Another heart-attack alert for the Mogambo about Total Fed Credit...

SO I WAS having another nightmare about the inflation in consumer prices that is guaranteed by the Federal Reserve creating so much money, writes the Mogambo Guru from Tampa, Florida, for The Daily Reckoning.

This time, my nightmare was some kind of weird replay of The Lord of the Flies, which seems kind of odd since I haven't read, or thought about, that book since the '60s when I was required to read it for English class, and I really don't remember much about it except that there was a pig (which I assume was a metaphor for the Federal Reserve), and everyone reverted to acting like tribal savages, killing each other in gruesome fashion, which I assume was because inflation in prices was raging across the island and food cost so much that everybody was starving, which would explain angry people killing each other...

Hey! This economics stuff is easy!

I don't remember my teacher stressing this obvious metaphor, however – although, now that we are suffering due to the utter failure of the Federal Reserve, maybe he should have!

So anyway, there I was in bed, tossing and turning, screaming in my sleep, yelling, "No! No! No!" when my wife suddenly jabbed her elbow in my side hard enough to rudely wake me up and/or crack a rib, and yelled, "That's enough! Go and sleep in your Stupid Mogambo Bunker (SMB)!"

Dejectedly, I trudged out into the night to the SMB with my pillow in one hand and my teddy bear in the other. As I approached the door, I was suddenly aware that I could faintly hear, through the walls, the Mogambo Fed Alarm (MFA) ringing its little heart out, going "clang, clang, clang!" whereupon my heart started going "clang, clang, clang!" too, and I was scared, really scared, and I hugged my teddy bear close to me for comfort.

The security system asked for a Secret Mogambo Code (SMC) to open the blast-proof door, and my trembling finger entered 1-27-1756 (Mozart's birthday). As the door swung open, I raced to the Mogambo Fed Alarm (MFA) to see, you know, what in the hell was happening, clang, clang, clang!

Well, I got shooting pains across my chest and my left arm went numb when I saw that the Federal Reserve had increased Total Fed Credit last week by a whopping $28.8 billion! In One Freaking Week (OFW)! Clang, clang, clang indeed!

Usually, this Fed Credit is pumped into the banks, giving them the power to loan almost 100 times this money, or a 1000 times the money, or a zillion times the money (thanks to the fraud of fractional-reserve banking gone crazy). This time, however, they used most of the money to buy up (thus monetizing!) $23 billion in debt!

Gaaahhh!

I don't know what it is that the Federal Reserve bought with $23 billion in one week, and I would not believe them even if they told me, mostly because the government has been caught, like Obama, lying, lying, lying to me so long, about so many things, but which I suspect is mostly just another $23 billion of worthless bank debt gone bad and is threatening to drag another bunch of butthead banks into bankruptcy.

My teddy bear looked into my eyes and solicitously said, "You need something to calm down! Take a handful of those pills your doctor is always badgering to you take, and wash it down with something cool and soothing. Like tequila!"

Always ready to take such good advice, I did it, only to discover that taking a long, hard pull on a bottle of cheap, rot-gut tequila is neither "cool" nor "refreshing" – but that only shows how little teddy bears know about real life, I suppose, and what an idiot I was for listening to him.

So, my throat burning, gagging and gasping for air, I decided that the better route was to look at some other statistical facts and figures, perhaps to find some glimmer of hope that we are not, as I so often say, "Freaking doomed!"

My hopes were dashed, as I immediately saw that the monetary base jumped up to $2.02 trillion from $1.97 trillion last week, too!

Suddenly, with the dangerous direction that the money supply is taking, thanks to the Federal Reserve creating so much of it, my brain recoiled in horror and spasmed painfully as I remembered that horrendous inflation in consumer prices is guaranteed by such a huge increase in the money stock.

My mind, in some kind of weird escape-from-reality limbo, was swamped with more visions of flies ("buzz, buzz, buzz!") and people killing each other ("whack, whack, whack!") to keep from starving to death ("Let's go out for pizza!"), and then I remembered that Buying Gold, silver and oil will protect me!

Whew!

Instantly, with this salvation to hold onto, I was back in the real world, and there were not yet any flies, and there were not yet any people killing each other, and there were not yet any people starving because the price of food keeps going higher and higher as the Federal Reserve keeps creating money and the federal government keeps spending the money to help people cope with the higher prices of food which makes the price of food go higher.

And so while there is still time before the collapse because of the madness in government and the Federal Reserve, there is also plenty of time to accumulate the sanity of gold, silver and oil. Whee! This investing stuff is easy!

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Will a classic dose of the "Summer Doldrums" knock the Gold Price lower in 2010...?

The GLOBAL GOLD MARKET has always seen India as the largest individual source of demand for gold, writes Julian Phillips at Gold Forecaster.

Indian demand has reached 850 tonnes in the best years and even in the worst years held over 300 tonnes. And thanks to the Hindu festival calendar, it has been possible to track the seasonality of this demand fairly easily during this time.

This demand has been labeled by Western analysts as "jewelry demand", we believe wrongly. But this title helps us to understand the Indian market for gold. Indian gold demand is centered on the family, the strongest of Hindu India's institutions. With an unbreakable distrust in the police, the civil service and the government, gold is part of a "black" (or underground) economy, outside the banking system. Gold's greatest quality is that it is money and can operate outside the visible money 'system' with banks at its heart.

In the Hindu family it is the husband that owns the families assets, but the wife brings both the liquidity and financial security to the new family through her dowry. The dowry is a gift to the couple from the wife's parents. It's fashioned as jewelry decorating the bride (and only from 24-carat gold) as she is "given" to her husband.

It was the case that 70% of Indian gold demand emanated from the agricultural sector. The marriage and its timing is therefore, the foundation of Indian gold demand. Hindus believe that there are auspicious days and non-auspicious days on which to get married. These are institutionalized in the various Hindu festivals in the autumn through to the spring in the northern hemisphere. In turn, seasonal factors dictate when these will be.

In the closing days of May, the agricultural sector turns to the planting season at the start of the Monsoon (heavy rainy) season. Crops grow through June to August when they are harvested and sold. The heaviest cash flow then starts towards the end of August. Autumn sees the start of important religious festivals considered the best time to Buy Gold. The marriage season reaches a peak in May. All are conscious that this jewelry is investment gold.

In the developed world Jewelry demand is likewise seasonal. The start of the high season is at the end of August each year. After the summer holidays, jewelers focus on the end year festivities and the gift-giving, at that time. That's when they Buy Gold ahead of manufacture. The season tends to follow through right to May too, with the quiet time from May to end August.

In the West it's important to understand that 'jewelry' is not the same as it is in India. In the West gold is usually just a small part of a piece of jewelry. Hardly any jewelry is bought for its gold content. Usually it's diluted to 18 or even 9 carats, a level unacceptable to the Indian market in general. But part of the changing world is that in India, 24-carat jewelry is giving way to small bars of gold in the dowry.

Consequently, the period June-August has been known as "The Doldrums" – named after the area in the Atlantic where the Trade Winds die down to nothing. However, for the last eight years the Gold Price has not fallen significantly in this period, except for one of those years and that not for traditional reasons. So will we see the gold "Doldrums" in 2010...? First, we have to understand why the Doldrums have not struck for 7 out of 8 years.

India has seen growth in their economy such as they have not seen before. The size of the Indian middle class has burgeoned so much that this sector has overshadowed the agricultural sector in its demand for gold. The new middle class is urban and its disposable income available all the year round, not seasonal. Add to that the advance of technology amongst gold dealers. They can now buy forward to the date they want delivery. The banks will permit buying and paying when they, in turn, are paid. This takes the price risk out of their gold holdings. It also allows them to buy when they think the price is right all the year round.

China has faced the same social changes but on a much larger scale. With no gold-giving, marriage traditions, urbanization and its higher paying opportunities has given rise to a big increase in gold demand all the year round. This demand is also long-term investment giving financial security. The Chinese are big savers (40% of their small incomes) and are likely to be so for the next generation.

The combination of this structural change in the market has virtually taken seasonality away from the Gold Price. Seasonality is not yet eliminated, but because investment demand is so large it is overwhelming current jewelry demand. This trend is growing by the year. As a result we do not expect what is left of the Doldrums to knock the Gold Price. The structural change taking place in the gold market is not just in its seasonality but in the entire shape of demand.

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The case for inflation-proof gold amid asset-price deflation...

USELESS for pretty much everything except storing wealth (its economic value is social, not industrial), gold acts as inflation-proof money when investors need it most – right in the middle of an asset-price deflation.

Or at least, that's how people choosing to Buy Gold amid today's global deflation in risk assets see it. Why else do you think German coin and small-bar dealers are being emptied, even at 5% (and worse) premiums to "melt" value? Why else did gold-hoarding deliver secure, rising purchasing power amid the Great Depression of the 1930s...?

Given central banks' default response to any level of financial stress, it's a unique and appealing attribute. Because rather than leaving cash hoarders alone, sub-zero real rates of interest – plus the ever-present threat of massive devaluation – force sleepless nights on cautious savers. (The risk of banking collapse is an extra, but non-government-inspired threat.)

So when there's a dash for cash, it's little wonder that "worried wealth" finds gold better even than Dollars. Because gold cannot be inflated, nor destroyed. And it has 5,000 years of human use as a secure store of value behind it.

Yes, this month's flight from everything into cash (which still means US Dollars worldwide) has knocked the Gold Price 6% off its recent record high vs. the greenback. But compared with all other assets bar Treasuries, however, gold shows phenomenal strength so far. Oil is down 20%. Platinum is 15% off. Aussie Dollars have dropped 10%, despite paying 450 basis points above cash deposits at the US Fed.

And should the slump continue, investment demand for physical gold is likely to put a floor under gold prices much sooner than other "risk assets" find their floor, just as it did during the Lehmans Crash...

Amid financial stress, physical gold hoarding creates a source of deep and widening demand that no other asset class enjoys. Not even silver comes close, because institutional and high-net worth buyers would rather get gold's significantly deeper wholesale liquidity and much lower storage costs.

Indeed, it's hard to class all "precious metals" together – in terms of price behavior – when the inevitable hits the fan.

Gold, unlike platinum and Silver, commands a "safe haven" premium that industrial commodities can't – a critical point when credit dries up and risk assets are converted back into cash.

Compare gold's price-action with any other raw material, in whatever currency. When confidence and economic demand sink, gold attracts capital. Whereas crude oil, copper, soybeans, even silver and platinum...they're all vulnerable to risk aversion, because their bull markets tend to rely on economic growth, whether or not it's fed by money-supply inflation.

Gold, in short, is not merely the "inflation play" that most analysts and journalists think (if, indeed, they're thinking at all). Hoarding physical metal may not seem a "sophisticated" reaction to current events. Hedging your move into cash may not even outperform an all-Dollar position, short or long term. But it is perfectly normal, historically evidenced, and sane response.

It also remains a minority sport at present.

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Silver and Gold Investing highlighted by the Greek Eurozone crisis...

WHAT A SPECTACLE, writes Porter Stansberry in Daily Wealth...

In an utter and complete repudiation of its founding principles, the Eurozone central bank (ECB) has decided to copy the US Federal Reserve's 2008-2009 strategy of "papering over" Europe's massive debt problems.

The ECB will provide nearly unlimited credit to Europe's sovereign borrowers, while also buying troubled assets from Europe's largest banks.

This latest development has caused a significant change in what I call "the most important chart in the world".

Readers of my investment advisory are familiar with the chart by now...as we've been publishing it nearly every month...and even more frequently in the daily S&A Digest. It shows the value of US government long bonds (represented by the bond fund, ticker TLT), the price of gold (represented by the GLD Gold ETF), and the Silver Price (represented by the SLV silver trust fund).

This is the battle for monetary supremacy. Because the market is arguing over a fundamental question: What is money? Dollars? Gold? Or silver?

For more than 60 years, the US Dollar has unquestionably been the world's safest, most liquid form of money – its reserve currency. During times of economic trouble, investors rush to buy US bonds as a safe haven, causing their value to rise sharply.

And that's what happened – briefly – during the Greek crisis last month. But then, something changed. As soon as the ECB announced its big bailout and established a swap line with the US Treasury (more about this below), investors realized there's no real difference between the US Dollar and the Euro. They are simply different names for the same thing: paper money. And investors understand the value of paper money may finally collapse under the weight of these massive sovereign debts.

What did investors buy when they sold the US Dollar in this crisis? Where did they run? As you can see, in reaction to the ECB announcement, investors bought gold...and to an increasing degree, silver. I believe this preference for metallic money will continue to strengthen as the financial problems of the US Treasury begin to mount.

If you ignore this trend, you will be financially destroyed over the next several years. If you act now to protect yourself and your family, it will be the greatest single investment decision of your life.

Now, let's look more closely at what the Europeans have done to stave off the collapse of the European Union...

To maintain a veneer of legality, the ECB will create an off-balance-sheet entity to "borrow" roughly $1 trillion from itself, the US Federal Reserve, and the IMF. Europe's member states agreed to guarantee these debts, which the ECB claims will be "riskless" because they're simply loans between central banks.

At the root of every paper currency arrangement is a simple scheme to grant credit where none is due. In this case, the scheme is designed to give credit to bankrupt governments in the European Union, via guarantees from those same bankrupt governments and additional credit from the US Treasury, which is itself a troubled creditor at best.

In short, the ECB is going to print up lots of Euros and give them to the least creditworthy states and the worst bankers in Europe.

The politicians apparently believe this massive infusion of new money and credit will "jumpstart" the European economy, which will then produce enough tax revenue and banking profits to finance these new debts. Don't laugh...

Meanwhile, to ensure this action doesn't result in a collapse of the Euro currency, the Federal Reserve has agreed to open a "swap" line, which will allow the ECB to fund as much of these news "loans" with Dollars as is necessary to prevent a run on their currency.

Will this work? At the risk of dramatic future inflation, will creditors really be willing to accept devalued Euros, which offer investors almost nothing in interest payments? I don't think there's a chance in hell.

The reason paper money systems always fail is because they provide no practical limit to credit. New currency reserves can always be printed. Bad debts – credit defaults – can be "papered over" rather than restructured. The stability of paper money systems seems like a virtue. The ability to simply manufacture money – without a deposit or true asset as collateral – is the ultimate financial sinecure. As long as confidence in the system remains, the amount of credit that can be manufactured seems limitless.

Unfortunately, this always leads to more debt. At some point, the whole system simply collapses. The debts become so large, they create an untenable economic imbalance, overwhelming the real economy. And when the credit bubble finally bursts, it doesn't destroy just one or two banks' house of cards. It wipes out the entire system, which is linked together by the currency itself.

Remember...this just isn't about problems in Europe. The United States is in the same situation: under huge debts we cannot hope to repay.

I recommend you protect yourself by holding real assets like energy, gold, and Silver Bullion.

Priced in gold, a barrel of oil is sinking fast...

AREN'T GOLD and oil both measures of inflation? asks Brad Zigler at Hard Assets Investor.

Because if so, then why is gold up and oil down? Shouldn't the gold-oil ratio – the cost of one ounce in barrels – stay pretty static?

Well, generally speaking – and that'd be very generally indeed – gold and oil do move in tandem. But wrinkles in the relationship develop because of differing fundamentals and because of differing fears. As the gold oil ratio shows, we're living in a fear-driven market now and that's where gold really, um, shines.

As the Greek debt crisis unfolded and fear of Continental contagion spread, capital streamed to safe-haven investments like the greenback and gold. Meanwhile, the prospect of a further meltdown in aggregate demand tilted an already-glutted oil market – for WTI crude, at least – downward.

Put simply, oil got cheap, not only in Dollars, but also in terms of Gold Bullion. Recently, as the gold-oil ratio below tells us, an ounce of gold could buy as few as six barrels of crude to as much as 25 barrels...

The gold-oil ration's most recent high followed six months of frantic de-leveraging and was itself followed by basing at the 14-times level as economic fixes were instituted and fears eased

Take a look at the chart, though. We've had a vertical ascent in the ratio this month. We're pushing on the 18-times level now.

The question for traders is whether this is a repeat of the late-year 2008 move or just a short-term blip.

The consensus – a thoroughly unscientific poll as it happens – seems to line up with the blip notion. For now, at least.

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Greece risks the first, not last, sovereign bond default of our times...

HOW TO FIX the Euro? asks Eric Fry from Laguna Beach, California for The Daily Reckoning.

This troubling question has vexed the financial markets for the last several weeks. One week ago the Eurocrats amassed a $1 trillion war chest (of borrowed money) to "fix" the Greek debt crisis and stabilize the Euro. Seven days into the mission, the Greeks are as bankrupt as ever and the Euro has tumbled to a new four-year low.

The European Central Bank – like British Petroleum – can't seem to figure out how to contain the mess they made, much less how to clean it up for good. Just like the crude oil gushing out of BP's underground well, Europe's sovereign debt crisis continues to gush out of control and threatens to wash up on the shores of Italy, Spain and Portugal.

One week is not enough time to judge the success of the ECB's $1 trillion "Euro Defense Plan", but one week is plenty of time to judge its failure. This $1 trillion fix did not fix anything. It merely annoyed short-sellers for a couple of days and inspired enthusiastic Gold-Buying.

Rome wasn't built in a day, of course. So we should not expect Athens to be rescued in a week...or ever. The country's fiscal condition is beyond repair. Either Greece slips into the Mediterranean, figuratively speaking, or the Euro does...or both. Borrowing $1 trillion to fight against the consequences of excess debt does not seem like a winning strategy.

In a worst-case scenario, the ECB will exhaust its cash, credit and credibility trying to save Greece...and will destroy the Euro in the process. Best case, the "fix" will persuade a few Wall Street strategists that the "worst of the Euro crisis is over" and will suck a few more suckers into the European sovereign debt markets before the situation gets REALLY ugly.

And it will get ugly...one way or another.

Many investors behave as if sovereign defaults are like polio: eradicated forever. These investors are half right. Polio has been eradicated.

Greece may not actually default, depending on the rescue measures that come its way. But Greece is already bankrupt. The creditors to Greece should understand that history is not on their side. In fact, the creditors to every sovereign borrower should understand that history is not on their side.

"While a European sovereign default has appeared inconceivable in recent history," a recent Wall Street Journal article observes, "defaults and debt re-schedulings were actually a common feature of the European financial landscape throughout the nineteenth century and up until the end of World War II, according to the economists Carmen Reinhart and Kenneth Rogoff.

"Greece has defaulted or rescheduled its debt five times since gaining independence in 1829, the economists wrote in their paper This Time Is Different, published in 2008 and recently expanded into a book. Spain has the lead in Europe at 13 times since 1476. Germany and France have both done it 8 times, while the UK has never done it since William the Conqueror invaded in 1066.

"Greece has existed in a 'perpetual state of default' since its independence," the Journal concludes, "having spent 50.6% of those years in default or rescheduling, easily tops in Europe. Russia is next highest, with 39.1% of years spent as a bad debtor after defaulting or rescheduling five times."

Governments default. That's what they do. They tax; they squander the tax revenues; they default. This is the established unnatural order of the governmental world. The Greek crisis may be the first sovereign debt debacle of recent times, but it won't be the last.

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