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NEWS: Minera IRL Announces Exploration Update, Escondido Project, Argentina

Minera IRL Limited, the Latin American focused gold mining, development and exploration company, announces an exploration update at the Escondido Project in Patagonia, Argentina. Assay results have now been received from 9 new widely spaced holes into the Northern Breccia trend. 

Highlights:

  • * Best intersections into the bulk tonnage target area include E-D10-020 with 33.5 meters grading 0.89g/t gold and 2.83g/t silver, including 10.2 meters of 1.83g/t gold and 4.45 g/t silver and E-D10-24 with 17.0 meters grading 1.13g/t gold and 8.23g/t silver

  • * A new IP Gradient Array geophysical survey east of the previous IP grid has defined a highly encouraging resistivity and conductivity anomaly along the untested 900 meter south-easterly trending extension of the Northern Breccia trend

  • * The next stage of diamond drilling into the Northern Breccia Zone, with a program of approximately 4,000 meters, is scheduled to commence during March 2011

Minera IRL Limited announced a new discovery in September 2010 at the Escondido Project, Santa Cruz Province, Argentina. Drilling identified wide zones of potentially bulk minable gold and silver mineralization, contiguous to Mariana Resources Las Calandrias Project. More encouraging assay intersections have now been received from the widely spaced second-pass scout drilling program carried out in December 2010. The drill program confirms that mineralization extends over almost 700 meters of strike from the northern tenement boundary and remains open-ended toward both the east and south-east. 

Results have also been received from an extended IP Gradient Array geophysical survey which shows a wide resistivity anomaly over the remaining 900 meters of untested ground between the current drilling and the eastern boundary of the Escondido tenement block. A substantial, chargeability anomaly coincident with the resistivity has also been identified. The extended geophysics provides another excellent drill target for the 4,000 meter diamond drill program about to commence in March. 

“The recent drill results provide a significant step forward in progressing our immediate objective of probing the limits of mineralization on the Escondido Northern Breccia trend” said Courtney Chamberlain, Executive Chairman of Minera IRL. “A new fence of holes to the south east has confirmed continuity of gold/silver mineralization along strike of a newly defined chargeability high within a broad resistivity geophysical anomaly. This confirms a strong probability for disseminated sulphide mineralization within a silicified zone giving us another excellent target for the pending drilling program.”

Selected intercepts from the second pass Escondido scout drilling are tabulated below.

  Intercept Assay – g/t  
Hole
Number
From To Meters Au Ag Gold Equivalent – g/t* 
E-D10-020 51.00 84.50 33.50 0.89 2.83 0.91
including 56.15 66.35 10.20 1.83 4.45 1.90
E-D10-022 10.00 62.45 52.45 0.64 9.51 0.80
including 26.00 29.45 3.45 3.53 26.37 3.97
E-D10-024 15.00 32.00 17.00 1.13 8.23 1.27
E-D10-027 20.60 65.00 44.40 0.52 1.79 0.55
E-D10-033 86.25 90.70 4.45 0.82 59.02 1.80
*Gold equivalent grade is calculated by dividing the silver value by 60 and adding this to the gold value.

Minera IRL considers that there are several significant findings in these results. Hole E-D10-024 confirms the presence of precious metal mineralization in a central area where results reported in September 2010 were weak. Gold and silver values from step out holes E-D10-027 and E-D10-033 suggest mineralization is open toward the south-east where extended geophysics has identified highly encouraging drill targets spanning over 900 meters. 

Additional information on Escondido, including plans and drill sections as well as the extended geophysical images, can be found on the Minera IRL website www.minera-irl.com.

In addition, Minera IRL continues to advance the Don Nicolas feasibility study and is actively exploring a number of highly promising grass roots precious metal prospects that are also located within the 2,700 square kilometre lease holding in Patagonia.

Full release

Silver Outweighs Gold

By Peter Schiff, March 2

In the world of precious metals, silver spends a lot of time in the shadow of its big brother gold.

Gold, with its high price-to-weight and distinctive yellow tint, has always occupied a special place in the human psyche. To many people across many ages, gold is simply the ultimate form of money – and, as a long-term, stable store of value for one’s personal wealth, I agree it’s hard to beat.

However, rare circumstances are aligning today that I believe will make silver the true champion of this bull run.

WHAT’S DRIVING PRECIOUS METALS?

Gold and silver are both benefitting from a perfect storm in the sector.

Dollar devaluation means that much of the ‘gains’ we see are really just losses by people holding dollars. In other words, if your dollars lose 50% of their value, it’s going to take twice as many of them to buy the same ounce of gold.

But the rally is based on more than simple inflation. Precious metals are regaining their role as the ultimate reserve asset. That means many, many more people are buying and holding these metals than at any time in the last thirty years.

Another factor is the rise of emerging markets and decline of developed markets. As billions of poor Asians, Africans, and South Americans lift themselves out of poverty by embracing the free market, the US is plunging itself into poverty by rejecting it. This means there are a mind-boggling number of new customers for jewelry, savings, and industrial products that require precious metals – and that we are becoming less and less able to outbid them for these resources with our dollars.

SILVER’S DRIVING FASTER

If the world were going to hell in a hand-basket, then I would expect gold to outperform silver. However, it is only the developed economies that are on the rocks – and only the US that faces true catastrophe. Thus, we have seen silver outperform gold for the last eight years.

The market is telling us that while uncertainty reigns supreme, the global economy will prosper in the years ahead. While gold most effectively insures the investor against economic devastation, silver offers both a shield against monetary turmoil and exposure to market growth.

THE KEY: INDUSTRIAL DEMAND

This is because silver is both a precious metal and an industrial metal. Gold is mostly precious, copper is mostly industrial, but silver strikes a fine balance between the two. And it seems as if this moment in history is perfectly suited to this balance. We are facing not only the prospect of the collapse of the international monetary order, but also the largest industrialization process the world has ever seen.

While in a past era, wood, steel, or oil would have been the most critical commodity, today silver is used in everything we hold dear: iPhones, flat-screen TVs, batteries, solar panels, etc. Asia – the new heart of the global economy – is accumulating gold, but they’re consuming silver. That makes both metals good bets, but likely gives silver the edge.

It’s safe to say the future depends on a steady supply of silver. This burgeoning demand is reflected in the latest figures: global demand for silver is about 890 million ounces a year, while global mine production is about 720 million ounces a year. We’re actually consuming scrap to make up the difference. And unlike gold, which tends to remain in a recoverable state as coins or jewelry, a large quantity of silver is ending up in trash dumps – where it is essentially lost forever.

As long as the emerging markets continue to trend toward freer markets, and consumers the world over continue to demand computers, electronics, and green tech, silver should only become more scarce – and thus more valuable. I think these assumptions are pretty safe to make.

CAN THE WORLD THRIVE EX-US?

Of course, if everyone agreed with me, silver would already be worth hundreds of dollars an ounce and there wouldn’t be any profit to be made on the trade. Fortunately, there are a couple of bogeymen in the financial media scaring the majority of investors away from silver so far.

First, some analysts still believe – bless their hearts – that the US is really going to pull through this time into a sustainable recovery. After being duped by dot-coms and then housing, they are all aboard the Treasury Express back to Bubbletown. Unfortunately, as in the previous two cases, the current low interest rate environment is merely masking an underlying economy that is vastly more rotten than it was even a decade ago. The unemployment rate is a key signal that this time, Bernanke’s magic medicine won’t work.

A second cohort sees that the US is doomed, but still thinks we will drag the rest of the world down with us. This is the school that holds that despite our persistent current account deficits and monumental external debt, the world economy “needs” the US consumer to drive growth. As I alluded to in my book, How An Economy Grows And Why It Crashes, this is like a plantation master claiming his slaves need him around to consume the fruits of their labor, or else they wouldn’t have anything to do. Well, the results are in: after an initial panic rush into dollar-based assets, emerging markets are back at full sprint while the US is still limping along.

SILVER IN A DOLLAR COLLAPSE

Just like a Hollywood celebrity, we in the US spent our time at the top of the world – and soon let our status get to our heads. And like a celebrity, our adoring fans the world over will be quick to forget us as we fall from the limelight and deal with our powerful addiction to partying and cheap money. To survive the next decade in America, you are going to want an asset that is in demand globally, but is also free from counterparty risk here at home.

I recently did an interview with a group that is making a film about living in America in the year 2019. The premise is that inflation is rampant, the economy is in shambles, and groups are springing up that do all their trading in silver rounds. While I think their timeline is quite generous, this is a fairly accurate picture of what lies ahead.

Not only does silver appreciate while sitting in your safe due to overseas demand, but it also comes in units that are ideal for use as a common trade unit. Two or three ounces of silver can buy you groceries for a week. By contrast, just try to eat an ounce of gold’s worth of vegetables before they spoil. There are fractional gold coins and bars, but they carry very high markups.

None of us have had to think about these things in our lifetimes, but it is not abnormal in history. Soon, understanding precious metals will be as much a survival skill as knowing how to change a car tire.

THE GOLDEN RATIO

I always say that every investor should have at least 5-10% of his portfolio in physical precious metals. Of that, the proportion allocated to gold vs. silver depends mainly on risk tolerance. Silver tends to be more volatile than gold, so silver investors must have the discipline not to liquidate their stash at the first sign of a correction.

I generally advise a ratio of 2:1 gold-to-silver in the average portfolio. More aggressive investors can push it to 1.5:1 or beyond.

Year-to-date, silver is up 5 percentage points more than gold, and I expect that trend to continue. It’s important to understand that in this fast-changing world, silver is no longer runner-up.

This article is written by Peter Schiff of Europac and with their kind permission, O B Research has been privileged to publish their work on our website. To find out more about Europac, please visit:

A No-Win Situation for the Fed

By Clif Droke, March 2

A situation is developing the global markets which threatens to undo the recovery of the past two years.  The price spikes in fuel and especially agriculture prices is the Achilles’ heel of the recovery and may well serve as its death knell before the year is through.

The surge in commodity prices since last summer is garnering headline attention as fears of a surge in consumer price inflation increase.  Agricultural prices have jumped in recent months and grocery store prices are forecast to increase across the board by summer.  Developing countries have born the brunt of the commodities surge, with the poorest countries paying an estimated 20 percent more for food in 2010 than in 2009.  Wheat prices at the Chicago Board of Trade are up by more than 75 percent in the past year; corn prices have gained almost 90 percent. 

The central banks of both China and the U.S. have taken a big share of blame for the global food price inflation.  Many experts have accused the U.S. Federal Reserve of stimulating an inflationary outbreak by embarking on its $600 billion Treasury security purchase plan.  China’s own $586 billion stimulus plan has had arguably a greater impact on food price inflation in that country considering that China’s economy is only a third the size of the U.S. economy.  The Fed’s quantitative easing initiative, which is expected to continue until June, clearly has had a benign impact on equity prices and arguably has helped corporations shore up their balance sheets and raise cash levels to their current highs.  It has, however, had a rather malignant spillover effect in another area of the financial market.

One spillover effect of the Fed’s Treasury purchasing program can be seen in the huge amounts of money that have been funneled into commodities.  Oil and agricultural commodity prices in particular have been beneficiaries of the Fed’s QE campaign.  This has increased prices for a broad array of consumer goods as well as boosting transportation costs. 

The biggest victims of the concerted central bank stimulus campaigns have been the poor in the emerging nations.  Rising food prices in the Middle East region have already led to a revolution and one dictator has already toppled as a result.  Moreover, global food prices have pushed 44 million people into extreme poverty, according to the World Bank. 

The turbulence in the Middle East is making matters worse by spiking the oil price even more.  The Kress 120-year “revolutionary cycle” is in its final descending phase and this is why we can expect to see more revolutionary activity between now and 2014.  The strong deflationary undercurrents that accompany this cycle are responsible for creating the economic chaos which is the dominant factor behind political revolt and popular uprisings.  With the Middle East a revolutionary powder keg, the oil price has never been more vulnerable to factors other than those of the financial market. 

Fed chief Bernanke has the unenviable task of balancing a domestic economy plagued by low consumer demand against his loose money policy.  In the first two years following the credit crisis, Bernanke’s loose monetary policy served him well.  Commodity prices were depressed along with equity prices and this gave the Fed plenty of room to re-inflate with worrying about immediate-term consequences.  Two years of steadily rising commodity prices have eroded the Fed’s cushion, however, and the end game is surely in sight.  Any additional commodity rice increases will threaten the global market recovery and will exert profound pressure against the Asian and emerging market economies.  It won’t do any favors for the still weak U.S. economy, either.  

Mr. Bernanke has expressed his determination to continue the second quantitative easing (QE2) campaign, which commenced in November 2010, until June this year.  This means at least three more months of potential spillover into the commodity price uptrend.  Hedge funds are taking full advantage of this copious increase in liquidity and what we’re seeing here is essentially Act 2 of the drama that unfolded in the months before the credit crash in 2008.  At that time, a fund-driven rally in the oil price put tremendous pressure on the already weakened financial market and added fuel to the credit fire.  The oil market eventually succumbed to that raging inferno, but not before causing tremendous economic damage. 

The situation that appears to be repeating here is the same theme we saw in the months leading up to the credit crisis.  Oil and gas stocks accounted for much of the stock market’s gains during 2007 and although the market did effectively ignore the rising crude oil price for a while, the relentless rally in oil eventually turned out to be the proverbial straw that broke the camel’s back. 

Chairman Bernanke’s conundrum is truly of the catch-22 variety:  either he’ll be forced to ease off the monetary accelerator to prevent prices from rising too much, in which case the forces of long wave deflation (i.e. the long-term Kress cycles) will push hard against the financial system and eventually create another systemic crisis.  Or if he decides to keep pumping the increase in commodity prices (particularly oil) will put all kinds of pressure on the still fragile economic recovery.  Under this scenario, there would most likely be a sharp spike in retail prices across the board, particularly for gasoline.  This in turn would be followed by a deflationary crash.

You may wonder how a fuel price spike would create deflation?  The reason is that higher oil prices eventually result in reduced consumer spending, which in turn puts downward pressure on prices, i.e. deflation.  Another point worth mentioning is that in the last 40 years, with the exception of 1986, year-over-year rises in oil prices of 80% or more have always been followed by recession (see chart below).  So no matter which way Mr. Bernanke turns, he is confronted with the specter of deflation. 

Deflation likely won’t be a concern until later this year or early next year, particularly after the 6-year cycle peaks in October.  For now we’ll continue to look for opportunities on the relative strength and momentum front among individual mining stocks and ETFs.  But we need to be aware that the days of easy profits and extremely low volatility are likely over.  For the rest of 2011 investors would do well to assume a market environment similar to that of 2007, which had its ups and downs but was characterized by increasing turbulence as the year progressed. 

Until lately, the gold price hadn’t benefited from the Fed’s second QE campaign quite as much as oil and agricultural prices.  It has nonetheless managed to catch up to the oil price recently.  There are two components behind the gold price uptrend that are especially significant from an interim standpoint, namely the fear component and the currency component.  Fear has been a major factor behind gold’s surge in recent years, particularly following the credit crisis.  A weak dollar has also helped fuel the gold bull market, and to that end the Fed’s loose money policy has benefited gold in a residual fashion. 

Yet the Fed’s easing program has also hindered gold’s progress since last November.  The easy money fueled a surge higher in stock prices, which resulted in a diminution of investors’ fears.  This in turn led to a temporarily diminished demand for gold investments.  With market volatility on the rise once again in response to Middle East troubles, fear is returning to the market and will help gold gain additional traction.

Cycles

Over the years I’ve been asked by many readers what I consider to be the best books on stock market cycles that I can recommend.  While there are many excellent works out there on the subject of technical and fundamental analysis, chart reading, etc., precious few have addressed the subject of market cycles.  Of the relatively few books on cycles that are available, most don’t even merit mentioning.  I’ve read only one book in the genre that I can recommend – The K Wave by David Knox Barker – but even that one doesn’t deal directly with stock market cycles but instead with the economic long wave.  I’m pleased to announce, however, that after nearly 10 years of research and one year of writing, I’ve completed a book on the subject that I believe will meet the critical demands of most cycle students.  It’s entitled, The Stock Market Cycles, and is available for sale at: 

http://clifdroke.com/books/Stock_Market.html

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including most recently “The Stock Market Cycles.” For more information visit www.clifdroke.com

This article is written by Clif Droke and with his kind permission, O B Research has been privileged to publish his work on our website. To find out more about clifdroke.com, please visit:


German-Irish Brinkmanship Raises EMU Stakes

By Ambrose Evans-Pritchard, March 2

German bail-out fatigue and fierce resistance to EMU “rescue creep” threaten to derail a eurozone deal this month, and risk triggering a fresh round of Europe’s debt crisis.


The EU’s new criteria for bank stress tests to be agreed this week adds another risk.

Ireland’s new leader Enda Kenny faces a daunting task as he tries to change the terms of his country’s €67bn (£57bn) EU-IMF package, either by cutting the penal rate of interest or changing the remit of the rescue fund to help Ireland claw its way out of a debt trap.

The three parties in Chancellor Angela Merkel’s coalition have issued a paper ruling out use of the bail-out machinery to purchase the bonds of eurozone states in trouble, or engineer a “soft” debt-restructuring by lending to these countries so that they can buy back their own debt cheaply from the market.

They oppose any form of eurobond that puts Germany on a slippery slope towards a ‘Transferunion’, and have demanded a Bundestag vote on the accord reached by Mrs Merkel at next week’s EU summit.

A group of 189 German professors has stiffened the Bundestag further by warning of “fatal consequences for the whole process of European integration” if the EU crosses the Rubicon to a de facto debt union.

“I cannot remember any occasion when lawmakers have set guidance like this before: Merkel has very little leeway,” said Hans Redeker, currency chief at BNP Paribas. “There is going to be disappointment at the summit and that will make life even harder for the EMU periphery.”

Mr Redeker said the EU’s new criteria for bank stress tests to be agreed this week adds another risk. If the tests are seen as a sham, like last time, they will sap confidence: If too tough, they will revive fears over the capital levels of weaker lenders.

The EU dispute comes as the latest oil spike queers the pitch for vulnerable countries on Europe’s fringes. A report by Ernst & Young warns that if oil stays near $120 for the rest of this year, it will cut EMU growth to just 1.1pc this year and 1.2 next.

“We think the peripheral countries would suffer most. Spain, Greece, and Portugal face a double whammy since they have no room to offset the oil shock by slowing the pace of fiscal consolidation,” said the author, Marie Diron. Oil at $150 would tip the eurozone back into recession, with the risk of cross-border bank contagion and default by at least one country.

German finance minister Wolfgang Schauble is hoping for a “grand bargain” in which weaker EMU states agree to stringent discipline in exchange for a boost to the bail-out fund, hoping this will assuage critics at home.

However, Germany’s plans for budget vetting and intrusive reforms set off a storm at an EU leaders dinner earlier this month, with some calling it a diktat that trampled on sovereign prerogatives. Mr Schauble has dug in his heels, insisting that “the German government is not willing to make any compromise on this issue.”

The European Commission has sought to defuse the crisis by drafting its own compromise plan, but any dilution will inflame critics in Germany. Bundesbank chief Axel Weber has already attacked the EU proposals for a more ‘pro-active’ rescue fund as a move to eurobonds “through the back door”, shifting debt costs onto EU taxpayers.

If anything, hard-liners are gaining strength in Germany, Holland, and Finland, where the eurosceptic True Finn party is surging in polls. All three states oppose a cut in the penal rate on bail-out packages, fearing moral hazard and the risk that others will be tempted to tap the fund.

Ireland is paying 5.9pc on the EU chunk of its loans, far above the EU funding cost of 2.6pc. Jens Larsen, Europe strategist at RBC and a former IMF director, said the policy makes no sense.

“This shouldn’t be a mechanism to punish countries, but to help them turn around the ship. I think a 4pc rate would be reasonable. But what matters most is giving the European Financial Stability Facility a wider remit so that it can intervene in secondary bond markets. If there is no deal, we could see renewed contagion,” he said.

Andreas Rees, Unicredit’s Europe economist, said Ireland should have “no problem” paying 5.9pc. This rate lifts Irish debt service costs to 4pc of GDP, compared to 10pc in the 1980s.

Mr Kenny’s problem is that this hawkish view reflects broad German opinion. His other problem is what happens as recovery pushes up bond yields across the board, lifting rates on Ireland’s loan package pari passu.

His trump card is to threaten ‘haircuts’ on senior bank creditors if the EU refuses to compromise, a move that might set off EMU-wide contagion and inflict big losses on German Landesbanken. To play to such a card would enrage Europe, but not to play it might test patience of an aggrieved Irish nation.

Source

GoldMoney. The best way to buy gold & silver

Disasters Rocking U.S. Dollar?

By Axel G Merk, March 1

From earthquakes in New Zealand to revolutions in the Middle East, natural and man-made disasters are rocking the world. We are all too often made to believe that in times of crisis there’s a flight to the U.S. dollar. However, the U.S. dollar has instead had a rocky ride of its own thus allowing the crisis-ridden Eurozone to shine. What’s going on? Is there no crisis, or has the U.S. dollar lost its appeal as a safe haven?

Over longer periods there is little correlation between the U.S. dollar and other assets. In the past two years, however, a mentality has arisen that whenever there is a crisis the U.S. dollar benefits; as the crisis abates money flows out of the U.S. dollar and once again into currencies and markets overseas that may be deemed riskier. That may well be a skewed pendulum, however, as the U.S. dollar may have a more difficult time attracting money at each subsequent crisis. Firstly, the U.S. is simply better at spending and printing money than the rest of the world; causing the balance sheet of the U.S. to deteriorate at a faster pace than that of the rest of the world. And secondly, policy makers around the world are addressing whatever the cause of the crisis may have been i.e., the “trillion-dollar” backstop provided in the Eurozone to support weaker countries. One can argue how effective such measures are, but generally speaking, the region may be safer than before measures were taken; not safe, but “safer”, meaning less money may flee back to the U.S. dollar the next time a crisis flares up.

But maybe there is no crisis? Saudi Arabia may make up for any shortfall of lost Libyan oil production and Egypt and Tunisia don’t affect U.S. markets anyway. The argument we heard in early phases of the sub-prime crisis was “it’s all contained“. Intelligent people in both Libya and abroad did not think the Egyptian turmoil would swamp over to Libya. After all, the standard of living – and with it, presumably social stability – in Libya is higher due to wealth created by oil. For now, the extreme volatility in the oil markets suggests that market participants beg to differ as to how all of this unfolds. If anything, that is a healthy process; it’s when everyone agrees that bubbles are created.

To understand the dynamics unfolding we have to dig a little deeper into the “it’s all contained” argument. People don’t like autocratic rule but we have argued that people may put up with oppression as long as they can feed themselves. Escalating food prices may be a key reason revolts and revolutions are happening now. (See also our analysis of Politics of Inflation.) However, U.S. policy makers generally disregard food inflation for a couple of reasons:

  • The U.S. economy is not very dependent on food. Yes, people need to eat but only a small portion of disposable income is spent on food in the U.S.
  • Food inflation in the rest of the world is really the problem of the rest of the world. Federal Reserve (Fed) Chairman Bernanke, when pressured on whether U.S. monetary policy exports inflation to the rest of the world, has argued that other countries have plenty of tools at their disposal to address inflationary pressures there. That is correct but in the absence of foreign policy makers heeding Bernanke’s advice, the world is less stable; $100 oil is a reminder that global instability does come home to roost.
  • Food inflation is temporary. There is a widely held belief that food inflation is due to special factors such as a plethora of bad crops throughout the world. However, the Financial Times writes: “The World faces a protracted bout of extremely high food prices, the US government has warned, overwhelming farmers’ ability to cool commodity markets by planting millions of additional hectares with crops.
  • Not only can farmers plant more, they can also farm more efficiently. Developing countries, over time, may greatly enhance the productivity of their farmland. That is correct, but let’s not forget that as the standard of living is rising in the developing world, there’s a shift towards a more protein based diet. A lot of corn will be needed to feed the cattle to produce the meat to satisfy demand.
  • Acknowledging these drivers, it’s still a question of whether we are merely seeing a bout of inflation, i.e. a reset of the price level or an era of continuously rising food prices. Even with little agreement on where we are headed in the medium term, most would agree that there is no such thing as continuity in agricultural commodity prices. As an example, Bloomberg reports that wheat prices fell 8.6% from February 18 until February 25.

While we believe food inflation will be with us for quite some time and may contribute to an unstable world possibly for years to come, the Federal Reserve appears to be firmly in the camp of heavily discounting food inflation. The European Central Bank (ECB), in contrast, has historically taken commodity inflation more seriously than the Fed – ECB President Trichet talks about his concern over “second round effects”, i.e., commodity inflation stirring inflation throughout the value chain.

The relevance of all this is that in the U.S. it’s business as usual as far as monetary policy is concerned. According to Fed Chair Bernanke, the U.S. economy must grow at a rate of at least 2.5% per annum just to keep unemployment stable, however, he has made it clear that he will pursue policies to boost growth above that level. With oil prices soaring, he is facing yet another headwind. Rather than mopping up the liquidity that, in our assessment, has contributed to global commodity inflation, he may be tempted to keep the printing press in high gear to promote economic growth.

It doesn’t really matter whether we think there is a crisis. What matters is that the Fed doesn’t think its policies are contributing to global instability and continues on its expansionary path. After all, the banks continue to sit on their money and as such, the economy is certainly not in overdrive. With the exception of social instability spreading globally, the Fed may be very much on course:

  • Bernanke may want a weaker dollar. Unlike his predecessor, Bernanke embraces the U.S. dollar as a monetary policy tool to boost economic growth.
  • Bernanke wants higher inflation. Having explicitly called for higher inflation since last August, he has since praised the progress the market has made in pricing higher than inflation expectations. The challenge with raising inflation expectations is not only that it may be difficult to lower those expectations later but that it is difficult to control where that inflation appears. Bernanke, in our assessment, needs to get home price to rise and is willing to put up with rising prices in other areas.
  • We often focus on housing as a reason the Fed wants to boost growth, but we can also focus on WalMart: in the 13 weeks that ended 1/29/2010, WalMart’s sales declined 1.2%. Keep in mind that unlike government statistics, WalMart’s sales are not inflation adjusted. Also keep in mind that WalMart has been expanding its produce section in recent years; the section very much exposed to food inflation. As a result, on a real basis, sales have had rather substantial declines. Given that WalMart’s sales comprise more than 10% of total U.S. retail sales, we don’t believe there is such a thing as “company specific” problems; WalMart’s problems are those of the U.S. economy.

In contrast, the rest of the world is taking steps to stem inflationary pressures. Russia is the latest country to raise interest rates, following countries ranging from Sweden to Norway, Canada to Australia and Korea to China. In the Eurozone, the pairing down of some emergency facilities (leading to a draining of liquidity; a form of monetary tightening) and recent hawkish talk suggest interest rates may be raised later this year.

This article is written by Axel G Merk of Merk Investments LLC and with his kind permission, O B Research has been privileged to publish his work on our website. To find out more about Merk Investments, please visit: