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8.28.24 -Investors Around The Globe Seek Safety Of Gold

Gold prices end higher on safe haven buying interest amid growing geopolitical tensions. U.S. stocks lower, S&P 500 falls below 2,000 on fresh Ukraine worries. Gold last traded at $1,288 an ounce. Silver at $19.53 an ounce.

There has been a rather stunning reversal in world stock markets and the gold market over the past 24 hours as euphoria over record-setting highs for the Dow and S&P 500 gave way to renewed concerns over tensions between Russia and Ukraine.

In fact, "tensions" is probably are gross understatement. Russian forces in two armored columns invaded Ukraine and captured a key southeastern coastal town.

The two Russian columns, including tanks and armored fighting vehicles, entered the town of Novoazovsk on the Sea of Azov after a battle in which Ukrainian army positions came under fire from Grad rockets launched from Russian territory.

As a result of these developments, all of the world's key stock markets--Shanghai, Hong Kong, Tokyo, Frankfurt, London, Paris, and New York--are sharply lower.

Meanwhile, gold is sharply higher as investors around the globe seek safety and security.

Combat between Russia and Ukraine isn't the only geopolitical factor Wall Street is keeping a wary eye on.

A new English-language magazine from Al Qaeda in the Arabian Peninsula (AQAP) was released and features a how-to article on making car bombs and suggests terror targets in the United States; including casinos in Las Vegas, oil tankers and military colleges.

It also implies an attack is imminent. The executive director of the Middle East Media Research Institute (MEMRI), Steve Stalinsky, who monitors Jihadi communications of all sorts, reports the magazine implied that the next attack is "coming soon."

Given that US intelligence now estimates some 300 US citizens are fighting with ISIS in the Middle East, taking part in unspeakable atrocities, these types of threats can no longer be discounted. With AQAP releasing a statement of solidarity with ISIS last week, this threat could be more significant than past threats. Terrorist attacks could conceivably have a profound economic impact and possibly a direct impact on financial markets.

Terrorist attacks aren't the only form of attack the financial system must be concerned about. Other types of attacks could have an even more direct threat on investors.

The FBI is looking into a coordinated cyber attack on international banking giant JP Morgan Chase. Sophisticated attacks were coordinated by Russian hackers against JP Morgan as well as four other financial institutions.

The attacks could conceivably have been in retaliation for US sanctions imposed on Russia.

While there does not appear to have been any financial losses associated with these attacks, they illustrate the risks associated with deposit accounts and electronic exchanges.

Physical gold and silver may be the only safe haven investments that are truly "hacker-proof." Hackers can steal personal information, financial assets and even your identity, but in order to get your gold and silver, they have to physically access it.

Cyberattacks may not even be the most serious threat to banks and financial institutions.

At the height of the financial crisis in 2008, the U.S. government forced some of America's largest banks to take “bailout” funds amounting to billions of dollars in order to keep them from going bankrupt. It was a move designed to not only keep too-big-to-fail financial institutions afloat, but one that would inspire confidence and keep American consumers spending. As a result, the last several years have seen stock markets reach record highs with Americans continuing to rack up personal debt for real estate, vehicles, education, and consumer goods.

But the purported recovery may not be everything government officials and influential financial leaders have made it out to be.

Recent comments delivered by Federal Reserve Vice Chairman Stanley Fischer suggest that not only are global and domestic economies still struggling, but the U.S. government itself is preparing financial contingency plans in anticipation of another widespread economic event.

This time around however, according to Fischer, t he government won’t be bailing out financial institutions in need of cash. Instead, failing banks will turn directly to their unsecured creditors when they need money. Within this context, that means depositors (otherwise known as bank customers).

As part of this approach, the United States is preparing a proposal to require systemically important banks to issue "bail-in-able" long-term debt that will enable insolvent banks to recapitalize themselves in resolution without calling on government funding. This cushion is known as a “gone concern” buffer.

Under this scenario, bank depositors would be forced by government-imposed rules to cover bank debts in the event of a crisis. This would lead to banks forcibly seizing funds from depositor accounts in order to pay their debts.

This is what happened in Cyprus last summer and Europe and Japan have already prepared for such measures.

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8.26.14 - Trouble Lies Ahead For U.S. Stock Market

Gold prices end higher on bargain hunting and short covering. U.S. stocks higher on a better-than-expected reading on consumer confidence. Gold last traded at $1,285 an ounce. Silver at $19.39 an ounce.

There is an alarming new, objective report on the US stock market that flies directly in the face of the new record highs the Dow and the S&P 500 have reached.

The Swiss economic and financial consultancy Wellershoff & Partners just published a study that indicates the U.S. stock market is likely to be more than 30% lower in the next five years than where it stands today.

The company, whose chief executive is former UBS chief economist Klaus Wellershof, found a strikingly strong inverse correlation between the stock market’s valuation and its maximum drawdown over the subsequent five years.

This is very bad news for U.S. stocks. As judged by the cyclically adjusted P/E (CAPE) ratio championed by recent Nobel laureate Robert Shiller, the U.S. stock market’s current valuation is at one of its highest levels in history. The latest CAPE reading is 25.69, which is 61% higher than its historical median of 15.95 (and 55% higher than the historical mean of 16.55).

Wellershoff & Partners found that since 1900, the average five-year decline following CAPE levels as high as current readings is between 30% and 35%.

Furthermore, the study found there is little basis in the historical record for thinking the market will somehow be able to sidestep a big decrease during the next five years: “Going back to 1900, there has been only one instance when the valuation levels we see today were not followed by drawdowns of 15% or more over the subsequent five to six years. Thus, at least for the U.S. market, it seems fair to say that the risk of losing capital is substantial.”

With the Dow and S&P 500 trading at record heights, now would seem to be an ideal time to begin unwinding stock positions, taking profits and diversifying into assets that represent better value.

One of those assets, of course, is gold. At this point, even savvy central banks are beginning to add to their gold reserves. This is quite a contrast to the 1990s when central banks often liquidated gold reserves.

The central banks of Russia and Kazakhstan, for example, have continued to boost their gold holdings, partially due to geopolitical tensions and partially due to economic concerns.

There is reason for individual investors to be concerned about the US economy as well, despite government reports and statistics.

There is now even more evidence those government reports may not be as reliable as some think.

A new academic paper from Princeton University suggests the unemployment rate appears to have become less accurate over the last two decades, in part because of a rise in nonresponse. In particular, there seems to have been an increase in the number of people who once would have qualified as officially unemployed and today are considered out of the labor force, neither working nor looking for work. In other words, the report has been skewed by politicians to say that the economy is doing better than it actually is.

This calls into question improvements in the US unemployment rate over the past several months.

If the unemployment is higher than official government reports indicate, that means the overall economy is weaker than is being calculated. This has substantial implications for the financial markets, which already seem vulnerable to a pullback.

One sector that does not appear to be very healthy right now is residential real estate. U.S. single-family home prices fell in June and disappointed expectations.

The S&P/Case Shiller composite index of 20 metropolitan areas declined 0.2 percent in June on a seasonally adjusted basis. A Reuters poll of economists had forecast a flat reading.

Significantly, for the first time since February 2008, all cities showed lower annual rates than the previous month.

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8.21.14 - Investor Optimism Seems Out Of Place

Gold prices fall after a larger-than-expected drop in U.S. jobless claims. U.S. stocks advance as reports on manufacturing and existing home sales exceeded expectations. Gold last traded at $1,275 an ounce. Silver at $19.42 an ounce.

Irrational exuberance appears to have returned to the stock market at an odd time: just as the threat of terrorism targeting America has ramped up to levels not seen since 9/11.

All of the US stock indices have continued their climbs to the sky based on investor optimism.

It turns out that optimism is very much a double-edged sword. In fact, it is often a contrary indicator.

The American Association of Individual Investors said today that 46.11% of retail investors described themselves as bullish in their latest survey. This is the highest reading since Dec. 26. The survey found 23.65% described themselves as bearish marking the lowest reading since late June.

The survey tends to serve as a contrarian indicator, so this is the sort of new high that might actually prompt some concern for market bulls. “While less than half of individual investors are bullish, we are getting close to that 50% threshold that has spelled short-term trouble in the past,” wrote analysts at Bespoke Investment Group after the survey's release.

This optimism seems out of place as polls show Americans are bracing for a new wave of terrorism.

The vicious Islamic State group is now vowing to kill Americans wherever and whenever it can.

Tuesday’s horrific videotaped beheading of American photojournalist James Foley was packaged with a new Islamic State posting on social media threatening the United States: “We will drown all of you in blood.”

A US intelligence official told the Washington Times today, “I would tell you ISIL has had a longstanding, overt interest in killing Americans.”

Robert Spencer of the website Jihad Watch indicates there is ample evidence that the terrorist group is gearing up for attacks against the US.

Intelligence and Defense officials believe some Americans have joined the Islamic State and are being programmed to conduct suicide bombings.

“They have said they are going to go after Americans,” Mr. Spencer stated. “They have said American civilians are all legitimate targets. It seems to be absolutely certain they will be trying to kill as many Americans as possible in the United States as well as elsewhere.”

The threat of terrorism is unpredictable and even if a terrorist attack occurs, it is not certain just how, or if, the financial markets might be effected. If this threat does metastasize, historical evidence indicates it could impact the financial markets negatively.

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8.19.14 - Stock Market Warnings Are Growing Louder

Gold prices slightly lower on a stronger U.S. dollar ahead of Janet Yellen's speech expected at the end of the week. U.S. stocks higher, Nasdaw Composite hits 14-year highs. Gold last traded at $1,296 an ounce. Silver at $19.41 an ounce.

With the NASDAQ trading at a 14-year high, is it any surprise the warnings about a stock market bubble are getting louder?

The NASDAQ climbed yesterday to its highest level since March 2000 as the market cheered the easing of some of the geopolitical tensions that have been worrying market observers.

The stock market, however, is driven by underlying economic factors long term. Geopolitical factors may come and go, but the economic factors are ALWAYS present.The underlying economic fundamentals simply do not support a NASDAQ at its highest levels since Bill Clinton was president.

Sentiment also plays a big role in the financial markets. A poll by the Wall Street Journal shows nearly half of all Americans believe the US economy is in a recession. Given the parade of disappointing economic reports over the past few months, this belief is understandable.

Yet the NASDAQ is at a 14-year high? This just does not add up.

As a result, some of the brightest minds in the financial world are sounding alarms about the stock market.

Nobel Prize-winning economist Robert Shiller wrote in the New York Times last week that "The United States stock market looks very expensive right now."

Hedge fund king Carl Icahn blogged last week that, "We can no longer simply depend on the Federal Reserve to keep filling the punch bowl."

Icahn called the current scenario a "dangerous financial situation."

Ex-Treasury secretary Robert Rubin wrote in the Wall Street Journal last week that, "The risk of excesses and the consequent instability have increased substantially."

Despite the stock market at record heights, a new survey for Bankrate.com shows over 1/3 of people (36%) in the U.S. have nothing saved for retirement. One contributing factor to this alarming figure, and the widely held view that the US economy is in recession, is the fact that the past five years of so-called economic recovery have done almost nothing to boost paychecks for average Americans. This marks the weakest growth since World War II.

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