Over the past year, I have spoken with numerous business and financial reporters in the U.S. and Canada. These reporters range from employees of small-town newspapers to my much larger hometown chronicle, the Pittsburgh Post-Gazette. I have spoken with representatives of industry trade publications like Oil & Gas Journal, as well as reporters from the Vancouver Sun, Canada’s The Globe & Mail, the Los Angeles Times, the Associated Press and the Dow Jones Newswires. In addition to the print media, I have also been interviewed on many different radio programs.

Part of a recent interview with an Orlando, Florida radio station focused on the immense losses announced by Merrill Lynch and Citigroup, and the departures of the top managers of both firms. Merrill wrote down over $8 billion of bad financial paper, leading to a quarterly loss of nearly $3 billion. And Citigroup has massive losses that may be in the vicinity of $13 billion or more. These are mind-boggling numbers, yet my view is that we are just seeing the tip of a few icebergs.

It seems that over the past few years, much of the financial industry loaded up on bad debt instruments. I will not even dignify this rotten paper by calling it some sort of “investment,” because there was and is essentially nothing to back it up. There are entire portfolios filled with subprime loans, initiated via “no documentation” loans against over-appraised buildings on the far side of the railroad tracks. In other words, these are worthless loans that will never see a dime of repayment. In many cases, these loans are evidence of economic crimes.

When the banks and investment houses acquired these bad books of business, the risk models that they used were pure guesswork. In the real world, engineering has made complicated structures like bridges and skyscrapers safer over time. But the so-called modern “financial engineering” has done nothing of the sort in the economic world. It all goes to show that just because the human mind can come up with an idea, it does not mean that people should act on it, let alone back it with their funds.

At this point, it is all but impossible to value much of what the financial houses have on their books. So the write-downs are just beginning. I believe that there are greater losses lurking in the shadows for both Merrill and Citigroup, and for many other banks and investment houses around the world. Several well-known banks in Germany, for example, are on the brink of disastrous write-downs. It is just a matter of time before these losses become public.

While on the air in Orlando, the interviewer and I cracked a few jokes about how Merrill Lynch’s Stan O’Neal is receiving a $160 million severance package for departing in the wake of his troubled tenure. This huge sum is surely far more than he deserves. After all, Mr. O’Neal took some big paydays over the past few years when things looked good at Merrill and he was firing 26,000 people to juice up the bottom line. So why does he get the big bucks again, on the way out the door, now that his ship has hit the rocks? Good question.

Then the interviewer asked what I anticipate for the U.S. economy and how the individual investor should protect himself from the coming turmoil. My reply was that I believe that the U.S. dollar is in a long state of decline. This is going to be an ongoing tragedy because so many people in the U.S. and around the world will be caught in the riptide as the value of the dollar washes away.

Do you remember when you would walk into a store and the owner might have the first dollar he ever earned in a frame, hanging on the wall behind the counter? People were proud of their money and trusted it as a long-term store of value. Not any more. Yet most people in the U.S. know only the dollar and understand only the dollar and their savings and investments are almost entirely in the dollar. So what happens when the value of the dollar just disintegrates? It is painful to think of the hardship that is coming down the road.

No one really knows how the decline of the dollar will play out. There is no modern precedent for what is about to occur as the world’s reserve currency evaporates in value.

Literally billions of people rely upon the U.S. dollar as the economic rock that holds up the foundations of the world economy. Yet that rock is turning into loose sand. How does one save, let alone invest, in a world where the value of the dollar is in irreversible decline? A declining dollar is the same as the destruction of capital.

My advice is to load up on gold and other precious metals and mining shares in companies that control real ore in the ground. While you are at it, also go for the companies that own or control real energy reserves, such as oil and gas, coal, uranium and renewable energy systems.

As if on cue, last month, the British newspaper The Independent launched a story with these words:

“A new phase in the credit crunch, one of ‘$1 trillion losses,’ seems to be dawning. The crisis at Citigroup and renewed doubts about some of the world’s leading banks disquieted stock markets on both sides of the Atlantic recently, with the fractious mood set to continue.”

So there are a trillion dollars of losses yet to be booked…and a company the size of Citigroup does not have the capital to manage itself as an ongoing entity…and the prices for gold and oil are skyrocketing as the value of the dollar declines.

My advice is to protect yourselves, dear readers. There are wolves at the door.

Until we meet again,
Byron W. King

December 11, 2007

More Dollar Doom was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

In fact, not only would gold or silver probably not enter the conversation, chances are most people wouldn’t be able to name a single gold or silver mining company. That’s because even though gold has almost tripled and miners have risen over 600% since 2000, most people haven’t yet realized that precious metals have been outperforming the general market since then by leaps and bounds.

However, that may be about to change. The Fed’s decision to lower the fed funds rate by a larger than expected 50 basis points kicked the dollar index down to a record low. The euro traded over 1.40 per dollar for the first time, and the Canadian dollar reached parity against the U.S. dollar for the first time in over 30 years. These events reached the front page around the country.

This time, the dollar’s decline coincided with a sharp rise in public awareness about the weakening greenback. As a result, the precious metals bull market may be entering a new phase. When the general public becomes more aware of the dollar’s bleak future, more and more people will see charts comparing the price of gold and the U.S. dollar index and ask themselves why they haven’t been invested in gold:

Such a shift in public awareness is usually the ingredient that changes a stealth bull market — like the one we’ve seen so far in gold — into a raging bull market.

Every time people listen to the news, they are reminded of how stocks perform. They are reminded of interest rates and the bond market every time they get their credit card statement or check to see if it they should refinance their mortgage. They are reminded of the bull market in energy every time they fill up their gas tank. But unless they collect coins as a hobby, most people have very little regular contact with the price of gold. With the exception of a brief period at the peak in early 2006, the precious metals rally has garnered very little investor interest.

Since May 2006, fund flows out of precious metal stock funds have been huge, even though the price of gold remained near its peak. This suggests that even the investors who are aware of gold remain more interested in trading gold stocks than holding them for the long run.

All the sentiment signs suggest that we have a long way to go before gold is considered a must-have, long-term buy-and-hold investment. Such sentiment extremes are the stage at which all long-term bull markets end.

Technology stocks reached that pinnacle of sentiment in 1999-2000, and real estate reached that point in 2005-2006. The precious metals bull market may now just be at the dawn of its recognition by the public, which makes it unlikely gold is anywhere near an end to its bull trend.

The Amex Gold Miners Index consists of the 37 largest gold mining companies in the world. Over the past seven years, it has stair-stepped higher from a low at 180 in late 2000 to an intraday high at 1,266 in May 2006 — for a total gain of 603%. You can see the periodic consolidations outlined in black on the chart. Since May 2006, it has consolidated yet again, laying the groundwork for another sprint higher:

I have been keeping a sharp eye on miners ever since my paid service, The Survival Report, was launched in April. While I have anticipated a resumption of the long-term bullish trend, I’ve also been mindful that the correction from May 2006 was ongoing and could still produce more downside before it was completed. That downside came when the general market sold off in July and August and the miners were pulled down with it. The Amex Miners Index fell from a July high of 1,175 to an August low at 890 — a loss of 24% in one month.

However, that sharp loss in mining stocks was not accompanied by a decline in gold, and as soon as the general market stabilized, the miners quickly rebounded. The recovery was further aided by the Fed’s decision to lower the fed funds rate by 50 basis points, which led to a broad rally in miners and a breakout in gold above its May 2006 high.

The sharp sell-off in August appears to have been the washout that was needed to end the correction from May 2006, and the miners look to have now resumed their long-term uptrend. This means that mining stocks may just be the way to play this bull market.

Regards,
Mish

December 7, 2007

Mining Profits from the Gold Bull was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

AS THE DOLLAR CONTINUES TO LOSE FAVOR around the world, we may have seen the biggest decline in the popularity of the once universal currency. As reported in several different news publications over the past few weeks, rap star Jay-Z has recently showed fans that he no longer believes in the almighty dollar, either.

In the video for “Blue Magic,” the lead single off his new album, American Gangster, Jay-Z is seen thumbing through stacks of 500-euro notes. That’s what it has now come to — euros are cool; dollars are not. Jay-Z told us so, and now we must listen.

It didn’t take long for the dollar’s slide to reach the level of pop culture. But just as foreign governments and high-powered investors have turned their attention away from the dollar, so too has this powerful rap mogul told the world that the real money is the euro. Remember, hip-hop had previously told us that it was “all about the Benjamins.”

Jay-Z does not specifically come out and denounce the dollar in the lyrics of the song, but the imagery cannot be coincidence. Unlike some other videos Jay-Z has come out with in the past, showing him in exotic locales flaunting the native flair, this video takes place in the heart of Manhattan. American dollars are still the unit of exchange in New York, but you wouldn’t know that from this video. It is there that the superstar, who has made himself plenty of dollars over the past decade, shows the world that he now has no need for them.

If you think that Jay-Z’s endorsement of the euro over the dollar should have no serious effect on the world, think again. Jay-Z, as well as other rap stars, has shown that his influence can be very important when it comes to the popularity of one particular product. This is also true outside of the hip-hop community, as it has recently bled into other products.

Beginning with his 1996 debut album Reasonable Doubt, Jay-Z has boasted about his affinity for the expensive, luxurious Cristal brand of champagne. Cristal, a product of Louis Roederer Champagne, has existed since the time of Alexander II of Russia. The champagne has always been considered a high-end luxury. It was not, however, until rap stars, led by Jay-Z, began endorsing the bubbly relentlessly that it became a household name. This happened until last year, when the managing director of the company, Frederic Rouzaud made remarks in an interview that Jay-Z believed to be racist. Rouzaud came across as suggesting that the attention his successful product has received from the hip-hop community was unwanted.

Jay-Z, who is not only a rapper but also a successful nightclub owner, decided to launch a boycott of the champagne he once adored. Six months later, in the video for his first new single in three years, “Show Me What You Got,” we see Jay-Z with a gold bottle of champagne that is anything but Cristal. The bottle he now seemed to be endorsing was Armand de Brignac. This champagne, also referred to as “Ace of Spades,” due to the logo on the bottle, was previously an almost unheard-of commodity.

“H-O-V-A/Gold bottles of that Ace of Spades,” the rapper exclaims in the song’s lyrics.

That quote, along with his physical endorsement of the product in the video prompted Armand de Brignac to launch an official Web site and gladly take credit for the champagne that has now been embraced by the hip-hop community. The sales of Ace of Spades following Jay-Z’s endorsement went from 6,000 bottles annually to an estimated 200,000 bottles. That shows the amazing power that one influential man can have.

Does this mean that millions of American kids who idolize Jay-Z will now be asking that Abercrombie & Fitch pay them in euros instead of dollars? Probably not. But it does show the remarkable way that the world operates out of trends. We’ve already heard the stories about Gisele Bundchen requesting to be paid in euros, or Bette Midler being paid in South African gold coins in the 1970s. What’s next?

Many savvy investors have already turned to investing in other foreign currencies and taking their money out of the dollar. Even billionaire Warren Buffett has advised investing in companies that pay in foreign currencies. As Jay-Z influences people on how to dress and what to drink, Warren Buffett is the trendsetter on how to invest wisely and make money.

People may not want to take advice from Jay-Z on how to plan their retirement, but his willingness to show the euro as a currency associated with wealth and prestige may be a sign of things to come. Since the beginning of this year the dollar has been living a hard-knock life, while the euro appears to be big pimpin’.

Until next time,
Jamie Ellis

November 28, 2007

Money Ain’t a Thang was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

WITH ALL EYES NOW SQUINTING at the fast-vanishing U.S. currency, it was only ever a question of “when” — not “if” — the bold and the beautiful would start rejecting the misshapen dollar.

The imperial greenback is just sooooo 20th century, darling!

“We don’t know what will happen to the dollar,” as Patricia Bundchen, sister and manager of Gisele, the statuesque and shapely Brazilian supermodel, puts it. “Contracts starting now are more attractive in euros.”

Not so fast, counters her agent at IMG Models in New York. “ Gisele does have contracts in dollars, [but] when she works in Europe, she gets paid in euros. When she works in the U.S., she gets paid in dollars…when she works in Brazil, she gets paid in reals.”

Whatever hair-pulling and hissing is going on among her people behind the catwalk, the former squeeze of Leonardo DiCaprio has now asked for euros, not dollars, in payment for promoting Dolce & Gabbana’s new perfume, The One.

Being based in Legnano, Italy, D&G no doubt had plenty of euros on hand. But Procter & Gamble? According to Veja — Brazil’s best-selling weekly magazine — Gisele has now demanded euros instead of dollars in her new contract to promote P&G’s Pantene shampoos and conditioners.

And who can blame her? In the year up to June, Gisele made an income worth $30 million to defend. If she kept that sum in dollars, then this Beauty would have already lost 8.3% of her money — in four short months — to the lumbering Beast…

Rejecting the dollar isn’t a new gambit for headline-hungry celebrities, of course.

The last time the U.S. dollar sank beneath the weight of low-yielding Treasury bonds, soaring oil prices and a looming recession, Bette Midler — the comedienne and singer — famously demanded that her $600,000 fee for a European tour in 1978 be paid in South African gold coins.

Smart move! Eighteen months later, that little mountain of Krugerrands would have been worth $2.1 million. But did Ms. Midler show more brains…if not beauty…than today’s ex-dollar superstar?

Gisele Bundchen actually seems keen to quit the U.S. altogether. (Maybe The Enquirer should tell her current beau, Tom Brady of the New England Patriots…) She cut the asking price of her New York penthouse just last weekend. Now her West Village apartment, with views of the Hudson thrown in for free, is on the market for $9.2 million — down from $10.9 million previously — according to the New York Post.

“In Tribeca,” the rag goes on, “Russian supermodel Natalia Vodianova has discounted her alluring 5,000-square-foot penthouse from $11 million to $9.9 million.”

Are the beautiful people turning bearish en masse on both the greenback and U.S. real estate? They might want to show the brains of Bette Midler…instead of the tanned midriff of Gisele…if so.

Since the dollar reached parity with the euro, for instance, exactly five years ago this week, gold priced in euros has risen by nearly 70%.

Yes, that pales next to the gold price in dollars…now more than 140% higher from this time in 2002.

And yes, “Gold is the most reliable performer as a hedge against dollar movements,” as Rhona O’Connell found in a research report for the World Gold Council last month. She compared the performance of various commodities — everything from zinc, cattle, heating oil and palladium to sugar — with the dollar’s changing fortunes on the currency market.

O’Connell’s yardstick for the U.S. dollar was an index of the world’s next five most important currencies. Gold bullion mirrored the changes in this dollar index more closely than any other physical commodity from January 2005-July 2007.

But gold is delivering much more than simply a dollar hedge. Given the political and economic barriers to raising interest rates anywhere in the world right now, you might wonder if it’s going to keep on giving, too.

Gold, so far in November, has also broken out against a whole series of other major currencies besides the U.S. dollar. Gold priced in euros just broke the top of May 2006, equal to 562 euros per ounce. The Japanese yen is trading at a 23-year low in terms of bullion. The Australian dollar — caught between being a “commodity currency” and a debt-fuelled Anglo-Saxon basket case — has just sunk to new record lows against gold.

And for British investors, gold has never been so valuable…

What to make of it? Here at BullionVault, we’ve been trying to figure out just what investors buying gold today can expect it to do for them.

Gold itself makes no promises, remember. Paying no yield or interest — and with little-to-no industrial usage, compared with silver or platinum — gold really doesn’t have very much to recommend it. Not besides the verdict of history.

The ultimate store of value and wealth for more than 3,000 years, gold is now drawing in a flood of investment cash from private individuals across the world. The proof? It’s moving fast against ALL of the world’s major currencies, not just the dollar.

We blame central bankers. And government wonks. And those investment banks that created a flood of “near money” assets at a record clip when they spied the mark of low-income homebuyers with no hope of ever repaying a mortgage.

“[Bank of England governor] Mervyn King’s effective guarantee of the liabilities of the British banking system is much more significant than declining South African gold production,” as John Hathaway of Tocqueville Asset Management puts it.

We’d add the Bernanke put, too…plus the Bank of Japan’s zero-rate madness…the Swiss National Bank’s sub-3% rates…and the eurozone’s basic political fault lines.

If you want to join Gisele, then buy euros. Thrown in for free, you’ll get the yawning gaps between Germany’s economy and the overspent, over-indebted economies of Italy, Greece, Spain, Ireland and Portugal.

If you don’t trust central bankers or government paper, on the other hand, then make like Bette Midler. Just don’t pay the extortionary dealing charges and insurance fees that buying a pile of Krugerrands will cost you.

Regards,
Adrian Ash

November 14, 2007

Beauty and the Beast? Gisele vs. Bette was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.