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Keep Your Head Above Dollar

By Peter Schiff, October 29

There has been so much discussion recently about “QE 2” that you would think the entire financial sector were about to embark on a transatlantic cruise. Unfortunately, they, and we, are not so lucky. In the year 2010, “QE 2” doesn’t refer to a sumptuous ocean liner, but a second, more extravagant round of “quantitative easing” – stimulus. In the past, this technique was simply called “printing money.” As if the nation has not already suffered enough from the first round, Captain Ben Bernanke and the Fed are determined to compound the damage by hitting us with another monetary juggernaut. Their stated goal is to boost the economy and create jobs. However, since economic growth cannot be achieved by printing money, their QE 2 will sink just as surely as the Titanic.

The intent of QE 2 is to lower interest rates to promote job growth and avoid the apparently growing threat of deflation. But the very idea that the economy is weak because interest rates are too high is laughable. Deflation is the market’s cure for the asset bubbles that have recently burst, so any attempt to avert it will only weaken the economy further.

In fact, one of the reasons the US economy is in such bad shape is that interest rates are already too low. Low rates have encouraged excess borrowing, by both individuals and governments, and discouraged saving, fueling new asset bubbles at the expense of legitimate investment. As a result, the dead weight of debt has simply overloaded our economy, and our creditors are getting nervous. What we need now is to make hard choices, not engage in more easing – to deleverage, not borrow more.

Worse still, by keeping rates too low, the Fed has enabled the US government to grow significantly larger than it otherwise could had its borrowing been restrained by higher rates. Absent these low rates, Washington likely wouldn’t have passed expensive new healthcare and financial regulation reforms; they would be too busy trying to keep the lights on in the Capitol.

For this and other reasons, the bogeyman of deflation is really not a concern at all. It’s not a threat because falling consumer prices could serve as a relief for many suffering from layoffs and pay cuts in the recession. Even if it were a threat, it’s not even likely because so much liquidity has already been created and an infinite amount could still be created at will by the Fed. Consumer prices are already rising across the board, despite a contracting economy, so what’s all this talk about deflation?

The Fed is quick to point to falling real estate prices. But a drop in real estate will no more cause consumer prices to fall than the real estate boom caused them to rise. Real estate prices are too high, and the economy will never truly recover unless they are allowed to fall. It is interesting that when real estate prices were rising, the Fed did not raise rates to bring them down, but now that they are falling, the central bank feels compelled to lower rates to prop them up. If falling real estate prices threaten deflation, why did the Fed not perceive an inflation threat when real estate prices were rising?

My thinking is that, at the end of the day, all this deflation talk is a red herring. The true purpose of QE 2 is to disguise the decreasing ability of the Treasury to finance its debts. As global demand for dollar-denominated debt falls, the Fed is looking for an excuse to pick up the slack. By announcing QE 2, it can monetize government debt without the markets perceiving a funding problem. If the truth were known, a real panic would ensue. So, the Fed pretends buying treasuries is simply part of its master plan to boost the economy, even though, in reality, it is simply acting as the buyer of last resort.

If the Fed really wanted to help the economy, it would raise rates quite dramatically. Instead of preparing for QE 2, it should be unloading the debt it purchased during QE 1. Of course, that is not so easy to do – which is precisely why I was against QE 1 from the beginning. However, even though the exit will be painful, going down with the ship will be even more unpleasant.

Higher interest rates and a commitment from the Fed to refrain from purchasing Treasury debt would force the government to dramatically reduce spending. If we combine less government spending with fewer regulations, reform our tax code in a way that stops punishing savings and investment, stop all government subsidies for real estate so that prices can fall to affordable levels, and allow all insolvent entities to fail, then a real recovery will take hold.

If the Fed refuses to set sail on QE 2, then her loyal passengers might complain, but at least the US will be on solid monetary ground as it tried to rebuild a viable economy. If instead we board QE 2 (and QE 3 and QE 4 thereafter), then we are headed to a sea full of icebergs called interest rate spikes, and all on board will surely drown in a sea of worthless Federal Reserve Notes.

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:

Debt Bubbles and the Bull Market for Commodities

By Frank Holmes, U.S. Global Investors, October 28

The “World’s Greatest Investment Event,” the 2010 New Orleans Investment Conference kicked off on Wednesday as gold and natural resources investors descended on the Crescent City for answers to today’s market questions.

The list of speakers for this year’s conference reads like a who’s who of the natural resources and commodity world—Dr. Marc Faber, Newt Gingrich, Dennis Gartman, Dick Armey, Peter Schiff and others.

We know everyone can’t make it down to the conference this year, so we’re going to be sharing some of the highlights with you over the next couple of days.

Rick Rule, chairman of Global Resource Investments, Ltd., was first to speak Thursday morning and he had a clear message for the audience: We’re in a bull market for commodities and natural resources. Rule said that the easy money, what he called “riskless” money, has been made, but the “big” money is still out there.

Rule cautioned that this bull market in natural resources comes with a hefty amount of volatility; however, he told the audience of several hundred to use the volatility to their advantage. Rule said “volatility means items are continually being sold at 30, 40 and 50 percent off.”

One big reason Rule cites for the bull market in commodities and resources are supply-side constraints. A severe bear market in the 1980s and 1990s kept many companies and governments from investing in exploration and today’s consumers are living off reserves discovered in the 1960s and 1970s. With per capita consumption growing in places like China, new discoveries will need to be large and fruitful to prevent supply shocks.

Next up on the stage was Brien Lundin, editor of the Gold Newsletter and host of the New Orleans Investment Conference. Lundin began his presentation on gold showing that the current rally—which he says began in August 2009—has taken longer and appreciated less than recent run-ups in 2006 and 2008.

Lundin says he has been expecting a correction in gold prices that has not come to fruition. This could likely come when the Federal Reserve institutes their second edition of quantitative easing because market expectations have just gotten too high.

Lundin is also positive on copper, saying that analysts have been trying to kill off copper for years but the Chinese have refused to play along. Lundin thinks we’ll see $4 a pound copper sooner rather than later.

Although Lundin thinks a pullback in gold prices is coming, he believes this is the time for investors to reload. His long-term bullish view on gold is based on unprecedented debt levels by the Fed and the oncoming devaluation of nearly every major currency in the world.

Bubble-spotter Peter Schiff led off the mid-day session with a discussion of bubbles and excessive government spending. Schiff says we’re currently experiencing one of the biggest bubbles in history; it’s not a bubble in equities, not in gold or commodities, but a bubble in government. The rest of his half hour speech laid out the case supporting this argument. Schiff says that the 2008 housing bubble was the overture to a much greater debt opera that is nowhere complete.

While Schiff spent his time at the podium explaining where a bubble is, newsletter mavens Pamela and Mary Ann Aden spent their time onstage explaining where there isn’t one—in gold. Mary Ann Aden began by laying out the history of gold’s trip from $200 in the 1990s to more than $1,300 today. One of the biggest drivers has been the explosion of government debt. Mary Ann said that if the government paid $1 million a day on its debt, it would take nearly 2,000 years to pay it off.

Mary Ann said that gold is far from a bubble because of the world’s reliance on paper currency and “there’s not one paper currency in the history of the world that has survived.” Mary Ann says that central banks have seen the writing on the wall and that’s why you’ve seen a pickup in central bank buying of gold this year. Mary Ann’s sister Pamela Aden proclaimed in her speech that gold is currently in a “once in a lifetime” megabull market.

We’ll have more updates from other speakers tomorrow.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

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


All Asset Prices Set to Rise

Puru Saxena, chief executive at Puru Saxena Wealth Management, reveals why he is optimistic on the prospects for all assets. He shares his investment strategy with CNBC’s Chloe Cho, Jackie Deangelis and Maithreyi Seetharaman, in this edition of Protect Your Wealth.

OceanaGold to Restart Philippine Gold, Copper Mine

Australia’s OceanaGold Corp said on Friday it will restart work on a gold and copper project in the Philippines in the first half of 2011, with initial capital cost estimated at $140 million over the next four to five years.
The Didipio mine, with a reserve life of 20 years, holds 1.41 million ounces of gold and 169,400 tonnes of copper, according to an updated technical report on the mine released by OceanaGold.

Australia’s fourth-largest listed gold miner said it had formed an exploration team to assess the mineral potential of surrounding areas of the Didipio mine in the northern Philippines to see if it can be expanded.

OceanaGold halted construction in late 2008 after spending $80 million due to high cost estimates of the project, initially set at $320 million.

In September, the company said it thought the Didipio project was viable and found it could be completed in 15 to 21 months with additional expenditure of $140 million.

A budget of about $4 million will be set aside for working capital in the first two years of the mine’s operation, on top of the initial cost estimate of $140.1 million.

A further $1.5 million has also been allocated for 2011 for exploration work in surrounding areas of the mine.

Source: Reuters

Related news:
OceanaGold updated Technical Report for the Didipio Project (pdf)
OGC 2010 Third Quarter Results Conference Call Presentation (pdf)

Bolivian Government Agency to Audit Orvana’s Bolivian Subsidiary, EMIPA

Orvana has been advised that the purpose of the audit is to verify EMIPA’s compliance with Bolivian commercial and administrative regulations during the period from 2005 through 2009. EMIPA understands that it is one of a number of companies currently being audited by AEMP.

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There are many companies with assets in Bolivia, and as the release suggests, this audit is not directed on Orvana only, but on several other companies as well. Pan American Silver, Newmont Mining, Coeur d’Alene are some of the companies found to have operations in Bolivia today.

Full release