Gold Promises and Currency Lies

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The signals
emanating from the global economic matrix that can be considered
realistic, unbiased and leading indicate strongly that we're edging
closer to another brink of some sort. Nobody can see over the edge,
but if the last cataract shot by our collective connected market
kayak is anything to go by, the Eskimo roll escape afforded by government
counterfeiting (oops…I mean "stimulus") is not likely
to deliver us to any safe harbor.

Here are my
favorite indicators and what they're doing:

statistics from

The U.S. Department
of Labor is shamelessly optimistic to a degree that would make George
Orwell blush. Actually, optimistic is not the word…just plain misleading
is the better descriptor. The official numbers in red versus the
ShadowStats numbers as determined by that site's John Williams,
himself a professional consulting economist, demonstrate a discrepancy
of at least 10%.

The real macro-trend
speaks for itself. The counterfeit dollars (I mean stimulus dollars)
that have been directed exclusively to the same large financial
institutions who perennially fleece the average Joe have done nothing
to offset the carnage that the small business landscape has become.
This single chart alone, even if it was the official numbers that
were actually true, demonstrate clearly what should be headline
news: No broad economic recovery is possible without employment.
Dear mainstream financial press editors: Please quit seizing upon
temporally insignificant anomalies within macro data and offering
them up as evidence of recovery. Nobody believes you anyway.

Baltic Dry

The Baltic
Dry Index is a relatively pure snapshot of the supply and demand
for the global commodities that are transported around the world
on ships. When the chart is rising, it indicates there are fewer
ships competing for larger numbers of cargoes and when the chart
falls it indicates that the competition for cargoes is high because
there is less shipping demand. So when you see a prolonged period
of sustained declines, such as that which we've witnessed since
the end of May this year, it's a strong indication that there is
a general deterioration in global economic activity, because the
commodities shipped are essentially the building components of everything
from roads to cars to industrial machinery.

With a decrease
of over 50% in just under three months, the Baltic Dry Index is
suggesting that there is a huge lull in commodity movement, which
in my view, is an excellent precursor to stagnation in global industrial
output. No demand, no supply, no jobs, no money, no recovery.

Price of

It must be
idiot season. A growing chorus of clowns on tiny mental tricycles
have been clamoring since about May for a great gold sell-off. And
as usual, it's the people with the most impressive credentials leading
the lunacy. I'd list them here, but I prefer to stick to my mother's
advice: If you don't have something nice to say about someone….

Gold's recent
price weakness is a harbinger of many things. It tells us that the
sell-off that always occurs after setting a new record, part of
a standard pattern over the last ten years, is again underway. If
we analyze that trading pattern with an eye towards future price
movement potential, this solid foundation in the $1150 to $1200
range would suggest that there should be another price record run
coming up soon.

Absent the
meaningful fiat currency management changes that would have to be
adopted by the G8, namely a broad cessation of the unbridled counterfeiting
(oops…I mean "stimulus"), there is no reason for gold's
advance to cease.

The problem
with so much counterfeit money in the system is that it can be brought
to bear on markets that would otherwise reflect cleanly the pure
influence of supply and demand — that is, supply created from primary
sources and demand created from use. Not the artificial supply and
demand created by "investment" and "stockpiling"
and "derivatives" that make it so hard to see the unadorned
truth. At some point in the future, the gambling instruments we
call futures will be abolished, consigned to that growing heap of
Ill-conceived Human Inventions. For now though, we must muddle through
the mine-field as best we can, as lowly individual investors trying
to preserve our wealth while perhaps adding to it.

Looking at
the gold chart of the last six months, a technician may be forgiven
for proclaiming an end to gold's bull market, but all it will take
is a look at the ten-year chart to see how naïve such a conclusion
would be.

Lets face it:
Stimulus is nothing more than perpetuating debt into a distant futures
where there is no bank with a foreclosure stamp hovering over the
ersatz value of our G8 economies. If I agree and he agrees and they
agree that we all agree to pretend that this cycle of continuous
counterfeiting (oops…I meant "stimulus") is legitimate,
then we can kite cheques back and forth among ourselves while fattening
up on caviar and foie gras washed down with fabulous Malbecs and
Syrahs in perpetuity. Our capacity for self-delusion is only exceeded
by our passion for haute cuisine.

The question
is, at what point does the unassailable reality overcome the artificiality
of this manufactured supply and demand scenario? Where does the
buck actually stop these days? At this point, difficult to discern
the future, it is (as Yoda would say). The real demand is for a
standard of living beyond reason and belief. Homes across the world,
instant travel several times a week, wardrobes of overpriced clothing
seldom worn twice…all part of a flawed perception that this ability
to satisfy any desire at the drop of a hat is somehow representative
of personal freedom and power. But I now digress into the metaphysical/philosophical,
and so not wanting to risk the alienation of anyone who has read
this far, I return to matters economic.

Down here in
Perú, the economy grew by an astonishing 9.6% in the month
of May. This is a legitimate figure. Perú is experiencing
the unleashed entrepreneurial fury of a culture finally unburdened
after 63 military dictatorships' suppression. You can now compete
head to head with established family businesses without the concern
that one of your son's ears will appear in your mailbox or the family
patriarch will be machine-gunned down in his driveway. And the government's
heretofore artificial public outrage directed at corruption has
had the unanticipated side effect that it's tougher for your assets
to be swiped. Still, SUNAT, the equivalent of Canada's Revenue Agency
or the IRS of the United States, can wedge you between a rock and
a hard place should you earn their wrath for any reason. Now all
the country needs is enforcement of laws and an improved appreciation
for public hygiene and architectural beauty, and there is a chance
this place could, as local culinary icon Gaston Acurio avers, be
"first world" within ten years.

The biggest
customer here for assets is China, buying everything from iron and
copper to timber and shellfish farms. What investors both institutional
and private fail to grasp is that this is the final competition
for the world's economically viable natural resource assets. China,
with its multi-generational long-term view, has deployed an army
of asset acquirers and is very steadfastly stockpiling all the commodities.

By all accounts,
China continues to be the only shoulder against the wheel of the
economic engine with sufficient velocity and inertia to keep the
thing turning at all. But that strength upon which we are all to
some degree reliant presently may be faltering.

Earlier this
month, former IMF chief economist Ken Rogoff said that China's property
market was starting to collapse. He points out that the value of
property sales dropped 25% in May from the previous month.

And after an
11.9% growth in GDP for the first quarter of 2010 over last year,
the Chinese government has set itself a growth rate of 9.1%.

This diminished
performance from the world's strongest economy does not bode well
for the general future welfare of the global economic system. The
alleged recovery underway, whose legitimacy is certainly a very
large question mark, will most definitely be further undermined
by even a slight deterioration in China's appetite for commodities.
And judging by the Baltic Dry index, and the chart above, that slowdown
is already underway.

US Dollar

This is ugly.
After peaking in June, the index is headed back to the basement,
which will only induce more printing with abandon counterfeiting
which has become the U.S. government's particular brand of anesthetic
to treat the pain from its gaping trade deficit wound. And, just
like all anesthetics, they are effective at diminishing the pain,
but do absolutely nothing to treat the actual wound. The purchasing
power of the American people continues to deteriorate in lockstep
with the average Joe on Main Street's opportunities to create
revenue. If that's not a recipe for civil unrest, I don't know
what is.

At this point,
the old Jewish farewell that says, "May you live in interesting
times" has taken on a whole new dimension, and in the months
to come, interesting may become synonymous with fatal.

Is this the
beginning of the wholesale abandonment of the U.S. dollar? If so,
there's a much bigger precipice ahead for all of us.

31, 2010

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