-> Terror Fears Push Oil Prices to New High -AP
-> Stocks Sell-off gains momentum -CBSMW
-> Gold gyrates on data, manages gain -Reuters
-> March Trade Gap Widens to Record $46 Billion
-> Greenspan Warns Deficit a Big Threat to Economy -NYT
-> Economists forecast rising inflation -CNNfn
-> Rates on 30-year mortgages rise for 7th week -USAT

-> MONEY THAT WILL NEVER CHANGE -Craig R. Smith, SATC
-> THE GREAT BEAR MARKET, PHASE II -Bill Bonner, DR
-> THE TRILLION DOLLAR QUESTION: INT. RATES -Russell
-> GREENSPAN PREACHES WHAT HE CAN’T PRACTICE -NI
-> THE MIGHTY METAL - John Myers, Outst. Investments

"Liberty cannot be preserved without a general knowledge among the people, who have a right, from the frame of their nature, to knowledge, as their great Creator, who does nothing in vain, has given them understandings, and a desire to know; but besides this, they have a right, an indisputable, unalienable, indefeasible, divine right to that most dreaded and envied kind of knowledge; I mean, of the characters and conduct of their rulers."

-John Adams

On May 14, 1804, Capt. Meriwether Lewis and Lt. William Clark, charged by President Thomas Jefferson with finding a route to the Pacific Ocean, embarked from Camp Dubois, Ill., on the east bank of the Mississippi River, upstream from St. Louis. They were accompanied by a 33-member group skilled in botany, zoology and outdoor survival. The "*Corps of Discovery*" arrived at Oregon's Pacific coast in November of 1805 and returned to St. Louis on Sept. 23, 1806.

This year America celebrates the 200th anniversary of their exploration of the northwest United States. The U.S. Gold Commemorative coin series (1903-1926) contains the 1904 and 1905 Lewis and Clark $1 gold coins.* These two issues are the rarest of the 11-coin set. _The Lewis and Clark gold commemorative coins were the only two-headed U.S. coins ever minted._ They were originally sold in 1904 for *two dollars* at a Portland, Oregon, fair celebrating the famous expedition. MORE ...

NEW FEATURE ARTICLE:
THE TOP INFLATION FIGHTERS ARE TANGIBLE! -- 5-12-04 -- Is inflation lurking around the corner? Or is it already here? By Barbara Hagenbaugh, USA TODAY "Every time I go to the gas station, I'm shocked. Housing prices are insane. That's inflation, right?" ... INFLATION 101 ... Top Inflation Fighters by Linda Stern, Reuters; "Commodities. Gold, silver, copper...Jewelry, art and collectibles" ... FULL STORY

MARKET NEWS DIGEST

Terror Fears Push Oil Prices to New High -AP
By ANUSHA SHRIVASTAVA, AP Business Writer
May 14, 2004

NEW YORK - Oil prices soared to a record Thursday on the New York Mercantile Exchange, crossing $41 a barrel and settling at the highest point in the 21-year-history of crude futures trading in New York.

June light, sweet crude oil futures settled at $41.08, up 31 cents from Wednesday, after touching an intraday high of $41.10.

The previous high was $41.07 on October 11, 1990, in the run-up to the Persian Gulf War (news - web sites). That day, Brent blend crude oil futures settled at $41.15 on London's International Petroleum Exchange.

On Thursday, June Brent gained 54 cents to settle at $38.49 a barrel on the IPE.

"There is a war or fear premium built into the price of crude oil," said Ed Silliere, vice president of risk management at New York-based Energy Merchant Corp. "It seems that al Qaida is ready, willing and able to attack Saudi Arabia's oil facilities and that fear is bringing speculators pouring into the Nymex."

Silliere said the recent events in Iraq which had clearly taken a turn for the worse — had compounded terrorism fears. A weekend attack curbed Iraqi production and on Tuesday, a videotape of an American being decapitated in Iraq was released.

Loss of oil production in Iraq, coupled with lower production in Nigeria and Venezuela, had worsened the situation, he said.

Nymex June gasoline futures also rose 2.7 cents to settle at $1.4005 a gallon, the highest-ever gasoline settlement price.

http://www.yahoo.com/news

March Trade Gap Widens to Record $46 Billion

May 12 (Bloomberg) -- The U.S. trade deficit grew in March to a record $46 billion as the highest oil prices in more than two decades and increased consumer spending boosted the value of imports, the Commerce Department reported in Washington.

The gap in goods and services trade comes after a deficit of $42.1 billion in February. Imports and exports surged to all-time highs, and the deficit with the Organization of Petroleum Exporting Countries was the biggest ever.

Concern over supplies drove up the price of crude oil in March, while tax refunds, low interest rates and an improved labor market helped lift demand for cars, electronic goods and other products made outside the U.S. Accelerating global growth and a weaker dollar contributed to a rise in U.S. exports, which kept the deficit from widening further, economists said.

``The economy is extremely strong, as booming demand consumer demand is driving big gains in imports, and firming global economies and a weaker dollar have buoyed exports,'' Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut, said.

Import prices rose in April for a seventh month, led by higher costs for iron, steel and other raw materials, the Labor Department reported. The 0.2 percent increase in the import price index followed a 0.8 percent gain in March. The index is up 2.4 percent over April 2003, the biggest 12-month gain in a year.

Economists had expected the deficit to widen to $43 billion for the month compared with a previously reported deficit of $42.1 billion in February, according to the median estimate of 67 forecasts in a Bloomberg News survey.

http://www.bloomberg.com

[NOTE: Americans continue to live beyond their means by spending more than we earn. The kindness of strangers is our financial saving grace at this point, but how much longer will it last? We shall see ...]

Stocks Sell-off gains momentum -CBSMW
Crude oil, gasoline prices push higher
By Mark Cotton, CBS.MarketWatch.com
May 14, 2004

NEW YORK (CBS.MW) -- U.S. stocks were lower Friday in choppy trading as investors steered their way through a mixed batch of data, including an unexpected dip in consumer sentiment, a benign inflation report and stronger-than-expected industrial production figures.

"It's a real mixed bag on the data front," said Art Hogan, chief market strategist at Jefferies & Co. "And with such confusion on the numbers, the market is certainly not going to trade up in the current environment. The path of least resistance is down."

High energy prices also remain a concern with the June crude oil futures contract touching a new record of $41.50 a barrel in morning trading, while June unleaded gasoline hit a fresh all-time high of $1.406 a gallon on the New York Mercantile Exchange.

The Dow Jones Industrial Average was down 24 points at 9,986, but off its worst level of the session of 9,938.42.

The Nasdaq Composite was down 23 points, or 1.2 percent at 1,902, with a pullback in semiconductor shares weighing on the tech-rich index.

The S&P 500 was off 3.76 points, or 0.3 percent at 1,092 while the Russell 2000 index fell 0.7 percent to 543.56.

On the broader market, there were an equal number of advancers for decliners on the New York Stock Exchange, but fallers outpaced gainers by an 20-to-8 margin on the Nasdaq.

Volume was 521 million on the NYSE, and 661 million on the Nasdaq.

On a sector-by-sector basis, airlines, biotech stocks, networkers and telecom shares were all moving lower.

Gold shares were moving higher, buoyed by gains for the precious metal, while energy stocks ticked up as crude oil prices continue their ascent.

http://www.cbs.marketwatch.com

Gold gyrates on data, manages gain -Reuters
May 14, 2004

NEW YORK, May 14 (Reuters) - COMEX gold ended higher Friday but was whipsawed by the dollar and mixed interpretations of data pointing to mounting inflation pressures, strong manufacturing growth and steady consumer confidence, dealers said.

June gold closed up $2.20 at $377.10 an ounce after trading between $377.90 and $373.20. Estimated volume was a light 38,000 lots.

Trading activity was unsettled after gold's initial rise and the dollar's fall, on the Labor Department's report that its Consumer Price Index for April rose 0.2 percent. Traders focused on core CPI, which excludes food and energy prices and which rose 0.3 percent, more than the 0.2 percent forecast by economists.

"It has been just a very choppy day. It got a lift early in morning off the data," said Tom Boustead, analyst at Refco Inc.

"Was it inflation worry that drove it higher? Or was it the headline being a little under (expectations) maybe taking some interest rate fears off?" he said. "You could actually read it either way."

Emotion was mixed for gold. One one hand, it is seen as insurance against inflation and geopolitical tensions. On the other, the Federal Reserve is widely expected to raise interest rates this summer to prevent the economy from overheating, which would make gold, which carries no yield, less attractive than dollar deposits.

"Core CPI was greater than expected and was greater than the main CPI and that's what people are keying off of," said a metals futures broker, adding gold was being led around with "a chain in the nose" by the euro.

The dollar fell only to bounce briefly after the April U.S. industrial output report showed a bigger-than-expected 0.8 percent rise. The University of Michigan's preliminary May consumer sentiment index read 94.2, unchanged from May.

http://www.reuters.com

"THE TIMELESS TRUTH ABOUT GOLD" CD RELEASED TODAY -- 5-10-04 -- Swiss America Trading Corp. today released new CD with a historic 1996 radio interview between G. Gordon Liddy and Craig R. Smith in a new campaign launching nationally on The G. Gordon Liddy Radio Show airing M-F 10am-2pm ET. "The Timeless Truth About Gold," recorded in 1996, covers a broad range of topics related to gold, silver and free market economics ... GET YOUR FREE COPY ...

Greenspan Warns Deficit a Big Threat to Economy -NYT
By EDMUND L. ANDREWS, Associated Press
May 7, 2004

Image: Alan Greenspan, the chairman of the Federal Reserve, on a video screen as he addressed the Conference on Bank Structure and Competition at the Federal Reserve Bank of Chicago.

WASHINGTON - Huge federal budget deficits threaten the nation's long-term economic stability, Federal Reserve Chairman Alan Greenspan said Thursday as he raised new concerns about impending financing problems in Social Security and Medicare.

A day of reckoning will come, Greenspan warned, because there is no "free lunch."

Greenspan used a speech to a banking conference in Chicago to make the case again that this year's presidential campaign should address reforms of those massive entitlement programs.

Both President Bush and Democratic challenger John Kerry have said they will deal with the shortfalls that will occur in both programs. But unlike Greenspan, the candidates have avoided suggesting that benefit cuts are needed to cope with the financial demands from the retirement of 77 million members of the baby boom generation.

Speaking via satellite, Greenspan told the conference that he was more concerned about the economic impact of the budget deficit than the soaring trade deficit or record levels of household debt.

Normal economic forces will handle the trade and household deficits, he said.

"The yawning fiscal deficit" will require political action to bring under control, the Fed chief said.

The Bush administration estimates the deficit will reach a record $521 billion this year.

Asked whether something has changed that would allow the country to "disregard all the time-tested criteria of imbalance and economic danger," Greenspan said, "Regrettably, the answer is no. The free lunch has still to be invented."

http://www.nytimes.com

GREENSPAN SPEECH TRANSCRIPT

Economists forecast rising inflation -CNNfn
Blue Chip survey finds GDP view unchanged from a month ago as forecasts for rising prices increase.
May 10, 2004

WASHINGTON (Reuters) - The U.S. economy is expected to grow a healthy 4.6 percent this year, with inflation picking up as producers pass on the cost of rising commodity prices to consumers, a panel of top forecasters said Monday.

The closely watched Blue Chip Economic Indicators newsletter said its latest poll of more than 50 professional forecasters found expectations for growth the same as a month ago -- though inflation expectations were ramped up.

"The results of this month's May 3rd and 4th survey dovetail with signs of optimism about the pace of growth but growing conviction that inflation will be higher than earlier thought," the newsletter said.

The survey found panelists expected the gross domestic product (GDP) price index to rise 1.7 percent this year, while the consumer price index was projected to rise 2.1 percent. Both forecasts were nudged up 0.2 percentage points from the month-ago prediction.

The forecast for growth in the CPI, the best-known measure of price pressures facing consumers, is up half a percentage point since February.

Prospects of rising inflation are expected to prompt interest rate hikes this summer from the Federal Reserve, which has held rates at 1958 lows of 1 percent since June.

The panel said the Fed will likely hike interest rates by "at least" 50 basis points by year-end.

http://www.cnnfn.com

Rates on 30-year mortgages rise for 7th week -USAT
By Jeannine Aversa, Associated Press May 7, 2004

WASHINGTON — Rates on 30-year mortgages rose this week to the highest level in eight months amid signs that the economy is gaining traction and the Federal Reserve may push short-term interest rates up this summer.

Rates on 30-year fixed-rate mortgages averaged 6.12%, marking the seventh weekly increase since rates hit a low for the year of 5.38% the week of March 18, Freddie Mac reported Thursday.

The mortgage giant's nationwide survey of rates showed that the increase, up from 6.01% last week, left 30-year mortgages at their highest level since they averaged 6.16% the week of Sept. 12.

Federal Reserve policymakers, in deciding to hold their target for short-term interest rates steady at 46-year low 1% on Tuesday, dropped a promise to be patient before they start raising rates.

Analysts viewed that change as a step to prepare Wall Street and Main Street for a rate increase. A growing number of economists believe the Fed's first rate increase in more than four years could come when policymakers meet Aug. 10.

"A steady drip of good economic news coupled with the Federal Reserve's change of language ... reinforced market expectations that the Fed may raise rates sooner than expected," said Amy Crews Cutts, deputy chief economist at Freddie Mac.

That helped push bond rates up, causing long-term mortgage rates to rise.

http://www.usatoday.com

COMMENTARY

MONEY THAT WILL NEVER CHANGE - Craig R. Smith, SATC
Kill my dollar, just let me compete!
May 10, 2004

SOUND AS A DOLLAR

There has been a huge shift in the way we view money in America, and many people have ignored these fundamental changes. For example, for over a century, the old saying was; "AS SOUND AS A DOLLAR."

Strength is good, right? The stronger the dollar, the better. The slogan created confidence, which is so important -- especially in today's substance-less money system.

If my paycheck, savings account, 401K account, and home value are all valued in dollars, it only stands to reason that the average American would want a strong dollar, right?

Not so fast, Skippy.

You see, while you and I benefit from a stronger dollar, a dollar that buys more and spends farther is not the desire of the U.S. government, or big businesses. Quite to the contrary, government and big businesses want the dollar to be weak.

What? You got it.

GOVERNMENT VS. THE DOLLAR

Governments want to keep their currencies low for one reason: to stay competitive.

-Let's not make a better product or increase efficiency.
-Let's just lower the value of the unit we use to exchange the item for.

Over the next two decades, world trade will be controlled by whomever keeps their curriency low in relative value, without destroying it's domestic economy. It won't be decided by whose currency is the strongest, but rather, by who can manipulate the value of their respective currency the best. With that in mind ...

* Have you prepared your finances to reflect the changing financial times in which we live?
* Does your portfolio reflect hopes for a stronger dollar in the future, or a weaker dollar?

If you plan for a stronger dollar and it remains weak, you may be flipping burgers at age 75 to make ends meet every month. Currency markets are the most difficult markets to understand or invest in.

The best way to avoid the pitfalls of currency fluctuation is to own the ultimate currency - gold - being the one constant, as the ultimate plumbline of true value over the long term. This fact is something on which the world universally agrees.

MONEY THAT WILL NEVER CHANGE

Be a 'value investor' and own gold today. This way you can compete with the BIG market makers; those who make the market work for them, not them working for the market.

Track an ounce of gold for any period of time in world history and see for yourself why gold is the ultimate store of value. Find out why gold is always ignored, even bad mouthed by the press and media. Why bankers cringe to hear people are buying gold.

Manipulation of markets have been around as long as civilized man has been on the earth. Find out why gold cannot be manipulated in the long term. Learn why every prepared portfolio should own gold.

All of our trading partners prefer gold to other currencies. Why? Because gold is money that will never change.

When you buy U.S. gold and silver coins, you are helping to restore the concept of "Sound as a Dollar" in your personal and family government, even if the U.S. government does the opposite by printing trillions of debt-backed paper "dollars."

A dollar must make a sound to be considered "sound" money. That is, the sound of a tangible, silver dollar clanking on a table top creates a confidence of true value, but the silent sound of a debt-backed paper "dollar" never can, because day by day it's true value is shrinking its way nearer to extinction.

READ MORE ABOUT SILVER DOLLARS ...
READ MORE ABOUT GOLD DOLLARS ...

THE GREAT BEAR MARKET, PHASE II -Bill Bonner, Daily Reckoning
May 10, 2004

The financial press is full of the usual gibberish. What company is beating expectations... which mutual fund is outperforming its sector... how Alan Greenspan is managing the economy...

No one seems to have noticed that Phase II of the Great Bear Market seems to have gotten underway...

Friday's drop in the Dow was the least of it. The stock market was in broad, general retreat, with more than 10 stocks going down for every one on the rise.

Now, the Dow sinks back towards 10,000... and no one seems to notice. The two leading companies of Greenspan's credit bubble - Fannie Mae, which lent the money... and Wal-Mart, which helped consumers spend it - are headed down. And according to Richard Russell, the 'Hindenburg Omen' is still operative... Wall Street is in 'potential crash mode.'

Of course, this will not be the first time you've heard us say so. We've been a little early before... and may be again.

Still some things are worth expecting all the time, even if they never happen. If you are in bed with your mistress, for example, it is probably a good idea to expect your wife to come through the door at any moment. Likewise, when you're holding a bevy of very expensive stocks... you might as well believe that every day is the last day of the bull market.

You will recall that the first 'break' in the bull market happened just 4 years ago. But after a quarter century of rising prices, people were not ready to give up the dream of getting something for nothing. They had swallowed Wall Street's sales pitch: they believed they were 'investors,' not gamblers. And they thought that getting something for nothing was not only exactly what they wanted, but what they deserved. Buy a well-diversified group of stocks, they told each other, hold for the long term... and somehow - for some reason they could not explain - they would get rich.

Of course, it is bunk. Nonsense. Folderol. Flim flam. A scam. The old false shuffle.

Stocks do not go up over the long run; they go nowhere. Up. Down. Sideways. Nowhere.

There is no reason a dollar's worth of earnings should be worth more in the future than it was in the past. Nor will the average company be more valuable. Instead, it will go out of business. Over time, everything degrades, decays and fades away. Sooner or later, all businesses become defunct... and every stock becomes worthless.

Real investors buy companies, not stocks. As Buffett puts it, they buy good companies at a "fair" price. The little guys - the lumpeninvestoriat - shop for 'bargains' and only buy when there are none. That is, they only come into the market at the worst possible time... after the bull market is well advanced. And then, they don't look for good companies... they look for stocks they think will go up.

The lumps buy stocks timidly at first. They feel proud to be in the game with Soros, Buffett, and other pros. Then, as more and more of their fellows come in, their confidence mounts. Soon, they are buying stocks brazenly, wantonly... with neither a clue nor a prayer. Real investors, meanwhile, are selling.

Eventually, the lumps will be knocked out or squeezed out of their positions; then, they will forswear stocks for another quarter century! But after 25 years of rising stock prices, who believes it?

So, when the break came in 2000, stock buyers weren't ready to give up. The bear market remained a work in progress... a hesitation... ursus interruptus...

'Investors' abandoned the Nasdaq, but not the stock market. They merely moved to 'safer' sectors. And then, after a suitable interval of mourning for their beloved tech stocks, they were ready for another fling. For thousands of investors, Google comes along at just the right time, just when they were looking for a little excitement.

The AOL/Time Warner coupling marked the first break... Google's public offering could very well spice up the second.

Between the first break and the second was the most aggressive E-Z credit campaign the world has ever seen, the biggest turnaround in federal finances, and the largest run-up in debt. We only mention it to round out the picture. You have heard us discuss these things so often that you must be getting tired of it.

Still, the trillions in borrowing and spending looked like 'growth' to economists; they couldn't tell the difference. The newspapers were able to print cheery headlines. Companies were able to report higher profits. And the 'recovery' seemed like a done deal.

Even the employment numbers, stubbornly negative, finally seemed to be improving. Except, if you bothered to look at them, you noticed that people were actually working fewer hours and earning less money. Wal-Mart's sales figures showed spending weakening by the end of the month; the obvious inference: people were running out of money. And all over the Anglo-Saxon world, people were going bankrupt at the fastest rates in history; they were being crushed under the weight of Greenspan's debt!

How can companies make money when their customers are going bust? How can they defend their profit margins when the Chinese are making things at half the price? How can stocks go up when everyone who ever wanted them already has more than he needs? How long will the lumps continue to believe in 'stocks for the long haul?'

These answers to these... and so many other exciting questions... will surely be revealed as Phase II of the Great Bear Market gets underway.

http://www.dailyreckoning.com

READ FINANCIAL RECKONING DAY BOOK REVIEW

GREENSPAN PREACHES WHAT HE CAN’T PRACTICE -Chris Temple, NI
The National Investor
May 7, 2004

Yesterday, Federal Reserve Chairman Alan Greenspan gave his second strong condemnation of the size of the federal budget deficit in the past couple weeks. Speaking via satellite to a gathering of bankers in Chicago, he warned that the soaring deficit represents a major obstacle to America’s long-term financial health. Notably, Greenspan said he was more concerned about this than both the trade deficit and the high level of household debt. Both of these others, he said, could be “corrected by market forces.”

The central banker trotted out all the various reasons for his concern over Washington’s out-of-control spending, and propensity to promise everything to everyone. “We have legislated commitments to our senior citizens,” Greenspan said, referring to the massive entitlement programs politicians must one day deliver on, “that, given the inevitable retirement of our huge baby-boom generation, will create significant fiscal challenges in the years ahead.”

True enough. But what “The Maestro” conveniently overlooked in his comments was the fact that one major market force does indeed have the power to rein in the federal government’s spendthrift ways.

That market force is the Greenspan-led Fed itself.

A couple weeks ago, Greenspan appeared before the Joint Economic Committee of Congress. There, he also waxed philosophical about the nation’s budget woes, similarly warning of dire consequences for the markets and economy down the road if Washington is unable to rein in its spending.

There, though, he was not able to get by with talking about what, in effect, is but a symptom of a more fundamental problem. Most notably, Congressman Ron Paul (R-TX,) who most always is able to make Greenspan squirm at such gatherings, hit the nail on the head in pointing to the Chairman himself as the enabler of not only the federal government’s free-spending ways, but the one man who could stop such behavior.

Dr. Paul, as many of you know, is one of the precious and, unfortunately, very few real statesmen who have been elected to Congress in recent memory. As both a libertarian and an advocate of sound money (as Greenspan himself once was) Paul regularly grills the Fed chairman over his wild inflation of our monetary base; often, Paul uses Greenspan’s own past speeches and articles against him in this regard.

This time around, Congressman Paul pointed out that the Congress would have much less room to run staggering deficits were it not for the fact that the Greenspan-led Fed has been drowning us in a rising sea of dollars. He has created so many of them, in fact, that there are sufficient quantities to go around to enable everyone to take on more and more debt—including Uncle Sam. To guarantee that long-term rates don’t move higher in spite of his wild monetary inflation, he has further arranged for Japan and China to join in the fun. Thus, it is the Fed itself that has completely removed any need for the government (or anyone else, for that matter) to spend within its means.

Once upon a time, as Paul stated to a Fed chairman who seemed to have a “when is this session going to end?” look on his face, we had a central bank that was not so wildly inflating the volume of our fiat currency. In those days, if the federal government deficit began to move too high, the “punishment” came in the form of the so-called bond market vigilantes trashing U.S. government debt, and pushing market rates higher. One way or another, there was a cost for the government’s behavior; even if it didn’t always pay attention right away.

http://www.nationalinvestor.com

THE TRILLION DOLLAR QUESTION: INTEREST RATES - Richard Russell, DTL
For The Gold Report
May, 2004

Let's start with a paragraph from today's New York Times. The article headline, "As Household Debt Rises, New Risk in Higher Rates." And here is the paragraph –

"A management consultant in Denver, Mr. Thomson bought at $500,000 townhouse last Friday in the suburb of North Cherry Creek. As many other first-time home-owners have done, Mr. Thomson put no money down. Instead he took out a first mortgage for 80 percent of the purchase price and paid the rest by taking a home equity loan against the new house. To reduce his monthly payments, and to qualify for a big enough loan, he took out an adjustable rate mortgage that requires him to make only interest rate payments."

And what happens if we get a spike in interest rates? The bank will own the house, that's what will happen. Is this the kind of financing that has given us a good portion of the big real estate boom or as I call it, the enormous "real estate bubble"? Yeah, I'm afraid it is.

So the trillion dollar question ahead, as I see it, is interest rates. If rates head up from here, there's going to be hell to pay. There is now about $22 trillion in domestic debt. On top of that there is an estimate seven times that outstanding in derivatives. Roughly 85 percent of all derivatives are interest-rate oriented. So the truth – nobody knows what will happen if rates start up, and more importantly if rates spike up. Nobody, I repeat, NOBODY including the Fed, has the answer to what could or will happen if rates suddenly start to spike.

The debt situation in the US is ballooning. At the Federal level the national debt is rising at almost a 10 percent rate annualized rate. Total debt in the US is now about 300 percent of the US Gross National Product, a situation never seen before. A goodly chunk of the debt has been financed at the Fed's low 1 percent rate. The situation, as I see it, is extremely dangerous. I've said that the Fed, in keeping rates at 1 percent, has built a fantastic "debt-bubble." When this bubble bursts, and it will burst, the US could go into a long period of deflationary "unwinding," a period which would see a panic for liquidity and dollars with which to carry or pay off debt.

This is the frightening situation that now faces the Greenspan Fed. How to raise rates to halt the current inflationary pressures – and at the same time not panic the money markets. Let me tell you something – the process of building debt is inflationary UP TO A POINT. But past that point – the debt situation become DEFLATIONARY. These must be the thoughts of Alan Greenspan as he wonders whether or not to "gently" raise rates.

But here's the danger – by holding rates down artificially month after month, Greenspan has gone against the "natural" laws of economics. The longer rates are held artificially low, the greater the power of the ultimate upward "adjustment" as rates surge higher (unwinding) following their long "confinement."

Why will rates surge higher? The need for cash, the panic for cash to pay off the debt once the economy tops out. And by the way, my studies of the stock market suggest that the stock market has topped out – and when the stock market tops out it's a forecast on the part of the stock market. It's a forecast that's telling us that it's only a matter of time before the economy itself tops out.

(May 4, 2004)
http://www.aureport.com

READ WHEN IN DOUBT, STAY OUT -Russell, 4-14-04

THE MIGHTY METAL - John Myers, Outstanding Investments
May 7, 2004

"There are a zillion people looking for gold these days, because with the gold price up and money flowing in that direction, people can get financed to go and look for it," says John Embry, chief investment strategist at Sprott Asset Management. "But the fact is gold is a precious metal, and the reason it's a precious metal is that it's not that easy to find. So I think that, much as in the exploration boom of the mid-'90s where incredible amounts of money were put into the ground, remarkably little was found." Like us, Embry believes that despite intense efforts, very little gold will be discovered over the next few years. And also like us, he believes that we are entering an era of new wealth creation that will fuel demand for precious metals.

"We've got a worldwide boom going, particularly in the Third World, much of it driven off sort of the consumer strength in the United States," adds Embry. "The United States is desperate to avoid deflation and they've been printing money...creating credit at a rapid pace. And the bad news for the U.S. is that an awful lot of that demand that they're creating is leaving the United States shores and it's going over to China and India and other places in that part of the world, and what is underwritten is a very significant boom. I would submit that China is almost out of control at this point, on the upside in the sense that credit creation is growing at extremely rapid levels."

So close is Embry's reasoning to ours that you may think that your editor "word-jacked" his story. But the truth is we both see the same sorts of trends that will power gold to much higher levels.

Who Will Seek Gold?

Why am I so confident the Midas metal is set to soar to higher levels? Two reasons - or really two certainties...first of all, Washington refuses to accept a crushing deflation. Second, vast numbers of people are generating new wealth - wealth that they will no doubt spend but also save...some of it in the form of gold bullion.

With so little confidence in the dollar these days, it seems certain that some of the world's new bourgeoisie will look for other instruments in which to stash their savings. If even just a fraction of the world's new wealth is invested in gold, it will have an explosive impact on bullion's price.

Demand Squeezes the Earth

As more of the new wealth invests in gold, we encounter the same old problem: lack of supply.

Gold is extremely scarce. Each year, all the gold mines in the world produce only about 80 million ounces. A world-class gold discovery yields a million ounces...but they are rare. When you consider that the world's three largest gold mining companies produce less than 15 million ounces a year, you get the picture.

South African production peaked in the 1970s, while Canadian gold production has been in decline since 1991. The truth is that it is getting harder each year for blue-chip gold companies just to replace their reserves. In fact, over the past decade, many gold conglomerates have shut down exhausted gold mines.

Of course, there have been plenty of mergers and acquisitions, but they don't add a single ounce to the world's inventory of gold. They merely change the ownership of the same gold.

Today the mining industry is on a treadmill, desperately trying to replace 80 million ounces of annual production, just to stop from shrinking. With larger discoveries harder and harder to find, it is almost certain that world gold production will decline this decade.

"Consider that to mine the 80 million ounces of gold that is produced each year, assuming that the average worldwide grade is 10 grams per tonne (it is probably less), would require moving, crushing and processing 250 million tonnes of rock," writes analyst Paul van Eeden. "That would make a 3.4 billion cubic-foot hole, and the gold produced would be only 4,500 cubic feet. No wonder it is tough making money mining gold."

Profits Rise With Tight Gold Supply

Of course, higher prices over the past year have made gold mining more profitable for most companies, and we are, in fact, within striking distance where even the most expensive deep-shaft miners will become profitable (more on this in a moment).

But what I think is so fascinating about the gold market is that the entire amount of gold discovered this year will be worth approximately $30 billion. That is less than one-quarter of Coca-Cola's market cap and a minuscule fraction of the $11 trillion-plus U.S. bond markets.

The gold market is so very thin that if just one in 1,000 of the world's nouveau riche were to buy even a paltry few ounces of the Midas metal, its price would soar. And while the U.S. bond market is growing by a trillion dollars every year, and M1 money supply has grown on average by more than 7% per year over the past five years, the aboveground gold supply is growing by about 1%.

Eying Our Golden Future

Meanwhile, the gold price is now hovering around the $400 level. It has also broken below what some feel is an important psychological level several times, perhaps signaling trouble.

Don't believe it. The great gold bull market of the 1970s had several corrections, one of which was of a far greater magnitude than this hiccup.

Newmont Gold President Pierre Lassonde agrees with us. He also points to the 1970s to demonstrate why gold could soar in an era of what he calls a "manic-depressive dollar." "We haven't even started to correct the U.S. financial imbalance of the last three years, said Lassonde. "Don't tell me that the gold bull market is over. It has hardly even started."

Newmont's president predicts gold will outperform other assets for some time to come. "As long as they don't cure the financial imbalances, the dollar will continue to go down and be very volatile. I don't know how long it will take, but it will take quite a few years [to work through], and that is the gold story in a nutshell."

Gold Soars Over Falling Dollar

The truth of the matter is that Asian holdings of American government debt have soared, while the U.S. government is spending at a record rate. But I think what is most interesting is another fact Lassonde points out - that technical innovations in mining have dried up.

Even if he's wrong on this point, though, and cheaper exploration extraction methods are developed, gold production is certainly going to lag future demand. There have been incredible advances in finding and mining gold over the past hundred years, but on average the aboveground gold supply has grown by scarcely 1% per year. If the advances in geology, particularly in the 1940s and '50s, could not break this barrier, I am doubtful anything that science has to offer tomorrow will, either.

"The last real gold bull market was in the 1970s," Lassonde recalls. "It went on for 9 years, from 1971 to 1980. What we've had in the past 20 years are bear market rallies. So when you read...that the average gold bull market is 40 months and we're 36 months into it - and that's bad. Well, you know what, they haven't seen anything until you go back to the 1970s."

Citing a strong dollar-euro correlation, Lassonde said, "Over the past two-and-half years gold has been a currency, not a commodity. That's because the dollar, as currency of last reserve, is not acting that way, thanks to the U.S. financial imbalances that are enormous, unresolved and growing."

On the last point I couldn't agree more. But Wall Street is having a hard time coming around to this point of view. You must remember that most stockbrokers don't know a darn thing about commodities, other than the fact that a bull market in gold is typically bad for business. Not one in 50 stockbrokers has even a rudimentary education in geology, and is far more likely to have an MBA on his wall, a testament to the fancy business ratios he learned in grad school.

Just one problem: Resource companies don't fit many of these ratios. What does fit is good management, and, most of all, opportunity...opportunity to find and produce gold, and opportunity to profit and grow through sound practices and a good (we prefer great) exploration team.

Don't pass up on sound resource stocks just because they're not Wall Street's darlings. And if you miss the coming bull market in gold, well...you can't say we didn't warn you.

Regards,

John Myers
For the Daily Reckoning

Editor's note: John Myers - son of the great goldbug C.V. Myers - has been helping readers earn suprisingly lucrative returns in stocks largely unknown to Wall Street's wunderkinder since his early 20s. Our man on the scene in Calgary, John has his fingers on the pulse of natural resource profits - including oil, gas, energy and gold.

http://www.dailyreckoning.com

David M. Bradshaw is Editor of Real Money Perspectives, publisher of Rediscovering Gold in the 21st Century: The Complete Guide to the Next Gold Rush (7/01) and has been an economic commentator since 1987, when he produced the World Economic Perspectives radio show. In 1997, he produced a one-hour TV documentary, "Preparing Wisely for the Next Millennium," which was distributed free of charge at Blockbuster Video nationally. In 1999, he produced a one-hour radio special, "The Big Picture: The Shape of Things to Come" discussing geopolitical, economic and spiritual trends in the 21st Century. MORE...