By David A. Banister, Market Trend Forecast

I’ve been busy counting the months of correction since Mid-April this year when I forecasted a top in the U.S. Markets following a massive 13 month rally off the March 2009 lows.  The theory I had at the time was that the % of bulls in sentiment surveys was running at nearly 3 to 1 over Bears.  57% of those surveyed were Bullish in Mid-April and only 20% were Bearish.  In addition, we had completed a clear 5 wave bullish pattern up from the March 2009 lows, and the time period of the rally was also a Fibonacci ratio.

Since that time, we have dropped to as low as 1011 on the SP 500, which is a 38% Fibonacci intersection of the 2007 highs to 2009 lows, and also the 2009 lows to 2010 highs.  This created a platform for a calendar year bottom, and since then we have marked some time rallying up to Fibonacci pivots and back down again.

The most recent action is what really caught my eye and my subscribers were made aware a few weeks ago to prepare for a rally.  The drop from 1130 to 1040 on the SP 500 was a “corrective pattern”, meaning it was in a three wave formation.  60 points down to 1070, 30 points up to 1100, and another 60 points down to 1040.  This also lined up with the May 25^th bottom and is yet another Fibonacci intersection.  The rally up last week was extremely strong off the lows, and admittedly probably caught some bears off guard and caused short covering as well.  What really woke me up as I did my research over the weekend was the sentiment surveys through last Tuesday.

The percentage of Bulls in the survey had dropped to 29% whilst the Bears had roared ahead to just over 37%.  This is the first time that the Bears had been this high in the surveys in a very long time, and in addition, the last time the Bulls percentile readings were nearly this low was back in March of 2009, at 26%.  Typically these types of readings when coupled with what I believe to be bottoming or “corrective” wave patterns often lead to big rallies and catch people off guard.  Conversely, overly bullish readings as in Mid April concomittant with certain Elliott Wave patterns I identify often lead to tops as well.

What I expect now is a pullback to 1080, possibly 1070-1074 on the SP 500, and then a large rally to roughly 1145.  This will encounter some resistance there as it also is a 61.8% Fibonacci pivot of the 2010 highs and the 2010 lows.  The pendulum appears to be swinging back to the Bulls, and I expect that following the first full week of October we will be rallying up past 1160 on the SP 500 and then challenging the 1220 highs of April of this year.

A side note on Gold and Silver as well:  I wrote a forecast on silver last week with silver at $18.73 an ounce predicting an imminent move above $19.50 with a breakout leading to  $26-$29 per ounce over several months.  At this time I favor Silver over Gold performance wise for the foreseeable future, and I still like Gold moving to the $1300-$1325 per ounce level in the coming months.

Below is my projected SP 500 chart recently released to our paying subscribers at TMTF.

Please considering subscribing or enjoying our free weekly reports at www.MarketTrendForecast.com

By Captain Hook, Treasure Chests

The title a quantum physics enigma likely best captures (as opposed to ‘ A Parallel Universe, etc.’) the essence of describing two things occupying the same space at the same time, as is the case with both inflation and deflation within the matrix of our sordid economies. Because this topic is of growing interest at present with deflation spreading into increasing sectors, it does in fact appear timely to take a good look at the condition our condition is in, where parallels in central bank policy compared to the 30’s can be made in the sense it might be a ‘Fed mistake’ (lack of inflation) that sparks the next Great Depression. Of course if central banks do respond to the risk of deflation spreading across the larger economy with further quantum leaps in quantitative easing (QE), better known as hyperinflation, the nature of the present depression could be quite different from the last, a hyperinflationary depression that would go full circle, so why bother. (i.e. because the bureaucracy will attempt to preserve itself.)

So the great inflation / deflation debate rolls on, with inflationists stuck on the belief the government / central banks will respond to the threat of deflation taking control of the macro conditions, possibly leading to hyperinflation at some point, which in fact will likely occur in response to collapsing asset values, something that appears to be accelerating as we speak. Because we have arrived – arrived at the tipping point of acceleration in the demise of fractional reserve economies – which in the reverse, will bring about a return to a gold standard. Of course some (deflationists) believe gold would eventually succumb to a wider deleveraging in the larger economy. For ourselves, we are not so sure this will be the case, at least not on a lasting basis considering participation rates in precious metals amongst the greater population are still so low. The Gold$eek radio show, featuring Harry Dent Jr. this week, a noted deflationist, offers a great analysis looking at both sides of this equation, which you can find attached here.

And for our own purposes (calculated speculation in select financial markets), we of course find ourselves taking a good gander at the great debate as well given timely considerations playing on larger degree macro-conditions at present. In this regard, and manifest in Figure 1 below, we have the little followed yet profound and ultimate global deflation signal, the monthly Dow / TSX (Toronto Stock Exchange) Ratio, where once a breakout above indicated resistance occurs, we will have confirmation Canada, essentially the only Western economy not taken by the credit crisis yet, has finally joined the party. This, when it occurs, would mark the onset of the second round of wholesale global develeraging, which in turn would likely provide a lasting deflationary backdrop across increasing sectors across the larger economy. For this reason then, you should know the Canadian economy is considered the ultimate leading indicator in this respect by those who bother to watch such things closely, which naturally puts it on our radar screen, where it has been for some time.

The question of course then arises, ‘is a breakout immanent right now (see below), running into fall, a characteristically / seasonally bad time of year for stocks, possibly kicking off a larger deflationary sequence as deleveraging grips the macro in profound fashion?’ Because you should know that although our increasingly precarious debt markets will definitely be key in defining an eventual larger deflationary sequence, stocks, are still at center in terms of defining just when such a sequence will get underway in earnest. And in this regard it’s speculator-betting practices that will dictate when such a sequence will get underway in earnest, which is why have the increasingly perverse wolf market you see today. What’s more, and a key consideration in this regard then, with so many expecting a black swan event this fall it likely will not happen, where although I will not show you the updated plots today (expect this Thursday), sentiment readings, as measured by key US index open interest put / call ratios, confirm this view in jumping higher post the August expiry last week. (See Figure 1)

Figure 1

In terms of tipping the balance then, if stocks do in fact remain buoyant, just considering the water that has already gone under the bridge, never mind what’s coming, it’s now not inconceivable thinking the bond market might be in trouble sooner rather than later, and that some degree of what would be viewed as hyperinflation will spring up. Here, it’s particularly important to note that new currency growth rates need not accelerate to see prices rising, only the desire for increasingly hot money that wishes to exit the present fiat currency regimes by purchasing tangibles, and of course the hard (historic) currencies, gold and silver. In fact, considering fundamentals and market internals, it’s likely safe to say gold, with silver leading the two, will also likely lead commodities higher, this to the surprise of many at present who consider a deflationary (falling prices) scenario a given moving forward. This is the big message(s) being thrown off by the Gold (and silver) / CRB Ratio already being at historic extremes with so much upside still possible in precious metals due to other factors. (i.e. alternative currency and store of value considerations.) (See Figure 2)

Figure 2

Combine all this with the fact September is the strongest month of the year for gold and silver, and the possibility for a big surprise in precious metals exists moving forward, where after COMEX options expiry this Thursday prices could leap higher. With the ratio of calls to puts at approximately 1.8 at the $1200 strike for gold (see here), a quick trip down to this level is probable, where in fact the bureaucracy’s price managers undoubtedly have the computers programmed to take the entire equity complex down prior to this in aiding this effort. Post expiry on Friday however, and likely before, don’t expect gold and silver prices to stay down for long given the totality of understandings provided above, especially if the dollar ($) turns lower.

Unfortunately we cannot carry on past this point, as the remainder of this analysis is reserved for our subscribers. Of course if the above is the kind of analysis you are looking for this is easily remedied by visiting our web site to discover more about how our service can help you in not only this regard, but also in achieving your financial goals. As you will find, our recently reconstructed site includes such improvements as automated subscriptions, improvements to trend identifying / professionally annotated charts, to the more detailed quote pages exclusively designed for independent investors who like to stay on top of things. Here, in addition to improving our advisory service, our aim is to also provide a resource center, one where you have access to well presented ‘key’ information concerning the markets we cover.

And if you are interested in finding out more about how our advisory service would have kept you on the right side of the equity and precious metals markets these past years, please take some time to review a publicly available and extensive archive located here, where you will find our track record speaks for itself.

Naturally if you have any questions, comments, or criticisms regarding the above, please feel free to drop us a line. We very much enjoy hearing from you on these matters.

Good investing all.

Captain Hook

The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, August 24^th, 2010.

Copyright © 2010 treasurechests.info Inc. All rights reserved.

Treasure Chests is a market timing service specializing in value-based position trading in the precious metals and equity markets with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested in discovering more about how the strategies described above can enhance your wealth should visit our web site at Treasure Chests.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. We are not registered brokers or advisors. Certain statements included herein may constitute “forward-looking statements” with the meaning of certain securities legislative measures. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the above mentioned companies, and / or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Do your own due diligence.

By Toby Connor, Gold Scents
Lately we’ve been hearing a lot of talk about Kondratieff cycles, Elliot Wave super cycle, end of the world, deflation, deflation, deflation.

What the deflationists fail to acknowledge is that in a purely fiat monetary system deflation is a choice not an inevitability. To put it in simple terms, if a government is willing to sacrifice its currency there is absolutely no way deflation can take hold in a modern monetary system.

It doesn’t matter how large the debt contraction is, 10 trillion, 100 or 1000 trillion, any government with a purely fiat currency can, with the stroke of a computer key, print enough money to wipe out the debt. Granted they will destroy the currency by doing so, but at some point we are going to be faced with the choice of print or deflate. I have little doubt Bernanke will choose to throw the dollar on the sacrificial alter.

Consumer credit isn’t growing you say. Consumers are deleveraging. Not possible to have inflation unless consumers are borrowing and wages are rising. Pure nonsense!

Let me point out one indisputable fact and then I will delve deeper into the deflation/inflation argument and where investors need to put their capital to protect themselves from the coming inflationary storm. In a purely fiat monetary system a government that is willing to sacrifice its currency can, if they so desire, print enough money to mail every man, woman, and child a check for $1,000, $100,000 or a million dollars. To do so would halt any deflationary force right in its tracks. It would for most practical purposes wipe out all consumer debt. Impossible you say? Well the US has already done it twice. (It was called a tax rebate, in case you forgot.)

Here’s the thing, where the inflationary forces show up is determined by who gets first use of the money. So far that has been the banking system. Through the myriad bailout programs the Fed has created money out of thin air and forced into the insolvent financial system. That has resulted in selective inflationary forces being unleashed. Instead of loaning credit to consumers or businesses who don’t really want it, the financial system has plowed the money back into financial marketss. It’s the reason the stock market rallied 80% despite flawed fundamentals. It’s why oil rallied from $35 to over $80 despite impaired fundamentals. It’s why gold is threatening to break out again to new historic highs.

If instead of forcing the liquidity into the financial system it had instead been mailed to the average consumer, we would now be seeing real estate prices rising rapidly again, food prices and gasoline would be going through the roof. Wages would be rising out of control.

Where inflation shows up is a direct result of who gets first use of the freshly minted dollars. I can assure you we don’t have an impending deflation problem; we have a rapidly approaching inflation problem and currency crisis.

I’ve said for a long time now that eventually the market is going to make Bernanke pay a terrible price for his insane monetary policy. That price is going to be a currency crisis in the dollar and I think it’s already begun.

While everyone was busy watching the Euro crack during the first part of this year what no one foresaw was that eventually the cancer that began in Europe would at some point spread into the dollar.  It began 3 months, ago although no one has noticed yet.

Next I’m going to illustrate the long term cyclical nature of the dollar as the cycles are now lining up perfectly to bring on a major currency crisis in the US dollar, much worse than what just transpired in the Euro.

First let me show you a chart of the largest cycle, the three year cycle.

I’ve marked the last six 3 year cycle lows. These have tended to bottom about every 3 to 3 1/2 years with most running 3 years and 3 months. The consideration here is that the next major three year cycle low is due next year sometime around the March to June time frame.

As they say, the doody is going to hit the fan when the dollar moves down into this major cycle low, and Bernanke’s foolish attempt to print away the credit crisis is going to blow up in our face. By spring of next year we are going to be mired in a full-fledged dollar collapse.

The first warning is going to come when the dollar breaks back below 80. That will signal that the current intermediate cycle has failed. As soon as that happens we can close the door on the dollar. 

We should first see a test of the all time lows by late this year when the next larger yearly cycle is due to bottom. After that we should have one more leg down into late spring or early summer that I expect will send the dollar to new all time lows

The only way to abort this from happening is for Bernanke to immediately start withdrawing massive amounts of liquidity from the market. That won’t stop the 3 year cycle from coming but we might have hope that the dollar could hold above the all time lows and we might avert or at least reduce the damage that will be caused by the impending currency collapse.

I can assure you he will do no such thing though. For one he has no idea the crisis is brewing. (This is the same man who assured us in ’07 that the credit problems were contained in the sub-prime markets and in ’06 that real estate was not in a bubble.)

And second, if he were to withdraw liquidity the country, and world, would quickly sink back into recession and then depression. No, I don’t think we have to worry about Uncle Ben turning off the presses.

So what should investors do to prepare themselves for the approaching conflagration? They must be invested in real stuff, commodities. There is a reason virtually the entire commodity complex was showing relative strength as the market put in the intermediate cycle low in early July. Smart money was and still is positioning to weather the coming storm.

I would point out that the beginning phase of the crisis isn’t going to feel like a crisis at all. A falling dollar will act to support all asset prices. We may even see nominal new highs in the stock market.

But eventually too much of a good thing will turn deadly and the true scope of the mess we are in will dawn on the market. At that point the collapsing dollar will no longer support stocks and we can expect the market to roll over and begin the next leg down in the ongoing secular bear market. Unlike stocks, commodities will thrive in a currency crisis with one in particular shining above all the rest.

That one of course is the only remaining secular bull market…Gold!

Toby Connor

GoldScents

A financial blog primarily focused on the analysis of the secular gold bull market.

If you would like to be added to the email list that receives notice of new posts to GoldScents, or have questions, email Toby.

The Daily Reckoning

So gold is now at “fair value” says Bill Bonner, long-time gold bug and my former boss/partner-in-crime at The Daily Reckoning’s London HQ.

No, he won’t sell yet…if ever…says Bill. But gold’s huge under-pricing a decade ago has clearly passed by. Value-hungry investors got their “reversion to the mean,” and in the form of 400% gains, too. What one ounce of gold bought 2,000 years ago – a good suit of clothes, in Bill’s oft-repeated example – it now matches, if not exceeds in price, here in late 2010.

From here, that makes it a “speculation”.

Never mind that, around the birth of Christ, all clothes were hand-cut and sewn locally…rather than glued together by the world’s cheapest labor, four or eight thousand miles away. A suitable outfit for visiting the coliseum or agora would have been made-to-measure, too…and today’s finest tailors, at least in London or New York, will ask much more than the $1240 you’d raise by selling one ounce at current “spot gold” prices.

Never mind all that. Because Bill’s point is well made, again…

Gold was a screaming buy at the start of last decade, sinking to its lowest price – in real terms – since the early ’70s, as the chart above shows (courtesy of the World Gold Council, and taken from Roy Jastram’s incomparable study, The Golden Constant).

But “Nobody cared! Nobody was interested,” as a (very drunken) London dealer cried at me late last year. “I’d email out jokes, porn-site links, anything to get clients reading so I could repeat three simple words: ‘Buy gold now!’

“But they didn’t care… I don’t even know if they looked at the porn…”

Today, in contrast, you can’t move for anxious investors and bullish hedge funds piling into gold. Or so the media coverage would make it seem. New gold dealers – online and on Wall Street – are meantime sprouting like fungus to catch the “retail dollar”, and the story’s grown so old, it’s even spawned its own calendar for financial hacks (the summer lull, India’s post-harvest festivals, quarterly data from the mining-backed World Gold Council, the Sept-end of each year of the Central Bank Gold Agreement). Wherever you look, the only debate that counts – “It must be a bubble, so when will it burst?” – rolls on for what is now more than two years.

As for the dumb lump of metal, yes – it continues to pull in new money, nudging its purchasing power ever-closer to the big top of 1980. But look again at that chart above. For while Roy Jastram saw a “golden constant” in his two centuries of US data (and four centuries of British gold prices), the shorter-term volatility is striking. Not least since gold ceased being money 39 years ago, and became mere trinkets and collectibles instead.

“In terms of what gold will buy, it does not seem undervalued to us,” Bill Bonner writes. “As near as we can tell, gold is now fairly priced.

“[So] the reward now is different. It is speculative…not inherent. We cannot expect to make money by waiting for the metal to revert to the mean. It’s already at the mean.”

But what is gold’s mean purchasing power – the “golden constant” of Jastram’s peerless research? By our reckoning here at BullionVault today, it has risen sharply since the US abandoned its last pretence of a gold standard and floated the dollar in August 1971. Compared with the first seven decades of the 20th century, in fact, gold’s real purchasing power has stood more than 75% higher on average. Which seems odd. Because without being used as money – its only utility beyond decoration – gold became only more valuable. So while its purchasing power may have looked “constant” across long historical periods from Roy Jastram’s vantage of 1977 (and again to die-hard gold bugs 20 years later), its utility had in fact changed.

Gold became more useful as a way of storing purchasing power, even though it was no longer money. Or rather, because it was no longer money, in an age where “Every morning, when you look in the mirror, I want you to think ‘What am I going to do today to increase the money supply?’…” as John Ehrlichman, assistant to Richard Nixon, apparently told Fed governor Charles Pardee, sometime in the early 1970s. Post-war economic policy across the West was haunted by the Great Depression, and thus flowed from the fear that, unless money was losing value, then spending and particularly investment growth would grind to a halt.

Without the spur of inflation, capital would choose to sit tight – in purses, pockets and deposit accounts – because its purchasing power today would be retained tomorrow. Savers could thus spend (or not) as they chose, rather than being forced to exchange or grow their money to realize or maintain its present value. Devaluing their money, in contrast, via persistent (and obvious) inflation would force savers into the stores and stock-broker’s office. And thus today’s targets for persistent (and obvious) inflation were born.

“[Harvard professor] Kenneth Rogoff is proposing that the United States use a burst of inflation to get out of its slump,” writes Princeton professor Paul Krugman. “I agree…[but] if central banks can gain any leverage at all, it’s only by credibly committing to inflation over a fairly sustained period…[not Rogoff’s] two or three years of slightly elevated inflation.”

Bill Bonner is bang on the money, in short. Gold from here is a speculation, but a speculation only on academics getting their inside man (whether Mervyn King in London or Ben Bernanke in Washington) to apply their latest hare-brained scheme – massive new money inflation.

What price will you assign to gold’s utility as a store of real value if…when…they succeed?

Regards,

Adrian Ash
for The Daily Reckoning

Speculating in Gold originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

More articles from The Daily Reckoning….

The Daily Reckoning

Wall Street did no damage yesterday. It left peoples’ money where it found it…as The Street took off for Labor Day. But the financial press didn’t stop…and neither did we at The Daily Reckoning.

The most amazing thing is that the people who are supposedly the most able thinkers seem unwilling to do any thinking. So many well-educated, smart economists spend their lives trying to understand what is going on. So few really seem to care.

So many economists…. If you could take all the world’s economists and lay them end to end, you should do it. The world would be a better place with out them.

And take Paul Krugman…please! He’s in The New York Times this morning with an analysis worthy of a Ph.D. economist/Nobel Prize winner…but unworthy of a first year philosophy student, cab driver or hairdresser. At least he is efficient. In the space of just a few well-chosen paragraphs he is able to misunderstand the entire economic world.

More on that too…but not today…

Today, we’re waiting… Wise investors spend 90% of their time waiting for something to happen. The other 10% of the time they are caught off guard when it finally does happen.

Here at The Daily Reckoning we are still waiting for the washout…the sell-off…the final leg down of the bear market that began in January 2000. The Dow should sink below 7,000. Most commodities should go down…along with art, collectibles, and labor costs. (Oil is down below $75 this morning.) US housing should lose another 10% to 30% of its value. Even gold should sell off…

…or maybe not.

How do we know this market downturn is coming, you ask?

We don’t. But it’s too likely to ignore.

“Stock market valuations actually hit their last low in the mid-’70s. They spent the next nearly 10 years shilly shallying around,” said an investment pro yesterday. Our friend in London has been operating an independent investment research company for nearly 30 years.

“It’s so complicated,” he went on. “And inflation distorts the picture. It’s probably best to think about it in terms of gold. Gold is the only real money. And bear markets are fundamentally an adjustment between money and stocks. Sometimes people are hopeful and want the upside of stocks. Sometimes they are fearful and want the protection of cash in hand. The adjustment can happen in either direction – either with an increase in the price of money or a decrease in the price of stocks.”

At the ratio’s peak in 1998, it took 43 ounces of gold to buy a single unit of the Dow – a single share in each of the companies that make up the average. Back in ’98, investors really took leave of their senses. They thought computers and modern communications were creating a brave new world where the old rules no longer applied. “This time it’s different,” they said, and paid good money for stocks in companies with no earnings, no history, and business plans that were little more than wishful thinking. Since then, investors’ optimism has been hammered out of them. By a bust in the NASDAQ, the 9/11 disaster, Bush II, Hurricane Katrina, Iraq, Afghanistan, the huge bubble of ’05-’07…subprime, another stock market bust, 10% unemployment, Lehman Bros., Obama, and other catastrophes. The ratio of gold to stocks has already come down to under 10. But there’s much further to go. At its low-point, gold and the Dow tend to trade at a ratio of 2 to 1…or even 1 to 1.

Where might we find the low point of this market?

“Well, maybe if gold were to rise to $3,000 and the Dow were to fall to 6,000, we might be at a bottom,” continued our London sage. “And we might be talking about another 5 to 10 years with no positive returns for the average stock market investor.”

We’re not wise enough to know what will happen. And we’re not fool enough to think we know. But there’s no need to take the analysis too far. A bull market takes prices up. A bear market brings them down. A bear market began in January 2000. The big risk is that the bear market hasn’t completed its work…that stocks, housing, commodities, etc, still haven’t reached their ultimate lows for this cycle. The danger of a new, major low is high. Investors should beware.

So we wait. And hold gold. Gold is not the only form of money. But it’s the best form. And money becomes more and more valuable as people seek protection from the bear market…and from other forms of “money.”

If we’re right, sometime in the future, investors’ fear will reach its climax. Money will be as valuable as it’s going to get. Assets such as stocks and houses will be as cheap as they are going to get. Then, it will be time to reverse the trade…

But hold on. You can get a good deal on great US companies now. The last time we looked, dividend yields over 5% were available now on some of the world’s best brand-name stocks – Altria, Eli Lily, Reynolds, Diamond Offshore Drilling…

Well, yes…there are some good deals available.

But if we’re right, even better deals are coming.

Bill Bonner
for The Daily Reckoning

Faith in the Gold-Dow Ratio originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

More articles from The Daily Reckoning….

Bullion Vault
How much is too much to pay for new gold-in-the-ground resources…?

WHATEVER’S LURKING in Andean Resource’s data room – opened to suitors for two years, but now closed after GoldCorp trumped Eldorado’s US$3.3bn bid by a hundred thousand thousand or so – it must be pretty spectacular, writes Adrian Ash at BullionVault.

Because on published figures, and at current spot prices, GoldCorp’s offer equals 74% of the gold and silver resources indicated and inferred at Cerro Negro. Based on viable reserves alone, the bid is priced at 1.5 times proven and probable ounces!

That suggests real confidence not only in the precious-metal bull market, but most spectacularly in Andean’s exploration projects.

Southern Argentina certainly looks juicy compared with the world’s older but fast-thinning Gold Mining sites. A marginal producer at the top of gold’s last long-run bull market, South America has since overtaken Australia, North America and South Africa, and now spits out twice as much gold per year (according to GFMS’s 2010 forecasts) as the world’s single largest gold-mining nation, China. Extraction costs are also alluring, doubling since 2006 to around $350 per ounce (GFMS again) but undercutting North America’s average cash costs by well over $100 and slashing South Africa’s cost in half.

As for the timing, 2010 has already overtaken full-year 2008 with record spending on Gold Mining mergers and acquisition. The sector’s third-largest corporate action takeover of the year to date, GoldCorp’s agreed offer – which may still see revised bids from other suitors, according to the newswires – follows Newcrest’s US$8.4bn acquisition of fellow Australian firm Lihir in May, and last month’s $7bn purchase by Kinross of the 91% of Red Back Mining it didn’t already own.

This size of takeover led the mining world table in 2008, when precious-metal producers didn’t even figure in the top 10 deals, according to PriceWaterhouse Coopers‘ hard-assets report, despite it being a bumper year for gold M&A. And as for last year, gold’s biggest takeover in 2009 was the $1.7bn purchase of Sino Gold by Eldorado – Andean’s disappointed suitor today.

So what about price? Well, Newcrest’s successful bid for Lihir in May was priced at just 22% of proven and probable reserves, equal to 12% of indicated and inferred resources – a real bargain compared to Kinross’s merger with Redback. Even with spot gold trading near all-time highs, that cost nearly 25% of potential resources, equal to fully 38% of proven and probable ounces. Little wonder perhaps that the ISS stockholder analysis group on Friday called Kinross’ bid too rich; J.P.Morgan says Redback would needs to near-double its resources to make the offer worthwhile.

But with Gold Mining firms bloated with cash and bleeding reserves as they continue to mine, could one-third (or so) of proven-and-probable ounces set a useful benchmark for acquisitive majors? Andean may be sitting on a further 4.2 million ounces of "potential" gold, reckons Credit Suisse’s Michael Slifirski. In which case (and not forgetting South America’s low extraction costs), GoldCorp’s bid would fall to 35% of total resources at current prices.

Together with the Kinross-Redback deal (and only if both complete), that might suggest a base level for M&A pricing in a world losing 4 million ounces per year in new discoveries since 1980.

Want to buy Physical Gold and own it outright but without the hassle or risks of keeping it at home? "If there’s an easier way to Buy Gold, I’ve yet to find it," says one BullionVault user…

Bullion Vault
Is "dangerous defeatism" really blocking good monetary policy…?

MUCH OF OUR WORK aims to refute muddy thinking, writes Toby Baxendale, chairman of the Cobden Centre, and this recent article by Telegraph journalist Ambrose Evans-Pritchard is most confused.

Given the "dangerous defeatism" he finds in arguments against fresh quantitative easing, I would love to hear from AEP, or from Professor Tim Congdon – whom he cites at length – exactly how creating money is supposed to create wealth.

If the central banks of the world buy private-sector bank debt, they create new demand-deposit money that the private-sector banking system can then lend. But more money units chase the same goods and services, so where is the new wealth?

Many people associate rising money supply measures with rising GDP and increased prosperity. Mistaking correlation for causation, they view an increasing money supply as the source of prosperity. This puts the cart before the horse.

Wealth is only created when entrepreneurs make better goods and services, satisfying more of the needs of consumers, in better and more convenient and cheaper ways, via more capitalistic and hence more efficient methods of production. Both the capital investment and the subsequent purchase of the new goods and services should be supported by real savings (meaning forgone consumption).

If such genuine wealth creation occurs, it will prompt banks to increase lending, and under our current system of fractional reserve banking this will necessarily entail an expansion of the money supply. This expansion is the result, not the cause, of wealth creation. Artificially increasing the supply of money will not create wealth, any more than injecting mercury into your thermometer will cause a rise in temperature.

As it is wealth we need to get us out of this hole, all policy should be directed at lowering taxes and reducing the burdens on entrepreneurs.

When it comes to central bankers, it is not dangerous defeatism we should fear, but catastrophic hubris.

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Latest jobs data, plus the rising US trade deficit, show how the world – and Gold Investing – is changing…

LAST WEEK’S better-than-expected but still poor US employment figures were generally taken as a sign that the recovery is here, but L-shaped with a slightly rising bias, says Julian Phillips of the Gold Forecaster.

The new stimuli from government will be positive and hitting where they should. Tax breaks on new equipment and infrastructural development taste the same as digging holes and filling them in did in the 1930s. We have to wait and see if the economy will respond. We sincerely hope it will. But do investors even in the US believe that a recovery will see a fall in the Gold Price? We think not!

We ask the question: Will a recovery help the US Dollar? One of the factors that US investors have looked at in the past, but which has broken down this year, is the belief that if the Dollar falls gold will rise and vice versa. Cast your mind back to the pre-credit crunch time and what did we see?

The US trade deficit was a regular $60 billion a month or more, because imports were cheaper than locally made goods. So consumers bought imports. Consequently the Dollar drifted over time, and drifted lower. With US consumers now more thrifty than then, and now buying cheap imports in place of local products, we expect the same to be true in a slow recovery.

In fact, the trade deficit has already been rising faster than expected, and for this very reason.

Asian manufacturers add to their expertise as time goes by, and so the quality of their goods (but not necessarily the price) also rises, claiming more market share than ever before. So in even a slow US recovery, expect a rising trade deficit. Which is of course Dollar negative. But what should be of greater concern to all investors and savers, however, is the internationalization of the Yuan. Once this internationalization of the Chinese currency has gained traction, we will see the use of the US Dollar in international trade decline and fairly rapidly. The unused Dollars will have nowhere to go except home. On the world’s foreign exchanges the result will be a faster decline in the Dollar’s exchange rate. And unless there is a structural change in import demand within the US, the United States itself will contribute further to the Dollar’s fall.

The only quick way out for the US is protectionism, which will help stop this decline. However, this will bring a far greater level of instability and uncertainty in foreign exchanges than we see now. This will be extremely positive for Gold Investment.

The overall impact of a recession or even worse, a depression, is that the quantity of money shrinks, even in the investment world. Yes, in that scene gold is sought out as a preserver of wealth, but perhaps not in as great a volume as in an uncertain, unstable, recovering economy. The shock of the last three years on the developed world could not have been greater as the US economy and its position in the global economy reached it zenith, then buckled. In the years since then there has been a considerable metamorphosis in investment thinking. The rosy future has gone. The fact that any day could bring some more bad news, more uncertainty and more instability, is firm in all of our minds. Consequently, prudence is taking as greater place as muted optimism in the investment world and investment strategies are adjusted accordingly.

As part of that new prudence Gold Investments have found a solid place in successful portfolios. The strategy is to act as a counter to other, poor-performing asset classes. As this attitude to gold continues to grow, more and more investment managers are getting to know the value of gold, even if they don’t want it in their portfolios. More and more of those managers are turning from disliking gold, to liking it. This does not necessarily mean that there is a steady drift by developed world investment managers into gold, but it does mean that each time there is another shock to the monetary system and investment world the speed and investment volumes with which investment managers turn to gold, increases. So battered are we in the last three years by bad news that we are extremely sensitized to it and react quickly.

The benefits of even a slow recovery over a recession, as far as it concerns Gold Prices, is that greater volumes of investment funds will be available for investment in gold and gold-related products. A rapid recovery would have fanned a positive attitude to more productive investments, and could well have deflected US investment managers from investing in gold. Even as the recovery struggles to take hold, however, current doubts about the recovery keeps fear and uncertainty in place.

The failure of the recovery to gain pace after so much has been injected into the economy so far, has fanned uncertainty and increased cautionary investing policies. It is going to take far more than simply unemployment figures that were not as bad as expected, to convince investors that a recovery has really taken hold. If the current efforts of the Obama Administration fail, it will be nigh on impossible to convince the investing public that all is well in downtown, USA.

Such a mood is internationally infectious and will spread globally. Should that happen gold will accelerate its move to center stage, in the investing world.

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Priced in Gold Bullion, the US stock market still has a way to fall yet…

WALL STREET did no damage on Monday. It left peoples’ money where it found it…as the Street took off for Labor Day, writes Bill Bonner in his Daily Reckoning.

But the financial press didn’t stop…and neither did we at The Daily Reckoning.

The most amazing thing is that the people who are supposedly the most able thinkers seem unwilling to do any thinking. So many well-educated, smart economists spend their lives trying to understand what is going on. So few really seem to care.

So many economists! If you could take all the world’s economists and lay them end-to-end, you should do it. The world would be a better place with out them.

And take Paul Krugman…please! He’s in The New York Times this morning with an analysis worthy of a PhD economist and Nobel Prize winner…but unworthy of a first-year philosophy student, cab driver or hairdresser.

At least Krugman is efficient. In the space of just a few well-chosen paragraphs, he is able to misunderstand the entire economic world.

For today, however, we continue waiting. Wise investors spend 90% of their time waiting for something to happen. The other 10% of the time they are caught off guard when it finally does happen. And here at The Daily Reckoning we are still waiting for the washout…the sell-off…the final leg down of the bear market that began in January 2000.

The Dow should sink below 7,000. Most commodities should go down…along with art, collectibles, and labor costs. (Oil is down below $75 this morning.) US housing should lose another 10% to 30% of its value. Even Gold Bullion should sell off…

…or maybe not.

How do we know this market downturn is coming, you ask? We don’t. But it’s too likely to ignore.

"Stock market valuations actually hit their last low in the mid-’70s. They spent the next nearly 10 years shilly shallying around," said an investment pro yesterday.

Our friend in London has been operating an independent investment research company for nearly 30 years.

"It’s so complicated," he went on. "And inflation distorts the picture…

"It’s probably best to think about it in terms of gold. Gold is the only real money. And bear markets are fundamentally an adjustment between money and stocks. Sometimes people are hopeful and want the upside of stocks. Sometimes they are fearful and want the protection of cash in hand. The adjustment can happen in either direction – either with an increase in the price of money or a decrease in the price of stocks."

At the ratio’s peak in 1998, it took 43 ounces of Gold Bullion to buy a single unit of the Dow – a single share in each of the companies that make up the average. Back in ’98, investors really took leave of their senses. They thought computers and modern communications were creating a brave new world where the old rules no longer applied.

"This time it’s different," they said, and paid good money for stocks in companies with no earnings, no history, and business plans that were little more than wishful thinking. Since then, investors’ optimism has been hammered out of them. By a bust in the NASDAQ, the 9/11 disaster, Bush II, Hurricane Katrina, Iraq, Afghanistan, the huge bubble of ’05-’07…subprime, another stock market bust, 10% unemployment, Lehman Bros., Obama, and other catastrophes.

The ratio of Dollar Gold Prices to one unit of the Dow has already come down below 10. But there’s much further to go. At its low-point, gold and the Dow tend to trade at a ratio of 2 to 1…or even 1 to 1.

Where might we find the low point of this market?

"Well, maybe if gold were to rise to $3,000 and the Dow were to fall to 6,000, we might be at a bottom," continued our London sage.

"And we might be talking about another 5 to 10 years with no positive returns for the average stock market investor."

We’re not wise enough to know what will happen. And we’re not fool enough to think we know. But there’s no need to take the analysis too far. A bull market takes prices up. A bear market brings them down. A bear market began in January 2000. The big risk is that the bear market hasn’t completed its work…that stocks, housing, commodities, etc, still haven’t reached their ultimate lows for this cycle.

The danger of a new, major low is high. Investors should beware. So we wait. And hold gold. Gold is not the only form of money. But it’s the best form. And money becomes more and more valuable as people seek protection from the bear market…and from other forms of "money".

If we’re right, sometime in the future, investors’ fear will reach its climax. Money will be as valuable as it’s going to get. Assets such as stocks and houses will be as cheap as they are going to get. Then, it will be time to reverse the trade…

But hold on! You can get a good deal on great US companies now. The last time we looked, dividend yields over 5% were available now on some of the world’s best brand-name stocks – Altria, Eli Lily, Reynolds, Diamond Offshore Drilling…

Well, yes…there are some good deals available. But if we’re right, even better deals are coming

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By The Mogambo Guru

I was surprised when Mike Burk of Alpha Investment Management wrote that “Some of the NYSE breadth indicators look pretty good, but that is from strength in fixed income which makes up about half of the issues traded on the NYSE. Fixed income looks like a bubble.”

Well, being an admittedly stupid guy who just wants effortless and instantaneous satisfaction of every desire, I am, as such, not really into the “nuts and bolts” of things.

Not surprisingly, then, I never heard that fixed-income makes up half of issues traded on the stock exchange, but it seems somehow important, in a menacing, sinister kind of way, like when I first noticed that my wife was no longer the same woman I had married, but was instead now some old crazy woman who thinks I can “change” after all these years of not changing.

So I wrote to Mr. Burk, and I was going to ask him, you know, as a kind of ice-breaking opener, if his wife thought, for some bizarre reason, that he could be “changed,” but instead I stuck to business and asked him if he was sure about this “half of the issues traded are fixed income” thing.

I was thinking that, you know, it seems so somehow strangely significant that I was hoping he could define “shares of fixed income.”

Well, he writes back and says that he was referring to the fact that “Only about half of the issues traded on the NYSE are operating companies,” and that “the rest are preferreds, some variety of bond fund or other interest bearing instrument.” Hmmm!

As an example, he said, “Last Friday there were 3,143 issues traded on the NYSE, and 1,768 of them were operating companies.”

Well, I’m a guy who is already petrified at the low interest rates that Treasury bonds are yielding, because it means that bond prices are so high that bond prices will collapse when interest rates rise to at least some vaguely average, roughly historical shouting-distance semblance of normalcy, which is up around 3% more than inflation.

Now I am even more freaked out that half of the issues traded on the NYSE are some kind of weird bond derivatives or something, making the Bad, Bad News (BBN) that is that inflation is now running over 8% (according to John Williams at shadowstats.com) even more frightening! Yow! We’re freaking doomed!

And when bond prices will collapse, it will hand unfathomable losses to idiots around the entire globe who, for some stupid reason, bought high-priced bonds to capture these low rates instead of buying gold, silver and oil when gold, silver and oil were priced at bargain-basement lows!

And it makes you wonder how it is even possible that you can even have low interest rates when you see things like The Wall Street Journal article titled “Consumers Dodging Jump in Food Costs.”

If you have ever played dodgeball when you were in phys ed class in school, then you know how dodging things usually works out. Perhaps you broke a wrist, or maybe you got a concussion when you caught one – pow! – in the head from Ernie, the kid who is some kind of gigantic freak of nature who has been held back three times, looks like adult linebacker, and who is rumored to be dating some of the teachers.

And it is that kind of dodgeball experience that perhaps gives you a little insight into this new concept of perpetually managing to dodge things like higher prices, especially since the price rises are not insignificant, as in “Compared with a year ago, the farm-level price of soft red wheat grown in the Midwest is up 91%, the price of hogs in Iowa and southern Minnesota is up 52%, the price of eggs is up 32% and the price of con in central Illinois is up 15%.” Yikes!

Perhaps not coincidentally, the article goes on “Fast-food giant Burger King Holdings recently authorized its franchisees to raise the price of its Whopper Jr. sandwich to as much as $1.29 from $1,” which is an immediate 29% jump in price, which sounds bad, but which may be, as I may recall, the result of taking back a previous price reduction, done as part of a national frenzy of “value meal” craziness, but I don’t really know, mostly because it is just my job to eat them, not record their prices, and I have held up my part of the bargain and done a wonderful job of eating Whopper Jr. hamburgers over the years. So don’t lay your guilt on me.

As bad as it sounds to have someone accuse me of not eating my share of delicious meat-oriented fast-food products, even more horrific was the paragraph containing the Absolutely Freaking Unbelievable (AFU) statement that “If the US economy picks up steam next year, the USDA expects food-price inflation to accelerate in 2011 to a more typical rate of between 2% and 3%”! Food has a “typical” rate of inflation of 3% inflation? Gaaaahhhh!

Immediately, I know what I have to do; get to the safety of lock-down in the Mogambo Battle Bunker (MBB), now a central part of the newly-discovered Mogambo Tribe of Native Americans that wants to open an Indian casino and take paleface wampum, an obvious ruse that will hopefully take decades to get through the courts.

I am the only known survivor and spokesman for this proud, ancient people whose myths and legends tell of the terrible tortures of an expanding fiat money supply, and I am called Crazy With Fear (CWF), which certainly seems apropos when talking about a “typical” 3% inflation in the price of food! Yikes! This is outrageous!

Even worse, The Financial Times notes that “fast food chains” in the US are “rolling out more expensive premium products,” including McDonald’s and Burger King, and that the “pricing trend” is, according to a McDonald’s spokesman, such that “five dollars will be the new $2.99,” which is a statement that I admit I don’t understand, and I get more confused when I look at it closely, but I get the chilling idea that what once cost $2.99 will start costing $5.00! Yow! A 67% price inflation!

If I am right about this, then if you are not buying gold, silver and oil in the face of such obvious inflation in prices, then I am sorry to tell you that you were right in your secret suspicions about yourself; there IS something Very, Very Wrong (VVW) with you.

The Mogambo Guru
for The Daily Reckoning

Dodging the Rising Cost of Food originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”