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TFN eNews 11/18/2009: How long will gold go up? The answer may surprise you!

Published via e-mail broadcast on November 18, 2009

In today’s TFN eNews:

* The secret of the gold bull market

* Silver lining — set your stop losses!

* Members’ Only Update

Dear TFN eNews reader,

Yesterday, the local bank sent the renewal statement for one of my son’s Certificate of Deposit. I burst out laughing when I saw the yield:

The bank is paying my boy the princely reward of 0.75% to park his money with them.

75 cents for every $100… $7.50 for every $1,000… or $22.46 for the entire year.

The boy — a born entrepreneur — made more money selling a didgeridoo he made from a piece of bamboo pilfered from my neighbor’s back yard!

This yield is worse than anything offered after 9/11. And I thought that stunk!

At 7.5 cents on the dollar, it’s hard to convince an adult — let alone a teenager — of the rewards of saving. With yields like this, it takes two million bucks in principal to generate a $15,000 income a year. Which means that today’s retirees receiving an annual pension of just $30,000 from a state, government, or private company are basically in the same position as millionaires who’ve worked and scrimped a lifetime to accumulate a nest egg of $4 million.

No wonder people are pushing into government jobs!

How does this tie in with our view on the markets? Let me take a step back…

*** You see, just yesterday, my colleague Bill Bonner asked aloud “Where is the End for Gold?”

He pondered: “We remember the dollar at the exact same level… was it a year ago… more? And it’s been at that same level, more or less, all the while that gold has gone up more than 10%. It’s not the fall of the dollar that is driving the gold market, in other words. It’s something else… it’s the fall of all paper currencies. For when the dollar goes down, so do the rest of them — more or less.

“No nation wants its currency to rise too much against the greenback. Americans are still the world’s biggest spenders. They spend dollars… not rubles… not euros… not zlotys.”

Bill may be on to something. Indeed, the U.S. dollar has been valued at much lower levels than now during the Bush Boom. (I distinctly remember a double take paying for a day ticket Berlin last year… calculating I just blew $8.15 on lunch… at an exchange rate of $1.63 per euro!) Gold at the same time traded for $200 less per once… even though the dollar was worth less than it is now.

What has changed?

Hope and Change happened: The United States economy has now officially turned Japanese. Like their Japanese counterparts back in the early 1990’s, U.S. banks are sitting on huge non-performing loans that political expediency keeps them from liquidating and expanding their lending. Budget deficits and new debt creation through the U.S. government as a percentage of GDP have exceeded those of debt-happy Japan! The U.S. government is in the process of jacking up the marginal tax rates even above Japan’s extortionist taxation levels. All of this translates into depressed domestic consumer demand. Naturally, the focus shifts to exports. Which means keeping the respective currency as unattractive and barren as possible.

That’s where my son’s CD statement comes in:

The Bank of Japan’s zero-interest policy is now matched by the Federal Reserve. Holding dollars or yen simply doesn’t pay: The rate of inflation vs. the rate of return has turned both currencies into hot potatoes. By holding them, you actually lose money. And the longer you hold them in the face of debt-fueled inflation, the higher your prospective loss will be.

Which is why money is flowing out of the dollar into stocks and into commodities. We call this the Commodities Carry Trade.

Gold is an asset notorious for not generating returns other than speculative gains. It doesn’t pay interest or dividends. But at this point, neither does the U.S. dollar. Or the yen. Or the euro, pound sterling, Icelandic krona:

The comparative opportunity cost of holding gold has been eliminated!

Plus, the cash flows out of the dollar have created an asset bubble that will keep inflating!

How long will this last?

As long as the Federal Reserve keep punishing dollar savers with non-existing interest rates! That may be at least another year…

Today, Federal Reserve Bank of St. Louis President James Bullard said the bank may not start raising rates until early 2012 — as long as inflation expectations are “stable” and unemployment fails to decline.

As businesses are continuing to head into bankruptcy due to collapsing demand, feeding a vicious cycle of unemployment and further bankruptcies, the gold bubble will keep inflating.

Not because the world is abandoning “fiat currencies”… but because holding dollars is a losing game now — engineered and maintained by the U.S. government!

*** So far, we’ve been rubbing our hands as gold went up. Gold bugs may be up twenty percent for the year. But our silver stocks are beating that yield by multiples!

In case you didn’t notice, our Hot Stock Confidential silver picks have been soaring over the past couple of days. A good thing, unless you have to make a decision on how to proceed from here!

Our core pick Silver Wheaton (NYSE:SLW) is now up 66% over our buying range. Laura Cadden’s Silvercorp. (NYSE:SVM) has exceeded her original profit horizon of “20% in 4 months” by ringing in at 36% as I write.

In the medium to long term, we see only upside for gold and other precious metals. In the short term, there’s lots of potential for pullbacks.

Establishing stop losses in situations like this is a matter of “damned if you do, damned if you don’t”. It works like lines at a supermarket checkout: The one you chose inevitably slows down to a crawl the minute you line up.

The moment you set a stop loss, it usually gets triggered.

We’re going to take this risk — but allow ourselves just enough rope to hang ourselves with, basing our stop loss on the maximum recommended entry price of the original recommendation.

For SLW (”buy below $10″), we recommend you establish a 50% stop loss at $15…

For SVM (”buy under $5.50″), we recommend you establish a 30% stop loss at $7.15… locking in double-digit gainers #70 and #71.

***Last Friday, I requested you send me a quick “postcard” of how the economic recovery is playing out where you live. Here are more actualities…

TFN eNews reader Donna from South Florida writes:

“What’s it like here? None of my girlfriends will wear jewelry anymore. Everything is in safes. Everyone is scared to death to walk outside with anything valuable for fear of their lives. West of here, in Coral Springs, there are whole neighborhoods of empty homes that have been totally vandalized and are sitting there just rotting. Mold, spiders and rats are the occupiers now. Once were very nice middle class neighborhoods. Those places were sold out to people who had no down payments and should have never had them in the first place. There are no stoves or appliances left, no lighting or fans. Carpets and anything of value is gone. Just shells are left.

“Property taxes here are still crazy, lower each year but far from where they should be. Crazy hurricane insurance still exists but is now lower than 2 years ago. There are for sale signs and rent signs as far as the eye can see almost anywhere you drive. Las Olas Blvd, a very prominent area, has transformed. Many stores that we used to know and love are gone now. The top-line restaurants are down about 35% , that’s what they are admitting to. Weekends seem to be still good. My neighbors and friends are scared of crime and most now have guns. They are raving mad at the Gov and fear the Gov. From builders to retailers, no-one trust the Gov. It is just about all any of us talk about. Many are leaving to other countries and have already moved their monies. Others are packing now to leave for good. People really fear this Gov.

“Some local missions that feed the poor would never take cooked food or food that had been opened. My daughter said they are even taking peanut butter even if it is only half full. They just need anything they can get. It is that bad. I don’t care where you go here in South Florida, people are all talking about the Government. You can’t even go to dinner and have a relaxing evening. I think Americans have had it. They are just in the initial stages of starting to stand up. We do not want our government. taxing us to death and taking our hard-earned money to distribute it to those who are sitting back just waiting for more handouts. Enough is enough.”

There’s more in our mailbag — and more in a new little column below we call “Insider report”. Please send us your own update of how reality looks like where you live: Email me at support [at] todaysfinancialnews [dot] com!

*** SPECIAL OFFER: Northeastern University’s Master of Science in Finance:

Fully online, 16 months, AACSB accredited. Visit: http://onlinemsf.neu.edu/finance-online

*** Insider Report:

TFN eNews readers report on the actualities of their economic environment:

“My income is largely based on the well-being of the RV Park business. Vacancy rates in general are up substantially here in Northern California. The flip side of this, at least for us, is that many of our spaces are now filled with long-term tenants who are now living in the big fifth wheel trailer they bought with the money from refinancing their homes. For some, it was a choice, but for most, it was not — they have lost their house, but still have the RV and big truck to pull it.” — TFN eNews Reader Mike A. in the San Francisco Bay area

Become a TFN eNews contributor! Please send us your own update of how reality looks like where you live: Email me at support [at] todaysfinancialnews [dot] com!

*** Members’ Only Update:

Gold futures rose to record high of US$1,151 an ounce today, as stronger-than-expected U.S. consumer prices stirred inflation worries.

At today’s levels, that means that the gold reserves of this junior Canadian gold miner are worth a whopping $460.4 million! Let’s put that into the fuzzy math of financial newsletter marketers: With 333.42 million shares outstanding, $1.70 currently buys you 1.38 ounces or $1,589 worth of that gold!

As gold prices keep moving up in the great game we call the Commodities Carry Trade, this U.S.-traded stock could snag you a cool 30% gain before New Year’s.

Hot Stock Confidential members will be receiving this Hot Stock Pick of the week tomorrow before noon. We hope you’ll be one of them. Join up right here: https://web-purchases.com/HSC/EHSCK904/location.html

*** Quote of the Day:

“A wise and frugal government, which shall leave men free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned — this is the sum of good government.” —Thomas Jefferson

Today’s Top 3 Financial News Stories:

NPR.org– Housing Starts Drop 10.6 Percent In October “Housing starts dropped 10.6 percent in October, as building permits, an indicator of future housing activity, fell 4 percent. In a separate report, consumer prices edged up 0.3 percent in October as energy and new car prices both advanced.”

Telegraph.co.uk — China questions costs of U.S. healthcare reform “Mr Bernanke stressed the dollar will remain ’strong’ and continue as a ’source of global financial stability’. But his comments, part of a speech in New York, were not enough to stop the dollar’s fall, easing 0.6pc against a basket of major currencies, allowing sterling to rise by more than a cent to $1.6830.”

Bloomberg.com — Consumer Prices in U.S. Increased 0.3% in October “The cost of living in the U.S. rose more than forecast in October as Americans paid more for fuel, while so-called core prices held at a pace that supports the Federal Reserve’s forecast for tame inflation.”

Cordially yours,

J. Christoph Amberger

Executive Publisher, TodaysFinancialNews.com

P. S. Yes, above I was complaining about the lousy yields on U.S. bank CDs. Of course, I know better: Your general, run-of-the-mill banks pay lousy rates. If you’re not convinced that your money may serve you better invested in the stock markets, I can recommend our friends at EverBank for offering some of the best yields on CDs or even just checking accounts. Check them out — and tell them TFN sent you: http://www.everbank.com/001CurrencyCDIndexNewWorldEnergy.aspx?referID=12250.

Next Article: Lock in gains for Cytori Therapeautics (CYTX)

Posted by J. Christoph Amberger · Filed Under TFN eNews

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