1.

Gold update: Gold over $1000 and still no gold

bubble
For the past ten years we could run ourselves ragged trying to counter the
gold disinformation machine. For example, the lead story in the Markets
section of today’s Wall Street Journal “Odd Couple: Stocks, Gold Share
Same Ride Higher” begins:

As the world begins recovering from the worst financial crisis in 70 years, an odd couple of winners have emerged: stocks
and gold. So far this year, the Dow Jones Industrial Average, a bet on economic recovery, is up 14%. Gold futures, a bet
on calamity, are up 19%. The reason: Low interest rates and heavy government stimulus have poured cheap money into
financial markets, helping both the economy and stocks. But the creation of all that money, together with the Federal
Reserve's maintenance of near-zero benchmark interest rates and the prospect of heavy government borrowing to fund
deficits, threatens to weaken the dollar and fuel inflation and economic volatility later.

Let’s look at the key assertions in this opening paragraph in the context of actual data, the price of gold and of the S&P
over the past ten years since iTulip opened shop and we started buying gold. We also correlate the data with the political
economy of the FIRE Economy that drives gold and stock prices.

Are rising gold and stock prices unusual?

Here are the facts.

o The S&P finished higher in only six out of the past ten years.
o In three out of the four years that the S&P finished lower, gold
finished higher.
o Each year for the last ten years the gold price has finished higher
than the year's starting price, except for the year 2000 when gold
prices fell 3%.
o Even in the year 2000, the year in the past ten that gold prices fell,
gold prices fell less than 1/3 as far as stocks fell.
 o Gold performed worse than the S&P during the stock bubble years
of 1998 and 1999 when the S&P gained 14% and 23% respectively.
Even so, gold prices went up 1% in each of those years.
o The S&P gave it all back and more from 2001 to 2002 when stocks
fell 10% then 26% while gold prices increased 20% then 17%.
o In total over the ten year period, gold prices went up 260%
compared to a loss of 8% for the S&P.

So far the reflation rally of 2009 is looking similar to the reflation rally of 2003 when the now famously asset inflation
happy Greenspan Fed launched the housing bubble with 1% interest rates and deregulation of mortgage credit. The S&P
shot up 23% that year and gold rallied 17%, the year after gold rallied 20% and the S&P fell 26%.

In the first two years of that post-bubble bust reflation, in 2003 and 2004, the S&P grew 3% net while the gold price went
up 27%. The “bubbles in everything” that resulted from reflation policy produced lackluster returns on the S&P, while gold
had three strong years between 2005 and 2008.

The bubbles collapsed in 2008, with the S&P down 38%. Even so, gold finished higher that year.

Turns out that the 2000s reflation did create “bubbles in everything”—everything except gold, that is.

Is the Dow Jones Industrial Average a bet on economic recovery while gold is a bet on calamity?

Gold has risen almost every year since 1998, with the exception of a 3% decline in 2000. Gold can only be considered a
refuge from calamity if by “calamity” we mean a decade long process of credit financed asset bubbles and collapses of the
domestic FIRE Economy that, along with an equally disastrous foreign policy, resulted in a 40% depreciation of the dollar
against major currencies.

Do gold prices reflect future inflation expectations?

Gold does not rise in response to future inflation fears but in response to currency risk. As the risk to the dollar has risen
every year since 1998, so has gold; the greater the risk, the greater the rise.

Some of the factors that increase dollar risk are also bullish for stocks in the short term. The WSJ writer gets this part
right: near-zero interest rates and heavy government borrowing to fund deficits are reflating parts of the economy as they
add more fuel on the dollar risk fire, a fire that’s been burning since 1998.

It’s human nature to think that the day we started to notice gold beating stocks is the day that gold prices started to beat
stocks. The truth is that gold has been beating stocks for ten years.

The real story of gold versus stocks since iTulip.com opened for business in 1998 is that gold has produced better year
over year results than stocks and with less volatility.

Over the past ten years, thousands of Ivy League university trained money mangers, schooled in the “science” of modern
portfolio theory, spent in aggregate hundreds of thousands of hours analyzing the stock market, rotating holdings from one
sector to another, carefully selecting entry and exit points to maximize returns, costing tens of billions in fees, all to try to
beat the horrid -8% nominal return of the S&P index over that period. Still few were able to mimic the 260% return on
gold they could have earned if they bought gold at the start of each year since 1998 and then did nothing at all.

Readers need no more than the one chart above to measure the scale of the disaster that FIRE Economy political and
economic policies have brought us: two massive asset bubbles and a mountain of unpayable private and public sector
debt. Rescue efforts after the latest crash have so far produced the grim monstrosity of nationalized GSEs, Government
Motors, further concentration of money and power in America’s financial institutions, and a multi-trillion dollar gamble of
the nation’s sovereign credit that housing prices can be re-inflated and credit-financed consumer spending restarted.

Don’t hold your breath waiting for a devaluation of the dollar. As I have said a dozen times before, the U.S. will never, ever
explicitly devalue the dollar. Since the floating exchange rate system began in the early 1970s, no net debtor nation has
ever explicitly devalued. To do so is to trigger a sovereign credit crisis. Since the 1970s, such devaluations have only ever
been announced after a credit default had already occurred.
Net debtors don’t have to devalue; currency depreciation is a natural result of fiscal deficits, in combination with other
factors. For a net debtor, the challenge comes in the other direction. How to maintain the exchange rate value of the
currency in the face of massive fiscal deficits if the economy does not develop self-sustained, organic growth?

The U.S. spends and spends to try to “stimulate” the economy

(read: expand public debt) until it grows on its own (read: private debt expands)
 Yet consumer credit continues to decline

What if the U.S. runs out of sovereign credit before the consumer starts going back into debt?

If that happens we get currency event that we have warned since 1999 may be the eventual payback for decades of FIRE
Economy policies. And if that happens not only will gold rise even more than it has nearly every year for the past decade, it
will rise to the $2500 to $5000 range that we have forecast since 2001 sooner than later.

See also: What Gold Bubble? - Janszen Oct. 2006

Economic and market forecasting in a post-bubble world ($ubscription)

Last night I attended a private event in Boston where Jeremy Grantham spoke to an audience of about 30
for an hour. As a fellow asset bubble watcher for more than a decade, he faces similar challenges now that
the bubble era is over and a new era of uncertainty has begun. These are my comments on some of the key
points that he made.

I read Grantham’s superb newsletters six months to a year after they are published. In fact, I don’t read anyone’s market
and economic forecasts until they are at least half a year old. That may strike some readers as odd but there’s a method to
the madness. If I stick to my own primary research and analysis then readers can be certain that if my analysis agrees
with others' it’s because I have reached the same conclusions independently.

Grantham comes across in person as brilliant, honest, self-critical, and hyper-competitive. These are great qualities for a
fund manager. I got the impression that he’d make a very, very demanding boss who does not suffer fools.

He contested his reputation as a perma-bear. As a point in fact he recalled his March 2009 special issue newsletter that
appeared on the GMO web site on the very day that the S&P bottomed. Back when I was warning readers “beware relief
rallies” he was saying “buy, buy, buy” but don’t expect the rally to reflect fundamentals. more... ($ubscription)

iTulip Select: The Investment Thesis for the Next Cycle™

__________________________________________________

To receive the iTulip Newsletter or iTulip Alerts, Join our FREE Email Mailing List

Copyright © iTulip, Inc. 1998 - 2009 All Rights Reserved

All information provided "as is" for informational purposes only, not intended for trading purposes or advice.
Nothing appearing on this website should be considered a recommendation to buy or to sell any security or
related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for
any actions taken in reliance on information contained herein. Full Disclaimer

Hyper Debt
Total U.S. debt as a percentage of GDP remained almost a straight line around 160% of GDP from 1959 to 1969
before it rocketed straight up to 380% of GDP as of 2007.  The avalanche of excess injections of money supply,
liquidity and random bailouts in late 2008 and continuing in 2009 on top of what has already been an untenable
debt level is a huge risk.  As of May 2009 debt has been estimated to be 461% of GDP and it is continuing at the
steepest slope in history.

All economic statistics have been favorably distorted, especially since 1992 when growth of economically
unviable debt really accelerated (click on the graph to see it enlarged for better legibility, then the back
button to return): 
The Government is creating a fantasy of future prosperity based on an illusion of recovery at the cost
of debasing our currency by reinflating the debt and housing bubbles. 

 We do not accept the official representation that re-defaults of heavily downward adjusted
mortgages are only at 23% - people with real estate experience have warned that the number will be
closer to 60%.  The now discussed "second" wave of defaults could easily turn into a series or a
continuous flow of defaults.
       
 The next major risk is that in March 2010 about half a trillion dollar's worth of ARM mortgages
will trigger much higher interest rates, up from discounted "teaser" rates.  Therefore, unaffordability,
unemployment and the credit limit condition of the majority of U.S. households, which are defacto
bankrupt, will push many more mortgages into default without more government intervention.

CNBC reported on the maxxed out credit condition of 117 million US households, all of which today an honest
bank regulator would have to declare as bankrupt and unfit to receive even one more penny of debt - any debt. 

The balance sheets of over 90% of households, businesses and the nation as a whole have been run down by
excess debt since the Eighties.  The above chart shows how the relationship of overall debt to median household
incomes started to come apart in 1982.  This accelerated in the Nineties in an unprecedented abuse, whereby
monetary and fiscal authorities completely abdicated their crucial role of controlling such exploding debt.  The
resulting boom was based entirely on leverage, debt upon more debt.

The Obama Administration and the Democrat Congress subsequently abused the popularity of the new President
to increase debt to even more catastrophic levels.  There was no electoral mandate for this massive printing of
money, which will result in deficits as far as the eye can see and an overall debt level that cannot be paid back
within reason.
What kind of a cure is this?  Much more debt to cure much too much debt?

The size of the risk of the current crisis is represented by size of the task to undo this.  We argue that
there is no solution that does not involve serious deleveraging.  Deleveraging brings along severe adjustment to
asset prices, because it was leverage, i.e., debt that kept them artificially high, especially home prices.  Interest
rates, now at or near zero, will be forced to rise and that will cause bonds to fall just as hard.  We have provided
a comparative analysis to the Great Depression and the similarities are scary.

We have to stress, however, that governments around the world will fight to the end to prevent this.  Massive
injections of printed money and the fact that all developed nations around the world are doing the same at the
same time could drag this out or bring incremental adjustments.  As of this writing in February 2010, political
establishments and fiscal and monetary authorities are on a course that makes an adjustment in line with the
above mentioned comparison with the Great Depression more likely.  A second argument for such an
outcome is that also the Japanese stock market could not prevent a fall of -80%.

The following is excerpted from a Bloomberg report of March 31, 2009 by Mark Pitman and Bob Ivry in New
York.  The report itself left us in disbelief, as did the fact that a detailed accounting of such huge numbers and
changes is not properly forthcoming and readily available.  We were and still are in much more disbelief, how
there can be widespread cheerleading by the media and Congress about such severe abuses of the U.S. Financial
system - just consider how unresolved "legacy" problems such as Social Security and Medicare pale next to this:

 The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an
amount that approaches the value of everything produced in the country last year, to stem the longest
recession since the 1930s.  The combined commitment has increased by 73% since November 2008,
when Bloomberg first estimated the funding, loans and guarantees at $7.4 trillion.
 New pledges from the Fed, the Treasury Department and the Federal Deposit Insurance Corp. include $1
trillion for the Public-Private Investment Program, designed to help investors buy distressed loans and
other assets from U.S. banks.  The money works out to $42,105 for every man, woman and child in the
U.S. and 14 times the $899.8 billion of currency in circulation.  The nation’s gross domestic product was
$14.2 trillion in 2008.
 President Obama and Treasury Secretary Geithner met with the chief executives of the nation’s 12
biggest banks on March 27 2009 at the White House to enlist their support to thaw a 20-month freeze
in bank lending.  “The president and Treasury Secretary Geithner have said they will do what it takes,”
Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein said after the meeting. “If it is enough,
that will be great.  If it is not enough, they will have to do more.”
 Commitments include a $500 billion line of credit to the FDIC from the government’s coffers that will
enable the agency to guarantee as much as $2 trillion worth of debt for participants in the Term Asset-
Backed Lending Facility and the Public-Private Investment Program.  FDIC Chairman Sheila Bair warned
that the insurance fund to protect customer deposits at U.S. banks could dry up because of bank failures.

The Gold Spike Argument - The Canary in the (Coal) Gold Mine:  The final stage of a loss of confidence
in currencies has historically been accompanied by a spike in gold prices caused by panic buying (click on the
graph to see it enlarged for better legibility, then the back button to return):
We advise our clients to adapt their strategic outlook and planning to the new realities – be hedged at all times –
the problems will be long-term.

Great Depression Signs

The Roaring Twenties were a time in which credit abuses led to an asset price and economic bubble.

Today there are similarities to the Great Depression, the aftermath of the Crash of 1929:  First a drop of some
40%, then a rally back up.  In 1930, there was a 48% up rally, and as you can see in the chart, it took actually 2
years and 10 months and 6 bull traps, before the market reached bottom at -89.19% in July 1932. 

Today's massive injections of printed money are without historical parallel.  This makes it difficult to forecast
when a threshold principle will be crossed, at which markets will force a severe adjustment to occur, or whether
there may be several smaller shocks, or just a "sour and skinny market" for an extended period of time, as a
leading Wall Street firm has described a sideways market.

But you cannot legislate prosperity, or simply shove such a mountain of debt under the rug.  The severe abuses
of credit, particularly from the Nineties to 2009, exacerbated by the recent attempt with seemingly limitless
printed money to reinflate the debt and housing bubble, could very well result in a deeper, prolonged recession
or even depression (click on the graph to see it enlarged for better legibility, then the back button to
return):
Then and now:  The similarities are scary - when adjusting for the more months of the current chart due to the
most massive Government intervention in history, you would think you're looking at the same chart - only the
scale on the Y-axis tells you which movement of the Dow you are looking at (click on the graph to see it
enlarged for better legibility, then the back button to return):
Euro Invest Group provided a technical analysis of these bull traps, confirming that except for the 2nd
successive such bull trap after the initial one (see green trendline below), when the first crash-low was
approached, every time the purple trendline was broken, the DJIA went further down without looking back (click
on the graph to see it enlarged for better legibility, then the back button to return):
In the current bear market the first down swing and its retracement lasted a lot longer than 80 years ago and
also covered more ground:

                                   1929-1932                         2007- 2010

down swing:     - 49.4 % in 2.4 months          -54.4% in 17 months

retracement:    + 52.2 % in 5 months            +65.8% in 10.5 months

Euro Invest Group made the following technical observations:

1) Whenever the trend line (in purple) of a correction was broken, the market moved to new lows without
looking back (only one trend line had to be redrawn, marked in green).

2) At the break of the prior low, the market just dropped further without any retracement, therefore, bottom
picking will be extraordinarily risky.

3) Retracements: The down swings are delimited with blue lines and the retracement levels with black (50%)
and red (61.8%) lines.  At the beginning of the bear market, retracements of the prior down move reached a
little above the 50% level (black line). Later retracements fell short of the 50% level. The 61.8 % level (red line)
was never reached.

4) Generally each consecutive down swing was larger than the prior one and especially at the beginning also
lasted longer in time.  The exception was down swing #6 from Nov. 1931 to Jan. 1932.

 #1:  -16 % in 13 Trading Days

 #2:  -25 % in 18 Trading Days
 #3:  -37.4 % in 3 Months
 #4:  -39.3 % in 3 Months
 #5:  -45.4 % in 3 Months
 #6:  -41.4 % in 2 Months (1 exception)
 #7:  -54.9 % in 4 Months
 
5) During the whole bear market, at every rally, price and momentum peaked at the same time.  On the bottom
of the chart the RSI (14) is shown.  No bearish divergence in rallies, but bullish divergences at bottoms.  This is
typical behavior of strong bear markets.  You will rarely get a bearish divergence in up moves.

A pragmatic view:  Deleveraging and correction of the debt crisis could alternatively be an even more drawn-
out process, given the immense size of the intervention, which is also taking place worldwide.  But in the long-
term, an adjustment will come, whether in a single Black Swan Event, several smaller ones, or analogous to
1929 market psychology.

It took 25 years and 2 months from 1929 - 1954 for the DJIA to get back to its previous level of 1929 again
(click on the graph to see it enlarged for better legibility, then the back button to return):

The period after 1929 is a warning, a handwriting on the wall:  GDP fell for almost 4 years, from the crash of
1929 to the end of 1933.  It took 7 years to 1936 until the GDP level of 1929 was surpassed again.  Industrial
production needed the same time from 1929 to 1936 to recover as did GDP.  It took 44 years from 1929 to 1973
for the Banking Index to reach the same level again (click on the graph to see it enlarged for better
legibility, then the back button to return):
We advise our clients to adapt their strategic outlook and planning to the new realities – be hedged at all times –
the problems will be long-term.

In total over the ten year period, gold prices went up 260% compared to a loss of 8% for the S&P