The Golden Bull is Stomping

Before we start, some definitions regarding the money supply are in order. M1, Money Supply, consists of cash plus checking accounts and travelers checks. M2 consists of M1 plus retail money market funds, savings and small time deposits. M3 consists of M2 plus large time deposits, Eurodollars & large money market funds.

MISCONCEPTIONS ABOUT GOLD AND THE MONEY SUPPLY

Misconception 1) Double Counting

A large portion of the money supply is not really money and should not be included in any money supply discussions. Money is cash and spendable checking account balances. That's it. The problem is that money circulates and is counted many times because it is not labeled correctly. In similar fashion, a portion of both M2 and M3 are actually double counted also. So the question now is, how much has the FED increased the "real" money supply? Real money is defined as cash or checking account money (the stuff that chases goods and services and that could create inflation). The answer is not precise, but the amount is most likely quite a bit higher than reported. The best way to find out what the real inflationary effect of M1 really is, can be accomplished by using ratios from the mid 1950's to mid 1970's; before money market accounts with check privileges came into being and distorted and confused the counting of the "money supply" numbers. Back then, the average ratio between M1 and M2 was about 1 to 3 and M3 was usually only 10% higher than M2. Using these ratios, the portion of M2 that is actually spendable cash or cash equivalents might be as high as $3.6 billion. If this is true, then the real inflation inducing money supply (M1) in the last 10 years (1994 to 2005) has increased to only $1.2 trillion, It appears that there is $2+ trillion of money market mutual funds buried in M2 and although these accounts have check writing privileges, the money is really meant to be saved and not spent, so it is not "real" money. In other words, M1 should actually be $1.2 trillion not $3.9 trillion. This portion of M2, which should be in M1, is the true money supply. These numbers imply that a severe and sustained inflation is less likely to occur in the immediate future than most people suspect. Nevertheless, money is being created at an ever increasing rate all over the world; especially by the BOJ. The confusion is that money (cash), Demand Deposits (checking account money) are different from Credit money (money lent to you by a bank) or Stocks and Bonds, which are financial assets and are totally different animals. That is why when the stock market (stocks are a financial asset, not money) loses $2 trillion because the tech stocks decline or we have a 1987 style stock market crash, it really doesn't affect the price of cars, pizza or theater tickets. You would think a $2-3 trillion financial hit would create a huge "deflation", but it doesn't work that way. Stocks, bonds and buildings are assets that can be sold for cash, but are not cash. Remember that the cash you get from someone who buys your stocks or buildings means that person now doesn't have the money anymore to spend, since he has given it to you. The transaction does not affect the money supply. The easy maxim is that financial assets and real assets are not inflationary, only excessive paper money increases that do not come out of real savings, but are created out of thin air are what makes the prices of goods and services go up.

Misconception 2) A Debt collapse

A debt collapse is close at hand…and with it a massive deflation. FALSE. Someday this may actually happen, but to worry about this now is way too premature. Consider the following hypothetical scenario: There is a severe recession in the U.S. and there are massive bankruptcies and thousands of banks are about to go under. There is panic in the streets. The Fed would come galloping to the rescue long before we reached this stage, by convincing us that it is necessary to do a one-time massive increase of the money supply to add liquidity to the system to avoid the crunch, eliminate panic and preserve jobs. Let's say they propose a one trillion dollar increase in money and credit. Certainly a very large number, but that is what would be necessary according to them to handle all the problems. Of course they would try to convince us that this would not only be non-inflationary, but what's necessary to stop a Depression from developing. They would come up with some clever, reasonably sounding explanation like "the extra $1 trillion will help productivity, create new jobs and help in capital investments which will create jobs and pay for itself. The thing to realize is that this is exactly what they will do and have already done so in the past. The Fed will create liquidity to bail out the establishment institutions, debtors, banks as well as depositors both large and small and just about everyone else who votes. This, however, is inflationary and will make gold, silver and the mining stocks skyrocket.

Someday, when they finally print too much money and no one wants it, a total collapse could occur, but this is most probably a long way off. They will do everything in their power so as to not let the system collapse, even if they knew it would only be temporary. At some point in the future they may not be able to do anything, but I think we are many trillions of paper dollars away from that point.

DANGER AHEAD! WATCH OUT

The Real Estate bubble has burst and no one knows how bad it can get. Remember Real estate affects 70% of the people, while only 40% of the people are directly involved in the stock and bond markets. What could happen when all those 1% zero down teaser mortgages come due within the next year in conjunction with the recent flurry of negative amortization refinancing; which are really only bookkeeping tricks, along the lines of the Enron shenanigans, merrily designed to book false refinancing profits while hiding bad loans, that can only get worse. A 50% collapse in real estate prices, which is possible, could bring about that financial debt collapse with its resulting deflation. BE CAREFUL.

THE END OF FIAT MONEY (HYPERINFLATION)

Gold Bugs and Libertarians along with all other DOOM & GLOOMERS talk about the end of paper money as the point when everyone knows everything they buy will be selling at a higher price (within days or even hours), therefore everyone spends their cash as soon as possible to beat the price increases.

This is when hyperinflation becomes a runaway inflation and paper money is exposed on the grandest of scales as a fraudulent economic concept. A deflationary collapse would then soon occur but it would have to be on the order of many trillions of dollars of defaults and bankruptcies all at once - an economic accident of huge proportions. Therefore, I would NOT bet on a deflationary nightmare just yet…(Watch Real Estate) But you can still take some precautions without damaging your potential investment returns by owning Gold Bullion and Gold Coins such as Double Eagles, Maple Leafs or Krugerrands, just in case. As long as they can print money and get away with it, a massive deflation will not take place.

To a gold investor, the argument is non-consequential because during an inflationary period, gold is your best bet anyway as it is certain to retain its purchasing power. Should there be a massive deflation, gold is also your best bet as it will be the only money still standing. Either way you are protected.

Misconception 3) Gold is related to Oil

The gold price is NOT related to the price of oil. Oil like onions, wheat and beef all have their own demand/supply dynamics. Gold does too. But gold, unlike everything else, is also money and until that idea changes, pegging gold to the production of anything (except paper money) can lead to false conclusions. In the final analysis, I think gold mining shares should be on the top of anyone's investment list.

Misconception 4) THERE IS AN OIL SHORTAGE

(We are not running out of oil & there is no real energy crisis)

In a free market economy, the only way to create a crisis is by Government regulation.. 85% of all the land in America, as well as its continental shelf, is not available to exploration. Refineries & nuclear power plants cannot be built because of Government regulation and the Courts. We could be 75% to 85% self sufficient in oil if Government just got out of the way. Instead we are looking to set up commissions to look for price gouging. There is no such thing as price gouging in a free market economy. The only gouging being done is by the Governments. Remember the 70's? Price fixing only causes shortages and long lines, but it does not lower prices. Since when has a Tax Increase ever increased the supply of anything? Allowing the Free Market to work is the only way to solve any and all problems, from high oil prices to poor schools and everything else in between. Having a rational energy policy would not only bring down the price of oil to below $25/barrel but would also go a long way to solving our international problems by putting Iran, Venezuela, Russia and the rest of the oil dictators back in their proper place, instead of allowing them to hold the rest of the world hostage.

GOLD AS A STORE OF VALUE

A long time ago, (Pre 1971) the store-of-value aspect of money used to be taken seriously. That era coincided with a gold standard that began in 1717 by the British. In 1785, the Americans adopted a bi-metallic standard of silver and gold. In 1900, the US switched entirely to a gold standard. The US maintained full convertibility of the dollar into gold until 1933 when FDR not only banned US citizens from owning gold, but confiscated the gold that they already owned, but continued to honor convertibility by foreign central banks. This lasted until Nixon closed the gold window in August 1971, leaving the US dollar as the world's only reserve currency. The dollar from that point on has been no more than an "IOU Nothing" piece of paper. As long as the dollar was tied to gold, there was practically no inflation. Debasement of the dollar during the 93 years of Federal Reserve management is shown by the fact that goods and services obtained in 1913 for $100 would cost more than $2000 today, and the loss of the dollar's purchasing power goes on unabated. Since the 1930's, the application of Keynesian economics, later joined by monetarism and the NeoCon's, has centered on maximizing economic growth via the expansion of credit and fiat paper money. Central bankers have attempted to intellectually demonetize gold, and the 34,000 tons of Gold our central bank claims to have left in their vaults is probably 50% over stated as the result of the forward-selling schemes of the last twenty-five years. Most modern economists express optimism that the world's evolved money/credit system, without gold. is sound and that central bank managed economies are here to stay. The problem is that the normal cycles of economic contraction are being dealt with by unprecedented fiscal and monetary stimulus, pushing debt to unprecedented levels. At present, it takes $6 of debt stimulus to get only $1 of GDP growth. With total credit market debt (government, corporations, and individuals) at over $37 trillion, debt is now over 300% of GDP and still growing. Total credit market debt had reached its previous all time high of 260% of GDP in 1929, on the eve of the Great Depression. US total credit market debt has more than doubled over the past five years, alone.

GOLD'S STEADY PRICE INCREASES

The steady rise in the gold price, that started six years ago, is forecasting that the paper money economy and world debt pyramid is essentially out of control and eventually will come face to face with reality. It will then come as no surprise in the years ahead to witness gold, with its 5000 year history as money, to once again resume its rightful role in enforcing monetary discipline and as a store of value against a background of severe economic upheaval. In the meantime, prudent investors are encouraged to look beyond the soothing reassurances of Wall Street's conventional wisdom to the still early-stage investment opportunities in a primary gold bull market.

A recent extensive survey of Global Fund Managers had 10% reporting that they thought inflation would be "a lot higher" next year. There are tens of thousands of fund managers globally. If only 10% of this group decides to start buying gold mining stocks, as a hedge against this expected "lot higher" inflation rate, then a huge demand will develop. Since the realization that the inflation cycle is just beginning, I am sure the number of managers who start seeing the trend will swell in the months and years to come. This will mean a great deal of buying power coming into a relatively very thinly traded market. Remember, the total capitalizations of all the world's gold mining companies put together would total no more than the capitalization of maybe just Google alone.

THE FEDERAL RESERVE DILEMMA

The dilemma that the FED is now faced with is: How can they continue to print money when inflation has clearly reappeared? But how can they not print money in the face of a bursting real estate bubble?. There is also the secondary reason for the FED's existence besides keeping our money stable and that is maintaining full employment. It appears that their only solution is the one that they have been following for the last 24 months or so; gradual rate hikes and plenty of new money at the same time - all long term bullish for gold and gold mining shares.

TRADING THE GOLDEN BULL

I told you so! Normally it is never polite to say this even if it were true, but I'm saying it now only because its still not too late to do you all some good. In November 2005, I called for the end of the consolidation that would mark the end of minor Wave 4 of the larger Wave I and that when it comes to commodities 5th Waves are usually the most explosive Waves - So far so good.

I also warned you that you cannot and should not even try to trade THE GOLDEN BULL because it will buck you off and you will be left sitting on your ass, holding your cash in your hand as the Bull takes off leaving you in a cloud of dust and flying Bull s-it.

There are some very bright contributors to this website and most of them and some of you caught the May 2006 top exactly, but how many of them and you were able to get back in at the lower prices less than one month later? What is much worse is, how many of you are still holding on to what will eventually turn out to be meager profits? And how many will stay in cash and ride out this bull on the sidelines, waiting for that great Pull-Back that never comes, only to get sucked back in right at the top somewhere in the next three to five years?

OK WHAT DO I DO NOW?

Get back in NOW. In my opinion, the correction has just about run it course.. Once gold goes above $660, just BUY. Until then, scale up or scale down but whatever you do, get back in. DO NOT use margin just yet. Use your margin if we are lucky enough to get one last pullback to $600 area or breaks out above $660, but start to get back in now. For those of you who have remained fully invested in both Gold and Silver, sit back, close your eyes, relax for two or three years and enjoy the ride. It would be best if you would not check prices for at least two years, but I know that that is too much to ask. BUT whatever you do, DO NOT let yourself get bucked off the GOLDEN BULL!

Aubie Baltin CFA, CTA, CFP, Phd. (retired)

Palm Beach Gardens, FL

[email protected]

561-840-9767

31 January 2007

P.S. I want to thank you all for the tremendous responses that you have given me as well as to inform you that I now have more clients than I can handle and will not be taking on any more. Once again, thank you for your response and encouragement.

I intend to continue to answer general questions on the markets and the economy to the best of my ability, time permitting; so don't hesitate to email me your questions.