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When Quantitative Easing causes inflation, people naturally turn to Gold Investment…

THE BIG ISSUE in global markets is the meeting of the Bank of Japan, writes Julian Phillips of the Gold Forecaster, where they debated what to do about a Yen strong enough to damage Japanese exports, the mainstay of the Japanese economy.

It was agreed that Japan will spend ¥920 billion ($10.8bn) on economic stimulus and compile an extra budget if needed. The central bank expanded a loan program by ¥10 trillion ($116bn). This left the market underwhelmed and the Yen went stronger still. This was a red rag to a bull as it invited speculators to push the Yen even higher. They will keep pushing it up until the Bank of Japan takes sufficient action to prevent its rise.

The talk is now that it will rise to around ¥78 against the US Dollar, which will force crisis action on the government. But far more than meets the eye lies in this action and potential action.

• It attacks the reasoning behind Exchange Rates;
• It encourages speculation both on the Yen; and
• Unlike the US action, this does not fill the holes caused by deflation but devalues the buying power of the Yen with an inflationary stimulus.

Both these new actions thus undermine Japanese money internally and externally. If no one objects to this, then a tacit approval of this policy is being given. If this is the case, then you can be sure that other major nations will follow suit. What of price stability and exchange rates that accurately reflect the Balance of Payments of a nation.

To understand the importance of these issues we take you back to the last time you heard the US complain about the undervaluation of the Chinese Yuan. It is perceived by many in government and in both parties that the Chinese are manipulating their currency to gain advantage in international trade and this is making many people angry.

The Japanese are about to attempt the same. While the principles of a currency’s exchange rate dictates that it should reflect the underlying Balance of Payments, such moves clearly go against this. Perhaps we should question whether the Balance of Payments should dictate an exchange rate? Or should it be as in Asia, do what you can to support your exports? If it is the former then the system of exchange rates as we have relied on is giving way to expediency, a road with no principles. In short, if expediency is the way forward then the global system of exchange rates is under threat.

It is not simply a case of manipulating ones economy to engineer a weakening of one’s currency if you need to stimulate your own economy. Surely, this also applies if you already have a strong economy.

In the case of the US the policy of benign neglect has led the US into a situation that will lead to a falling Dollar as it has a structural Trade deficit and has watched its manufacturing slip away to China over the years. The reality of this is now China can exert a huge influence over US monetary policy due to the huge investment it has in US Treasuries. And right now they are making moves to reduce this investment to the detriment of the US

The reality is there is no set of rules that determine exchange rates in the world economy. But you will find those who end up at a disadvantage howling ‘foul’.

When the ‘credit crunch’ struck, money literally disappeared of the balance sheets of banks and off those of individual investors. Governments stepped in, in Europe and the US and pumped in new money in an attempt to fill those holes to keep the system going. Despite this the credit crunch persists. Yes, the banks did fill these holes and have made good profits through their trading activities, but the impact on the broad economy is that bank lending was not resuscitated. The state of the consumer and the broad economy in the developed world tells us this.

What’s more, the banks have been pumping that money into Treasuries and making money there. So the purpose of the QE is actually being defeated in the States particularly. Certainly, no inflation is being seen in the US economy as a result of the QE. At least not yet! What should happen is that the money supply should be expanded in conjunction with job stimulation.

We take you back to the Depression and the vast money expansion which President Roosevelt authorized through the revaluation and purchase of Gold Bullion thereafter. One of the ways he pulled the US out of the Depression was to employ the unemployed to dig holes and fill them in again. Many thought this ridiculous, but what did it do? It introduced that new money into the economy by expanding the numbers of employed but most important of all it got the consumer spending as the money supply expanded. The money did not go in at the top but went in at the bottom to then filter up into the entire economy. This got the entire economy going, not just the banks. It wasn’t inflationary because it did not simply add money to the system, it added spending consumers too. It matched the expansion of the economy to the expansion of the money supply.

Japan is a different kettle of fish. It has suffered deflation for a decade now. Its deflation has been absorbed by the economy and no ‘holes’ are there needing filling. New money in their system, we believe, will lie on the surface of the economy (as they want it to). It will precipitate inflation. Once this happens, savers will see little gain in holding depreciating cash and turn to invest in assets, so as to protect the value of their savings. They are not spending, but continue to save. By doing that the flow of money in the economy is too slow.

We believe that Japan is now about to walk that inflationary road to get the consumer spending through lowering the value of his savings. The only difficulty is that they have not done enough in this latest package to achieve that, so expect more and soon, as the Yen continues to rise. If they have success, you can be sure the US will do the same.

How can this be good for Gold Investment? Put yourself into the shoes of the Japanese investor. He has suffered deflation for so long he regularly invests in other currencies to gain the interest rate differential as well as the gain in foreign currencies over the Yen when it falls. With the Bank of Japan telling these investors they want to lower the Yen, these investors, when convinced this is about to happen, will follow this route more enthusiastically.

If he believes inflation is about to take off, he knows that in the present global environment the Bank of Japan cannot afford to let interest rates rise (and take the Yen with them). He then realizes that the buying power of the Yen is being reduced by such stimuli. Inevitably, once the Yen has been undermined by QE, interest rates will eventually have to rise, to counter excessive inflation. With this in mind both cash and fixed income securities lose their attraction. A hard asset that cannot be debauched is preferable. Locally this can be anything from property to gold. The advantage of gold is that it is well known to the Japanese and it travels all over the world. History also shows that gold has proved itself the certain retainer of value in all extreme times including both deflation and inflation.

In view of this we believe that the Japanese will turn to gold, once they see the policies intended to lower the Yen, working.

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Source:Japan's New Stimulus: Good for Gold

The falling ratio between broader Gold Mining stock prices and the juniors is bullish for gold itself…

The PAST FEW WEEKS have been bullish for gold, in its bullion form, and also as an embed in mining stock prices, writes Brad Zigler at Hard Assets Investor.

We’ve touched on the different volatility of bullion and mining stocks before here at HAI, previously comparing Gold Bullion (or rather, the SPDR Gold Trust proxy) with the Market Vector Gold Miners ETF (NYSE Arca: GDX).

There’s more than one way to obtain broad exposure to the gold mining sector, though. Since its November 2009 launch, the Market Vectors Junior Gold Miners ETF (NYSE Arca: GDXJ) has outperformed GDX by a 3.5-to-1 margin, albeit with a dollop of extra volatility. Some of GDXJ’s components overlap into the GDX portfolio, but the newer fund weights smaller capitalization (read: development and exploration) companies more heavily than producers.

The excess variance can be seen readily when you plot the price ratio of the two ETF portfolios. The GDX/GDXJ ratio started life around 2.0 (that is, GDX’s price was roughly twice that of the nascent GDXJ fund’s), but has generally drifted lower since then.

I say "generally" because there have been significant gyrations along the ratio’s downward course. At times, the ratio sinks, meaning GDX’s senior producers lose value relative to the exploration companies. That’s when investors’ risk appetites sharpen.

At other times, when investors rein in their risk-taking, the ratio tends to rise in favor of GDX. Presently, the GDX multiple is 1.72 times – not its lowest value, but well off its most recent top at 1.92x. If the ratio breaks through the 1.72x level, a test of its old low at 1.69x is likely to follow.

But here’s the thing: A falling ratio means a bigger market appetite for risk. More specifically, a bigger appetite for Gold Mining stock risk. That, in turn, is an expression of investor confidence in bullion’s price strength.

So if you’re bullish on Gold Prices, then, you want the ratio between the broad gold-mining sector and the juniors miners to fall. Which it is doing.

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Source:Bull Signal for Gold from Its Miners

No longer under-priced, Gold Bullion is from here a speculation…

WEDNESDAY was a good day for stock market investors, writes Bill Bonner in his Daily Reckoning. Prices went up. The Dow rose 254 points, leaving us uncertain about its near-term intentions.

Of course, we’re always uncertain here at The Daily Reckoning. But sometimes we’re more uncertain than others. What seems certain to us is that stocks are a bad bet.

You might find this interesting, dear reader:

Guess who was better off at this stage following the beginning of the crisis. The investor in the Great Depression? Or, the investor today?

Well, we haven’t done the calculation ourselves, but we’ve heard from two different sources that if you take inflation and re-invested dividends into account, investors during the Great Depression were actually ahead. The difference is in the dividends. In the 1930s, companies paid substantial dividends; today, they don’t.

But yesterday a report came out that told investors that manufacturing activity was picking up. After so much bad news for so long, that was all they needed. They switched back to "risk on" mode.

Back and forth…to and fro…Mr. Market is making us wait. But for what?

We expect stocks to go down until they finally reach their rendezvous with the bottom. We saw one estimate that put the final bottom seven years into the future. But who knows? All we know is that it hasn’t happened yet. And since we believe it must come sooner or later, we conclude that it must be ahead of us…because it is not behind us.

Since a lower low lies ahead, we see no reason to invest in stocks at all. The odds are against us. Besides, what’s the hurry? The good companies will still be around seven years from now. And the bad companies? Well, we wouldn’t want to invest in them anyway…

But where…how…are we going to make some money in the next seven years? That is a good question, dear reader. We’re so glad you asked.

Do you have a good answer? Hope so, because we don’t.

The only reliable bull market of the last ten years has been in gold. The yellow metal lost $2 yesterday, closing at $1,248. That is only $14 below its all-time high. Which means, while we’ve been watching Bernanke, Jackson Hole, and stocks –  gold has been quietly creeping up…

Stocks go down; stocks go up – and gold keeps moving up…

Fiscal stimulus, monetary stimulus, quantitative easing – and gold keeps moving up…

Recovery…no recovery – gold keeps moving up…

Inflation…deflation – and gold keeps moving up…

Are you beginning to see a pattern?

Yes, gold is in a bull market. It moves up on bad news. It moves up on good news. It moves up on no news at all.

And if we’re right about how this period of Great Correction ends, the price of gold in dollar terms should go up much, much more.

But here’s the important thing. Gold is money. You can use it to buy things. In terms of what gold will buy, it does not seem undervalued to us. Much has been written on the subject. But as near as we can tell, gold is now fairly priced.

Go ahead; buy all you want. It is a good way to maintain your wealth and protect it against the monetary and economic calamities that are doubtless coming. And if you expect to make a lot of money on it, you’ll probably succeed. When the Bernanke Fed loses its grip – which it will – and when the public gets on board the gold bull market – which it will – gold speculators will probably make a lot of money.

We’ve been a gold bug for the last 30 years. Two thirds of that time was miserable, punishing and humiliating. Only the last 10 years have been rewarding. We expect the next 10 years to be even more rewarding.

But the reward now is different. It is speculative…not inherent. When we bought gold in ‘99, we were buying an undervalued asset. We were buying real money, cheap. We made our money when we bought.

Now, gold is fully priced. It is a still a good way to save money. But we cannot expect to make money by waiting for the metal to revert to the mean. It’s already at the mean. Gold is now a speculation.

A warning: we still have not had the sell-off in the financial markets that we expect. The Dow has still not sunk down to 5,000. The lights are still on at banks that should have been put out of business months ago. The public still believes another "stimulus" effort might do the trick. Leading economists still believe they can manage the economy back to growth and prosperity.

We have not hit bottom yet. Far from it.

When we do, the price of gold could be substantially lower. Which is okay with us. We bought years ago. We’re happy with our gold holdings and don’t really care if the price drops. Heck, we’d be happy to see the price back below $1,000; we’d buy more.

But speculating on a rising Gold Price is a different thing. Most likely, speculators will be wiped out once or twice before gold hits its final top.

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Source:Speculating In Gold…?

A new name for a long-time paranoid lunatic…

SINCE I am known as something of a gold bug, a lot of people write to me about gold, says the Mogambo Guru in The Daily Reckoning.

But since I am a paranoid lunatic, I don’t read their letters, mostly because I now call myself Marvelous Macho Grande (MMG), figuring that an established alias could potentially come in handy when the prices of gold, silver and oil shoot higher and higher as inflation in consumer prices starts going parabolic as a result of the despicable Federal Reserve creating so, so, so much money, especially so that the despicable federal government can borrow and spend that selfsame so, so, so much money.

So, you can see how a dramatic, romantic new name like Marvelous Macho Grande (MMG) would perfectly suit a guy like me, which is a guy with a theoretical massive coming increase in wealth from investing according to The Mogambo Perfect Portfolio (TMPP), which uses the Austrian school of economics (see Mises.org) and the last few thousands of years of history as Absolutely Compelling Reasons (ACR) to invest in gold, silver and oil when the government is acting so insanely bizarre, as does ours now, blithely deficit-spending a monstrous 11% of GDP, now with a national debt nearing a heart-stopping 100% of GDP, and allowing the Federal Reserve to continue to create So Freaking Much (SFM) money that, like creating too much money always does, it creates booms and bubbles that predictably, inevitably, unstoppably, disastrously go bust, leaving you, sadly, worse off than before.

So, you can see how I am not in the mood to answer emails from people who, deep down in their hearts, are pleading, "Oh, please help me, Masterful Mogambo Guru, or Marvelous Macho Grande (MMG), or whatever in the hell your name is this week: Sadly, I have not been following your terrific advice to Buy Gold, silver and oil as the One True Way (OTW) to end up with a lot of money without working for it, and now I need one of your famous Secret Investment Plans (SIP) to make up for lost time, else I am reduced to being the widow of a rich Nigerian banker who needs to sneak $100 million out of Nigeria and into your country. In that case, I will give you $50 million after you give me your bank account number and $5,000 in cash to pay various fees, expenses and bribes."

Alas, I don’t have $5,000 to invest in this terrific opportunity to make a quick $50 million, as likewise there are no Secret Investment Plans (SIP), although I have spent a lifetime looking for one.

Fortunately, constantly Buying Gold, silver and oil is always the smart thing to do when your stupid, desperate, half-witted, corrupt, clutching-at-straws government is acting like all the other stupid, desperate, half-witted, corrupt, clutching-at-straws governments that created too much money and destroyed themselves over the last 4,500 years.

And if you don’t believe me, then maybe you will listen to the famous Richard Russell of the Dow Theory Letters, who writes:

"Investors sometimes get caught up in the day to day and week to week movements in gold and silver. Don’t waste your time or energy on that, just accumulate. Standing in front of us is the greatest transfer of wealth in history. When the dust settles, those holding the gold will make the rules."

And "just accumulate" sounds so easy because it is so easy, which is why I say, as I always say until you are tired of hearing me say it, "Whee! This investing stuff is easy!"

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Source:Confessions of a Gold Bug

Digging for metal on the stock market is less productive than digging in the ground…

WITH ITS $39 billion hostile bid for Canada’s Potash Corp., global mining giant BHP Billiton capped an active August in the mergers-and-acquisitions market, writes Martin Hutchinson at Money Morning.

With the moribund growth prospects of the US economy, there would seem to be no great urgency for companies to go on an M&A spree, yet the total value of announced buyout deals for August alone has topped $175 billion.

Cynics are reaching only one conclusion: With interest rates so low and corporations so cash-rich, it seems that company management teams would rather do anything with that cash than to give it back to shareholders via stock buybacks or boosted dividends. And those deals signal additional trouble ahead for the US economy.

There’s certainly plenty of cash available to keep fueling this deal boom. According to Moody’s Investors Service, US non-financial corporations are currently sitting on $1.84 trillion in cash. When measured as a percentage of total corporate assets, that’s Corporate America’s biggest cash hoard in 50 years.

And that cache of cash doesn"t end there: Hedge funds hold an additional $450 billion in cash, which can also be brought to bear in M&A deals. With bond-market conditions also currently favorable and interest rates at 50-year lows, it’s thus not surprising that top Corporate America execs are indulging their wildest empire-building fantasies.

US CEOs could, of course, be paying that money out to shareholders as dividends. As of Aug. 25, the dividend yield on the Standard and Poor’s 500 Index was 2.09% – representing a 40% dividend-payout ratio on an S&P index that was trading at 19.38-times earnings.

While that’s above the average of 32% payout ratio of the 2000s it’s well below historical levels – the payout ratio in the Great Depression was greater than 90% and averaged more than 55% through the 1950s and 1960s. Given the huge amounts of cash that so many companies currently possess – as well as the relatively favorable tax treatment of dividends (individuals currently pay only 15% on dividend income) that’s right now in place – US public companies could easily pay out much more of their income in dividends than they presently are.

As shareholders, we should demand higher dividend payouts. Historically, dividends have represented about half the return on the S&P 500 Index. Dividends alone provided US shareholders with a total uncompounded return of 61% in the 1980s and 43% in the 1990s.

The 2000s, by comparison, were pathetic: Dividends provided a total return of only 16%, not enough to make the overall return positive. Given that companies have accumulated record levels of cash (as well as making innumerable fatuous takeovers), we investors should feel shortchanged.

A number of factors have caused this change in management behavior. First and foremost, monetary policy has been very loose since 1995. So there’s always been lots of liquidity sloshing around the global financial system, making mergers easy to finance.

Modern financial theory has held that a company should concern itself mostly with the tax consequences of its balance sheet. This meant that earlier concepts of balance-sheet ’soundness" were irrelevant and that cash dividends should be of less interest to investors than the fluctuations in the company’s stock price. Top managers have increasingly been rewarded with stock options, and as a result have come to view dividends as unattractive, since those payouts take cash out of the company – reducing the value of the shares (besides, option-holders themselves don"t reap the benefit of dividends).

These have all been factors. However, the most important factors leading to merger activity have arisen from the shift in the shareholder power base that we"ve seen. It was once true that large individual shareholders exercised direct control over a company’s management.

But that’s now a relatively rare situation: The top shareholders are now largely institutional in nature. And rather than waste time sparring with a corporate management team whose policies or strategies it doesn’t like or agree with, an institutional investor will be all too willing to simply "dump" its shares.

All of these changes have induced corporate leaders to treat companies as their own private piggy banks, paying themselves ever-larger salaries and bonuses and being relatively unconcerned about shareholder value – except as something to which they pay lip service.

Most important, managers get rewarded based on the size of their empires. This elevates the importance of the M&A deal: Acquisitions, which increase the size of the empire being managed, become all the more alluring to a CEO who is looking to increase the span of the company he controls.

Merger-and-acquisition deals have the additional advantage of allowing frequent restatements of earnings and other financial accounts, meaning it’s easier for managers to hide losses or other financial problems without having to actually run them all the way through the income statement.

Some of these same issues make M&A deals attractive to the target ("acquiree") company. For instance, with the "golden-parachute" payouts and other payoffs that management teams receive as compensation when their firm is taken over, it’s not surprising that the leaders of a firm that becomes a buyout candidate don’t fight too hard to preserve their company’s independence. When Potash CEO Bill Doyle is due to receive a $445 million payoff when his company is sold, he will be less than ferocious in opposing the sale.

Thus, it is not surprising that corporate cash is useful to management primarily for acquisitions. If the shareholders are particularly quiescent, as in the Kraft Foods Inc. takeover of Cadbury Plc, the buying chief executive can be paid off with a $27 million premium for undergoing the nervous stress of arranging the deal, without waiting to see whether it actually provided any benefit to Kraft.

In that case even Warren Buffett, owning 9% of Kraft stock, was unable to prevent the acquisition, as Kraft’s financially counterproductive aggression and its oodles of cheap money wiped out a 200-year-old British company.

Management behavior will only change when its incentives change, and that won"t happen until interest rates are much higher than they are today. In the meantime, the damage that foolish acquisitions will inflict on US industry is immeasurable: Corporate America will slash employment, hold back on capital investment and – worst of all for the future – dial down research-and-development activities.

Action to Take? Concentrate your investment Dollars on companies that pay high dividends, and on foreign companies in countries such as Germany and Japan where management remuneration is lower and does not contain many stock options.

At shareholder meetings, vote against all acquisitions that are not obviously beneficial, and blatantly ask management if it is putting acquisitions before dividends – which is another way of asking why the company is embracing a ruinous short-term viewpoint and shortchanging

Cross-examine the Remuneration (Compensation) Committee of the board of directors of the companies you invest in about top-management pay. Your objective: To ascertain – or, better still, to ensure – that top-executive compensation is both lower and contains fewer incentives to play merger-and-acquisition (M&A) games with your money.

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Source:Making a Big Deal of $1.84 Trillion