Peter Schiff’s Boldest Call Ever

Sentiment for a euro swan dive must stand at a record; it must dwarf any negative reading the U.S. dollar ever had. No fresh data are available on the sentiment for the USD:euro cross, but the chatter everywhere about the imminent demise of the EU is truly deafening.

The Mr. Magoo of Wall Street, Euro Pacific Capital’s Peter Schiff appears to have not noticed.  As the crowd runs from talking nice things about the euro, he just muddles along with his prediction of a renewed U.S. dollar weakness against the euro—and sterling, yen, Swiss franc and the other small-weighted currencies making up the UDX. Sign-up for my 100% FREE Alerts!

“Our short-term target for the euro, maybe by year end, will be up near 1.48,” Schiff told KWN on Oct. 25.  “I think that’s going to catch a lot of people off guard who were writing the obituaries for the euro, to see the euro approaching the 1.50 level.  The dollar index should be headed back down to the 72 level.”

Schiff appears to be completely alone with that call.  Even Jim Rogers and Marc Faber cannot be quoted about the overly negative sentiment in the euro.

That should trouble contrarian investors; it reminds us of similar negatve sentiment of the U.S. dollar prior to Lehman’s death.  At that time, the USDX hovered at an all-time low of 72 in March 2008, scaring the bejesus out of the financial media of an imminent collapse of the dollar.

And like magic, the USDX soared approximately 24 percent to 89 by March 2009—a year latter, amid the Lehman Armageddon and talk of ‘deflation’ of 2009.  Jim Rogers and Marc Faber were among the handful of market savvy observers who warned of too many traders on one side of the boat before Lehman.  Not so today.

So, fast forward to today; it’s the euro’s turn.  And like clockwork, the media’s favorite apologist for the dollar among the gold community, Dennis Gartman, told Bloomberg News on Nov. 4, “The driving force in the gold market is the problems in the euro,” Gartman said in a telephone interview. “Central banks in Europe and individuals will want to lower their euro holdings and buy gold since no one knows what is happening to the euro. The euro is heading towards parity once again.”

The drama in Europe has been prime time media coverage since March 2010 with the trouble in Greece.  If Hugh Hendry was around, he’d laugh at Gartman for his much-too-obvious recommendation.

Side note: Why Gartman talks about gold in euro terms when nearly three of four visitors to his Web site are from either Columbia or Canada is as strange as his persona.  The chart from, below, indicates that most of the traffic to the Gartman Letter Web site originates from the country of Columbia.

Maybe the underground in South America needs to know which currency to counterfeit (tin-foil hat translation: for the ‘good guys’ to spend?).  Shouldn’t Gartman forecast gold in terms of the Columbia pesos, then?

Contrast Gartman’s latest assessment to Schiff’s call.  Schiff added to his Oct. 25 interview with KWN that the gold price could possibly trading at $2,000 by year end.  In U.S. dollars!

“I think we will come pretty close to hitting $2,000 on gold this year,” Schiff predicted.  “It would be hard for gold not to be above $2,000 in 2012.  I really think it would be unlikely that we wouldn’t see prices north of $2,000 next year.”

He continued, “The dollar is headed right back to the lows and I think it will take out the lows.  If it does break to new lows, that’s when we might see another crisis because then we might start to see the world questioning the viability of the U.S. economy….”

From the chart, above, the USDX has traded below its 20-month moving average (a metric which famed author of The Dow Theory Letters, Richard Russell, likes to use as a guide for major turns) since November of 2010.  And with so much hype for a euro collapse in the face of the USDX trading below its 20-month moving average may not tell us where the euro is going from here, but this phenomenon should not be taken lightly, nor should Peter Schiff’s call for a lower dollar and higher gold prices—in U.S. dollars! and euros . . . and Columbian pesos.

James Turk: Lehman type Collapse in Weeks

Brace for impact and volatile trading, because Europe teeters to the brink, this time for real, according to James Turk.

Turk, the chairman of Goldmoney, told King World News he sees the signs of a rapidly approaching collapse in Europe’s debt markets, and the ramification will rival the collapse of the U.S. banking system in 2008 following the fall of Lehman Brothers. Sign-up for my 100% FREE Alerts!

Initially, what was a tiny Greek problem (2 percent of EU GDP), has moved to the heart of the eurozone through Italy (GDP of 2.1 trillion, or 13 percent of EU GDP), Though not a surprise, the attack on Italian debt this week has sped up the timetable for the needed chain of events to occur for a final resolution to the euro.

As Italian 10-year bonds trade above 7 percent, the line in the sand that Morgan Stanley said is where traders say Italy won’t recover, the crisis has moved definitively to the next step to resolution, one way or the other—monetize debt, break the euro, or allow the system to collapse.

If Italy won’t recover, the euro cannot recover—though “illegal intervention,” according to zerohedge in yesterday’s Italian 1-year bill by new ECB chief and former Goldman Sachs operative Mario Draghi served to grant more time for the euro—again, though not a surprise.  But an extended period of Fed-like shenanigans in European debt markets by the ECB is highly unlikely.  The Germans would recoil violently at the idea of a re-run to Weimar, taken behind closed doors, of course.

“Clearly the two percent plus drop today by the euro against the U.S. dollar is a warning sign that a major crisis is brewing,” Turk told KWN on Wednesday.  “I mentioned before that the Dexia and MF Global collapses are not the Lehman event I’ve been expecting before year end. But the markets are telling us that a major crisis is now brewing.  So be prepared for another Lehman type of collapse which will bring the financial structure to its knees.”

Turk’s grave assessment of Europe’s of the situation echoes countless among the media (not counting rumor mill central, The Financial Times of London), where the dialogue between the markets and the endless closed-door meetings of European leaders has been fancied.

French President Sarkozy and German Chancellor Merkel have already released some trial balloons to the effect of a euro breakup, a suggestion floated around by Wall Street and Main St. analysts for months.  Reuters served the European leaders their outlet to the markets yesterday regarding the latest solution.

“German and French officials have discussed plans for a radical overhaul of the European Union that would involve establishing a more integrated and potentially smaller euro zone, EU sources say. French President Nicolas Sarkozy gave some flavour of his thinking during an address to students in the eastern French city of Strasbourg on Tuesday, when he said a two-speed Europe — the euro zone moving ahead more rapidly than all 27 countries in the EU — was the only model for the future.”

While the foundation for a breakup of the euro is laid, the toothless apparatchiks of Europe will bark and humiliate Italy until it’s finally released along with the other Club Med fiscal basket cases to a second tier euro, knowing full well what Morgan Stanley had rightfully stated is a “mathematically impossible” future of Italy’s ability to service its public debt.

“The EU and the IMF telling Italy that it must adopt austerity measures is advice that comes about five years too late,” Turk explained.  “The Italian government cannot cut enough or fast enough to improve their financial picture.  The bottom line is the fallout from Italy is going to get very bad very quickly.”

He added, “ . . the wheels are finally coming off the cart and they [KWN readers] need to be prepared for some volatile and cataclysmic events over the next several weeks.”

Turk suggests holding gold, physical gold, that is, while the banks attempt to seize Italy’s 2,450 tons of the yellow metal.

Eric Sprott: Another Lehman “almost has to occur”

Little did Sprott know at the time of his latest interview, it appears the triggering event took place early this morning.

Speaking with Goldmoney’s James Turk in Munich, Eric Sprott warned of another Lehman-like event stemming from the European debt crisis, which this morning took a definitive leap forward toward Sprott’s prognostication. Sign-up for my 100% FREE Alerts!

As the bellwether 10-year Italian bond blew through 6 percent on Monday, now through 7 percent, to 7.46 percent, this morning, it appears that the ECB has either given up on containing the contagion through its Italian bond purchases (as it had threatened on Monday), or worse, has been active in the market but cannot stem the avalanche of selling.

It was all CNBC has been talking about this morning, with an audio track from the movie “Godfather” playing between commercial breaks to add to the morning discussion.  Jim Rogers was there, too, providing commentary and his usual straight talk.  Rogers reminded viewers he’s short European stocks while the CNBC bugs flashed big red down arrows.

Like Rogers, Sprott doesn’t believe the banks balance sheets in Europe.

Sprott points out the obvious to those familiar with the bogus accounting out of the European banking system (and U.S. system).  Aside from the tier-3 assets (derivatives) not accurately reported by the banks, the tier-1 assets-to-equity that is reported reveals that European banks are grossly more leveraged than the US banks were prior to Lehman’s collapse.

“The level of derivative that are not even on the [banks] balance sheets is staggering.  So even if you’re looking at 20-to-1 you don’t even know if it’s 20-to-1 anyway.  It could be 50-to-1,” Sprott said, whose estimate may in fact be true given how net exposures turn into gross exposures at time of an event, to wit, Dexia and MF Global.

And Barclays Capital agrees, whose latest communique suggests that due to the collapse in Italian bonds this morning, “it seems Italy is now mathematically beyond point of return.”

Barclay’s reasoning is simple, it stated after the close of trading Tuesday, “Simple math–growth and austerity not enough to offset cost of debt,” and “reforms . . . in and of itself not enough to prevent the crisis.”

And as far as the EFSF backstopping Italy (if it can actually get funded), Barclays states, it’s “not adequate,” anyway, a conclusion FX Concepts John Taylor had drawn during the summer.

What to do? Zerohedge wrote, “Hint: Not good.  Sell euro, buy gold.”

Back to Sprott, who said on Financial Sense Newshour on Oct. 19, gold has been the de facto reserve currency during the ongoing crisis, as its price has appreciated in all currencies since the Lehman meltdown three years ago.

“The markets have made gold the reserve currency.  That’s what I believe, that’s gone up 100 percent against every currency in the world,” Sprott explained.  “So, it is the world’s reserve currency, as far as the markets go.”  “And as an offset to that, gold is not going to be a reserve currency without silver playing a hand here.”

Fast forward back to the Turk interview, Sprott, when asked about the possibility of another Lehman-like moment, Sprott said, “it almost has to occur.”

Sprott’s expected falling dominoes could be in motion now.  It appears market maker LHC.Clearnet has become a little nervous about its clients holdings of European debt, issuing a notice on Nov. 8 to holders of Italian 10-year debt of a deposit hike to 11.65 percent, from 6.65 percent.  After today’s rout, which by the way, has inverted the Italian 2y-10y yield curve for the first time throughout the 20-month drama (as Greece debt had, and is), we suspect LHC will issue further notices.

Gold Price: Chinese to Bust Gold Cartel

A higher gold price is inevitable for a variety of fundamental reasons, not least of which is the yellow metal’s limited ‘available’ supply against a backdrop of overall growing demand from private parties across the globe.  But Tangent Capital’s Jim Rickards points out that strong demand for gold coming from that very same global banking system should buoy the gold price, as well, every step of the way to, maybe, just maybe, Jim Sinclair’s $12,500 price tag.

Rickards explains the simple dynamic between the three dominant currencies in play during the epic global re-balancing act—the U.S. dollar, euro and the yuan (renminbi).   Each government behind these currency will ensure a long-term tailwind to the gold price for, we hope, many years, because an abrupt revaluation of the gold price could suggest untold social unrest, revolutions and war—which is a scenario Swiss money manager Marc Faber predicts.

“The main event is the three-ring circus of the U.S., Europe and China and their respective currencies, the dollar, euro and the yuan,” he wrote in a piece posted on King World News on Sept. 18.  “The dynamic is straightforward – all three would like a cheaper currency, relative to the others, to help exports.”

Correct.  Each country has its own constituency to reasonably satisfy under the most difficult of circumstances since at least as far back as the Great Depression.  Ultimately, no one wants a trade war, though during political seasons the hyped jingoism stirred up among pols to garner votes from the Colosseum crowd rears its ugly head as the true degenerates of societies play the old as it is tired game of tribalism rhetoric.

Cutting through the politics, Rickards explains why owning gold is important during the present state of war, a currency war, between the three blocks.

“This dynamic plays out as you might expect. The U.S. devalues against yuan and the euro – it gets all of what it wants. China revalues upward against the dollar, but keeps a peg to the euro – it gets half of what it wants,” he explained. “And the euro remains strong against the dollar and pegged against yuan – so it gets none of what it wants. This has been the prevailing paradigm since June when the Chinese finally let the yuan appreciate against the dollar in a serious way.”

Aside from the stresses between Germany and the PIIGS as a sequel to Rickard’s thesis, Beijing has a big problem with the way this currency war is playing out. That is, rapid inflation in China.

There is no way that China, nor any country, can escape rising consumer prices under the scenario, above.  But, between the U.S. dollar and the euro, representing 88% of total central bank reserves, China has been, and will continue to be mired in inflation for ever at the pace of devaluation of the dollar and euro must achieve to right global imbalances between debtors and creditors.

A U.S. or European citizen can absorb some inflation due to relatively high per capita purchasing power parities (though painful to the bottom of the economic ladder), but China’s $8,500 per capita PPP is too low to keep the natives calm during this expected protracted process.  Do Tunisia, Egypt and Libya come to mind?  All three countries weigh in with under $4,000 per capita PPPs.

The plan, then?  Beijing must grab as much gold for its central bank and its people as fast as possible without disrupting the gold price too much in an effort to absorb the inflationary effects of the depreciating U.S. dollar and euro of the future.

According to a WikiLeaks cable,


“China increases its gold reserves in order to kill two birds with one stone”

The China Radio International sponsored newspaper World News Journal (Shijie Xinwenbao)(04/28): “According to China’s National Foreign Exchanges Administration China ‘s gold reserves have recently increased. Currently, the majority of its gold reserves have been located in the U.S. and European countries. The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold’s function as an international reserve currency. They don’t want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar’s role as the international reserve currency. China’s increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB.”

It’s laughable to think the gold price means nothing to the Fed and ECB (Jeff Christian, are you listening?).  But, in this case, the price of gold is important to Beijing, as well.  As China accumulates gold to buttresses its reserves, a steady rise in the gold price, not a rapid one, is preferable to its long-term plan to introduce the yuan as a fully convertible reserve currency—backed by gold.  Strong evidence from bullion dealers, KWN’s anonymous London trader, Jame Turk and Eric Sprott indicate that Beijing was the big buyer (India, too) during gold’s drop to below $1,600 per ounce.

How this will all play out and who will get what they want from the new reserve currency regime down the road is unclear, but it’s no matter, according to Rickards.  Throughout history, the winners of currency devaluations have a 100 percent track record of emerging from the heap of paper.  No exceptions.

He concluded his piece, “ . . . it is not quite true there are no winners in a currency war. There is always one winner – gold.”

Just in from the Financial Times of London (subscription required, but excerpted by

Analysts expect the September import surge to continue until the end of the year as Chinese gold buyers snap up the yellow metal in advance of Chinese New Year, China’s key gold-buying period.

In September we saw some bargain hunters come back into the market on the price dip,” said Janet Kong, managing director of research for CICC, the Chinese investment bank.

Data from the Hong Kong government showed that China imported a record 56.9 tonnes in September, a sixfold increase from 2010. Monthly gold imports for most of 2010 and this year run at about 10 tonnes, but buying jumped in July, August and September. In the three-month period, China imported from Hong Kong about 140 tonnes, more than the roughly 120 tonnes for the whole 2010.

The last two months of this year are likely to see China’s gold imports surge further ahead of Chinese New Year, supporting gold prices, according to Ms Kong. “We’ve noted a quite strong seasonality in gold prices, typically prices go up in the months before the Chinese New year.

WikiLeaks Exposes Germany’s Euro Exit, Gold, Diamonds, Oil to Soar

It’s the German way or the highway in the eurozone, according to the latest hot cable released by WikiLeaks.  Sign-up for my 100% FREE Alerts!

U.S. ambassador to Germany, Philip Murphy (Goldman Sachs alumnus), issued cable 10BERLIN181 to Washington on Feb. 12, 2010, which essentially states that Germany leadership’s reluctance to backstop the PIIGS’s profligate spending of the past centers upon its sense that, in the end, Germany’s political and economic survival would be placed in jeopardy.

It appears Germany has no intentions of running a U.S.-style print-and-spend economy, nor does it want to hand over decades of productively earned savings to a bunch of layabouts from Club Med, either, especially those in Greece, where a Greek civil servant is able to retire at age 50, and, while employed, can take 14 months pay for 12 months work, for, presumably, spending-money during vacations.

Approximately 40% of the population of Greece works for the public sector. In comparison, nearly 20% of U.S. jobs come from U.S. tax dollars—a bloated number even by U.S. standards.

Gross inequity.  That’s the predominate mood in Germany, according to German news organization Die Welt (translated to English), which published a poll revealing that 71% of Germans insist upon a referendum on further steps taken regarding German’s obligations under the euro currency block.  Sixty-three percent of Germans want Greece to leave the euro.

One can only wonder about the rational of the other 29% and 37%, respectively, who agree to pay for early retirements and lucrative government jobs for so many Greeks.

Moreover, it’s no secret that Greeks don’t even want to pay for their own government’s spending habits.

CNN reported, “Greece is renowned for its history of tax evasion, estimated last year as worth 4% of GDP—$11 billion.”  That amount equals to approximately $560 billion to the U.S. Treasury derived from a $14 trillion economy—per year.  But the UK Telegraph suggests the amount of tax payments evaded is much higher. Greece loses €15bn ($20.5bn) a year to tax evasion, is the headline by the Telegraph.  Now, we’re talking nearly 7% of Greece’s $304 billion GDP (World Bank statistic).

And the New Yorker Magazine writes, “Greeks . . . see fraud and corruption as ubiquitous in business, in the tax system, and even in sports.”

So Germans, who’ve prided themselves as the most productive workers of the most extraordinary products for centuries, are now asked to pay into a broken system that the Greek people, themselves, don’t have confidence in?

In all, the WikiLeak’ed cable doesn’t add much new to what is already known, but it’s an interesting note that Washington has been bantering around the German question for some time, and has probably added fuel to the fire in Europe, too, in the hopes Treasury can skate a little while longer with its dollar debasement program of scare tactics, herding fund managers into the ‘safety trade’ of the U.S. dollar—another grotesque excuse for a currency.

Little attention by the U.S. media has been paid to the U.S. dollar’s noticeably weak response to the circus-like atmosphere in Europe—with no qualms, either, from the rumor mill of the Financial Times of London, as the Anglo-American tag team place center stage each and every sideshow act, as well, though Berlusconi’s narcissistic behavior can be quite amusing and compelling to report.

If the outrageous situation between the Germans and Greeks isn’t enough to crash the euro experiment in a heap with the Ford Edsel, the best tidbit within the Murphy cable briefly outlines the most difficult bolder to roll in the effort to force Germany to bailout Europe (which it mathematically cannot anyway): the legal one.

“In 1990, Germany’s Constitutional Court ruled that the country could withdraw from the Euro if: 1) the currency union became an ‘inflationary zone,’ or 2) the German taxpayer became the Eurozone’s ‘de facto bailout provider,’” Murphy stated in the cable to Washington.  “Mayer [Thomas Mayer is Chief Economist of Deutsche Bank Group] proposes a ‘Chapter 11 for Eurozone countries,’ which would place troubled members under economic supervision until they put their house in order.”

Under these bizarre circumstances, a blog entry by Pippa Malmgren, former economic adviser to President George Bush (George II), has been given some traction since her post about her thoughts on the euro, in September.

She believes that the Greeks will default, the euro will fall, the Germans will walk, and gold, oil as well as other commodities will soar.

She writes, “Greece defaults. . . The Germans announce they are re-introducing the Deutschmark. They have already ordered the new currency and asked that the printers hurry up.”

As a result, she add, “Gold, diamonds, agricultural assets, energy prices and mined asset prices will rise. Default reduces the debt burden and allows growth and inflation to return.  If central banks (other than the ECB) throw huge liquidity out into the market because of this event then the liquidity is going to lean away from paper financial assets other than the most trusted and liquid (U.S. Treasuries), and lean toward hard assets.”

Anyone wondering how the U.S. Treasury intends to come up with $628 billion by Mar. 31, 2012, to keep the illusion of the U.S. dollar alive without herculean efforts by the Fed’s balance sheet may see the crisis in Europe as possible or partial answer.  As German protects itself from another Weimar, the U.S. needs a solution to its own reichsmark.  So far, the dying PIIGS have provided Treasury a temporary one.

Silver Price: “10-bagger” from here

Cazenove Capital’s Robin Griffiths believes that when the ‘big reset’ finally comes to the global financial system, the price of silver in today’s dollars could reach a ten to twenty “bagger”—that’s 10 to 20 times from $34, or $340 to $680 per the ounce. Sign-up for my 100% FREE Alerts!

“I believe going forward that silver will be a ten or twenty bagger, one just has to tolerate the short-term volatility,” Griffiths told King World News.

Griffiths suggested that today’s price for silver reflects a continued lack of awareness among the general investor public of its safe haven status and store of wealth, especially when widely-quoted exchange rates don’t reflect the carefully orchestrated currency devaluations among central banks.

The lessons of drastic changes in currency crosses leading up to the 1987 stock market crash and Asian currency crisis of 1997 must remain fresh in the minds of policymakers.  In hindsight, the G-5 Plaza Accord and the rapid rise of capital flows into the ‘Asian Tigers’ destabilized the global financial system, respectively, resulting in market convulsions, bankruptcies and unprecedented (at that time) central bank interventions.

Big swings in currencies and in the proxies for those currencies, debt markets, bring on sudden bankruptcies to highly levered participants, such as a Dexia and MF Global as well as the temporarily hidden losses between counter parties of the two entities.  In those two cases, the lesser-understood sovereign debt market crisis was the culprit and overshadowed any sizable swings in the dollar-euro cross.

That may explain, to a rather limited degree, why demand for precious metals remains remarkably low in the U.S., still, among the vast majority of American investors who’ve had little to no experience coping with the fallout of a grossly mismanaged currency.  The knee-jerk reaction to a financial crisis for many is to run to cash—not gold and silver, as many investors still believe in the integrity of the US Treasury market.

“There is no euphoria in the gold market at the moment,” said Griffiths.  “It’s not an over-owned trade. There are still a few gold bugs and prudent people who are using gold as a hedge against paper money being overprinted, but we are nowhere near the exponential, runaway move yet.”

Those above the age of 60-years were probably old enough to remember high inflation and high unemployment of the 1970s—a time of rapidly deteriorating dollar value overseas, and wealth, domestically.  Both inflation and sluggish consumer demand can coexist.  Gold preserved wealth, while holders of Treasuries were decimated in purchasing power.

At this stage of the financial crisis, it feels more like 1974 all over again.  The threat of deflation (according to the Fed and commentators) grips the markets, as was the case in 1974, corralling investors into Treasuries—a move that famed commodities trader Jim Rogers said is “the wrong thing to do.”  Rogers made his first fortune getting it right in the turbulent 1970s.

Moving into cash, Griffiths believes, will be the trade in the coming months as the European mess gets even messier.  That means a rally in the USDX, according to him.

“The dollar should go higher than 81 and I could see it running up into the high 90s on the DXY.  That would be a significant dollar run,” Griffiths speculated.

“People are still worried, and the dollar, still, for the moment, is the world’s leading currency,” he added.  “Once they go into cash that’s what they go into.  So I think we are in a period, from now until the beginning of the year, where you should be long the U.S. dollar.”

In a way, Griffiths sees the world as FX Concepts John Taylor sees it, parting, however, from Taylor on the outlook for gold during a hypothetical dollar rally.  Griffiths envisions a higher dollar and higher gold prices.

When KWN’s Eric King asked Griffiths if his outlook for the dollar meant lower gold prices, Griffiths said, “Not necessarily, when you are worried you buy a bit of both don’t you?”

On the other hand, FX’s Taylor expects gold to drop to $1,000 before jettisoning to new highs—similarly to gold’s plunge from its nearly $200 all-time high in 1974 before dropping back to $100 during an 18-months sell off period—which lasted until 1976.  The yellow metal, then, made its big move to eventually reaching a high of $850 in Jan. 1980.  In disbelief, most investors were left behind until the very last moment of the end to the trade.  Taylor, presumably, believes gold will be sold to satisfy redemptions among hedge funds.

Euro Pacific Capital’s Peter Schiff has a different take from both men.  He believes the move down in the dollar to its last bastion of major support at the USDX 72 level is imminent and will fail that support, leading to a panic out of the dollar in coming months.  He said investors will be shocked by the contrarian move in the dollar.

So what to do among the disparate opinions from some of the smartest in finance?  As Dow Theory Letter’s famed author Richard Russell puts it, just buy enough gold as an “insurance policy” and “forget about it.”  But if investors seeking leverage to the gold price, they should buy more silver.  That’s the advice of nearly all hard money advocates, including the latest to come aboard the silver train, Gerald Celente.

Buy Gold Stocks, Peter Schiff & David Einhorn

Speaking with KWN’s Eric King, Euro Pacific Capital’s Peter Schiff recommends gold stocks at this time due to the meaningful lag of the sector relative to the high price of gold. Sign-up for my 100% FREE Alerts!

“I think if you look at the underperformance relative to bullion, they (gold stocks) are the cheapest they have ever been.” Schiff told KWN.

Anyone following Schiff’s commentary knows he’s liked gold stocks, especially as the gold bull market enters its second stage—a stage when hedge fund managers start jumping aboard more broadly in both the bullion and stocks.

One such manager, Greenlight Capital’s David Einhorn, has been getting lots of press lately for his decision to lighten up on gold bullion to buy gold shares for his clients.   Einhorn has been a gold bull for several years, but he anticipates that after 30 months of poor performance of the gold stock relative to the metal the time is now to change to a faster horse.

“A substantial disconnect has developed between the price of gold and the mining companies,” Bloomberg News reported Einhorn saying in a conference call to investors. “With gold at today’s price, the mining companies have the potential to generate double-digit free cash flow returns and offer attractive risk-adjusted returns even if gold does not advance further.”

He added, “Since we believe gold will continue to rise, we expect gold stocks to do even better.”

According to Bloomberg, Einhorn has chosen the gold miners ETF, GDX, to expose his fund to the sector’s major producers.  He still favors the metal, but he now wants to get more for his buck from the leverage to the gold price that gold stocks offer investors.

As with any stock, management and operation risks remain as primary concerns to investors taking on exposure to the gold bull market through the ownership of mining shares.  Einhorn’s choice of mitigating that risk through the GDX ETF is a good one, in that a diversified holdings of the world’s major producers reduces his exposure to either a surprise nationalization of a mine somewhere in the world or some other negatively impacting event to one or two of the stocks which make up the GDX.

The graph, below, demonstrates Schiff’s assessment and Einhorn’s bet.  The ratio of the gold price to the GDX has risen to approximately 30 while the gold price rallies to above $1,750.  One would think the gold:GDX ratio would drop rapidly. Not yet.

Note the low gold:GDX ratio between the years 2002 and 2008.  While gold traded below $1,000 (except briefly for a short spell in 2008), the gold:GDX ratio stood at below 20 nearly consistently throughout the six-year+ period.

Today, however, the majors have enjoyed bullion prices above $1,500 for quite some time.  The gold price to the oil price is quite high, which is also favorable to the majors.  Margins of the majors should be ballooning quite rapidly.  It’s only a matter of time investors notice some pretty hefty earnings from the majors, decompressing those P/Es through higher stock prices.  That’s the Einhorn bet.

Silver Price: Silver “Could Easily See $75”, James Turk

Silver bugs anxiously waiting for a the next big move in silver could get one soon enough.  Goldmoney’s Founder James Turk is out with his next call for the silver price.  He believes silver could reach between $60 to $75, “easily,” but wouldn’t put a time period for that target range.

Turk does, however, expect a technical breakout of the silver price from its consolidation to take place sometime in November, which he expects will embolden the bulls to race prices through $50 and to all-time highs.  After $50, the sky’s the limit for silver. Get my next ALERT 100% FREE

“Silver is forming a beautiful, long-term, flag consolidation pattern,” Turk told King World News, Monday.  “The flagpole started in 2010 at $18 and peaked at $49 earlier this year.  We are now in the flag and we can expect a breakout, I think, within the next few weeks.”

As one of several old hands of the bullion business, Turk understands what drives gold prices—therefore, silver prices.  He takes publicly available Federal Reserve data to estimate the expected change in the Fed’s balance sheet and calculates to a ‘fair price’ for gold and silver.  He calls his simple, yet elegant, model, “The Gold Money Index”.

As traders watch for any hint of a Fed announcement regarding more QE, the matter before the Fed appears to be fait accompli.  As a reminder of the grotesque U.S. budget deficit, expected to reach at least $1.6 trillion for fiscal 2012, the U.S. Treasury issued a news release on Monday, announcing its funding needs for the quarters of Oct. – Dec. and Jan. – Mar., totaling $628 billion, or a 35 percent jump from the equivalent six-month period a year ago.

Here’s the widely-known problem with Treasury’s plan to fund additional deficits at this time:

Foreigners, who have propped up U.S. deficit spending for more than two decades through increasingly higher amounts, have been net sellers of Treasuries lately, not net buyers—and that 35% increase in additional funding needs comes at a time when foreigners are withdrawing from the dollar to debase their own currencies.

One question looms large.  Will the Fed have to buy the entire $628 billion net issuance?  If so, the Fed’s balance sheet will grow at a 47.9% rate from its approximately $2.9 trillion total.

A collision course with a big precious metals move is near, as auction results should show larger and larger take-downs of Treasuries from its primary dealer network.  That should spook the markets.

The formation for silver’s recent consolidation indicates the market expects the Fed to mop up Treasury issuance in another QE operation.  What else can it do? Talk of ‘inflation expectations’ and U.S. GDP is an obvious and tired smoke screen to the reality of Treasury’s funding needs.

“. . . it [silver price consolidation formation] projects to a $60 silver price, but given the strength of this pattern, one could easily see $75,” said Turk.  “The shakeout over the past six months has put a lot of people on the sidelines.  I don’t expect that money to come back into the market until silver goes back above $43.  When silver takes out $43 it should rocket just like it did earlier this year when it nearly doubled in price.”

The graph, below, illustrates James Turk’s confidence of rapidly rising silver prices in the coming months, though the extent of the anticipated damage to the Fed’s balance sheet, which drives precious metals prices, is unclear.

It’s no secret that higher interest rates cannot be tolerated by the Fed.  Near-zero rates at the short end of the curve until at least June 2013 is already entered into the record.  That is clear.  Therefore, if foreigners cannot be counted on (they don’t have the additional cash) to buy U.S. Treasuries, no one else but the Fed can buy them.

PIMCO’s Bill Gross asked the rhetorical question in one of his missives last summer, “Who will buy Treasuries if the Fed doesn’t?”  A better question might be, “How much Treasuries will the Fed buy?”

Or . . . and may be classified as a tin-foil hat proposition: what if an outrageous event occurred somewhere in the world that would scare investors into Treasuries at any price?  We could see Treasuries mopped up at lower yields and soaring precious metals prices simultaneously.  Who knows?  But traders of both gold and silver shouldn’t be disappointed in any event.