I have been writing for years that we are NOT heading for a period of high inflation. You are getting this idea from some other site. Search this site for "hyperinflation". 

You do not buy bonds to hold until maturity. You hold them for capital appreciation when rates fall. In recessions, 30-year T-bond rates fall.http://bit.ly/1HzNZuk Investors make profits.  --Gary North

The China Factor on Commodities?

Rick Rule, founder of Sprott Global Resources

August 4, 2015
Vilnius, Lithuania

On April 2, 2001, the price of gold closed the market trading session at $255.30.

And that was the lowest price that gold has seen ever since.

In US dollar terms, gold closed the 2001 calendar year higher than it did in 2000. Then it did the same thing again in 2002. And again in 2003.

In fact, after reaching its low in April 2001, gold closed higher for twelve consecutive years-- something that had never happened before in ANY financial market with ANY asset.

Then came a correction; the price started falling, and gold is now on track for 2015 to be its third down year in a row.

What’s incredible is that, despite its history of gains, and 5,000 years of tradition behind it, gold is rapidly becoming one of the most widely despised assets.

But before we pronounce it dead and write the final gold eulogy, however, let’s consider the following:

1) Nothing goes up (or down) in a straight line. After 12 straight years of unprecedented gains with any asset class, it’s not unusual to have a meaningful correction.

(Just imagine how severe the correction in stocks will be. . .)

And like all frantic booms which go way past sustainable levels, corrections also overshoot fair value.

This correction in the gold market could easily last for several more years, with prices potentially well below $1,000.

But then we could just as easily see another massive surge all the way past $2,000 and beyond.

That’s the nature of these markets-- to be extremely fickle (and highly manipulated).

Even over a period of a few years, the market can show about as much maturity as a middle school lunchroom, complete with pubescent gossip and inane popularity contests.

But it’s rather short-sighted to completely lose confidence in an asset that has a 5,000 year track record because of a few down years.

2) The gold price shed nearly 5% after the government of China announced recently that they owned 1,658 metric tons of gold.

This amount was lower than what many investors and analysts had been expecting, and the price of gold dropped as a result.

My question- since when did anyone start believing official reports from the Chinese government?

Seriously. The Chinese have a vested interest in understating their gold holdings.

They know that doing so will push the price of gold LOWER, which is exactly what they want.

China is sitting on trillions of dollars in reserves right now, a portion of which they’re rapidly trying to rotate OUT of US dollars.

So it’s clearly beneficial to the Chinese government if they can sell dollars while they’re strong and buy gold while it’s cheap.

And if they can push gold to become cheaper, even better for them.

3) Remember why you own gold to begin with.

Gold is a very long-term store of value. Notwithstanding a few down years, gold has maintained its purchasing power for thousands of years.

Paper currencies come and go. They get devalued, revalued, and extinguished altogether.

How much would you be able to buy today with paper money issued by the 7th century Tang Dynasty? Nothing. It no longer exists.

Or a pound sterling from 1817? Very little. It’s barely pocket change today.

Yet the gold backing up that same pound sterling from 1817 is worth over $250 today (165 pounds).

Even in modern history, the gold backing up a single US dollar from 1971 is worth vastly more than the paper currency that was printed 44 years ago.

But even more importantly, aside from being a long-term store of value, gold is a hedge--a form of money that acts as an insurance policy against a dangerously overleveraged financial system.

How much will your dollars and euros buy you in the event of real financial calamity? Or if there’s a major government default or central bank failure?

No matter what happens in the financial system--whether it collapses under its own weight, or cryptofinance technology revolutionizes how we do business--gold ensures that you’re protected.

4) Resist the urge to value gold in paper currency. We all have this tendency--we invest in something, and then hope it goes up in value.

But that’s a mistake with gold. It’s a hard thing for some people to do, but try to stop yourself from thinking about gold in terms of its paper price.

(It’s also important to remember that there’s a huge disconnect between the ‘paper price’ of gold, and the physical price of gold.)

Remember, gold is not an investment; there are plenty of better options out there if you’re looking for a great speculation.

So the notion of trading a stack of paper currency for gold, only to trade the gold back for a taller stack of paper currency misses the point entirely.

5) Having said that, if you find it too difficult to do this, and you catch yourself constantly refreshing the gold price and checking your portfolio, you might own too much.

Listen to your instincts; if you’re always feeling frantic about the daily gyrations in the market, lighten your load.

Don’t love anything that won’t love you back. Stay rational. Own enough gold that, in the event of a crisis, you will feel comfortable that you have enough ‘real savings’… but don’t own so much that you’re constantly worrying about the paper price. 

Until tomorrow,

Simon Black
Founder, SovereignMan.com

Murray Rothbard on Trade Deficits: They Don't Mean Anything

Origins of Progressive Regulation

The Explosion in Elderly Workers

Robert Wenzel

Retirement? What retirement?

Some choose not to retire at 65, but others can't because of financial reasons.

Things are changing in America, and outside the tech sector, where government regulations have a difficult time catching up, the changes are not for the better.

U.S. Homeownership Rate Declined Last Year to 64.5 Pct, the Lowest Since 1994

U.S. Homeownership Rate Declined Last Year to 64.5 Pct, the Lowest Since 1994

People are scared out of their wits about buying a house now. As can be seen from the chart, they weren't when prices were soaring and interest rates were much higher.

I am generally not a fan of buying a house for investment purposes, but given current prices and the very low mortgage rates, I consider it an ideal time to buy (Don't get an adjustable rate mortgage, get a fixed rate--lock in these rates before they climb.)

Foreign Holders of US Debt

This is a pretty good chart.  I had no idea that Brazil would be #6 or that Belgium was anywhere in the group, logging in at #3.  Shocking.  Until I learn what it means.  Nor did I realize that Japan was one of the leading holders of US debt.  Interesting.  From Business Insider through Bob Wenzel at Economic Policy Journal. 

Chicago School Versus Austrian School

US Dollar As Safe Haven?

As Europe, Japan, South America, Russia, and Ukraine have monetary problems, the dollar could rise as the "safe-haven" currency. Also, what's credit doing? Credit makes up the bulk of the money supply.

US Interest Rates Bottomed in 2012

Bob Wenzel explains:

The recent dip in interest rates have caused many to hold the view that interest rates are now at new lows, but this is not the case. The bottom on 10-year Treasury securities, for example, was more than two years ago on July 25, 2012.

You can't know precisely what the future holds, but given the amount on money the Federal Reserve has printed since the 2008 financial crisis and the likelihood that price inflation indexes will show strong acceleration once oil prices stop falling, there is a strong possibility that the July 2012 low in interest rates was indeed a significant bottom and that rates are now in the early stages of a multi-year climb.

Keynes Argued that Markets Operated Perversely
He reviews Milton Friedman & Frederic Hayek contrasting the two to Keynes.

Gary North Reviews Oil at $55 a Barrel

Shale Oil: America's Emergency Reserves

Gary North - January 12, 2015

With oil around $50 a barrel, fracking becomes problematic. Here's why.

North Dakota needs an oil price of around $55 per barrel at the wellhead and a fleet of about 140 rigs to sustain production at the current level of 1.2 million barrels per day, the U.S. state's chief regulator told legislators on Thursday. . . . Breakeven rates for new wells, the level at which all drilling would cease, range from $29 in Dunn county and $30 in McKenzie to $36 in Williams and $41 in Mountrail. These four counties account for 90 percent of the drilling in the state.

Breakevens in counties on the periphery of the Bakken play, which have far fewer rigs, range up to $52 in Renville-Bottineau, $62 in Burke and $73 in Divide.

  

But Flint Hills Resources' posted price for North Dakota crude was just $32, Helms said, compared with almost $49 per barrel for WTI. Wellhead prices, which are roughly an average of the two, are around $40 and have been falling since the start of this year.

Even before prices hit these minimum levels, drilling will slow sharply. The number of rigs operating in the state has already fallen to 165, down from 191 in October, according to the department. . . .

To keep output steady at 1.2 million b/d for the next three years, the state's producers need a price of $55 rising closer to $65 in the longer term to support a fleet of 140-155 rigs.

Helms' projections confirm North Dakota's oil output will start to fall by the end of the year unless prices rise from their current very depressed level.

When we see the price at $50, this is not the price that producers get in the shale oil belt. We tend to forget this. Or maybe we never knew.

Second, shale-oil output falls like a stone. In three years, the party is over.

Unlike conventional projects, shale wells enjoy an extremely short life. In the Bakken region straddling Montana and North Dakota, a well that starts out pumping 1,000 barrels a day will decline to just 280 barrels by the start of year two, a shrinkage of 72%. By the beginning of year three, more than half the reserves of that well will be depleted, and annual production will fall to a trickle. To generate constant or increasing revenue, producers need to constantly drill new wells, since their existing wells span a mere half-life by industry standards.

In fact, fracking is a lot more like mining than conventional oil production. Mining companies need to dig new holes, year after year, to extract reserves of copper or iron ore. In fracking, there is intense pressure to keep replacing the production you lost last year.

On average, the "all-in," breakeven cost for U.S. hydraulic shale is $65 per barrel, according to a study by Rystad Energy and Morgan Stanley Commodity Research. So, with the current price at $48, the industry is under siege. To be sure, the frackers will continue to operate older wells so long as they generate revenues in excess of their variable costs. But the older wells--unlike those in the Middle East or the North Sea--produce only tiny quantities. To keep the boom going, the shale gang must keep doing what they've been doing to thrive; they need to drill many, many new wells.

Right now, all signs are pointing to retreat. The count of rotary rigs in use--a proxy for new drilling--has fallen from 1,930 to 1,881 since October, after soaring during most of 2014. Continental Resources, a major force in shale, has announced that it will lower its drilling budget by 40% in 2015. Because of the constant need to drill, frackers are always raising more and more money by selling equity, securing bank loans, and selling junk bonds. Many are already heavily indebted. It's unclear if banks and investors will keep the capital flowing at these prices.

As David Stockman has repeatedly written, the shale oil boom is in fact a gigantic bubble that has been created by the Federal Reserve. The Federal Reserve initially pushed down interest rates through quantitative easing. But that easing has ceased, and interest rates are still falling. We have to understand, falling rates now are a function of fears of recession, which is now looming worldwide. There is a move into bonds, including treasury bonds, because people are afraid of the setback that is facing the world economy. We should not blame the Federal Reserve for today's low interest rates in the United States. Low interest rates In the United States today are a function of expectations regarding the world economy.

So, the shale oil bubble has led to a rapid depletion of American oil stockpiles. The fracking revolution is not a revolution; it is a bubble. It is a bubble that is dependent upon strong growth in the demand for oil. But this strong growth does not exist in the United States. On the contrary, there has been a contraction of demand for oil in the United States. Consumption is falling. We are finding ways to conserve oil. "Oil consumption in the U.S. has fallen by over 8% since 2010, and the shrinkage in Europe is far greater than that. Meanwhile, China and India have not proven nearly as voracious as forecast."

Output will not fall. At the margin, oil from existing wells is still profitable. Sunk costs are gone. They no longer influence the decision to pump.

When prices drop, however, almost all conventional wells keep pumping. That's because the variable cost of lifting the crude is still far lower than the prices it fetches on the world market. Ten-year old wells often have variable costs of just $20 to $30 a barrel, so their owners keep on producing at prices of $60 or $80, even though it would require $100 oil to generate a good return on their total investment. In other words, what they spent to drill the well becomes irrelevant. All that matters is the cash they can generate over and above what's required to suck out the crude every day. "What drives the business is the marginal cost, not the total cost," says Ronald Ripple, a finance and energy business professor at the University of Tulsa. "Even at low prices, the production is still contributing something to cover the upfront investment."

As a result, the global supply of oil is what economists call "inelastic." Even if prices crater, the oil majors and sheiks keep pumping more or less the same quantities. They'll only stop when prices drop below the variable cost--and for most wells, they seldom sink that far.

For fracking, the breakeven point is higher. so, there is no long-term hope for a revolutionary breakthrough in the United States regarding oil.

From time to time, we see articles about the huge increase of oil production in the United States. The people who write these silly articles think that fracking and shale oil are long-term solutions to the energy crisis. Wrong! All we are doing is depleting the supply of oil that we had in the ground. This supply of oil could have served as a backup for a major oil crisis, when oil prices move upward relentlessly. This is the true value of shale oil: stored in the ground. It is like a gigantic emergency oil reserve. But because of Federal Reserve policy, and because of today's incredibly low rates of interest, our shale oil reserves are now being consumed. This is the biggest misallocation of capital resources that is going on today in the USA. The United States is consuming its oil reserves. This would not have happened if the Federal Reserve had not entered the capital markets in 2008 and quadrupled the monetary base.

Any time that you see an article about peak oil theory's having no verification, and an appeal is made to the expansion of oil production in the United States, you can be sure that the guy writing the article knows nothing about fracking, shale oil, and the half-life of shale oil wells. He is just some guy spouting off.

If there is a breakthrough technologically in some other area of energy production besides oil, then the shale oil boom will have bought us some time. But that is all it has bought us. Time. It has not solved the peak oil problem.

Best Year for Jobs Since 1999

 

Bob Wenzel explains . . . 

Yet another reason to keep in mind that the Fed creates a Boom-Bust cycle. It's not only a bust. There is also a distorted boom phase, which is ongoing at present.

The U.S. economy added 252,000 jobs in December, the Bureau of Labor Statistics said Friday. That’s the 11th month in a row that job growth topped 200,000, the first time that has happened since the mid-1990s. For the full year, employers added nearly 3 million jobs, making it the best year since 1999.