Gold News and Silver News

Learn Korean Daily Leson 70 It was delicious!

2009-08-05T00:37:00.001-07:00

◆ 잘 먹었습니다.

[Chal mogot-ssumnida.]

It was delicious!

A : 맛있게 드세요.

I hope you enjoy your meal.

[Masit-ge tuseyo.]

B : 네, 잘 먹겠습니다.

Thank you.(Literally: Yes, I'll have a delicious meal.)

[Ne, chal mok-getssumnida.]

<식사 후> <After the meal>

B : 정말 잘 먹었습니다.

It was a delicious meal!

[Chongmal chal mogot-ssumnida.]

A : 특별히 차린 음식도 없었는데, 한국 음식을 좋아하시나 봐요.

We didn't prepare much. I guess you like Korean food.

[Tukbyulhi charin umsikddo opsonnunde, hanguk umsigul choahasinabwayo.]

B : 네 , 좋아하지만, 오늘은 특히 맛있게 먹었어요.

Yes, I usually do, but today's meal was extra delicious.

[Ne, choahajiman, onurun tukhi masit-ge mogossoyo.]

You will have quite a few opportunities to visit a Korean home while living in Korea. Usually Koreans will invite you to eat with their family and if so, a polite table manner is to say '잘 먹겠습니다[chal mok-getssumnida] before eating, which literally means. 'I will have a delicious meal.' After you finish your meal, another good table manner is to thank your host or hostess by saying, '잘 먹었습니다.[chal mogot-ssumnida] or '맛있게 먹었습니다.'[masit-ge mogot-ssumnida]

Bullion dealer champions physical Gold Investment

2009-08-05T00:33:00.001-07:00

A prominent UK Gold Bullion dealer has today (August 4th) highlighted the value of making a physical investment in the yellow metal, the Daily Telegraph reports.

There are a number of options open to investors, such as buying jewellery, exchange-traded funds and allocated or non-physical, unallocated gold accounts.

However, Tony Baird of Baird and Co explained in an interview with the newspaper that buying bars - rather than coins - offers a particularly attractive form of Gold Investment.

He said: "On a weight-for-weight basis, premiums on bars are generally lower than for coins and this makes bars the more attractive proposition for investors.

"As a rule, bigger bars have lower premiums (reflecting manufacturing and refining costs) than smaller bars."

Meanwhile, Marcus Bachmann, who manages about $140 million worth of assets in the Johannesburg-based Craton Capital Precious Metal Fund, also made a positive prediction for the future of gold prices.

He explained that the recent surge in gold jewellery demand in Asia - and in particular China - looks set to continue for the foreseeable future.

"The economic environment in Asia is improving. You can expect jewellery demand will potentially be supportive for the gold price," he told Bloomberg.

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Royal Mint doubles output on increased demand for Buying Gold

2009-08-05T00:32:00.001-07:00

The Royal Mint in the UK was forced to double its gold production in the second quarter of 2009 as demand for the yellow metal continues to grow.

According to a new report by Bloomberg today (August 4th), output was increased from 8,030 ounces to 16,910 ounces on a year-on-year basis during the three-month period.

Furthermore, the news provider - which obtained the information under the Freedom of Information Act - revealed that production in the first half rose 86 percent to 45,406 ounces.

Investors traditionally Buy Gold as a store of wealth in tough economic times and as a hedge against possible inflation, with both strategies finding favor so far this year.

"There's still interest in gold as a safe-haven asset," said Stephen Briggs, an analyst at RBS Global Banking and Markets in London.

"This whole sector will capture people who don't have access to the futures market."

Last week, the World Gold Council claimed that China could surpass India as the world's leading consumer of gold by the end of 2009.

According to the marketing organization, demand for Buying Gold in China during the first quarter of the year was six times higher than in India, where levels fell by 83 percent on a year-on-year basis.

"India's gold consumption is reportedly dropping this year due to the financial crisis," said Hou Huimin, deputy head of the China Gold Association, in a Bloomberg interview.

"China's consumption is growing and this year's will surely be more than last year's."

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Goldman Sachs Advises Closing Long Euro-Dollar Bets

2009-08-01T19:20:00.001-07:00

Investors should close bets the euro will gain against the dollar, according to Goldman Sachs Group Inc., recommending an end to the trade before the 16-nation currency reached the bank's target of $1.45.

The euro was in a 4 percent range between $1.3749 and $1.4304 since the U.S. investment bank's June 9 recommendation to purchase the currency. Investors would have made a 1.4 percent gain using $1.3890 as an entry, Goldman Sachs analysts wrote in a note to clients today.

"We do not see any near-term macro catalyst for an extension of the move in the direction we hoped for," the report said. "Going forward, we will be watching the market closely for a cleaner entry point to recommend fresh euro-dollar longs." A long position is a bet a currency will strengthen.

The dollar advanced today from near the lowest level this year against the currencies of six major U.S. trading partners, including the euro. The euro, which makes up 58 percent of ICE's trade-weighted Dollar Index, fell 1 percent to $1.4027.

The Dollar Index increased 0.9 percent to 79.531 after reaching 78.315 yesterday, the lowest level since Dec. 18. The gauge also tracks the greenback's value against the pound, yen, Swedish krona, Canadian dollar and Swiss franc.

To contact the reporters on this story: Daniel Tilles in London at dtilles@bloomberg.net; Oliver Biggadike in New York at obiggadike@bloomberg.net

Gold will hit $1,000 again

2009-08-01T18:53:00.001-07:00

On the supply side, gold mining production has been decreasing at a rate about 4 to 5pc per year after reaching a peak production in 2001, Jason Toussaint, managing director of exchange traded gold, said today. "Even if demand stays the same, prices must go up."

Gold, traditionally a popular hedge against financial turmoil due to its store of value, has risen 5.7pc this year and briefly traded above $1,000 in February. It reached a record $1,032.70 on March 17, 2008.

"Investors are much more focused on wealth preservation than upside returns because they are much more focused on risk management within portfolios," Toussaint said. "We will see that continue. Demand for gold will also rise as pension funds, sovereign funds and other asset managers seek to preserve their wealth against inflation. Only 3pc to 5pc of assets at large institutions are allocated to gold, he said."

Holdings in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, fell to 1,072.87 tons yesterday, the lowest since March 17, according to the company's website.

Gold for immediate delivery was up 0.2pc at $931.63 an ounce.

By Bloomberg

Gold Seeker Closing Report: Gold and Silver Gain Roughly 1%

2009-07-29T05:21:00.001-07:00

	Close	Gain/Loss
Gold	$953.30	+$6.15
Silver	$13.71	+$0.21
XAU	148.13	-0.02%
HUI	657.63	-0.11%
GDM	1092.96	-0.01%
JSE Gold	2331.92	-28.29
USD	78.76	-0.14
Euro	142.13	-0.02
Yen	106.94	+0.27
Oil	$65.40	-$0.21
10-Year	3.554%	+0.077
T-Bond	117.28125	-1.046875
Dow	8881.26	-0.39%
Nasdaq	1926.38	+0.53%
S&P	954.07	-0.05%

The Metals:

Gold and silver saw slight gains in Asia before they fell to see modest losses at as low as $944.60 and $13.37 in London, but they then rallied back higher for most of trade in New York and gold ended near its high of $954.45 with a gain of 0.65% while silver ended near its high of $13.748 with a gain of 1.56%.

Euro gold rose to about €670, platinum gained a dollar to $1169, and copper gained over 7 cents to about $2.52.

Gold and silver equities fell about 1.5% by midmorning before they rallied to see over 1% gains by early afternoon, but they then fell back off into the close and ended with slight losses on the day.

The Economy:

There were no major economic reports today, but Bernanke continued his testimony before Congress today with a Q&A session in front of the Senate Banking Committee. His comments were mixed, but the overall feeling was definitely one of cautiousness on the future of the economy heading forward. He also "fought hard to protect the independence of the U.S. central bank and keep responsibility for consumer protection on financial products in its hands."

May FHFA Home Price Index Rises 0.9% Forbes

Tomorrow at 8:30AM EST brings Initial Jobless Claims for 7/18 expected at 558,000 and at 10AM is the Existing Home Sales report for June expected at 4,830,000.

The Markets:

Charts Courtesy of http://finance.yahoo.com/

Oil pared early losses but still ended slightly lower after it was announced that crude inventories fell 1.8 million barrels, gasoline inventories rose 800,000 barrels, and distillates rose 1.2 million barrels. Capacity Utilization fell 2.1% to 85.8%.

The U.S. dollar index and treasuries fell on renewed worries over the continually enormous amounts of debt to be auctioned.

The Dow, Nasdaq, and S&P traded mixed and near unchanged in reaction to varied earnings reports.

Among the big names making news in the market today were Pfizer, GE, PepsiCo, Delta, CIT, Boeing, IBM, Morgan Stanley, and Wells Fargo.

The Commentary:

"Dear Friends,

This is the real thing.

Gold is going for its third try against $1000 which will after minor work fall as gold moves on to $1224.

If you are not protected you are about to lose the opportunity to protect yourself.

May God and Gold help us.

Respectfully yours,"- Jim Sinclair, JSMineset.com

"Dear CIGAs,

From my vantage point, the big story of the day is the action in the copper market which soared through its high of this year and pulled gold and silver along with it even in the face of a weaker crude oil market and collapsing grain prices.

Copper is moving higher in anticipation of a rebounding Chinese economy and thoughts among some that the US economy has hit a bottom. Keep in mind that does not necessarily mean that we are off to the races in the US; even those subscribing to the "worst is over" theory are not proclaiming that. What they are looking for is very flat growth with the economy meandering sideways over here in the US. Interesting enough, the lumber market does not seem to be buying into the recovery theory. Neither do the bonds for that matter which although lower on the day thus far, have rallied sharply over the last two trading sessions especially after Bernanke's Congressional testimony of yesterday.

Chatter today was that the CFTC looking into limiting the index funds (and perhaps some of the hedge funds) position wise spooked wheat market traders putting pressure on that market which did not help corn any, as it has been under pressure from what appears to be nearly perfect growing weather (there is talk of record yields and perhaps even a record crop). That has me eying the CCI index, which is off its high of this year but appears to be holding well above the lows it recorded late last year and early this year. If the commodity markets are looking for deflation, they do not appear to be showing it at least on that chart and particularly on the copper chart which is amazing bullish.

The commodity currencies also do not appear to be voting with the deflationists as they are all higher as well. It will take a push by the bonds above 121 ^00 to tip the scales in favor of the deflation argument as well as a meltdown in those commodity currencies. For now, that crowd seems to be running out of allies.

The Dollar was weaker today. There does not appear to be much in the way of chart support until we get down to this year's low near 78.40. A crack of that and kiss the greenback goodbye until at least 76. That should be the catalyst to push gold above $980 and on up to $1,000. Generally once we get through August, seasonals tend to begin favoring gold advances.

Taking a look at the hourly gold chart you can see that the same pattern of consolidation, followed by a leg higher, followed by consolidation is very obvious. Resistance can clearly be seen near today's session highs which is where our "friends" the bullion banks continue to ply their evil craft attempting to create a make believe world in which there are no consequences resulting from nearly unlimited Quantitative Easing.

The gold shares are higher today with quite a battle shaping up near the 360-363 level on the HUI. Should the miners be able to push cleanly through this level on the close, it would augur further strength and a test of the 380 level. The mining shares look to be steadily GRINDING higher. It would take a closing push through the 400 level to set them on more of a sharper uptrending move."- Dan Norcini, More at JSMineset.com

"August Gold closed up 6.4 at 953.3. This was 8.7 up from the low and 1.7 off the high.

September Silver finished up 0.222 at 13.7, 0.045 off the high and 0.315 up from the low.

After some initial weakness the gold contract managed a fairly impressive recovery effort on Wednesday morning and that strength seemed to be off a combination of residual weakness in the Dollar, periodic up beat economic views and gains in US equity prices. With the Dollar flirting with a significant downside breakout on the charts, it is possible that the currency market influence was a dominating force in the trade. Some players even went as far as suggesting that the decision to leave quantitative easing in place (from the Humphrey Hawkins testimony) for an extended period of time might have rekindled inflationary expectations again.

The silver market seemed to outperform gold after the initial early morning choppiness. Like the gold market, the silver market seemed to garner buying interest off the combination of weakness in the Dollar, strength in equity markets and perhaps even because of strength in copper prices. In fact, copper prices managed to reach the highest level since last October and that in turn seemed to provide some spillover buying interest in the silver market."- The Hightower Report, Futures Analysis and Forecasting

GATA Posts:

Silver market will overtake gold: David Morgan

2009-07-29T04:06:00.000-07:00

David Morgan, whose interest in silver dates to the tender age of 11, returns to The Gold Report today to discuss the latest buzz about his favorite subject. One of the world's leading authorities on silver as a commodity, an investment, a safe haven and an increasingly important manufacturing metal, he expects this year's stronger-than-anticipated late spring climb to lose momentum before the end of the month.

Longer term, though, the founder of the respected monthly, The Morgan Report, sees silver appreciating at a faster pace than gold. And while he also likes the idea of monetizing silver—rather than gold, because silver is far more liquid—that's one wish he does not expect to see granted.

The Gold Report: Last month saw the biggest single gain in silver since the 1980s. Why did this happen when it did? And what should we expect in the months to come?

David Morgan: I don't know if anyone can really answer why it happened in May. This sounds trite, but it's true: Any market, commodity or stock, is based on buying or selling pressure. A lot of buying pressure in silver from all angles—the exchange traded funds, the mining equities, and the physical market itself—combined to really push the market higher.

Normally you see good seasonality in precious metals, with peaks sometime in the first quarter every year. We've seen the May peak a couple of times before, the big peak in 2008 also came in May. Here we are again actually in early June and we're still near a peak. I do believe, unfortunately, that we will see the top of this on an intermediate-term basis.

TGR: And what will happen then?

DM: Loss of momentum. I've been following this market for more than 30 years and I'm good at making calls. It has a very historic parabolic pattern, silver especially. Basically, like anything, it loses momentum. If you throw a baseball up into the air, it reaches its apex. As it's getting to its peak, it's starting to run out of energy. It's the same in the stock market. You starting to run out of energy and that energy is new buyers. So I think we're getting to that point. Also, it's very obvious if you look at the charts. As far as everything I know so far, it appears as if we're going to hit a peak fairly soon.

There could always be surprises, especially on the silver side. Silver is such a small market that anything can happen. It wouldn't take much buying to continue to accelerate silver to the upside. As an example, when Warren Buffett bought silver, the silver market went from under $5 to $8 very, very rapidly. Everybody wondered what was going on. It was only after the fact, once Buffett announced that he'd bought 129.7 million ounces of silver, that we learned the reason for that rapid rise.

So, certainly, some large buyer could be waiting in the wings to come into the silver market. That kind of new buying could take silver to $20 or $25, who knows? It depends on how much buying is available; how much is done would determine where the price rests. Barring an event of that nature, I think we're near a top—temporarily.

Longer term, I believe we're going to see silver again outpace gold as it has done this year. And I don't see the top of this market coming until probably 2011 to 2012, and perhaps longer than that.

TGR: When you say 'this market,' are you referring to precious metals as a kind of hedge against inflation? Or do you mean silver specifically?

DM: The precious metals move together, generally. When they peaked in January of 1980, they basically peaked nearly the same day. Whether that'll happen the next time around, I don't know, but I think they'll peak probably within the same month or so.

There are arguments on both sides. People such as Jim Sinclair state that gold is going to make a huge rally and it's really not going to pull back but will stay at a very high level. Certainly that could be the case if gold were remonetized (at a high price) at some point.

I don't think silver will ever be remonetized, though I would like to see that happen. My friend in Mexico, Hugo Salinas Price, proposed putting silver into circulation alongside the Mexican peso. It was an extremely favorable idea to not only the governors of all the states of Mexico, but additionally to almost all the legislature and something like 90% of the people. However, the banking establishment has a lot of clout in Mexico, and right now the proposal has been shot down.

TGR: Assuming that precious metals investors should use different strategies for silver versus gold, could you highlight the difference?

DM: There's a widely held perception that gold is much, much different than silver. Gold-centric people have the philosophy that gold is the only monetary asset available and it's the only safe-haven asset. But the actual objective truth is that silver has about an 85% correlation with the price of gold. It doesn't move exactly as gold moves, but it does most of the time. So regardless of what guru or what gold expert you listen to, you have to stay grounded and realize that silver and gold pretty much march to the same drummer.

Of course, silver is a smaller market, so its moves are greater percentage-wise than gold's. It's like a NASDAQ stock versus a Dow stock. I think that's a good analogy. Gold is like the Dow stock; more of a sure thing. It trudges along as long as you're in a bull market and you're pretty safe buying it. Silver is more like a NASDAQ stock. It has bigger moves up and down, but chances for extreme gains are much greater than with the Dow stock.

In my opinion, metals portfolios should have both gold and silver. The advantage of silver is actually liquidity. Although more gold than silver is available in investment form, silver has a much lower price, which makes it far more liquid. Gold is not nearly as liquid. It's pretty hard to buy groceries or gasoline with a gold coin in circulation when it has a value of $1,000.

TGR: In January the ratio of silver to gold was on the wider end than usual, so many people who follow silver were expecting a good run up to return to a more traditional ratio. What is that ratio and where are we today?

DM: This ratio question is very controversial. I've probably become more of an adherent to the ratio than many others. If we go back in history and look at the background, and for 4,500 years we charted this out and every century measured one foot long, the chart for 4,500 years would be about 45 feet. And for every foot of that chart, you'd have a gold/silver ratio below 16:1 except for the last 19 inches of that chart. So, let that sink in for a moment please!

If you can picture that in your mind, the chart measures 45 feet from left to right and the ratio is 16:1 or less for every foot except for the last 19 inches, you're visualizing monetary history. (This information courtesy of Franklin Sanders of The Money Changer.)
For many, many hundreds of years, the ratio was 12:1, which is what I call the natural ratio. The natural ratio is how it came out of the ground relative to gold for all of those centuries. No one had a mandate for a 'correct' ratio. The marketplace determined the ratio based on what came out of the ground. Today the ratio favors silver from the aspect now that the natural ratio is now 8:1, which means that in the earth's surface, there's roughly eight ounces of silver available for every ounce of gold that's available.

Silver usually disperses itself nearer the surface and a lot of that easy-to-get-to silver has already been mined out of the earth's surface. During one of the periods that the metals were "officially" monetized, Sir Isaac Newton established the ratio of silver to gold at 15.5:1. That's what I call the monetary or the classic ratio, which held up until about 1873. The Crime of 1873 (the Coinage Act of 1873) basically demonetized silver. At that time, the ratio started to take off and it's been as high as 100:1 a couple of times in recent history.

Because silver is becoming scarcer and its uses continue to increase and investment awareness grows, I believe that the ratio will favor silver over the longer term. When I said that the silver market bottomed in September of 2003, I was very accurate with that call. The ratio was roughly 80:1 then. Today it stands at about 60:1. It's been as low as about 50:1 during this bull market. At the top of the market, we may see the classic ratio reestablished.

The classic or monetary ratio, as I call it, was reestablished very briefly in 1980, when silver peaked. The ratio got to around the16:1 level at that time. I think we could reasonably see 30:1, which would mean that silver would outperform gold 2:1 from here on out. However, to be consistent I have stated that in a buying panic we might even see a 10:1 ratio. I want to keep my creditability, before we get that type of ratio we need to see 50:1, then 40:1 and so on; in other words, let us watch the market before we make too wild a forecast.

TGR: How does paying attention to the ratio benefit the investor?

DM: There are lots of ways to look at the ratio. It's just numbers. Everything I've said to this point is pretty much history, so does it mean anything? I think it does. Whether you put a lot of faith in the ratio is an individual choice. What does a ratio do to your advantage?

From my perspective, it's a huge advantage. These metals trade within a wide channel, and I do physical trading between gold and silver. When silver is dear, we sell it; when it isn't, we buy it back. So you can actually trade this ratio back and forth and make money by just driving down to your coin dealer or mailing your metal in to your favorite coin dealer.

In summary, there are advantages to this ratio if you pay attention and know what you're doing. I like it. And I like the wide swings because, as I said, you can take advantage of them. You can end up with a much bigger position in the metals just by swapping silver and gold back and forth.

TGR: How do you know when silver becomes more dear or less dear if it trades in a much wider band?

DM: There are several ways and, of course, it's an art—not a science. One is by using technical analysis. A second one is looking at sentiment. Not very many articles were favorable to silver a couple of months ago; now tons of articles are talking about silver. I'm reading articles by people I've never heard of, and that's fine. I always encourage new people to come into the market. I'm a big free-market guy. In fact, I've said many times and will state it again—the "free-est" market of all is the free market of ideas. Everybody who wants to should have a voice on whatever subject they want.

TGR: You've been kind enough to write a series of articles on basic silver investing, which we're going to feature in The Gold Report in our Guide to Silver Investing every week. Would you like to share any thoughts about this series for our readers to whet their appetites?

DM: I would. We're on the verge of the next big move up in the metals. Whether that happens this summer or next spring, I don't know, but I know it's going to take place. A lot of people will be entering this market for the first time.

As you know, gold gets a lot of free publicity. It's become almost mainstream. You hear it on Wall Street, you hear it on CNN, CNBC, some of the financial channels. But silver is hardly ever mentioned. So I thought it was a good public service to write kind of the primer on the silver market, on how you establish an investment position in silver, why it's an important part of a precious metals portfolio.

I was happy to do it, I'm glad you asked me to—I think it's going to be beneficial to some people out there who are at least curious enough to investigate the silver investment realm.

TGR: With all of the publicity focused on gold, the metal itself, a lot of the gold mining companies, particularly the seniors, also have enjoyed a lot of media attention and have seen a really great run up in stock prices. What's been happening with the silver producers?

DM: Silver mining companies have gone up equal to the gold mining companies, better in most cases. You don't see a lot of that in the news, but I study as much as I can on both sides—gold and silver—but I devote more time to silver. There's been quite a bit of coverage lately—not in the mainstream but on the Internet—regarding silver and silver stocks. A lot of these stocks have done quite well, as you would expect. Silver's had its best month (May 2009) in 22 years, so, obviously, somebody's going to notice that. A lot of latecomers, so to speak, are jumping on the silver bandwagon right now.

If silver does its usual, which is to disappoint right at the top, you probably won't hear from some of these people again for a while. The markets get overbought on the way up and they get oversold on the way down. But generally speaking, you've got to look at the major trend and the major trend is still up for both of these metals.

Because of that fact, if you align yourself with a major trend, you're going to come out quite well in the long run. The problem with today's investors is that most of them are failed speculators. They want everything to go their way for a week or a month or two and then trade out. Certainly, you can make more money trading than you can in any other way, but it's extremely difficult. That's why I advocate keeping a core position on about 75% and trade with 25%. That way, if anybody mis-times the market and you know you're in a major bull market, you're still going to come out way, way, way ahead.
TGR: In that core position of 75%, do you have a certain percentage in seniors versus juniors?

DM: I do, but not really in percentages. Very much of the big money goes into the major companies that have huge potential. A lot of times I actually write options against my position, as I'm doing now. I think that we are at an intermediate top. These stocks have gone up substantially. I can rent my stock for about a 17% yield for maybe an eight-month write. And if the market comes back, as I expect it will, somebody has rented my stock from me and the premium comes out of that. I keep the option premium, and I also keep my stock.

I use that option premium as my fun money. I take that money and put it into some of my favorite juniors. But I advocate small money for smaller companies that are highly speculative. You really want to bet money you can afford to lose. In other words, if you put a lot of money in a junior and it's going to ruin your life if it fails, you're doing the wrong thing.

If you want big money, serious money goes into serious companies. Fun money goes into fun companies. That's the way I approach it.

TGR: Mines Management Inc. probably would be characterized as being in the advanced exploration stage. What's the story there? Is that a place for some fun money?

DM: Full disclosure, I own Mines Management. I was the first one to write it up back in the early 2000s. It's a company that I've gone back and forth on. It has a project called the Montanore in northwestern Montana. Historically Montana was notoriously unfavorable to mining, but that's the past. Montana has become much more favorable to mining. I believe that with about 150-plus million ounces of silver and well over a billion pounds of copper that Montanore will become a mine.

They have continued to work on the project, but it's going to take some time. The Environmental Impact Statement public review period just ended. Whether it gets approved on the first round or not doesn't necessarily mean it won't be approved ultimately. The price of silver and capital requirements for development are other factors that may affect the timeline. Although the company has fairly strong cash and line-of-credit balances, they may opt to curtail development activities to conserve cash until conditions improve.

In any event, Mines Management is a rather conservative speculation. It doesn't trade a lot of volume. We basically recommended the stock around the $1 level and recommended taking profits around $8. As the stock came down, I continued to watch it and we reentered around the $2.60 level.

TGR: What do you expect for the final phase or leg of the precious metals market?

DM: I think what we just saw into early June is a pretty good precursor to it, meaning that these metals keep going up in price; they can't go any higher and yet they do continue to move up. In the final leg some of your gurus like me might be saying they've peaked and they continue to go up. At that point, people start getting greedy and think it can continue forever. This is known as a blow-off top but sooner or later the bubble does burst.

It's just like what happens in all markets. It happened in the housing market, it happened during the technology boom. People were buying stocks there that were cheap at the top because they were cheap and these companies had absolutely no merit whatsoever. You'll see the same thing happen in the gold and silver sector, especially with the mining stocks in my view. The problem this time is selling gold or silver (the actual metal) might not be wise this time and I will address my readers at the time on strategies I have already developed to keep them profitable and safe at the same time.

TGR: When silver is frothy and there's some summer slump, many times you'll see a pullback in exploration. Minefinders Corporation and Kootenay Gold Inc., for instance, seem to be relying a lot on exploration. Could they weather a longer-term slump in the silver price?

DM: Well I consider Minefinders well past the exploration phase; in fact, if you understand the "discovery" cycle, Minefinders has a chart pattern that is almost textbook perfect. This is one we got in and out of when the "overvaluation" hit during the initial discovery. Regardless, you have to ask yourself two simple but fundamental questions: 1) How much money do they have in the treasury?; and 2) What is their burn rate? You really have to look at that and find out whether your favorite exploration company can weather another year or so of downtrend. I doubt it's going to take that long, but it may be two years. In any case, at the end of that time, you still want to have a fair amount of cash to proceed onward, because without cash you can't continue a drill program. So you have to ask the right questions.

There are, undoubtedly, some very good exploration companies out there that are out of cash and basically unable to raise any more. The really, really good ones will be cherry-picked by companies that maybe don't have as good a project but do have the cash to buy them up and thus make a better combined company for their shareholders. If I were on the board on any mining company, that would be my recommendation—use cash wisely to strengthen shareholder value.

You have to be very careful, I think. The heyday of easy money in the mining sector is over. You can't just blindly buy any company that has gold or silver in its name and expect to make 500% anymore. You have to be much more careful about where you place your money from here on out.

I do need to give a caveat, though.

TGR: What's that?

DM: When the public rushes into the market, you will see any company that has gold or silver in its name start to move. But it's a very, very short period of time before it peaks—similar to what happened to the technology boom. At the end, the public was buying some really ridiculous companies because they were technology stocks, but not for any other reason.

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More Mortgage Meltdown

2009-07-29T03:44:00.000-07:00

Expect more US banks to fail as the mortgage meltdown gets worse...

U.S. CITIZENS have mountains of debt to work through yet, says Chris Mayer of the Capital & Crisis newsletter.

The last bubble was one for the ages. And we've all heard stories of one kind or another.

There was the glass cutter who earned $5,000 per month, pretax. So WaMu gave him a $615,000 home loan with payments of $3,600 per month.

There was a house – a shack, really – that appraised for $132,000 and got a mortgage of $103,000. The owner hadn't worked in 13 years. Upon foreclosure, a neighbor bought the house and paid $18,000 just to tear the thing down.

The most eye-popping of all was a house in Fort Myers that sold for $399,600 on Dec. 29, 2005 – only to sell for $589,900 the very next day, Dec. 30, 2005.

America, it seems, just went crazy – borrowers, lenders, nearly everybody. These anecdotes and others are told in a new book titled More Mortgage Meltdown by money managers Whitney Tilson and Glenn Tongue.

But what caused the mania and how we got there is less to the point than what happens from here.

"If the problems in the mortgage market were limited to subprime loans, then the carnage would be mostly behind us," the authors of More Mortgage Meltdown note. Subprime loans were the riskiest mortgage loans. Prime loans were where the borrower made a substantial down payment and had good credit history. Subprime loans, by contrast, were to borrowers of poor credit quality and spotty job histories.

The bigger problem is that the mortgage bubble infected a number of areas beyond just subprime. The subprime crisis was the first to drop, like a marathon dancer that falls to the floor exhausted. But there are still other dancers on the floor ready to topple over too.

Take a look at this chart, which has gained some currency in the worried circles of financial people. It's worth a bit of study. It shows you the other dancers on the floor.

The first thing to jump out at you is that subprime is only about a $1.5 trillion market – not anywhere near the biggest of the risky loans. There are other layers here.

Subprime is only one slice of this low-grade bologna. It sits at the bottom. Alt-A is the next riskiest slice of mortgages above subprime. Alt-A are mortgages to people who are better credit risks than subprime, but still not prime. Documentation is still spotty as far as verifying income, and loan to values are high. Plus, about a quarter of these mortgages went to non-owner-occupied homes – meaning they were for "investors" and therefore subject to even greater speculation.

The scary thing is that this mortgage market of Alt-A loans is perhaps 50% to 100% bigger than subprime. Unlike subprime, Alt-A loans typically have five-year resets – meaning, the interest rates adjust to higher rates. The Alt-A reset surge doesn't really get started until 2010! It continues through 2012.

You'll also see something called "option ARMs" on that chart. These loans usually have ultra-low teaser rates and often were interest only. Again, the reset surge for these loans only starts in 2010.

You'll also see something called "jumbo prime." These are big loans – on average about $750,000. These were common in the most inflated bubble states, such as California and Florida, and were often made to poor credit risks. This is a market of $1-1.5 trillion – about as big as subprime.

Then there are home equity lines, which you'll see just below jumbo prime. As Tilson and Tongue write, home equity lines funded "in 2007, 30% of new car purchases in California and 20% in Florida." These loans are second loans, behind all the garbage I mentioned above. That means that many home equity loans will be a total loss for the lenders, as housing prices have collapsed and can't support the junk loans in first position, much less junior liens like home equity lines. (See nearby chart for a look at the housing price index collapse.)

I won't go into all of these loan categories, but I think you get the picture.

Moreover, the pattern for all of these loans was the same. You see rapid growth in the bubble years, roughly from 2000-2007.

In fact, the riskiest loans grew the most. You also see skyrocketing delinquency rates beginning in 2007 and continuing today – and massive losses for banks. Subprime was only the first wave.

Through March of 2009, US banks had taken only $1.1 trillion in write- downs to date. Even the most conservative estimates put total credit losses at $2.2 trillion.

But Tilson and Tongue make a convincing case that the losses will be far worse than that – more like $3.8 trillion. And these numbers seem only to grow over time.

I remember sitting at a Grant's conference over a year ago when John Paulson, the fund manager who saw all this coming and profited mightily, tossed out $1 trillion as the number for total losses. That number induced gasps at the time. So I think Tilson and Tongue will be closer to the mark. It may well be even more than that when it is all said and done.

The fallout from all of this is that the banks will have to raise a lot more capital. They've raised only $1 trillion so far – yes, only. Given the high leverage in the banking sector, they may yet need to raise at least another $1 trillion. I don't see how that is possible in today's market. Where is the money going to come from?

Take a look at the nearby chart to see how leverage has increased over time. As banks' assets got riskier – with subprime, Alt-A and all the rest – they actually borrowed more to hold these assets. The typical bank has only 4 cents of tangible equity for every Dollar of assets. That means a 4% drop in asset value wipes out the equity – making the bank insolvent. As you can see, the banking system is vastly undercapitalized.

And this, then, answers the great fundamental question that seems to baffle so many market commentators.

Why aren't the banks lending? People point to the trillions of Dollars the government pumped into the economy, including on bank balance sheets. But the answer is that the bankers know they will need the money to cover losses from their toxic loan portfolios.

The banks are clearly not lending. Banks are cutting lines of credit to consumers – and to businesses, too. New loans in various business categories are down 60- 80% from where they were a year ago. It is hard to imagine any economic recovery when the banking system has such gaping funding holes it needs to fill.

As it is already, banks are failing and the losses are severe; on average, the losses amount to more than 40% of assets. The data coming in on foreclosure recoveries are bleak. In California, recovery is often less than 35 cents on the Dollar. It's not supposed to happen like this. It's like the hogs broke free and skinned the butchers. If this crisis is anything like previous cycles, we've got a long way to go on bank failures.

How do you invest in this environment? An early conclusion would be to still avoid banks and leveraged financial institutions in general. And don't expect the banks to start lending so freely again anytime soon.

That means you should also avoid businesses that depend on regular access to credit to grow – such as real estate investment trusts. I would also say that the housing market is not due for any recovery anytime soon. There is still enormous inventory to work through. Homebuilding stocks and related investments also face stiff head winds.