RETIRE.FUND: Inflation

Showing posts with label Inflation. Show all posts

Thursday, March 31, 2011

Inflation fears are not new. 56 years ago many people had the same concerns, only with different prices in mind!

Image by stuant63 via Flickr

Comments made in the year 1955!

‘I’ll tell you one thing, if things keep going the way they are, it’s going to be impossible to buy a week’s groceries for $10.00. ‘

Is hyper Inflation in Americas future?

I had an uncle (who married my father's sister) who lived in Germany prior to the outbreak of World War 2. He once told me that, when he was a boy, in the 1920's, when Germany was held accountable for the debt of the first world war, he saw people actually take wheel barrows full of cash (Deutche marks) to the grocery store to get food. It was not unlike the boy pictured here, in modern day Zimbabwe. That was the effect of hyper inflation. The rise of Adolph Hitler was one of the results.

I just read a great article by Ron Hera at SeekingAlpha.com In that article Hera lays out, in much detail, why, he believes, hyper Inflation is coming to America. It is an article that deserves to be read by every investor, American or not, who has money in today's markets. It should especially be read by those who are hoarding their cash, as they are the most likely to face huge losses in the coming years.

I touched on this subject in previous articles including:

Dilly Dollar Daze in the USA
IMF selling more gold
America on the road to ruin
Hold on to your Loonies
Capitalism, Greed and the Faustian bargain of more liquidity
and finally:
The Argument for Gold

However Ron Hera, founder of Hera Research, LLC, and the principal author of the Hera Research Monthly newsletter holds a master's degree from Stanford University and is a member of Mensa and of the Ludwig von Mises Institute. A much smarter guy than this writer, he lays out in a very methodical, and convincing way, why hyper inflation is in America's future, and it is not very far away. Some excerpts:

"Deflation causes debt default and that harms lenders. Governments have no mechanism to tax gains in the value of currency so monetary policy always errs on the side of inflation.
The result is a long term devaluation of the currency" (in this case the usd).

A case in point, Hera points out that "Since the inception of the Central Bank in 1913, the U.S. dollar has lost 95% of it's value"

Some more excerpts from Mr. Hera's article:

Patterns of Hyperinflation

"From the perspective of sovereign debt, the commonly understood process of hyperinflation is that if a government responds to declining foreign appetite for its debt with monetization (or in a historical context direct currency debasement) rather than immediate budget cuts, its currency loses value, at first in proportion to the dilution of the money supply and then more quickly as foreign bond holders and the nation’s own citizens seek shelter from inflation in other asset classes.

The cost of the government’s future obligations then tends to rise in nominal terms, creating an apparent need for larger bond issues while bond yields rise, i.e., the cost of borrowing increases since monetization signals greater risk to investors. Exacerbating the problem, tax receipts tend to lag behind as domestic price inflation sets in.

Further monetization is the path of least resistance. Although officials certainly believe that monetization is only a temporary measure both confidence in and the credibility of the government fail. Insolvency is eventually recognized as a reality and the nation’s currency then collapses entirely."

Crisis of Credibility

"A gradual decline in the value of a currency is generally accepted by consumers and businesses because it has little immediate impact and can have short-term benefits, such as making money more accessible and stimulating economic activity and growth.

However, when debt increases disproportionately, a deflationary bust is inevitable and if it is postponed by further credit expansion systemic instability results."

In 1949 Ludwig von Mises pointed out in Human Action (Chapter XX, section 8) that “there is no means of avoiding the final collapse of a boom brought about by credit expansion."

The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

Among other things, excessive monetary inflation means that the US dollar cannot function as a store of value. Mounting evidence points to systemic instability, a lower US dollar and ultimately to a hyper inflationary outcome"

"Seven US states are worse off than the financially troubled European nations of Greece, Ireland, Portugal and Spain resulting in warnings of a US credit rating downgrade possibly indicating an eventual sovereign default."

In an article last year, I pointed out that U.S. Banks were holding financial Derivatives such as CDSs in the Trillions of dollars, and that they were not counted on their books. In that article I speculated that the amount of Financial Derivatives might add up to more tha 3 times the world GDP. I was obviously wrong. Here is a real eye popping statistic that Hera lays out:

"The largest US Banks remain the largest holders of financial derivatives, e.g., credit default swaps (CDSs), which suggests that they may hold liabilities far in excess of amounts that can be paid or that can be bailed out if significant losses occur. The CDS market, which is the single largest class of financial derivatives, represents over $600 trillion dollars, a roughly 10x multiple of world GDP."

Now that, my friends, is a truly scary number! No wonder Warren Buffet called these "Financial instruments of mass destruction". He wasn't kidding or even exaggerating.

Finally, Mr. Hera points out obvious warning signs for his hypothesis:

"Perhaps the most important indicator of impending hyperinflation is whether the statements of a government or of its central bank, e.g., with respect to the government’s budget or the central bank’s balance sheet, are evidence based or ideological. If they are not evidence based, the credibility of the government or central bank, and its currency, will weaken and eventually fail.

Currently, the largest buyer of U.S. government debt is it's own Central Bank. If a government so lacks credibility that it cannot issue bonds because there are no buyers other than its own central bank, the value of its currency declines faster than money is printed to cover its obligations.

When the balance sheets of US banks are maintained by suspending accounting rules and when banks hold financial derivatives liabilities greater than world GDP, both the stability and credibility of the banks is questionable.

When private financial losses and toxic financial assets are transferred to taxpayers while profits and bonuses abound on Wall Street thanks to accounting rule changes in the midst of the worst economic contraction since the Great Depression, the credibility and competency of the US Treasury and Congress, with respect to the finances of the nation, is questionable.

When the US Federal Reserve defies the US Congress, resists independent auditing, engages in ongoing QE and is the lender of last resort for banks that under normal conditions would be insolvent, its credibility is questionable. When the Chairman of the Federal Reserve, who failed to detect the largest asset price bubble in the history of the world and who has been consistently wrong in his assessment of the US economy is reappointed following the worst financial and economic disaster in generations, both his credibility and that of the Obama administration are questionable.

The plethora of red flags spewing from Wall Street, from the Federal Reserve and from the federal government point to a breakdown of de jure value that is already in progress, thus to a hyperinflationary outcome for the US dollar."

I encourage you to read the entire article at: Seeking Alpha.

Here's another, in depth view.

Thursday, September 10, 2009

The Argument for investing in Gold!

Image by hto2008 via Flickr

I am not a gold bug. I am a realist, but even at $1000 per ounce, gold may be a good investment right now for several reasons. Here are some of them:

The banks have had a great run this summer. After coming back almost 100% since it's lows in March, I have sold some of my TD Stock. (Yes it is still a good stock, but at 100% return, it's time to take some profit, no matter what stock you are in) I have also solidified some other gains, but continue to hold on to some small tech firms with huge upside potential such as Wilan Technologies and Ballard Power .

I don't believe the United States is anywhere near being "out of the woods" in it's recovery. A year after the crash, Wall Street is up to it's old tricks . There is a very good chance of an even larger correction in 2010 than we saw in 2008. No one really knows of course, but all the warning signs are in place. The bounce in the markets has been spurred by massive Government interventions, to the point where the most important man on Wall Street is Barrack Obama.

Many U.S. banks are still in serious trouble and hundreds more will fail over the next year. Institutions like Fannie Mae, Freddie Mac, AIG, etc, will "never" recover!!! The smartest guys in the room (Goldman Sachs, J.P. Morgan etc) as always, have come out on top, but even they have an uphill battle as the USD battles runaway liquidity while they still have to value those "toxic Derivatives" that haven't gone away. Wall Street bankers are now trying to do to our life insurance policies, what they did to our mortgages. They are still trading in over the counter derivatives with no transparency, and are paying huge bonuses to executives (sound familiar).

The commercial real estate market is facing a real crisis of re-financing. It could actually cause the next crisis. The domestic real estate market is sliding again and will until at least 2011. Creditors like China are searching for other stores of value, outside of the U.S. dollar. Besides commodities, China is investing in gold and actually telling it's citizens to do the same. Several large U.S. hedge funds are also investing in gold and finally, the Hong Kong government is currently in the process of moving their gold reserves to a domestic site from London. Now, if there is another crisis caused by the paper creating Vultures of Wall Street , do you really think the American public will allow their administration to launch even more expensive bailouts? Neither do I. That is why many investors are turning to a standard of value that reaches back thousands of years.

Gold investors know full well that, most of the worlds gold supply is already above ground. That is why major firms often go back to old, proven, gold fields with new technology to find and extract what remains. Let's face it, the days of individuals panning for gold in a river bed are long gone, but that doesn't mean exploration stops. It merely changes.

While contemplating which gold investments to make, I have been following this story with keen interest. A small American gold company, Apollo Gold (TSX: APG) (NYSE - Amex: AGT) of Denver Colorado, started producing gold at it's Timmons, Ontario site called "Black Fox" earlier this year. Since May when it produced it's first ounces of gold from that mine, it has been on the radar of a number of gold speculators and has been rated a strong buy because of that production, which has reached over 32,000 ounces in four months. Many feel it is very much undervalued and currently under the radar.

What has gold bugs truly salivating is a recent drill result that, at least in one new hole, in it's "Grey Fox" site (approx 30 km away) indicated a result of 455 g of gold per ton of ore. Now, in an industry where 3-5 "grams" of gold per ton is considered worthwhile, well.... you can fill in the blanks. Since then they conducted more drilling in August at Grey Fox, which have not been officially released yet, but oddly, two weeks ago, Apollo bought up the mineral rights to the entire stretch of land between Black Fox and Grey Fox giving them access to the entire fault line where, in prior years, there was a very productive gold mine.

One of the previous occupants of these claims, Cameco, sold off it's gold interests to concentrate on Uranium (which it now dominates) In one of it's last reports on this area, it's geologists mentioned that they believed a deeper drill may result in a greater find. Apparently, that's exactly what Apollo Gold has done, with a stunning result! I've noticed the share price go from .30 cents to .45 cents in the past 10 days, as they raised another $10 Million through private placement, and no drill results have been officially released yet. I couldn't resist, so I bought in at .45

12 month Analysis estimates (see below) are $2.76 based solely on the Black Fox production. However, the Grey Fox strike has caused an even bigger stir but we won't know the full story until the most recent results are released in late October 2009. I know this part of the equation is speculation but, sometimes, you have to read the tea leaves as best you can then, take the plunge. I believe that, at this price, I am well protected with at least a 250% upside built in. As the rest of the world invests in gold in the traditional sense (bullion, bars, coins etc) or in the large companies which are already producing large quantities from their mines (Rio Tinto, Barrick, Hemlo etc) I think Apollo Gold might be a home run, maybe even a grand slam. One word of caution: Apollo has it's gold hedged at $876, however it's production cost is $400 and dropping.

The last time I made such an investment,( nine years ago) it was in Novagold at $1 share. It went to $18 At that time, gold was just over $300 per ounce. Many analysts are predicting gold in a year at $2,000. Some are even throwing out a top end of $3,000 or more. That seems extremely excessive to me, but the $2,000 range is possible. Certainly, $1200 in the short term is likely.

If you are tired of feeding the Vultures of Wall Street., you may wish to investigate this opportunity like I did. I am not risking too much and neither should you. Now, don't take my word for this speculative gold play (or anyone's word for that matter). Do your own research on this or any company you wish to invest in. You may wish to invest in gold by merely buying gold bars or coin or buying ETF's (exchange traded funds of gold stocks) as I am also considering.

Apollo Gold Corp - check it out (TSX: APG / NYSE Amex: AGT).

Update Sept 25th 2009, Apollo Stock - over 7 million shares traded in two days!

Nasdaq.com Target price for Apollo Gold

12 Month Price Target Range

2.72