Bearish on Gold and Silver? What Fools these Mortals Be!

I'm having difficulty dealing with current market sentiment for gold and silver. The idiot-box keeps pounding into my head that gold and silver are sensitive to downturns in the global economy, and precious metals are not a safe harbor from the storm during good times or bad. What a frightening thought that is, when we consider that from 1980-2000, as the economy roared upwards, and the latest price quote for Microsoft or Intel was the price for peace of mind, gold and silver saw bear-market declines of 69% and 91%. These idiot-box "experts" must be expecting even worse declines in gold and silver as the global bond and stock markets melt-down sometime in the next few years.

Maybe the real problem with gold and silver isn't that the economy goes up or down, but as the Federal Reserve approaches its centennial, there still is an economy? The problem with that theory is that it wasn't until 2001, after the NASDAQ bubble crashed, and after the "Masters-of-the-Universe" began making $250K sub-prime mortgages to the chronically unemployed, that gold and silver finally responded positively to Washington's bubble economics. We should also note that it wasn't until 2000 when gold and silver began their bull markets, as Congress was inflating the mortgage bubble (2001-07), though the precious metals continued to appreciate long after the mortgage bubble crashed (2008-09).

That would suggest that gold and silver have appreciated for the past eleven years

* BECAUSE *

the "policy makers" have grossly overburdened the shrinking global economy with backbreaking levels of unserviceable debt, and insanely inflated the global-money supply to such extremes that global currencies can no longer be said to be backed by faith in sovereign credit, but by the economic ignorance of the masses.

Looking at the world in this light, it makes perfect sense to believe that gold and silver * MUST * continue appreciating as the US Federal Reserve and European Central Bank continue bailing out the select but powerful few, at the expense of the many. But since this is undoubtedly true, why on earth is my idiot-box telling me to sell gold and silver, and buy financial stocks and bonds? Yes indeed: why?

Well one thing is for sure, the economy is seeing difficult times, as recorded in Barron's Pulse of the Economy. Even government statistics have to deal with the fact that the economy has not returned to its pre 2007-09 Credit Crisis levels. In fact, just looking at the chart below informs us that economic activity has not even returned to the levels of the 1990s high-tech bubble.

Ah, but I hear that housing is on the rebound! In fact, housing starts are up 41% over the past three years. That sounds mighty impressive coming from the talking heads in the idiot-box, until one examines the past forty two years of data in the chart below. The fact is, the US housing industry was hamstrung, and will continue to be crippled for the next ten years, or more, because Congress with its Clinton era "affordable housing legislation" created unlimited inflationary funding in the mortgage market. If the United States didn't have a Federal election every other year, I suspect housing prices would have already declined by more than 50%. It's no secret that the banking system is holding years of supply off the market for fear of what this inventory would do to housing prices, and in the process, preventing the American people from having affordable housing.

The media and the government are not the only entities to supply defective economic information to a gullible public. On December 21, 2011 the National Association of Realtors announced (in an article deceptively titled "Existing-Home Sales Continue to Climb in November") that they were revising their figures to show that 3.54 million existing home sales since 2007 never took place! That's right, folks. You thought the real estate market was bad already, how about now with the "benchmark revisions" the NAR was so kind to make promptly, years after the fact so as not to panic the public with the truth.

Courtesy of John Williams of Shadowstats.com and Jim Sinclair:

"The National Association of Realtors (NAR) corrected its estimates of existing home sales today (December 21st), and 3.54 million previously reported home sales vanished, in revision, since January 2007. Put in perspective, the amount of sales wiped out was the total amount of seasonally-adjusted existing home sales that previously had been reported in 2011, through October. Post-2006, 14.3% of existing home sales were eliminated, with sales in the Northeast taking a 30.9% hit, followed by a 14.2% reduction in the Midwest, 12.3% loss in the South and 5.3% loss in the West.

In revealing recognized reporting problems, the NAR has addressed issues not commonly taken on by trade groups that report industry data, or by the federal government. Where the nature of some of the problems (overly optimistic underlying assumptions) are common with many government series, including payroll employment and retail sales, the government would do well to overhaul much of its reporting.

Reflecting adjustments for some double-counting, mis-estimates of homes for sale by owner, and some improper inclusion of new home sales, the revisions were structured in such a way as to preserve as much as possible of the previously reported month-to-month and year-to-year patterns. Sales levels were reduced by 10% to 11% starting in 2007, hitting a peak reduction of 17% in late-2008, and averaging around 14.5% in the most-recent reporting."

End of Quote

The sticky residue of the housing bubble (US mortgages) is still gumming up the world's pension funds and insurance companies' financial reserves. It's just not reasonable to expect any real change for the better until Mr Bear is allowed to scrub clean the global financial system's balance sheets with an industrial-strength degreasing agent. So who is stopping the furry fella from going to work? The same "policy makers" who are responsible for the mortgage mess in the first place! These geniuses have yet to discover the correct verbiage to explain to pension fund beneficiaries worldwide that hundreds of billions of dollars or euros they're relying on for support in their old age are in fact mostly fictitious ledger entries.

These "policy" dudes are mostly former college professors, so they aren't stupid. I'm sure the "best-and-the-brightest" in "public service" long ago figured out that if they said nothing, pension beneficiaries would eventually discover their retirement problem on their own. So why draw the current attention and future wrath of the masses by bringing up the subject now? That is how these people think!

On this one issue (private and public sector pensions), we've barely begun seeing the earliest signs of the current economic upheaval that hangs over everyone's head. Everything these people touch dies. So, until Professors Twiddle Dumb and Twiddle Dee, and their big ideas are driven from the halls of power, nothing will ever change.

Well, isn't unemployment improving? It is according to the US Department of Labor. The only problem with this data is that it comes from the US Department of Labor, who employs plenty of college level Ph.Ds to their dirty work. With a presidential election coming in 2012, it's a political necessity that unemployment comes down. So, I have great doubts we are looking at the real world in the chart below, rather than a new method of statistical manipulation required to keep incumbent politicians, and the US Secretary of Labor in office. If the Dept. of Labor claims that unemployment is below 9%, I suspect it's actually above 20%.

Come on Mark; give us a glimmer of hope. Well you can forget about that from anything I write, at least until Mr Bear finishes his cleaning duties, at which time I'll become a roaring bull! But as Obama offers you hope, from me you'll get charts; like electrical power consumption (EP) which not only refuses to return to its highs of August 2008, but has completed a fourteen month inverted-bowl pattern to the downside. Unlike the government's funded data, EP in December 2011 is measured in the same exacting engineering unit used in August 1930; the kilo-watt. This makes variations in EP invulnerable to the whimsical and ever changing statistical methods used by dubious government statisticians.

One look at EP's long-term chart below should tell you that our current economic situation really * IS * different. Not since the post WW2's retooling of the American economy, from wartime to peace time production, has EP declined so drastically. Not since the Great Depression has so much time passed from one BEV Zero (new all-time high in electrical power consumption) to the next. But what in the economy isn't powered by electricity? Unsold condos, shut-down assembly lines in darkened factories; stuff like that. As goes the economy, so goes EP. And right now, EP is once again contracting.

Below is EP's chart from 2000 to 2011, and I direct your eyes to the red circle. In Barron's 26 Dec 2011 issue, EP has broken below its BEV -1.5% line. A week later (Barron's 01 Jan 2012 issue) EP slipped to -1.90%. We've had a warm winter so far, so maybe this decline is due to seasonal factors. However, when I consider the idiots, morons and moral reprobates in charge of "economic planning" of our "free enterprise system", I can't rule out the possibility that we are witnessing the beginnings of an economic downturn that will eventually rival the -17.32% EP decline seen in 1933.

Okay, the economy is in decline, but why isn't that bad for the price of gold and silver? Well it might be if the "policy makers" were attempting to cause the current decline in economic activity, as they've done many times in the past to eliminate the "excesses" in the economy. In the past, they induced recessions by raising interest rates, forcing banks call in business loans. This would result in a contraction in the Fed's monetary aggregates; M1 and M2. In other words, they raised interest rates to contract the money supply, knowing that economic activity would slow down. However; that is * NOT * the case today!

Since October 2008, at the peak of the Credit Crisis, as our Congress held hearings on live TV, and Hank Paulson (then Secretary of the Treasury) told Congress he needed a bazooka to battle the beams of deflationary radiation directed at the US mortgage market from an unknown, possibly inter-galactic source, the Fed Funds rate has been held below 1%. Okay, I'm making up the bit on deflation rays from outer-space, but today's "0% Fed Funds Rate" (actually below 0.10% per annum) indicates the "policy makers" are frantically attempting to re-inflate the economy with absolutely no success.

One look at the Fed Funds Rate chart below tells us that Doctor Bernanke is riding on the back of a tiger. He doesn't dare raise the Fed Funds Rate back above 1% because he knows if he does, the monetary monster he and his predecessors created will consume him, and his precious Federal Reserve System.

But if the good doctor can't raise short-term interest rates, he sure can print dollars and "inject" massive volumes of cash into the economy. And since he became chairman of the Federal Reserve in 2006, that's exactly what he's done.

The dollars Doctor Bernanke creates may no longer be backed by ounces of gold and silver, but instead by something more socially scientific, and so much better for "policy": US Treasury debt. The wisdom of the debt-backed dollar and the folly of the gold standard had been beaten into the defenseless minds of college students since the days when tuition for college could be financed by the efforts of students themselves, (maybe with some help from their relatives). But the quality of college education, instruction that provided actual economic benefits to the student didn't last long after government began its guaranteed student loans program, even though the college professors and administrators of higher education prospered as never before.

It's not surprising that our educational elite present a united front in opposing the return of the gold standard. When gold was money, costs for college, like everything else were set by market forces. This was actually beneficial for students, as colleges kept their expenses down, and they actually cared that their students could go out into the world and become financially successful. Grateful graduates had a way of becoming alumni, generous to their Alma Mater.

But this superb system no longer exists. With the debt-backed dollar, a dollar managed by this same educational elite, the only factor limiting the price increases for tuition and text books (written by professors) is how much "aid" their colleagues in government are willing to extend in the form of student loans. And as we all know, Washington has been very generous to "education" with its student loan program. Today, any institutional interest colleges formerly had in the financial success of their graduates has been short circuited by the current college system's direct connection to the hose of "liquidity" from the Federal Reserve. Educational standards for both professors and students in our college system have been drastically cut to facilitate enrollment expansion, because that is how the big bucks in education are made. And today, education is all about the big bucks. That many, if not most of our educational system graduates struggle with crippling debt for many years, is something not discussed in polite academic society.

And in 2011, exactly how much "liquidity" has the college system injected into our youth? I haven't a clue. But I'll stick my neck out and guess that in 2011 alone, the school loan program "injected" more inflation into their students than the total national debt of the United States in July 1938: $37 billion.

Well, now that I have all that off my back, let's see just how bad things really are for gold and silver as 2011 draws to a close. No better chart than a Bear's Eye View to illustrate how bad things really are, and after taking a quick look at how little success Mr Bear has had in clawing down the price of gold since 2001, all I've got to say to you "men" out there (and I use the term loosely) is: you're pathetic! As the year 2011 came to its close, the "policy makers" have done their worst in the gold market and they failed to get the price of gold to break below its BEV -20% line. That is correct, since gold's highs of August this year, on a daily closing basis, gold's maximum decline in this correction was only 18.47%

If this is all the worst they can do, then the end of their reign of terror in the gold market draws nigh, and all I hear is boo-hoo-hooing from people who should know better!

Let's take a good hard look at the price of gold since 1969 with the Bear's Eye View (BEV). In a BEV chart, every new all-time high is converted into a zero percent, because to Mr Bear, that's all a new high is worth to him - nothing! Mr Bear is only interested in how large a percentage he can claw back from the bulls' profits.

Geez Louise, look at the corrections Mr Bear inflicted on the gold bulls between 1969 and 1980! From 1969-75, gold seldom saw more than a few new all-time highs before Mr Bear gnawed 20% from the bull's gains. And from 1969-75, did the gold bulls begin blubbering like a gaggle of girlie-men when gold declined over 20%? THEY DID NOT! Like men, real men, they kept a steely eye on their compass; and an iron hand on the tiller, even as gold declined 48% from an all-time high in August 1976.

Now compare the 1969-80 bull market with ours. Gold clawed its way back from the dead with barely a pause in its advance, and ONLY ONE PRICE CORRECTION in the past twelve years that might be compared with something from the 1970s, and that less than 30% correction DID NOT HAPPEN in 2011!

Last week I listened to Eric King's interview with Jim Sinclair. Mr Sinclair, has blood-shot eyes manning a 24 hour gold-bug suicide hot line, because the "policy makers" failed in their attempt to get gold to decline below its BEV -20% line. Well it's true, so-called gold bugs are in an emotional state of panic, keeping poor Mr Sinclair up all night because the former "Masters-of-the-Universe" failed to whack gold down 20% from its highs of August. Funny, Wall Street's Masters-of-Disaster could do a plus 20% whack-job on gold in 2001, 2006 (twice) and 2008.

Let's look at the next chart, with the BEV series beginning at the absolute low of the 1980-99 bear market. What's wrong with you gold bugs? We are seeing the fourth deepest correction from 1999 to present, a correction of less than 19%, and you're ready to run to the tall grass like a pack of poltroons!

And what's wrong, New York and London; is this less than 19% decline all you got? Of course not! The GLD ETF must still hold a few bars of gold you can still lend, swap or somehow collateralize and entangle in the open market. Hey, it's what banks do with other peoples' assets; they take a deposit of one and lend it to ten, or more people. We would be foolish to believe the big banks haven't maximized their own profits, by risking the assets of other people held in any precious metal ETF they control.

Hey you Big Shot Bankers; maybe one more huge margin increase would do the job, sending the price of gold towards its BEV -30% line. But you'd better not take any chances, so you guys will need to whack another commodity futures trading firm, and then send the poor souls whose lives you've ruined into regulatory purgatory at the CFTC, exactly as you did with MF Global. Hey! Do you know what would really be funny? Have your willing-tools at the CFTC send an official letter to all your future victims informing them they have to personally appear at the offices of the Commodity and Futures Trading Commission to be photographed and take a number for service. Have the number series start at some odd number over a million.

Who is there to stop you? I'll tell you who: Mr Bear. When I think of all the dollars of currency and debt you've created with your debt-backed dollar since 1980 (the end of gold last's bull market), I know that you are growing weaker, as Mr Bear grows stronger. That's why since 1999 you've been * UNSUCESSFUL * in dragging the price of gold down a full 30% from a new all-time high even once. To my way of thinking, that makes Mr Bear is the biggest gold bug in the market, and he is someone Washington and Wall Street can't stop out!

That's enough free "financial advice" for the malignant narcissists community; let's move on to the table below and see just how good the markets have been to people who were wise enough to buy and take delivery of their metal, and refrained from playing the devil's favorite game at the COMEX: trading paper metal.

Look at the cumulative gains in gold and silver since 2000, and then tell me that precious metals haven't been a safe harbor for investors during the financial turmoil of the past decade. As always, for thousands of years anyways, gold and silver have been the investment of choice during times of economic trouble.

Against my better judgment, I was listening to the idiot-box (CNBC) with the volume turned up as their "experts" were making their predictions for 2012. Guess what; they made the same predictions they've been making since 2000, and once again gold and silver didn't make the cut. Well; stupid is what stupid does, year after year. So I'd like to recommend a New Year's Resolution for my gold and silver buddies: in 2012 we will all turn down the volume on the idiot box, we will not leverage our positions, and most importantly, we will all grow some guts. Come on, let Mr Sinclair get a little sleep!

Mark J. Lundeen

[email protected]

1 January 2012