Silver was comatose all night long, but showed the same signs of life just before the Comex opened. From there, it rose about 30 cents and sat at about $16.85 for the next ten hours, when it too started into a gentle decline at the beginning of Hong Kong trading this a.m.

Considering that the US$ fell about forty basis points and oil tacked on over five bucks…and a lot of the grains were limit up…and the CRB set a new high…this precious metals action was underwhelming to say the least. I wasn’t impressed with the ‘performance’ of the gold indexes either.

As far as Tuesday’s open interest goes, there was a strange dichotomy once again. Gold o.i. declined 7,317 contracts…and silver went the other way…up 2,134 contracts. The gold o.i. number makes sense because of the $27 drop in the price, but unless someone went massively short silver on Tuesday, it makes no sense that silver o.i. went up instead of down. Tuesday was the cut-off day for the Commitment of Traders report…which comes out tomorrow. These numbers should be there, but I’ll be amazed if they are.

There has been a lot of talk in the last month or so about Lehman Brothers. You have to wonder if we will have another Bear Stearns or Enron-type scenario on our hands in the near future. Below is the link to the 3-year KBW Regional Banking Index (KRX). It will be interesting to see if the Fed and the President’s Working Group can save them (and LEH) this time…like they tried to several times in the last eighteen months. The link to the graph is here.

My first offering today is from marketwatch.com and is entitled “How gold will perform in a U.S. recession”. I’m surprised to see a positive story on investment demand coming from someone at the World Gold Council, as they normally only champion the cause of jewelry. The link is here.

This next item is the second story in a week from The Wall Street Journal commenting that a return to the gold standard might be worth considering. This is the fifth gold story in as many weeks on this topic…two from the Council on Foreign Relations, one from the Asia Times…and now two in a row from the WSJ. Does it mean anything? Don’t know for sure…but I’ll have my eyes wide open for any more stories like these. The commentary is entitled “The Weak-Dollar Threat to World Order” and is certainly worth reading…and is linked here.

The hottest places in hell are reserved for those who remain neutral in time of great moral crisis. – Dante Alighieri (1265-1321)

I see that Fed Vice-Chairman Donald Kohn said that it might be good idea to let inflation run amok for a while. (Note to Donald: what the hell do you think has been happening for the last 25 years?). The Dow was finally allowed to decline a little. But what it really wants to do is die…however, the ‘powers that be’ just won’t let it. It’s wall-to-wall ugly out there, so keep your head up and your stick on the ice.

I hope your Thursday goes well…and I’ll see you tomorrow.

Casey Research correspondent-at-large Ed Steer is a keen observer of the financial scene and a board member of GATA.org.

Source: And Then There’s This…Thursday, June 12th, 2008

I listened to various experts talk for over thirty minutes on Radio 5’s afternoon show last week about the high oil price. Not one mentioned Peak Oil. Not one mentioned out-of-control money supply. Not one mentioned increasing Asian demand..

Yes, oil is overbought; yes, oil is going to correct at some stage…but it’s not a bubble.

Then we had Anatole Kaletsky in The Times tell us the rising oil price ‘threatens to do far more damage to the world economy than the credit crunch.’ He’s right about that. Unless of course you’re long of oil in some form or other, in which case things are looking rather rosy.

Kalestsky goes on, ‘The present commodity and oil boom shows all the classic symptoms of a financial bubble, such as Japan in the 80s, tech stocks in the 90s and, most recently, housing’. Does it?

In a bubble supply overwhelms demand, yet prices continue to rise. In the 1990s tech companies with no earnings issued masses of stock; in the US housing boom-bust, builders built everywhere and there was an oversupply of inventory. Is there an oversupply of oil?

The chart below from IEA statistics shows oil supply and demand 2003-2007.

Since 2007, supply has remained constant at about 85 million barrels per day, while demand is now around 88 million barrels per day. No supply-glut there.

Kaletsky goes on to say that the Gulf is ‘crammed with supertankers chartered by oil-producing governments to hold the inventories of oil they are pumping but cannot sell’. Hang on, are you sure?

A bit of research reveals there are in fact ten supertankers ‘cramming’ the Gulf, with about twenty million barrels between them – or less than 25% of one day’s global demand. They are carrying heavy Iranian crude, just at the peak of the refinery maintenance season in Asia and the Mediterranean, when refineries have seasonal shut downs for repairs. It’s just a temporary lack of refining capability for heavy oil, that’s all.

It’s worth noting that just a few weeks back, when oil was $100, George Blake, a geologist who studies hard data, rather than an info-spinning journalist, noted an imminent shortage of refinery capacity in Canada and Australia and said it was going to shortly lead to $160 oil. He was laughed at and dismissed. As we touch $135, it’s starting to look now like one of the calls of the decade.

What about other commodities? Are they in a bubble?

So is this commodities bull market a classic financial bubble as Kalestsky asserts? Below is a long-term chart of commodities prices since 1749:

Since 1792 there have been five major bull markets in commodities. These lasted 23 years, 21 years, 23 years, 18 years and 12 years – an average of 19.4 years. The current bull market began around 2000, so we are 8 years in. If history is any guide, this bull market is not even at the halfway stage. Unless, of course, ‘it’s different this time’ and this is the shortest commodities bull market ever.

At the end of last week, the Fed also announced that it would allow lenders to launder their dirty car loans, student loans and credit card debt; they can henceforth use it as collateral for loans from the Fed. And this week, Ben Bernanke, guardian of the nation’s money, urged Congress to take action to avoid more foreclosures.

And then, there’s the promise of a “tax holiday” on gasoline for the summer.

All these measures are designed to do the same thing – make people feel richer than they really are. Thanks to the Fed’s emergency low interest rates, they can borrow more money and pay less for it. Thanks to the ‘rebate’ cheques, they can spend more money too. If the feds intervene to block foreclosures, as they have already stepped in to bail out Wall Street, people who should have gone broke can still hold their heads up…and live in houses they can’t really afford.

And now, dear reader, we find that all these marvellous deceits are having an effect; they’re bamboozling almost everyone into thinking things are getting better.

There’s also a hidden flimflam…an even more important one. Since ’95, reports Martin Hutchinson, the US money supply, as measured by ‘money of zero maturity,’ (MZM) has gone up at about 8.8% per year. The average fellow, seeing that he has 8.8% more cash – and with no knowledge of the volume theory of money – might reasonably conclude that he is richer. But when money increases faster than the goods and services it’s destined to pay for, the result is rising prices. At 8.8%, US money supply was increasing about 50% faster than the GDP. You’d expect prices to rise and the dollar to fall – which is exactly what has happened.

But recently, the feds have put their fabulous money machine into high gear. MZM has been going up at a 28% annual rate over the last three months.

Here at the Daily Reckoning, our theory is that the feds’ inflation will goose up prices of commodities, gold, consumer prices and oil – but not the real economy. So far, that seems to be what is happening. The CRB commodities index is up 24% since last September. Oil has gone up 25% this year. Natural gas has risen 49%. Gold, meanwhile, has only gone up 4.8% in 2008…but this is after a correction; remember it was over $1,000 just a few weeks ago.

As for consumer prices…the latest numbers show consumer prices rising at an 11% rate in March. This number would have been a shocker – if it had ever seen the light of day. Instead, the boys down in the basement of the Labor Department went to work on it with hammers and baseball bats; when they were finished, the number had been ‘seasonally adjusted’ down to only 3.6%.

But consumer price inflation is definitely in the pipes. It will start coming out of the faucets and backing up in the drains soon. Yesterday, oil – the sine qua non of modern economies – rose to a new record high of $122 a barrel. People are killing each other over rice and wheat. Farmers are sleeping in their fields to prevent thieving neighbours from helping themselves. And crooks are peeling the lead roofing off of churches in England…pilfering copper gutter pipes in Baltimore…and stealing the manhole covers in Detroit. This huge run up in prices of primary materials has to make it way into prices for finished products – sooner or later.

And how about the economy? The latest report showed the economy growing at a 0.6% annual rate. Since the population is growing at 1%, this represents a real decline in output per person. We’re getting poorer, in other words – just as forecast.

Still, all of this new cash and credit is creating its own happy disaster. People who didn’t completely ruin themselves in the bubble phase are getting another chance. People who should be saving for their retirements, for example, are being encouraged to continue borrowing and spending as if nothing had changed. People who should move to a house they can afford are being encouraged to hold on to digs that that are beyond their means. Companies that should be liquidated are being refinanced and restructured on the Fed’s EZ Credit. And to many people, all this looks almost too wonderful.

Yesterday, we mentioned Warren Buffett’s comments – the credit crunch is over, he said.

Today, the Wall Street Journal tells us that the “housing crisis is over,” too.

In a way, they’re probably both right. With lower rates coming in…and fiscal stimulus cheques going out…the money is flowing again. The ‘crisis’ stage is probably over – at least for now. But your teeth don’t get better by putting off a visit to the dentist. And when the pain returns – probably in a few months – it will be worse than before.

*** Gold rose $3 yesterday…climbing back towards $900. Many gold investors are worried that the end of the Fed’s rate cuts also means the end of gold’s bull market – at least for the near term.

We don’t think so.

Rate cuts, more loans, rebate cheques, money supply increases – it all adds up to higher rates of inflation. And there’s no Paul Volcker on the horizon to stop it.

Here’s the way our friends at Doug Casey’s ‘Big Gold’ report see it:

“So what happened? Is the bull market over, or is it intact?

“We are confident the bull market in gold is not over. There is simply too much pressure for higher inflation and a weaker dollar for gold not to rise. A dreadful day (or week or month, or even a season) for gold doesn’t drain out the bad stuff that’s been simmering in the economic cauldron. The Federal Reserve hasn’t stopped printing money (in fact, it’s picked up the pace); the U.S. government hasn’t balanced its budget (in fact, the “stimulus package” is making the deficit worse); and the dollar’s foreign exchange value hasn’t fallen nearly enough to cure the U.S. economy’s enormous trade deficit. In short, we don’t share the sentiment that all is better in the U.S. economic and financial systems.

“It’s our opinion that gold’s downturn and the corresponding easing of worries about the financial system are temporary. How long “temporary” will continue is unknown, but events always trump psychology at some point. First we will see investors return to gold – and then we’ll see newcomers fleeing toward it.”

*** Yesterday, we went to visit Julian Mayo, who runs Charlemagne Capital here in London.

“The results from investing in emerging markets, over the last five years, have been spectacular,” he said. “It’s only in the last few months that they have fallen off. But this probably means that this is a great time to get in.”