Friday, June 5, 2009

The Economist, June 12, 2009

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US Jobs Report

The U.S. economy shed “only” 345,000 jobs in May, the Labor Department said this morning. We forecast Wednesday that today’s employment gauge would beat expectations, but wow… this number smashed the Street’s guess of 520,000. Last month’s loss is the smallest since it all hit the fan last September.

May’s number establishes a trend for 2009, too. The jobs scene is far from rosy, but at least it doesn’t seem to be getting worse… not yet anyway.

But the details of today’s jobs report aren’t quite as rosy as the headline number. The unemployment rate rose to 9.4%, notably higher than the expected 9.2%. In other words, the unemployed are not being rehired. While the rate of firings cooled off, the bread line is just getting longer and longer. 9.4% is the highest rate since 1983.

And it’s funny how the dark science of charting works. The chart above would lead you to believe the jobs scene has bottomed… but does this one inspire the same confidence?

More disturbing details:

  • Over 6 million people have lost their job since the recession officially began in December 2007
  • The “long-term unemployed” -- those out of work for six months or more -- now exceed a record 4 million. Many of these “discouraged” people are not counted toward the official unemployment rate
  • 9.1 million people are working part time because they can’t find a full-time gig -- also not counted as officially unemployed.

Kiplinger's Personal Finance, July 2009

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Gold & Silver Short Term Top?

Inter-Market Dynamics

In past market wraps I have discussed various inter-market relationships and the fact that some of them have changed, while others keep oscillating back and forth: sometimes tracking one another in the same direction; and at other times moving inversely to each other.

These changing inter-market dynamics are the signature of a paradigm shift that is taking place: the death of paper money (and related assets) and the re-emergence of gold and silver as the ultimate store of purchasing power and value over time. (more)

Jim Rogers, Bear Market Rally

Daily Currency Analysis


The Euro rallied to levels above 1.42 against the dollar in early Europe on Thursday, but was unable to sustain the gains and dipped back towards the 1.4150 level ahead of the European interest rate decisions.

The ECB left interest rates on hold at 1.00% following the latest council meeting which was in line with market expectations. At the press conference following the decision, President Trichet was slightly more optimistic over the economy than in recent comments. The forecasts for 2009 were still downgraded by the bank with an estimate that GDP would decline by 5.1% for 2009 with a marginal return to growth for 2010.

The ECB confirmed that it would by EUR60bn in covered bonds with Trichet refusing to make further comments on the possibility of additional purchases. (more) U.S. Morning Call for Friday, June 5, 2009

Overnight Developments

  • The European DJ Stoxx 50 this morning is up +0.87% and June S&Ps are up +4.90 points (+0.52%). The Asia-Pacific stock markets today closed mostly higher with Japan (+1.02%), Hong Kong (+0.96%), China (-0.49%), Taiwan (-0.28%), Australia (+0.93%), Singapore (+1.42%), South Korea (+1.15%), India (+0.63%). (more)
  • Gold Stocks in a Depression

    What if deflation wins?

    While we think the odds are strongly stacked against it, particularly given the government’s furious pace of money printing, the prudent investor understands — and respects — the time-tested adage, “Nothing is guaranteed.” So while our chips sit squarely on the spot marked “inflation,” what will happen to gold stocks if we’re wrong?
    The Great Depression Speaks

    The most notable example of what happens to gold stocks in a prolonged deflationary environment is the Great Depression. However, the United States was on a gold standard at the time, so miners had a guaranteed selling price — which was a good thing for them, because their operating costs were plummeting. So the comparability isn’t perfect, but let’s see what we can learn.

    When the stock market crashed in 1929, gold stocks were part of the general wreckage (sound familiar?). The market then rallied and recovered almost 50% of its losses by April 1930, with gold shares again tagging along. It’s what happened next that gives us our first clue about deflation’s effect.

    When the bear market resumed in the summer of 1930, all securities sold off again — except gold stocks. Gold shares stayed basically flat until early 1931, when they boarded the elevator and headed for the penthouse.

    Let’s look at how shares of Homestake Mining, the largest gold miner in the U.S. at the time, and Dome Mines, Canada’s senior producer, performed during the Great Depression.

    And the chart doesn’t show that you could have bought both stocks at half their 1929 price five years earlier, which would have led to gains of around 1,000%. And get this: both companies paid healthy and rising dividends as the depression wore on; Homestake’s dividend went from $7 to $15 per share, and Dome’s from $1 to $1.80.

    Yes, volatility was high in the gold stocks throughout the depression, with occasional wild price swings, but after the 1929 crash most of the volatility was to the upside.

    The bottom line is that the two largest gold producers — during a time of soup lines and falling standards of living — handed investors five and six times their money in four years.

    From Homestake’s chart, you get a clear picture of what the stock did compared to the market as a whole:

    You’ll notice the large spike down in both Homestake and the Dow during the 1929 crash...but then look at Homestake’s recovery immediately afterward, returning close to its old high. This is eerily similar to our recent pattern: our stocks sold off violently last October but have since doubled or more from their bottoms.

    You’ll then notice that Homestake took almost two years to exceed its old high, but once it broke out, it was off to the races. The stock doubled four times in five years during a seven-year run to its peak after the ’29 crash.

    The conclusion? If history is any guide, gold stocks can hold their own against deflation. And they could profit tremendously if the demand for gold as a safe haven continues to grow.

    Gold vs. Deflation

    On April 5, 1933, President Roosevelt issued an executive order forcing delivery (confiscation) of gold owned by private citizens to the government in exchange for compensation at the fixed price of $20.67/oz. And less than nine months later, he raised the gold price to $35, effectively diluting the dollar in every wallet 41% overnight and swindling everyone who had turned in his gold.

    We don’t know exactly what an untethered gold price would have done during the depression, but given its distinction in history as a store of value, it’s likely to retain its purchasing power in a deflationary setting regardless of its nominal price. In other words, while the price of gold might not rise, or could even fall, your best protection is still gold.

    But with this said, the overriding concern is that in a fiat system, any deflation will be met with an inflationary overreaction (as we’re seeing). And the worse the deflation, the more extreme the overreaction will be.

    It’s for this reason that the editors of BIG GOLD urge you to own physical gold, in your possession and under your control, given its reliability as a store of value in both inflationary and deflationary environments. If you have less than our recommended one-third of your investable assets in some form of gold, check around for places to buy gold coins and bars at good premiums.