Thoughts on Markets

Monday, October 13, 2008

Recession - Depression - Inflation, That is the Question!


It appears that gold is being capped again and following the pattern of Friday. It has made a dramatic downward spurt. An hour or so later, we are shown a resumption of the upward move. Maybe it will be different today. Can it be that the intervention will be less? I would not count on it, but I pray that is the case.

Presently, gold is 830.6 down 19.30 and silver is 10.48 up 0.35.

Silver is on the same path with a downward turn as in Friday. Remember, no markets only intervention.

The broad, general market is roaring today. The DJI are up 478 to 8924. They were up higher earlier and down lower. The volatility is there. Investors may be waking to the fact that there is little reason for enthusiasm even with all the central banks shenanigans. It is a bit early to determine how the day will proceed from here. Let's wait and see how it plays out.

From Schaeffer's Opening View this morning:

"In equity news, General Motors (GM) is reportedly holding merger talks with Chrysler, while federal officials announced that they would protect Mitsubishi UFJ's (MTU) $9-billion investment in Morgan Stanley (MS). Finally, Wachovia (WB) is issuing preferred shares, Wells Fargo (WFC) could be downgraded at Moody's, and Spain's Banco Santander (STD) is reportedly in talks to buy Sovereign Bancorp (SOV)."

They also reported that futures indicate some optimism in the market today when it opens.

From Resource Investors today:

"There are no better hard assets than the two most popular precious metals, gold and silver. Both have been relied upon as a store of value for at least four millennia. Neither can be printed by fiat."

"Unfortunately, at present there is not enough of the real metal to spread among all the individuals that want to own it. How do we know that? Because of all the “out of stock” notices on even the largest bullion outlets in the U.S., the U.K. and in Europe. We know it because of the historic, extremely high premiums over the current spot pricing which all bullion items command right now whenever a bullion dealer does manage to obtain some inventory.

While the margin masters, liquidating yesterday’s major traders in the paper-futures markets and opportunistic short sellers have temporarily managed to skew the benchmark spot prices for both gold and silver to unreasonably low levels (relative to the actual intense demand in physical bullion markets), large and small holders of precious metals apparently sense that the spot prices are artificially low. They aren’t selling. At least they aren’t selling in large enough volume to lower the currently sky-high premiums for gold and silver or to put real metal into the inventories of bullion dealers.

What spectacular irony. At the very time when investors want to buy physical gold and silver the most, the paper-contract markets (which affect the spot or cash market benchmarks) are being sold down to such ridiculously low levels that few want to sell any real physical metal unless they just have to or are forced to. Meanwhile, the divergence in pricing between the physical bullion markets and what is still called “spot” that this report mentioned last time grows even wider.

The year 2008 will very likely be remembered as this generation’s great crash. It is also very probably the best opportunity to come along since 1873, 1901, 1907, 1929, 1931, 1974, 1987, 2000, 2001 and 2002. We’ll see."

From the Aden Sisters as posted on Kitco's Commentators Corner:

"HYPER-INFLATION OR DEFLATION?

The Fed is spending money at an astronomical rate. It’s creating this money out of thin air by monetizing bad debts and whatever else it has to. Remember, this is on top of all the other ongoing government expenses and it’s extremely inflationary.

Normally, there is a lag of about a year or so between money creation and inflation but eventually, what’s recently happened will result in massive inflation, a much lower U.S. dollar and a soaring gold price. This is inevitable but as our dear friend Chris Weber points out… not necessarily.

The bottom line is this, if the banks start to lend again, then the economy will be on the road to recovery and inflation. But we know the banks are scared and they’re being extremely cautious, for good reason. So if the banks decide not to lend and instead just sit on their cash, then the inflation process will freeze.

In other words, the risk of deflation has greatly increased. Inflation is not a given and much will depend on what the banks do, or don’t do in the period just ahead. The Fed is providing the ammunition but the banks have to use it. If they don’t, the outcome could be much different than what most analysts feel is a done deal.

WHAT TO DO

At this point, it’s best to be prepared for either outcome. That means gold for inflation and cash for deflation, at least until we see how things unfold.

For now, important changes are taking place but that also means challenges and opportunities. This may all end up differently than what we initially thought, but we’ll adapt and keep an open mind. Whatever lies ahead, the current challenge is getting safely from here to there relatively unscathed and we’ll do our best."

A dear friend called my attention to a possible need for stocking up on food. As he spoke, I recalled that the commissary shelves where I shop have some empty spaces where they in the past were packed full.

The grocery stores seem to have a 24-72 hour stock of food products. The computerized inventory control with automatic updates at point of sale allow a reduction in over stock. This enables stores to reduce inventory costs.

With the recent experience of Ike, all should be aware of the necessity of having some extra food, water, and other consumable items stashed away just in case.

I recall the early warnings in 1999 of the catastrophic calamity of the year 2000. We did stock up some on items. However, we used some wisdom and purchased only the items we used on a regular basis. We further searched for sales on durable food items and would purchase extra from time to time. As 1999 waned away, I became more and more convinced that it would be no problem. However, most of our stash was food purchased at sale prices. So we began to consume these items and never regretted stocking up, because most of the items were much more expensive as 1999 came to a close and 2000 arrived. The net result was that we realized a "profit," from stocking up and reduced our spending for food, etc for several months.

In view of the financial situation today, it might not be a bad idea to carefully stock up food and other consumable items. Were we to go into a hyperinflation, which could result from the vast amount of FIAT currencies being showered, not necessarily from helicopters, throughout the world, there should follow price inflation. Then the price of consumables would rise. Of course, we are teetering on the brink of either recession/depression or inflation. At this point in time, it is difficult to say which. Were I to be pinned down for an answer, I would respond that we are in a recession which may turn into a depression, and is very likely to be followed by inflation.

I rest in the fact that our God remains in absolute control of all. In His word He provides all with information on the final result. He promises that nothing can separate His people from His love and eternal security. He also promises that those who are not His will receive His eternal wrath. Thus, it is imperative that we study His word to find the Lord Jesus Christ and to diligently follow His commands. We truly love, only because He first loved us.

Best to each, Doug

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