The Fed wants you to believe hyperinflation is looming. Or at least, it shouldwant that, if doubling its balance-sheet – purchasing and lending against investment junk – is going to work the wonders that modern central-bank theory says it can. And the Fed certainly wants you to believe it will stop at nothing to avoid deflation (”whatever means necessary” as the chairman put it back in 2002).

So anyone touting the hyperinflation risk in public is playing the shill, a decoy – seemingly unconnected – proclaiming the miracle powers of Dr.Ben Bernanke’s snake oil to CNBC anchors at every chance.

In fact, they’re doing the Fed’s work better than the Federal Reserve itself. Really.

“The major danger with a zero lower bound for the interest rate,” said Swedish policy-wonk Lars Svensson(also a Princeton colleague of the Fed chief and his credit-bubble associate Paul Krugman) in a speech earlier this year, “is that inflation expectations will be too low and even negative, and that the real interest rate will thus become too high.”

With it so far? Slashing interest rates to the very minimum of 0% suggests inflation has vanished, at least in the central bank’s eyes. But that, in turn, reduces the rate of inflation expected by consumers, investors and business. Central banks are credible forecasters, you see. At least in central-bank eyes. So in Svensson’s philosophy, the zero-rate solution to falling inflation proves self-fulfilling as people hoard cash and sit tight in bonds.

“It is thus necessary to…to counteract expectations of falling inflation, and preferably to create expectations of higher inflation,” Svensson went on. But “as Paul Krugman put it” says the Riksbank’s deputy governor, “How will the central bank ‘credibly promise to be irresponsible’…?

Heaven knows the Fed’s trying. (So’s Krugman, to no one’s surprise.) But while it’s embraced credible recklessness, the Fed’s stop short of French kissing it.

Why so coy…?

“We have a very serious recession, we have a 9.4% unemployment rate,” said San Fran Fed governor Janet Yellen in a speech in California on Tuesday. “If we were not at zero, we would be lowering the funds rate…We should want to do more.”

Just how much further would the Fed go – all the way to hyperinflation perhaps? Racing to first base, “The vigorous policy actions of the Fed and other central banks, combined with sizable fiscal stimulus here and abroad, have sent a clear message that deflation won’t be tolerated,” Yellen said.

“Based on measures of inflation expectations,” she went on, an apparently reading straight from Svensson, “the public appears confident that the Fed will adopt policies that will maintain a low, positive rate of inflation. Evidently, the credibility that the Fed and other central banks have built over the past few decades in bringing inflation down has spilled over into a belief that we won’t allow inflation to get too low either.”

Steady on, cheeky! Second base next, and “A glance at history shows that many countries with massive structural deficits and without an independent central bank turned to the printing press to pay off their debts,” Yellen continued.

Straight to third then, and “That’s a recipe for high inflation and, in some cases, hyperinflation.”

Gulp, almost home! But then, somewhere between third and fourth base, the Fed’s gone shy and rebuttoned its blouse. Because “I don’t believe the United States faces that threat,” Yellen said, showing the come-on to be just one big tease.

“Looking back in history, runaway fiscal deficits have often been accompanied by high inflation,” she explained in Tuesday’s speech in the bankrupt state of California. “But, since World War II, such a relationship has only held in developing countries. In countries with advanced financial systems and histories of low inflation, no such connection is found.”

Oh man, what a let down! Who’s gonna put out hyperinflation if not the Fed…?

“In order to make up for the collapse of credit, we are effectively creating money,” said George Soros, the legendary if only occasionally accurate hedge funder, at a Washington forum in March. “If and when credit is restarted, you would then have an incredibly swollen monetary base, which, if it were leveraged, you would have an explosion of inflation.”

The trouble comes, as Lars Svensson guessed back in January, with that “if and when”. Because it opens the door to the idea that a central bank might opt instead to withdraw all this new money after the deflation panic has ended. And that in itself is enough to make creating it useless. Pointing to Japan’s five-year experiment with ‘Quantitative Easing’ between March 2001 and March 2006, said Svensson, boosting the monetary base by some 70% failed to “noticeably affect expectations of inflation and the future price level.

“For example, the Yen did not depreciate as it should otherwise have done. Firms and households clearly believed that the expansion of the monetary base was temporary and not permanent, which subsequently proved to be true. The monetary base fell back to normal levels when the interest rate was later raised to above zero.”

Sure, the Bank of Japan’s trillions did triple Japanese Gold Prices. But even with gold refusing to drop back against the Dollar right now, eagle-eyed readers will note that, quite apart from the urgent debate in Europe, the US authorities are at pains to deny they need an ‘exit plan’ any time soon. White House advisor Christina Romer made that much plain in last week’s Economist magazine, blaming the double-dip depression of 1937 on “an unfortunate, and largely inadvertent, switch to contractionary fiscal and monetary policy.” Yellen said it again Tuesday.

So Team Bernanke have got the right idea – at least on Planet Svensson – if not the right level of irresponsibility just yet. Slip a little vodka into their juice though, and they might start talking up inflation like Alan Greenspan, Bernanke’s predecessor and the Maestro himself, writing last week in the Financial Times. He tried to spook everyone out of cash and into the stores by warning of a decade of inflation ahead!

“A pending avalanche of government debt is about to be unloaded on world financial markets,” Sir Alan of Greenspan warned sagely, almost visibly winking from behind those enormous spectacles. “The need to finance very large fiscal deficits during the coming years could lead to political pressure on central banks to print money to buy much of the newly issued debt.”

Or given enough sauce to get really loose, the Fed might even get crazy like Asia-based doomster Dr.Marc Faber. (He’s been known to enjoy the odd cocktail or two.) Stop warning on hyperinflation. Just come out and say it instead.

“I am 100% sure that the US will go into hyperinflation,” as Faber told Bloomberg in late May, and again onJune 29th. “The US central bank has structured and introduced policies without considering exponential credit growth and its consequences,” added the Gloom, Boom & Doom author in an interview with the Korea Timeson Wednesday.

See what I mean about being a shill? It’s like he’s on the payroll…

“The United States will not raise interest rates for many years to come because it needs to pay off its huge debts,” he went on, recommending inflation-friendly assets such as equities and Gold Bullion. “In turn, too much money in the economy will raise costs of everything, including healthcare and education, giving rise to hyperinflation.”

There, now that’s the way to do it! Greenspan and Faber on song, while the Bernanke Fed tip-toes around stating its aim:

Spark inflation and leave it to burn. Because putting it out worsened both the Great Depression and Japan’s “lost decade” – the one that started two decades ago and hasn’t yet ended. Everyone who’s anyone in monetary theory knows that.

And if they claim otherwise, maybe they’re the ones kidding.

Source:  Faber and Greenspan: Shills for Fed Snake Oil

Spot gold stood at $923.40 per ounce by 1132 GMT, having earlier hit a six-week low at $912.90 in Asian trade. That compared with $921.90 quoted late in New York on Monday.

Traders said that bullion prices, having hit three-month highs recently just shy of $1,000 an ounce, were ripe for the falls seen over the past few days with speculators looking to clear out stale long positions.

But the metal’s traditional role as a hedge against jittery sentiment in other asset classes was also kicking in as investors, spooked by doubts about growth prospects for leading economies, shift into risk-averse gear.

Concerns about reserve diversification away from U.S. assets caused the dollar to turn lower against the euro ahead of the Federal Reserve’s monthly meeting, after Moody’s said one risk to the U.S.’ triple-A rating is if the dollar is challenged as the main reserve currency.

“Gold is tracking the dollar closely today, but we’ll have to wait for the FOMC statement tomorrow night for the market to choose to move clearly in one direction or another,” said David Thurtell, analyst at Citigroup.

A weaker dollar makes metals and other commodities priced in the U.S. unit cheaper for non-U.S. investors.

Crude oil prices rallied to $68 a barrel on Tuesday ahead of data expected to show a fall in U.S. oil stocks, reversing losses and renewing the appeal of gold as a potential inflation hedge.

“The key driver here is basically crude oil, the dollar and inflation expectations, and I think gold at the moment is pricing in a huge amount of inflation expectations,” said Jesper Dannesboe, an analyst at Societe Generale.

INVESTOR CAUTION

U.S. gold futures for August delivery rose nearly half a percent to $924.80 per ounce on Monday on the COMEX division of the New York Mercantile Exchange.

Overall investor caution was stirred by the World Bank on Monday, which said prospects for the global economy remained “unusually uncertain” as it cut 2009 growth forecasts for most economies.

“Investor risk appetite has lost forward momentum as the market begins to question the extent to which the green shoots of the financial risk rally have roots in the real economy,” Tullet Prebon said in a note to clients.

“There is nothing like a 3.1 percent drop in the S&P on a day to get the bears out of the woods…, but the joke aside it is beginning to look like those who hoped for a V-shaped recovery will find that we are looking at the tail end of it.”

The world’s largest gold-backed exchange-traded fund, the SPDR Gold Trust , said its holdings fell to 1,131.24 tonnes as of June 22, down 0.91 tonnes from the previous business day.

It was the first change in the holdings since June 5. The holdings hit a record 1,134.03 tonnes earlier in the month.

In other metals, silver firmed slightly to $13.83 , up from $13.72 quoted late in New York on Monday. Platinumrose slightly to $1,167.50 from $1,159.50, while palladium firmed to $234.50 from $232.00.

LONDON, June 23 (Reuters)

Spot gold was bid at $932.90 an ounce at 1420 GMT, against $932.35 an ounce late in New York on Thursday. U.S. gold futures for August delivery on the COMEX division of the New York Mercantile Exchange eased 70 cents to $933.90 an ounce.

Prices awaited new direction from the currency markets, currently the main driver of gold. Gold becomes cheaper for holders of other currencies as the U.S. dollar slips.

“If you are looking at the ups and downs of gold in its narrow trading range, it is more or less a reflection of the swings in the euro/dollar exchange rate,” said Peter Fertig, a consultant at Quantitative Commodity Research in Germany.

The dollar fell broadly as improved U.S. data fuelled hopes of an economic recovery. It later pared gains against a basket of currencies, however.

Moves in the currency remained limited ahead of a two-day Fed policy meeting next week. As long as the currency markets remain rangebound, gold will also be hemmed in.

Factors such as jewellery buying, safe-haven demand and inflation hedging are all likely to remain subservient to the influence of currencies, analysts said.

“Inflation expectations are not there just yet, and the precious metal could see even more losses if equities bounce back up,” VTB Capital said in a note.

“Gold’s attractiveness as a safe haven asset is virtually zero at the moment, which is evident from the unchanged speculative positions in gold futures or ETFs,” it added.

On other markets, European shares extended gains early afternoon, while U.S. stocks opened higher as appetite for equities picked up. Oil firmed a touch after bullish economic data helped the demand outlook.

WIDER MARKETS

Holdings of the major gold exchange-traded funds were stable, as investors awaited clues from the wider markets. Another wave of bad news on the economy could unleash new inflows, however, analysts said.

The U.S. Senate signalled its approval of a long-planned sale of just over 400 tonnes of gold by the International Monetary Fund on Thursday.

UBS analyst John Reade said in a note: “There are lots of uncertainties regarding the sale but we do not expect this to be a negatively disruptive factor to the gold market.”

“If the gold is taken by other official sector buyers (it) could be a very positive development for the market,” he added.

Silver was at $14.22 an ounce against $14.19. Platinum was at $1,206 an ounce against $1,200, and palladiumat $240.50 against $238.

ETF Securities said holdings of its ETFS Physical Palladium fund rose to a record on Thursday, up just over 3,000 ounces or 1 percent to 315,572 ounces. The fund’s reserves are up 10,000 ounces or 3.3 percent week-on-week.

LONDON, June 19 (Reuters

This chart shows the price movements since the beginning of the year of the Powershares DB Agriculture Fund (NYSE:DBA). It represents a basket of futures contracts for commodities such as wheat, corn, soybeans and sugar. As Justice says, “Commodity after commodity has roared back to life, thanks to a combination of renewed inflation expectations, a crashing U.S. dollar, and newly bullish fundamentals.”

Last Thursday, we discussed at length the effects that inflationary expectations are having on the market. We said that Treasuries were a bad place to be and that energy-related commodities such as uranium and lithium were likely winners in an inflationary scenario. Justice points out that corn, soybeans and sugar are worth considering.

Corn prices surged to a six-month high,” Bloomberg reported earlier this week, “after the U.S. government said domestic demand will exceed production for the third time in four years, slashing reserves by 28%.”

Corn inventories are expected to fall even as the various demand sources for corn – food, livestock and fuel – rise an estimated 3.5% next year.

Soybean prices, meanwhile, recently hit seven-month highs on the CBOT (Chicago Board of Trade) after U.S. stockpile forecasts dropped. Beans were also boosted by word that the Brazilian National Agriculture Confederation, a major farm lobbying group in Brazil, would press for limited soybean acreage in the coming planting season to help keep prices firm.

And finally Sugar, not to be outdone, recently hit 34-month highs – their highest level in nearly three years – on “poor crops and robust demand,” according to the Financial Times. A failure of India’s local sugar crop was seen as a big price booster. “Swings in Indian sugar output, which move the country back and forth from exporter to importer, are a critical factor in global prices,” the FT reports.

“The price of lumber is a fair indicator of where the market is headed,” says Tom Dyson in last Friday’s DailyWealth. Lumber is an “on-demand” market. That means prices are set by real commercial demand (not the pie-in-the-sky nonsense we’re seeing in US equities right now). This from Tom:

Take the 2008 credit crisis as an example. The lumber price was the first to signal a bear market was coming. It peaked in May 2004. The Bloomberg Homebuilders Index peaked in July 2005. The Case-Shiller U.S. home price index peaked in July 2006. The credit crunch started in February 2007, when New Century Financial collapsed. And finally, the S&P 500 peaked in October 2007.

Gold was at $919/921 an ounce at 1242 GMT, down from $937.15 late in New York on Monday, when it fell more than 1 percent as investors moved away from safe-haven investments.

World stocks hit five-week highs on Monday as investors pocketed riskier assets on growing optimism that a U.S. plan to purge toxic assets from the balance sheet of banks could ease the misery of the financial sector.

“Sentiment (on gold) is a bit weaker off a perceived improvement in other forms of asset classes,” said Michael Khosrowpour, an analyst at Triland Metals, pointing to overnight gains in stock markets and gains in the dollar.

The U.S. plan helped boost Japan’s Nikkei average to a 2-1/2 month closing high on Tuesday. But European stocks dipped, breaking a three-day winning streak after euro zone and UK macro data showed job losses and higher inflation.

Traders said markets were watching out for testimony before Congress by Fed Chairman Ben Bernanke and U.S. Treasury Secretary Geithner at 1400 GMT.

Analysts said fears of inflation fanned by the Federal Reserve’s plans to buy long-dated U.S. Treasuries still lingered even if they had eased a little.

“Gold will probably continue to follow inflation expectations in the near term although remains vulnerable to improved risk asset sentiment,” UBS said in a note.

Analysts also said a higher dollar was putting pressure on gold prices.

Gold is often viewed as an alternative to holding the dollar, and often falls when the dollar rises because it makes metals priced in the U.S. currency more expensive for holders of other currencies.

Bullion has recovered ground from a six-week low of $882.90 marked on March 18 but still has some way to go before approaching the 11-month high above $1,000 reached in February.

It soared to an all-time peak of $1,030.80 in March 2008.

Receding interest in gold was also evident in the holdings of gold-backed exchange traded funds.

The world’s largest gold-backed ETF, the SPDR Gold Trust , said its holdings nudged down about a third of a tonne to 1,114.29 tonnes on March 23 from a record high 1,114.60 tonnes.

Silver was at $13.36/13.42 from $13.63, platinum was at $1,109/1,119 from $1,121, and palladium was at $203/208 versus $207.5.

March 24 (Reuters)

A steep drop in commodities prices has dampened inflation expectations significantly in recent months. But despite declines in consumer and producer prices, the Fed’s monetary base – the amount of total amount of a currency that is either in the hands of the public or in the central bank’s reserves – has expanded by 80% in the past six months.

Meanwhile, the Fed’s balance sheet has ballooned to $1.8 trillion in assets from $959 billion over the past year.

However, Bernanke argued yesterday that that many banks are opting to keep their capital on the sidelines and that “a significant shrinking of the balance sheet can be accomplished relatively quickly.”

“Some observers have expressed the concern that, by expanding its balance sheet, the Federal Reserve will ultimately stoke inflation,” Bernanke told journalists at the National Press Club. “The Fed’s lending activities have indeed resulted in a large increase in the reserves held by banks and thus in the narrowest definition of the money supply, the monetary base. However, banks are choosing to leave the great bulk of their excess reserves idle, in most cases on deposit with the Fed. Consequently, the rates of growth of broader monetary aggregates, such as M1 and M2, have been much lower than that of the monetary base.”

Bernanke added: “At this point, with global economic activity weak and commodity prices at low levels, we see little risk of unacceptably high inflation in the near term; indeed, we expect inflation to be quite low for some time.”

Still, as credit markets and the economy begin to recover inflation could make a speedy recovery.  Should that happen, the Federal Reserve will have to act quickly, something Chairman Bernanke says he is prepared for.

”The Federal Reserve will have to moderate growth in the money supply and begin to raise the federal funds rate. To reduce policy accommodation, the Fed will have to unwind some of its credit-easing programs and allow its balance sheet to shrink,” he said. “A significant shrinking of the balance sheet can be accomplished relatively quickly, as a substantial portion of the assets that the Federal Reserve holds…are short-term in nature and can simply be allowed to run off as the various programs and facilities are scaled back or shut down.”

To increase transparency and give the market a better sense of the Fed’s expectations, the FOMC will publish long-term projections for the economy, particularly inflation.

The FOMC’s projection of inflation over the next five years, he said, “may be interpreted … as the rate of inflation that FOMC participants see as most consistent” with price stability and maximum employment.

By releasing longer-term projections The Fed seems to be edging closer to an “inflation target,” which is something already utilized by central banks in Europe, as well as an objective Bernanke himself lobbied for in the past.

The FOMC believes that the optimal inflation level over time between 1.7% 2%, according to the minutes from its Jan. 27-28 meeting.

The producer price index (PPI) rose 0.8% in January, after falling 1.9% in December the Labor Department said today. Core prices, which exclude food and energy, rose 0.4%. Consumer price data for January is scheduled for release Friday.

“It is doubtful that the price increases will be able to stick given the weakening economy and rising unemployment,” James O’Sullivan, a senior economist at UBS Securities LLC told Bloomberg News. While “inflation hasn’t collapsed yet, the big concern is still that inflation will fall too much.”

Source: Federal Reserve Chairman Bernanke Not Yet Worried About Inflation

There has been a lot of talk lately about the gold-to-oil and gold-to-silver ratios. This is understandable, as both ratios are further out of whack than they have been for a long time.

The gold-to-oil ratio, for one, is now at ten-year highs.

The gold-to-silver ratio is similarly extended, though not by nearly as much as gold-to-oil.

For gold-to-silver, the 200-month moving average is 57 and the current value (as of this writing) is a touch above 69 – meaning a single ounce of gold is worth 69 ounces of silver.

The 200-month simple moving average tells us that 57 is closer to the norm. So that puts a better than 20% premium on the price of gold versus silver (based on U.S. exchange-traded futures contracts).

Analysts have looked at these relationships and come to some interesting conclusions. Some feel strongly that it’s time to buy oil (or silver). Others feel – quite foolishly in my opinion – that it’s time to short gold.

Let me expand on a few key points here so you can come to your own conclusions.

First of all, many investors and traders have gotten into the habit of throwing gold, oil and silver all into the same bucket – the “inflation expectations” bucket. Reason being, when inflation comes roaring back, all this stuff should come roaring back too (as the value of paper currencies plunges).

That’s the basic theory. But it’s also a bit simplistic. We need to remember that all three of these commodities lead “double lives,” so to speak. There is more to the equation than just inflation expectations.

Oil’s Industrial Role

Oil, remember, is an industrial good. We use it to power nearly everything that moves (and a lot of stuff that sits still).

During oil’s run-up to $147 a barrel, the world was barreling ahead (no pun intended) at full steam. A global economic boom was under way, and the supply/demand balance for oil was very tight.

When the global economy fell into recession, though, global oil demand fell too. That slip in demand at the margins was enough to send oil prices crashing through the floor.

Remember that the demand for commodities (and most everything come to think of it) is determined at the margins. The price is set by the most desperate buyer (or anxious seller).

So when there was very little daylight between supply and demand, the price of crude just kept marching higher. But it didn’t take much of a drop-off in demand before, suddenly, the world had excess oil on its hands, as we were no longer burning up every last drop of the 86.4 million barrels being pumped out each day.

When the price of oil went into freefall, sharp-eyed traders saw a chance to store the stuff in tankers and wait for higher prices to return. But eventually most of the storage facilities filled up, and the stuff just kept coming. And so crude continued to fall.

Peak oil is still in effect, mind you. It’s just a long-term type phenomenon that needs a rising global demand trend to really have effect.

When the global economy gets back on track, oil demand will relentlessly tick back up. Think of long-term oil demand as the needle on a dial: At some point growth will take us back to 86 million barrels per day… 86.5 million… 87 million and beyond…

When those days come back, oil will be expensive again as we run headlong into a production ceiling. For now, though, oil is cheap.

The Golden Thermometer

Gold has a “double life” too. Or maybe two double lives, if you count jewelry and ceremonial demand. The double life we’re going to talk about here is gold’s role as a general anxiety barometer – a sort of thermometer for how the world is doing.

Gold is the ultimate safe haven asset. It’s the thing you buy when nothing else can be trusted.

Furthermore, gold has earned its safe haven reputation over a history of thousands of years, whereas the present-day fiat currency experiment is less than 40 years old (dating back to Nixon’s shutting of the gold window in 1971). Four decades versus multiple millennia… hmm, is there any wonder people are flocking to gold in this time of great upheaval?

The other wild thing about gold is the supply/demand picture. We just talked about the ugly supply picture for crude oil right now – how the stuff is overflowing because the world isn’t burning it.

With gold the opposite is true. There just isn’t enough gold in the world to even begin to satisfy total demand right now.

Consider that the total dollar value of all the gold ever mined, at present prices, is something like 4 trillion to 4.5 trillion dollars.

Four trillion bucks is a drop in the bucket. Foreign central banks already hold at least $3 trillion worth of U.S. Treasury securities, with trillions more set to be issued in 2009. The Federal Reserve alone has nearly 2 trillion dollars on its balance sheet – one entity with paper assets and obligations totaling close to half the worth of all the gold in the world!

Central banks around the globe would probably love to own lots more gold. But they know that they can’t buy it in size, because if they tried to they would run the price into the stratosphere.

That’s why, even now, countries like China, India, Russia and Japan have 3% or less of their total reserve holdings in gold. If they made a concerted effort to ditch dollar-denominated assets and up that total, the price of gold would explode.

Supply, Demand and Anxiety

In light of this information, the extreme highs of the gold-to-oil ratio make perfect sense.

Oil is in a deep funk right now due to the supply/demand situation and the prospect for a continued slump in global economic activity. While there is reason to be long-term bullish crude, there is little reason to expect a higher oil price until global demand trends show signs of returning to form.

Gold, on the other hand, is in high demand right now as a safety blanket – a salve for the general anxieties brought on by flailing governments, out-of-control printing presses, and mass “stimulus” schemes that get bigger by the day. There is not enough gold to go around right now. Hunger for the yellow metal is waxing, not waning.

As for the gold-to-silver ratio, gold’s 20% premium isn’t hard to understand there either. While silver is a bona fide “precious” metal, it is also an industrial metal… and silver has less psychological traction as an anxiety barometer.

There will come a day when the price of silver could explode, and perhaps even rocket past gold like it was standing still in percentage performance terms. But we will need to enter a mania phase for that to happen, and we are far from seeing that just yet. People are buying precious metals more out of a safety motive than a speculative one at this point, and so silver waits.

A Word on Economic Revival

There is another point that is important to address. Some pundits in the “sell” camp argue that gold will be ripe for a fall when economic recovery starts to take hold. When the sun begins to shine again, they reason, investors will come back to traditional equities and hoary old gold will go back in the closet.

I don’t think so, and here is why – the U.S. Fed and Treasury would consider the return of serious inflation a “win” at this point. Right now, Ben Bernanke and his global counterparts are doing everything they can to fight a deflationary death spiral. Inflation is a mosquito bite in comparison.

And so, in a dangerously deflationary world – the one we inhabit at this present moment – noticeable and persistent inflation pressures must take hold in order for us to have clear assurance that the Fed and Treasury’s rescue policies have worked.

And because mass stimulation is a highly inexact science, we won’t get to choose the amount of inflation we get. When you dynamite the deflationary dam, so to speak, you don’t get a say in whether it’s a trickle or a flood that results. The same goes for the Fed’s reflation efforts.

This leads to the odd conclusion that, in the event we see signs of recovery accompanied by signs of inflation, gold’s upside movement could actually accelerate.

But it’s really not so odd, when you think about it, because the price of gold is anticipating a future outburst of inflation here. Either that, or the debasement of all paper currencies into oblivion. One’s as good as the other as far as gold bulls are concerned.

Runaway Train?

In conclusion, I would argue that the extraordinary nature of the gold-to-oil ratio at this point is merely a reflection of extraordinary times.

We have seen a global deflationary bust knock down the price of oil, even as general anxiety and currency debasement fears have sent the price of gold rocketing higher. We are also seeing a marked divergence in the supply/demand picture, with plenty of oil to go round but not nearly enough of the yellow stuff.

I am chomping at the bit to go long oil and gas at some point in the coming year, but not as a currency debasement play. I’ll wait for global demand to show signs of life before getting on that train.

As for the gold train… if the $900 level holds, we could see another blast of upside movement soon as all the “wait for a pullback” folks get nervous and pile in.

And silver, which is still very much playing second fiddle at this point, will likely start going nuts once we hit the true “mania” phase – which we are nowhere near as of yet.

Source: The Gold-to-Oil and Gold-to-Silver Ratios – What are they saying?

“In the space of a few months, we have gone from the highest rate of manufacturing input price inflation in nearly 30 years to the lowest monthly rate on record. And measures of short-run inflation expectations have fallen back sharply,” King read from a statement before a press conference.

When asked about cutting rates, King said the Bank of England is “prepared to cut bank rates to whatever level is necessary” to keep inflation at its 2% target, Bloomberg reported.

Already, the BOE and government have made several moves to restore order to the U.K.  economy.

Last week, the central bank cut its benchmark rate 1.5 percentage points to 3.0%, marking the lowest BOE interest rates in 53 years and the biggest single cut in 27 years.

In early October, the government announced an $87 billion (50 billion pound) recapitalization plan to repair bank balance sheets and restore confidence.

Also with that plan, the Bank of England increased the amount of funds available for short-term lending to $346 billion (200 billion pounds). The plan further guarantees an additional $432 billion (250 billion pounds) in loans.

That same week, the BOE was also one of the nine central banks around the world that simultaneously cut interest rates to put an end to the worst market rout since the Depression era.

“There are very few historical parallels to the present set of circumstances,” said King. “So the uncertainty surrounding the projections in today’s Report is unusually large.”

Source: Bank of England’s Deflation Defense: More Cut Rates

Well… We might as well get right into this… I’m sure you heard that the Jobs Jamboree was awful on Friday. UGH! Jobs are dropping like the temperatures outside, and there doesn’t seem to be anything to stop them from dropping either! For the record… October’s jobs losses were worse than expected (-200K) and came in at -240K… OUCH! But the real kicker, something the mass media might not have covered, was found in the September revision… Recall that September’s Jobs data showed a negative -159K… Well, that number was revised to -284K! Double OUCH!

I would have to think, given the size of the Sept. revision, that October’s -240K will be revised to near 300K… The job losses are beginning to accelerate folks, and that’s a spiral that’s difficult to come out of. And as far as these revisions are concerned… That’s a fact of life in a slowing economy… You see, it’s all based on Past Performance, and there’s no way the models they use can adjust to this, and therefore they have to wait for the “hard evidence” to show up… Maybe they could use different models? Yeah, right… They might do that right after they get rid of their “inflation expectations” …

So… With the Jobs Jamboree circling the bowl on Friday, the deep, dark, dangerous clouds hovered over the U.S. economy once again, and at first, the recent Trading theme began to trade the dollar higher… But apparently, someone with an ounce of brains on the trading floor, said, “Wait! This is crazy”! And the dollar began to sell off, which went into the afternoon market, which on a Friday, after London heads to the pubs, and it’s already Saturday in Japan, there’s not much volume or liquidity, and that can lead to boredom or wild crazy moves… This was more of the boredom Friday afternoon.

In the overnight markets last night, the euro has tacked on some minor gains VS the dollar, but once again the Trading Theme hangs over the currencies like the Sword of Damocles.

We used to have a local newspaper that would carry a weekly article called, “news of the weird”, and as you can imagine the articles would be quite entertaining… Well… The reason I bring this up, is, I was reading an article on Friday, and it reminded me of “news of the weird”…

Here goes… Michael Alix, chief risk officer at Bear Stearns from 2006 until its demise in March, was named senior vice president in the Bank Supervision Group of the New York Fed on Oct. 31.

OK… I could just leave that one alone… Or… I could rip the Fed for hiring the guy who was the watchdog over risk at Bear Stearns… To do just that for the Fed! I mean come on! Shouldn’t this guy have just slipped off quietly? But, to his credit, the Fed thought enough of his abilities to hire him… I just have to question, what the heck is going on at the Fed! We all know that the Fed’s balance sheet is growing bigger all the time with “risky assets”, and they need someone to manage that risk… And they picked the guy from Bear Stearns, the now defunct Bear Stearns…

Now, was that “news of the weird” or what?

OK, back to currencies, economies and anything else I can think of to write about! OH! AIG’s bailout is swelling to $150 Billion, and the insurer posts another huge loss! I know the market participants have become “Comfortably Numb” with the “numbers” being thrown at these losses and bailouts these days… But come on! This is real money! President Reagan used to say, that’s billion with a Capital B!

On Friday, I mentioned the possibility of a Russian ruble devaluation of 30% and how I was glad we didn’t offer that currency… A few readers took exception with that and pointed out the losses in Aussie dollars… Well… The point I was simply trying to make is that with a devaluation it happens overnight… So, you wake up and your investment is 30% underwater, without you having a chance to “get out”… That’s all…

Did you hear about China’s big deal this weekend? Here’s how the Wall Street Journal reported it… “China’s government set plans for 4 trillion yuan, or $586 billion, in spending and stimulus measures through the end of 2010 aimed specifically to target people’s livelihood in an effort to offset the impact of slowing global growth and unlock the spending power of its vast population.”

Now, I can hear the “hey Chuck, how come you’re not ripping China for their stimulus announcement?” Ahhh grasshopper, Spending money you have in your war chest is one thing, while spending money you don’t have, and putting it on the taxpayers bill is another…

The currencies are all liking the China announcement, as it gives hope that the U.S. recession doesn’t cut too deep for the rest of the world… I think the currencies also like the fact that there appears to be a new “sheriff” in town… A new “white knight” if you will… China… And why not, they’ve been packing away Billions each month in Trade Surpluses!

The Chinese announcement came at the G20 meeting of finance ministers that was held in Brazil over the weekend… The finance ministers agreed to take “all necessary measures” to get financial markets back to normal and counter the backlash of the credit crisis. OK… You know me… And I think these things are nothing but boondoggles… For instance… The Finance Ministers make that big announcement, but give us nothing, not even a bone, about how or what they will do to make that announcement come to fruition!

Today… The Treasury Dept will discuss TARP… This is the “Troubled Assets Relief Program” that’s part of the bailout… This should be interesting…

The data cupboard is bare today, and tomorrow is a Holiday… Veteran’s Day. Wednesday, when we come back, will be pretty bare too! So, we don’t get any real data until Thursday, when the Trade Deficit for September is printed, along with the Monthly Budget Statement… Then on Friday, we get Retail Sales for October… The Butler Household Index (BHI) indicates that the Retail Sales figure for October will be very disappointing.

It’s been a while since I talked about the BHI… This is a simple observation by yours truly as to how many shopping bags I see come into the house during a month… I call it the BHI… And it has been quite indicative of what we will see in the national Retail Sales data. I made it up folks… It’s not real, except in my mind and in the Pfennig! ( I once had someone send me an email and tell me they tried to Goggle BHI, and didn’t get anything! HA!)

In New Zealand, a new government took over this past weekend, and I’m sure they are real happy about that, given the problems going on globally, and in New Zealand… The change went off without a lot of fanfare, and hardly noticed by the markets…

So… As I get ready to go to the Big Finish, the euro has pushed past the 1.29 handle, and the currencies as a whole look better overall… But remember this move higher for the currencies can be erased in a NY Minute, if the Trading Theme is put back into place. The good news for currencies is that there isn’t any real economic data for a few days this week, which means the deep, dark, dangerous clouds will lift temporarily…

Currencies today 11/10/08: A$ .6950, kiwi .6030, C$ .8540, euro 1.2920, sterling 1.58, Swiss .8525, ISK (no quote) rand 9.8850, krone 6.7350, SEK 7.7270, forint 205.20, zloty 2.8050, koruna 19.5350, yen 99.10, baht 34.90, sing 1.4875, HKD 7.75, INR 47.37, China 6.8260, pesos 12.66, BRL 2.1205, dollar index 85.13, Oil $64.40, Silver $10.34, and Gold… $752.90

That’s it for today… Don’t forget tomorrow is Veteran’s Day! Banks will be closed, and no mail will be delivered. Our Trading Desk will not be live. So, if you forget and call, we won’t be here… There will be some in to get caught up, etc. but phones will not be answered. It’s a holiday!

Source: U.S. Payrolls Plunge!

Here’s what he might write:

Dear Alistair

Hiya! It’s me! Mervyn King, Governor of the Bank of England. As you know, it’s our job to keep inflation stable – at around 2.0% as measured by the Consumer Price Index. If it goes below 1.0% or above 3.0%, I have to write you a letter explaining why.

Guess what! It’s gone above 3.0%. So this is that letter. Here goes…

There’s no easy way to say this, but I reckon it’s all your boss’s fault. As Chancellor, he presided over a massive credit binge, which is inflationary. He also allowed public spending to grow ahead of inflation. That’s inflationary too.

When we had steady growth and stable prices, he was happy to stand up and take a cheeky bow. Now we have slowing growth and rising prices. Personally I reckon you, or your boss, should be writing a letter to me, not the other way round.

But anyway, there’s your answer. We missed our target because your boss is a clown.

Cheers

Merv

PS I’ll be invoicing the Treasury for the cost of this stamp. I’m not made of money, you know!

On second thoughts, he probably won’t write that. But I bet he wants to! So… why am I certain that the Bank will miss its target? Because yesterday the results of its quarterly Inflation Attitude Survey came out.

The average Briton reckons the true inflation figure right now is 4.9%. And they reckon it’ll average 4.3% for this year. Compare these figures to February. The average respondent then thought inflation was running at 3.9% per year, and would average 3.3% in 2008.

This is a massive jump. It tells us that the Bank of England is losing the battle when it comes to influencing inflation expectations. And these expectations matter.

Inflation has a tendency to be what economists call positively autocorrelated. What this means is that high inflation in one time period tends to be followed by high inflation in a second, subsequent time period (we would call it negative autocorrelation if the opposite were true, i.e. we saw a high-low-high-low pattern).

Here’s how this works. Once inflation starts to rise, consumers notice. How can we not – we all have to buy things. And – with the exception of the terminally unobservant – we notice when the prices of things we buy go up.

And when there’s an expectation that prices will rise, there’s a very great likelihood that they will rise. The main mechanism that drives this process is wage demands. Faced with a rising cost of living, people ask their employers for more money. If employers refuse, they’re left with an unhappy and truculent workforce. Not good for businesses.

But if employers concede, their profit margins are squeezed. In order to maintain profits, they pass the cost of their increased wage bill onto the consumer, in the form of higher prices. Voilà! We have inflation.

Then, the whole dance begins again. This is the classic wage-price spiral. It is through this mechanism that higher inflation tends to beget higher inflation. We’re seeing it right now – prices rising, and consumers factoring that into their expectations.

So what can the Bank do? Simple – slam the brakes on! Confound those expectations!

The bond market has priced in three rate rises over the rest of the year. Why not just do them all at once? Send a clear message that the Bank means business. We’ll see an immediate inflow of funds into sterling, and a stronger pound will make imported commodities like food and oil less expensive for us.

Of course, a steep rate rise will play havoc with the housing market. But last I looked, that was on the critical list anyway.

However you look at it, the economy’s in a bind. We’ve had some good years. Now we’re going to have some bad. Boom and bust never went away, whatever New Labour might have told us to the contrary.

Either we raise rates, and people (especially those with loans to repay, such a mortgages) feel poorer. Or we allow inflation to keep creeping up. Faced with ever rising prices, people will feel poorer.

Some of those who feel poorer will, depending on their line of work, ask for a pay rise. Of those, a significant number will be knocked back, or offered something they deem unsatisfactory. Today sees the start of the Shell tanker drivers’ strike – a four-day bid to secure a 12.5% pay rise.

But this won’t be the last strike we see this year. Things will get really interesting when public sector unions decide to take on Brown’s weak government…

Get ready for some dramas.

How a €20 bribe unlocked Central Africa’s long-lost treasures

‘Let me tell you a story,’ writes Manraaj Singh in today’s Profit Hunter. ‘It’s about how one simple €20 investment could end-up paying back billions…

‘It didn’t happen on Wall Street or in the City…instead, it happened in a Belgian museum…’

As any mining start-up will tell you, exploration is a dicey business. It’s a safe bet that Central Africa has vast mineral wealth – but where, exactly?

Ordinarily it would take years of searching in malaria-infested jungles. But the Chinese have done something very clever. You see, there’s a museum in Belgium which houses maps dating back to the days of the Belgian Congo. One of things these maps show is – you’ve guessed it – the best place to mine for various minerals.

When a group of Chinese ‘tourists’ showed up at the museum, staff could be forgiven for thinking they were just another group of harmless holidaymakers.

But the souvenirs these guys wanted weren’t to be found in the museum gift shop…

Manraaj Singh has the full story in today’s FREE edition of Profit Hunter. Find out more HERE