Wednesday, September 2, 2009

Trouble in the Sand States; Frank Holmes on Why September's the Best Month for Gold

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The Daily Reckoning
Wednesday, September 2, 2009

  • Summer is over - and it's back to business as usual...
  • Florida sees the first population drop in 60 years...
  • The road to destruction may be longer than most anticipate...
  • Frank Holmes on why Sept. is the best month for gold...and more!

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    Trouble in the Sand States
    by Bill Bonner
    Bedford Springs, Pennsylvania


    Summer is over...and the rally may be over, too.

    It's back to business. No more long lunches. No more afternoons painting windows. No more soirees in the evening.

    We return to our lonely m├ętier - chronicling the decline and fall of the US economy...and the Anglo-American empire too....

    Two bits of news signal the scale of this trend. But first, here's one two-bit piece of news: the Dow lost 185 points yesterday. Could this mark the beginning of the end for the rally? Yes, it could. Should you be out of US stocks? Yes, you should.

    But let's turn back to our 'decline and fall' chronicles...

    From Florida, comes news of the first drop in population in 60 years. "Unemployment is soaring," reports USA Today. "Florida is second to California on foreclosures."

    Yes, dear reader, there is trouble in the sand states...

    Florida lost a net 58,000 people this year...for the first time since the 1940s.

    Why would that be? We'll take a guess. Florida is a state where people go to retire. It is where people go when they stop producing and begin consuming. The major industry in the state was housing...building houses for consumers!

    But now, the turn has come. Fewer people have money to consume. And those who do are keeping their money in their pockets. We even saw a report in The Wall Street Journal that people are cutting their own hair to save money. They're also staying put, rather than moving to Florida. So Florida needs fewer new houses...and fewer people to build them.

    Second, from national income statistics comes a report that the typical US household has less discretionary spending than at any time in the last 50 years. Why? Americans have no money to spend because they already spent it! Now they're paying the price. And it will take years - maybe 10 years, maybe longer - before they've paid down their debts to more comfortable levels. In the meantime, they are poorer than they've been since the Eisenhower years.

    Keeping it simple: Our view is that there is a major transition underway. There will be no genuine recovery, not now...not never. That is not to say the world economy is doomed to perpetual darkness and misery. Not at all. What it's doomed to is a long period of adjustment...with high unemployment, on-again, off-again recession, and desperate efforts by the feds to return to the good old days of the bubble years.

    But there's no going back. It was as if the economy was playing a game of Russian roulette...and then the pistol went off - the debt bubble blew up. Once the bullet left the chamber, the game was over. Recovery? Forget about it. The old economy isn't going to bounce back; it's dead.

    Still, just because a thing is hopeless doesn't make it unpopular. The feds are fighting the correction every step of the way. They're propping up brain-dead companies...and keeping zombie banks going by feeding them the blood of taxpayers. It's ghoulish...it's a very scary movie!

    [You can protect yourself from these flesh-eating monsters...by setting up a protective shield of your own 'personal bailout.' All the resources you need to get started can be found here - don't delay.]

    More news from The 5 Min. Forecast:

    "It all started with a rumor. A bank was to fail this week - a big one. Hit the bid," writes Ian Mathias in today's issue of The 5 Min. Forecast.

    Bank Stocks Head Down

    "We're hearing plenty of grumbling now - that stocks 'are no longer trading on fundamentals.' If they were, yesterday's bullish manufacturing news would have sent stocks through the roof...those damn short sellers and their 'bear raids' are at it again. But is it possible that (gasp!) the fundamentals for banks are still lousy? The SPDR Bank ETF is up 137% from its March low...has the banking sector really gotten 137% better?

    "'These bulls are misdiagnosing the situation, and here's the main reason,' writes Dan Amoss, our resident short seller and de facto banking analyst. 'The banking system has no experience managing through the current "negative home equity" environment. This is an environment in which mortgage rates are already about as low as they can get and consumer balance sheets are as stressed as ever. Due to the non- recourse nature of mortgages, most borrowers have no financial incentive to keep paying. Many are choosing to mail the keys back to the lender.

    "'This problem will cap the upside of bank stocks for years to come, and this sector will offer lots of short selling opportunities.

    "'The next move in the financial stocks will be down and regional banks and thrifts will lead this move. Most banks are reluctant to book the provision expenses necessary to maintain loss reserves, because this cuts into net income. But delaying recognition doesn't mean they'll go away; delay just means that losses in the future could be bigger and exacerbate the trend toward tighter credit. The market for bank stocks is not discounting this development right now, but it will over time. None of these smaller institutions are "too big to fail," so many will be resolved by the FDIC, and acquired or liquidated."

    "'This month, we're shooting for 150% gains in put options on a thrift that strayed from its humble roots and is now dangerously undercapitalized.'"

    Wanna learn more about Dan's short selling opportunities? It's all in his latest special report, found here.
    And back to Bill, with more thoughts:

    Unfortunately, the ghouls vote! And everywhere the feds look there's a campaign contributor or a lobbyist or a voter...and they all want the A-positive blood of taxpayers. They look to the feds for a transfusion in order to keep living in the style to which they've become accustomed...

    Just what you'd expect, in other words. And with so much debt in the system, the feds are desperate to raise inflation levels. They must increase the CPI to persuade consumers to spend money rather than save it. Otherwise, the nation risks falling into a deflation trap - the very thing Ben Bernanke has pledged to avoid. So they'll continue going down that road - towards inflation - until they finally get there. And they'll keep pressing harder and harder on the monetary accelerator until they finally run into a tree. Again, just what you'd expect.

    So, where's the surprise? We're on the road to destruction; that's clear. But it may be a much longer road than most people expect.

    Ambrose Evans-Pritchard in London's Telegraph:

    "'The current financial crisis is unlike any others,' says the Bank for International Settlements. Lasting damage has been done. The 'cumulative output loss' is likely to reach 20pc of GDP in the major economies.

    "The message is the same at the International Monetary Fund. 'The world is not in a run of the mill recession. The crisis has left deep scars. In advanced countries, the financial systems are partly dysfunctional,' said Olivier Blanchard, the Fund's chief economist.

    "It has certainly alarmed US retail tycoon Howard Davidowitz. 'As a country we are out of control, we're in a death spiral,' he said.

    "Jeff Wenniger from Harris Private Bank says an army of baby-boomers have seen their old age plans shattered by the housing bust. Their nightmare is here. They will have to spend less, and save more. 'Generational destruction of a society's balance sheet will not rectify itself in a matter of months.'

    "'How about a quarter century?'"

    [While most shudder to think the correction could continue for a quarter of a century, this is good news for some. Due to a legal 'loophole' in the bailout, there is a way you can get up to $17,500 this year - and every year until the US economy gets back on its feet - in 'bailout income checks'. You first check could be in the mail in a matter of weeks - act now.]

    Byron King, our Pittsburgh correspondent, reminisces about Bedford Springs...

    "Always liked Bedford Springs. A resort to presidents going far back into the early days of the republic (you know... 'A republic, if you can keep it.')

    "My dad used to go there quite a bit. The Pennsylvania Bar Association hosted its annual meeting at Bedford Springs for many decades. And my dad used to do very well in the golf tournament. So he'd schmooze with the judges, and win at golf...you got a problem with that?

    "Delightful mountain retreat, really. An escape from the bad air and worse sanitation of old east coast cities. A necessary water stop on the Pennsylvania Railroad. Giant old building, with many a fine room - those walls have some stories to tell, I'll bet. And those elegant balconies? Ah, from there you can catch the cool breezes falling off the nearby hillsides.

    "Time was unkind to the hotel, however. Oh, what a wreck and ruin the place was by the mid-1980s and through the 1990s. Time passed it by. It was built for a steam railway age, when horses and carriages would lug the guests and baggage up from the train station for lengthy stays. People would 'summer at the Springs.'

    "By the modern era, people didn't need some old-fashioned mountain resort. They wanted to get into jet airplanes and fly off to some coastal port-city, thence to board giant cruise ships or the like. Take their vacations riding the waves in 'don't spill the drinks' comfort. All while visiting some island du jour, where they speak English with funny accents.

    "Really, who needed Bedford Springs so long as the world offered cheap credit and cheap energy?

    "Still, someone must have realized that Bedford Springs is irreplaceable. They just don't build 'em like that anymore. So the place underwent a superior renovation about 10 years back. Now it's a luxury resort...beautiful job. But in a world of tightening credit? Hmmm...it's a luxury resort, 'if you can keep it,' to coin a phrase.

    "Thus Bedford Springs still has to compete hard in this tough economy. From what I know, it hosts many a wedding and a few business meetings - its advantage is that it lacks the federalized stigma of other resort locales like Las Vegas. But it has yet to make it in a big way into the public consciousness.

    "Still, it's right off the Pennsylvania Turnpike. So for the price of half a tank of gas, you can get there from Pittsburgh or Philadelphia, Washington or Baltimore...and within a three hour drive or so. So geographically, it's a good place for an era of tighter credit and more expensive energy.

    "Plus, it's on the dry land of the Keystone State. It's a fixture, with deep foundations and good old bones.

    "When the Chinese have long since repossessed the encumbered airliners and cruise ships, they might have some trouble seizing and shipping home the likes of Bedford Springs.

    Who knows? The American economy may yet dig in, and its last ditch will be along Route 30 near Bedford Springs. 'This far shall you advance, oh you creditors and claimants, and no further.'

    "Bedford Springs...what a great old piece of Americana."

    Until tomorrow,

    Bill Bonner
    The Daily Reckoning

    P.S. For more from our intrepid correspondent, Byron King, see his latest report. In it, he details a secret source of energy 113 miles northeast of LA that could significantly reduce our dependence on foreign oil. It's a fascinating story...read all about it here.

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    The Daily Reckoning PRESENTS: We're heading into September this week, so it's a good time to revisit the historic seasonality of gold and gold stocks. Frank Holmes explains, below...


    History Lesson: September Is Best Month for Gold
    by Frank Holmes
    San Antonio, Texas


    Over the past four decades, September has been the best time for gold in terms of its month-over-month price appreciation. You can see this on the chart below - in a typical year, the price of gold in September rises 2.5 percent above its August price.

    The gold price has risen in 16 of the 20 Septembers since 1989, by far the best success ratio of any month of the year.

    Gold Average Monthly Returns

    What accounts for this predictable trend?

    September kicks off several of the planet's most potent gold-demand drivers:

  • The post-monsoon wedding season in India and Diwali, one of the country's most important festivals;


  • Restocking by jewelry makers in advance of the Christmas shopping season in the United States;


  • The holy month of Ramadan in the Muslim world, whose end in late September is marked by a period of celebration and gift-giving;


  • And in China, the week-long National Day celebration starting October 1 and the run-up to the Chinese New Year in early 2010.
  • This could be a challenging September in India, the world's largest gold consumer. The economic slowdown and gold prices near record highs drove jewelry demand down 31 percent in the second quarter compared to the same period in 2008.

    On the other hand, the World Gold Council says India's bank deposits saw 22 percent year-over-year growth in the second quarter of 2009, so cash is available to be spent if the rupee price for gold weakens even slightly. The WGC also expects the wedding and Diwali season to "underpin a seasonal improvement over the remainder of 2009."

    China, the world's #2 gold market, actually saw a year-over-year gold demand increase of 6 percent in the latest quarter, with buyers favoring 24-carat gold jewelry for its quality and as a store of value. The WGC says that trend toward the purer form of gold should continue, though the third quarter is usually the low season for this segment of the market.

    Gold Stock Monthly Returns

    While September is a good month for gold, it is historically a great month for gold stocks as measured by the NYSE Arca Gold Miners Index (ticker GDM), as seen in the chart above. The GDM index comprises a broader collection of gold miners - including more smaller-cap companies - than either the NYSE Arca Gold Bugs Index (HUI) or the Philadelphia Stock Exchange Gold and Silver Index (XAU).

    After the typically soft months of June and July, the gold miners start to bounce back with a 2 percent bump in August before shooting up another 8 percent in September. Since 1993, when it was created, the GDM has been up 11 times in September and down just five times.

    In September 1998,
    "The Federal Reserve's massive stimulus spending and the expectation that the current low-interest-rate environment will continue for many more months are additional headwinds for the dollar, and thus tend to be positive for gold."
    the GDM had by far its best-ever month (up 54.3 percent) when the bullion was bouncing off a two-decade low price of less than $275 per ounce. A decade later in September 2008, however, amid the severe credit squeeze triggered by the global financial crisis, the GDM fell 10.2 percent.

    The strong correlation between the gold price and the value of gold- mining stocks explains much of the average September jump for gold stocks. But the relationship is not lock-step - gold stocks (particularly for companies that do not hedge their production) have historically offered leverage to the gold price. In up markets, earnings growth has tended to exceed the increase in gold price. Of course, the leverage also works in the opposite direction - gold stocks also tend to decline more when the price of bullion is falling.

    One of the most consistent correlations for gold is its inverse relationship with the US dollar - when gold is up, the dollar tends to be down, and vice versa. Looking at weekly data going back 20 years, this relationship occurs nearly 70 percent of the time.

    DXY Index

    The seasonality chart above shows that September is only second to December in terms of dollar weakness, the average result for the US Trade Weighted Dollar Index (DXY) being a 0.66 percent decline from August. Looking at the 39 Septembers going back to 1970, the dollar has seen negative performance 26 times, more than any other month of the year.

    The Federal Reserve's massive stimulus spending and the expectation that the current low-interest-rate environment will continue for many more months are additional headwinds for the dollar, and thus tend to be positive for gold.

    In our June commentary "Why the Time Could Be Right for Gold Stocks," we pointed out that gold stocks tend to outperform the overall stock market when the federal government is engaged in deficit spending. This year's federal deficit is expected to be a record $1.6 trillion, and the White House projected this week that the deficit will grow another $9 trillion between 2010 and 2019. These huge deficits will fan inflation fears and keep downward pressure on the dollar.

    Based on the long-term record, this may represent a good time for investors who want to establish or add to a gold or gold-stock position in advance of seasonal demand growth. The guidance provided by historical patterns may improve the chances for investment success, but of course, there are no guarantees that this September will follow the well-established trend.

    Regards,

    Frank Holmes
    for The Daily Reckoning

    Editor's Note: Now is certainly the time to stock up on some of our favorite yellow metal...especially since you can get it at just a penny per ounce. Find out how to put your pocket change to work by clicking here.

    Frank Holmes is CEO and chief investment officer at US Global Investors, a boutique investment advisor specializing in natural resources and global emerging markets. The company manages the US Global World Precious Minerals Fund (UNWPX) and the Gold and Precious Metals Fund (USERX). Read more from Frank Holmes and the USGI investment team in the blog "Frank Talk."

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