DON'T BELIEVE THEM when they say that…..

• The US Dollar has bottomed out.
• The US FED will save the day!
• The Fed and US Treasury believe in a strong US Dollar policy.
• GOLD is overvalued and must be sold.
• GOLD is illiquid.
• You must Sell gold and buy stocks!!!!
• Inflation is not a threat and is under control.
• We’ve seen the last of the write downs and losses at the banks. Their books are clean now.
• Financial stocks are cheap after the massive correction over 2007.
• The Credit Crunch is over!!
• The Sub prime mess is contained, and the US economy is resilient.
• Resetting ARMs will cause no trouble at all.
• The US Consumer is in good health, and is ready to leverage up again.
• It’s a good time to buy a home in the US.
• The US Economy will turn around sometime next year, or later in 2008, once we’re over this temporary blip.
  

INSTEAD REMEMBER that

• GOLD IS MONEY
• Inflation is becoming a major dilemma for Central Banks everywhere.
• Bailouts only come to those overloaded with ‘derivative counterparty risk’ (You cannot be a threat to overall stability!!)
• Deleveraging is a long and painful process. ( even Buffet recently said so!!)
• Losses from Toxic CDOs will only increase as the housing slump deteriorates further.
• The Banks won’t lend to each other, because there is no trust.
• They don’t know the losses in their own books, let alone try guessing potential losses in the counterparty’s books.
• Rate cuts won’t solve problems of fear and uncertainty, let alone deal with an oversupply in US home inventory.
• This is an Insolvency crisis, coupled with total loss of confidence, in addition to the much talked about credit crisis.
• The Pundits who were bullish on emerging markets going into 2008 are nowhere to be seen. Some even recommend waiting for a further fall(after the massive crash) in emerging markets before attempting any fresh buying.
• The government may brush aside inflation fears…. but rising unemployment from resulting job cuts, will be a difficult issue to deal with in an election year.

APRIL FOOLS' DAY ON WALL STREET !

The US Stock markets are up over 2.5%.
and WHY ???
- The writedowns at investment banks are behind us ..............................FOR NOW!!!!
- The UBS writedown will be its last.
- The US DOLLAR is on the road to recovery.
- The Financial sector has bottomed out, and financials are leading the market rally.
- The ''Subprime Mortgage Collapse mania'' was overdone!!
- Gold has continued to fall, as the stock markets are now a safer place,( Gold is a buy on such declines, a staggered buying approach is advised)

REALITY CHECK
- Bear Stearns just went bust!!!!!!!!!!! and no one but the FED seemed to be willing to lend it $30Bn for its'''questionable/worthless collateral'''
- Philadelphia becomes the first U.S. city to halt foreclosure sales in the current crisis...
http://www.reuters.com/article/idUSN2830318520080328?pageNumber=1&virtualBrandChannel=0
-The US economy is already in a recession!!!
- Central Banks are losing the Inflation fight!

GOLD & The Patient Investor

The recent correction in commodity markets has seen GOLD correct sharply back to the early 900's in USD terms. After its recent surge, a correction was to be expected.
Food Grains, Oil, and Precious metal prices have all pulled back sharply.

The US Treasury is now looking to expand the role of the US Fed, ensuring that it provides stability to a 'shaky US Stock Market', after the recent collapse at Bear Stearns.

The US Fed will continue to lend against 'questionable'/ 'worthless' mortgage backed paper, as its strives to avert a major collapse on Wall Street. The ECB and the BOE may have to follow the FED, if the credit markets dont ease up soon..

Coming back to the Patient Long term Gold Bullion Investor:

As was the case with the May 2006 correction, declines are pretty rapid, as leveraged speculators and short term traders who enter at peak prices get caught out.

Gold is headed for new highs for reasons listed below; the intelligent and patient gold investor, must just hang in there and enjoy the ride.

INFLATION : Gold - The Inflation Hedge

Countries around the world are struggling with rising inflation, mainly led by the surging cost of food and energy.

Central Banks are losing the fight against inflation, as they look to cut rates to combat slowing growth and continue to pump money into the markets.

India's annual inflation rate accelerated to a 13 month high of 6.68 % last friday, having doubled in just a few months.

The Chinese Consumer Price Index showed prices rising at 8.7 %yoy in February, the sharpest acceleration in almost 12 years.

Eurozone consumer price inflation rose to a new peak of 3.5 % in March.

Inflation in Saudi Arabia surged to a 27-year high of 8.7% in February.

THE CREDIT CRUNCH/ INSOLVENCY CRUNCH : No end in sight

Even as the Fed cuts rates, Mortgage rates remain high, as banks hoard cash.

The US Housing market Crisis continues....and consumer confidence is at new lows.

The ECB may have to cut rates if growth slows, even though inflation is at new highs. This action could lend support to the USD, and would as a result drag down the gold price.: This would be a good time to add to gold positions. Meanwhile the USD is headed for its biggest quarterly Loss Against Euro since 2004.

Counterparty risk is a risk no one seems to be willing to take.

Overexposed and Undercapitalized => Current state at most Investment banks with leveraged Balance Sheets.

In all the commotion, everyone seems to have forgotten about the Bond Insurers, who were the centre of attention only last month.

Bringing in more regulation now, will not make the outstanding Toxic OTC Derivative positions disappear overnight. Possibly more questions may be asked, additional paper work will add to costs and further casualties may arise.

This is a problem of Solvency, which cannot be solved by Cheap Money: The very culprit of the current crisis.

This is a time for preservation of capital rather than chasing yield.

Buy gold on declines, keeping its long term outlook in mind.

BEWARE THE BOUNCE ! !

Its not over yet ! ! !

• The Credit Crisis is far from over.
• More banks to go under.
• Counterparty Risk continues to be a greater threat than ever, as no one is willing to lend.
• Losses to Employee Stock Options & Pension Fund Investments, in cases such as the Bear Stearns collapse.
• The Fed is down to his last few rate cuts, and he has no solutions yet!!
• USD pegged currencies, can no longer sustain falling interest rates, as local inflation soars.
• The impact of Middle East Oil producers dropping the USD peg, and pricing oil in ' a basket of currencies', as against the USD.

Lastly, heres an interesting article on 'The Credit Crisis', from the Interfluidity Blog

http://interfluidity.powerblogs.com/posts/1205997488.shtml

Best Explanation to the Credit Crisis yet.

GOLD LOVES STAGFLATION

STAGFLATION is back!!!!!!!!!
The recent consumer price index (CPI, an important inflation indicator) announcement, has renewed inflation concerns.
Stagflation is characterized by inflation, slow economic growth and relatively high unemployment ( expect more job cuts as the economy slows).
Stagflation dosent just go away, but is annoyingly persistant.
As Central banks around the world start to cut rates to boost slowing growth, they are unable to deal with rising prices. A combination of rising food grain prices and oil prices are the primary causes of inflation today.
Inflation + Falling USD +Central Banks cutting rates ==> High gold prices. Even the recent news of an upcoming sale of Gold by the IMF has had little effect on the enthusiasm of Gold Buyers.

Over the short term, although the news flow is positive for gold, a sharp sell off in world markets could lead to a sharp pullback in gold prices. For long term buyers, though caution is advised for now, adding to gold positions on declines in equity markets is advised.

As the arrow mark in the first graph shows, gold prices can crash sharply in an equity market sell off (May 2006), something that is increasingly likely as world markets factor in a US recession.

MBIA & The State of the Bond Insurance Industry.

Here are some details of the recent testimonies before the House Committee on Financial Services, on The State of the Bond Insurance Industry. Thursday, February 14, 2008
http://www.house.gov/apps/list/hearing/financialsvcs_dem/ht021408.shtml

Testimony of Mr Chaplin, CFO of MBIA. http://www.house.gov/apps/list/hearing/financialsvcs_dem/chaplin021408.pdf

Charles Chaplin, Chief Financial Officer, MBIA Inc., in his written testimony, hit out at William Ackman (of Pershing Square Capital Management), for his large short position in the MBIA stock. Ackman has claimed that the bond insurers are ‘functionally insolvent’, and has questioned the rating agencies about the AAA ratings assigned to the Bond Insurers. Ackman has voiced his concern about MBIA and other Bond Insurers in many TV interviews, presentations, letters to the Fed & the Treasury as well as his latest testimony. http://www.house.gov/apps/list/hearing/financialsvcs_dem/ackman021408.pdf

• Is it William Ackman’s fault that the bond insurers, chose to insure Structured Finance Products, CDOs and other now toxic derivatives, instead of relatively safe and low yielding (in terms of revenue for the bond insurers) municipal bonds?


• As per page 106, of the MBIA testimony, Ackman on 23/5/07 claims that the insurance subsidiaries of the bond insurers are effectively insolvent, and then on 23/11/07 claims that the bond insurers are insolvent. If he was wrong, why are the bond insurers struggling to raise capital, even as they deny the need for ANY BAILOUT?


• What was the methodology employed and analysis used by the Rating Agencies, which concluded that the capital adequacy of the bond insurers was sufficient; thus enabling them to retain their AAA rating?


• Do Henry Paulson (U.S. Treasury Secretary), Charles Chaplin(MBIA) and Ben Bernanke honestly believe that the Bond Insurers will be able to pay up, in the event of a drastic escalation in defaults?

REALITY SETS IN : The downtrend resumes..

Markets around the world are correcting, amidst growing fears of a US Recession.

The US Stock Markets have had a rough start to 2008, and the FED seems helpless and unable to avert a severe slowdown. Small Cap companies are especially vulnerable due to their dependence on the US economy, as compared to Large multinationals that have a greater exposure to international markets.



Consumer Confidence is low.

Philadelphia FED DATA: The Diffusion Index of Current Activity.

Manufacturing in the Philadelphia region slowed significantly. The Index fell to a negative 20.9 in January, its lowest level since October 2001. Taken from the Philadelphia FED's Survey, it is considered to be the broadest measure of manufacturing conditions. http://www.philadelphiafed.org/

BOND INSURERS IN REAL TROUBLE
Bond insurers risk losing their AAA rating, as they struggle to raise fresh capital.

Any downgrades would really add to the turmoil in the credit markets.

Clearly not the right time to be buying stocks just yet. I expect gold prices to be volatile ahead of the rate cut, with some further downside likely if a world market sell off occurs.
GOLD will outperform, as overvalued markets correct this year.