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August 21, 2011
Issue 161  -  Weaker and Weaker
 
 
Listening to republican candidates running for president is very disheartening as they either don't understand what's really happening or are afraid to say it to the masses.  Either alternative portends bad things ahead and with the media ignoring Ron Paul despite his second place finish in Iowa there is no relief in sight.  (Ron Paul was even left off of a major online poll list!)  With Obama clearly in the same boat of economic illiteracy, I don't see much hope for any type of true reform.  Obama provided more evidence of his lack of economic understanding because as the economy starts down again, it has nothing to do with "bad luck."
 

Obama: 'Bad Luck' Reversed Growth

By Jon E. Dougherty at 16 Aug 09:22

(Newsroom America) -- President Barack Obama on Monday said in a speech to supporters in Iowa his economic plan had "reversed the recession" until a string of incidents overseas derailed it.

"We had reversed the recession, avoided a depression, gotten the economy moving again," Obama said to the crowd in Decorah.

"But over the last six months we've had a run of bad luck," the president continued, citing the Arab Spring protests, the European debt crisis and the tsunami in Japan.

"All those things have been headwinds for our economy," he said. "Now, those are things that we can't completely control. The question is, how do we manage these challenging times and do the right things when it comes to those things that we can control?"

Obama also blamed Republicans, saying the economy suffered again when the GOP pressed hard for spending cuts in exchange for an increase in the government's debt ceiling, an agreement he called "a debacle."

"The problem is that we've got the kind of partisan brinksmanship that is willing to put party ahead of country, that is more interested in seeing their political opponents lose than seeing the country win," he continued. "Nowhere was that more evident than in this recent debt ceiling debacle."

Monday's stop was part of a three-day bus tour Obama has launched that will take him through Minnesota, Iowa and Missouri.

 
What the president will refuse to say, or doesn't understand (noticing a pattern here?) is that most of these things are related.  The system is so broken that we can expect these bouts of "bad luck" to continue for some time.  The data is irrefutable:
 

D.R. Horton Inc., the second-largest homebuilder by revenue, reported third-quarter earnings that beat analyst estimates as cost cuts helped the Fort Worth, Texas-based company to cushion a decline in revenue.

"Nothing’s really strong out there, and I would reiterate that most of our markets continue to still be soft, softer, and softest," Chief Executive Officer Donald Tomnitz said on a conference call with investors on July 28. "I would anticipate that ‘12 will be better than ‘11 but I don’t expect it to be significantly better," he said.

A measure of builder confidence held at 15 in August, according to a report yesterday from the National Association of Home Builders/Wells Fargo. Readings below 50 mean more respondents said conditions were poor.
 
 
Without a housing recovery, there is no WAY for the economy to come back in any meaningful manner and that just doesn't look likely with the big builders saying 2012 won't be much better than 2011.  That means at best, a muddle through type of economy.  Part of the problem is wages and how they've been on a slide for what seems like forever:
 
 
What you see here is Shadowstats.com's chart of wages, adjusted for REAL inflation since 1964.  As you can see starting in the early 90's, we started falling and there is no relief in sight.  This is because we have been living above our means and that can only go on for so long.  This is also the main use of money inflation which is practically invisible to most "normal" humans.  The "theft" (of purchasing power) is almost completely hidden.  Most people just go with the flow and accept whatever is fed to them, no matter how unbelievable.  This falling real wage trend is contributing heavily to this phenomenon, and this, even with incredibly low interest rates:
 

Industry's Past-Due Mortgages Climb Above 6.5 Million

By: Carrie Bay 08/16/2011

Lender Processing Services (LPS) issued a report Tuesday which puts the number of mortgages that are delinquent or in foreclosure at 6,538,000.

The company’s assessment is based on mortgage performance statistics derived from its loan-level database of nearly 40 million mortgage loans through the end of July.

The grand total of past-due mortgages has risen by nearly 190,000 loans over the past two months. In June, LPS’ tally of loans at least 30 days delinquent or in foreclosure was 6,452,000. In May it was 6,350,000.

LPS says the national delinquency rate — loans that are at least 30 days past due but not yet in foreclosure – rose to 8.34 percent as of the end of July. That’s up 2.4 percent from June but down 10.4 percent from July 2010.

According to the company’s latest report, 4.11 percent of the nation’s outstanding mortgages were part of the foreclosure inventory at July month-end.

The foreclosure inventory rate – which LPS calculates as loans that have been referred to an attorney but have not yet reached the final stage of foreclosure sale – increased 0.4 percent from June, and is up 9.7 percent from a year earlier.

Of the 6,538,000 mortgages going unpaid in July, LPS says 2,156,000 were in the process of foreclosure.

The remaining 4,382,000 were 30 or more days past due but the lender had not yet initiated foreclosures. Of these, 1,899,000 were 90-plus days delinquent.

According to LPS’ study, the states with highest percentage of non-current loans – which combines foreclosures and delinquencies – include: Florida, Mississippi, Nevada, New Jersey, and Illinois.

States with the lowest percentage of non-current loans include: Montana, Wyoming, Alaska, South Dakota, and North Dakota.

 
 
Think about this article.  Interest rates are lower than ever, yet we still have people late on mortgages.  Remember also that people pay their mortgage first, and this is not a good omen.  The powers that be want to try and keep you distracted and that's why the deception is used.  As I've consistently documented before this is done with fake stats.  This is another prime example:
 
 
 
Now how can consumer confidence be in the tank and retail sales at highs?  I believe its a combination of two factors.  First, the numbers are jiggered to make them look as good a possible.  Secondly, gross sales don't necessarily equate to more units moved.  Think about it, if prices are up 10% on widgets, and a store sold the exact same number this year as last, they could report a 10% increase in "sales."  There was ZERO increase in sales, but that isn't seen here.  This would tie in with the above chart. 
 
So why do people feel less confident?  I believe it has something to do with the subject of this piece from USAWatchdog.com
 

The reality since Ben Bernanke announced his QE2 policy in August 2010 is:

•Unleaded gas prices are up 45%.

•Heating oil prices are up 46%.

•Corn prices are up 71%.

•Soybean prices are up 26%.

•Rice prices are up 13%.

•Pork prices are up 31%.

•Beef prices are up 25%.

•Coffee prices are up 38%.

•Sugar prices are up 48%.

•Cotton prices are up 13%.

•Gold prices are up 42%.

•Silver prices are up 115%.

•Copper prices are up 23%.

The official inflation rate is 3.6%, but anybody with an IQ above 70 knows that’s a statistical lie. According to economist John Williams of Shadowstats.com, the true annual inflation rate is around 11% (if calculated the way Bureau of Labor Statistics did it in 1980). In his latest report, Williams warns the dollar is in serious trouble because the Fed is not interested in fighting inflation when it needs to continue propping up the banking system. The Shadowstats.com report said, "Massive, fundamental dollar dumping and dumping of dollar-denominated assets could start at any time, with little or no further warning. With a U.S. government unwilling to balance or even address its uncontainable fiscal condition; with the federal government and Federal Reserve ready to prevent a systemic collapse, so long as it is possible to print and spend whatever money is needed; and with the U.S. dollar at risk of losing its global reserve currency status; much higher inflation lies ahead, in a circumstance that rapidly could evolve into hyperinflation."

 
So the public realizes that something is wrong even if the data is hidden.  They can see the difference in how much they are spending versus the government numbers.  With inflation as high as this, and likely to continue as this clip from urbansurvival.com shows:
 

But now, thanks to the Federal Reserve's most recent H.6 Money Stock Measures report, we can go much further in our analysis.

But first, let's look closely at that Money Stocks report:

Look at the M1 figure (cash and demand deposits) for the month of June and then the preliminary July figure.  In one month, it was up 3.0194% in a single month  The quickie guess would put it north of 36% annualized, but how far does the 'magick of compounding' get us?

Pretend for a moment you start with a $100 bill.   What do you think this kind of interest rate compounds out to?  I don't mean to offend by  offering amortization tables for breakfast, but you need to see this one:

$100.00

Start

$103.02

Month 1

$106.13

Month 2

$109.33

Month 3

$112.64

Month 4

$116.04

Month 5

$119.54

Month 6

$123.15

Month 7

$126.87

Month 8 

$130.70

Month 9

$134.65

Month10

$138.71

Month 11

$142.90

Month 12

Bankers would skin you for a few fractions in there perhaps, and to be sure, this is only the M1 rate.  M2 is a little more laid back, but not much.  It's went up a mere 2.21% last month, but this still compounds to a 31.09% monetary inflation rate!

This is is a HUGE number and it should be screamed from the front page of every responsible financial rag in the country, but instead there is a near deafening silence about it.  Why?  Because it lays out in stark relief, the 'box canyon' the U.S. has been herded into.

This huge acceleration in money printing is only going to lead to more price rises, especially in commodities (gold and silver obviously included).  Tying into this, there was a most interesting development in the gold world this week:
 

Chavez Wants Gold Holdings Moved To Venezuela

August 22, 2011

Melissa Block talks with Jack Farchy of the Financial Times about the challenge of shipping huge amounts of gold overseas. Venezuelan president Hugo Chavez has announced he wants all the country's holdings in gold physically moved to Venezuela. The logistics are tricky — but even trickier is the issue of insurance.

Copyright © 2011 National Public Radio®. For personal, noncommercial use only. See Terms of Use. For other uses, prior permission required.

MELISSA BLOCK, host: With gold trading at record prices, here's a new challenge for what's called the bullion logistics industry. That is, the people who move gold around. The challenge is how to send and insure a really big shipment.

Venezuela's president Hugo Chavez has announced that he wants all of the country's holdings in gold to be physically transferred to his country. That's more than $12 billion worth of gold. And the prospects for shipping it fill our heads with all kinds of James Bond-ish ideas.

Well, Jack Farchy wrote about this for the Financial Times. And, Jack, we're talking about 211 tons of Venezuelan gold. Where is it exactly?

JACK FARCHY: Well, most of it is in the U.K., in the Bank of England vault. There's also a little bit in the U.S. and in Canada.

BLOCK: And it's stored exactly how? I mean, what form does this gold take?

FARCHY: Well, it comes in 400-ounce bars, which is the standard, what's called good delivery bar, which is the standard unit of physical gold trading in the London market which is the center of the global gold market. So that 211 tons is something like 17,000 400-ounce bars.

BLOCK: OK. So, if Hugo Chavez wants to get the 17,000 bars of gold into Venezuela, how do they do that? How does it get there?

FARCHY: Well, the real challenge is one of insurance, because the issue is not so much weight. Two hundred tons is not - it's heavy but it's not huge amounts of cargo especially to move. The issue is, at today's gold price which is a new record, as it seems to be every day these days, it's worth almost $13 billion.

BLOCK: And going up all the time.

FARCHY: And it's going up all the time, exactly. So the real challenge is to find somebody who's prepared to insure that or, alternatively, to just send it in lots and lots of smaller packages, five tons each, which is a more usual amount for physical gold transfers. But, of course, that means that you then have maybe 40 or 50 trips from London to Caracas and a few from New York or Toronto to Caracas, which is not so easy to do, especially given that there are no direct flights from London to Caracas.

BLOCK: What would a five-ton shipment of gold look like physically? How big is that?

FARCHY: Well, so I mean, a 400-ounce bar is a bit smaller than a regular kind of paperback book. So, five tons is about 400 400-ounce bars. Not even, I mean, at 400 very slim paperback books.

BLOCK: So it would be going on what kind of plane?

FARCHY: Well, in general physical gold is often shipped on passenger flights, in fact. Just, you know, it goes along insured with its security guards, along with the rest of the passengers or on a cargo flight. It could also be the case that Venezuela will charter a plane specifically for the job, given the large amount of gold involved here. It may be that they'll charter a plane specifically, maybe even give it a military escort to try and make sure it gets back to Caracas safely.

BLOCK: A military escort?

FARCHY: Well, I've been told by gold traders there have been occasions in the past where military jets have arrived laden with gold.

BLOCK: Let's walk this back a little bit, Jack. Why does Hugo Chavez want the gold repatriated to Venezuela?

FARCHY: Well, it's to do with the fear that it could be thieved or frozen due - for political reasons. I mean, obviously he's seen what happened in Libya, where Libya's foreign assets have all been frozen, at least those that are in Europe and the U.S., and is quite explicit about the concern that the assets could be frozen.

BLOCK: Jack Farchy covers commodities for the Financial Times. Jack, thanks so much.

FARCHY: Thank you very much.

BLOCK: Jack Farchy telling us how the Venezuelan president might have some 211 tons of gold shipped from overseas.

 
So why is this important.  If the "gold" guys, and I'm talking the big guns like James Turk, are right, this is going to expose a large problem in the market.  The gold isn't there in anywhere near the amounts being reported.  Even if it was, there are far more claims on each ounce of gold than just one.  Here is an explanation from Dave in Denver:
 
The real reason JP Morgan recently decided to open and operate a Comex gold vault is now in full view. A close friend of mine in the NYC hedge fund community informed me today that hedge funds are now buying gold from JP Morgan, who turns around and "safekeeps" it for them for 15 basis points (that's .15%) on the market value of the gold being stored. My friend referred to this as "allocated" gold. On the surface it looks like the smart money "gold rush" is on.

But, in the wisdom of Shakespeare via Macbeth: "nothing is but what is not." The "what is not" part of the above business transaction is the full, 100% allocation of the gold being purchased. In other words, just as those of us who understand how the game is being played - and have pointed this out explicitly with proof from the GLD prospectus and other examples - JP Morgan is employing the traditional Wall Street/banking business model of fractional gold ownership. This is not new, as Morgan Stanley was successfully prosecuted for this same scheme several years ago when the firm was exposed for selling physical silver to high net worth clients - and "safekeeping" it for a fee. The scheme was exposed when a few of them demanded delivery and Morgan Stanley was unable to deliver the actual silver on a timely basis. Please use google to find the case if you are curious about the details. Only those of us intimately involved in the precious metals market at the time even bothered to care about this case.

Here's how it works. JP Morgan sells Comex gold to hedge funds, who then opt to safekeep it at JP Morgan's Comex depository for a 15 basis point fee. It makes the purchase very simple, the "storage" inexpensive and enables the hedge fund to seemingly have possession of physical gold. But in reality all the hedge fund gains is a "security interest" - or paper documentation - in the gold rather than the actual gold. Here's why: how many of those hedge funds will actually ever ask for delivery of the gold into a private depository or go visit the vault to make sure that the gold it purchased is physically sitting in a separate, allocated bin? JP Morgan is "banking" on the fact that none of them will. This enables JP Morgan to make an electronic ledger entry and create an account statement showing the market value of the gold purchased, but it never has to actually produce the physical bars and deliver them. This dynamic permits JP Morgan to sell gold that the bank is never held accountable for. This is exactly the scheme Morgan Stanley used with their silver fraud on a much smaller scale, that GLD and SLV use and that the Comex and the LBMA bullion banks use for their futures/forwards business.

The best part of this is that JP Morgan is "storing" the gold for substantially less than the rate charged by the private depositories in Delaware, which generically charge 50 basis points (that's .5%) for the same service. On millions of dollars of market value, this 35 basis point differential is heavy incentive for these hedge funds to take JP Morgan up on this generous storage offer. I say "storing" the gold because really what JP Morgan is doing is creating a 15 basis point income stream for itself and the only risk the bank is taking is the risk that all of the customers don't ask to have the gold delivered off-Comex at the same time. This is something that has never occurred since the Comex started trading gold futures in the mid-1970's. But we'll see how "generous" this offer really is when the shit hits the fan and the real scramble to take possession of the physical metal begins. JP Morgan also gets to use the money that these funds put up to "buy" the gold.

The real beauty of what JP Morgan is doing - from a market manipulation standpoint - is the removal of tens of millions of dollars of demand for real physical metal and diverting it into this fractional gold banking scheme in order to prevent/delay an inevitable market squeeze for physical gold. GLD serves the same manipulative purpose. It also shields the Comex and banks like JP Morgan, from facing the potential of defaulting on contract performance, which would likely happen if even less than half of the long side of the gold and silver market demanded the delivery of their gold/silver away from the Comex and into private, independent depositories like the ones in Delaware. It's a good bet from this perspective because very little gold has actually been demanded to be delivered off-Comex since gold futures started trading in the mid-1970's.

Back when I first started doing this sector in 2001, it was only the hardest of the hard core goldbugs who preached that the only way to truly invest in gold is to buy the actual physical metal and keep it yourself (with all the necessary safeguards, of course). They won't even invest in mining stocks. As I've watched the landscape evolve over the last 10 years with developments like I describe above, I fully understand the significance of keeping your own metal.

Most of you probably don't remember, or even know at all, that David Einhorn, the proprietor of one of the bigger NYC hedge funds, had announced in July 2009 that his fund had sold all of its GLD stock and replaced it with physical gold that the fund was taking deliver of and was safekeeping in a private storage facility. At the time Einhorn's fund was the largest holder of GLD. It was clear to me at the time that Einhorn had finally read the GLD prospectus from front to back and probably nearly shit his pants when he realized the Ponzi scheme potential created by the SEC-approved document. I doubt any of the funds buying gold from JP Morgan will be as diligent...

My fund partner actually traveled to Delaware a couple of months ago to take inventory of the gold and silver owned by our fund and safekept with a private depository in Delaware. We know where our gold is - how about you?
 
This is quite amazing.  We will have to watch and see how long it takes to deliver the gold to Chavez.  If it takes a long time, there is probably an issue.  If you had thousands of tons of gold, it shouldn't take long to get 100 tons out to the requestor.  If there are multiple claims, or god forbid, not enough gold in house, it will take some time.  If it takes too long, others may get nervous and ask for their gold back.  Sort of a domino effect.  If this truly turned to crisis mode, and the gold isn't there, the price of gold will go to the moon.  If fraud is revealed, then gold will be revalued overnight.  What price that would be is anyone's guess.  I do know that you would want yours before, because after, you may not be able to afford it. 
 
 
Positions
 
GORO  (closed $24.99, down $1.23, average price paid $6) 
 
GORO was still under assault of the shorts as they furiously battled to get the price under $25 on Thursday and Friday.  I think they are in a losing battle but in the short term, anything can happen.
 
Mexus Gold  (closed $.14, down $.03, average price paid, $.22) 
 
As I've pointed out before, this is a VERY thinly traded, highly speculative stock.  This means high volatility is a given.  There has been no news that would have caused the stock to drop this far which means this probably nervous investors selling.  Great time to get in if you have been thinking about it.  For those already in, I realize this is quite nerve racking but that comes with the territory when you buy single stocks.  That's why I recommended risking only money you could afford to lose.  I believe we will see Mexus trending back up soon.
Alexco Resource Corporation -  AXU  (closed $7.33, down .17, recommended at $7.90)  
 
Stocks    (Current status, out, sold on March 18) 
 
Incredibly volatile market and no place to play around with timing.  I'm still out unless I see a huge drop of 700-1000 points. 
 
Physical Gold  (Closed $1840, up $96,  average price paid $395)
 
Physical Silver  (Closed $42.00,  up $2.97,  average price paid $5.31)
 
Finishing this week with one of the coolest (and useful) inventions I've seen, have a great week!