Friday, November 21, 2008

Another Window Closes

I have advised a few people who have come to me for advice on how to purchase precious metals to use the Perth Mint program in Australia. This is one of the largest mints in the world, and I liked their program based on their low costs and their ability to store the metals outside of the country.

Today I found out that their window to purchase has now closed as they have suspended all orders for metals until January due to the overwhelming amount of orders taken over the past few weeks. They cannot keep pace with demand.

http://www.theaustralian.news.com.au/business/story/0,28124,24687337-643,00.html

1 ounce physical Silver Eagles averaged $27 an ounce today in the open market, while the paper COMEX price can still be purchased for $9.60 an ounce. At some point those prices must once again be equivalent. You can take your bets today on which way you'll think it will go.

In the headlines today you read about the credit card defaults soaring, auto loan defaults soaring, foreclosures soaring, and you're still hearing about the subprime loans getting worked through the system. All these things continue to destroy the major investment banks balance sheets.

In about six months, as the subprime loans and foreclosures have brought our nation to the brink of bankruptcy, the true atom bomb and possibly the final bomb will be dropped in neighborhoods across the country in the form of the Alt-A mortgage loans.

These loans were given not only to people with no credit, no income, no assets,(subprime) but they were also given to the mainstream, the prime buyers. They provided home owners a monthly choice of paying their (A) full payment, (B) paying interest only, or (C) paying less than the interest payments and having the remainder added on to the total principle every month.

You just checked A, B, or C every month and sent in your check. Which option do you think the majority of Americans chose? Well, we'll soon find out. Starting next year the first wave of interest rates resets will begin for the Alt-A loans and they'll continue all the way through the first quarter of 2011 like a never ending tsunami.

Imagine as homes are falling in value every month and begin to go under water that at the same time principle is being added onto the total amount owed. What is the likelihood that those people are going to continue making their payments on the underwater homes when their payments reset and they now have to pay principle AND interest on a larger principle AND a much higher interest rate.

It's going to be a disaster coming at the same time the cost of living is exploding, people are losing their jobs, stock prices are falling in true value, and home prices are collapsing in true value. I say "true value" because you will eventually see a rally in the nominal stock price due to the inflation currently being injected into the system. I would expect to see a few major bear market rallies in the stock market over the next few years that will be spectacular.

These will present tremendous selling opportunities for anyone still holding American stocks. These temporary and artificially inflated stock prices will not buy anyone any more goods, but they'll make people feel better when they look at their statements every month.

Thursday, November 20, 2008

True Pricing

As I have discussed in the past, the "paper" precious metals markets are currently being artificially pushed lower with enormous short positions by major investment banks.

This artificial suppression has created a disconnect between the paper price of the precious metals on the COMEX and the real physical metal price of the metals being sold outside of the COMEX.

There is no major market medium that can track these prices at a non-COMEX spot price, but in the recent headlines you can read stories of extremely large purchases of the very wealthy over the past few weeks making purchases at huge premiums over the current artificial spot price. For example, the price of gold has been trading in the $700's for the past month, but a few weeks ago there was an enormous purchase made overseas for around $1100 an ounce.

The only real physical market that can be tracked outside of the artificial paper market is Ebay which is a global network found in just about every major country in the world. Unfortunately with Ebay there has not been a system put in place to track what the average price is paid per ounce on its website.

Until now.

A company called 24 hour gold has put together a program to track the daily average for gold and silver purchased on the free market. I have placed the links to left of this page, making it easy for you to access at any time.

Gold is trading around $950 an ounce in the free market depending on the size of the purchase. Silver is currently trading around $18 an ounce for large amounts and over $20 an ounce for smaller amounts.

So this creates a rational question? Why would I not just take delivery at the artificial spot price created on the paper market and then sell it into the real market? You can. Two people I know made physical purchases yesterday to protect their wealth. One received his invoice from the dealer today with the following at the bottom:

"All Bullion Products are shipping 12 -14 weeks from the receipt of good funds with the exceptions of Silver and Gold Canadian Maples,Silver and Gold American Eagles and Silver Vienna Philharmonics which will be available for shipping in March of 2009."

14 Weeks or March of 2009!

This will continue until the COMEX defaults on its paper contracts, or the paper price aligns with the real price. Remember, this is all happening with the dollar strengthening in value over the past few weeks. Imagine what things will begin to look like when the dollar begins its final collapse downward 80-90%.

Imagine what it will look like when the public first begins to turn to gold and silver for safety like they did in the late 70's, except this time they find out that there is no gold and silver available. Right now there is a 14 week wait to take delivery and 99.9% of the country has 0% of their portfolio allocated in gold and silver.

What would happen if they allocated just 1% of their investments into the metals?

Tuesday, November 18, 2008

Picking up the Tab

Sometimes when people go out to get drinks they end up having a little too much fun and lose track of how much they've spent; their bar tab. This year we've gone on a spending spree to try and deal with our current financial crisis. Let's see where our tab stands as of this week:

Federal Reserve

(TAF) Term Auction Facility - $900 Billion
Commercial Banks - $99.2 Billion
Investment Banks - $56.7 Billion
Loans to buy ABCP - $76.5 Billion
AIG - $112.5 Billion
Bear Stearns -$29.5 Billion
(TSLF) Term Securities Lending Facility - $255 Billion
Swap Lines - $613 Billion
(MMIFF) Money Market Investor Funding Facility - $540 Billion
Commercial Paper Funding Facility - $257 Billion
(TARP) Treasury Asset Relief Program - $700 Billion

Automakers - $25 Billion

(FHA) Federal Housing Administration - $300 BIllion

Fannie Mae/Freddie Mac -$350 Billion

Total cost for this is at $4.284 Trillion. That's much greater than the inflation adjusted cost of WWII by over $600 Billion. This is just for what we've spent on the financial crisis, this does not include our regular budget deficits which are exploding.

We are not using this money to protect our country in a war. We're using this money to try to help investment banks that made terrible investment decisions.

Would things be bad right now if we were not protecting the banks? Yes, they'd be horrible. Home prices would be collapsing, the stock market would have been decimated, the bond market would be falling, and our currency would be getting crushed. Unemployment would be very high and Americans would have to do the unthinkable: stop spending and start saving.

It would probably be bad for about 24-36 months and with the proper leadership home prices, the stock market, and our currency would find a bottom, and we could begin to rebuild the country with a new focus toward production and saving. We could begin to move toward exporting goods to the rest of the world in receipt for what they send us.

I've spent the last four years studying under some of the most brilliant minds in macro-economics. Those economists over a year ago had a clear vision of the bank failures and economic collapse we are experiencing today based on previous decisions/mistakes made by our leaders.

At the time they could not see what would come next because they could not see the response our leaders would have to the future crisis as it unfolded. It is now unfolding and our leaders have left no doubt in any one's mind how they plan on handling our current economic trouble based on their actions over the past 60 days. So what are those same economists saying now?

They are advising putting together a plan on physically removing yourself from this country if necessary. That sounds as ridiculous now as it did a year or two ago when they explained why we would be experiencing the economic troubles we are now.

Please understand that there is no longer going to be a very rough landing for our country. It is going to be destroyed, decimated. The decisions being made today are going to turn our country into a wasteland. The American public is going to be wiped out, and it's going to be an absolute tragedy.

A friend of mine purchased physical silver for the first time yesterday. He spent the afternoon calling around to local precious metal dealers. Time after time they told him that they were no longer planning on being involved in the silver business. His first reaction was that it was because the demand dried up due to the price falling so sharply over that past few weeks.

"Not at all," was their reply. They could not find silver anywhere, and when they did receive it there was an order there waiting for its arrival. He decided to call a national bullion dealer and make his purchase over the phone and have it shipped to him. His wait time? 3 months. Many dealers are being forced to push back their delivery dates to March of 09'.

Three major banks currently have 80% of the ENTIRE silver short position on the COMEX. If a large number of investors decided to take physical delivery over the next 60 days the COMEX would default on its silver contracts. Will that happen? Maybe, maybe not. But it'll sure get interesting if it does.

Monday, November 17, 2008

The Big One

A topic often discussed here is the last great bubble to burst which is the treasury bond market. (The corporate bond market has recently burst and some companies have debt selling at very attractive prices.)

So what does a bond bubble mean?

In simple terms it means interest rates are going to rise.

Imagine you own a $1,000 30 year treasury bond yielding 4%. This means you lend the government $1,000 and every year they will pay you $40 for 30 years. At the end of 30 years they will pay you your $1,000 back.

If treasury bonds become attractive to investors and more people are buying them, then the yields drop. This is because investors are willing to take a lower return on their money. This means that if you bought a $1,000 bond at 4% and now the same bond is priced at 3%, you can sell your bond in the open market for more than what you paid. This is because new bonds are now only paying $30 per year with the 3% yield. To give that same return of $30 per month to a new investor you can charge more for your bond.

The opposite is true if interest rates rise. This means the value of the bond falls. No one will buy your $1,000 bond yielding 4%, when they can just go to the government and buy a $1,000 bond yielding 5%. In order to sell your bond, you must sell it for less than the $1,000 you paid to make it attractive to a buyer.

Right now investors around the world are running toward US treasury bonds for security. This has pushed interest rates to ridiculously low levels. These yields are short term and artificial creating a massive bubble.

Foreign countries at some point will become net sellers of treasuries into the open market. This will come at a time when the government is selling treasuries to raise money to pay our enormous budget deficits and tries to stimulate our economy as it collapses.

This will raise yields on US treasuries, which remember, raises the amount the US has to pay on its new debt and its short term debt that is rolled over. (Think of an adjustable rate mortgage) It will be unable to due this which will in turn make it more dangerous to borrow from the US which in turn will raise the interest rates even higher. This will further depress the value of our currency thus making US bonds less attractive and pushing rates even higher. It will be a self reinforcing death spiral.

The last option will be for the Fed to purchase treasury bonds to try to keep the bond market from collapsing. They will do this with printed dollars which will be flooding our economy at the same time all of our dollars currently being held by foreigners are coming back to our country as they redeem their treasuries which are becoming dangerous to hold.

Investors holding dollars bonds will be killed. Of course you don't have to sell your bonds, you can keep collecting your 4% interest over the next 30 years as inflation is running between 10-20%. The only thing worse than holding dollars will be the promise to receive dollars in the future, which is what a bond represents.

Right now we are dealing with a short term financial crisis, but keep your eye on treasury bond yields as they will be the catalyst for our long term economic collapse.