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 January 16, 2011
Issue 131  -  Why I Don't Fear Deflation
 
 
It seems that contrary to nearly all headlines and data, the Fed consistently talks about avoiding deflation.  Now granted, deflation can be a bad thing, however, deflation can be a godsend.  If prices drift down due to better productivity and technological gains, that is a bonus for all.  Your dollars will buy more.  Inflation, on the other hand is the expansion of the money supply and credit.  This leads to rising prices and that is nearly ALWAYS bad.  It is a hidden tax, especially to those on fixed incomes, and it is very difficult to measure.  If I had a choice I would definitely take deflation.  So why is the Fed constantly demonizing deflation?
 
It's a direct threat to the banking system. 
 
It's really that simple.  Without credit, we have no money.  Under our fiat system, without a debtor, there is ZERO money in circulation.  All of our money is lent into existence.  There is nothing backing it. 
 
Therefore, if deflation occurs, the money supply/credit shrink, which means less profit for the banks, and the Fed can't have that.  For this reason, it is virtually assured that deflation won't happen.  QE1 and QE2 will be just the start to preventing any deflation.  It seems that these programs are starting to have an effect and it's not a good one:  (list from GATA and myself)
 
Muni-Meter price increase

City workers visited parking meters yesterday to reprogram higher costs. Muni-Meters south of 86th Street in Manhattan will now require $3 per hour instead of $2.50. Where meters throughout the city cost 25 cents, the allotted time will be 15 minutes instead of 20. The hike will collect more revenue for the city —

Diesel prices start 2011 with another increase
 
Another week, another rise in diesel prices was again the theme, according to data released by the Department of Energy’s Energy Information Administration (EIA) this week.  For the week of January 3, the EIA reported that diesel prices were up 3.7 cents from the week of December 27 to $3.331 per gallon.  This continues a trend of escalating diesel prices, with this week’s gain marking the fifth straight increase for a cumulative 16.9 cent hike, coupled with this most recent hike once again marking a new two-year high for the sixth time in recent weeks.
 
Frontier plans massive FiOS cable TV rate hike

Frontier Communications Corp. plans a massive rate hike for its FiOS cable TV customers in Oregon and Washington, marginalizing the company as a competitor to Comcast.  Rates will rise 46 percent or more for standard cable plans -- the result, Frontier says, of rate hikes by the cable networks.

Chicago cab rides going up 50 cents.
 
Surcharge increase takes effect because of higher gas prices.  Starting Tuesday, add 50 more cents to that initial charge. Sustained high gas prices have triggered an increase in the fuel surcharge, city officials announced Monday.
Universal hikes prices of Annual Passes adding no new benefits.
 
Albemarle to Increase Prices of Clear Brine Fluids

Leading specialty chemicals maker Albemarle Corporation(NYSE: ALB) announced today that it will increase global prices for its line of clear brine fluids. The price increases are effective immediately, or as contracts allow, on the following products:Zinc Bromide / Calcium Bromide/ Fluid Zinc Bromide

Albemarle's clear brine fluids are part of the company's Performance Chemicals division within the Fine Chemistry Services business segment. These products provide high value in oilfield, clean energy, water treatment, and other applications.

Chemtura to Increase Price of Weston(R) Liquid Phosphite Stabilizers

Chemtura Corporation announced that effective Feb. 1, 2011, or as contracts allow, it will raise the price of its Weston(R) liquid phosphite stabilizers by 15 percent. This increase is due to significant and sustained increases in Error! Hyperlink reference not valid., energy, and transportation costs. The increase will apply to all deliveries on or after the effective date.

Time Warner Cable rates to increase in Central New York

SYRACUSE, N.Y. -- Time Warner Cablehas begun notifying customers of rate increases that will boost the local price for standard cable TV by 6.8 percent and add 7.7 percent to the cost of digital cable service. The new rates take effect Feb. 1.

Rates for stand-alone phone service or Internet service are not increasing. But the company has raised the price of most cable TV packages, including packages that bundle TV with phone or Internet.

Ashland Hercules Water Technologies to increase prices for polyacrylamide products

WILMINGTON, DEL. — Ashland Hercules Water Technologies, a commercial unit of Ashland Inc., announced that it will increase prices on Jan. 14 for its portfolio of polyacrylamide products, according to a press release.

This will be a global price increase ranging from 5 to 15 percent, or as contracts allow, the release stated.

Kraton Polymers announces price increases (31.11)

Effective 15-Jan, Asia Pacific will see a general price increase of $125/mt for Kraton SBS, OE SBS, and SIS polymers and compounds.

* Effective 1-Feb, North America will see a general price increase of $110/t, or 5 cpp for Kraton SBS, and OE SBS polymers and compounds.

Blue Shield of California seeks rate hikes of as much as 59% for individuals
 
Insurer says the increases result from fast-rising healthcare costs and other expenses resulting from new healthcare laws. The move comes less then one year after Anthem Blue Cross tried and failed to raise rates as much as 39%

NMDC increases iron ore prices by 5.22% for Jan-Mar quarter - Economic Times

India's largest iron ore miner is reported to be raising iron ore prices by 5.22% due to a rise in iron ore demand and a squeeze in global supply.

Gas prices top $3 a gallon

Gasoline prices are up 30 cents and are likely to continue higher throughout 2011.

Corn, Soybeans Rise to Highest Prices Since 2008 on Smaller U.S. Supplies

Corn and soybean futures rose, extending a rally to the highest prices since July 2008, on signs that inventories will be lower than expected in the U.S., the world’s largest grower and exporter.

Yesterday, the Department of Agriculture cut its estimate on the U.S. corn harvest in 2010 and said inventories will fall to 5.5 percent of consumption, the lowest since 1996. The forecast on soybean output was reduced for the third time since October, slashing reserves to 4.2 percent of projected demand.

 
Those headlines don't exactly scream deflation to me.  How about you?  How about your insurance, is that going down?  No, we are headed for higher prices due to this ridiculous issuance of paper.  So prices will continue to rise as we spend and borrow our way to "prosperity."  Or will we?  Not so fast....
 
 S&P, Moody's Warn On U.S. Credit Rating

LONDON—Two leading credit rating agencies on Thursday cautioned the U.S. on its credit rating, expressing concern over a deteriorating fiscal situation that they say needs correction.

Moody's Investors Service said in a report Thursday that the U.S. will need to reverse an upward trajectory in the debt ratios to support its triple-A rating.

"We have become increasingly clear about the fact that if there are not offsetting measures to reverse the deterioration in negative fundamentals in the U.S., the likelihood of a negative outlook over the next two years will increase," said Sarah Carlson, senior analyst at Moody's.

Bloomberg News

A Wall Street sign stands outside the New York Stock Exchange. S&P and Moody's warned the U.S. about its credit rating and urged the government to do more to arrest a deteriorating fiscal situation.

"The view of markets is that the U.S. will continue to benefit from the exorbitant privilege linked to the U.S. dollar" to fund its deficits, Carol Sirou, head of S&P France, said at a Paris conference Thursday. "But that may change. We can't rule out changing the outlook" on the U.S. sovereign debt rating in the future, she warned. She added the jobless nature of the U.S. recovery was one of the biggest threats to the U.S. economy. "No triple-A rating is forever," she said.

 
"No triple-A rating is forever."  That's the bottom line of this warning.  Actually, nothing is forever on this hunk of rock.  We have lived so long above our means, that eventually the end will play out.  Moody's should have ALREADY lowered our credit rating.  It's just a matter of having the reserve currency that has protracted the inevitable.  It looks like something else is being protracted with all this spending and credit....the stock market:
 
After Nearly Two Years Of Searching, TrimTabs Still Can't Figure Out Who is Buying Stocks
Submitted by Tyler Durden on 12/23/2010 18:05 -0500
A year after Charles Biderman's provocative post first appeared on Zero Hedge, in which he asked just who is doing all the buying of stocks as the money was obviously not coming from retail investors (and came up with one very notable suggestion), today Maria Bartiromo invited the TrimTabs head once again (conveniently in CNBC's lowest rated show, during Christmas Eve eve, at a time when perhaps 5 people would be watching) in an interview which disclosed that after more than a year of searching, Biderman still has no idea who actually buying. In response to Bartiromo's question if the retail investor, who left after the flash crash (thank you SEC), Biderman responds what every Zero Hedger has known for 33 weeks: "Retail investors are not coming back to the US. Those investors that are investing are buying global equities and are buying commodities. We are seeing lots money going into commodity ETF funds: gold, silver..." and the even more unpleasant summation: "individuals have been selling, companies are net selling, insider selling and new offerings are swamping any  buyback and any cash M&A activity since QE 2 was announced. Pension funds and hedge funds don't really have that much cash to invest. So what nobody's asking is what happens when QE 2 stops: if the only buyer is the Fed, and the Fed stops buying, I don't know what is going to happen...When I was on your show a year ago I was saying the same thing: we can't figure out who is doing the buying it has to be the government, and people said I was nuts. Now the government is admitting it is rigging the market." Cue Bartiromo jaw dropping.

As for the simple math of where the money is actually going:

"Money flows come out of income, take home pay of everybody plus money that came from real estate is down about $1 trillion a year. It peaked in the 3rd quarter of 2008, at $7 trillion, that's take home pay for everybody who pays taxes plus the money that came from real estate. It has now bottomed at $5.9 trillion. We are still down $1.1 trillion in money that people have to spend each year, that 16%. And some of the money that is leaving equity markets we think is going to pay bills."

Why these CNBC numbnuts are so disbelieving that the Fed  is buying stocks is a mystery for the ages.  I guess they just don't want to know.  If looking at public records and money flows doesn't show what's happening, then it must be someone with gigantic secret powers. There are only so many suspects.  Once you realize that the Fed has announced that the stock market greatly affects consumers, and we MUST have spending to keep the game going, then it's pretty easy to figure things out.
 
Since the money must continue to flow, that means that commodities will continue to outperform.  Sure, there will be ebbs and flows, but the trend is up.  Which leads back to the best commodities, silver and gold.  This past week I issued a rare email alert about a possible raid on the gold and silver markets.  Here is the post from the Yahoo JPMorgan message board which prompted me:
 
This is what I am hearing from your former traders (who made "very interesting career decisions"). Well it seems that they are on to a new scheme to corner the Comex and drive the price of silver up $10 to $15 dollars in a matter of weeks.

The strategy is as follows. We know that Comex only has 105 million ounces of silver of which only 50 million ounces are availabe for delivery. (I personally don't believe the Comex numbers are anywhere near that high, but that is neither here nor there for now.) Well, all it would take is 10,000 contracts on the Comex to buy up all the "available silver" at the Comex and 20,000 contracts to deplete it completely. The current front month March OI is north of 78,000.

Watch the OI closely. Blythe's former traders are advising major hedgefunds and billioniare investors to buy up as many contracts as possible as March 1 approaches and deposit the cash needed to stand for delivery for the month of March. The purpose is not necessarily to bust the Comex but to force the Comex to pay a premium (some as much as 30 percent) for cash settlement. Think about it. If a group of hedgefund gets together and bankroll $1 billion, they can buy more than 30 million ounces of silver. Of course, the contract sellers like The Morgue cant deliver the silver so a cash settlement is the only recourse. So what's wrong with $200 million in profit on a $1 billion investment that takes less than 4 weeks total?

Guess what Blythe? Your former traders are advising everyone they know to put on this trade come the first week of February. Is this what happened in the Decemeber contracts? Is this why silver went from $22 on September 30 to $29 by December 1? How much do you think silver will spike in February as we approach March 1? The traders think silver will be north of $45. Heck it went over $9 as we approached December and everyone who got a pay off in terms of a premium cash settlement will be back for more. And they are all gonna be bringing friends to partake in the bounty.

Your former traders are telling everyone who would listen that all they need to do is purchase a huge amount of March contracts near the end of February and stand for delivery and they will all make 20 percent in a matter of days. Is this what you are hearing Blythe? If so, shouldnt you let the price of silver move up so that you can get some physical to deliver before March 1?
 
This is being written "to" Blythe Masters, head of global commodities at JP Morgan.  She is in charge of these gigantic gold and silver shorts that JP owns.  This post is heads up that the "boys" have a plan to rake these shorts over the coals.  They are planning to go long silver and then ask for delivery.  They did this in December and averaged a cash settlement of 20% over spot price NOT to take delivery.  If you're willing to give that much of a premium over spot to not take delivery, it's a pretty good chance you don't have the metal.  The traders are going to try this again at the end of February and ask for March delivery.  Their hope, is to receive an even larger premium. 
 
There is a warning though, and why I sent out an email about not buying gold or silver right now.  There is another rumor from the same group that JP Morgan is going attack silver via the gold market.  This could be a violent move, perhaps taking silver to the low twenties.  I would put off any purchases until the dust settles.  If silver goes through $24, I would consider it safe to start purchasing again.  It might go lower but that would be a great price and in the long run will pay off handsomely. 
 
It really doesn't matter that much when you buy however, as the metals are destined to go higher.  I found another chart this past week that shows just how far away from a top in silver we actually are.  (from Zeal)
 
 
This is a chart of the price of silver with an inflation adjusted trace.  The red line is the official price, while the blue line shows what the price is in today's dollars.  The peak was not $50, but $135.  Keep in mind this is using the official inflation rates which are widely believed to be understated.  John Williams at Shadowstats, keeps track of the older methodologies for the CPI and says silver's old high is actually over $300 an ounce.  That's ten times higher than now.  I believe we see that eclipsed.  Only one more thing to say:  you NEED silver, make sure you have some.
 
 
Positions
 
Goro  (closed at $27.30, up $.88, average price paid, $6.10) 
 
Goro had a pretty exciting week.  They actually rang the opening bell at the NYSE.  Afterwards, CEO Bill Reid appeared on CNBC and was interviewed by Mark Haines.  A video of this interview can be seen here.  GORO was also featured in an article:
 
Gold: Cost of Production
JOHN CARNEY
Posted By: Lori Spechler | Senior Editor, CNBC
CNBC.com
| 13 Jan 2011 | 11:44 AM ET

The CEO of AngloGold Ashanti surprised even Joe Kernen this morning with his comment that it cost “more than $1000 an ounce across the industry to produce an ounce of gold.” Surprised me, too so I did a little research.

John Doody, founder of the newsletter “Gold Stock Analyst” broke down the cost per ounce for AngloGold Ashanti in Q3, 2010:

Cash cost: $643

Depreciation: $157

Other costs: $166

Total: $966 per ounce

“Other costs” include exploration, management, taxes, interest—$166 was the cost in the third quarter of 2010 and John says, “Mark (Cutifani) knows what they are forecasting for 2011, $1,000/oz is probably a good number”.

The industry average cash cost he says was $542 per ounce in 2010 plus all the other costs or, about $100 an ounce less than AngloGold. Even with gold near $1400 an ounce, margins are still tight.

What are the highest cost mines? John says Harmony Gold and DRDGold , both South African mines, with cash costs of about $1,000 per ounce, plus the other costs.

Lowest cost mines? Gold Resource is projecting cash cost of “zero” in 2011 on production of 90,000 ounces. And Yamana Gold , which John says produced over 1 million ounces in 2010 at a cash cost of $102 per ounce making it the lowest cost, large producer.    

Both Gold Resource and Yamana get their low cash costs due to big by-product credits loosely defined…as income from metal production other than gold.

So, while the AngloGold Ashanti CEO is patting himself on the back for taking off its forward hedge book, maybe its time to consider some downside protection and get long gold "puts".

 
As you can read there, GORO has a HUGE advantage over most gold companies when it comes to cost per ounce.  This is being rewarded and I believe will continue to be rewarded.
 
Mexus Gold  (closed .25, down 1 cent, average price paid, $0.20)
 
Other stocks I'd buy  GG, NEM, RBY, SLW, PAAS, VLCCF, PVX, DNN, CJJ, and TGLDX.   
 
I'm closing this week with a video that shows the utter failure that is our border protection.  Further proof that the powers that be DON'T WANT to stop illegals.  Have a great week!