Can You Pass The 2011 Gold Quiz?

By Jeff Clark
BIG GOLD


CPM Group recently released their 2011 Gold Yearbook, an invaluable resource for us gold analysts. Mostly a reference book, even a gold enthusiast might find it dry reading. But I loved it, and as I studied it on a plane, I kept finding data that made me perk up.


To have a little fun with it, I thought I’d summarize what I read in the form of a quiz. See how many you can get correct. Regardless of your score, I’m sure you’ll agree with the ramifications each point makes for the gold market.


I’ll start off easy…

1)      The main driver behind rising gold prices over the past decade is:

a)      Increased jewelry demand in India
b)      Greater industrial uses of the metal
c)      Investment demand

A Crack in the Great Wall-mart: Watch Out for Rising Prices from China

Jason Kaspar, Contributing Writer
Activist Post

In a widely covered interview last Wednesday, the CEO of Wal-Mart, Bill Simon, warned that “U.S. consumers face ‘serious’ inflation in the months ahead for clothing, food and other products.” He noted: "We're seeing cost increases starting to come through at a pretty rapid rate."  Given his purview, I accept Simon’s opinion as positively disconcerting, and if inflation is to hit home in the heartland of America, it will certainly begin at Wal-Mart.

While America’s labor force struggles to regain employment and reclaim real wages, the prices of necessary products are preparing to surge, creating the uncomfortable prospect of stagflation, that dour economic phenomenon of rising prices and falling wages last seriously confronted three decades ago. It would be a toxic drink to swallow. Packaged in China for Sam’s Club, and mixed with a little Mexican Wage Gouging Tequila, this “stagarita” would leave a bitter taste in an election year. And what a hangover.

Yet, although there is asset inflation in many areas, the fact that wages are not increasing in tandem implies that this inflation must be short-lived. I speculate that we are entering a period similar to the 2008 deflationary crisis, when many asset prices spiked before plummeting rapidly without the economic strength to support the new price levels.

Get Out of the Stock Market and Into These Alternative Investments

George Self
Investing Answers

The S&P 500 is down more than -9% from five years ago. If you haven't already, maybe it's time to consider moving your money out of stocks, and into some of these alternative investments.

Gold
When inflation besets the economy and the dollar starts to lose its value, gold is traditionally the best proverbial mattress in which to stuff your cash. Between 1976 and 1980 inflation rose at a rapid +8.84% per year, a  significant move by any standards. This means that if you had literally stuffed your cash in a mattress during this decade, it would have lost nearly -30% of its purchasing power!

On the other hand, the value of gold increased +369% during the same period (after correcting for inflation). As soon as investors regained confidence in the dollar, gold bullion quickly lost nearly -50% of its peak value. Still, investors who got in before the bubble made a handsome profit.

To compare, gold appreciated +109.3% from 2006 to 2010. This time the gain was due to increased uncertainty surrounding debt and equity markets alike. During the previous great spike in gold prices, it was more difficult to jump on the bandwagon, as the only way to gain exposure to the commodity was to own physical bullion. Today, it is easier to own gold through an investment in an ETF such asSPDR Gold Trust (NYSE: GLD) or via options and derivatives. 
      
Real Estate

A key part of realizing the American Dream is home ownership. Leading up to the Great Recession of the late 2000s, politicians and lenders realized this and enacted policies that quickly drove up the percentage of Americans in homes. Well, as we are now well aware, these seemingly benevolent actions in effect distorted financial and real estate markets to the point of collapse. According to bankrate.com, the average 30 year fixed mortgage rate is currently 4.36%. Anyone who has ever bought a home knows that this is the perfect opportunity to refinance and lock in an incredibly low rate.

The question today is whether property values have hit rock bottom after a period of drastic revaluations.

Of course, there are several different ways to invest in real estate. If you have the capital, you can always buy properties and lease them out, but this can quickly become strenuous and time consuming. If you aren't retired or looking for a new career, another real estate investment vehicle is a Real Estate Investment Trust (REIT). A REIT is a corporation investing in real estate that doesn't have to account for corporate tax, but in exchange is mandated to distribute 90% of income to investors. Essentially, it is a mutual fund investing in real estate rather than securities. And just like securities, REITs can be publicly traded, allowing any investor to put some real estate in their portfolio. [Interested in REITs, but don't know where to start? Check out our recent article, Lock In High Yields with 5 Historically Strong REITs.]

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The Great Divergence: Private Investment and Government Power in the Present Crisis

Robert Higgs

By Robert Higgs
Also by Robert Higgs:
Crisis and Leviathan: Observations amid the Current Episode   05/21/10
Campaign For Liberty



Private saving and investment are the heart and soul of the dynamic market process. Together they provide and allocate the resources used to augment the economy's productive capacity, generate sustained long-run economic growth, and thereby make possible a rising level of living. Economic crises interrupt this process by discouraging investors and causing them to consume their resources or to employ them in relatively safe, low-yielding ways. Absent entrepreneurs willing to take the great risks that characterize investments in great technological and organizational innovations, the growth process fades into economic stagnation or even decline.

The present recession starkly displays this characteristic crisis-related abatement of the economy's investment process. Indeed, the decline of private investment during recent years has been much greater than most observers realize. Consider the following data, taken or derived from the most recently revised National Economic Accounts prepared by the Commerce Department's Bureau of Economic Analysis (Tables 1.1.5, 1.1.6, and 5.2.6).

In 2006, gross private domestic investment reached its most recent peak, at $2.33 trillion (in constant 2005 dollars), or 17.4 percent of GDP. After remaining almost at this level in 2007, this measure of investment fell substantially during each of the next two years, reaching $1.59 trillion, or 11.3 percent of GDP, in 2009. This decline is severe enough, but it does not give us all the information we need to gauge the extent of the investment bust.

The greater part of gross investment consists of what the statisticians call the capital consumption allowance, an estimate of the amount of money that must be spent simply to offset wear and tear and obsolescence of the existing capital stock. In a country such as the United States, with an enormous fixed capital stock built up over the centuries, a great amount of funds must be allocated simply to maintain that stock. In recent years, the private capital consumption allowance has ranged from $1.29 trillion in 2005 to $1.46 trillion (in constant 2005 dollars) in 2009. Thus, even in the boom year 2006, about 60 percent of gross private domestic investment was required merely to maintain the economy's productive capacity, leaving just 40 percent, or $889 billion in net private domestic investment, to augment that capacity.

From that level, net private domestic investment plunged during each of the following three years, taking the greatest dive between 2008 and 2009, when it fell to only $54 billion (in constant 2005 dollars), having declined altogether by 94 percent from its 2006 peak! Last year only 3.5 percent of all private investment spending went toward building up the capital stock. Thus, net private investment did not simply fall during the recession; it virtually disappeared.

Unless this drastic decline is reversed soon, the future will be bleak for the U.S. economy. Without substantial net private investment, brisk economic growth is unthinkable beyond the very short run. Although private investment spending has recovered somewhat since it reached its trough in the third quarter of 2009, gross private domestic investment in the most recent quarter (April to June) of 2010 remained 21 percent below its peak in the first quarter of 2006, and net private domestic investment remained about 64 percent below its previous peak.

While this private-sector disaster was occurring, however, the government sector of the economy was booming. The ratio of all federal government spending -- purchases of goods and services plus transfer payments -- to GDP increased from 20.6 percent in the fourth (October to December) quarter of 2007 to 25.4 percent in the most recent (April to June) quarter of 2010.

Of this increase, about 73 percent represents an increase in transfer payments. According to the National Economic Accounts (Table 3.2), federal transfer payments for social benefits to persons -- old-age pensions, unemployment-insurance benefits, disability-insurance benefits, Medicare benefits, and so forth in great variety -- increased from a seasonally adjusted annual rate of $1.28 trillion in the fourth quarter of 2007 to $1.72 trillion in the second quarter of 2010 — a leap of more than one-third in only two and a half years. During the same period, government grants-in-aid to state and local governments rose from a seasonally adjusted annual rate of $382 billion to $525 billion, an increase of more than 37 percent.

Data compiled by the Bureau of Labor Statistics show that the number of private nonfarm employees fell from 114.1 million in 2006 to 108.4 in 2009, and even further this year, reaching 107.9 million in August 2010. At the same time, the number of government employees at all levels increased from 22.0 million in 2006 to 22.5 million in 2009, although a slight reduction has occurred recently, putting the number at 22.4 million in August 2010.

The Federal Reserve System has played a major role during the current recession, acting in unprecedented ways to inject funds into the financial system in general and into selected failing firms in particular, especially AIG, Fannie Mae, and Freddie Mac, which have been effectively taken over by the government, giving rise to a situation in which the government supplies or insures about nine-tenths of all new residential mortgage loans. Before the recession, the Fed's financial assets consisted overwhelmingly of U.S. Treasury securities. It now holds a variety of securities, including mortgage-backed securities valued on the Fed's books at approximately $1.1 trillion. In this way, the Fed has become the major direct source of funds for the government-sponsored enterprises that provided an inviting secondary market for the commercial banks and other primary lenders that inflated the housing bubble.

Through the TARP scheme, created late in 2008, the U.S. Treasury acquired ownership stakes in hundreds of commercial banks.

Of course, the government also took over General Motors and Chrysler, bypassing existing bankruptcy laws and ramming into place restructuring arrangements that served the Obama administration's political goals, especially its support for members (active and retired) of the United Auto Workers.
The foregoing measures constitute only a small fraction of the many significant actions the federal government has taken to augment its size, scope, and power during the current recession. Thus, while the market system's driving force -- private investment -- was being brought to its knees, the government's crisis-driven surge only added an additional discouraging feature to those operating though market channels, such as the reluctance of commercial banks to make new loans and investments and the desire of households to repay debts and increase their holdings of cash balances. A government growing in so many different directions at once, with many additional initiatives -- such as higher tax rates, new taxes on energy use, and new restrictions on financial service providers -- still awaiting enactment or regulatory specification, creates tremendous uncertainty for anyone contemplating a long-term investment: who knows what the contours of future government exactions, restrictions, and requirements will be, and hence whether a particular investment will prove to be profitable or not?

Therefore, a major consequence of the Great Divergence — the starvation of private investment and the feasting of government -- is what I call regime uncertainty. This form of uncertainty is a pervasive incalculable apprehension about the future security of private property rights in capital and the income it yields to investors; indeed, a pervasive apprehension that extends beyond investors to include nearly all private participants in the economy — consumers, workers, and managers, as well as investors -- in regard to the future economic order. The Great Divergence in itself is very bad news. Its effects in enhancing regime uncertainty only make it more unfortunate for everyone outside the privileged precincts of government.


Robert Higgs [send him mail] is senior fellow in political economy at the Independent Institute and editor of The Independent Review. He is also a columnist for LewRockwell.com. His most recent book is Neither Liberty Nor Safety: Fear, Ideology, and the Growth of Government. He is also the author of Depression, War, and Cold War: Studies in Political Economy, Resurgence of the Warfare State: The Crisis Since 9/11 and Against Leviathan: Government Power and a Free Society.



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Rogers gets appetite for Chinese gold investments

World-renowned investor Jim Rogers is in talks with Hengtai Datong Gold Investment Ltd on cooperation opportunities to cash in on surging demand for the precious metal in China, the company claimed on Wednesday.

Wang Zhibin, the Beijing-based company's CEO, said that Rogers may either buy a stake in the privately held firm or jointly develop gold mine projects with it.

"Our innovative investment model in bullion has attracted Rogers," said Wang, adding that the US investor, who visited the company's headquarters in July, may use the company as a platform to enter China's nascent bullion investment market.

The company's transaction volume for the yellow metal jumped 50 percent in the first seven months of this year compared with the same period in 2009, on Chinese investors' feverish enthusiasm for gold as the realty and capital markets lost steam.

"I bought gold in China many times, and I'm sure I will continue to buy gold in China, I do think there's fabulous future for gold in China," Rogers said in a telephone interview with China Daily on Wednesday.

But he didn't confirm possible cooperation with Hengtai Datong, saying that he only had dinner with the company's top management team a few weeks ago in Beijing.

"If I find a suitable way to invest (in China's gold market), I'm sure I will," said Rogers, the co-founder of the Quantum Group of Funds with tycoon George Soros in the 1970s.

"Anything is possible, if the opportunities come along," Rogers said.

China is the world's biggest supplier and the second-largest consumer of the precious metal. Gold demand in the nation surged 9 percent to 427.5 tons in 2009. That compared with the global market's 11 percent drop in demand over the same period.

Zhang Bingnan, vice-president of the China Gold Association, said that China is expected to report even higher gold output in 2010.

The People's Bank of China, along with five ministries, released a report earlier this month to encourage the development of the domestic gold market.

If the government seeks to foster the growth of China's gold market, this will create "great opportunities" for investors, Rogers said, adding that the size of the country's population and the limited supply of the precious metal in the world market were also the reasons for him to bet on gold.

He said that China transition from a less-developed to a developed economy would offer "hundreds of opportunities", but he refused to comment on the sectors that he favors the most. 

Source: China Daily