Sudden but Long Expected Change

By: Boris Sobolev, Resource Stock Guide

May 28, 2009

From our perspective, the main event of the month was a simultaneous selloff in the US dollar and the US bond market. USD fell by 5.6% (3.6% in the past week) and the 10-year yield rose by 10.4% since May 1.

The catalyst for such a sharp fall was the downgrade by the S&P rating agency of the UK government debt. This development led to a well justified comment by Bill Gross of Pimco that the US debt awaits the same fate.

The S&P economists see major escalations of government debts around the world in the next few years. At last they’ve seen the writing on the wall! US government debt to GDP ratio will rise from 44% in 2008 to 77% in 2013 according the analysis. Growth in government debts will occur in all of the developed world, but the fastest rate of growth will be experienced by the US and the UK. (more)

Prepare To Get Buried

Clive Maund
Fundamentally the rally in the broad stockmarket from early in March is viewed as being the result of a combination of media hype, wishful thinking and short covering, but there may be more to it than that - it would appear that a sizeable proportion of the TARP (Troubled Asset Relief Program) funds not thus far deployed have been used to drive up the stockmarkets in order to create a positive environment for the banks to issue secondary shares and thus raise equity. While this is perfectly understandable, it also means that once the banks have finished selling this stock to the public, or the market is simply exhausted by being soaked in this way, it is likely to go into reverse in a big way. (more)

Invest in Moly?

For the first time in years, the Chinese have become net importers of molybdenum,” reports Chris Mayer in his latest Special Situations alert. Moly, if you are unfamiliar, is a lynchpin of the energy complex. It’s a vital resource for oil pipelines, nuclear reactors and fuel refiners. Above all, moly is used to strengthen steel.

“China recently became a net importer of moly because its mines are too costly to run profitably at current low moly prices. Various estimates put about half of China's moly production at costs north of $13 a pound. The current moly price is only $8 and change -- down from $30-plus last year, mainly as energy markets softened. So there have been a lot of shutdowns in China, as Chinese producers can't make any money.

“China is the world's largest producer of steel, by far. No one's even close. China produces nearly 40% of the world's steel. It makes twice as much steel as the No. 2 guy, the European Union. Much of that steel will need moly.

“Therefore, any rebound in moly is bound up in the China growth story. In fact, over the past five years, Chinese demand for moly has grown 27% annually, compared with only 4% globally. China alone now makes up 25% of the global demand for moly -- about 110 million pounds.”

Thus, if you believe in the China boom, concludes Chris, “molybdenum is a winner, albeit one that is temporarily resting, like a basketball player taking a breather before he steps back on the court. All the elements that pushed moly to $30-plus per pound in the first place are still in place for yet another run at three sawbucks or better. Molybdenum is cheap at $8 per pound.”

U.S. Inflation to Approach Zimbabwe Level, Faber Says

By Chen Shiyin and Bernard Lo

May 27 (Bloomberg) -- The U.S. economy will enter “hyperinflation” approaching the levels in Zimbabwe because the Federal Reserve will be reluctant to raise interest rates, investor Marc Faber said.

Prices may increase at rates “close to” Zimbabwe’s gains, Faber said in an interview with Bloomberg Television in Hong Kong. Zimbabwe’s inflation rate reached 231 million percent in July, the last annual rate published by the statistics office.

“I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said. “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.” (more)

David Morgan Investing In Mining Stocks

What Moves Up 3 Times Faster Than Gold?

The dollar is out. The U.S. dollar index has fallen 5% last week.

Treasury bonds are quickly falling out of favor. The yield on 10-year Treasury bonds has climbed from 2.5% to almost 3.5% since March signaling inflation fears and an unwillingness to fund ballooning government borrowing.

Gold is hot. Gold prices are back on the rise and gold stocks have done even better.

Is this a sign of things to come?

Well, if you take a look at the mainstream headlines, you’d think so.

An editorial headline on Bloomberg proclaims, “Dollar is dirt, Treasuries are toast, and AAA is gone.”

Even CBS News is warning, “Inflation could be coming to a U.S. dollar near you.”

To me, it seems just like a typical overreaction in the short-term.

Yes, the long-run trend for the dollar is down as the Fed keeps printing more and more of them and monetizing government debt. And yes, the prospects for gold get brighter and brighter with each passing week. (more)

Gold and Gold Stocks

Gold and gold stocks have two periods of seasonal strength: Middle of July to the end of September and middle of November to the end of January. The seasonal trade is lining up nicely this year,

Fundamentals currently are mixed. Gold in U.S. Dollars are tracking slightly lower in the second quarter relative to the same period last year. That means earnings and cash flow by gold companies generally will be flat at best in the second quarter (more)

Hitmen Contracts to Bust COMEX

Major dislocations are coming. Tremendous disruptions are coming. Price discontinuities are coming. Price chart patterns might be rendered useless soon. Last week, the case for a grand Paradigm Shift was made, covering many elements in order to paint a mosaic. Taken in isolation, any one point is important in its own right, but not enough to convince of a structural change. Taken in entirety, the many points create a full picture that is more easily recognized. The ruinous events of the Wall Street banks last September and October surely served as an extreme event loaded with profound disruption. The Chinese have proceeded with a transition to yuan-based domestic banking, with an installation of yuan swap facilities around the world, with an ASEAN regional fund again supplied by yuan for flexible purposes, with permission granted to two Hong Kong banks to sell yuan-based bonds, with an admitted rise in significant gold bullion reserves, and with continued verbal battles over legitimacy of the USDollar as the global reserve currency. These Chinese initiatives in recent weeks, occurring rapidly, are serving as a collective extreme event with the potential for profound disruption. A gold-backed yuan currency would surely cause massive disruption in a climax merger of events. The barter system set up between Russia and Europe will bypass the US$-based settlement system, as will the barter system set up between Russia and China. The avoidance of contract settlement in USDollars would result in extreme disruption to the global banking system. (more)