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Thinking of Buying Silver today? Find three more reasons here...

WE ONCE had an ongoing series in Big Gold called "1001 Reasons to Own Gold", says Jeff Clark, senior editor of Doug Casey's Big Gold newsletter.

The idea was that there were so many valid reasons to own the metal, I wanted to track and report on them all. And if you're now invested in the precious metals arena, you will also know there have been a myriad of bullish indicators for silver this year as well.

Here's a couple new reasons to own silver that a lot of mainstream investors probably aren't aware of...

Due to increased demand from industry and investors, silver exports from China are expected to drop about 40% this year. And that's actually an improvement; customs data show exports plunged almost 60% through the first eight months. China exported about 3,500 metric tonnes of silver in 2009, but has exported only 970 tonnes through August of this year.

What a lot of Westerners don't know is that China ended export "rebates" two years ago to stem the shipment of natural resources leaving the country. As a result of the regulation, silver exports decreased in 2009 but are nothing like what they're experiencing this year. In other words, the large drop in exports is a direct result of a huge increase in demand within China itself.

According to one Chinese banker, the spike in silver demand is coming from all areas – jewelry, investment, and industrial. In his words, it's led to a "physical market shortage in the Far East."

How important is this? China is the world's third largest producer of silver (after Peru and Mexico), so the amount of silver coming to the global marketplace this year will drop by more than 74 million ounces. This represents roughly 8.3% of total annual global supply from 2009. If worldwide demand continues at its current pace, where is the extra metal going to come from? This alone tells us the price of silver will move higher.

The next item I sleuthed out was that the US Mint is expected to release a new five-ounce Silver Bullion coin this year, the first ever. The coin will be three inches in diameter and have a composition of .999 fine silver.

I've read the five-ounce bullion coins will be near-exact replicas of the America the Beautiful quarters. There will reportedly be five different designs, and the mint plans to produce 100,000 of each. I can't wait to see them.

The coins will be classified as bullion, meaning they should be available to the same dealers already authorized by the mint. This will likely create excitement in the silver market, especially when you consider its affordability. At $23 silver, the five-ounce Silver Bullion coin will cost $115, plus premium. One ounce of gold runs $1340 as I write, while five ounces will cost you $6,700 plus commission.

Perhaps most bullish is the fact that silver is vastly underpriced when compared to gold. Look at it this way: gold is currently priced 57% above its 1980 nominal high of $850; silver would have to more than double to reach its 1980 nominal high of $48.70. And that's excluding any inflation-adjusted calculation. Yes, silver's spike was partly a direct result of hoarding by the Hunt Brothers, but my question to the skeptics is this: what's keeping us from seeing similar stockpiling today? What if there are several Hunt Brothers out there?

It's true that central banks don't buy and store physical Silver Bars anymore, so one source of demand that's common for gold isn't present for silver. But let's keep things in perspective: demand for all forms of silver is rising, and we see no reason the trend won't continue. And with indicators like decreasing supply from China and increased attention from a new bullion coin, I say the big picture on the Silver Price is extremely bullish.

This silver sleuth says, Buy Silver on the next dip. There's lots of reasons, I believe, you won't regret it.

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What sort of "liquidity trap" is marked by this boom in financial assets...?

"There is too little money in the economy."
– Bank of England governor Mervyn King, 19 October 2010

SO the US CENTRAL BANK, the Federal Reserve, remains dead-set on creating inflation, and it's plain to see why, writes Adrian Ash at BullionVault. (Catch up with Part I here...)

Household debt in the US now stands so large, paying it down to 2001 levels – as a proportion of income – would require a drop in consumer spending of $2.7 trillion, some 18% of this year's gross domestic product. Deleveraging to 1990 levels of gearing (again, a then-record at the time) would cost US households $3.5 trillion, well over a quarter of their 2010 incomes.

It ain't gonna happen, in other words. Not this side of Paul Krugman joining John Maynard Keynes in that eternal "long run" in the sky. So what's needed, or so the theory runs, is inflation in prices. It would make deleveraging very much easier, as happened during the last retrenchment, back in the early 1980s. Consumers got to pay down debt without...well, without paying it down! And that gave households enough confidence (and rope) to start expanding their debts again.

Y'know, like the corporate sector is already doing today...

"We do have to wonder just what sort of 'liquidity trap' we are in – a state of paralysis where only cash will do, remember – when US (indeed, global) high-yield [debt] issuance hits its highest on record, as it did this past quarter," writes Sean Corrigan of Diapason Commodities at the Cobden Centre.

"We also wonder just what sort of 'liquidity trap' we are in when equity IPOs increase 55% in value and 215% in number from the same period in 2009.

"We further wonder just what sort of 'liquidity trap' we are in when US-based [mergers and acquisition] rises 22% year-on-year, with private-equity involvement up 117% to a two-and-a-half-year high and, as such, [is] responsible for more than 10% of all deals.

"We wonder, too, just what sort of 'liquidity trap' we are in when the number of ETFs grows 22%, their assets rise 14%, and trading volumes jump 15% in the first nine months of the year."

But while all the money spat out since late 2008 by the Federal Reserve and its friends in London, Tokyo, Frankfurt and Zurich has indeed found a home – and a home where it's fast multiplying, too – it hasn't yet reached the "economy". Not the "economy" that you, me and Mervyn King at the Bank of England think of when we use the word – meaning our neighbors' pockets.

Because although central banks can raise asset prices, as well as the cost of living, by nakedly slashing the value of cash...and even though they can do it with greater success than the Japanese beta-test of 2001-2006 – when the Nikkei-225 just about got back to break-even, rather than adding two-thirds as the S&P 500 has done since early 2009...they have yet to reverse unemployment or raise household incomes. So even with debt falling in real terms, households lack the inflated incomes they need to take advantage.

Yes, Washington's official Consumer Price Index may indeed be a joke, just like today's near-zero reading of inflation. Yes, the US Bureau of Labor Statistics itself admits that, if international standards are applied, CPI rose 1.9% in the year-to-Sept., rather than the 1.1% headline reported. And yes, John Williams' Shadowstats puts the true rate of US inflation some four times higher again, way up at 8% per year, simply by applying the methodology used by Washington back in 1980.

But inflation in prices is only making things worse – not better – for consumers, because inflation in wages is entirely absent. That's unlikely to change with unemployment running at either 10% (official), 17% (the old U-6 measure) or perhaps 22% (Shadowstats, again). The top of the debt cycle – now three years since – therefore remains structural, because households cannot and will not raise their borrowing.

The recent past – and likely future – of the US economy, therefore, really is another country. Japan, in fact, as this chart from PragCap so neatly shows...

Looking ahead, Step #1, we guess from here, will see the Fed keep pumping money into the banks – and thus into commodity and financial markets – until inflation on the official CPI finally shows up. Or hyperinflation. Or a hot war with China. Or a sweeping Democrat victory in Utah. Whichever happens first.

Let's call it the "Krugman Trap" – the belief that, when an idiotic policy fails, it must be repeated and raised to the power of, say, the number of idiotic things you can say in one column for the New York Times.

Step #2 – once this super-sized idiocy fails to work, again – we'll likely see the Fed stop buying Treasury bonds, and try instead to jivvy up corporate spending and bank lending by buying commercial debt, equity funds, or even real-estate investment trusts direct. Never mind that debt issuance and equity prices have had all the help they might need; it's what Japan is about to try, 20 years after its bubble blew.

So why not steal a march on Tokyo, and apply its latest ideas right now?

"With growth in private final demand having so far proved relatively modest, overall economic growth has been proceeding at a pace that is less vigorous than we would like," said the Fed chairman in his recent speech, Monetary Policy in a Low-Inflation Environment.

"In particular, consumer spending has been inhibited by the painfully slow recovery in the labor market, which has restrained growth in wage income."

If only inflation in prices would spark inflation in wages – or consumers just did what they should and got back to borrowing and spending – then the recovery would be upon us! Even though, as noted above, the household sector in aggregate has lost all appetite for extending its debts without retrenching first. So finally, and unless sanity breaks out at the next Jackson Hole summit of central bankers...and barring the intervention of hyperinflation, a hot war with China, or the Democrats winning Utah...we move to Step #3 – outright gifts of cash to US households, personally delivered by the Fed chairman in a Santa outfit, if not buried in disused coalmines.

Because that's what it will take to get US households spending more than they earn again any time soon. And it's a trick the Bank of Japan has yet to try...so hey – it might just work!

"In reality," writes Nomura economist Richard Koo in his 2008 book, The Holy Grail of Macroeconomics, "borrowers – not lenders, as argued by academic economists – were the primary bottleneck in Japan's Great Recession. If there were many willing borrowers and few able lenders, the Bank of Japan, as the ultimate supplier of funds, would indeed have to do something. But when there are no borrowers the bank is powerless."

You can lead a horse to water, and you can drown the bloody thing if you want. But you can't make people borrow when they've barely begun to pay down the greatest credit bubble in history. The problem for retained wealth, therefore, is trying to second-guess what Dr.Ben's patented deflation cure – the one he urged on Japan's central bankers around a decade ago – will do to your money while you're waiting for inflation to show up.

Buying Gold today...?

The SCW to HTC as QEII strikes the Treasury bond market...

THERE ARE many difficulties associated with being lazy and inattentive like me, such as superficially interpreting the title "Gold Vs Treasuries: Which Do You Believe?" – which is an essay by Michael Pento, Senior Economist of Euro Pacific Capital – writes the Mogambo Guru in Tampa, Florida for The Daily Reckoning.

This title is initially perplexing to me, because neither Gold Bullion nor Treasury debt obligations have voices with which to speak any truths or lies, which means it is some kind of metaphor that I don't immediately understand. I was going to make a big stink out of Mr. Pento's insensitivity to us dimwits out here – who, as we say, "ain't so bright."

Perhaps this is why he soon changes his approach. He writes, "Bonds are flashing a warning sign of deflation, while gold and the Dollar presage hyperinflation," which leaves unanswered the question of why bonds are "flashing," but gold and the Dollar merely "presage."

Naturally, I consider this to be a Secret Code Word (SCW) surreptitiously placed there by the Mogambo Guru to indicate the need to immediately buy as much gold, silver and oil as we can...except that I am the Mogambo, and I didn't put it there, which indicates either some weird kind of telepathic ESP or another mix-up in my medications. I dunno.

Anyway, Pento goes on:

"Today, the environment is similar to what the country confronted 30 years ago. Like then, our monetary base has surged – but this time even faster. Instead of merely doubling in eight years as it did under Burns' watch, Alan Greenspan and Ben Bernanke have tripled the base in twelve years (from $621 billion in 2000 to over $2 trillion today).

"Accordingly, the Dollar price of gold has more than quadrupled, from $280 per ounce in 2000 to over $1300 today. Over that time, the Dollar has registered a 35% drop in value. However, in stark contrast to 1980, the yield on the 10-year Treasury note has collapsed from 6.6% in 2000 to less than 2.4% today."

That T-notes have been bid up so high that they have an effective yield of 2.4% when inflation is running north of 5% is an indication of several things. One is that a humongous clot of money being created by the Federal Reserve was being used to buy all that Treasury debt, which increased the national debt by an astounding $1.7 trillion in the last 12 months.

Another thing it means is that bond buyers are morons. As an article titled "The Magic Bullet" in The Economist puts it:

"Traders see the central banks as putting a floor under bond prices. So QE is a kind of magic bullet, helping all asset prices to rise. That may help to explain why gold and Treasury bonds both performed so strongly in the third quarter, an unusual combination."

This is a statistical oddity, as it turns out that there were "only four other quarters since 1980 when gold, equities and Treasury bonds have strengthened simultaneously."

So, four times in 30 years certainly seems like one of those "outlier" events, but before you get carried away with computing probabilities and all the rest of that statistical mumbo-jumbo, Dhaval Joshi of RAB Capital says that "the four previous periods of triple strength since 1980 were all followed by falls in Treasury-bond prices."

And it also turns out that equities and stocks usually perform inversely to one another, which means that as bonds go up, stocks are going to Hit The Crapper (HTC), and gold and silver will soar, soar, soar in price in the confusion and panic of the bonfire of the stupidities!

This makes it all so, so easy that I literally roar in delight, "Whee! This investing stuff is easy!"

Buying Gold today...?

So the United States government wants a "Strong Dollar"...? Buy Gold – again...!

"WE WILL NOT devalue the US Dollar," US Treasury Secretary Tim Geithner said last week (or words to that effect), writes Steve Sjuggerud in his Daily Wealth email.

And by golly, the people believed him! The Dollar soared on his "reassurance". Gold Prices fell.

Wow...I was stunned.

Do THAT many investors NOT know their economic history?

On June 30, 1997, Thailand's leader said, "We will not devalue our currency." Like Geithner this week, Thailand's leader backed it up with all kinds of powerful, incontrovertible statements...like "if the currency is devalued, we will all become poor."

But three days later, on July 3, 1997, Thailand devalued its currency.

The currency crashed. Check out a chart of Thailand stock market during the time of the crisis...down 90% in terms of US Dollars:

Can you imagine a 90% bust?

Thailand is just one well-known example of the "we will not devalue" speech, followed by a massive devaluation. We've seen it happen over and over again.

Porter Stansberry and I started out writing investment letters in the mid-1990s, focusing on emerging markets. The "we will not devalue" line got to be a joke around the office...As soon as we heard "we will not devalue" from an emerging-market finance minister, it was time to bet on a devaluation.

It's like this. "We will not devalue" is the equivalent of your 7-year-old child hustling into the room and announcing, "There's no need to count the number of cookies in the cookie jar!"

It makes you think, "Well, I wasn't worried in the least about the cookies in the jar. And I wasn't worried about my child lying, either. But now we'd better seriously check on both."

Now, the US Treasury Secretary Tim Geithner just gave the "we will not devalue" speech. "No need to count those cookies in the cookie jar!" he's hustling to tell us. Uh oh.

Our currency can't have a crashing devaluation like we've seen time and again in emerging markets. We simply have a different type of currency system in the US than the emerging markets did when their currencies crashed overnight.

But Geithner just uttered the magic words of future currency collapse...So far, the market has believed him. The Dollar soared and gold crashed on his comments.

I thought investors were in on the joke...

My instinct – built on years of watching politicians say the same and end up doing the opposite – is to do the opposite of what investors did after Geithner's speech. My instinct is to run from the Dollar, for the long run.

The fate of the Dollar was sealed last week. Looking ahead, the future is bright for Gold Investing and bleak for the Dollar.

Invest accordingly.

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Risk management litmus tests for the next generation of Wall Street brains...

The NOBEL PRIZE panel granted its top award to seven leading economists – whose theories went on to cost investors trillions of Dollars in losses.

This story – as well as some of the other top financial fiascos through the ages – is detailed in the new book, Alchemists of Loss: How Modern Finance and Government Intervention Crashed the Financial System, written by Martin Hutchinson, a former merchant banker and Money Morning columnist, and Kevin Dowd, an economist and respected academic.

Here, Money Morning executive editor William Patalon III sits down with Hutchinson to talk about the book...

Money Morning: Congratulations, Martin. Alchemists of Loss is a great book. What prompted you guys tackle this topic. Was there a single incident or event that motivated you to do it, or was there kind of an "epiphany" moment?

Hutchinson: I did a piece on risk management for Financial Engineering News in late 2006, which the editor sent to Kevin Dowd to review (my article said that Wall Street had it all wrong and should be using fuzzy logic). Kevin sent a lengthy reply, through which we discovered we agreed on a lot; so we became buddies and agreed we should do a project together. When the crash happened, it looked like an excellent opportunity, and much to my joy, he had the contacts at the publisher, John Wiley & Sons Ltd, to get it accepted.

MM: What major conclusion, or conclusions, did you come to in your research... as well as in the book itself? What's the most important conclusion you reached?

Hutchinson: Kevin may disagree, but my favorite section is Chapter 15, which is about risk management. There we propose two "litmus tests" for extreme risks that Wall Street should be using today to weed out CDO squared, credit default swaps and the other rubbish the "quants" may come up with in the future. We think our "litmus tests" are strong enough to catch anything they can come up with, but recognize that we could always be surprised!

Of course, our overall conclusion that they granted seven Nobels for a spurious set of theories was also an enjoyable one! Tracing how the modern finance theory virus got into Wall Street was interesting – Kevin knew all sorts of stuff that I didn't, and vice versa.

MM: Did this experience change your views on global finance, investing, and the lot? Or did it reinforce your views? In either case, what was that key view?

Hutchinson: I think it crystallized and reinforced my view that Wall Street has gone wrong in the last 25 years, and that misguided incentives and agency problems are crucial in explaining why it went off the rails. I did a piece, "The rent seekers of Wall Street," in April 2006, so I was already thinking along these lines, but doing the book made it all much clearer. Chapter 7 (mostly Kevin) on managerial versus shareholder capitalism was also key to explaining what had gone wrong.

MM: Did anything surprise you in your research? In other words, is there something you found out, or discovered, that created a "holy cow!" moment?

Hutchinson: There were several. Among the most illuminating was the discovery that Overend, Gurney & Co. (a London wholesale discount bank that was known as "the banker's bank), which had gone bust in 1866, had made essentially the same mistakes as Lehman Brothers!

MM: Is there anything else about this experience, or your research, that you'd like to mention?

Hutchinson: Books, particularly with a really good collaborator (so you have someone to discuss it with, apart from the unfortunate wife and family), and a publisher you have confidence in, are enormously satisfying to write, because you feel (somewhat spuriously, of course) that you've done something permanent. Journalism, let alone blogs, doesn't do that.

Years from now – say, in 2300 – the book will still be in the British Museum Reading Room and the Library of Congress. So some future economic history student can get his Ph.D through rediscovering it!

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Living standards in the West are certain to fall as Asian wealth grows...

"There are more tears shed over answered prayers than over unanswered prayers..."
– Teresa of Ávila, patron saint of headache sufferers

IT'S NOW five years and $1.7 trillion of Chinese foreign-currency reserves since the People's Bank ended a decade-long peg to the Dollar, writes Adrian Ash of BullionVault.

Throughout the mid-to-late 1990s' Asian Crisis, and again as the US currency first began its long decline in the early Noughties, Beijing had defended 8.3 per Dollar. Its rising power – plus grumblings from trade partners – made some level of appreciation inevitable, but only if Beijing kept it strictly controlled. So back then, as today, China refused to even begin making the Yuan freely convertible – and thus accessible to foreign investment – but for very different reasons.

The fear when China carefully recalibrated its Dollar peg in 2005 was of foreign speculators driving the Yuan lower. Whereas in 2010, it's got the opposite problem. Grabbing export share (and that mountain of foreign-exchange reserves) by suppressing its currency way below any measure of "fair value", Beijing clearly fears a repeat of the Japanese bubble-and-bust that followed 1985's Dollar-weakening Plaza Accord. Because since first loosening the Yuan's Dollar peg (if only a little) half-a-decade ago, China has overtaken Japan as the world's No.2 economy, and become the world's top importer of copper, biggest user of cement, No.1 consumer of energy, edible oils, soybeans, rice and wheat, and the No.2 destination for physical Gold Bullion.

Yes, China's currency should reflect this growth, at least according to non-Confucian theories of floating currencies and trade rebalancing. No doubt it will in due course, too. But if US Treasury Secretary Tim Geithner were to get his wish at the G20 meeting this weekend – which he won't, not yet – and the Chinese Yuan did bear a greater share of the Dollar's global devaluation, Beijing's impact purchasing power in the food, energy and mineral markets would only grow greater.

So where Timmy might want to watch out is that the appreciation in China's purchasing power must come at the expense of today's freely convertible currencies.

First, Beijing likely holds some $2 trillion or more of the "big four" reserve currencies – Dollars, Euros, Sterling and Yen. Gresham's Law says it's more likely to spend those holdings ahead of its own, increasingly valuable money, as it buys ever-more food, energy and mineral resources to meet its surging domestic demand for a better standard of living.

Second, and should the Yuan extend its global usage from this year's McDonalds' bond float to central-banking reserves, the relative loss of purchasing power in Dollars, Euros, Sterling and Yen will only accelerate further. Together, the Big Four account for 96% of forex reserves according to the IMF, but that's the lowest proportion since before the late '90s Asian Crisis – a crisis which Beijing managed to avoid but remembers all too well.

Third, and most critically amid the global currency war – a war which will not be settled over the conference table for as long as Western central-bank policy remains fixated on currency inflation – flows of "hot money" are rightly expected, not least from US, UK and Japanese wealth fleeing zero-per-cent rates at home.

As it is, China is gently loosening controls on money outflows, but only a little, and actual outflows of Yuan remain blocked. So trying to preserve its global value, retained wealth in the West cannot get direct exposure to the currency (nor the equities at present) which will increasingly put a price on the biggest trend of the 21st century – the Eastward shift of global demand and consumption.

Even if China does liberalize (which it won't any time soon) retail investors will be last in the queue. So a fair proxy, meantime, remains buying hard assets and natural resources. It also gets to the heart of the problem, because living standards in the West (by way of our global purchasing power) are certain to fall long-term. Asia's growing use of world resources must come at our expense, in just the same way as the Pound Sterling's first fall from top-dog currency status – starting some seven decades ago, and running pretty much ever since – made for a relative loss of wealth to the United States.

Most clearly amid the currency turmoil only just getting started, China's ever-growing demand for Physical Gold and silver highlight that big, fat 21st century trend in action. By the time (if ever) that Yuan deposits become widely available through retail banking in the US, Eurozone, UK or Japan, this morning's $1319 price-tag on gold might look a great bargain.

Buying Gold today...?

Why this really isn't the early '80s recession replayed...

WHATEVER the problem is, a lack of money it ain't. Just so we're clear. Quite how more money might help, therefore, we can't say.

Still, that won't stop the world's No.1 central bank from creating yet more of the stuff. Not according to Ben Bernanke last week, nor to anyone listening or watching the Federal Reserve since America came round from his first stab at money-creation.

Instead of punching adrenaline through the chest wall again, Dr.Ben's more likely this time to put up a drip (so analysts think), flushing $100 billion or so into the system each month, and reviewing America's vital signs before changing the bag every quarter. Either way, the problem for retained wealth – meaning your savings and pension...if not (just yet) the money you hold from pay-day to month's end – is trying to second-guess what Dr.Ben's patented deflation cure will do when there's no money-deflation to cure.

Sure, the Fed can create money. But it can't create credit (from the Latin credere, "to trust, have faith"). And it sure as hell can't let America's outstanding debts – both private and public – simply get written off now, neither at home nor abroad. Not after all that crashing and banging in ER from 2007-09.

So never mind the record-large cash pile sitting at non-financial corporates. Never mind that their problem is too much debt, not the $1.8 trillion in cash they've already got. Never mind the 50-fold growth since 2007 to $1 trillion in US banks' cash holdings either. Again, debt is their problem – not a lack of money – but it doesn't matter. New money is the only fix Dr.Ben now has to hand (he's all out of interest-rate cuts). So those foreign reserves, US corporates and domestic banks already drowning in money will get flooded with more.

This, if it weren't for America's debts, would surely mean runaway inflation in prices. But there is all that debt, gnawing away on every spending decision. Hell, even US households have been re-building their cash savings...tucking away a total of $6.3 trillion by end-June, over a quarter more than they held in deposit and checking in 2005. But even after paying down debt at a record pace (2.2% annually during the April-June quarter), that still leaves a near-record volume of household debt outstanding ($13.5 trillion) with consumer leverage also squatting near historical highs – only just shy of the pre-crisis peak.

To date, the retrenchment in gearing-to-income also lags the pace of retrenchment during the early '80s, although it is approaching a similar proportion...

Still, a lot continues to separate today's retrenchment in household leverage from the retrenchment of 30 years ago...

• US households now carry twice as much debt – compared to income – as they did in the early '80s. Maybe that kind of gearing is perfectly manageable...but maybe the peak of 2006 and 2007 marked an impossibility instead. Either way, today's leverage remains much nearer the top than the pre-credit-boom levels of a decade ago;
• That bellwether of hope and growth, the stock market, sank to true fire-sale prices in the early '80s...whereas the S&P index now trades above 20 times earning, rather than the middling single digits;
• Interest rates, on the other hand, are now are record lows (as in zip – or ZIRP, depending on whether or not you're an economics professor)...whereas then, at the start of the '80s, they were at record highs;
• Domestic devaluation of the Dollar – a.k.a. inflation – stands just to the right of zero. Three decades ago, consumer-price inflation was coming off peace-time records.

That last point is the clincher, of course. Because where America's outstanding household debt has actually fallen this time around ($13.45 trillion from $13.84trn), it continued to grow at the start of the '80s ($1.576trn from $1.276trn), even as leverage fell between 1979 and 1982. Inflation in both prices and income did the heavy lifting back then. It's buckled, in contrast, since 2007.

Over the three years to end-1982, inflation ate nearly quarter of the debt which US households already owed at the start of that period. It would need to average more than 8% per year to achieve the same feat in three years today. But instead, the official Consumer Price Index rose by little more than 1.3% last month from Sept. '09.

Even if inflation had been stronger, US households would still have needed stronger wage growth to get any benefit. From 1979-1982, personal incomes rose by 34% in nominal dollars, resulting in a real pay rise of 5.6%. Added to the impact of inflation on the burden of outstanding debt, that enabled consumers to expand their nominal borrowings by nearly one third while still cutting their gearing-to-income from 62% to 57%. Today, in contrast, US personal incomes (handily annualized by the BEA's latest quarterly stats) have risen just 4.7% since 2007 – a mere 0.7% ahead of inflation (again, on the official CPI measure, and yes, still with three months of the year to run). So the current delevering has had to come almost entirely from paying down debt.

This, in short, is not the early '80s recession replayed (y'know, the one when gold, oil, stocks and bonds all sank together), much less the 1990-92 recession or 2001 slowdown. (Consumer leverage leapt as the Tech Stock Bubble collapsed; what kind of "recession" was that?) The slump of the last three years (and counting) benefits from neither inflation or wage growth. Debts must either be paid down from static incomes, or be written off by forgiving lenders. Devaluation isn't coming to help. Not yet at least.

But hey, that's why they invented the Fed, right?

Part II to follow...

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China, that is. But is there enough Gold Bullion around to diversify Beijing's Dollar position...?

The BIGGEST HOLDER of US Treasury debt isn't happy, writes Byron King at Whiskey & Gunpowder.

And why should they be? They're sitting on the sidelines holding US Treasury bonds worth $797 billion. That's quite a chunk of change.

I'm talking, of course, about China. The Chinese have been the biggest foreign creditor to the United States and in recent statements they've made it clear that Washington needs to maintain the value of the Dollar.

"We have made a huge amount of loans to the United States. Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried," said Chinese Premier Wen Jiabao.

It's estimated that around 50% of China's total reserves are held in US treasuries. And they know that the reserve currency they hold is depreciated with each passing day.

With so much riding on the price of the Dollar you can bet that Beijing has been keep a close tally on America's spending – and the results can't be pleasing.

To say the least, Chinese faith in the Dollar is feigning.

And I'll give you one guess as to where they are going to spend their $797 billion nest egg...Gold Bullion!

Right now China is 6th on the list of world gold holdings with around 1,000 tonnes of gold reserves. Not bad right?

Wrong.

When you look closer at the statistics you can see that China has a mere 1.9% of its total reserve holdings in gold. Compare that to the US with 77% and you'll start to see China's future motivation.

China is in the market for a reserve currency that's stable. And when it comes to stability nothing glitters like gold.

Need proof? Look no further than another developing world powerhouse...India.

Recently India made a bold move to start protecting itself from the US Dollar and fiat currencies in general...

News broke that India made a huge gold purchase from the IMF – somewhere in the neighborhood of 200 tonnes.

Previously, the government of India held 350 tonnes of gold reserves. This 200 tonne purchase is a 57% increase in India's reserves. Now that's what I call a stand against paper currency!

The Indian transaction may be the largest single central bank purchase of gold ever. The only comparable event was the US government seizure of gold from circulation within the nation back in 1933, along with steady US government purchases in the 1930s and 1940s.

I spoke with an acquaintance of mine who works in the "financial" side of the US government – I cannot say what Cabinet department, but his office has a view of the White House.

I asked why the IMF sold the gold to India, and not China. My acquaintance replied:

"It's all about balance. India holds a lot of US Treasuries and needs gold to diversify its assets. We can't let all the IMF gold go to China and leave India in the dust. China is already building up its gold reserves due to being the No. 1 gold producer in the world and still a net importer. Besides, if the news hit the wires that China just bought all the IMF gold, it would crush the Dollar. So the deal was that India could buy 200 tonnes."

Put it all together and the global outlook for the US Dollar is dreadful. As time passes more countries will try to escape the depreciation of the Dollar – and that leads them to one option for wealth preservation: gold.

Okay, so no one wants paper Dollars and instead they want gold – that's easy right? Not so fast...

Just like the "peak oil" phenomenon, we're headed for "peak gold." It's all about how much gold is left unprocessed underground. The more we take out, the harder it is to find more. And the harder it is to get to.

For instance, miners used to pan for gold in streams. Today, just to get enough gold for a wedding band, you need to crush up to 20 tons of rock.

And remember, gold isn't just for jewelry, Gold Coins, or bars of bullion. Gold goes into computers, cell phones, and satellites. It's used in medical lasers, industrial lasers, and in spacecrafts. It plays a major role in medical research. It's even used for treating some diseases.

According to the World Gold Council, the world mined 2,414 tonnes of gold in 2008 – 64 tonnes less than the year prior. It was even less gold than mined in 2006.

Meanwhile, the amount of gold used in jewelry and industry alone topped 2,186 tonnes – add that to demand for bars and coins (which has really been ramping up lately) and you'll see that, by necessity, at least 425 tonnes had to come into the market – most likely by central banks out of their dwindling hoards, a practice that cannot continue indefinitely.

And that's not even including industrial use or the demand from vastly popular gold investment holdings like ETFs!

In fact, when you get down to brass tacks, the supply outlook for gold is down right dismal.
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Over the past 10 years large Gold Mining discoveries have been inexistent. The discoveries that are being made tend to be in more remote and less geopolitically attractive areas.

Tough new environmental laws and 20 years of low mining investment don't help. But it's really geology that's conspiring against the miners most. Nobody can find the big gold deposits anymore. It looks like they're all tapped out.

With Gold Prices up, they're looking. More holes open up in the ground. More tons of rock go through the mills. But so far, the average quality of the gold they're finding has gone down.

The low hanging fruit of the gold mining universe – the easy deposits and rich mines – have started to disappear. Gold's already rare. But it's getting more rare by the day. This rarity is running into increasing demand. There isn't a more fundamental argument for rising prices. And if the US Dollar continues to plummet there'll be no stopping the yellow metal's upward charge.

Again, it's economics at work. Gold is priced in Dollars, so as the currency becomes less valuable, the metal naturally becomes more valuable.

You want to accumulate your Gold Investment now, I believe, while prices are still relatively low. Sure, Gold Prices are at all-time highs, but they still have a long way to go...over $2,000...maybe as high as $3,000...or even $5,000!

Buying Gold? Quit paying "retail" and go straight to the low-cost, ultra-secure "wholesale" market instead...starting with this free gram of gold at BullionVault now...