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Inflation Destroys Real Wages

By Michael Pento, April 18

In the same vein as medieval physicians believed bloodletting would cure illness, modern snake-oil economists still perilously cling to their claim that rising wages and salaries are the cause of inflation. With my recent debates with these mainstream economists, I’ve heard the following: “without rising wages, where does the money come from to push prices higher?” I was tempted to respond, “where do the employers get the money to pay those higher wages?” But economists tend to get a little nasty when you make them feel stupid.

It is actually the predominant belief that wages and salaries rise before aggregate price levels in the economy and thus during periods of rising inflation, real wages are always increasing. However, economic history has proven over and over again that real wages actually decrease during periods of rising inflation. Nominal incomes do increase, but this is merely a response to the inflation that has already been created.

The essence of this folly is that modern economists don’t have a firm grasp on the mechanics of inflation. At the most basic level, inflation comes from too much money chasing too few goods. The battle against rapidly rising inflation always has its genesis from a central bank that prints money in order to monetize the nation’s debt.

And because the central bank typically only gives this new money to the nation’s creditors–half of which aren’t Americans–the money created is never evenly distributed into the wages and salaries of the people. It goes first into the hands of those bondholders who receive interest and principal payments. In addition, the rapid expansion of the money supply causes the currency to lose value against hard assets and foreign currencies. Nominal wages and salaries eventually respond to soaring commodity prices and a crumbling currency, but always with a lag that causes their purchasing power to fall relative to other asset classes. Have you ever tried to ask your boss for a raise simply because living expenses cost 10% more than a year prior? As you are laughed out of the office, you can see the wage lag in action.

Recent economic data provides clear proof that the “wage-price spiral” alleged by Keynesian economists is plainly wrong.

The Consumer Price Index (CPI) has now increased for nine consecutive months. It increased by 0.5% in March from February and is up 2.7% year-over-year. The YOY increase in the prior month was 2.1%. It appears the increase in consumer prices is accelerating-and quickly. Meanwhile, in the last 12 months, the US Dollar Index has lost 8% of its value against a basket of our 6 largest trading partners. The dollar has also lost 29% of its value since April 2010 when measured against the 19 commodities contained in the CRB Index. If you needed more evidence of the dollar devaluation, producer prices are up 5.8% and import prices surged 9.7% YOY.

So there’s your inflation. But was it caused by rising wages and full employment? The unemployment rate has dropped a bit from 10.1% to 8.8% – but this is mostly due to discouraged workers dropping out of the labor force altogether. However, even if the decrease came from legitimate employment gains, it would be hard to argue that an 8.8% unemployment rate would put upward pressure on wages. And, in fact, it hasn’t. Real average hourly earnings dropped 0.6% in March, the most since June 2009, after falling 0.5% the prior month. Over the past 12 months they were down 1%, the biggest annual drop since September 2008!

The conclusion is clear: rising wages cannot be the cause of inflation.

Alas, there is a predictable path for newly created money as it snakes its way through an economy. It is always reflected first in the falling purchasing power of a currency and in the rising prices of hard assets. That’s because debt holders move their newly minted proceeds into commodities to protect against the general rise in price levels and as an alternate store of wealth. Food and energy prices have a higher negative correlation to the falling dollar than the items that exist in the core rate. They are the first warning bell in an inflationary period, which may be exactly why they are left out of the headline measure.

Nominal wages and salaries eventually rise but always slower than the rate of inflation, causing real wages to fall. If rising wages increased faster than aggregate prices, inflation would always lead to a rise in living standards. Is that what we’ve seen in Peron’s Argentina or Weimar Germany? The reason why the unemployment rate soars and the economy falls into a depression is precisely because the middle class has their discretionary purchasing power stolen from them.

Mark my words: if the Fed and Obama Administration place their faith in stagnant incomes to contain inflation, they will sit idly by while the country collapses in front of their eyes. Because of their medieval understanding of economics, these central planners are going to bring us right back to the Dark Ages.

This article is written by Michael Pento 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:

Major Policy Shift Ahead

David Galland, Managing Director (Interviewed by Louis James, Editor, International Speculator)

Editor’s Note: David Galland, Casey Research partner and managing editor of The Casey Report, sees a major shift in Federal Reserve policy ahead and has advice on how to invest accordingly. Time is short, so we’ve asked David to share his thoughts with us.

L: David, in recent editorials you’ve warned of what could be an important shift in Fed policy – can you fill us in?

David: Sure. The purpose of The Casey Report is to keep subscribers well positioned in powerful, long-term trends – the kind of trend that will keep giving and giving. The trend in precious metals – gold and silver – which we’ve been heavily recommending for ten years is a good example. The overarching goal of The Casey Report is first and foremost to identify those critical larger trends and then closely monitor them until they play out – which is another way of saying that we aren’t big about market timing or jumping in and out of trades. I mention this to set the context for the coming shift in Fed policy.

L: And that context is?

David: That the shift, and it is imminent, will not change the larger trend, but it has the potential to be quite disruptive over the short term.

L: Explain.

David: In terms of the larger trends, the fundamentals that have caused so much pain and economic woe over the last ten years or so remain intact. If anything, they’ve gotten worse. We’ve gotten currency debasement, not just in the U.S., but especially in the U.S. dollar, which is not just any currency, but the world’s reserve currency.

We’ve got a truly mind-boggling expansion of the reach of government into all aspects of society and the economy, with all that that implies in terms of regulation, taxation, controls over investments and finance, impact on personal liberty, and so forth. By recognizing this destructive trend for what it is, investors can position themselves to avoid the worst, and to profit by betting on things like the continuing debasement of the dollar.

So that’s the big picture.

There is growing evidence that in the next month or two, we will head into a very dangerous period. The Fed has been extremely supportive of the U.S. government’s insane spending, polluting its own balance sheet by buying up toxic loans by the hundreds of billions and by pumping enormous quantities of cash into the money supply.

You don’t have to look very hard to understand why we have seen some small recovery in the economy, much of which has been driven by the financial sector that has been the recipient of so much largess – it was bought and paid for by the government, working hand in glove with the Fed.

But there is about to be a fundamental change in this arrangement. It appears that the Fed has decided that it’s time to take a step back from its monetization – or quantitative easing (QE), as they now term it – in the hopes that the market will step in to fill the large gap it will leave.

They can’t know how that’s going to work out, but if they don’t stop pumping money into the economy, they never will know if the quantitative easing has worked.

Based on a lot of statements from a number of the voting members of the Federal Open Market Committee, the change just ahead is that they are serious about stopping QE in June.

As they won’t wait until the last minute to confirm the end of their Treasury buying, I would expect their intentions to be made clear following their end-of-April meeting, the full minutes of which should be released in early May.

L: To be clear, do you mean no QE3, or that they cancel the portion of QE2 they haven’t spent yet?

David: They may leave themselves a bit of wiggle room by holding back some of the funds slated to be spent as part of QE2, in the hopes of demonstrating a high level of confidence in their decision to stop the monetization.

That would also give them a bit of powder to use should the need suddenly arise, without exceeding the mandate of QE2. The important point is that I am increasingly sure they won’t just roll out QE3, and that will have consequences.

L: Are you saying, no QE3 at all?

David: No. I think there will be a QE3, but it won’t materialize until after a relatively lengthy period during which the Fed stands aside in order to give the market the opportunity to adapt and adjust to their exit from the Treasury auctions. In other words, once they stop, I wouldn’t anticipate them jumping right back in at the first sign of trouble – say, if the stock market crashes.

In time, however, as the ponderous problems weighing on the economy come back to the fore and return the economy to its knees, the Fed will be forced to reinstitute the monetization, though they will likely try to come up with a moniker other than quantitative easing to describe it.

L: You’re as cheerful as Doug. Why are you so sure there will be a QE3?

David: Because the problems that made the economy stumble in 2008 have not been solved. As I said before, most have gotten worse. Have the impossible levels of sovereign debt and trillions in unresolved bad mortgages embedded in the balance sheets of Fannie, Freddie, the Zombie Banks and even the Fed been resolved? Hardly.

Is there any real sign coming out of Washington that the deficits will be substantively tackled? You don’t have to be as active a skeptic as I to understand that the deepest spending cuts being discussed don’t even scratch the surface of the $1.5 to $2 trillion deficit. As for the $60 trillion or so in debt and unfunded obligations, forget about it.

The U.S. government and the governments of most large nation-states are fundamentally bankrupt. In time, they will have to default on their obligations. While there will be some overt defaults, I expect most of them to follow the path of least resistance, which is to try to inflate the problem away. And that means QE3.

For now, however, the Fed will claim victory over the economic crisis and follow suit with many other central banks – switching to a less accommodative monetary policy.

L: They’ve done their job and now it’s time for back-slapping and cigars.

David: Yes.

L: Consequences?

David: If you look at a chart of the dollar, you’ll see that it has been bumping along the bottom recently. Logically, if the Fed stops monetizing the Treasury’s spending, we should see a rebound in the dollar. The big traders – the big institutional money out there – are going to use the change in Fed policy as a clear signal that it’s safe to get back in the U.S. dollar.

It would be wrong to underestimate the amount of money that needs to find a home, and the liquidity advantages offered by the U.S. Treasury market. If the river of money redirects into Treasuries, it could – at least for a time – offset the Fed’s exit and push the dollar up, maybe significantly so. And if the dollar comes roaring back, commodities, including gold and silver, would likely take a fairly hard hit.

Again, this is a short-term view. The longer-term trend for the precious metals is absolutely intact, because the fundamentals are entrenched – namely that the sovereign debt and spending is out of control, and politically uncontrollable.

L: Let’s talk about that for a moment. These people – the big money – are financial types. Bankers. They know about all the bad debt they have, even if the ever-so-convenient new reporting rules allow them to keep some of their problems off the books. They must know that a so-called jobless recovery is not a recovery.

They are well aware of all sorts of dirt they don’t discuss in public – how could they be stupid enough to let the Fed convince them the economy is healthy when their own information tells them it isn’t?

David: First off, “they” are not one guy. They are a lot of people with a lot of different perspectives and a lot of different objectives. Right now, for example, people look at the lack of yields in bonds and the potential for inflation in bonds, so they’ve been easing back on bonds and getting into equities more, in the hope of generating some kind of return.

If you’re a fund manager or a large institutional trader, you’re not paid to sit on your hands. You’ve got to “do something,” even though there are times – and I think this is one of those times – when doing nothing is exactly the right thing to do. So, I wouldn’t say they are being stupid–

L: Doug would: “An unwitting tendency toward self-destruction.”

David: Yes, he would – but these guys are not stupid; it’s rather that they’ve made their own calculations and concluded that U.S. equities are still safe – a position that is supported by the very low levels of volatility. Even the troubled financials have seen strong gains of late, even though nothing has been fixed. Of course, if you look under the hood, you find they’ve benefited substantially from the cheap money and rigged deals the government has orchestrated to bail them out.

While no one can say when the shift out of equities and back into Treasuries and lower-risk assets will begin, in my view the Fed’s exit from quantitative easing sets the stage for that to happen. After that, it will just be a matter of time before traders are going to wake up and decide equities are not safe, and they’ll start leaving in droves.

Remember, however, that the stock market and the economy are by nature very complex systems. There are so many variables, you just can’t know which variable is going to rule the day at any given time. But given the importance of the Fed’s intervention and the government spending that has helped engender, its policy shift is certainly a variable to keep an eye on.

L: I find the capacity of bankrupt financial companies to defy gravity truly amazing. Disbelief sustained for such lengths of time makes me dizzy.

David: You’re not alone. The vast ocean of bad debt out there is just as big as ever. Everything I hear from people in the financial industry is that the banks’ debt profiles are not getting any better. People are not getting on top of their debts. They are not paying down their mortgages. Default rates are still astronomical…

L: How could it be otherwise? Unemployment is still high.

David: Unemployment is still stubbornly very high, though if you buy into the government’s figures, it is moving steadily in the right direction. Of course, the government has no reservations about jiggering the data to suit itself. That makes it important – if you want to get a more realistic picture – to look at the topic from different angles.

One telling statistic is unemployment as a percentage of the employable population, which screens out many of the government’s self-serving adjustments to its official figures. Looked at that way, you can see that unemployment is continuing to rise, even though the government is reporting that it’s falling markedly.

L: No! You can’t be suggesting good old Uncle Sam would lie to us…

David: You could say we have another deficit, one in government accountability. Clearly, it’s very politically important that unemployment be perceived as declining, therefore, voilà, it is.

L: “Alas, Bartleby.” Okay, let’s back up a bit to the debasement of the dollar. You mentioned that as a given, almost in passing, but there are a lot of people who don’t see it. Inflation is low, Uncle Sam assures us, so the dollar has not been debased. Q.E.D.

David: Well, anyone who can see beyond the tip of their nose can see that inflation is going up. Just pull up a chart of the CRB Index for commodities – the real stuff required for life – and one can see it has been on a steep upwards trajectory. Inflation is very much here and alive.

L: John Williams’ Shadow Stats chart shows inflation at nearly 10%, while the Bureau of Labor Statistics is reporting 2.1%.

But even Williams’ statistics don’t report real inflation; they just report what it would be if the government reported inflation the way it used to, before it started “improving” its reporting in the 1980s. It’s still an incomplete view, because the government’s original reporting was flawed to begin with.

David: Right. And one of those flaws is the way they weigh housing. It plays a big, big role in CPI, and in 2008 housing was dealt, if not a death blow, at least a blow that put it in the hospital. And it will be there for a very long time, because government policies encouraged bad decisions on the part of both lenders and borrowers. This has left trillions of dollars of bad debt hanging out there.

The retracement of housing prices, as a component of official CPI, pulls the official inflation figures down, even though those figures don’t sync up with the actual cost of living. Of course, a low CPI gives the government cover for continuing to monetize its debt.

Inflation problem? What inflation problem?

L: The net of this for inflation is that the crushing of the housing sector makes the CPI drop, making it look like life is getting cheaper, whereas the reality is that people’s hard-earned wealth put into real property has taken a beating at the same time as the things they consume on a daily basis cost more. Life has gotten a lot more expensive even as savings have been wiped out. Not good.

David: Right. And the government is trying to get people to ignore the signs of inflation, saying everything is all right. But recently, several Fed governors have been saying outright that there is a problem and that they need to cool off the money creation and start dealing with inflation. This is why I think there isn’t going to be an immediate QE3.

L: So, what happens next?

David: Consider Japan as an example of an advanced economy that has been struggling to deal with the aftereffects of a collapsed bubble in real estate and stocks for many years – well before the recent earthquake.

If you look at what happened when they did their equivalent of QE after the initial stock market crash, the spending stimulated a fairly significant recovery in Japanese equities, taking the market back up about halfway to the bubble’s top; but the rally didn’t last.

Once the Japanese government put an end to its quantitative easing, the Nikkei plummeted. The government resisted reinstating quantitative easing for two years before throwing in the towel and once again cranking up the money engines in an attempt to break the economy out of the doldrums.

The long-term result is a Nikkei still well below the crash level (even before the earthquake), and all the spending has caused Japanese government debt to rise to 200% of GDP. While no two situations are identical, I think the U.S. is following a very similar script.

L: If the Fed decided to hold off on QE3, do you think it could take as long as two years for them to feel forced back to it, forced to do something?

David: It could. It would depend on how sharp the downtick is. There are so many factors at work here that it’s really unknowable at this point. Nearer-term, all the signals are that the Fed will hold off on QE3 at their next meeting. And, as I have tried to make clear, that will have consequences – for equities, for the dollar, for the commodities sector.

L: Can you give those readers not familiar with The Casey Report some reason to believe your crystal-ball gazing? What’s your track record with these sorts of predictions?

David: Well before the current financial storm hit, we were forecasting that the Fed would begin monetizing the government’s debt, and we were writing about a credit crisis leading to a currency crisis, which is exactly what’s happened. We absolutely nailed it, and our subscribers made a lot of money on some of our recommendations – and safeguarded a lot of their wealth with others.

L: That’s true, though back then, before The Casey Report separated out the big-picture writing from the International Speculator our portfolio did take a temporary beating – along with everything else at the end of 2008.

David: Yes, but everything we said about the debasement of the dollar and its consequences for gold was borne out. Further, we made a bold move, counseling people to go a third in gold and gold-related assets, a third in cash, and a third in other assets that could do well in an economic crisis. Subscribers who actually followed this allocation suffered very little in 2008.

L: Isn’t it a bit contradictory to recommend that people keep 33% of their wealth in cash, if you think the dollar is being destroyed?

David: The dollar is being destroyed, as one can see by how much gold, oil, wheat, cotton or any other number of things one can buy with it. However, while it’s not dropping day to day and the markets remain extremely volatile, cash is not a bad thing to hold – especially in relatively safer currencies, like the Canadian dollar and the Norwegian krone.

So, again, the big trends remain intact. Our question now is what’s going to happen next, in the short term. And in that context, the Fed’s switch in policy is a big deal. When you go from the Fed showing up every week and buying Treasuries, to the Fed stepping back and saying “No more,” it can send major shock waves through the economy.

L: So, if the Fed does what you think it will, by June, how do readers invest accordingly?

David: [Laughs] This may not be a popular answer, but I think the correct answer is that the best thing you can do in the near term is to increase your cash position. I would be very cautious about moving into any other asset class at this point, including gold.

L: You wound me.

David: I know. Listen, if you own high-quality gold stocks, such as those you recommend in the International Speculator – companies that have the goods and can weather the coming storm – you can certainly just ride right through what’s coming. But if you’re not quite confident enough to avoid panic selling in a correction, or if you have some mutts in your portfolio that haven’t performed and you’re not sure why you own them, I’d get rid of them fairly quickly.

Remember: the time line on the Fed’s decision is quite near-term. That doesn’t necessarily mean there would be an immediate stock market crash, but it certainly would have an effect on the commodities sector.

On the other hand, as I’ve said, markets are complex. Saudi Arabia could go up in flames, sending oil and gold both way up. So I’m not telling anyone to get out of the markets. There’s no way to predict such events – but what we do feel confident about predicting is that the Fed will not roll right into QE3.

L: Agreed. And if you’re wrong, having cash to deploy into new opportunities won’t be a bad thing. Anything else?

David: If you’re of a mind to play in the currency markets, you could take a leverage bet on the dollar rising against competitive currencies. But right now, personally, I’m inclined to do nothing, except maybe to lighten up on some investments and go to cash.

That sets you up for the real play. If I’m right, and commodities – including precious metals – sell off, and mining stocks sell off even more, there will be some fantastic opportunities to take advantage of. The people who are paying attention will be able to clean up.

L: Now you’re singing my song: short-term cash, and get your shopping list ready.

David: That’s the way I see it.

L: Okay then, thanks for your predictions – I look forward to seeing how they bear out.

David: It was fun. We should do this again sometime.

L: I’m sure Doug won’t mind, especially when you get a strong sense of where the markets are going, like this one.

David: Until next time, then.


[David Galland is one of the editors of The Casey Report – a monthly advisory analyzing big-picture trends that every investor needs to know about. Try a one-year subscription today for 20% off the retail price… plus 3-month money-back guarantee. And don’t forget to sign up for FREE to have “Conversations with Casey” delivered to your inbox every Wednesday.]

Late to The Party…Once Again

By Peter Schiff, April 18

The only thing more ridiculous than S&P’s too little too late semi-downgrade of U.S. sovereign debt was the market’s severe reaction to the announcement. Has S&P really added anything to the debate that wasn’t already widely known? In any event, S&P’s statement amounts to a wake up call to anyone who has somehow managed to sleepwalk through the unprecedented debt explosion of the last few years.

Given S&P’s concerns that Congress will fail to address its long-term fiscal problems, on what basis can it conclude that the U.S. deserves its AAA credit rating? The highest possible rating should be reserved for fiscally responsible nations where the fiscal outlook is crystal clear. If S&P has genuine concerns that the U.S. will not deal with its out of control deficits, the AAA rating should be reduced right now.

By its own admission, S&P is unsure whether Congress will take the necessary steps to get America’s fiscal house in order. Given that uncertainty, it should immediately reduce its rating on U.S. sovereign debt several notches below AAA. Then if the U.S. does get its fiscal house in order, the AAA rating could be restored. If on the other hand, the situation deteriorates, additional downgrades would be in order.

AAA is the highest rating S&P can give. It is the Wall Street equivalent to a “strong buy.” If a stock analyst has serious concerns that a company may go bankrupt, would he maintain a “strong buy” on the assumption that there was still a possibility that bankruptcy could be averted? If the company declared bankruptcy, would the analyst reduce his rating from “strong buy” to “accumulate”? 

In truth, if bankruptcy is even possible, the rating should be reduced to “hold,” at best. Only if the outlook improves to the point where bankruptcy is out of the picture should a stock be upgraded to “buy.” A “hold” rating would at least send the message to potential buyers that problems loom. Then if the company does declare bankruptcy, at least it does not do so sporting a “buy” rating.

Of course, by shifting to a negative outlook, S&P will try to have its cake and eat it too. In the unlikely event that Congress does act responsibly to restore fiscal prudence, its AAA would be validated. If on the other hand, out of control deficits lead to outright default or hyperinflation, it will hang its hat on the timely warning of its negative outlook. This is like a stock analyst putting a strong buy on a stock, but qualifying the rating as being speculative. 

The bottom line is that the AAA rating on U.S. sovereign debt is pure politics. S&P simply does not have the integrity to honestly rate U.S. debt.  It has too cozy a relationship with the U.S. government and Wall Street to threaten the status quo. In fact, given the culpability of the rating agencies in the financial crisis, it may well be a quid pro quo that as long as the U.S.’ AAA rating is maintained, the rating agencies will continue to enjoy their government sanctioned monopolies, and that no criminal or civil charges will be filed related to inappropriately rated mortgage-backed securities.

Remember S&P had investment grade, AAA, ratings on countless mortgage-backed securities right up until the moment the paper became worthless. Amazingly, the rating agencies somehow maintained their status, and their ability to move markets, after the dust settled.

Currently, they are making the same mistake with U.S. Treasuries. Once it becomes obvious to everyone that the U.S. will either default on its debt or inflate its obligations away, S&P might downgrade treasuries to AA+. Such a move will be of little comfort to those investors left holding the bag.

In its analysis of U.S. solvency, S&P typically factors in the government’s ability to print its way out of any fiscal jam. As a result, it applies a very different set of criteria in its analysis of investment risk than it would for a private company, or even a government whose currency has no reserve status. But the agency completely fails to consider how reckless printing will impact the value of the dollar itself. It can assure investors that they will be repaid, but the agency doesn’t spare a thought about what if anything our creditors may be able to buy with their dollars.

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:

US Warned Over Debts as S&P Cuts Outlook to ‘Negative’

By Richard Blackden, April 18

America’s ability to tackle its deficit has been given a strong vote of no confidence, after leading rating agency Standard & Poor’s said the chances are rising that the country will lose its prized AAA status.

S&P downgraded the outlook for the US government’s debt to negative from stable on Monday in a clear shot across the bows of Congress and The White House.

In sharp contrast to every other developed economy, the US has increased its budget deficit in the last year in an effort to accelerate the economic recovery here.

While President Barack Obama and the Republicans have in the last month laid out plans to reduce the deficit, S&P warned that a plan needs to be agreed upon within the next two years for the US to retain its status as a top borrower.

“More than two years after the beginning of the recent crisis, US policymakers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures,” said Nikola Swann, an analyst at S&P.

The move by S&P sparked an immediate reaction in financial markets, with US government bond prices falling alongside the S&P 500. Gold prices jumped to a new record of $1,496.

The dollar fell sharply against the euro and the pound.

“It is going to put a lot of pressure on the Obama administration to move faster at reducing the deficits, or cutting spending and possibly increasing taxes,” said Hugh Johnson, chief investment officer at Johnson Advisers.

“So it will put pressure on the Republicans as well.”

America’s status as the world’s biggest economy, and the dollar’s role as the world’s reserve currency, has afforded politicians a breathing space denied other countries.

China and Japan, for example, remain two of the biggest buyers of US government debt. However, investors’ unease at the sharp political divisions in Washington over how to reduce the deficit has been rising this year.

With the presidential election in 2012, Democrats are loathe to reduce the expenditure in programmes such as Medicare, Medicaid and Social Security, while Republicans are broadly resistant to putting up taxes.

“Until recently, there always seemed to be time available to correct the problems before they spiralled out of control,” said Kevin Logan, chief US economist at HSBC. “However, recent political developments show that the two parties are far apart in their approaches on how to solve the long-term problem.”

The International Monetary Fund last week warned the US that it needed to make a “down payment” on tackling a budget deficit that’s forecast to reach $1.5 trillion next year.


GoldMoney. The best way to buy gold & silver

eResearch – Uranium

By Bob Weir, Managing Director, Research Services

The price of uranium collapsed after reaching its June 2007 high, bottoming at US$40.00/lb U3O8 in March 2010. It remained depressed until July 2010 when it began a short, sharp rise to US$73.00/lb in January 2011, a gain of 82%, before levelling off in the US$70.00/lb range.

Unforeseen, the Fukushima Dai-Ichi nuclear disaster of March 11th laid waste to not only the shares of uranium companies, which are down an average of about 30%, but also the uranium spot price (i.e., for immediate delivery), which has fallen about 17% to US$58.50/lb (as at April 11) and to US$57.75/lb (as at April 8). See chart:

Click on chart for larger picture

The shares of many junior uranium explorers are now selling for less than their book value. In our opinion, the sharp decline in uranium stocks is a knee-jerk reaction, probably exacerbated by the shorts, and provides an excellent buying opportunity.

While uranium prices and, thus, probably uranium company stock prices, could stay depressed for a while, there can be no denying that nuclear development sits at the core of energy thinking for China, India, Russia, and other emerging countries. This is a longer-term positive for uranium and associated stocks.

Astute investors should not be swayed by attention-grabbing, negative-slanting media headlines. Longer term, with global demand sharply increasing, the price of uranium has nowhere to go but up. This should spawn increased merger and acquisition activity in the sector, which would be a further catalyst for higher uranium stock prices.

This article is written by Bob Weir of eResearch and with their kind permission, O B Research has been privileged to publish their work on our website. To find out more about eResearch and their free newsletter service, please visit: