GOLD/SILVER

Richard Russell has been on a roll of late with some superb commentary on gold:

Gold -- I hear two explanations for gold's rise. I think one or both are correct.

(1) Negative interest rates are a positive for gold. Inflation is now around 2%. Short rates are now around zero. Zero rates minus the 2% inflation rate gives us a negative interest rate of minus 2%. At this negative interest rate the opportunity cost of owning gold is nothing, we're not giving up anything in the way of incoming cash to buy or hold gold. Yet gold is sensitive to the forces of inflation, and when it costs nothing to buy or hold gold and inflation is in the saddle, gold tends to rise.

(2) Interest rates alone do not account for gold's action. There's the matter of gold as money compared with fiat money. Central banks, the world over, fight deflation and recession by creating ever-more fiat currency. This means that the ratio of gold to fiat money is rising -- central banks can expand their currencies far faster than gold can be produced. As the world's total amount of fiat currencies expands, gold tends to rise.

Pressure is now increasing on the Fed to cut back on its money-printing and to raise rates. I've said before that I think Fed chief Bernanke has his ego on the line. Bernanke's thesis is "supply the money, and they will spend it." But America's shoppers were traumatized by last year's market collapse and the accompanying housing disaster. They're in no mood to spend, regardless of how many times the Fed and the administration tells them that "the recession is over, and the rainbow is just over the horizon."

The public isn't stupid, they see signs of unemployment everywhere. They note that their nephew, Sammy, who just graduated from Harvard, can't find a "suitable job," and Sammy doesn't want to wash dishes at the local steak house, even assuming that the job is open, which it is not.

Moreover, the poor yo yo on Main Street has become more cynical, and he no longer believes the glad tidings that the government is releasing. Worse, the poor devil notes an increasing number of vagrants in his town. And he wonders, is this like the Great Depression that grandpa so often talks about. "Jeez, I better start saving," thinks the guy on the street.

The facts are as scary as the happy fantasies. Twenty-five percent of all the houses in the nation are now worth less than their mortgages, and ten percent of all the houses in the nation are in foreclosure. The local newspaper and TV broadcasts the bad news, and the man on the street takes it all in. And somewhere in Washington Bennie Bernanke remembers something his daddy down in Dillon, South Carolina, once told him. "Bennie," his dad told him, "You can lead a horse to water, but you can't make him drink."…

Bull markets end amid great news and widespread public participation and wild optimism. We've not yet seen that in this gold bull market. The ten-year rise in gold has been characterized by disdain, skepticism and disbelief. Even at the recent highs, leading analysts characterized the gold advance as a "blow off" and a "bubble." The real optimism and excitement over gold lies somewhere ahead.