Gold In 3-Part Harmony !!!

September 20, 2005

Stock markets truly need trumpets, so that the herd of sheep could hear the unmistakable signal, stop in their tracks, and perhaps reverse direction to move in the proper direction. The press & media finally are asking tough questions, but unfortunately, they are so inept that proper answers tend not to be provided. The public, and even the investment community, does not know what inflation is, could not define it accurately, sees few valid statistics for its measurement, and hardly knows how to protect itself. Gold is widely regarded as an asset to protect from inflation. The concept of gargantuan federal deficits for the USGovt has entered the discussion. So far, debate has been remarkably shallow, but then again, so is the depth of economic thought shallow in this hyped nation.

Little if any mention is given to systemic derivative risk, despite recent meetings with top world bankers to discuss lost control. The upcoming strain to households and businesses from a severe cost shock will have far-reaching ripple effects. The false pillar of retail consumption is soon to witness grand erosion. Economic recession globally would cascade into an uncontrollable situation with debt default. Banks are at risk. A naïve refrain is often heard which minimizes the hurricane effect: "We got through the 911 attack ok, so this hurricane will be no big deal… America is amazingly resilient." This catastrophe is far more widespread, hitting the energy heart and aorta circulatory artery. A magnificent amount of liquidity has been pumped into the system, which will hit Main Street precisely when Maestro Greenspan exits office. All through Eastern Europe and in corners of the Middle East, the Petro-Dollar superstructure system is under direct assault. The markets are not "discussing" these dire angles which leverage gold onward and upward. Give it time !!! The vulnerable housing bubble is in the crosshairs of the economic slowdown. Will housing assets flow into GOLD? Could gold be the next bubble? Hmmm.

A sidebar comment is warranted. People cannot detect that inflation has different effects in different markets. My favorite annoying question from friends and subscribers is "do we have inflation or deflation?" To be sure, we have both, as one must specify which market to direct an answer toward. The answer is far more complicated than the question. A recent answer out there suggested that whatever China wants bears price inflation, but whatever China sells bears price deflation. That is probably the most astute and succinct simplistic but meaningful answer out there. My answers are obviously much more longwinded, but not offered here and now. Well, except when impatient, mine is simply "yup." My short intelligible answer is that whatever is imported, or competes with imports, has a declining price. Whatever is made or provided domestically, or which benefits from the huge avalanche of easy money, has an increasing price trend. In order to answer properly, relevant markets are:

For the first time since the year 2001, the gold bull market is running on three simultaneous major highways --- in Europe, in Asia, and in the United States. For all of 2002, 2003, 2004, the only evidence of a gold bull market was perceptible in the USA. During those three years, gold struggled in both euro currency and Japanese yen currency, without any semblance of a bull rally. The US markets ballyhooed a gold bull arrival and march, but the rest of the world was mute with yawns. There was no bull market outside the land of the USDollar. THAT IS NO LONGER, AS GOLD SINGS IN THREE-PART HARMONY !!!

Without question, the investment world is not sure at all as to why gold is running.

Behold the gold breakout in Europe. From 300 to 345 to 390, the breakout is not yet completed. It is well along. Gold investors can rejoice. The USA is no longer isolated and without help in feeding the gold bull.

The motivation for gold purchase in Europe has several sources. To begin with, the stability and structural foundation of the European Union is not firm. France and the Netherlands voted NO for a central government with a power center. Trust is lacking that Brussels should rule the European continent, with power like what the Corrupted Clueless Cast in Washington DC wields over the victimized vanquished vainglorious United States. Next is Germany to vote, most likely NO also for central power. Many member nations are in violation of the stability pact which guides on deficit spending. Turkey is way out of line, as is Italy. Even stalwart core nations like France and Germany are running deficits larger than in exemplary fashion. Expansion of the EU to include eastern nations might have gone too far, as the movement seems to have been halted, at least temporarily. Acceptance of additional small nations into the EU fold is sure to be delayed, upon further review. So their union is weaker at its core, and the union has watered down its strength with new annexations.

The euro currency has taken it on the chin since June when central power votes came in negative. The European Monetary Union in my opinion is not in danger, despite the failed initiative for Brussels to secure and wrest power. However, the euro confidence has been shaken, enough to usher some investment capital into gold. To dissolve the euro would be highly disruptive, with nobody leading that misguided foolish charge. Europe has been stuck in stodgy condition for a few years. This is a hackneyed line. It has a stable economy, unfettered by the horrors of American style inflation. Its economy has a stable core, one which might be struggling, but one which is far more stable than the steroid-driven American bizarre geared apparatus. We in the US love to claim robust strength. When we simply depend on easy money, lax credit extensions, government sponsored asset inflation, bubble after asset bubble instead of a strong manufacturing base, and scheduled rescues by the banking community to such an extreme extent that claims of health and viability are absurd. Europe is sure to embark on inflationary initiatives. Change was in the wind even before the recent onset of higher energy costs.

The Swiss bankers do not make much news. One can safely surmise that the Swiss and Germans are going with gold, and turning their backs slowly on the US Treasury Bond as a reserve investment. The strain on N.A.T.O. from the Iraqi War and its Reconstruction effort has put political pressures to bear on support of the irresponsible US spending patterns. Or should it be called what it is? … the bankrupt US financial condition!!! The death of Saudi King Fahd, and the succession with King Adbullah, has led to some magnificent changes. Saudis have brought home $350 billion from Western banks. Saudi workers have received a 15% pay hike. Abdullah is reported to have transferred considerable sums of US$-based investments toward European destinations. My personal take is that Abdullah will "talk nice" to us Americans, but behind our backs, he will "put the screws" to the US financial house. The new king wishes to make his imprint on the Saudi Kingdom, and send a message to the West. And then you have the Russians, who hold the spearhead for euro-based oil and natural gas transaction sales. Europe will secretly root on Putin and the Russian stealth initiative to install the euro as an official petro currency. My personal hunch is that Europeans are fast losing faith with those mismanaging the US Economy and the USDollar. US leaders no longer consult with European leaders. Instead, we shove our decisions down their throats, and criticize them when they fail to support our ill-advised maneuvers often which require that we take first helpings at the dinner table, only to leave them the leftover scraps. See Halliburton, Bechtel, and the Iraqi contracts.

Behold the gold breakout in Japan, the Asian financial center. From 4.40 to 4.70 to 5.00, the breakout might actually be completed. It has reached its target objective. Gold investors can rejoice. The USA is no longer isolated and without help in feeding the gold bull.

Whether Tokyo prefers to admit it or not, China leads in major decisions. All Asia follows their lead, and will continue to do so. The only financial lead offered by Japanese leaders is in their pathetic lackey lapdog behavior in sucking up to the USFed and the USGovt. Tokyo for years has done Washington's and New York's bidding without a fuss. They have provided critical overnight intervention support for the ailing USDollar for years. Their support is so steadfast, that the Bank of Japan has earned my label of "Federal Reserve Eastern Outpost." Reports circulate that Japan owns a 15% interest in the Federal Reserve itself. The devoted loyalty from the Japanese is uncertain as we proceed into the future. The effects of years and years of money unchecked supply growth, combined with a new generation of Japanese young consumers, has led to slow shifts in their economy. The Nikkei stock index has surpassed 13,000 for the first time since June 2001. The winds have changed, wherein the scourge of deflation might finally have succumbed to rising prices. Demographics shifts, productivity gains, corporate cash flow, augmented by governmental change to seed growth and reform, these have ushered in what seems to be rooted change. Rising prices could easily follow suit.

Ties with China are becoming wide and firm. It is reported that Japan sends the next-gen technology to China, which is not made available to the United States market. My personal take is that Tokyo will "talk nice" to us Americans, but behind our backs, they will "not show up at the critical time" to offer assistance to the US financial house. The key question centers on what Tokyo will do with their nearly $700 billion in USTBond trash. My conjecture is they will use some of it to eventually provide "seed capital" to the upcoming Asian Credit Market. Yes, the one which does not yet exist, the one which will be based upon the Asian Currency Unit. My expectation is that the ACU will be an official currency to parallel the Chinese yuan basket.

China is building its gold horde. Rumors of an eventual gold-convertible yuan currency are persistent. The actual realized effect from an ongoing longstanding rumor of eventual convertibility is massive. The leaders in China have made private gold ownership possible. Just as important is the institution of the Chinese yuan as an international reserve currency. That development is not only likely, it is a certainty, like the dawn following the dark night. The entire issue of a yuan reserve currency, and its associated advantages, are discussed in the next October Hat Trick Letter issue in detail. That rising yuan advantage puts the United States in an inferior position, like a homely zit-faced buck-toothed unwanted little sister sporting outdated bangs on the World Dance Floor.

Asia is sick of its substantial, oversized, and still growing accumulation of US Treasury Bonds. They are all loaded to the gills, and reluctant to accumulate more. My conjecture is that the Peoples Bank of China is now gradually migrating from USTBond bad paper into solid gold bullion vaulted holdings. Ever since the early months of 2005, Asia is noticeably missing in USTBond support. The TIC data bears this fact out, despite loudly absent reporting by the intrepid sleepy compromised subservient parochial US press & media. Asian lost support has been compensated by substantial Caribbean support. My kneejerk opinion is that USFed clandestine offices in the Caribbean are home to major buyers of USTBonds. Under the shadowed cover of the General Motors debt downgrade distress, wherein hedge funds unwound their mindless array of credit default derivatives, the USFed monetized a mountain of USTBond purchases quietly and surreptitiously. Nobody questioned it.

Behold the breakout for gold in the United States. The 470 level was penetrated on the December futures contract, but not quite on the spot market. My target from the chart is 495, with a flirt of 500 before the end of Jan2006. It could come as quickly as a thief in the night, and hit the 500 psychological objective before Christmas.

The arguments for gold are as unwelcome to the US financial sphere as the next Hurricane Rita is, in the horrific wake of the devastating Hurricane Katrina. They are as harmful as a fresh broken arm falling down a staircase with crutches wrapped around the tumbling mass, two weeks after a broken leg with the limb in a cast. For three years, a host of analysts have bemoaned the missing European and Asian participants in what we regarded (incorrectly) as a worldwide gold bull market. Finally, the rest of the world is pulling the gold chariot by a triple hitched horse team.

My first article ever was penned in November 2002, titled "25 Reasons Why Gold Will Rise." An update was dispatched in August 2004, titled "25 Reasons Why Gold Will Rise (revisited)" to review all 25 factors, but also to offer up two additional sinister reasons. More and more reasons are entering the picture, visible as relevant justifications. The dreaded rogue event is now on the radar screen, Hurricane Katrina, fully minimized and discounted by an ignorant public and investment community. Bulging federal deficits are now upon us. For a brief while, the currency markets will actually perceive and assess the Hurricane Katrina reconstruction efforts to be a boon to the US Economy. That beneficial view will be short lived.

A queer lethal vicious relentless, and perhaps nonstop new development will grip the nation in the form of swapped and traded risk. In desperation, the USTBond and USDollar will trade places in financial sacrifice. Quietly, the US financial house will lose its remaining pillars, washed by the financial storm surge from the hurricane. The consensus viewpoint of vigor injected into the US Economy from relief stimulus is sadly fallacious, as tragic as the hurricane destruction itself. All bad things are good for an economy supposedly, when stimulus follows with amplified liquidity. Bull. Swapped risk and other related topics are well covered in the October Hat Trick Letterissue also.

As Bastiat pointed out almost two centuries ago, when economists actually posed valid policy, and were not today's gaggle of whores, rehabilitation is not a net gain. What is spent on a broken window could instead be better invested in shop expansion or an upgrade to its efficiency. A systemic net drain comes from a grand initiative to rebuild. Already, controversy has arisen on diverting pork barrel appropriated federal funds for a laundry list of useless unproductive transportation projects, toward the Gulf Coast. DO NOT EXPECT ANY DIVERSION, not in our US Congress, the largest collection of economically ignorant, ethically compromised, misdirected and self-serving men and women on the planet. If any had a business degree, such parchment was exchanged when entering office for lobbyist business cards.

The household front stands in shock from higher energy costs, felt by commuters, vacationers, soccer moms, and boat/plane enthusiasts. What the heck! Draw on the home equity and don't change spending patterns. Keep that standard of living intact, which by the way is absurdly higher than what incomes can tolerate. The homestead stands tall in holding its value, but for how long? Soon, the entire labor front will join the household chorus of pain to demand higher wages, just to make it to work. Companies across the land must next adjust to higher shipping costs, and fuel surcharges to anything delivered. Can they pass along higher costs and remain in business, that is the question? A megatrend shock is in store. Our entire demographic setup is designed around the suburban layout, where fresh air and open space with better schools are traded for the long commute. My former manager used to travel 35 miles to work over an hour timespan. His costs take a bigger bite. Once upon a time at Digital Equipment Corp outside Boston, we knew of several nitwit commuters who traveled at least that distance from New Hampshire to the western Boston suburbs, Computerville, as we called it affectionately.

Some dark beliefs are presented by James Howard Kunstler, who predicts that alternative energy sources will never meet our needs and that we are in for a "rough ride through uncharted territory [which will take us] off the edge of a cliff [and from there into] an abyss of economic and political disorder on a scale that no one has ever seen before." The sprawl of metaphors is characteristic of Kunstler, who in The Long Emergency: Surviving the Converging Catastrophes of the Twenty-First Century adds a relentless, scary, and entertaining voice to the rising alarm about life after the cheap oil is gone. Bryan Urstadt reviews and analyzes such theories in "The Get-Ready Men,"a must read from "The Technology Review" as a wake-up call. The steady inexorable march into a land of lower standard of living, if not abject poverty, is unavoidable in my analysis. Kunstler puts forth an unduly negative swiftly developing decline. No, the USA will react with more inflation, plenty of deception, and surely more heavy-handed land grabs. War is the likely last chapter to our desperate dealings. We are witnessing the first shock, where the United States kisses goodbye cheap oil and its all trappings.

The USA has to date been spared its monstrous monetary inflation, which began in early 2001. We have exported it for years. See"Export Inflation, Import Deflation" from March 2005 for an interesting explanation of how the United States temporarily sidesteps the horrendous effects of its own unbridled inflation schemes and official machinations. With Asian cooperation, via acceptance of B.S.I.O.U. paper, we trade our worthless debt securities for solid tangible imported finished products. In the statistical arena, it gets worse. See"Inflation Pushes Down the CPI" from February 2005 for a curious paradoxical proposition that with sleight of hand, and premeditated deception, price inflation measurements are kept low enough to build a false front of immunity from our incredibly out of control inflation practices.

The world is awakening to the onset of both a cost inflation shock and an economic shock. The full impact will soon be realized. The economic fallout will take time to play out. Higher costs systemically will result in higher prices for goods & services, as well as eventual demands for higher wages. The financial fallout will be less visible. In my analysis, Hurricane Katrina is the ROGUE EVENT. Long awaited, it has been the subject of alerts to identify and expect. It is here. Bankruptcies, delinquencies, and business closures are next. Household pain is here, but it will escalate this winter when quantum higher heating bills are due. Banks are at risk, those who deal with the public and commercial stress points. Tough decisions will be made, to pass along higher costs, or else to close down the plants where businesses operate. Other tough requests will be made, to demand higher wages, or else to declare personal bankruptcy.

The hurricane has dealt a severe blow to confidence in the United States, to its financial viability. The floodwaters flow in parallel fashion to the flood of USDollars certain to enter the system, which gold smells acutely. Don't expect the money to be properly spent, since officials have already announced they are not too concerned about fraud. No-bid contracts will prevail to expedite the reconstruction. The amount of money spent in relief and rebuilding efforts by the federal government actually exceeds the Louisiana and Mississippi state budgets combined, a pace which cannot reasonably be monitored for fraud and waste. Welcome to the next era, marked by WAGE INFLATION without the seawall and jetties provided by China. Even China will pass along higher costs, sure to combine with the expense of future yuan currency upgrades. Future shock will be on the financial fronts, all in time. All three continents are preparing for it.

The energy shock will not go away. Tapping the US Strategic Petroleum Reserve is but a bandaid solution, temporarily supplying the nation a modicum of oil. The Gulf oil platforms, where 25% of US oil output is derived, suffers from over half its production capability out of action. The crude oil price is heading toward $80 as soon as the SPR is no longer tapped, and Gulf output is recognized as badly impaired for several months. Hurricane Rita could rip a second wound on the Gulf Coast. Could the United States suffer a second energy heart attack so soon?

The USA is facing astronomical debts. We have $350 billion in federal deficits (excluding in pro-forma fashion other huge costs). We have $7900 billion in national debt. We have $700 billion in current account deficits (trade gap). We have $300 billion in spent funds on Iraq and Afghanistan. We now propose $300 billion on Hurricane Katrina reconstruction. We have an absurd $250 billion appropriated on a wasteful pork sandwich known as the Transportation Bill. We have countless billion$ in obligations for Medicare prescription drugs and Social Security. We hold firm on multi-billion$ for trips to Mars and the Moon. We are maxxed out on our national credit card, which we use liberally as though it has no credit limit. It is a severe under-statement to claim that US leaders are asleep at the financial wheel, and fail the sanity test on fiscal responsibility. The outcome is national decline. Wealth and leisure, benefits from the headwind of world domination, seem a US entitlement. Obesity has many facets, with personal profile but one. Economically, we depend upon inflation engines, not work, from which to power our giant economy. The world is recognizing these facts. Simultaneously, the world is recognizing the permanently crippled status of the USDollar, its reserve banking currency.

The toughest question is whether the United States will descend into stagflation like the 1970 decade, or find itself in a Japanese quagmire, or suffer the calamity of an Argentina-like catastrophe. LET ME PUT MY MONEY ON AN ARGENTINA REDUX. Diplomacy is no longer a tool for constructive usage by our leaders. Capitulation is common on the economic battlefield, while aggression is common in the diplomatic arena. An ugly outcome this way comes, AND GOLD SMELLS IT ACUTELY !!!

The Hat Trick Letter has benefited handsomely from the energy stock runup. Next it will benefit from the mining stock runup this autumn. My forecast is for the gold price to hit 495 before the sun sets on the month Jan2006, and perhaps flirt with the 500 mark.Proprietary readers can read all about how and why, with the economic, bond, monetary, and international justifications fully analyzed and discussed.

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 23 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at

Jim Willie

Jim Willie

Jim Willie CB, also known as the “Golden Jackass”, is an insightful and forward-thinking writer and analyst of today's events, the economy and markets. In 2004 he launched the popular website that offers his articles of original “out of the box” thinking as well as content from top analysts and authors. He also has a popular and affordable subscription-based newsletter service, The Hat Trick Letter, which you can learn more about here.  

Jim Willie Background

Jim Willie has experience in three fields of statistical practice during 23 industry years after earning a Statistics PhD at Carnegie Mellon University. The career began at Digital Equipment Corp in Metro Boston, where two positions involved quality control procedures used worldwide and marketing research for the computer industry. An engineering spec was authored, and my group worked through a transition with UNIX. The next post was at Staples HQ in Metro Boston, where work focused on forecasting and sales analysis for their retail business amidst tremendous growth.

Jim's career continues to make waves in the financial editorial world, free from the limitations of economic credentials.

Jim is gifted with an extremely oversized brain as is evidenced by his bio picture. The output of that brain can be found in his articles below, and on the Silver-Phoenix500 website, on his own website, and other well-known financial websites worldwide.

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