Good day… And a Terrific Tuesday to you! First day back yesterday was a killer for yours truly… Went home, and went to sleep… But, I’m back today, and feeling good. I did something to my left knee on vacation that left me hobbling, and leaning on my cane more than I usually do. But today, it seems a bit better, so I’ve got that going for me!

Yesterday, I left you with the euro popping back and forth over the 1.43 level… But in a wink of an eye, the 1.43 level was gone, and the euro was trading with a 1.44 level, and remained there the rest of the day, reaching 1.4420 for the high… As I turn on the screens this morning, I see that the single unit has gone to popping back and forth over the 1.44 level… You don’t think it will get another sling-shot higher today do you?

I don’t… I was actually shocked to see that move yesterday… But then, I did say that the bias to sell dollars had really picked up steam lately. The piece of data that really pushed the dollar lower yesterday, was actually a “good piece of data” for the U.S. economy… The ISM Index (manufacturing) came in higher than expected and has reached a pre-Lehman Bros collapse level of 48.9… This was a BIG move from the previous month’s 44.8… It’s still below the “line in the sand figure” of 50, which is the indicator of contraction or expansion… I would say given the move from 44.8 to near 49, that expansion is already happening…

And why would that be given the rot on the U.S. economy’s vine? Ahhh grasshopper… Here’s a key ingredient, that I’ve pointed out to you for years now… The dollar… The dollar, measured by the dollar index has lost 13.4%… The dollar index, in case your new to class or have forgotten a previous lesson, is a basket of U.S. trading partner’s currencies. It is heavily weighted toward euros though… And therefore you have one of the reasons I always talk about the euro being the Big Dog… That, and the fact that the euro is the second most liquid trading currency in the world, and… It’s the offset currency to the dollar!

And… So… Here’s a note to the dollar bulls… Mess with this, and you’ll see manufacturing go right back into the dumpster!

But, what about this ISM Index? Pretty strong, I would say, given all that’s going on in not only the U.S. but the world. Going back to yesterday’s discussion about the recession coming to an end. This is one of the key pieces of data that will indicate to me that we have hit bottom and the bounce is on… I know that I have been pretty cynical of the forecasters that were calling for the bounce 6 months ago and so on, but if we get more of this type of data in the coming weeks, I’ll have to put a different cap on…

OK… The Reserve Bank of Australia (RBA) met last night, and as expected they left their internal interest rates unchanged. The RBA did move their bias for interest rates from easing to neutral, which is a natural progression to the next step of beginning a rate hike cycle. The RBA wasn’t in the mood to go “all in” on the move to neutral though… They hedged their move by saying that, “the present accommodative setting of monetary policy is appropriate given the economy’s circumstances.” That’s Central Bank parlance for “we’re doing this now, but we’re prepared to go back to easing should the economy’s rebound falter”…

So, the A$ was not able to push higher, as would normally be expected if the Central Bank would have gone “all in” on the move higher in bias… The A$ is hovering around 84-cents these days, which isn’t shabby considering that on March 1st of this year it was trading with a 63-cent handle! Still not the “go-go” days of summer 2008, when the A$ was knocking at the door of parity to the green/peachback.

The A$’s rise from the ashes of Feb 2008 is dragging kiwi along. The New Zealand dollar / kiwi saw the same kind of bloodletting the A$ did last fall, so any dragging higher is a welcome sight to kiwi holders. I’m still not sold on kiwi’s ability to maintain the levels it reached last year, given their deficit position… For those of you new to class, the kiwi was able to rise in the fact of a HUGE deficit, because of their interest rate differential to the rest of the world. New Zealand had the highest interest rates in the industrialized world, and those interest rates kept the blinders on their deficit… But, I kept warning folks that once the rates began to drop the Deficit would be as obvious as a man with a hatchet in his forehead!

So… The any dragging is good news to the kiwi holders…

OK… Back in the U.S., the Treasury announced that they would need to borrow less than originally forecast in the 3rd QTR by $109 Billion… They’ll still need to borrow over $400 Billion, and will keep the pace of the total borrowings through the end of the fiscal year (September) at $1.39 Trillion…

The Treasury is borrowing less, because a handful of Big Banks are repaying their TARP loans… That’s a good thing, I guess… But I just can’t get a warm and fuzzy about the stories I keep reading regarding this whole deal of loaning money and buying back their bad assets so they can repay the loans to the Treasury… It’s all mish-mashed folks… But! I’m not going there! I’m keeping my nose to the task at hand, and not veering off course…

The thing to take from this is that the Treasury will still need to borrow $1.39 Trillion in the past year, with the borrowings gaining momentum in the past 6 months… And this total amount of borrowings is what’s weighing on the appetite for Treasuries by foreigners…

Did you see where Wal-Mart (NYSE:WMT) just issued $1 Billion in bonds but denominated them in yen? Is there a message there? I believe there is a message there, folks… Now, if we begin to see more Corporations doing this, then the message will be loud and clear. These Corporations don’t believe they can sell their debt denominated in dollars, as the world is choking on dollars right now… When and if other Corporations begin to do this, we’ll see the dollar get sold like ponchos on a rainy day at Disney World!

OK… Let’s not go down that road of gloom and doom… Instead let’s talk about a currency that’s moved higher while remaining in stealth mode… The Canadian dollar / loonie… Ever since the Bank of Canada’s Gov. said earlier this month that he was going to do whatever he needed to do to keep the loonie weak… The loonie has taken off on a moons hot! In fact, the loonie just hit a 10-month high VS the green/peachback!

And, not meaning to place the Chuck’s kiss of death on these currencies, but this scene has played out in other places too… In Canada, Switzerland, and Brazil, each respective country’s Central Bank Gov. issued warnings about keeping their currency weak… In all three, the exact opposite has happened. And I have to smile about that, because… You may recall me calling out today’s currency traders as not having the cojones to take on Central Banks, as opposed to the currency traders of yesteryear who would take it as a personal challenge to defeat a Central Banker that put down a line in the sand on a currency’s level…

So… It may all be a coinquidink, that these three currencies are rallying after their Central Bank Governors said they would keep their respective currencies weak… But I doubt it!

I see that Gold and Silver are back on the rally tracks again… Gold is trading over $950 again… And the price of Oil has jumped too ($70.67)… Commodities are all on the rise, once again as risk appetite really begins to grow. The Chinese have ignited the fire on Commodities with their economic growth and demand for the raw materials, and with that thought, commodity traders are jumping on the bandwagon…

I suspect we’ll see some profit taking today in the currencies and commodities though… But that’s OK! Bring them back a bit, give everyone that was sitting on the sidelines waiting for an opportunity to buy, a chance to do so, and then move on to higher ground! That sounds like a plan! And you know what I like to say… I love it when a plan comes together!

Currencies today 8/4/09: A$ .8395, kiwi .6665, C$ .9365, euro 1.4390, sterling 1.6935, Swiss .9410, rand 7.8325, krone 6.0475, SEK 7.1625, forint 185.70, zloty 2.86, koruna 17.95, yen 94.60, sing 1.4330, HKD 7.75, INR 47.71, China 6.8296, pesos 13.13, BRL 1.8250, dollar index 77.66, Oil $70.67, 10-year 3.62%, Silver $14.12, and Gold… $953.50

That’s it for today… I hope you have a Terrific Tuesday!

Chuck Butler

Source: U.S. Manufacturing Is Recovering…

If you need a place to live and want to own a house, why not? Prices in some areas are fairly reasonable. But if you’re speculating, our guess is that you’ll get a better deal if you wait.

Why? For the many reasons we have given you in these Daily Reckonings. House prices may be firming in some areas – that’s what the Case-Shiller numbers seem to show. But nationwide, they are probably headed down for quite a while longer.

Herewith, four reasons why:

First, as you know, this is a depression. It will probably be long. And deep. You wouldn’t know it from looking at the stock market or reading the news. The Dow went up another 114 points yesterday. Oil rose to $71. And the dollar – anticipating inflation – fell to $1.44 per euro.

But that’s what bounces are supposed to look like. They look good enough so that people mistake them for the real thing… and get suckered into more losses.

Depressions drag down asset prices. Typically, prices become much more reasonable. And then they reach UNREASONABLE levels. House prices have become reasonable. Now they will become unreasonably cheap…

Second, waves of resets and foreclosures are still washing over the housing market. As Barry Ritholz told us in Vancouver, we’re only half way through the foreclosure process. There are more than 18 million empty houses in America. A news report yesterday told of a 32-storey apartment building in Florida with only one lonely tenant.

And still coming up are more refinancings… more drowning homeowners … and more people giving up on homeownership altogether. The bubble era created new households at the rate of 1.2 million per year. Practically every one of them wanted to get in on the housing boom. Now, there are only 500,000 new households per year. And few of them still believe that housing is the route to wealth. At the current rate, it will take many years to fill up all America’s empty houses.

Third, incomes are falling. Property crashed because people with average incomes could no longer afford to buy the average house. Now, they can afford even less. Ken Rogoff estimates that the consumer needs 6-8 years to pay his debts down to a more reasonable level. Part of that deleveraging process will mean getting rid of heavy mortgage debt – one way or another.

Fourth, there are too many houses that are too big… and in the wrong places.. Big houses were a status symbol in the bubble years. Now they’re a symbol of extravagance and error. Plus, they’re expensive to own. People will want to dump them – even if they can afford them. There was far too much building in the outlying suburbs of the sand states too – Arizona, Nevada, California and Florida. Those houses may have to be abandoned as people are forced to move closer to where the work is.

There are also a couple of more technical reasons why the Case-Shiller numbers may be erring on the bright side: seasonal adjustments and a changing mix of houses sold. But our guess is that real house prices – adjusted for inflation – will continue going down for many more years.

You want to see deflation? Go to Tokyo City in London. The restaurant chain says it is going to give its food away for free. Customers will pay for drinks plus 2 pounds 50 pence for service.

Meanwhile, in Tokyo itself prices are falling – again. The Japanese have had on-again, off-again deflation for the last 20 years… ever since their stock market crashed in 1989.

Hey, what’s the matter with those Japanese? Don’t they know about stimulus?

Hold on there, pilgrim. What the Japanese don’t know about stimulus ain’t worth knowing. They’ve stimulated their economy so much that their government debt now measures 200% of GDP. And what did they get for all that stimulus? Did it get their economy moving?

Are you kidding? Now, the latest news tells us that they also have the highest jobless rate in 6 years. And the latest figures show the inflation rate NEGATIVE. In fact, never has the inflation rate been lower.

*** Nissan announced an electric car. Shares soared.

*** Jobless benefits are running out for 1.5 million unemployed Americans, says a New York Times report.

*** And here a commentary by David Pauly on what Wall Street is doing about low earnings – lying!

“Stock analysts continue to promote corporate earnings lies, insisting that net income isn’t really what investors need to know… .

“In analyst speak, Intel Corp. (NASDAQ:INTC) wasn’t hit with a $1.45 billion fine from the European Union in the second quarter for anticompetitive practices.

“After setting aside funds to cover the fine, which Intel is appealing, the semiconductor-maker had a quarterly loss of $398 million, or 7 cents a share. Disregarding the fine altogether, analysts maintain the company earned 18 cents a share, beating their average estimate of 8 cents.

“As Wall Street tells it, the employee stock options Google Inc. granted in the second quarter didn’t cost its shareholders $293 million.
“Google (NASDAQ:GOOG), according to generally accepted accounting principles, earned $1.48 billion, or $4.66 a share, in the period. Not enough for Wall Street, which prefers to say the company earned $5.36 a share, leaving out the cost of stock options.

“Viacom Inc. (NYSE:VIA.B), an entertainment company, this week reported second-quarter net income of $277 million, or 46 cents a share. Analysts had estimated profit as if money Viacom paid out in severance in the period wasn’t the real thing. On that basis, Viacom earned 49 cents a share, beating the average estimate by 1 cent.

“Time Warner Inc. (NYSE:TWX), a rival of Viacom for entertainment dollars, said it earned $519 million, or 43 cents a share, in the quarter. Analysts insist Time Warner earned 45 cents, excluding, according to Bloomberg data, costs related to litigation and asset sales. Lawyers must work for nothing.

“By similar Wall Street reckoning, the expense of cutting jobs and selling an asset that reduced McGraw-Hill Cos. (NYSE:MHP) second quarter earnings per share by 10 percent was immaterial.

“Analysts also say investors should ignore $129 million that Textron Inc. (NYSE:TXT), maker of small airplanes, helicopters and golf carts, charged against net income in the latest quarter. Included was the cost of shutting a plant for an eight-seat jet Textron decided not to build.

“General Electric Co. (NYSE:GE), which makes jet engines and electric power equipment and has a financial services arm, had a second- quarter profit of 24 cents a share. GE and the analysts emphasized earnings from continuing operations, which at 26 cents a share, exceeded their estimate by 2 cents. A $194 million loss from discarded businesses was discarded.”

And so on… and so on…

*** “As You Like It” was as we liked it – lively, bawdy, and raucous. It is not Shakespeare’s finest play – or so the critics say. But it has some marvelous dialogue. “All the world is a stage… ” is the most memorable.

Our hostess had set up a stage on the lawn and put out a hundred or so chairs for guests. But by the time we sat down it had begun to rain. The chairs were wet. A Frenchman gallantly wiped off Elizabeth’s chair. Your editor sat down in a puddle… and the play began…

The rain continued throughout the performance. Some spectators – perhaps those who listened to the weather forecast – came equipped with parkas and anoraks. We had an umbrella, which we held over our heads throughout the performance.

Despite the drippy conditions in the bleachers, a good time was had by all. The English actors who performed the play were real pros. They enlivened the set with music and acrobatics, moving the story forward 4 centuries to the days of Peace & Love and strawberry fields forever. We never quite got the connection… but it seemed to work, somehow.

After the play was over, we retired to a stone barn for soup and dessert. There, we met neighbors whom we only see once a year – in August. Among them was a dear Daily Reckoning reader.

“I’m glad I bought gold when I did,” he said. “It was $600 or so at the time. So I made a gain on the gold. But the important thing was that I wasn’t caught in that sell-off in stocks last year.

“What do you think gold is going to do now?”

“Probably, it will go down,” we replied.

“So, you’re selling your gold?”

“No… we’re holding on… It’s too risky to sell it.”

*** “Of course, that’s the big question,” Elizabeth began on the drive home.

“What’s the big question?”

“About whether the world is just a stage. It’s really a question of free will. About whether we do things because we think them through ourselves, or whether we just play our roles.

“I suppose it’s related to the ‘Great Man’ theory of history… the idea that people actually determine history, rather than play their parts in it… ”

“It’s probably like all the great questions… that is, both true and untrue at the same time. I mean, Louis 14th couldn’t have been Louis 14th if there hadn’t been a Louis 13th… and if France hadn’t been the leading country of Europe… and if it hadn’t been the peak of the monarchic age.

“And Rommel couldn’t have led a Blitzkrieg in WWII if the tank hadn’t been invented in WWI… .

“In both cases, it appears that Shakespeare was right… that the roles were already there, just waiting for someone to play them… ”

“Yes, but I wonder if that is true… or as completely true as it looks. The fellow who took over from Lenin didn’t have to be a monster, did he?”

“I don’t know. If he hadn’t been so ruthless some other guy probably would have purged him out… sent him to the gulag. Once a revolution gets started, the most violent and ruthless groups seem to take over. So, I guess you could say that even there… the role must be played… ”

“Does that apply to our personal lives, too? Are we just playing roles? You are pretending to be my husband. I am pretending to be your wife. We are pretending to love each other. Is that all there is to it?”

“No… no… that’s very different… ”

“How so?”

“I don’t know… but when I say I love you, it comes out of my soul like smoke from a sacred volcano… ”

“What does that mean?”

“I don’t know… I just like the sound of it… ”

Source: More Empty Houses in America

Oil rose $2.50 on Friday…to $69. Gold rose $18 to $953. The Dow was up 18 points. And the dollar fell to $1.42 per euro.

And governments are still doing the wrong thing…trying to increase demand. It’s not possible…for reasons we describe below…

Well, it’s August…and we’re on vacation. But just because we’re on vacation doesn’t mean the world stops turning. It just doesn’t turn quite so fast.

“Why don’t you just stop writing for a while?” our mother asked this morning. She is visiting for the summer.

“I don’t know how you write every day anyway. You must say the same thing…”

Richard Russell has given a Dow Theory bull market signal. When you get a signal, he says, you don’t argue with it; you go with it. Stock prices are going up.

We don’t doubt it. The Dow would have to clime to about 10,300 just to give us a classic 50% bounce.

But we are in a depression. We don’t gamble on stocks in a depression. It’s too risky. Instead, we go with the flow. And the flow over the next 10 years or so is probably going to be down.

By our reckoning the Dow hit its high in January of 2000. Adjusted for inflation it’s been running downhill ever since. Investors have made nothing for their trouble. And if we’re right, they won’t make anything in the years ahead either. Instead, they’ll have to wait until stocks are cheap again.

You know, dear reader…investing is really very simple. Buy low. Sell high.

Okay…now that we got that figured out…let’s move on…

Sticking with the basics, what we notice is that stocks, bonds and commodities move in broad patterns that last for many years. Not to put too fine a point on it, but they go up and then they go down. Or vice versa. Just looking at the last 50 years, stocks were very expensive in 1966. Then, they dilly dallied around for a couple of years…and headed down. This bear market continued until August 1982. That was when BusinessWeek magazine declared that stocks were not merely ailing, they were dead: “The Death of Equities” was the cover story that month. Naturally, equities got up from their deathbed the very next month and entered the marathon. They ran for the next 18 years.

Well, you know the rest of the story as well as we do. It’s not complicated. The problem is that it takes patience to see it…to understand it…and to take advantage of it. The way to make money in stocks is to buy them when they are very cheap. But you may have to wait for 15-20 years. They’re not cheap towards the end of the bull cycle. Since you never know exactly when it’s going to end you don’t want to buy anywhere near the top. So you wait…and then stocks keep getting more and more expensive. Finally, the top arrives…and then you have to wait another decade or more until they reach bottom.

“Well, why don’t your write The Daily Reckoning once every 20 years?” mother wanted to know. “Just tell them when to buy…wait 20 years…and then tell them when to sell.”

But we’re going to ignore our dear, sweet momma this morning. She just doesn’t understand the complexity of the financial world!

For the last nine years, stocks have been going down (albeit with a major countertrend to the upside). We’ll probably have to wait another few years before they are cheap enough to buy. And when the end comes, stocks will be very cheap – between 5 to 8 times earnings.

When will that day come? Probably around August 15, 2018. Don’t forget to read The Daily Reckoning that day!

Stock market cycles tend to coincide, more or less, with broad trends in the credit cycle. When people borrow and spend it causes business profits to grow. The businesses then expand; they hire more people; they build more capacity.

Then, when the credit cycle turns, everything goes in the other direction. People stop borrowing and begin paying back. Sales decline. Unemployment grows. Profits fall. Credit contracts.

We are now in the early stages of a major credit contraction. This is not a pause in a credit expansion; it is a change of direction, a credit contraction with all that goes along with it – joblessness, bankruptcies, foreclosures, and so forth.

Bloomberg tells us that the numbers have already been revised – downward. “Worst recession since the Great Depression,” says its headline.

It is the worst recession since the Great Depression because it’s not a recession at all; it’s a depression. And the government is doing its level best to make it a great one.

The key to understanding a depression – or the downswing of the credit cycle – is that demand contracts. Consumers have less to spend. For a very simple reason: they already spent it.

Listen up, because this is important. When you borrow in order to consume, what you are really doing is consuming something today that you would have normally consumed in the future. You spend money you haven’t earned yet on something you’re not really ready to buy. You’ve heard the expression, ‘time is money.’ That’s why borrowing money is really borrowing time. Later, you have to make it up. You have pay off the debt. When you do, you take money out of current consumption; you’ve already consumed it!

This is what economists refer to as “demand destruction.” It’s what happens in a depression. People are replacing what they took from the future. They’re can’t consume because they’ve already spent their money in the last boom. Demand collapses.

We’ve seen that happen in the last two years. Savings rates went from zero to 7%. Sales have declined (the latest revisions show them off more than was previously thought.) Profits are shrinking.

This is, of course, a completely natural and necessary adjustment. You can’t take things from the future without putting them back eventually. The future won’t stand for it. But the feds, in their benighted confusion, fight the problem like a farmer who plows backwards to fool the crows. They think the problem is too little demand. So, they try to add demand…with tax cuts…spending programs…low rates…easy credit…cash for clunkers and other fixes. What do these policies achieve? Do they really increase demand? No, they can’t do that…that would require a richer population with more money to spend. What they try to do is to move demand forward.

The problem, of course, is that too much demand has already been moved forward. But they’re nevertheless trying to steal even more of it…taking away demand that would normally show up two, three, four…ten years from now. That car that you might buy next year, for example. With the ‘cash for clunkers’ program, you might make the purchase now instead of waiting until you actually have the money. Or, that new parking lot behind the town hall. We won’t really need it for a few years, but heck, if they’re giving away money now… Or how about that trip to Europe? With a big tax rebate check, you might decide to take it on your 20th wedding anniversary, rather than wait ’til your 25th.

Real demand increases only when real wages increase. Then, people have more purchasing power. Trying to increase demand by borrowing – or stealing – from the future is a scam at best. Even if it works now, it fails later.

Our gardener, Damien, came over yesterday…carrying a big wheel of cheese and a huge loaf of bread.

“Finally…you are back,” he said.

“Yes, it’s been a long time. But it’s August again…so we’re back…”

We explained how we had followed the annual bicycle migration out of Paris on Friday night. On the last day of July, Parisians load their bicycles on racks behind their cars and head for the country. We followed the bicycles out of town. The highways were jammed…traffic was start and go for hours.

“Look, I was just down in the Auvergne,” Damien continued, “so I brought you some cheese and bread. These are specialties from the region. They’re very good…

“And now that you’re back, let’s celebrate…let’s have a drink. How about some pineau?”

“Sorry Damien,” Elizabeth interrupted. “He’d love to, I’m sure…but he has another engagement. We’re going to the Berry (about 45 minutes East…where Georges Sand lived) to attend a play. Shakespeare…in English.”

“But who’s going to understand it,” Damien wondered. “The French can’t understand Shakespeare…”

“Even native English speakers have a hard time following Shakespeare,” we added.

But there was not time for a drink…we were off to see As You Like It performed at a friends house by an itinerant English group…

And so…the summer vacation begins…

Until tomorrow,

Bill Bonner

Surce: Sticking With the Basics

Everything is working out just like we thought it would. The stock market is performing as expected. The economy is on track. Even the politicians are doing what they thought they would.

Let’s begin with the stimulus/bailout/boondoggle/BS plan. As anticipated, it has failed. That is, the economy is getting worse, not better. It has failed the test set for it by its own creators. Back when the Obama Team was arguing for a big bailout bill, it warned that without a bailout unemployment would rise above 8% in 2009. ‘Pass this bill today,’ said Ben Bernanke, or words to that effect, ‘or there may not be a tomorrow for the US economy.’

Congress dutifully bent its back to the task of adding boondoggles to the bill and then okayed the measure. And here we are in the middle of 2009 and the unemployment rate is already at 9.4%.

It was obvious, even at the time, that the hacks in the administration had no idea what was going on. They were just guessing about the economy and taking advantage of the situation to pass out more money that taxpayers hadn’t even earned yet.

As predicted, the spending didn’t make the situation better; if anything, it probably made it worse – by delaying the process of destruction and hence retarding the process of creative reconstruction too.

We recall our other forecast too: when the bailout doesn’t work, they’ll pass another one. And so, in yesterday’s New York Times, there is David Leonhardt urging the pols to even bigger acts of absurdity:

“The economy really may need more help,” he says.

Yes, it will need more help. Especially if it keeps getting the kind of help it’s been getting.

The stock market is acting more or less as we thought it would too. The big bounce began on 9 March. It’s been almost 4 months now… and the bounce should be getting near its peak… and beginning to fall again. Just look at a chart of the Dow since March. You’ll see exactly that. Like a cannonball, it went up… and now it seems to be arching over for its fall to the ground.

Yesterday, the markets seemed to hang in mid air… The Dow was up 57Oil stayed at $69. Only gold seemed to know where it was going – rising $13.

As stocks roll over, the economic news rolls over too.

In the USA Today yesterday was a report that said small businesses are going broke faster than expected. Small businesses are supposed to be the survivors. Like mammals in the Ice Age, they replace the dinosaurs.

In a recession, big, costly, inflexible companies are supposed to get hit the hardest… leaving niches for small, nimble, low-cost competitors to slip into. These small businesses establish toeholds during the recession… hire people… and then scale up to the peak of commerce when the boom comes.

But this time it’s different. Small businesses are collapsing along with big ones. In April, for example, more than small 8,000 businesses went broke and filed for Chapter 11.

In addition to the business bankruptcies are the personal bankruptcies. According to the Los Angeles Times, the rate of personal bankruptcy is soaring in Southern California.

In April, according to David Rosenberg at Gluskin Sheff, the feds added $121 million (at an annual rate) in total stimulus to the consumer economy – including tax reduction and increased benefits. In May, the total stimulus rose to $163 million. How come so many bankruptcies when the feds were giving away so much money?

The answer, says Rosenberg, is that consumers didn’t spend the money; they saved it. Consumer spending rose just $1 billion April – despite $121 billion of stimulus. In May it rose $25 billion – despite a ‘stimulus’ 6 times that amount.

Meanwhile, the saving rate, which had been only 0.2% in March of 2008 exploded to nearly 7% in May 2009.

No consumer spending, no sales. No sales, no revenues. No revenues… no staying in business.

No small businesses. No new jobs. No new jobs, no economic recovery.

No economic recovery and the meddlers are back on the Hill asking for more power and money.

Depressions take time. Bankruptcy rates don’t rise overnight. First, it takes businesses a while to realize their sales are falling. At first, they think it might be a fluke. Then, they talk to friends and read the papers. And then, the next month confirms the story.

Then, it takes time for them to react. They have to figure out where they can make cuts. Typically, this involves layoffs and job losses. Employees who will be let go need to be identified. Then, they actually have to be sent home.

Then, the employee collects benefits. He looks for another job. He draws down savings. It takes time for him to react too. He watches. He notices that it is hard to find another job. He realizes his resources are running out. He begins to cut back. Unnecessary expenses are eliminated. Then, he broadens his definition of ‘unnecessary.’

Finally, he lacks the money for the essentials. The mortgage goes unpaid. Credit card deadlines are missed. This provokes an inevitable response – warnings, more warnings, official action, and finally… defaults, foreclosures and bankruptcy filings.

We expect unemployment and bankruptcy filings to edge up throughout the summer months. Then, by the autumn, asset prices should be going down again.

*** We came back to Paris last night to celebrate our 25th wedding anniversary. It wasn’t much of a celebration… just a simple dinner for two in a simple restaurant in the old Palais Royale.

It was a hot day in Paris. We sat outside in the galleries of the old palace. Near to us was another couple. Middle-aged, they seemed like people who were getting together for the first time, not a couple who had been married for a long time. The man reminded us of John Malkovich. The woman? She was not an especially attractive woman, with straight gray/black hair cut as short as a man’s. They held hands. They looked into each others eyes. They seemed to be making plans for a happy future.

When you’ve been married for a long time, on the other hand, you have to wonder if your happiness is not more past tense than future. You can recall the happy times you spent together… how the children were when they were little… how much fun you had when you were poor and starting out in life… and all you went through together to get to where you are now. But when you look ahead, your weary eyes fail. You may feel as though you’ve said all you had to say – and agreed to disagree. You may feel as though the grand adventure of your lives has peaked out – like a bull market – with nothing but the downward slope left for you.

You may feel that the great mystery of coupling has been revealed. Getting to know someone and getting together… even fusing your flesh, blood and spirit to form fully new human beings… is there anything left to discover? Are there more surprises coming?

Inevitably, the conversation turned towards the sovereign state of South Carolina. The poor state has a jackass for a governor. Mark Sanford has become a laughingstock for the entire nation. Not because he had an illicit dalliance and lied about it – who can honestly say he hasn’t done that? – but because he is a cad. And the worst kind of cad – the kind who pretends to be sensitive and caring.

He’s found true love, he says, with an Argentine beauty. But rather than dump his wife and fly to his heartthrob… he dumps the love of his life and tells his wife that he will try to fall back in love with her. The bonehead betrays them all – his wife, his lover… and love itself. He’s even given romance a bad name.

Meeting a woman who looks like Penelope Cruz on a dance floor in South America has an undeniable romantic appeal. When the story broke, there must have been hundreds of lonely middle-aged men in America booking their tickets and looking forward to tango. The Mark and Maria affair might have made the history books of star-crossed love, along with Tristan and Iseult, Antony and Cleopatra, Brad and Jennifer. But now, a week later, we know what kind of man Mark really is. Cancel the tickets. Any man who falls in love from now will feel like a sap.

As for us, we’ve been saps all our lives. Eventually, we’ll head for the romance of Buenos Aires too. But we’ll take our main squeeze with us, just to see what happens next.

Source: When the Bailout Fails, the Feds Will Pass Another One

Before you tell me I’m wrong, let me ask it this way…

• If inflation returns, or even hyperinflation…
• If the economic crisis persists and gets worse…
• If uncertainty and fear continue, and chaos and rioting begin…
• If stock markets languish or suffer another meltdown…
• If the recovery spending of the world’s governments proves futile…
• If government interference in the economy continues to increase…
• If the value of the U.S. dollar takes a major fall…
• If world recovery from the current recession/depression takes years…
• If you’re still wondering whether you have enough “safe” money…

…would you feel you own enough gold?

If all those things come to pass, I suspect many of us, including myself, would wish we had a few extra gold coins or bars stashed away.

So let’s assume you answered “No” to my question and need to add some ounces to your collection… is now a good time to buy?

The Best Time to Buy Gold?

Before glancing at the chart below, if you had to pick the month with the weakest average gold price, which would you select?

In our current 8-year bull market, June has seen the lowest return for gold. In other words, it’s been, on average, one of the best times to buy.

How does this compare to the bull market of the 1970s?

In the last great bull market, summer also was a good time to buy gold (although April was even better.)

What about gold stocks?

Since 2001, July and October have been the weakest months for gold stocks, as measured by the AMEX Gold Bugs Index, and the best times to buy.

However, keep in mind that these are price tendencies and not certainties. There were Junes when gold was up, and some Julys when gold stocks were up. Meaning, avoid using this chart for trading purposes or in anticipation of an immediate gain. Instead, use it to prepare for possible gold price weakness ahead. And if the weakness shows up, treat it as a buying opportunity and add to your holdings to position yourself for the next leg up in the bull market. Consider that this summer could be the last chance to buy gold for three figures.

Don’t lose sight of where we are at this point in the recession – in an intermission in the bad economic news. When it becomes apparent that the good ole days aren’t coming back, sentiment – and markets – could move rapidly. And gold is one of the best forms of capital that can protect you in a financial Armageddon. That gold was up in 2008 is a reminder of its protective power.

How much gold should you have? Continue to accumulate physical gold until you can honestly say you don’t care how many dollars Ben Bernanke prints.

Having physical gold in your possession is always a good idea in times of economic turmoil – there is no “uncertainty hedge” like it. But to actually make money, you should also look at premium gold stocks. Our current favorite has been so consistently successful that we call it “48 Karat Gold.” Click here to learn more.

Some observers are now saying that gold’s pretty much had its day and that once the recession is over, it will retreat for good.

However, the four-digit gold price we’ve seen so far is with no price inflation to speak of, no effects of the atrocious increase in the money supply, and despite a rising dollar. What happens to gold when each of those pictures gets turned upside down – high inflation, excess cash jolting the economy, and a falling dollar? After all, gold’s performance to date has been powered only by general anxiety, not by any visible erosion in the dollar’s value.

I decided to take a fresh look at calculations that could be used to appraise gold’s upside potential. No one of them, by itself, comes with compelling logic. But they all point in the same direction.

Gold’s Percentage Rise in the Last Bull Market. What if gold in this bull market repeats the percentage rise in the last bull market? In the 1970s gold rose from $35 to $850, a factor of 24.28. Our low in 2001 was $255.95. Multiply that by 24.28 and you get a gold price of $6,214 per ounce.

U.S. Gold Holdings to Money Supply: The M1 money supply consists of currency and checkable deposits. The U.S. government currently holds 286.9 million ounces of gold. If the government were to make each dollar redeemable by the amount of gold it possesses, we’d arrive at the following price for gold: $1.569 trillion ÷ 286.9 million oz. = $5,468.80 per ounce

Gold/Dow Ratio: The ratio was about “1” when gold peaked in 1980, meaning the Dow and gold were the same price. To restore that relationship at today’s stock prices would mean when the Dow is at 6,626, gold should be at $6,626/oz. Of course, we think it likely that the Dow will get a lot lower before gold peaks. But even if it drops all the way to 4,000, that would imply a gold price of $4,000/oz.

All the Money in the World vs. Gold Reserves: If the public eventually sees the paper game being run by the central banks for what it is, governments will be forced to back their currencies with gold (and perhaps other tangibles like silver). Assuming they had to go into the market and buy the gold needed to restore faith in their currencies, the numbers might look like this: Total central banks reserves (including gold holdings) = $4.8 trillion, divided by 929.6 million ounces total gold reserves held by all official institutions that issue currency = $5,246 gold price.

U.S. Gold Holdings to U.S. Foreign Trade Deficit: The size of a country’s deficit or surplus would be of no consequence if all currencies were convertible into a fixed amount of gold. However, the dollar is increasingly considered a hot potato, and when the trade balance reverses, as it must, dollars will flow back to the U.S. and fuel domestic price inflation. Based on the cumulative trade deficit of $9.13 trillion (up from $6 trillion since June ‘07!) and U.S. gold holdings of 286.9 million ounces, the corresponding price of gold would be $31,822 per ounce.

U.S. Gold to U.S. Government Liabilities: Finally, the GAO (Government Accountability Office) calculates an income statement and balance sheet for the U.S. government. As you’d suspect, it is dominated by future liabilities for Medicare and Social Security. What if they had to be backed by the supply of gold? Official U.S. government liabilities now ring in at an incredible $55.2 trillion. To make good on that would require a $192,401 gold price.

No, we don’t think gold will hit $192,000 or even $32,000. And there really isn’t any surefire way to forecast the eventual high. But it’s clear that every weathervane is pointing in the same direction. So, yes, gold isn’t going to $2,000; it’s going higher.

Witness the Breakdown

When determining how to keep your wealth safe, the state of global affairs can be a powerful reminder that gold should be part of the strategy. And today our world, essentially, is on fire.
· Eastern Europe borders on bankruptcy. Brazil’s economy is falling off a cliff. Ditto Mexico.
· Protests have erupted in Latvia, Chile, Greece, Bulgaria, Iceland, Dublin, and parts of the U.S. Workers have gone on strike in Britain and France.
· In the U.S., 36 states and the District of Columbia have proposed or implemented reductions in the civil workforce. (You think customer service is poor now…)
· An astounding one in nine homes, 14 million, sits empty in the U.S. The December median price of a home sold in Detroit was $7,500. More than 8.3 million homeowners were upside down on their mortgage in the fourth quarter. Freddie Mac’s new CEO resigned after six months on the job.
· Last quarter, 12 U.S. banks failed, bringing the 2008 total to 25, the highest one-year death rate since 50 failed in 1993. More foreboding, another 252 banks joined the FDIC’s “problem list.” So far this year, 19 banks have failed.
· The central bank of Ukraine banned the early redemption of term deposits, the most popular form of savings in the country. Bank deposits have dropped 20% since September, as bank customers dodge the risk of getting locked in.
· The projected US$1.75 trillion federal budget deficit is almost four times the nation’s previous record-high budget deficit. The Times Square debt clock reads over $11 trillion. Japan’s now reads $7.8 trillion.
· High unemployment has become a worldwide epidemic, with the infection spreading.
With world economies taking it on the chin, it’s little wonder that investor interest in gold as a safe haven is growing – a trend we expect to continue. And just wait until the dollar resumes its slide, the expanding money supply jolts the real economy, and inflation kicks in.

Both Hands on the Wheel

Given the ongoing turmoil and the swallowing darkness at the end of the crumbling economic tunnel, our recommended BIG GOLD strategy remains keeping one-third in cash, one-third in physical gold, and one-third in our selected gold stocks. New money for investment should be split among the same three categories; we just don’t see any safer places to be.

As economies around the world continue to shrink and governments continue administering larger doses of the wrong medicine, we’ll sit in relative comfort with our gold for protection and our stocks for profit. We expect the prices of both to rise as others join us.

***

Even though some of the mainstream media are already popping the champagne, cheerfully pronouncing the end of the crisis, we beg to differ. The economic quagmire the U.S. and much of the developed world is in is far from over… so be right and sit tight, as we at Casey Research like to say. And find out how you can make the most out of gold as a safe-haven investment, by clicking here.

Source: Global Economics on Tilt – How to Protect Your Ass(ets)

If I had been writing it, I would have titled it “Not All Of The People In The World Are Stupid!” with the subhead, “There are lots of smart people who are buying gold to capitalize on the sheer stupidity of governments abusing fiat currencies so that inflation in prices will soar as inflation in the money supply soars, until gold-owning people, giddy with greedy glee, will say, ‘The Mogambo was right! Whee! This investing stuff is easy!’”

But I am not here to show off how good I am at coming up with boffo headlines with the subtle undertones so that they offer me a job, at a fabulous salary, to write headline gems like this one; this is about how “On Tuesday morning, gold derivatives dealers, who had sold short in the face of a fast rising gold price, faced a serious predicament. Some 27,000+ contracts, representing about 15% of the April COMEX gold futures contracts remained open” indicating that, as holders of those long gold contracts, they “demanded” delivery of the physical gold “by holding futures contracts past the expiration date.”

The big problem belongs to the short-sellers of gold, who are finding, suddenly, that “long buyers were demanding in droves” – demanding physical gold bars, when, apparently, there were not enough.

Since I am confused as to what all of this means, Mr. Goodman correctly interprets the blank look on my face as puzzlement – if not outright befuddlement – and patiently explains that to keep things in perspective, history has shown that people investing in COMEX futures don’t necessarily want physical gold, and that they are merely speculators, as, “In normal times, very few people do this. Only about 1% or less of gold contracts must be delivered. The lack of delivery demand allows the casino-like world of paper gold futures contracts to operate. Very few short sellers actually expect or intend to deliver real gold. They are, mostly, merely playing with paper” which is the basis of the alleged gold and silver scams, as GATA.org and Ted Butler have long exposed, which gets us talking about how corrupt regulators are these days, as everything is else corrupted these days, which is, of course, just what you would expect at the end of long monetary booms, which doesn’t make it any more palatable.

But back to our story of the almost-default at COMEX… Fortunately, at the last minute, Deutsche Bank delivered “a massive 850,000 ounces, or 8500 contracts worth of the yellow metal.”

This is where I kind of lost interest, as this kind of thing is like blood in the water to sharks, who will soon be looking at the low price of gold and the complete lack of supply of bullion, and they will be hatching plots to squeeze this disparity and make a lot of money, and I was soon fantasizing about how my tiny little stash of gold will soar and everybody else who doesn’t own gold will be busted out, now that the scam has been busted, and there will be people, like cute college coeds, who will be so desperate that they will say they are willing to do anything for money, and I will say, “Anything?” and then they will quickly affirm, “Anything!”, and so I again ask, but with a rakishly raised eyebrow and licking my lips in a lascivious manner, “Anything?” and they gulp and say, but without their former enthusiasm, “Anything”… So you can see how I was distracted.

And anyway, somewhere along the line he admits that it is “circumstantial evidence” that Deutsche Bank was a major holder of short positions, or that “the gold used by Deutsche Bank to deliver and fulfill its COMEX obligations, came directly or indirectly, from the ECB”, which gets back to the headline “Did the ECB Save COMEX from Gold Default?” that we were discussing previously.

All of this, of course, is fraudulently criminal in many, many ways, breaks a lot of regulations in those and other ways, and he calls for investigations and indictments and all of that stuff, which won’t happen because the amount of corruption at the end of long monetary booms is so pandemic that it won’t be allowed.

Now, before I go off ranting and raving about how another bunch of scumbags perpetrated another scam with compliance from government scumbags, let’s concentrate on the important fact that not only are a bunch of guys buying gold and demanding delivery of the actual metal, but now increasing demand has swamped supply! Amazing!

In conclusion, let me say that if people don’t buy gold, in spite of the overwhelming historical evidence to do so when the money supply is set to double (and then double again and again!), in spite of gold’s gains for the last decade, in spite of the sight of people suddenly taking delivery of physical gold in unprecedented amounts, and in spite of me telling them right to their faces to buy gold, then there is something very, very wrong with them, which ought to give them something to think about as they are idly scratching around in the dirt looking for bugs to eat, because this economic mess caused by a Congress constantly deficit-spending and a Federal Reserve constantly creating the money for them to do so is going to get Really, Really Nasty (RRN), and I am scared for me and for them.

But I am not as scared when I have gold, so at least I have that going for me! Whee!

Source: Golden Shorts in an Economic Winter

This from Eric:

The flaming embers of inflation have already landed atop the thatched roof of American finance. And yet, investors can still buy inflation insurance on the cheap. In the next 1,373 words, we’ll examine a few of these “insurance policies”to assess their virtues and drawbacks.

Since a powerful new inflationary trend is very likely to occur, the prudent investor should probably take steps to guard against it. “But wait a second!” some readers be saying. “What if a powerful deflationary trend occurs first?”

Good question. It might. But we’d begin preparing for inflation anyway. Why not prepare for the near-certain arrival of inflation, rather than the uncertain timing of it.

If an infallible clairvoyant told you that your house would burn down in one of the next five years, would you say to yourself, “Gosh, maybe I should try to figure out which year it will be and not buy fire insurance during the other four years.”

You might actually guess correctly, in which case you would have saved yourself four years worth of insurance premiums. But you might guess incorrectly, in which case you would have lost your house.

Your call.

To this market observer, inflation seems like a near-certainty. Not an absolute certainty, mind, you, just a near-certainty, sometime within the next three years. So why not beat the rush to buy inflation insurance? Why not buy some now?

The nearby chart displays a sampling of inflation hedges, and how they performed during the last eight years of the infamous 1970s. Gold was clearly the standout winner. But we’d put an asterisk next to this result, due to a performance-enhancing assist from the U.S. government. During most of the preceding four decades, the US government had been artificially suppressing the gold price, while also forbidding private citizens from owning it. Therefore, once the government stopped its meddling, the gold price partied like a teenager whose parents had just left town.

Aside from gold, very few assets managed to keep pace with inflation, as measured by the Consumer Price Index (CPI). Hard assets like the CRB index of commodity prices and the Swiss franc did outpace the CPI, but stocks and bonds both lagged miserably.

Skipping ahead about 30 years, we can see that the modern versions of the 1970s inflation hedges have performed quite poorly during the last 14 months. Clearly, inflation is not a widespread concern. But that’s part of the reason it concerns us, and also part of the reason why we’d be inclined to take action now, while inflation hedges remain relatively cheap.

Our contrarian instincts lead us –rightly or wrongly – to distrust the consensus, especially when the consensus trusts in an idea as stupid as deflation…just kidding. We don’t think deflation is stupid, just unlikely. (More precisely, we suspect that deflationary indicia will be seasonal, like daffodils. For a while, they will seem to be everywhere. Then, just as suddenly, you won’t be able to find a single one).

So with that biased and unscientific preface, let’s sweep through a Reader’s Digest review of ETFs that might provide some kind of hedge against inflation:

1. Gold – The “Old Faithful” of hedges. It’s always worked before. Enough said. ETFs like the SPDR Gold Trust (GLD) provide easy access. With a $30 billion market capitalization, this is the “go-to”gold ETF. The next largest entrant is the iShares Comex Gold Trust (IAU) with a market cap of $2 billion. Both ETFs enable an investor to buy gold with a mouse-click. No muss. No fuss. But purists may wish to buy bullion coins like Krugerrands or Maple Leafs. As a gold investment, bullion coins have the advantage of being shiny, pretty and portable. But they have the disadvantage of costing 6% to 10% more than bullion itself, while also being so shiny and pretty that someone might want to steal them.
2. Gold Stocks – The bastard brood of gold and the stock market. As inflation hedges, gold stocks can be somewhat unpredictable and capricious. Over a multi-year span of time, they tend to reflect that gold side of their heredity. But during shorter time spans, gold stocks can behave much more like stocks than like gold…and that’s not always a good thing. That said, ETFs like the Market Vectors Gold Miners (GDX) provides a handy way to buy a basket of gold stocks.
3. Commodities –Like gold, a basket of commodities that includes crude oil, copper, wheat, gold etc. tends to provide a very reliable hedge against inflation. Unlike gold, a basket of commodities provides diversification across multiple assets and therefore, much lower volatility than gold. The largest commodity ETFs available are the PowerShares DB Commodity Index Tracking Fund (DBC) and the iShares S&P GSCI Commodity-Indexed Trust (GSG). DBC holds only six commodities: Crude oil, heating oil, aluminum, corn, wheat and gold. GSC holds a much broader collection of commodities.
4. Commodity-focused stocks. See comments on #2 above. The iShares S&P North American Natural Resources Sector Index Fund (IGE) provides broad exposure to commodity-focused stocks. Alternatively, the DWS Global Commodities Stock Fund (GCS) is a small closed-end fund that holds a similar portfolio. But GCS is selling 12% below its net asset value, which means that a buyer at the current quote controls one dollar worth of resource stocks for only 88 cents.
5. Non-Dollar Bonds – The Swiss Franc performed quite admirably during the last Great Inflation in the United States. But we are hesitant to bet on a repeat performance. Indeed we are hesitant to bet on ANY foreign currency as a way to hedge against US inflation. The Swiss economy, for example, no longer features a bunch of pocket-watch-toting gnomes guarding vaults full of gold bullion. Instead, the modern Swiss economy features pocket-watch-toting gnomes masquerading as hedge fund managers. The predictable result is that Switzerland’s two largest banks have amassed questionable derivatives exposures that exceed the GDP of the entire country. Many other bankers speaking many other languages have achieved equally enormous feats of stupidity. No one knows how these feats of stupidity will influence the values of their native currencies. Not knowing, therefore, we are disinclined to guess. But those readers who suspect that the dollar will be one of the first currencies to go down in flames, rather than one of the last, might be interested in the one of the many ETFs that hold foreign currencies. The CurrencyShares Swiss Franc Trust (FXF), for example, holds Swiss francs. Alternatively, the dollar-phobic investor could purchase the SPDR Barclays Capital International Treasury Bond ETF (BWX) that holds a basket of bonds issued by foreign governments. Its largest allocations include a 23% weighting in Japanese government bonds, 12% in Germany and 12% in Italy.
6. TIPS –No discussion of inflation hedges would be complete without mentioning TIPS, short for Treasury Inflation-Protected Securities. [To learn more about how they work, check out the November 26, 2008 edition of the Rude Awakening]. Investors may purchase a basket of TIPS by buying the iShares Barclays US Treasury Inflation Protected Securities Fund (TIP). In theory, TIPS provide a direct and reliable hedge against inflation. But like so many other seemingly brilliant ideas, TIPS work better in theory than in practice. The first risk is an overt one – deflation might persist for longer than expected (by us). In which case, the principal value of a TIP could decline below par. And even though the holder of the TIP would receive par at maturity, the interest payments that the holder would receive between now and maturity would decline in concert with the declining principal value. The second risk is a covert one: the federal government controls the calculation of the Consumer Price Index (CPI). Therefore, if the CPI, as currently constructed, were to get out of hand and produce very high inflation readings, the government’s bean counters would probably spring into action to create a “new and improved”CPI that would deliver much lower inflation readings. It has happened before.

Thus concludes our review of inflation hedges. We hope all readers will utilize the delightful deflationary interlude we are now enjoying to prepare for what may lie ahead. Hostile inflationary forces may be amassing their forces at the borders of our economy at this very moment. In short, we think it’s a good time to risk being paranoid about the threat of inflation.

Source: Inflation Gestation

A recovery in equities indicates a pick-up in appetite for risk and may divert investment from gold, analysts said.

Spot gold slipped to $955.90/957.90 an ounce at 0941 GMT from $862.45 late in New York on Tuesday.

“The gold price is a fear indicator,” said Commerzbank analyst Eugen Weinberg. “As the chance of us seeing problems on the (equity) markets is lower than it was yesterday, some risk aversion has been taken out of the market.”

Holdings of the world’s largest gold exchange-traded fund, the SPDR Gold Trust, were also unchanged for a fourth consecutive session on Tuesday, fuelling fears burgeoning demand for gold to back ETFs may have stalled.

“There is no demand for gold other than investment demand into ETFs and into small bars and coins,” said Weinberg.

Bernanke said on Tuesday major banks should weather the recession without being nationalized. His comments that he believed the Fed could head off rising inflation was also seen as negative for gold

“If, as Chairman Bernanke believes, consumer price growth is likely to remain tepid for the next several years, then low prices are likely to present a major headwind to further gold advances,” said HSBC analyst James Steel.

Equities bounced overnight in Asia as Bernanke’s reassuring comments sparked a rebound in financial stocks. European shares tracked gains in Asia and the United States, snapping a three-day losing streak.

The dollar weakened against the euro on Wednesday, but firmed to a three-month high versus the yen. Gold typically trends in the opposite direction to the U.S. currency, to which it is often bought as an alternative asset.

However, they have moved in line in recent months as both have benefited from a flight to safety among investors.

The other main external driver of gold, oil, was steady, having shed much of the last session’s 4 percent gains.

PICK-UP

Gold buying in India has picked up as prices have retreated from the record highs they hit last week. A further dip below 15,000 rupees per 10 grams may rekindle buying interest, dealers said.

“We are getting calls for the first time after gold dipped below $1,000,” said a dealer with a state-run bank in Mumbai.

India’s buying of the precious metal tailed off as gold soared, leading some to speculate that a depression in jewellery demand could prove a major drag on prices, despite the strength of investment buying.

On the supply side, analysts say the recent increase in the gold price is likely only to slow the decline in mine production. Figures released on Tuesday showed output in South Africa fell 13.6 percent in 2008 to its lowest in 86 years.

“Long-term trends show that production in the United States, Canada, Australia and South Africa is in decline,” said Johannesburg-based Credit Suisse analyst David Davis.

“The expected increase in production from South America, Indonesia and China is unlikely to offset the decline in production from (these countries) in the long term.”

Traders will be eyeing January existing home sales data due out in the United States at 1500 GMT for clues as to the health of the economy, and further testimony from Bernanke later in the session before the House Financial Services Committee.

Among other precious metals, spot silver eased to $13.71/13.78 an ounce from $13.74. Holdings of the largest silver-backed ETF, the iShares Silver Trust, were also static on Tuesday, albeit at record levels.

Platinum was steady at $1,036/1,041 an ounce from $1,040.50. Ridge Mining PLC said its Blue Ridge Platinum unit has closed out all its hedging arrangements.

Palladium slid to $195.50/198.50 an ounce from $198.

LONDON, Feb 25 (Reuters)

Gold slipped on Wednesday as investors cashed in profits after the precious metal hit a three-month high earlier this week, with a recovery in stock markets indicating the beginnings of a revival in risk appetite.

Spot gold was quoted at $892.10/894.10 an ounce at 1510 GMT, down from $897.35 late on Tuesday. U.S. gold futures for February delivery on the COMEX division of the New York Mercantile Exchange dipped $6.80 to $892.70 an ounce.

Gold has been well supported by investors’ fears over systemic risk and the outlook for the economy, which sent the metal to a three-month high on Monday. But signs are emerging that this risk aversion is ebbing, prompting some profit taking.

“Technically, the daily charts are overbought and warrant profit taking after a relentless rally over the fag-end of last week,” said Pradeep Unni, senior analyst at Richcomm Global Services.

Moves in the dollar versus the euro, which usually push gold in the opposite direction, are currently being trumped by the perception of risk.

The euro rose against the dollar on Wednesday as risk aversion cooled, pressuring gold, while investors awaited the end of a meeting of Federal Reserve rate setters.

While headline interest rates are unlikely to change from their current level of zero to 0.25 percent, investors will be looking for further news on U.S. quantitative easing and details of a proposed “bad bank” to take over toxic banking assets.

European shares also ticked up for the third consecutive day, with banks leading the market higher.

U.S. stock futures also rose on optimism the new Obama administration will move quickly to stabilize the ailing banking sector.

“In the last days the gold price was moving higher despite the stronger dollar,” Eugen Weinberg, an analyst at Commerzbank, said. “The risk aversion of the market participants was playing a huge role.”

“Right now, the European equity markets — another indicator of risk aversion — are friendlier and are showing some recovery. In this case, you are not looking for a safe haven.”

Oil prices, typically another key external driver of gold, were steady at just below $42 a barrel.

Fears over the outlook for the economy and growing systemic risk are currently playing a greater role in the direction of gold than its usual drivers, oil and currencies, analysts said.

SPDR SOARS

The 7 percent rise in the SPDR Gold Trust’s bullion holdings this year is widely attributed to safe haven buying.

The trust, an exchange-traded fund which issues securities backed by physical stocks of bullion, has seen interest soar as investors seek out physical gold.

However, jewelery demand remains depressed as prices hold near $900 an ounce, particularly in key global centres such as India, China and the Middle East.

“Jewelers are not comfortable buying at such high prices,” said Harshad Ajmera, proprietor of Kolkata bullion dealer JJ Gold House.

Among other precious metals, silver prices were little changed at $12.02/12.08 an ounce from $12.01.

The iShares Silver Trust , the world’s biggest silver-backed ETF, said its bullion holdings rose more than 110 tonnes on Tuesday to a record 7,453.15 tonnes, and are up more than 300 tonnes in the first two days of the week.

“What we tend to see between gold and silver prices is that initially people will opt for gold as a safe-haven asset, but if gold prices rally too far, the cheaper option is to buy silver instead,” said Barclays Capital analyst Suki Cooper.

Platinum and palladium firmed a touch. Spot platinum was at $950/958 an ounce against $945, while spot palladium was at $189/194 from $188.50.

A Reuters precious metals survey of 56 analysts showed most believe platinum prices will remain depressed this year as an expected small supply dip fails to balance falling demand from major consumers carmakers.

LONDON, Jan 28 (Reuters)