The Morgan Report Blog

Be Thematic In Your Approach

By Richard (Rick) Mills
Ahead of the herd

As a general rule, the most successful man in life is the man who has the best information

When looking for a dominant investment theme the approach I take involves looking at global or big picture conditions. I study trends, read the news, basically watch and listen to what’s going on in the world. What I’m looking for is something so powerful, so dominant, it’s going to be my guide to where I invest – I focus on the factors that I think will drive headlines going forward.

If you had used this approach almost a decade ago (and were to use it today) to try and identify major long term trends within which you can see long term opportunities you would have to come to the conclusion that the resource sector looks especially attractive/lucrative.

In the resource sector there were, and still are, considerable opportunities presenting themselves – investable themes always blossom from these major trends.

Three examples:

  • Obama’s electrification of America’s transportation system
  • Growing human population climbing the protein ladder
  • High oil prices,  

 

After identifying the major themes you need to study the different sectors in order to select the one that you think is going to match up well and outperform the rest.

  • Obama’s electrification of America’s transportation system – Lithium
  • Growing world human population climbing the protein ladder – Potash
  • High oil prices, reduction of carbon footprint – Nuclear power/Uranium

 

The next step would be to find individual Lithium, Potash and Uranium company’s – based on the quality of their management teams – and make an early, well timed ahead of the herd investment.

After you’ve made your investment, you need to show some patience and let your chosen management team, and the trend, go to work for you. Watch and wait. If you’ve made the correct decisions, management conducts successful programs, does a creditable promotion job and the trend continues, you will reap considerable rewards.

This is “Top Down” investing and in this author’s opinion is the most rewarding way to invest.

Most people do not seem to realize that today there are two easily identifiable, and easy to follow over riding dominant global factors from which all of today’s investable themes are blossoming from.

Each and every one of us, as investors, has to be aware of what is going on – we need to know the influencing factors on the economy and what is going to be influencing investor sentiment by driving headlines. Knowing what these dominant themes are, and understanding their effects, will help every investor decide where to place their money and see the inevitable corrections along the way as either a buying opportunity or perhaps that the end of that particular investment theme is near and it’s time to head for the exits.

Urbanization

Migration is defined as: the long-term relocation of an individual, household or group to a new location outside the community of origin. Today the movement of people from rural to urban areas is most significant. 

Migration cause can be explained two ways:

Push factors – conditions in the place of origin which are perceived by migrants as detrimental to their well being or economic security.

Pull factors – the circumstances in new places that attract individuals to move there. 

Unemployed, poor and hungry  (push factor) people from rural areas are attracted to cities because cities are perceived to be places where they could make more money and have a better life (pull factor). 

During the 19th and early 20th centuries urbanization heavily contributed to industrialization. Job opportunities in the cities caused the mass movement of people from the country to the city. These rural to urban migrants provided cheap and plentiful labor for emerging factories.

Urbanization is a macro-trend, in 1800 two percent of the global population was urban, by 1950 it was 30%. Today half of all the people in the world live in cities. This is an economic migration – historically poverty rates are 4 times higher in rural than urban areas. The UN projects that by the year 2030 there will be 1.5 billion more people living in cities.

Nowhere is this rural to urban migration – and a higher degree of industrialization – more evident today than in China and India.

Chinese urbanization

China has set a goal of 65 percent of urbanization rate in 2050. Over the coming 40 years that means 20 percentage points of urban growth per year. This translates into 300 million rural residents becoming urban residents over this time period.

  • At the end of 2009 mainland China’s total population was 1.334 billion. 712 million people or 53.4 percent of the population were residing in rural areas while 622 million or 46.6 percent were residing in urban areas.
  • City’s Blue Book: China’s Urban Development Report No. 3 said China’s urban population is twice that of the population of the United States, one quarter more than the total population of 27 countries of the European Union and that the urban economy would continue to drive domestic demand
  • The UN has forecast that China’s population will have about an equal number of people, the 50-percent point phenomenon, living in the rural and urban areas by 2015
  • By 2025 China’s urban population is expected to rise to 926 million. By 2030 that number will increase to a billion
  • China’s current urbanization rate of 46 percent is much lower than the average level of 85 percent in developed countries and is lower than the world average of 55 percent
  • In 2010 the disposable income of the urban population stood at 17,175 yuan per capita – the net income of the rural population was 5,153 yuan per person
  • Over the next two decades China will build 20,000 to 50,000 new skyscrapers
  • By 2025, 40 billion square meters of floor space will have been built
  • 221 Chinese cities will, by 2025, have one million people
  • More than 170 cities will need mass transit systems by 2025

The growth potential of the vast middle and western regions, together with the rapid development of small cities and towns, could keep the economy on the fast track for at least 15 to 20 years.” Wei Houkai, director of the center for China’s regional development at the Chinese Academy of Social Sciences (CASS)

China’s economy expanded at 9.8% in the quarter ended December 31st 2010.

“China’s GDP growth continued at a blistering pace during the first quarter of 2011, rising 9.7% from the previous year, according to economic data released by the People’s Bank of China. Once again this outpaced many forecasts – even that of the Chinese government – and reignited the discussion of China’s overheating economy. While its robust growth may raise a few eyebrows, the economy isn’t in danger of red-lining.”  Will China’s Economy Overheat? Frank Holmes, CEO and chief investment officer US Global Investors,

India’s Urbanization

Every major industrialized country in the world has experienced a shift over time from a largely rural agrarian-dwelling population to one that lives in urban, nonagricultural centers. India will be no different. However India’s urbanization will be on a scale, that outside of China, is unprecedented.” McKinsey Global Institute’s report India’s Urban Awakening

India has 1.2 billion people and the second largest urban system in the world – currently 340 million people.

Less than 60 percent of the households in India’s cities have sanitation facilities, and less than half have tap water on their premises.

The share of the urban population in India is expected to reach 40% by 2021, and by 2011, urban areas could contribute around 65% of GDP.

A report done by the McKinsey Global Institute called India Urban Awakening predicts that 590 million people or 40% of the population will live in cities by 2030 up from 340 million today. By that time, Asia’s third largest economy would have 68 cities with populations over 1 million, up from 42 today.

With less than 1/3 of the population India’s urban areas generate over 2/3 of the country’s GDP and account for 90% of government revenues.

India’s economy expanded at 8.9% in the quarter ended September 30th 2010.

Out of Control Spending

The federal deficit this year is a record $1.6 trillion — a number that requires the government to borrow 43 cents out of every dollar it spends. The US government’s total debt will mushroom from $14.2 trillion now to almost $21 trillion by 2016.

Obama’s projected $1.6 trillion deficit for the current year would be the highest dollar amount ever. It represents 10.8 percent of the total economy, the highest level since 1945 when the deficit was 21.5 percent of GDP and reflected heavy borrowing to fight the Second World War.

The president’s 2012 budget projects that the deficits total $7.2 trillion over the next 10 years with the shortfalls never coming in below $607 billion.

Professor Peter Bernholz, from the University of Basel, examined 12 of the 29 hyperinflationary episodes where significant data exists.

Hyperinflations are always caused by public budget deficits which are largely financed by money creation…The figures demonstrate clearly that deficits amounting to 40 percent or more of expenditures cannot be maintained. They lead to high inflation and hyperinflations.”

Most analysts quote government deficits as a percentage of GDP:

The president’s projected $1.6 trillion deficit for the current year…would also represent 10.8 percent of the total economy.”

This reporting is misrepresenting the true size of the problem because it doesn’t say how big the deficit is relative to expenditures.

On February 14, 2011, President Obama released his 2012 Federal Budget. The report updated the projected 2011 deficit to $1.645 trillion. This is based on estimated revenues of $2.173 trillion and expenditures of $3.818 trillion.

He then unveiled a $3.73 trillion budget for 2012 with a projected deficit of $1.1 trillion – a lot of savings/cuts and revenue assumptions in the 2012 budget appeared to this author, to put it politely, to be pie in the sky. The savings and revenue projections have more to do with the 2012 election than reality – Obama is trying to appear fiscally responsible to the voters. It also doesn’t look like either party can agree to any cuts except to those in someone else’s (that somebody being from the other party) back yard.

The US government cannot sell enough of its debt to its own citizens and foreigners to finance its deficit and pay the interest on its existing debt.

Yes, we are monetizing debt. You buy bonds and you monetize debt. Right now, a lot of that is going into excess reserves so it is not having an immediate effect on inflation. It will initiate inflationary impulses. It takes time.” Thomas Hoenig, President,Federal Reserve Bank of Kansas City, early March 2011

The US government is already buying its own debt – this is the most inflationary thing a country can do – and it looks like we can expect this trend to continue and probably increase.

On April 27th 2011 the Federal Reserve Open Market Committee (FOMC) announced it will continue to purchase government securities – including reinvesting principal payments from its holdings – and confirmed its accommodating policies may continue for quite a while.

FOMC downgraded their economic growth forecast, acknowledged inflationary pressures have moved from commodity inflation to core inflation and said inflation remains too low.

It should not be a surprise if the U.S. dollar weakens further – when a central bank wants higher inflation they’ll get what they wish for.

Conclusion

 

It’s quite obvious urbanization is the driving force behind global commodities demand and inflationary pressures have moved from commodity inflation to core inflation. Both urbanization and inflation look set to continue for the foreseeable future. Of course there will be corrections but the dominate themes are set, the trend is clear. And there are other factors influencing the supply side of the equation.

PDAC curse, sell in May and go away, unusual amount of financings done late last year and investors are chewing through a wall of paper – pick your reason – A, B, C or D all of the above – the fact is junior resource companies – the owners of the worlds future mines – are on sale a little earlier than normal this year. If you like their management team, and their plans for 2011, than perhaps now is the time to be slowly acquiring a position for this summer’s work programs in anticipation of fall results.

Two factors – developing countries urbanization and US$ weakness – are so overwhelming driving the global economy and their effects are so in-sync with each other that investments in two sectors – commodities and precious metals – should be on every investors radar screen. Is it on yours?

If not, maybe it should be.

Richard (Rick) Mills
rick@aheadoftheherd.com
www.aheadoftheherd.com

If you’re interested in learning more about the junior resource market please come and visit us at www.aheadoftheherd.com

Membership is free, no credit card or personal information is asked for.

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Richard is host of www.aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 200 websites, including: Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Lewrockwell, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, Mineweb, Resource Investor, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, FNArena, MetalsNews and Financial Sense.

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Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified.

 Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission.

Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.

Richard Mills does not own shares of any companies mentioned in this report

Mid-Week Dollar, Gold and SP500 Trend Report

The dollar continues to control the equities and commodities market with its inverse relationship to them. The past couple years it seems that the dollar does what it wants and the all other investments move according to their relationship with rising or falling dollar prices.

Most of you know that I follow the dollar very closely. And each morning I provide my analysis with what I feel will take place throughout the session or next 48 hours.

In Today’s (Wednesday’s) pre-market trading analysis I talked about the strength of the equities market in the past few sessions and that it looks as though it still has more power behind it.

Dollar Index 60 Minute Chart

Taking a look at the US Dollar I noticed this morning that it was pointing to even lower prices and that it would likely happen today. It was only a few hours later that the dollar went into a free fall blowing through my downside price target of $73.30. It was this sharp drop in the Dollar which sent stocks, silver and gold soaring higher yet again in our favor.

Equities Market – SPY 60 Minute Chart

Stepping back a couple hours before the US dollar dropped in value sending stocks higher I did see fear creep into the market as traders started selling their shares and buying put options expecting the stock market to fall. When I saw this I got exciting because higher stock prices are usually just around the corner which they were! That’s when I sent an update out subscribers noting we should see some fireworks very soon.

While I am bullish on the stocks and metals at the moment and are long in several positions I am starting to see signs that a pullback is becoming more likely each trading session. This is when money management is important.  I do not want to give back to much profit, but I must make sure we lock in some gains during times when the market is overbought like this.

Mid-Week Trading Conclusion:

In short, we continue to ride the trend of higher stock and precious metal prices as the US Dollar spirals down out of control. Our SP500 positions are deep in the money and we continue to ride it for all it’s worth raising our stops as we go.

The big question is if the Sell In May, and Go Away will take shape or not… Im thinking it will as when the time is right I will be looking to short the market.

If you are not yet getting my pre-market chart analysis be sure to join my trading service at http://www.thegoldandoilguy.com/free-preview.php

Chris Vermeulen

Where next for Gold-Silver and the SP 500 Indexes?

Dave Banister- www.MarketTrendForecast.com
The market action in both the precious metals complex and the equities markets has been moving in clearly defined Fibonacci and Elliott Wave patterns for quite some time now. All of the recent peaks and valleys in both areas can be clearly demarcated with Fibonacci retracements and crowd behavioral patterns both in advance and in hindsight. I’ve written about this phenomenon numerous times publicly and every week for my subscribers as well.

The Gold and Silver movements I outlined a few months ago well in advance of the current bull moves. I had suggested we would see 1525-1550 on Gold at the next interim peak back in late January from the 1310 lows. So far we have hit $1508 and near term $1518 is likely before a pullback to the 1480 ranges. Silver has run up to my 45-47 window that I forecasted back when Silver was in the mid $26 ranges. The question is then, what happens next?

Back in August of 2009 I forecasted that we were about to enter a very bullish five year window for the precious metals, and this is based on my theory of a 13 fibonacci year bull market that began in 2001. Crowds move in reliable patterns and my opinion is the movement we are seeing now is the biggest of the 13 year bull because there is “Crowd recognition”. Recall the huge bull market in tech stocks that began in 1986 and ended 13 years later in 1999 with a massive spike to 5000 on the NASDAQ. The final five years were the best for investors before the crash.

Looking at the current precious metals bull market, we are in year 10 now and it’s like 1997 in the Tech stocks. The best is still yet to come, but there will be peaks and valleys along the way as the Bull knocks everyone off the whole way up. Most recently at $1310 in January and only a few weeks ago at $1382 for instance. When I wrote the August 2009 article, gold was around $900 per ounce, and now it’s $1508. In August of 2010 I then forecasted that Silver was about to start a massive run from $19 per ounce, and since then we have rallied to near $47 in just 8-9 months. Silver is poor man’s gold, and my theory really was simply that investors as a herd would view Silver as “cheap” and rush to buy it relative to Gold which would be viewed as “expensive”. The bottom line is intermediately we are getting close to short term tops in both Silver and Gold, and corrections will ensue… but those will again be buying opportunities.

Below are my latest views on Gold and the near term direction:

The Equities markets are also in a multi-year bull market and in the most bullish of the phase as well. We began in March of 2009 and ran up for 13 Fibonacci months to April 2010 where I forecasted an interim top. Since then, we bottomed in July of 2010 in a wave 2 correction that was a 38% Fibonacci retracement of the 13 month rally. The rally to the 1343 highs was only wave 1 of a new 5 wave structure to the upside. The recent correction that surrounded the Japanese Earthquake was another wave 2 down in sentiment, only to be followed by a powerful rally of almost 100 points on the SP 500 index. This type of “shrugging off of bad news” reaction is typical of powerful major 3rd waves in Elliott Wave terms.

The most recent action bottomed at 1295 on the SP 500 and that was minor 2 down, and now what you will see if I’m right is a huge move to over 1400 on the SP 500 as the 3rd wave of this recent structure off the 1240 futures lows of March, begins to take hold. Strap on your seatbelts because this market is going to blast past 1400 and on to 1500 this year. You will also see the NASDAQ lead the charge and make a power move into the 3000’s as well.

Below is my latest chart on the SP 500 Index:

I have not written an article or forecast publicly in a while as I prefer to keep this content for my paying subscribers, who get several updates a week on Silver, Gold, and the US markets. If you’d like to check it out, go to www.MarketTrendForecast.com and sign up for a discounted subscription and some free materials.

David Morgan notes on the Silver Market

A basic premise is that all we need to do to analyze the silver market correctly is to look at the supply. Of course demand is as important but let’s focus on the supply of silver and realize that according to the Silver Institute’s latest Silver Survey, in 2010 scrap supply reversed three consecutive years of losses as it registered a 14% increase to 215 million ounces. I bring this up because I recently was at an investment seminar and a woman from the audience insisted that there was not silver recycling! I do not know where she got the idea but I told the audience that roughly 200 million ounces of silver is recycled each year.

These statistics can be taken at face value, but as Franklin Sanders of the Money Changer has pointed out in his articles it is amazing how these figures get re-worked without any explanation whatsoever. Regardless, the point is supply is what we need to place our attention. It can be pointed out as I just spoke the Silver Institute that the “reworked” figures are do to new information being updated as some of the figures are projections and when the true numbers are known they are submitted and changes do take place.

Silver has been in a continuous primary deficit since at least 1990 according to this study (Silver Institute provided by GFMS) until 2007. At that time the total supply mining AND recycling was greater than total demand. At this point my personal thoughts on the matter will be set to the side, and we will merely look at the reported numbers.

Again, I wish to bring up the point that demand is far more important than supply. It is a fact that approximately 1.5 BILLION more ounces of silver bullion existed in 1980 when the price temporarily went to $50.00 per ounce.

Why? DEMAND my friends, yes demand for silver, call it investment demand, monetary demand, or I am scare to death of what this piece of paper might be worth tomorrow demand, but demand is what took the price higher.

Gold for example has a rather healthy demand and the amount of gold bullion supply is far in excess of the silver bullion supply. The Money Metals – gold and silver – have been recognized as stores of value for thousands of years of human history.  Gold has certainly done its job; it has preserved wealth for those that have invested assets in this metal.  Gold has appreciated in U.S. Dollar terms roughly the amount the Dollar has declined.
In other words, gold has maintained purchasing power.

Things are not all that well in the financial system these days to even mainstream publications. I read most of the periodicals that North Americans read, and many such as Forbes, Fortune, Business Week, and others state plainly that there are problems with the Social Security system and many pension plans are in dire straights. The BRIC countries have problems, the PIIGS have problems and on and on it goes.

In fact not only are America’s finances strained, but look around the world:
a major demographic tide of declining birthrates is pushing nations further and further away from the promises that they’ve made to seniors. As nations age, they have fewer and fewer workers to support more and more retirees.

The plain truth is –it is mathematically impossible to pay off America’s national debt!

Nations around the world are “grappling with the long-term affordability” of their pension systems, according to a World Bank report. China faces a demographic crunch. By mid-century, its population will be older, on average, than America’s, thanks to its one-child policy. Starting about 10 years ago, China responded by broadening a social security system and enlarging a private pension system of “enterprise annuities,” states Richard Hinz, coauthor of the World Bank report.

India, also with more than one billion people, has been trying to enlarge its pension system beyond that for civil servants and employees of sizable corporations to those occupied in the “informal” and small-business economy.

However what people should really be concerned about is what the Mises Institute recently pointed out in an article about Social Security. The article pointed out that there is a popular misconception that there is some kind of “full faith and credit” obligation on the part of Congress to honor these Social Security “bonds.” The plain and harsh truth is most have been led to believe that the current system is a retirement program funded with segregated entrusted assets, the integrity of which is guaranteed and backed by the U.S. government.

The debate about whether there is a Social Security cash flow crisis in 2017 or 2042 also turns on whether those “bonds” have any value. The basic assumption is that the “bonds” in the fictitious trust fund somehow have value either for the U.S. or for workers and their families. 

As the Mises website article states: A bond is just a contract. A contract is an agreement between two or more parties that creates an obligation to do or not do a particular thing, such as pay out interest at a certain rate.

Thus, one may not enter into an enforceable contract with oneself, which is exactly what the U.S. is pretending to do with those social security “bonds.”

For a bond to be a real bond, there needs to be at least two parties; for example, the U.S. and a citizen who owns a U.S. treasury bond; or the U.S., as owner of a German bond, and Germany. The U.S. cannot issue “bonds” to itself and have their terms bind future Congresses.

Bottom line: These Social Security “bonds” are neither assets of the U.S.
nor property of workers and their families. In the not too distant future, you will have to ask yourself if the Social Security system will perform its function of providing any real security. You may decide to take action for yourself and depend on your own abilities. The ability of any government to be all things to all people is an illusion that will become a harsh reality to the general population over the next several years.

The $75,000 Social Security Solution

We know that we have many readers outside of the United States, and our discussion about Social Security may not affect them directly, but it could indirectly. Because so much of the world’s economic activity depends upon the spending power of the U.S., it should be factored into your thinking about the ramifications of the current situation.

Long-term studies of commodity prices have shown that over time, commodities return to their mean. This “average” price, however, can remain outside of this range for a very long time. Silver has certainly remained outside of its purchasing power range for the past 25 years, and remains so today.

Therefore we fully admit that having this knowledge for the past quarter-century was of little practical value. However, things are changing rapidly in the world’s financial landscape, and the new silver age is rapidly approaching, first from a technological standpoint and later from a monetary and wealth building/preservation perspective.

After Warren Buffett announced his silver purchase in 1998, Forbes magazine ran a brief article on silver and included a very interesting graph.  (visit web site http://goldinfo.net/silver600.html) This graph provided 600 years of silver prices in 1998 dollars. So, all the inflation is taken out of the equation, and the prices reflect silver’s true value. In constant dollars, silver’s purchasing power averaged $150 per ounce in 1998 dollars for 600 years. This is the average purchasing power for 600 years; obviously, silver has nothing close to that “value” today, which provides one unbelievable investment opportunity.

Remember I made this forecast when silver was under $10!   we are already up over 900% from the bottom and further to go– if you truly understand what is happening we may not be able to put a paper price on the precious metals.

Coming back to the Social Security discussion, what this system is supposed to do is provide a sufficient income stream to keep the contributors in a comfortable retirement for the rest of their days. The amount of $150 per day equals $4500 per month in purchasing power, or $54,000 per year-certainly not a huge income but sufficient in purchasing power for most Americans to retire upon. To obtain this level of income from “safe” T-bills would require over $3 million at 1.87% yield. Compared to 10,000 ounces of silver bullion that would cost roughly $75,000, it certainly is a risk profile that demands serious consideration. Very few of our readers will have three million in cash equivalents saved by the time they retire.
However, in this hypothetical study, if you did have that amount saved, a mere 2.3% weighting would be the $75,000, or about ten thousand ounces in silver bullion today.

Consider the fact that for centuries silver was used as money and the average worker earned roughly an ounce per day. One ounce of purchasing ($150) could be considered valid, using the 600-year average we are discussing. Ten thousand ounces is equivalent to 10,000 days, or, roughly, 27 years. This amount of silver would provide a safe retirement in days gone by-and perhaps a safe retirement in the future?

What makes this exercise so interesting is the amount of people that could actually secure their future in silver. With 103 million ounces on the Comex, only 10,000 people could own enough silver in historic terms (10,000 ounces).  This theoretical demand is all it would take to buy the COMEX inventory!

Compare this to what Social Security holds, the perhaps 2 trillion in “bonds”. The amount of paper promises outstanding versus the amount of real money in the world is staggering, and at some point the two will start to close in on each other as a very small percentage of people wake up to the economic reality that has been pointed out by Paul Volker and even the World Bank. Simply, the world faces energy, monetary, and cultural problems ahead.

There truly is less silver than gold but, it is important to qualify this fact.  First, this comparison is between gold bullion and silver bullion. In both cases, we are not talking about jewelry or art forms of the metals. However, to clarify the point, if silver coinage was added to the silver bullion, the total would still be approximately 1.5 billion ounces.  This is less than one-third of the gold supply, if we count both gold coin and gold bullion.

Many people are now waking up to the silver situation is as bullish as is being presented.  Many investors perhaps overlook this exercise.  Gold is still held by many governments . . . silver is held by virtually none.

China and India do have some silver inventory, but it is considered to be minimal, at best.  One easily verifiable fact is that the United States government is now totally out of silver at this point in time and now must go to the open market to purchase silver to continue its Silver American Eagle coin program.  Think about this for a moment: The U.S. once held 2 billion ounces of silver . . . and now has none!

In studying the silver market for nearly my entire life, I have stated the conclusion there will not be a sustained or substantial increase in the price of silver until the physical supply is so small that the commercial users sense a coming shortage.  Well guess what? We are there! At that point, silver will show price strength that few believe possible at this point.  Why?  Because, at that point, silver users in the defense, automobile and electronics industries will all be competing for silver at the same time that investors will sense the profit potential.  It is with this understanding that I build my case that silver offers far more potential than gold.

David Morgan

Watershed Event for US

Richard (Rick) Mills
Ahead of the Herd

As a general rule, the most successful man in life is the man who has the best information

 Billions of Dollars

 

 

Common sense tells us that a government central bank creating new money out of thin air depreciates the value of each dollar in circulation.” Congressman Ron Paul (R-TX)  Declining confidence in paper money is pushing gold and silver from the shadows to center stage.

 

 

 

The surge in commodity prices over the past year appears to be largely attributable to a combination of rising global demand and disruptions in global supply. These developments seem unlikely to have persistent effects on consumer inflation or to derail the economic recovery and hence do not, in my view, warrant any substantial shift in the stance of monetary policy.” Federal Reserve Vice Chairman Janet Yellen

 

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen… the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.” Frederic Bastiat (1801-1850)

The federal deficit this year is a record $1.6 trillion — a number that requires the government to borrow 43 cents out of every dollar it spends. The US government’s total debt will mushroom from $14.2 trillion now to almost $21 trillion by 2016.

Obama’s projected $1.6 trillion deficit for the current year would be the highest dollar amount ever. It represents 10.8 percent of the total economy, the highest level since 1945 when the deficit was 21.5 percent of GDP and reflected heavy borrowing to fight the Second World War.

The president’s 2012 budget projects that the deficits total $7.2 trillion over the next 10 years with the shortfalls never coming in below $607 billion.

Professor Peter Bernholz, from the University of Basel, examined 12 of the 29 hyperinflationary episodes where significant data exists.

Hyperinflations are always caused by public budget deficits which are largely financed by money creation…The figures demonstrate clearly that deficits amounting to 40 percent or more of expenditures cannot be maintained. They lead to high inflation and hyperinflations.”

Most analysts quote government deficits as a percentage of GDP:

The president’s projected $1.6 trillion deficit for the current year…would also represent 10.8 percent of the total economy.”

This reporting is misrepresenting the true size of the problem because it doesn’t say how big the deficit is relative to expenditures.

On February 14, 2011, President Obama released his 2012 Federal Budget. The report updated the projected 2011 deficit to $1.645 trillion. This is based on estimated revenues of $2.173 trillion and expenditures of $3.818 trillion.

He then unveiled a $3.73 trillion budget for 2012 with a projected deficit of $1.1 trillion – a lot of savings/cuts and revenue assumptions in the 2012 budget appeared to this author, to put it politely, to be pie in the sky. The savings and revenue projections have more to do with the 2012 election than reality – Obama is trying to appear fiscally responsible to the voters. It also doesn’t look like either party can agree to any cuts except to those in someone else’s (somebody from the other party) back yard.

The US government cannot sell enough of its debt to its own citizens and foreigners to finance its deficit and pay the interest on its existing debt.

Yes, we are monetizing debt. You buy bonds and you monetize debt. Right now, a lot of that is going into excess reserves so it is not having an immediate effect on inflation. It will initiate inflationary impulses. It takes time.” Thomas Hoenig, President, Federal Reserve Bank of Kansas City, early March 2011

The US government is already buying its own debt – this is the most inflationary thing a country can do – and it looks like we can expect this trend to continue and probably increase.

The Event

April 18th 2011 – Standard & Poor’s Ratings Service lowered its long term outlook for the United States sovereign debt to Negative from Stable.

Moody’s issued a warning earlier in 2011 saying that its rating could be downgraded if progress isn’t made soon on the $1.5 trillion US budget deficit.

Conclusion

Are any countries in the world going to enter into a hyperinflationary episode anytime soon? This writer doesn’t know – I do know we are experiencing inflation, I think it’s going to get to much higher levels than today’s and I’ve been saying so for quite a while.

Gold and silver shine brightest in inflationary times – when your cash is trash your gold and silver are shining – and history proves the greatest leverage to rising precious metal prices are junior companies involved in the discovery and development of precious metal projects.

Junior precious metal companies should be on every investors radar screen. Are they on yours?

If not, maybe they should be.

Richard (Rick) Mills
rick@aheadoftheherd.com
www.aheadoftheherd.com

If you’re interested in learning more about the junior resource market please come and visit us at www.aheadoftheherd.com.

Membership is free, no credit card or personal information is asked for.

***

Richard is host of www.aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 200 websites, including: Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Lewrockwell, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, FNArena and Financial Sense.

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Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified.

 Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission.

Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.

Richard Mills does not own shares of any companies mentioned in this report

Excerpts from the Silver Investor

by David Morgan, Silver-Investor.com, TheMorganReport.com, follow silverguru22 on Twitter, Subscribe to the silverguru Channel on You Tube

“When the physical silver supply is so tight it is difficult to get prompt delivery, the mining shares will gather increased interest and develop a life of their own.” -The Silver Investor

This is the second time I have quoted myself in more than 13 years of publishing on the Internet. The other quote, for those who are curious, is, “When you can lie about money, you can lie about anything.”

The reason for this month’s quote has little to do with your publisher; the point that is important to you is that more money can be made in “paper” silver than in physical silver. First, let us give some background. Every year we examine how a pure silver investment does, versus the same investment in the XAU or HUI. To the best of my memory, each year silver by itself (no leverage) has done better than either of those two indices.

For the record, our portfolio has done much better than physical silver but that does not mean that real silver can be overlooked. In fact, without demand for silver as an investment, none of the derivatives would do much-the mining shares, ETFs, futures, options, etc. The truth is, anything but real silver is a derivative.

As silver becomes harder to obtain (real or perceived) more people will be looking for alternatives, and this boils down to mining shares. Certainly, the ETFs will garner more interest from the professional, but the public that is coming in late will primarily buy mining shares.

At this juncture, the mining shares are undervalued relative to bullion, and this represents opportunity. However, the markets are in a state of flux due to many inputs, and the Japanese crisis will have profound impact over time. So, be careful, because the overall stock market remains uncertain.

Some of the biggest news this month is that Utah had both the House and Senate pass the bill that puts gold and silver back into circulation. Once the governor signs this bill into law, Utah would recognize gold and silver coins as legal tender.

House Bill 317 (HB317) makes the exchange of federally issued gold and silver coins an option for businesses and individuals, though it does not mandate it. The bill also requires gold and silver coins to be valued at their current market value.

According to Senate Majority Leader, Scott Jenkins, R-Plain City: “Our hope is to help stabilize the currency within our own state, long term.”

Those who have followed our work carefully from the beginning know we stated that the people end up determining what money is, eventually. We can all watch how this develops and what other states might enact similar bills.

Something else to bear in mind is the possibility of the legislature in Mexico to pass the silver “money” law, proposed by the efforts of Hugo Salinas Price and his group. In our view this may not only take place, but it may also have more traction to pass if Mexico sees that Utah had the power to sign this into law.

There is so much information about Japan and honestly we have a difficult time separating what is fact and what is not. My view is, first, human life is more valuable than any “economic” consequences; further, the people of Japan in my view are some of the most honorable on the planet.

Having said this, the damage to the nuclear power industry on a global basis cannot be determined at this time. My view on it has not changed from the January issue (those who can may want to review), meaning that the next generation of much safer nuclear power generation will continue in China. If the West determines to put this source of power on hold it will be very upsetting to the global economic system. The higher energy density per capita, that a nation, country, state, city, etc., obtains, the greater the creativity and benefits to the people.

As it stands at this moment, the type of reactor outlined in TMR in January is about the only clean, viable, cost effective, and SAFE way to continue making the human condition better. Unfortunately, the mainstream press has the “control” of the minds of most of the planet’s population, so the ultimate weighing of a factual debate most likely will not take place.

This month’s issue does focus primarily on the mining shares. Our last two recommendations went as high as a 30% gain and a 50% gain in one month. This took place as silver itself was up only 15%. ONLY 15%, in a month! What can I write that has not been stated before? Silver is a very exciting and volatile market. It re�mains undervalued longer term, but on a near-term basis could be forming some type of top.

Now for some Letters to the Editor…

Letter #1

I would like to get your input regarding the futures exchange. What do you think the likelihood is that the entire paper market will be shut down soon due to JP Morgan not being able to deliver the physical? if so, got any guess as to when that might happen ?

I was thinking about closing my futures account. ~ Ceech

Comment: Futures can always be settled in cash! It is in the contract all futures traders sign, but most don’t read.

It could happen, but you would get your cash settlement.

“When” is much more difficult; I would look for several (perhaps three) warnings:

  • 1.Increased margin;
  • 2.Much more drastic increase in margin;
  • 3.Limiting the number of new contracts that can be BOUGHT!

If I were to see something along those lines, all my paid members would be getting regular alerts from me.

Letter #2

Hi to Dave and all of staff. Want to take this opportunity to say thanks and I’m very excited about learning, reading, and listening to you for the past few years now. I leveraged three 1000-oz silver bars at $30 Jan 2011 through a broker; he calls me to sell at $32, sold it, then silver shot up to $36. It really bothered me much as to why I listened to him when my guts said don’t do it. I would love to learn how to trade on my own. Any recommendations as to where I can learn to be a great trader, like you? How will I now know when to get back into the silver market? I’m a new member, is this something you will warn us about or give us a heads up on when it’s a good opportunity to back up the truck?? Any advice you can give to a rookie!

Comment: I cannot give specifics. If you are on our Basic Plus trading service, you do get to see (over my shoulder) how I am looking at the markets. This could be of value to you; most think that it is. As for your trade, well, you did take a profit-that’s good.

I teach that trading should be part of your strategy and no more than 25% of the total. If you have $10,000 in the metals market, no more than $2500 would be devoted to trading; and that amount would be used a bit at a time, as not every trade works.

From a great deal of experience in these metals markets, just focusing on the stocks can do as well as trading part of your funds. In other words, trading takes time, effort, and discipline, and is worth the effort in some cases. Those who want to basically buy and hold are actually better served by the Basic service we provide.

Letter # 3

David, Would you recommend PSLV and PHYS over SLV and GLD? I ask because I have a self directed 401k at work and cannot buy physical silver in that (though I do own some physical).

I know paper is not as good as the metal… but wanted your thoughts, if any, on Sprott’s funds over the ETFs. Thanks-Rob

Comment: I greatly prefer Sprott’s.

Final Thoughts

We did a lot of coverage in the mining sector this month. Our gains have been excellent the past few months. As good as these gains have been we do expect even more in the future, but we may get knocked off the silver bull for some amount of time. Bull markets tend to shake off many on the way up, so stick with your conviction and even if some of your holdings go underwater, most quality companies will come back into profits for you in the future.

Until next time, wishing you health above wealth and wisdom beyond knowledge,

David Morgan

750,000 Silver Bars Robbery Underlines Need For Safe Storage Alternatives

Investors both large and small deserve ultimate safety for safe-haven bullion investments

As published in Investor’s Digest of Canada

A violent home invasion and the theft of $750,000 in silver bars from the private vault of a 52-year-old British Columbia man in January underscores the need for safe storage alternatives for bullion.

At Bullion Management Group, we sympathize with the man who lost his life savings to knife-and-gun wielding thugs who arrived at his door disguised as police officers. It’s a pity he didn’t know he had a better option for storing his safe-haven investment. The fact is that investors both large and small can conveniently purchase and store bullion with the same levels of security enjoyed by ultra-high-net-worth clients through the BMG BullionBars program. 

While wealthy bullion investors typically do not rely on home vaults to store their life savings, they similarly (and for good reason) don’t rely on bank safety deposit boxes. Even a single 1,000-ounce silver bar, worth about US$37,000 at today’s prices, would not fit the average bank safety deposit box. Of course, that assumes safety deposit boxes are safe.

In 2008, ABC’s “Good Morning America” news team published a story about the fate of San Francisco resident Carla Ruff’s safety deposit box with the Bank of America. The box contained jewelry appraised at $82,000. With no notice, it was drilled, seized, and its contents turned over for auction to the state of California, marked “owner unknown.”

This is by no means an isolated case. As ABC’s news team discovered, debt-ridden state treasuries are desperately seeking funds to balance their budgets, and with increasingly flimsy respect for private property, citizens’ safety deposit boxes are seen as a viable revenue source. 

So are bank safety deposit boxes a viable place to store your silver bullion? Sadly, in the US, no longer.  Nor in the UK.

In 2009, The Mail on Sunday did an investigative article on an epic police raid that saw more than 500 police offers smash their way through 6,717 safety deposit boxes on a search for illicit weapons and assets derived from criminal activity. In their zeal to apprehend the bad guys, the police soon realized they had breached the security and confiscated the private property of thousands of honest citizens. To add insult to injury, some of the carefully catalogued confiscated items of cash, diamonds and family heirlooms went “missing.” One detective told the newspaper: “Everyone presumed we had bagged a load of villains who would not dare claim their iffy property. But thousands of the box-holders complained.” One victim, Rabbi Yitzchak Schochet of Mill Hill Synagogue, said, “Safety deposit boxes are supposed to be confidential. The whole situation was very unsettling and an intrusion of privacy.”

While he was right to distrust safety deposit boxes, and wrong to opt for home storage, our robbery victim in British Columbia made the right choice of asset class for wealth preservation. Today’s media headlines are full of bad news: instability in the Arab world; the threat of “QE3” in the face ongoing negative forecasts for US housing values; and repeated warnings of impending 1970s-style inflation. This barrage has compelled wise investors to replace or at least balance fiat currency, stock and bond holdings with stores of physical bullion.

With home storage and bank safety deposit boxes off the table, what secure option does today’s bullion investor have? The BMG BullionBars program is proving very popular, and for good reason. BMG offers convenient, cost-effective and secure bullion storage to all investors, whether they have large or small holdings. The BMG BullionBars program offers any desired combination of one or multiples of 1,000-ounce silver bars, gold bars in 32.15-ounce, 100-ounce and 400-ounce sizes, and 50-ounce platinum bars, which are stored on an allocated and insured basis in a secure LBMA-approved bank vault in Toronto, Canada. For readers who don’t know, the World Economic Forum has ranked Canada’s banking system as the world’s soundest for the third consecutive year.

With each bullion bar purchased and stored, a physical Bullion Deed is issued that shows the owner’s name, bar weight, assayer, purity, fineness and the bar serial number. This process ensures that each bar is allocated to the purchaser (see definition of Allocated Account). This sets BMG apart, because much of the world’s precious metal purchased or traded today is stored in unallocated form (see definition of Unallocated Accounts).

In the event of the custodian’s financial failure, holders of unallocated bullion become unsecured creditors. Note that while there are reports almost weekly of bank failures in the US, in Canada there has not been a single financial institution failure reported since 1996.

Because BMG’s allocated bars ensure that title of the bullion is assigned to the purchaser, allocated bullion cannot form part of the custodian’s assets, and therefore is not subject to any third-party claims. And if for any reason an owner should desire to take delivery of the bullion, they may do so at their option. 

The BMG BullionBars program offers that same level of safe-haven security and convenience to all investors who wish to purchase bullion, a level that until now has only been available to ultra-high-net-worth investors – to store their bullion without risk.

The Morgan Report Blog