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XMFSinchiruna (27.53)

JP Morgan bullish on precious metals in 2008 - strongest sector! - contradicts Goldman Sachs view!

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December 09, 2007 – Comments (5)

Not that I trust either JP Morgan or Goldman, since I think they routinely play the market for their own insider gains with no regard for the average investor whatsoever... but after so many precious metals investors panicked last week when Goldman declared its prognostication for a decline in gold in 2008, I do find it interesting that they have this fundamental difference of opinion on this very important topic.  Of course, if we're looking for suggestions of which firm might be more likely to deliver propaganda with its headlines, consider the sheer number of prominent ex-Goldman Sachs executives who now hold key positions within the Bush White House.

Here's the JP Morgan excerpt in a reuters piece:

"U.S. bank JPMorgan said on Friday precious metals could
rally in 2008 as the U.S. dollar falls and supply flattens,
ranking the sector the strongest among all commodities for next
year."

http://uk.reuters.com/article/goldMktRpt/idUKT9064420071210

And for the piece on Goldman Sachs' links with the administration:

http://us.ft.com/ftgateway/superpage.ft?news_id=fto120320061956506824&page=1

And for an article on Goldman Sachs' outlook for gold in 2008, which I would take with a grain of salt the size of the moon...:

http://www.reportonbusiness.com/servlet/story/RTGAM.20071129.wgoldman1129/BNStory/SpecialEvents2/home

5 Comments – Post Your Own

#1) On December 10, 2007 at 12:21 AM, dwot (60.71) wrote:

I think the credit crunch will be somewhat deflationary and that will put downward pressure gold.

 

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#2) On December 10, 2007 at 2:33 AM, XMFSinchiruna (27.53) wrote:

dwot... I've heard that suggestion and can certainly see how one would arrive at it... every once in a while I make myself prove to myself that the cumulative impact of everything I see unfolding will be inflationary and not deflationary... that is I play devil's advocate against myself to make sure my confidence in the hyperinflation model is intact... and it is.  I agree that downward spiraling economies often experience deflation, but the amount of money that's been printed already to bail out the credit crisis and the mortgage crisis... that's where the inflation is... and in the trillions we've been printing to buy our war in Iraq.  In most other economic cycles I would agree with your prediction... but this cycle feels materially different to me.

 For starters, the Fed is moving in the wrong direction to control inflation.  First they lull Americans into a false sense of security by proclaiming modest inflation numbers like 2% or less, when in actual fact those numbers are wholly bogus!  For the past decade the Fed has been "claculating" inflation by excluding food and energy on the basis that those 2 areas of consumer spending are too volatile.  Well... volatile indeed... with oil having tripled in recent years isn't it convenient that they don't have to consider that inflation?  If you add food and energy back in, the real rate of inflation is more like 7-8%... and many economic firms estimate a real rate of inflation in the US at more like 10-14%!  [I'll look for links on that if anyone's interested].

Now, under normal circumstances the Fed would be able to raise interest rates to contract the money supply and thus tend to lower inflation... but recently they were torn between that strategy and one that caters to Wall Street... and wouldn't you know they picked Wall Street over the average American.  They are lowering rates, the government is failing to reign in spending, and everything that economists say leads to hyperinflation remains solidly in play.

I thank you for reading and commenting, and I hope you'll stay long at least a little on gold... it's not done yet... not by a long shot.

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#3) On December 10, 2007 at 2:41 AM, XMFSinchiruna (27.53) wrote:

Without wishing to endorse any particular website or goldbug out there, since there is lots of information out there and everyone can gather it at will, for me personally I have learned a TON from Jim Sinclair's MinSet website (http://www.jsmineset.com/).  

Check out his bio first... this guy's been around the precious metals markets for a lifetime, and his site is a totally free service.  Anyway, back in September of 2006 he posted his "formula" for the basic stages of the hyperinflationary gold bull market ahead of us, and the above conversation just made me want to post it here for all your consideration.  During copying and pasting the formatting was lost, so take this link instead for easier reading:

http://www.jsmineset.com/home.asp?RQ=EDL,1&sPID=4&linkid=3806

Jim's Formula - September 1, 2006

First interest rates rise affecting the drivers of the US economy, housing, but before that auto production goes from bull to a bear markets. This impacts many other industries and the jobs report. An economy is either rising at a rising rate or business activity is falling at an increasing rate. That is economic law 101. There is no such thing in any market as a Plateau of Prosperity or Cinderella - Goldilocks situations. We have witnessed the Dow rise on economic news indicating deceleration of activity. This continues until major corporations announced poor earnings, making the Dow fall faster than it rose, moving it deeply into the red. The formula economically is inherent in #2 which is lower economic activity equals lower profits. Lower profits leads to lower Federal Tax revenues. Lower Federal tax revenues in the face of increased Federal spending causes geometric, not arithmetic, rises in the US Federal Budget deficit. This is also true for cities & States as it is for the Federal government. The increased US Federal Budget deficit in the face of a US Trade Deficit increases the US Current Account Deficit. The US Current Account Balance is the speedometer of the money exiting the US into world markets (deficit). It is this deficit that must be met by incoming investment in the US in any form. It could be anything from businesses, equities to Treasury instruments. We are already seeing a fall off in the situation of developing nations carrying the spending habits of industrial nations; a contradiction in terms. If the investment by non US entities fails to meet the exiting dollars by all means, then the US must turn within to finance the shortfall. Assuming the US turns inside to finance all maturities, interest rates will rise with the long term rates moving fastest regardless of prevailing business conditions. This will further contract business activity and start a downward spiral of unparalleled dimension because the size of US debt already issued is of unparalleled dimension.

Therefore as you get to #12 you are automatically right back at #1. This is an economic downward spiral.

I heard all this "slow business" as negative to gold talk in the 70s. It was totally wrong then. It will be exactly the same now.

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#4) On December 10, 2007 at 5:46 AM, nycguy (< 20) wrote:

Remember, gold is not only a hedge against inflation but also a hedge against global financial collapse.  I actually think we might be on the brink of massive global depression.  I just wrote a blog entry outlining the parallels between the Great Depression and the current market situation.

The big shoe to drop will be a collapse of the equity and real estate market in China.  China thinks their economy is overheating and has yet again increased the reserve requirements for banking (they can't really increase interest rates without letting a faster appeciation of the Yuan).  A complete capitulation of China's currency regime will cause a major flow of capital to China to other markets.  This will probably cause a massive panic in the Chinese stock market.  Given the embroynic stage that Chinese capital markets are in, this could have widespread impact across the Chinese economy due to the massive crossholdings of stocks among Chinese companies.

 

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#5) On December 10, 2007 at 8:45 AM, abitare (52.23) wrote:

Good post.

GS - They reminds me of Enron. Paulson taking control of the Treasury reminded me of Kenneth Lay's appointment to the Dept of Energy before he was indicted. 

Good artictle on GS: 

Sub-Prime? So Over! Part II
By Adrian Ash

"Goldman Sachs bucked the trend this summer by making money � pots of money � selling subprime bonds short. Ironically, Goldman also issued what might prove the most toxic of all subprime bonds back in 2006. In other words, the
savvy investment bank sold the same junk twice, and make a tidy profit both times."

Recession, depression or hyperinflation?  It is a tough call.

Recession - 100% - Those most impacted: retail, home builders, financials, consumer discretioniary, real estate,banking

Depression - for many - poorly uneducted migrate workers, non English speakers, leveraged consumers, people who bought a house on an ARM in the last 3 years in a "hot" market. People, who work for companies which stock has fallen significantly.

Hyper inflation - a real possibitilty. I cannot guess the odds or a catlyst or time line. There is a chance of a dollar sell off or panic. EVERYONE IS SHORT / HATES THE DOLLAR

Gold - EVERYONE HAS BEEN LONG GOLD. In a recession all asset values decline including gold, stocks and real estate. However, since the US may be entering into something more severe, precious medal might be a good bet. 

www.everbank.com allows for deposits backed by Gold. Also if you are going to own gold you have to have it outside of the US. Since in a crisis, the US will confiscate gold from it's people.

Gary North - who I follow, recommends www.goldmoney.com

 

 

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