Why Gold is Falling, A Commercial Real Estate Play, Vancouver Gossip and More!

by Addison Wiggin & Ian Mathias

  • Greek rescue plan? Like Oakland, there’s “no there there”
  • How GDP fell more than one percentage point… yesterday
  • New commercial real estate warning… and a way to play it this week
  • Byron King with a chart that shows why gold has so much further to run
  • Vancouverites who wish Olympic fever would chill already… a message of hope from underneath 50 inches of snow… and more!

  “When we look at the world economy today,” our friend Egon von Greyerz from Matterhorn Asset Management writes this morning, “wherever we turn, we see a wall of risk.

“And sadly, this is an insurmountable wall with risks that are totally unprecedented in history. There has never before been a potentially catastrophic combination of so many virtually bankrupt major sovereign states (U.S., U.K., Spain, Italy, Greece, Japan and many more) and a financial system which is bankrupt but is temporarily kept alive with phony valuations and unlimited money printing.

But governments will soon realize that they are not alchemists who can turn printed paper into gold. The consequences of the global financial crisis are potentially catastrophic.”

  Nowhere is that more apparent than Brussels this morning. A summit there led by German Chancellor Angela Merkel, Greek Premier George Papandreou and European Central Bank President Jean-Claude Trichet has yielded the following…

· A demand that Greece get its fiscal house in order

· Vague reassurances of “determined and coordinated action.”

A rescue plan as discombobulated as this photo op

Not exactly the sort of specifics that would put Wall Street at ease. No wonder the market, which has been on tenterhooks for days over this Greece thing, slipped as much as 0.4% on today’s open. Even a sharp fall in first-time jobless claims last week couldn’t calm traders’ jitters.

  The uncertainty is also putting a hurt on the euro this morning, down against the dollar to around $1.37. The dollar index has pushed back above 80. And gold is joining the dollar as a safe haven, rising to the high $1,070s.

  So the details of Greece’s rescue haven’t been worked out yet. But for Bill Bonner, the details hardly matter — because the final result is carved in stone. “The focus of this week’s discussion is the PIIGS — Portugal, Ireland, Italy, Greece and Spain. Together, they’ve got about $2 trillion worth of debt. And lenders are making it more expensive for them to borrow more. If this continues, they’ll default. And then, say the financial authorities, terrible calamities will happen. The whole European financial system could come falling down. It would be the end of the world as we have known it.

“Does this sound familiar too? It should. It’s the same scare tactic used after Lehman was allowed to go under. AIG had to be saved. And Fannie and Freddie. And GM.

“The debts will be collectivized… just like those of Fannie and Freddie. Instead of being allowed to fail on their own merits, in other words, European nations are locking arms… they are all going to fail together!”

  There goes part of your fourth-quarter GDP. Statistical watchdog John Williams has pored over the trade deficit numbers we brought you yesterday. And he concludes it’ll whack off a good chunk of those fabulous GDP numbers we got late last month.

“The December deficit showed significant deterioration,” John says, “with the effect — by itself — of wiping out roughly 1.1% of the gimmicked 5.7% GDP growth, suggesting a downward revision to a still incredible (as in unbelievable) 4.6% annualized real growth rate.”

  And those are just the potential revisions to the fourth-quarter numbers. The first quarter of 2010 is looking positively ugly if one real-world measure is to be believed.

The PCI, or Pulse of Commerce Index, made its debut yesterday. Prepared by Ceridian and UCLA, it measures diesel purchases at some 7,000 truck stops nationwide. Its data set goes back to 1999, and it’s tracked GDP pretty reliably.

Like GDP, PCI grew at a healthy pace in the fourth quarter of 2009. But in January, PCI plunged an annualized 36.8%.


  The meltdown in commercial real estate has not been averted, merely delayed. That’s the takeaway from a report released this morning by the panel that oversees the TARP program. It cites the following cheery numbers…

· $1.4 trillion in commercial real estate loans will need refinancing in the next four years

· More than half of those loans are underwater

· Losses could reach $300 billion

· Those losses threaten the solvency of 2,988 banks — all of which have more than three times their assets tied up in commercial real estate loans

· The vast majority of those banks are small fries with less than $1 billion in total assets.

The panel warns this could put a damper on economic recovery. Uh, yeah.

Meanwhile, news could break after today’s market close affecting one of the major REITs. Our short specialist Dan Amoss figures whatever is announced likely won’t be good for the stock. In fact, it could deliver the big payoff on months of research that Dan’s put into the shaky REIT sector. Want in on the action? Go here.

  China appears to be getting skittish about any sort of U.S. debt that’s not backed by the U.S. Treasury. According to Asia Times, China’s big commercial banks and the State Administration of Foreign Exchange are dumping asset-backed securities and corporate bonds. From now on, only Treasuries and Fannie/Freddie debt will suffice.

China’s motives, as usual, are hard to suss out here. But we note this comes on the heels of an interesting decision by the Securities and Exchange Commission. No longer will money market funds have to get SEC approval before suspending withdrawals in the event investors begin a run on the fund.

And what kind of paper is most likely to get a money market fund into trouble? Yup, short-term asset-backed securities and commercial paper.

We caution this doesn’t necessarily mean the SEC is making way for an imminent dislocation of the sort that caused the Reserve Primary Fund to “break the buck” the same week Lehman went under and AIG went to pot. But all the same, we don’t blame the Chinese for hedging their bets.

  Don’t be scared off by last week’s sell-off in gold, says Byron King. “What got sold? Do you really think that people parted with their Gold Eagles, Maple Leafs and Krugerrands?  Did YOU sell YOUR gold?  Do you think that the Chinese sold gold from their national vaults? 

“No, last week people sold paper, not real goods.  Sure, it felt like a sell-off to your portfolio, when gold miners declined.  But beware thinking that we’re about to experience the Great Reversal in values for precious metals.


“For example, the world gold mining industry is galloping, just to maintain a slow overall annual decline in total output.  Here’s a chart that goes back over 30 years.  It’s clear that gold output from South Africa is steadily falling.

“I’ve discussed before how the South African mines are, overall, getting so deep, hot and dangerous that we’re on the edge of a major rapid decline in gold output.

“And notice that in the past decade, gold output from the rest of the world has just not picked up the slack.  Sure, there have been some great investment, growth and production stories.  I cannot fault the miners that are out there, digging away.

“But looking at the overall picture, total world gold output has decreased by 1 million ounces annually since 2001.  Meanwhile, the U.S. dollar is declining in value.  Peak Gold, anyone?”

That’s a gold story no one’s talking about. What do we hear from the mainstream, instead?

  The mainstream says John Paulson, after making a killing shorting subprime in 2007-08, has blown it with his move into gold.

The Wall Street Journal could barely contain its glee (headline: “Midas Touch Lost?”) as it reported Paulson’s new gold-oriented hedge fund has raised only $90 million or so on top of the $250 million Paulson himself is kicking in. And… horror of horrors… the fund is down 10% since it opened on Jan. 1.

This is the sort of thing that confirms James Turk’s analysis from last November: Gold has just begun stage two of a three-stage bull market. In stage two, interest grows, but mainstream skepticism abounds.

Since you need a $10 million minimum investment to get into Paulson’s gold fund, we assume you’ll need to find an alternative way to get in early on stage two. Byron King can accommodate. See his latest gold ideas here.

  “I was confused,” a reader writes, “by the two data points with which you began yesterday’s newsletter.  You noted that there were over a 1,000 homes repossessed this past December and then immediately went on to note that there were over 2.8 million US foreclosures last year — obviously, about 233,333 per month on average. 

“Does this imply banks are foreclosing, but hardly ever repossessing or is there some potential data incongruity here (or just some obvious point I am missing)?”

The 5: There’s a whole lot of that going on. This is the “shadow inventory” phenomenon we documented last week courtesy of Dr. Housing Bubble, one of the few people attempting to quantify it. His work focuses on California, but there’s anecdotal evidence from all over that people are living in their homes for well over a year after getting a notice of default.

  “I live in Vancouver,” a reader writes in response to Bruce Robertson’s firsthand observations, “and like many wish that the Olympics would go away or be funded by the corporations that see so much financial gain from them. I don’t see the corporations lining up to pay for it.

“From my perspective, the Olympic project has some 6 billion tax-admitted dollars committed under its name. Do the math: $6 billion divided by the 2.5 million people living in the lower mainland. How much per person in new taxes does that work out to… now amortize that debt as future public debt… as far I as can see, it’s a public wealth extraction.”

  Another reader chimes in by way of explanation: “The corporate media types here are wondering aloud why public enthusiasm is rather muted, as opposed to back in 1986, when Vancouver hosted a World’s Fair. The answer is that back in ’86, the notion of having people come from the world over was new and exciting.

“A quarter of a century later, cosmopolis is an everyday fact of life in Vancouver. It’s nothing new. Nothing special. It’s neither particularly good nor particularly bad — and it’s certainly not very exciting.

“For world-weary Vancouverites, the Olympics just means higher taxes and heavier traffic. Sure enough, a new sales tax takes effect this summer. It’s called the ‘harmonized sales tax’ (a nice, almost Confucian sort of euphemism!), but it would be more aptly named the ‘Olympic sales tax.’


The 5: Yikes. Thanks for the heads-up as we prepare for this summer’s Agora Financial Investment Symposium. We too will bring attendees and speakers from many countries and six continents. We certainly hope we don’t engender the scorn of your fair city. We’ll try to pay our own way… and we won’t encourage new taxes to be raised on our behalf.


Addison Wiggin

The 5 Min. Forecast

P.S. “Very quiet here this morning,” Dave Gonigam writes from the Agora Financial headquarters on Saint Paul Street in Baltimore. Dave’s one of the brave souls to actually dig out and make it into the office today. (On your behalf, I might add, since he’s been a critical player in producing The 5 this morning. Thanks, Dave.)

“My short walk from home was navigable,” Mr. Gonigam continues. “One door down from here, someone sprayed gang graffiti on a giant snowdrift that covers a parked car on St. Paul. It gives me faith in man’s infinite ability to adapt to his circumstances.”

While martial law has been lifted for the time being, several members of our customer service team are still snowbound. Please understand if you get a recorded message when calling our toll-free number, even during business hours, we’ll be back up to speed by early next week. Provided, of course, Monday’s storm doesn’t pack the wallop of these last two.

P.P.S. The markets are ripe for the trades being conducted in one of our most-expensive services. Now, and for a limited time, you can try it out for a 60% discount. Details here.


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