also agreed to participate in the scheme.

The process of 'injecting liquidity' is a euphemistic way of saying 'creating money out of thin air.' The Federal Reserve doesn’t need a printing press to do this. They simply create a book entry on its balance sheet, and presto, $40 billion (or whatever amount they deem appropriate) of new ‘money’ is created, which the Fed then lends to those bankers coming to it hat in hand.

Creating money this way is a barbaric process because it further debases the dollar, but is hailed by the banking insiders and their apologists as a brilliant maneuver to fight the worsening liquidity crunch. Of course it is a view of those with vested interests, and bluntly, is just their selling pitch to the masses. It is a view so horribly misguided these insiders obviously realize it is wrong. They must know that the problem impacting banks today is insolvency, not liquidity.

Years of reckless credit expansion are coming home to roost. The boom is over, and since this past summer we have been in the bust, which is worsening day-by-day. Solvency is a problem of asset quality, not access to sources of funding. For example, Citibank didn’t have any trouble raising $7 billion of funding from a sovereign wealth fund at the right price, which was 11% – a rate far above the rates Citibank is paying to its depositors. This 11% rate reflects the risk of dollar inflation and the risk that Citibank has a lot of bad loans and other inferior assets on its balance sheet that will never be repaid.

There are gaping 'black holes' on the asset side of bank balance sheets. These black holes cannot be filled by creating money out of thin air. These black holes were created by assets that have 'disappeared'. In other words, bank balance sheets are loaded with assets that are not worth what they once were, or in the worst possible case, no longer have any value at all. The bank liabilities remain, but their assets have been reduced. If this gap is larger than bank capital, then bank solvency is called into question, and that is the process now being evaluated by the markets.

Even though they have already announced countless billions of write-offs, banks have a long way to go in toting up their total losses. They face a daunting task. Many – but in reality, probably most – of their assets are impossible to value.

Sub-prime paper no longer has a functioning market to provide even a nominal market price for these assets. As economic activity slows and unemployment rises, people who the banks now believe to be good borrowers will increasingly default on their loan obligations. For example, The Wall Street Journal reported on December 6th: "First came housing loans and the subprime-mortgage crisis. Now, signs of stress are creeping into another key consumer area: auto loans. Delinquencies in the auto-loan market are ticking up to their highest level in several years."

The economic boom-to-bust cycle caused by bank lending and their subsequent credit contraction is not rocket science, nor a startling revelation. The last banking bust occurred in the late 1980s and early 1990s. Before that, a much deeper bust occurred in 1973-1974, and it more closely mirrors the severity of the way the present bust is developing. Here’s how Ludwig von Mises described the process nearly one-hundred years ago, making clear the inevitable destruction of fiat currency from inflation.

"The course of a progressing inflation is this: At the beginning the inflow of additional money makes the prices of some commodities and services rise; other prices rise later. The price rise affects the various commodities and services … at different dates and to a different extent. This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people … who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and … increase their cash holdings.

But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time … the things which were used as money are no longer used as media of exchange. They become scrap paper.”

And scrap bank accounts. While paper was the predominant form of currency in Mises time, today bank deposits moved around by check, plastic cards and wire transfer are a much more significant form of currency than paper.

Given this new market intervention scheme announced today by the Federal Reserve, it is reasonable to ask, where else are central banks intervening today? It seems clear that they are capping gold, and I would not be surprised to learn about huge central bank sales taking place today when they get around to reporting it a few weeks from now. With new dollars being created with abandon, crude oil climbing back above $92 and the Commodity Research Bureau Index climbing to another record high, why is gold so quiet?

GATA knows the answer, and so does everyone else who has been following GATA’s work, which is available free at the GATA website, www.gata.org In another barbarous market intervention, central banks are obviously capping the gold price, but that creates a wonderful opportunity to buy more gold bullion and get rid of overvalued dollars, dollars that continue to be debased and inflated. Gold is much lower today than it would be if central banks weren’t capping its price. So use this opportunity to continue accumulating physical gold bullion."

*****

Chapman University calls for a Recession in 2008

The A. Gary Anderson Center for Economic Research at Chapman University, CA, on December 5 released their annual economic forecast for the U.S., California and Orange County.

Here is an excerpt from their forecast:

• The Anderson Center is forecasting a recession in 2008. Although real GDP growth is forecasted to dip to –1.0 and –1.9 in the first and second quarters, respectively, a pick-up in the second half of the year is expected to lead to slow but positive annual growth of 0.9 percent.

• Gains in nonresidential construction are no longer offsetting losses in residential construction. Current estimates point to a decline of $91 billion in total real private construction spending in 2007, and we are projecting an even steeper decline of $125 billion in 2008.

• Much of the recent increase in consumer spending has been financed by households cashing out a portion of their home equity gains by refinancing their loans. But total home equity cashed out is estimated to decline by almost $60 billion in 2007. We are projecting an additional decline of $130 billion in 2008. The resulting negative hit on consumer spending will be considerable, especially when it is coupled with the impact of higher energy costs on reducing spending.

• The only major positive trend, at least with regard to spending, is a continuation of rapid growth in exports that is forecasted to hit 10.2 percent in 2008. This growth is explained, in part, by the fact that global growth, spurred on by emerging nations, has far outpaced that of the U.S.. In addition, the sharp fall in the U.S. dollar has made U.S. goods and services more competitive in global markets.

• Declines in construction spending, coupled with continued job losses in the mortgage banking industry and other real estate services, will have a pronounced negative impact on job growth. After peaking at 1.9 percent in 2006 and declining to 1.3 percent this year, U.S. payroll job growth is forecasted to drop to 0.2 percent in 2008.

• With the inventory of unsold homes increasing sharply and the confidence level of home builders reaching an all-time low, housing starts are projected to decline for the third consecutive year to approximately 1.1 million in 2008. This would be the lowest level of housing starts since 1991.

• An increase in the supply of homes available for sale (new, foreclosed and resale) points to further declines in housing prices. Following an average decline of 2.1 percent in 2007, home prices are forecasted to decline 4.8 percent in 2008.

• The Fed’s favorite indicator of price change, the core personal consumption expenditures price index, is forecasted to stay within the Fed’s comfort range with core inflation not exceeding two percent until the third quarter of next year.

• It’s too late, however, for Fed action to significantly affect overall spending through the first half of 2008. Lower short-term interest rates are also unlikely to reverse the major negative forces hitting the economy in 2008.

• We are projecting a sharp increase in foreclosures in 2008. Our estimates suggest a loss in bond value holdings resulting from these foreclosures to be roughly $350 billion. This loss in "paper wealth" is expected to lead to a significant decline in consumer spending and to further credit tightening.

For California, Chapman forecasts that "sluggish housing demand will extend into 2008," and 12,000 jobs will be generated next year, "an increase of only 0.1%."
In Orange County, "housing affordability index deteriorated sharply since 2002. In 2006, a potential homebuyer with median family income of $76,300 needed 49.9 percent of family income to purchase a median single family home, even after taking into account the tax savings of deducting mortgage interest and property taxes."

For the entire study please click HERE

Alex Wallenwein: Credit 'Crunch' - or Credit Collapse?

"..Mortgages are really nothing more than another type of promise to repay.

When you take out a mortgage, the bank clerk types a number into the bank's computer that shows up in the system as a "credit" on your account. This is done in return for your promise to "repay" the bank. That way, the bank gives you a legal fiction and your government backs up the bank's claim against you, in case you default, with the banks right to sue you in court.

In essence, it is you - not your government - that backs up your country's money supply. In truth, it is your future productivity that creates the money that "makes the world go "round" as the popular ditti says.

You are Atlas holding up the financial world, and the banks are riding on your shoulders.

The banks, though, have now finally shot themselves in the foot.

Their quintessential need to get more and more people into debt so that the banks themselves can prosper, has led them to generate more and more creative ways of finding more and more potential borrowers.

Their last resort was to make loans to home buyers who really didn't qualify for a mortgage. They felt constrained to loan to people who really didn't demonstrate the requisite future productive power they could pledge in return for the "credit" the bank created on their accounts.

So, when times eventually got a little tougher as interest rates rose, they began to default on their mortgages - in growing numbers.

Those borrowers didn't have much to lose. They got their homes for zero or near-zero down payments, based on fictitious "stated income" figures which the mortgage brokers were encouraged to dream up for them in order to make it look on paper as if the loan was justified. The loan broker's supervisor closed both eyes, issued the loan, and bagged his bank-sponsored bonus vacation for having found yet another sucker who would go for this gambit, and the world kept spinning.

These mortgages are now the epicenter of the so-called credit crunch.

But they are no different in nature than the very "money" that everybody earns and spends, the very money that governments, banks, and businesses now fear may one day stop flowing as abundantly as it has so far.

The sad truth is that both the mortgages and they money they are supposed to be repaid with are nothing more than - debt..."

Click HERE to read the entire article.

Aden Sisters: Soaring Markets...

"..Normally, for instance, you'll see the so-called smart money go into a developing bull market first. This includes investors who understand the markets and the big picture, some professionals and so on.

As prices rise, more gold bugs will move in, usually followed by some early-bird Wall Street types.

This is basically where we are now, in the second phase. But as New Orleans illustrated, this bull market rise is still lacking investor and Wall Street enthusiasm. That's still to come and we think that'll probably happen once gold hits a new record high above $850.

During the third phase of a bull market, the public jumps in. The public is usually late to the party and in their collective excitement, they'll drive prices up to extreme levels. The most recent example of this happened in the late 1990s when tech stocks were all the rage. Everyone was "into high tech" and these stocks were going to keep rising in the "new era," but of course they didn't.

As for gold, the public is barely aware of gold's ongoing rise and they're not in the market. The reason that's good is because the longer gold goes without attracting much attention, the higher it will ultimately go once the public starts moving in.

This suggests that the gold price could literally skyrocket at some point to levels far higher than most people are expecting. And with world tensions increasing on several fronts, it's providing plenty of fuel for the markets..."

To read the article please click HERE

John Embry: Gold gleams as central bank influence wanes

In a new essay in Investor's Digest of Canada, Sprott Asset Management's chief investment strategist, John Embry, notes the growing recognition of central bank manipulation of the gold market and argues that gold production can't be sustained without a higher price. Embry's essay is titled "Gold Gleams as Influence of Central Banks Wanes" and you can find it at the Sprott Internet site HERE

Austrian Economics vs. Bernanke's Economics

"What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation." (Mises, Planning for Freedom, 79)

A recent exchange between Congressman Ron Paul and Ben Bernanke took place during Bernanke's testimony before the Congressional Joint Economic Committee on November 8, 2007. Congressman Paul, instead of referring to either the PPI or CPI, referred to the MZM money aggregate:
Currently, of course, we can't follow the money supply with M3 but we can follow one of your statistics, which is the MZM — the ready cash available — and we see that inflation is alive and well. That money supply figure is going up about 20 percent per annualized.

To read the rest of the article please click HERE

Antal Fekete: The Dismal Monetary Science

"...In 1971 the government of the United States threw the international monetary unit to the winds, and embraced the regime of floating exchange rates. It solemnly declared that the old unit was obsolete, rigid, as well as reactionary. Above all, it was irrational as it denied the advantages of rational management of the dollar. At the long last, the government was now in a position to assume full power in the discharge of its sacred duty unfettered by petty superstition, namely, managing the currency in the national interest."

The above is an excerpt from Prof. Antal E. Fekete's address "THE DISMAL MONETARY SCIENCE. The Year of the Euro: The Missed Opportunity of the Millennium" delivered before the Athenaeum of Madrid, Spain, January 18, 1999.
A little dated but fresh as ever touching upon the true "mark of the nails"...
To read the entire essay please click HERE