Understanding why gold will keep going UP

Last week I had the pleasure of participating in a webcast for Bloomberg Markets Magazineregarding gold investing. It was a very insightful presentation and I suggest you view the replay atwww.bloombergmarkets.com. What struck me on the call was the negativity surrounding the gold market. Call it a bubble, a frenzy or mania, there seems to be a large number of voices in the marketplace who just are not fans of gold, whether prices are moving up, down or sideways.

Naysayers started calling gold a bubble back when prices hit $250 an ounce and though gold’s bull market has tossed and flung the bubble callers around for almost a decade now, their voices have only gotten increasingly louder as prices broke through $1,000, $1,200 and now $1,400 an ounce.

However, gold prices appear asymptomatic of the signs generally associated with financial bubbles.

For instance, we haven’t seen price spikes. Despite rising from under $1,000 an ounce to over $1,420 over the past six months, that represents only a 0.7 standard deviation move for gold prices, according to Credit Suisse (CS). The average standard deviation move of other bubbles—Japanese equities in 1986, the tech boom in 1999, the GSCI in 2005 and gold in 1979—is 5.3. Gold’s 180 percent move in 1979 represented a 10.3 standard deviation move, more than 14 times the magnitude we see today.

The reality is that gold doesn’t possess the traits necessary for a financial bubble to form. Rodney Sullivan, co-editor of the CFA Digest, has done some great research on the history of markets and bubbles going all the way back to the 1600s. He discovered three key patterns in the 47 major financial bubbles that occurred over that time period.

These three ingredients of asset bubbles are financial innovation, investor exuberance and speculative leverage. The process begins with financial innovation, which initially benefits society as a whole. In the exuberance stage, usage of these innovations broadens; they become mainstream and attract speculation. The third step, the tipping point for a bubble to form, is when these speculators pile on massive leverage hoping to achieve greater success. This excessive leverage adds increased complexity, which mixes with irrational exuberance to create an imbalance in the marketplace. Eventually, the party comes to an end and the bubble bursts.

This is what happened with the housing bubble in the U.S. as Main Street home buyers leveraged themselves 100-to-1, Fannie Mae leveraged itself 80-to-1 and Wall Street investment firms leveraged themselves over 30-to-1.

Gold as an asset class is far from being overbought by speculators. Eric Sprott recently did a fascinating presentation explaining how underowned gold is as an asset class. Sprott wrote that despite a 30 percent increase in gold holdings during 2010, gold ownership as a percentage of global financial assets has only risen to 0.7 percent. That’s a big increase from the 0.2 percent level in 2002, but Sprott points out that it’s misleading because the majority of that increase was fueled by gold appreciation, not increased level of investment.

Sprott estimates that the actual amount of new investment into gold since 2000 is about $250 billion. Compare that to the roughly $98 trillion of new capital that flowed into other financial assets over the same time period.

Gold equities have seen even lower levels of investment. From 2000 to 2010, $2.5 trillion flowed into U.S. mutual funds, but only $12 billion of that went into precious metal equity funds. Of course, those figures were significantly impacted by the advent of gold ETFs during the decade. Despite the growth of the SPDR Gold Trust (GLD), which held more 1,200 tons of gold as of March 31, gold remains largely underowned as a portion of global financial assets.

The bar chart from CPM Group shows gold as a percentage of global financial assets over time. In 1968, gold represented nearly 5 percent of financial assets. In 1980, the level had fallen below 3 percent. That figure had shrunk to less than 1 percent by 1990 and has remained there since. Sprott wrote that “it is surprising to note how trivial gold ownership is when compared to the size of global financial assets.”

That point is magnified by the pie chart from Casey Research. Dr. Marc Faber included it in his April newsletter to show just how small a portion gold and gold stocks are for large institutional investors like pension funds.

Investors who don’t think gold is a bubble but fear they’ve missed the boat need to look at the short- and long-term factors supporting gold at these historically high price levels. In the near-term, gold prices are being buoyed by continued weakness in the U.S. dollar.

The Trade-Weighted Dollar Index (DXY) is just above the lows experienced during November 2009 and is only 8 percent above the “critical” March 2008 low, according to BCA Research. BCA says the U.S. dollar’s weakness is driven by four factors:

• Federal Reserve balance sheet expansion via QE2
• Combination of low real interest rates, steeply upward-sloped yield curve and perky inflation expectations that should continue in the U.S.
• Plans by the European Central Bank to raise rates later this month
• Willingness of Chinese authorities to allow for yuan (RMB) appreciation when the U.S. dollar is weak

This is part of what we call the Fear Trade. This graphic illustrates that the Fear Trade is a function of two separate government policies: monetary and fiscal. Whenever there is a structural imbalance between a country’s monetary and fiscal policies, gold tends to perform as a “safe haven” currency. Currently, the quantitative easing measures implemented by the Federal Reserve and the significant size of the deficit spending by the government to increase entitlements to ward off a recession have created a significant imbalance between monetary and fiscal policies. This has devalued the U.S. dollar which, in turn, has boosted gold prices.

We believe that as long as the U.S. government refuses to trim entitlement and welfare programs and continues to keep Treasury bill yields below the inflation rate to battle deflation, gold will remain an attractive asset class.

Longer-term, our experience shows that whenever you have increased deficit spending, rapid money supply growth and negative real interest rates—that’s when the inflation rate is higher than the nominal interest rate—gold tends to perform well in that country’s currency. So far we have not seen rapid money supply growth here in the U.S., but the other two factors have been the main thrust behind gold’s record rise.

GFMS CEO Paul Walker echoed those drivers in an interview with MineWeb this week. Walker said that “ultra-low interest rates, macro-economic dislocation, fears of global imbalances…the wrath of these things still remain solidly in place and that’s really the bedrock of the gold bull rally.”

CS says the combined $6.3 trillion of excess leverage in the G4 economies (U.S., eurozone, Japan and Great Britain) means that their central banks will be forced to push real interest rates down to abnormally low levels. You can see from the chart that this is quite bullish for gold prices. Any time the real Fed funds rate is below 2 percent, gold tends to rise.

Current projections from the Congressional Budget Office (CBO) have the U.S. federal deficit at $1.5 trillion this year. To show the effect this has had on gold prices, we overlaid the rise in U.S. federal debt with the price of gold.

You can see from the chart that gold’s bull run began in 2002, about the same time federal debt began to rise significantly. Gold played catch up at first, but the two have tracked each other rather closely. Since 2002, gold prices have risen 308 percent versus a 119 percent increase in federal debt. This means that gold’s sensitivity to a rise in federal debt is just over 2-to-1. With lawmakers in Washington, D.C. still squabbling over where and by how much to cut the budget, it’s unlikely the federal debt level will recede any time soon.

This is very constructive for long-term gold prices, but just how bullish depends on who you ask. The team at CS sees gold at $1,550 per ounce by year end. BCA estimates gold to remain in the $1,400-$1,600 range in 2011. Walker of GFMS said he believes gold will surpass the $1,500 mark by year end because “all of the structural factors supporting gold are in place.” Perhaps the most bullish forecast has come from Rob McEwen, former gold analyst and founder of GoldCorp, who said late last year, and reiterated last week, that he thinks gold could hit $5,000 per ounce in the next three to four years.

It’s important to remember the strong cultural attraction that many people in emerging countries have toward gold. It’s a much stronger connection than that of the developed world and essential for rising gold demand.

We like to compare the G-7 countries to our E-7—the world’s seven most populous nations. Interestingly, the G-7 is 50 percent of global GDP but only 10 percent of the total global population. The E-7, on the other hand, represents roughly 50 percent of global population but only 18 percent of global GDP. We would like to point out that money supply and GDP per capita is rising substantially faster in the E-7 than it is in the G-7, 17.7 percent money supply growth in the E-7 versus 3.7 percent in the G-7. If money supply growth in the E-7 continues at a rate of 15 percent or more for the E-7, it would be a strong catalyst for higher gold prices.

In conclusion, based on the above factors and trends, we believe gold could double over the next five years.

source:http://www.usfunds.com/investor-resources/frank-talk/Economy-Markets/The-Bedrock-of-the-Gold-Bull-Rally-5354/?CFID=3196678&CFTOKEN=87783832

Don't worry about pullback..opportunity to buy instead..looking ahead :)

The article below comes courtesy of Frank Holmes, CEO and Chief Investment Officer of U.S. Global Investors.

The S&P credit agency sent shockwaves through the global financial system on Monday when it issued a warning on U.S. debt and changed its outlook on the U.S. sovereign credit rating from “stable” to “negative.” This sent markets lower and the prices of commodities such as oil rocketing back above $110 per barrel and both gold and silver to new highs.

It should be clear the S&P announcement was just a warning, not a lowering of the U.S. debt rating, which was affirmed at AAA (the highest level possible). The fears quickly subsided and U.S. markets hit fresh three-year highs. Essentially there’s only a one-third chance of a downgrade and anyone who’s ever listened to the weather man knows that a 33 percent chance of rain means you probably don’t need your umbrella.

However, the warning validates what we already know: The U.S. needs a plan to address its debt and budget issues…and fast. Due to the fact that future fiscal austerity measures will likely act as a drag on the economy, we also think this opens the door for a third round of quantitative easing (QE3) heading into next year so we’ll have to keep an eye on Bernanke and the Federal Reserve’s next move.

These factors will likely produce downward pressure on the U.S. dollar and upward pressure on commodity prices. This is why we emphatically believe the bull cycle for gold still has a long way to run. (Read: The Bedrock of the Gold Bull Rally).

One of the things we recently pointed out was the effect money supply growth can have on gold. Last week, one of my fellow presenters at the Denver Gold Group’s European Gold Forum was Dr. Martin Murenbeeld from Dundee Wealth who put the notion of a “gold bubble” in context with the following chart.

If you compare the current bull cycle for gold against gold’s run from the 1970s and 1980s, you can see that today’s run has been slow and steady. It’s also missing the sharp spikes typical of a bubble.

Also, a key difference in this gradual move higher is the growing affluence of the developing world. There people have traditionally turned to gold as a store of wealth and we are seeing that in unprecedented numbers in countries such as China and India.

Dr. Murenbeeld also presented this fascinating chart showing how much gold would need to increase in order to cover the amount of money that has been printed since gold was revalued at $35 in 1934.

Using that as the cover ratio, gold would need to climb all the way to $3,675 an ounce to cover all paper currency and coins. If you use a broader—and more common—measure of money (M2), gold would need to rise all the way to $7,931 in order to cover the outstanding amount of U.S. money supply.

With gold pushing through the $1,500 level and silver above $46, many investors are questioning whether we’ll see a pullback. Going back over the past ten years of data, you can see that gold’s current move over the past 60 trading days is within its normal band of volatility, up about 7 percent over that time period.

Silver, however, has traveled into extreme territory. Over the past 60 trading days, silver prices have jumped over 58 percent and now register nearly a 4 standard deviation move on our rolling oscillators (see chart). Based on mean reversion principles, odds favor a correction in silver prices over the next few months.

We should be clear: If a correction occurs, this would not mean the rally is over. It would just be a healthy bull market correction and reflect the normal volatility inherent with these types of investments. Investors must anticipate this volatility before participating in these markets.

This volatility also brings along opportunity. We believe we’re only halfway through a 20-year bull cycle for commodities and investors can use these pullbacks as an opportunity to “back up the truck” and load up for the long-haul.

Source: U.S. Global Investors – Weekly Investor Alert, April 21, 2011.

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Financial Crisis in 2012 is inevitable!! Here's why

A Financial Crisis in 2012 is Inevitable! Here’s Why

2012 is shaping up to be the blockbuster main event of the ongoing financial crisis. Massive amounts of new debt, vast quantities of additional digital dollars and the spark of higher interest rates will set off version 2.0 of the credit-driven financial implosion. Why Was Financial Crisis 1.0 Only a First World Crisis? The original 1.0 version had its origins in the collapse of the US subprime mortgage derivative deck of cards in 2007 before morphing into a broad-based financial crisis in the fall of 2008. It gradually spread to most other first-world advanced economies, but did not wreck havoc on emerging markets and second and third world nations. Most such economies were insulated from the folly of first-world finance - credit, borrowing, overwhelming debt and onerous interest payments – simply because they did not qualify for the intoxicating elixir of credit. Can the US Government Prevent Another Financial Crisis? A plethora of fact and opinion has been offered to explain what went wrong - Wall Street greed, crony capitalism, deficient and inadequately administered regulations, a credit and debt engorged consumer-driven economy, imprudent lending standards, negative real interest rates and nonexistent savings. Invariably, all reasons rest on the overwhelming availability and excessive abundance of cheap and easy credit and cash. The meagre measures that have been designed and implemented since the onset of the Great Recession to mitigate financial risk, such as the Dodd Frank Financial Reform legislation, have merely institutionalized the shortcomings of the regulatory framework.  Moreover, the ‘too big to fail’ private financial institutions which qualify for unlimited taxpayer bailouts are even fewer and larger today. Indeed, the supposed solutions to the problem exemplify what the problem really is – government! Deficits are exploding rapidly leading inexorably to massive debt at all levels of government from federal, to state and into local governments. US sovereign/federal debt is now over $14 Trillion and is expanding in the current fiscal year at over $1.65 Trillion – over three times greater than just three years ago.  Currently 37 percent of all federal spending comes from borrowing, which means much more debt...and a veritable fairyland of more magic money created by the FED to service the ballooning beast.  To this cauldron of crud one must add all the unfunded and underfunded obligations of the social safety net represented by Social Security, Medicare and Medicaid, all conveniently excluded from the federal government’s annual operating budget.  Depending on what assumptions are made for such factors as future inflation, eligibility criteria, program utilization and related issues, further unfunded liabilities of between $60 Trillion and $110 Trillion must be added to the US federal government’s debt tab. State and local governments contribute a further $3.87 Trillion in unfunded liabilities attributable to their employee pensions and health insurance benefits. Recent state and municipal employee demonstrations militating for retention of the unsustainable status quo have profiled what clearly are bloated pension and health benefits. Respected economists Carmen Reinhart and Kenneth Rogoff, in their recent book entitled “This Time is Different” outlined how a debt to GDP ratio of 90 percent is a nation’s tipping point.  Their conclusions are based on an analysis several hundred years of economic history.  The USA, United Kingdom, Japan and others are lined up to join Greece, Ireland, Portugal among others staring at the looming financial abyss. Fundamentals are therefore in place for another financial collapse.  This time governments will join private financial institutions heading toward the financial debt wall. Government won’t be able to perform its previous role of bailing out ailing financial giants since government itself is now in need of rescuing. Indeed, the most challenging questions today are how and who will bail outour failing governments?  European nations in the EU and those who share the Euro currency can’t help since many of them occupy an equally perilous perch on the financial precipice. It seems all advanced nations not supported by a strong natural resources sector (Canada, Australia) or high productivity manufacturing (Germany) are facing financial catastrophe. What Will Trigger Financial Crisis 2.0? Rising interest rates are all that is necessary to trigger the round two collapse of the ongoing financial crisis. It doesn’t take Mensa level intelligence to notice that current interest rates are lower than they have been since the early 1950’s. Real interest rates are also perilously close to being negative, if not already. With rapidly growing price inflation, interest rates will be forced northward. Until this year foreign purchasers have been the largest buyers of US Treasury debt, with China and Japan in the lead.  Japan now has other priorities following its recent highly destructive tsunami.  China has already substantially reduced its purchases citing lack of confidence in the declining value of the United States dollar. They have also found that spending their inventory of surplus US dollars by ensuring future supplies of minerals and energy to be much more beneficial to the Chinese economy.  Moreover, bond purchasers find sixty year low interest rates on US Treasury bonds, less than the rate of inflation, a very risky and unattractive investment. In the absence of enough foreign or private sector purchasers, the US central bank, the Federal Reserve Board, has been ‘monetizing’ federal government debt through its purchases of Treasury bonds.  The process dubbed Quantitative Easing, by which the FED creates money out of thin air, allows the FED to become the purchaser of last resort of government debt. At the present rate it is expected that the FED will purchase a full 50 percent of all new and maturing Treasury bonds in the current fiscal year.  This is necessary simply because there are not enough foreign or domestic, private sector or government buyers to be found at current rates of interest and levels of risk. The most telling and perhaps scary portent occurred recently when PIMCO, the largest private bond fund, sold its entire US Treasury bond holdings, thereby demonstrating its concern about federal government debt.  Reasons cited for the sale by PIMCO head Bill Gross are risks associated with near negative interest rates and the declining value of the US dollar stemming from excessive money creation. Knowing that institutional money managers representing pension funds and insurance company investment pools frequently follow industry leaders, we can confidently predict that many more Billions and Trillions of Treasury bonds will soon be dumped into the sickly bond market. When this process plays out, FED money creation and debt monetization will go into overdrive, since price inflation will take off as the dollar devalues. Why America’s Political Process Virtually Guarantees Financial Crisis 2.0? How can we be so certain that another and more serious financial crisis is on the horizon? Salient factors include: 1.    the magnitude and momentum of expanding government deficits, debt and unfunded liabilities, 2.    the monetization of Treasury debt by the Federal Reserve Board using manufactured money acquired through the somewhat mystical process labelled ‘Quantitative Easing’, 3.     the strong prospect of higher interest rates necessitated by an inflating and devaluing currency followed inevitably by increasing price inflation.  The political process virtually guarantees that no tough, but essential, measures of consequence will be undertaken by political decision makers to stabilize the financial system.  Witness the recent embarrassing public tussle between the two parties in Congress over a mere $33 Billion of pocket change in budget reductions when the total shortfall is $1.65 Trillion.  To suggest that strong leadership at this time of looming financial crisis is needed is to state the obvious.  However, politicians are like most other people in that they are ambitious careerists who worked hard to secure the jobs they so treasure.  Ditto for government bureaucrats who want to preserve their careers and the associated benefits, including the cushiness of defined benefit and inflation protected pensions as well as gilded health insurance.  Preservation of the status quo is understandably their top priority. Voters expect their elected representatives to be active and to ‘do something’ when a crisis strikes them between their eyes. However, there is absolutely no incentive to scan the horizon and to implement tough measures designed to head off a mounting crisis. Politicians of across the partisan spectrum and range of ideologies have learned, indeed they have thoroughly inculcated, the reality that the voting public does not want to hear about emerging or imminent problems. They want reassurance, not anxiety, but when a crisis blindsides them, they want immediate action from their government.  Until the crisis arrives, politicians who assume leadership roles as educators and disseminators of serious policy options are frequently branded as bad news bears and messengers of mayhem for calling for belt tightening and sacrifice. Instead, voters reflexively point to government waste and to the ‘rich people’ for austerity and additional revenue.  Politicians of vision are invariably chastised by losing their jobs at the next election. Candidates who ignore the storm clouds and who promise good times ahead are most frequently rewarded with the endorsement of a vote.  Political will wilts in this kind of hostile electoral environment. Is it any wonder the voting public hears what it wants and gets what it deserves? Presidential election years are traditionally awash with positive investment environments.  Politicians in power know that the public can be bribed with their own money...actually borrowed money. Voters enjoy their apparent prosperity and the general feeling of financial wellbeing.  Incumbent Presidents, legislators all, do well in such circumstances.  We will see this scenario play out again in 2012...but only if the persons in power can engineer it yet again.  But can they?  Will record low interest rates continue?  Will the large institutional Treasury bond purchasers such as pension funds and insurance companies follow PIMCO’S Bill Gross out of the Treasuries market?  Will the dollar plummet with the excess of FED money printing?  Will emerging price inflation in food and energy make for a grouchy voter?  Can the government keep the lid on or will the financial pressure cooker explode? Conclusion: 2012 Will Be the Year of the Perfect Financial Storm... Buying time by creating ever more magic money, which inevitably results in price inflation, overheated stock and commodities markets and which devalues the currency - will work until it doesn’t. This analyst sees the perfect storm of converging criteria almost perfectly timed and aligned with the 2012 election cycle. When the moment arrives, the financial earthquake will rapidly demolish the existing highly precarious financial system. Government will stand by helpless, unable to shield itself, much less its vulnerable citizens or private financial institutions from the tsunami of debt and currency destruction. If starting tomorrow morning our politicians were to act like adults, willing to lead in a pragmatic and focused fashion, free from the concerns of partisan advantage, rancour and rigid ideology, financial collapse could be delayed...perhaps avoided.  Unfortunately the challenge seems insurmountable and the political will too feeble. source:http://news.goldseek.com/GoldSeek/1302588240.php

US Default Could Be Disastrous Choice for Economy

The United States has never defaulted on its debt and Democrats and Republicans say they don't want it to happen now. But with partisan acrimony running at fever pitch, and Democrats and Republicans so far apart on how to tame the deficit, the unthinkable is suddenly being pondered.

"It's another game of chicken. And this time there are Mack trucks going at each other, not bumper cars. This is a biggie," said American University political scientist."

James ThurberAmerican University

The government now borrows about 42 cents of every dollar it spends. Imagine that one day soon, the borrowing slams up against the current debt limit ceiling of $14.3 trillion and Congress fails to raise it. The damage would ripple across the entire economy, eventually affecting nearly every American, and rocking global markets in the process.

A default would come if the government actually failed to fulfill a financial obligation, including repaying a loan or interest on that loan.

The government borrows mostly by selling bonds to individuals and governments, with a promise to pay back the amount of the bond in a certain time period and agreeing to pay regular interest on that bond in the meantime.

Among the first directly affected would likely be money-market funds holding government securities, banks that buy bonds directly from the Federal Reserve and resell them to consumers, including pension and mutual funds; and the foreign investor community, which holds nearly half of all Treasury securities.

If the U.S. starts missing interest or principal payments, borrowers would demand higher and higher rates on new bonds, as they did with Greece, Portugal and other heavily indebted nations. Who wants to keep loaning money to a deadbeat nation that can't pay its bills?

At some point, the government would have to slash spending in other areas to make room for any further sales of Treasury bills and bonds. That could squeeze payments to federal contractors, and eventually even affect Social Security and other government benefit payments, as well as federal workers' paychecks.

A default would likely trigger another financial panic like the one in 2008 and plunge an economy still reeling from high joblessness and a battered housing market back into recession. Federal Reserve Chairman Ben Bernanke calls failure to raise the debt limit "a recovery-ending event." U.S. stock markets would likely tank — devastating roughly half of U.S. households that own stocks, either individually or through 401(k) type retirement programs.

Allan Baxter | Digital Vision | Getty Images

Eventually, the cost of most credit would rise — from business and consumer loans to home mortgages, auto financing and credit cards.

Continued stalemate could also further depress the value of the dollar and challenge the greenback's status as the world's prime "reserve currency."

China and other countries that now hold about 50 percent of all U.S. Treasury securities could start dumping them, further pushing up interest rates and swelling the national debt. It would be a vicious cycle of higher and higher interest rates and more and more debt.

The U.S. has long been the global standard for financial stability and creditworthiness, with Treasury securities seen as a fail-safe investment. But after the near-shutdown of the U.S. government and a new credit-rating report this week questioning the country's fiscal health, Treasury bills and bonds are losing luster.

If there is a debt limit deadlock, the government by this summer could find itself legally unable to borrow more money to pay its bills, beginning with interest on its debt and gradually extending to day-to-day federal operations. At some point, the government would have to decide which bills to pay and which to put aside.

The debt ceiling will be hit on or around May 16, the Treasury Department says. Unlike the threatened government shutdown, the impact would start slowly, but then build mightily until the damage would be so dire that few political leaders or economists even want to contemplate it. The day of reckoning could likely be delayed at least until early July with creative bookkeeping.

When the House first rejected the Bush administration's $600-billion bank bailout in September 2008, the Dow Jones industrials went into a dizzying 778-point tailspin. A whiff of a possible similar stock market collapse came on Monday with a sharp selloff on Wall Street when Standard & Poors lowered its outlook on U.S. debt to "negative" from "stable," possibly a first step toward a possible downgrade of America's coveted AAA credit rating.

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"We haven't downgraded it. We just said, if nothing happens, we may have to," said S&P chief economist David Wyss. He said a government default remains uncharted territory, "which is one reason why it's not a good idea to hit the debt ceiling."

"There's reason to worry," said Wyss. "But my best guess is that we sort of muddle through this. Cuts will be made, they'll be too little too late, but at least they will be enough to maintain a triple-A rating."

"It's another game of chicken. And this time there are Mack trucks going at each other, not bumper cars. This is a biggie," said American University political scientist James Thurber. But he predicted that, as in the past, "there will be an accommodation. They will avoid a crash."

Investment bank J.P. Morgan Chase recently concluded that any delay in making an interest or principal payments by the Treasury "even for a very short period of time" would have large "long-term adverse consequences for Treasury finances and the U.S. economy." The analysis is being circulated on Capitol Hill by supporters of raising the debt limit.

"If anyone wants to push that button, which I think would be catastrophic and unpredictable, I think they're crazy," JPMorgan Chase [JPM  44.68    0.12 (+0.27%)   ] CEO Jaime Dimon said recently of those seeking to block raising the debt limit.

House Speaker John Boehner and most other GOP leaders agree on the need to raise the debt limit — and don't want to be held responsible for a new financial meltdown. Still, they want Obama to make more concessions on spending cuts than he has done thus far. That isn't sitting well with liberal Democrats, who think Obama has already given too much ground.

One reason the two parties can't find common ground: they can't even agree on what's causing high deficits. Democrats mostly blame it on policies of George W. Bush: two wars, tax cuts that continue to benefit the wealthy and an expensive prescription drug program. Republicans see government spending as the culprit, particularly on Obama's watch.

In fact, the main reason is the deep recession, which slashed tax revenues and led to hundreds of billions of dollars in recession-fighting spending by both Bush and Obama. The debt was $9 trillion in late 2007 before the start of the Great Recession, and it's just a sliver under the $14.3 trillion limit today.

Even though GOP leaders say they want to avoid more economic chaos, there is a large crop of tea-party aligned Republicans threatening to refuse to raise the cap under almost any circumstance. Polls suggest a large percentage of Americans oppose raising the debt limit.

The debt limit has been raised ten times over the past decade. Obama voted against Bush's debt-limit increase in 2006 as a senator, accusing Bush of "a leadership failure." Obama recently apologized for "making what is a political vote as opposed to doing what was important for the country."

source:http://www.cnbc.com/id/42732831

Is Gold Rising Because America Is Broke?

Gold prices shot up to a new record of $1,512.50 an ounce in New York late on Friday, posting a record weekly gain and maintaining a six-week winning streak.

While a lot of gold investors are laughing all the way to bank the world over, gold's super cycle rally could have ominous meanings for the Us economy.

Analysts have pointed out that gold's advance into what is termed as a super cycle does not bode well for the US economy.

A sustained gold and oil boom indicates that the dollar is slipping into grave danger and the economy closer to collapse, according to Daily Markets analyst Michael Snyder.

"... when these commodities go up in price it is a sign that the U.S. dollar is dying and that our country is getting closer to economic collapse," Snyder wrote recently.

He explained that when the gold and silver prices soar, it indicates that investors everywhere in the world are losing trust in the dollar and the U.S. government treasuries. And they seek out something they can trust more.

"The U.S. has been running trillion dollar deficits for several years now, and this has created a lot of new money." And he says the rest of the world is now seriously doubting the sustainability of U.S. government debt.

The factors that fuelled this unseemly gold rally are numerous, but the most prominent ones are panic over the state of fiscal stability in the U.S, a weak dollar, spiralling crisis in the Middle Eastern oil hub of and sustained uncertainty over European economic health, coupled with new sources of instability in Japan.

And among these it's dollar that is hurting the most. It’s no coincidence that dollar had fallen back to near-three-year lows against major currencies when precious commodity prices shot through the roof.

And the prospects for the dollar are bleaker in the months to come. Interest rates are at a record low and the Fed has still not looked like they are going to rise any time soon. Besides, the federal budget deficit puts added pressure on dollar, precipitating its possible fall towards the 2008 lows.

This is why analysts think the gold super rally is likely sustain well into the coming years. Analysts quoted by Reuters said they thought gold prices could touch $1,700 an ounce in 2015.

What the gold rally means to the dollar and the American people is obvious from the rush pawn shops see across the United States. "For many Americans struggling to make ends meet, the gold boom has meant a heart-breaking trip to the pawn shop, selling off jewellery to pay the bills," UK's Daily Mail wrote in an article.

"A lot of people don't want to sell their jewellery, but they have to ... It's their monthly mortgage payment or whatever the case is ... We hear a lot of sad stories," says Steven Bumb, part owner of Santa Cruz Pawn, according to the report. People also flock to gold parties where they can discreetly sell gold to meet their cash requirements.

High unemployment levels also drive people to the thriving wee -buy-your-gold markets across the country.

The commodity rally is not just limited to gold. Silver outperformed gold again in the last week, recording an 8.4 percent weekly gain as against gold's 1.5 percent gain. Silver prices hit another all-time peak of $46.69 an ounce.

The Standard Chartered bank report said gold prices could reach $2100 by 2014 per ounce and that as high a price as $5000 per ounce by the end of the decade is possible. The bank said gold prices are yet to hit the super cycle as demand from the emerging economies like China andIndia will scale to peak levels later in the current decade.

Read more: http://www.ibtimes.com/articles/137448/20110424/gold-super-cycle-rally-record-united-states-america-economy-pawn-unemployment-dollar-price.htm#ixzz1KVCv8fpx

Silver To Continue Its Run But Next Big Move To Belong To Gold - RB

According to RBCCM, silver is likely to continue to perform in the short to medium term but supply side issues are likely to cap prices in the longer term

Author: Geoff Candy

GRONINGEN - 

While gold's record-breaking run through $1,500 an ounce has been impressive, it is silver's performance year-to-date that has caught many an investor's attention.

And, while just eight months ago, the ratio of silver price to that of gold was 68:1 eight months ago, at the time of writing the frequently watched measure sat at 33:1.

And, while there are some that expect the silver to continue closing the gap between it and its yellow sister, some, like RBC Capital Markets think that the next leg of the race is going to belong to gold.

However, the bank says the move is not going to happen in the short term.

"Our new silver price forecasts assume that the gold:silver ratio stays in the 40s:1 for the next several years. We do not expect gold to rally while silver falls, but rather we believe that two more likely scenarios would be either a pullback in both metals (with silver declining at a greater rate than gold) or gold outperforming silver during the next upward rally in both metals." RBCCM says.

Over the short to medium term, the bank remains rather bullish on silver for a number of reasons. Firstly, the bank is bearish on the outlook for the U.S. dollar as it expects "The U.S. Government and the U.S. Fed to walk a tightrope of fiscal stability, with potential difficulties in extracting the record liquidity that was injected into the system over the past couple of years." It says that these difficulties are likely to weigh on the performance on the currency and thus be generally positive for precious metals."

Secondly, the bank paints a rather bullish picture of demand, particularly investment demand, over the 1 to 3 year horizon.

While traditionally, silver demand has come predominantly from industrial uses, jewellery and photography, the rise of digital photography has seen silver demand from that sector wane. This, decline has, however, been more than covered by the rise in demand from silver ETFs, which grew to account for 17% of total silver demand in 2010, up from 15% in 2009 and 5% in 2008.

With the enhanced transparency of the various silver ETFs (which trade on several regulated exchanges around the world), both retail and institutional investors have shown a renewed interest in silver investing," the bank writes.

Adding, " For 2010, total silver ETF holdings grew by ~115 million oz, including 45 million oz for the SLV. Looking ahead through 2011, we expect continued strength, perhaps at similar levels to 2010, with our forecast of 125 million ounces."

As a result of these factors and largely stable supply, at least in the short term, RBCCM has revised its price forecasts for the metal.

It now expects silver to average $37.50 in the second quarter of this year, $34.14 in Q3 and $36.50 in the last quarter of 2011.

That said, the bank does have some "medium- to longer-term concerns due to increasing primary silver mine supply, which we believe could eventually cap the upside for silver prices."

According to RBCCM, primary silver production is expected to increase in the near future with a couple of large scale operations either currently ramping up or slated for start-up over the next few years, including: Tahoe Resources' Escobal project in Guatemala and Pan American Silver's Navidad mine in Argentina.

By-product production is also expected to increase over the next five years with the ramp up of Barrick's Pascua-Lama operation and Goldcorp's Peñasquito mine.

While some of this output will be offset by the closure of existing capacity, RBCCM says "These new primary and by-product operations could add over 100MM oz of annual silver production (+14% of global mine supply)."

It adds that, one also needs to take into account the role of China, which is difficult to accurately estimate given the preponderance of thousands of small producers.

CHINA MAY BE INCREASING ITS SILVER STOCKPILES

"China's stockpiles were created by an over-production of silver mining during the 1970s and 1980s. From the early 1980s, production expanded rapidly, so that by the end of the decade, mined output had substantially exceeded local demand" says the bank.  "Given lower reported exports of silver for the last few years, in our view China has been either using silver production domestically or increasing stockpiles of silver. While we expect there has been a growth in domestic Chinese demand for silver, the increase in copper and lead/zinc concentrates imported to China for processing by smelters has, we believe, yielded much more silver by-product than domestic demand growth."

 It adds, "While total global aboveground stocks may have declined to a few hundred million ounces of silver or less, our supply/demand forecasts suggest these levels may be sufficient to meet the demand gap for a number of years should they enter the market."

 As a result of this, The bank believes that silver is likely to average $35 in 2012, before falling to $27.50 in 2013, $25.00 in 2014 and $22.50 in 2015.

Source: http://www.mineweb.com/mineweb/view/mineweb/en/page32?oid=125625&sn=Detail&pid=102055