A few days ago, billionaire hedge-fund manager, John Paulson, spent $1.28 billion to buy a piece of AngloGold Ashanti (AU: NYSE), the large South African gold miner. Paulson paid $32 a share for an 11.3% stake in the company. The following day, Fed Chairman Ben Bernanke delivered the shocking news that the U.S. Federal Reserve would buy up to $1.2 trillion of U.S. Treasury debt. And just like that, the price of gold soared, as did the price of AngloGold – handing Paulson a prompt $240 million profit.

But we’re guessing Paulson will hang around for awhile longer. We’re guessing the savvy investor is looking for a double on this investment, at least.

“Apparently, Mr. Paulson sees a solid-gold opportunity,” observes Byron King, the man who urged the subscribers of Outstanding Investment to buy AngloGold three weeks before Paulson made his high-profile purchase. “And Paulson, you may know, has pretty good eyesight, investment-wise. He’s the hedge-fund manager who made $10 billion in 2007 and 2008 betting that the subprime mortgage market would implode.

“Mr. Paulson’s purchase of AngloGold Ashanti is, in essence, a $1.3 billion bet that the U.S. government is pursuing a long-term policy to debase the dollar,” Byron continues. “Seems like a winning bet to us.”

AngloGold is not Paulson’s only wager on the yellow metal. He also owns 4.1% of Kinross Gold. Likewise, David Einhorn, the hedge fund manager famous for predicting the demise of Lehman Bros., is accumulating gold-focused investments (as we reported in the February 23, 2009 edition of the Rude Awakening, “Buy Gold…We Really Mean it This Time.”)

“Dollar debasement will doubtless trigger inflation,” Byron insists. “Over time, this will cause a flight from paper currencies to gold. I’ve already predicted gold at $3,000 within 30 months. I’ve heard other gold analysts forecasting gold at $4,500 within three years. So there’s a lot of room on the up-side.”

It’s true; the bullish case for gold has rarely seemed more compelling. But every investor has cause to wonder whether the bullish case for gold is also timely. Sure, gold could soar to $3,000 an ounce. But will it drop to $600 an ounce first…and stay there a while?

No one knows the answer, of course. Not even Byron King, an experienced geologist and student of financial history. Nor does John Paulson, a guy who knows how to make a few billion dollars by betting against the crowd. Nor does David Einhorn, an investor with an eye for profiting from adversity. But we’re inclined to trust the instincts of all three gentlemen. We are also inclined to trust the “instincts” of the market itself.

Six times during the last six years, gold stocks charged out ahead of gold bullion, signaling an imminent gold rally. Veteran observers of the gold market understand that major rallies usually BEGIN with gold stocks; not with the metal itself.

The chart above illustrates this phenomenon. In August of 2007, gold stocks advanced nearly 20% in three weeks, while the gold price barely budged. But during the next three months, gold soared from $650 an ounce to a new 17-year high of $825 an ounce.

A similar divergence has unfolded during the last few trading days. Gold stocks have jumped 30% – or double the gain of the S&P 500 Index – while gold, itself, has advanced only 4%.

Are gold stocks – like Lassie – trying to tell us something? We aren’t certain. But if we understand what the gold market is trying to say, either Timmy fell into a well or Ben Bernanke has incited the greatest inflationary episode in America since the 1970s.

Source:  Silver and Gold

Captain’s Log: Year of our Lord 2009, 6th day…

We have landed on a strange and wonderful watery planet – the third planet in orbit around the sun, a minor star in the Milky Way galaxy. Well, they say it is watery planet. Where we are, it is icy. But the locals say it warms up and the ice melts. We’re suspicious; maybe it’s just hype to attract tourists.

But what is strange about this planet is that its inhabitants all seem to play a game of make-believe, in which they all agree to believe things that every one of them knows is untrue. What is wonderful about it is that it seems so easy to make money here; there’s a fool on every corner just waiting for the chance to get rid of his wealth.

Recently, humans – the race that inhabits this place – believed that their lodges and living quarters would become more and more valuable – even though it was obvious that their houses deteriorated every day, as a consequence of solar radiation, wind erosion, liquor spilt on the carpets and other natural phenomenon. Then, on the back of this remarkable delusion, they built an entire world economy…including extravagantly complex financial instruments which the wisest among them called “weapons of mass financial destruction.”

Someone seems to have cut the power to that illusion a few months ago, so now they are taking up a new one: that if people are given more pieces of green paper they will all be richer.

Yesterday, the Dow – which measures stock prices in the United States – fell 81 points. But analysts say the technical indicators are still almost all positive; they think the US is beginning a major rally…or perhaps a new bull market.

The auto industry, meanwhile, reported terrible news. Sales fell 36% in December; GM (NYSE:GM) sold fewer vehicles than in any December in 49 years.

Oil rose $2 yesterday; amid all the gloom and doom, the oil price is moving up to nearly $50. Bond yields are rising too, along with the dollar. And gold fell $4 yesterday – for no particular reason.

Today’s press – the means by which delusions are shared and propagated – tells us that the government of this world’s richest nation, called the United States of America, is planning a “stimulus package” of something on the order of $1 trillion. What’s the package expected to stimulate? The idea is to get more of these pieces of paper into citizens’ hands, so that they will be encouraged to act as though they were wealthier. It doesn’t seem to bother anyone that the source of the misery of which so many now complain was the fact that, in the past, so many acted so much wealthier than they really were. Nor does it seem to disturb the collective fantasy that this stimulus plan is being created, more or less, by the same class of people who neither saw anything wrong with the last fantasy nor mentioned to anyone that it was going to collapse.

“Hopes pinned on rate cuts and fiscal packages,” says the headline in the Financial Times, a leading source of financial hallucination. It explains how the aforementioned U.S. government intends to cut taxes in order to put those aforementioned pieces of green paper into consumers’ hands.

Further in the paper, another headline – “Reports of $300 billion Obama tax cuts lift mood” – tells us that the public is getting in the spirit of the new fantasy even before it is officially launched.

“Optimism about central bank and government efforts to revive the global economy helped improve investor risk appetite yesterday,” continues the article.

“Fed Officials Endorse Big Stimulus to Battle US Recession,” adds another source – Bloomberg.

What a marvelous place! Every day is magic on this planet. Every day is a new day…with no memory of what happened the day before…nor any thought to what will happen tomorrow. People are ready to believe whatever makes their day more enjoyable…no matter how absurd.

Anyone who bothered to think about this ‘bailout’ plan for two seconds could see that it is a hoax and a scam. Those pieces of paper are not really wealth…they merely represent wealth. But since the U.S. government has no wealth in reserve – indeed, it is famously borrowing to make ends meet already – it can only pass out wealth to one person by taking it from someone else. It talks of ‘tax cuts,’ but we have heard nothing of spending cuts. So, what the global consequence must be is an increase in pieces of green paper – or let us say, demand for wealth – with no actual increase in wealth itself. It is just a shared illusion, in other words.

But we have to say too, after visiting this planet for a few weeks, we have fallen in love with it. We feel so superior. Almost everyone we talk to is a dope.

Besides, where else in the universe is it so easy to make money? As you know, dear reader, the easiest way to make above-market profits is to help the fools part company with their money. What other planet has so many fools?

We paraphrase one of the smartest of the humans, George Soros, who puts it this way: ‘The way to make profits is to find the premise that is wrong and bet against it.’ As far as we can tell, almost every major premise is wrong…or at least the over-arching premise of this new post-bubble era is as loony as the one that preceded it. Just as you can’t really get rich by borrowing and speculating… you can’t recover from a bust-up by borrowing and speculating more.

But heck, we don’t make the rules down here on Planet Earth…we just try to have some fun with them.

*** As we were saying, making money seems so easy here…especially now. There are companies that are in the business of pulling valuable minerals out of the ground that you can buy for less than the resources they own – even at today’s depressed prices. There are companies that drill and pump oil – still the major source of energy on Earth – you can buy now for only a couple times their annual profits. In Germany and Japan – two of the most productive and competitive nations on the planet – companies sell for what would normally be bargain prices… significantly less than book value. And emerging markets can now be bought at giveaway prices; considering that these economies still expect rapid rates of growth over the next 10-20 years, these could turn out to be fortune-builders for the next generation.

One of the easiest, surest ways to make money now is to buy high yield corporate bonds and sell low-yield U.S. Treasury bonds. When their last fantasy crashed, earthlings rushed to the apparent safety of U.S. government debt, forsaking the debt of their private enterprises. This pushed yields on the government debt to such low levels as had never been seen before…while yields on bonds rated C or worse rose over 30%. Of course, we have no particular opinion on what these yields should be, but it seems very likely that the “spread” between the two debt classes – now at a 100-year high – will narrow.

“If you’re looking at junk bonds,” adds Jim Paulsen of Wells Cap Management, “you have never had this kind of value before.”

But while we are talking about the bonds, an even surer bet to us is that U.S. government debt will decline in value. There is no theory that we know of that allows Treasury bonds to go up while the supply of them increases at such a rapid rate. Next year, the feds will borrow between $1.5 and $2 trillion – as much as 4 times the largest previous deficit in history. That means there will be a lot more U.S. Treasury bonds offered for sale. This increased supply is bound to put downward pressure on bond prices.

And we’re suspicious of those little green pieces of paper too. When you turn in a government bond, they give you green pieces of paper. But those are the same pieces of paper that they’re handing out all over town. According to the only theory we know, as supply increases – ceteris paribus – prices decrease. In this case, as they increase the number of those pieces of paper each one represents less and less wealth. The more pieces of green paper, the less each one is worth, in other words. And as we understand the earthling’s current delusion, they will intentionally increase the number of pieces of green paper until they go down in value. Yes, that is the purpose too, not only to put more ‘money’ in consumers’ hands…but to put out so many pieces of green paper that they go down in value. Why? They want to make sure consumers won’t be tempted to save them. Weird, huh? But it’s just another peculiar feature of the present dementia universalis on Planet Earth; humans believe they will all be richer if people spend their money, rather than hold onto it. Of course, every one of them knows it isn’t true; but they believe it anyway: that the more they consume their wealth the more wealth they will have. Like we said: super weird.

But it leads us to an investment that – under the circumstances – seems like a no-brainer. The only thing that bothers us is that so many earthlings seem to favor it too. Since humans are so prone to error, it makes us question our own judgment.

“US Treasuries are my least favorite asset,” says Mohamed El-Erian with Pimco. “My least favorite asset is US Treasury bills…and I don’t like the dollar either,” say Tim Bond of Barclay’s Capital. “Outside of a Treasury bond,” adds the aforementioned Jim Paulsen, “it is a remarkably good time to buy risk assets.”

Yet despite the agreement of these humans, we still think most of the species have seized onto a premise that is wrong – that dollar-based U.S. Treasury debt equals financial safety.

How do you bet against that premise? Probably the easiest way is to buy a more traditional form of money – which humans place at number 79 on their periodic table, gold. Believe it or not, over a long, long time gold has been extremely reliable. An ounce of it buys about as much bread in A.D. 2009 as it did in A.D. 9. As this present delusion blows up, humans will probably turn back to gold to protect their wealth.

As we said, the U.S. government is determined – ‘hell-bent,’ some would say – to keep consumers spending those little green pieces of paper. They have a plan to bring this about – at a cost of a trillion or so more of them. If this plan does what they hope it will do, prices will begin to rise. In fact, almost all asset classes will rise in price – especially gold. Shrewd investors will seek protection from inflation by buying gold – causing the price of the yellow metal to rise.

If the plan fails to work, on the other hand, the feds will continue emitting pieces of green paper, which will eventually call into question the value of the paper itself. Either way, probably the surest bet on the blue planet is that the price of gold will go up.

How high? Who can say? But we will be very surprised if it doesn’t at least equal – on an inflation-adjusted basis – its highest price ever, set in January of 1980. Then, it sold for $875. Adjust that price to today’s consumer price level and you get a price over $2,400.

Daily Reckoning readers who wish to take advantage of this terrestrial phenomenon should buy gold. If you wish to increase your risk and profits, you could buy the double ETF, giving you twice the gain from each dollar gold goes up. After all, this will probably be the last bubble…the biggest bubble of our lifetimes. For gold bugs, it is now or never. Those who really want to go for broke should mortgage their old houses and sell their young children to raise extra cash.

This advice is free. Of course, it is worth no more than you paid for it. All we ask is that if it doesn’t work out, please don’t rub our noses in it. We’ll feel bad enough.

Source: Bet Against a False Premise…Buy Gold

Mike Shedlock of globaleconomicanalysis.blogspot.com writes that I – and people like me, who are expecting inflation – are a bunch of idiots, which is unfortunately true about me, and I am grateful that my Natural Mogambo Stupidity (NMS) is his only complaint about me. I only wish that others were equally restrained in their criticism, as there is apparently no end to either my personal shortcomings or their delight in pointing them out.

He writes, thankfully not mentioning me by name, “You would think that inflationistas would have caught on. But they haven’t. Nor will they. And articles about shrinking day care, collapsing retail sales, rising unemployment, record foreclosures, massive credit card defaults, bankrupt insurers, collapsing auto sales, sinking commercial real estate, plunging commodity prices, and dozens of other things will not change their minds either, including an implosion in China.”

I have to admit that he is right, as my wife and kids will happily tell you that I never change, except to get worse. On the other hand, I steadfastly say that neither the Federal Reserve, nor the federal government, are going to sit still when people are whining about “shrinking day care, collapsing retail sales, rising unemployment, record foreclosures, massive credit card defaults, bankrupt insurers, collapsing auto sales, sinking commercial real estate, plunging commodity prices, and dozens of other things” when they have a fiat currency that they can instantly create, with unlimited abandon, which they promised to do, will do, and are already doing.

Thus, with a staggering, unbelievable amount of money being created, these and many more deflationary problems will soon be just a quaint memory as voluntary fiscal and monetary restraints around the world are being thrown wholesale into the dumpster even as we speak, and humongous “economic stimulus plans” financed by massive increases in fiat money are being trotted out across the globe, all meaning that inflation will rise and rise.

As if to prove me right, the article went on to note that Professor Steve Hanke, formerly with Credit Suisse (NYSE:CS) and now a senior fellow at the Cato Institute in the United States, said that this month, “Zimbabwe’s annual inflation had soared to 2.79 quintillion percent”, which is the inevitable result of the moron government of Zimbabwe spending decades literally printing all the paper money that makes such inflation possible!

In case you were wondering, “a quintillion is a figure with 18 zeroes and is a rung above a quadrillion”, which I will helpfully write out as 2,790,000,000,000,000,000%!!!!!

If you are a Junior Mogambo Ranger (JMR), then you need no explanation as to why I included five exclamation points at the end of that sentence, which indicates some extreme significance.

But even if you are NOT a JMR, then you should still need no explanation as to the significance of inflation that is measured in quintillions of percent, or even inflation measured in quadrillions of percent, or inflation measured in trillions of percent, or inflation measured in billions of percent, or inflation measured in millions of percent, or inflation measured in thousands of percent, or inflation measured in hundreds of percent, or inflation measured in tens of percent, or Any Freaking Inflation At All (AFIAA) that is more than zero, because what it means is that Bad, Bad Times (BBT) are a-coming as all of this money starts chasing a static supply of goods and services and people get Very, Very Upset (VVU).

And besides the fact that inflation in the USA is already running between about 5% and 10% (depending on your source), it is going to get worse and worse, and thus a BBT and a VVU are a-coming, which is why you need gold, silver and oil.

And the fact that they have been sold off to (as is theorized) raise cash and thus drive their prices to Laughably Low Levels (LLL), should have you in a buying frenzy, gobbling up as much of each as you can, and then going around to your stupid neighbors and ringing, ringing, ringing their doorbells and knocking on their doors, and then kicking their damned doors over and over because you can hear them in there whispering to each other, “Shut up or he’ll hear you!” and so you yell out, “Buy gold, silver and oil as fast as you can, you morons, or die a horrible death by inflation like the people of Zimbabwe!”

But as usual, they don’t buy gold, silver and oil, and they don’t even answer the door. Don’t you make that mistake!

Source: When Inflation Comes a-Knockin’

Yesterday, the Dow rose 41 points. Oil and the dollar held steady. But the big news today – the price of gold went back over $900. This morning, the yellow metal is trading at $910.

Is the correction in gold over? Seems so… Will gold fever soon take over?

We interrupt our look at the gold market with the following song lyrics from the Rolling Stones:

Who wants yesterday’s paper?
Who wants yesterday’s girl?
Who wants yesterday’s paper?
Nobody in the world.

What prompts this musical interlude is a thought: U.S. stocks are yesterday’s news. Maybe the U.S. economy is yesterday’s news too. Maybe the United States itself is yesterday’s news.

But what we reckon with today is not a dreary story of the decline and fall of the American empire. No, today…we bring you a cheerful message of hope for the future.

Our Trade of the Decade – buy gold, sell stocks – has done pretty well…though not as well as expected. Gold has almost quadrupled. U.S. stocks went down…then came up. Now, they’re back to about where they were 10 years ago. In real, inflation-adjusted terms, however, they’re down about 30%.

Of course, the decade is not over and we’re expecting to squeeze a lot more juice out of this trade before 2010. Still, we’re already looking ahead to the Trade of the NEXT Decade. We’ll take a peak at that below…but first, let’s look at the broad sweep of history. What was the number one success story of the 20th century? America. Oh…yes… there were more frightening stories…and stories with more suffering and more sturm and drang in them. WWI brought down the leading families in Europe – the Hohenzollerns in Germany…the Hapsburgs in Austro-Hungary…the Romanovs in Russia, not to mention the Ottoman Empire in what is today Turkey. Then, the Soviet Union lost 25 million people in the Great Patriotic War, known in the West as WWII…the Chinese lost tens of millions in Mao’s purges and famines. But as for stories with a happy ending, there was none bigger…and none happier…than the story of the United States of America.

And now, Will Hutton writes in The Observer that the United States will stay ahead of China in the 21st century, because it has more knowledge and brainpower…more universities…and a commitment to new technologies. Maybe Mr. Hutton is right. We had the same idea ourselves, when we were about 14 years old. We recall thinking that America was unbeatable…because she had created an almost perfect meritocracy, in which the brightest people – among whom we immodestly counted ourselves (remember, we were just 14 years old) – would always rise to top positions in government and business. These people could go to public schools and state universities, learn all the latest ideas and useful knowledge, and then apply what they had learned in their careers. The system was self-perfecting all the time.

Later, we realized that the brightest people are capable of making the greatest errors and suffering the biggest delusions…and that even the best systems are inevitably gummed up by self-seeking parasites and corrupted by time. We are, as Aristotle put it, a “deathward going tribe.” All our institutions age…decay…and die.

Universities are just are part of the lifecycle…from birth to decadence. Universities follow money and power, not the other way around. People get rich; then they build universities to celebrate and eliminate their wealth. People who could be doing good work on assembly lines or road crews are shunted off to ivy-covered campuses, where they undertake discussions of the role of gender in Egyptian history…or a metaphysical interpretation of the cinematic experience in, say, Dude, Where’s My Car?

Universities impoverish society; the scholars inevitably reduce the net knowledge of the population with foolish ideas and preposterous plans. After a few generations, the professors have introduced not only gender studies and film interpretation, but Social Security, ethanol, Medicaid, central banking, option pricing models, wars on terror, tax rebates, subprime mortgages, progressive taxation, direct election of senators – and all the other bugaboos and balderdash of modern societies.

Naturally, all these humbugs cost a lot of money. Yesterday, USA Today gave us an accounting. In the last year alone, it figured, the real deficit of the federal government increased $2.5 trillion. USAT did what we have done many times before – it looked at government finances as if it were a business. Sharp pencils in hand, it found that the federal government has net unfunded obligations of $57.3 trillion – or about half a million dollars per household. Add in state and local budget shortfalls, and you get to $61.7 trillion. This year alone, Medicare added $1.2 trillion to federal obligations. Social Security made the situation worse by $900 billion…and veterans’ benefits tacked on another $34 billion.

The last time we looked, the average American household had net assets of only about $70,000. How is it going to pay more than $500,000 to support government’s promises? In effect, the typical family is broke, with liabilities far greater than its assets.

We only bring this up to explain how it is possible for such a great nation – with so many great universities – to fall into decline.

And now, looking ahead, Bloomberg says the “sub-par growth is the New Normal in the US.”

Naturally.

When you reach a certain maturity, with so many burdens on your back, you slow down.

Here in London, Mervyn King, head of the Bank of England, has noticed the same thing. The “NICE” 10 years are behind us, he says. By ‘NICE’ years, he means the years of Non-Inflationary Continuous Growth.

Now, inflation is a fact of life. Central banks have to fight it with higher rates – which cause slower growth.

*** Back to our good news. If the U.S. boom was yesterday’s boom…what is today’s and what will be tomorrow’s boom? What will our Trade of the NEXT Decade be?

Well, we don’t know. But we’re beginning to think our colleague, Manraaj Singh, is right. This is the Century of Emerging Markets.