The week of April 29, 2013 in Review

ECBInterest Rate Down

Dear PGM Capital Blog reader,
During this weekend blog edition we want to elaborate on the following events that happened in the capital markets, world economy and the world of money:

  • The changes in USA GDP measurements.
  • The ECB interest rate was cut to a record low on Thursday May 2nd 2013
  • DOW-30 and DAX-30 to closed at a record high on Friday May 3rd 2013

The changes in USA GDP measurements.
The USA Bureau of Economic Analysis announced last week it would be changing the guidelines with which it calculates Gross Domestic Product, GDP, the standard by which the size and growth of the economy is measured.

The change comes after more than five years of economic stagnation that, despite frequent claims of a strengthening recovery, we have seen high real unemployment and slow growth of the economy, mainly fueled by the money printing exercises of the FED.

The new changes, which will include definitional changes to expand what is counted in GDP, are expected to add 3 percent to the USA GDP report, while not changing the actual output of the economy. Under the new GDP calculation methodology, research and development are included as an investment expense. This will result in corporate profits appearing inflated and more government spending accounted in the GDP.

It should be clear for everybody that a desperate USA government with debt up to its eyeballs, is resorting to creative accounting to measure their GDP and in this way raise it artificially with the purpose to letting the debt-to-GDP look smaller on paper.

A screenshot of the USA National Debt is shown below:


The Outstanding Public Debt as of May 6th, 2013 at 10:46:03 PM GMT is:

USA Debt Clock May 6 2013

With a Nominal GDP of 16.01 trilion USD at the end of Q1-2013, currently the debt to GDP of the USA is 104.9% of GDP.

The ECB interest rate was cut to a record low on Thursday May 2nd 2013
On Thursday May 2nd 2013, policy makers of the European Central bank, during a meeting in Bratislava, Slovakia, lowered the main refinancing rate to a historic low of 0.5 percent from 0.75 percent.

In addition, the ECB reduced its marginal lending facility from 1.5 percent to 1 percent, while the interest rate on deposits with the Central Bank remained unchanged at 0 percent.

The drop in the ECB’s key interest rate – its first interest rate change in 10 months – had been widely expected after economic data for the 17-nation Eurozone worsened recently.

Eurozone unemployment hit an all-time high in April, notably in member states on the bloc’s southern periphery, which continued to languish in recession.

While lower interest rates might boost lending in the crisis-hit Eurozone’s south, better-off countries in the north such as Germany, the Netherlands and Austria have been skeptical about its immediate effects.

German insurers and the country’s dominant savings and cooperative banking sector said last week that a looser monetary policy at the ECB would have little economic impact and instead undermine people’s savings.

With elections in Germany in September of this year, we believe that the ECB is just buying time in order to favor the current German chancellor in the election and that after this year’s German election, the ECB will show its real face regarding money printing.

DOW-30 and DAX-30 to close at record high on Friday May 3rd 2013.
On Friday May 3rd 2013, both the USA Dow-Jones Industrial (DOW-30), as well as the German stock-index the DAX-30, closed at an all time high of respectively 14,973.96 and 8,122.29 points as can be seen from below charts.

Dow All time chart

DOW-30 all time chart May 3rd 2013

DAX all time chart

DAX-30 all time Chart May 3rd 2013

The all time high for the DOW as well as for the DAX is measured in respectively USD and Euro. Both are fiat currencies that can be printed by central banks. However, when we measure the DOW and the DAX in Gold, we get a totally different picture. With a closing price of Gold on Friday May 3rd 2013 of USD 1,470.30 and Euro 1,120.96, the DOW measured in Gold had a value of 10.18 ounces of Gold and the DAX of 7.245 ounces of Gold.

Measured in Gold, which cannot be printed out of thin air by central-banks, the DOW and the DAX all time highs were reached in 1999 at respectively 43.7 and 27.1 ounces of gold, as can be seen from below charts.

Dow priced in Gold


With interest rates at or near zero in the West and with central bankers all over the world printing money in order to stimulate their domestic economy, we believe that this money will flow into the capital markets, without a fundamental improvement of the underlying economy, thus creating a Huge Bubble in the capital markets, especially in the bond market.

The smart money however, will choose to go into Gold, silver and other precious metals, awaiting the coming economic hurricane, which will wipe out savings and create the biggest shift of wealth ever seen on this planet.

But before this happens we’ll see manipulation with datas like inflation and GDP and a coordinated assault on the price of Gold, in order to do window dressing and try to maintain the confidence in paper money with no intrinsic value. History has proven time and time again that money printing by central banks and manipulations with (economic) data will fail and in the end, all fiat currency that has gone through this process, will result in their real intrinsic value, which is ZERO.

For the sake of humanity we hope we are wrong. But in the meantime, until there is no proof that we are wrong with our analysis, we advise our readers to avoid bonds and paper money. More importantly, we advise to put their money into hard assets, especially Gold, Silver and other precious metals, in an account in a low-debt country with a history of protecting (foreign) investors and account holders’ interests.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Yours Sincerely,

Eric Panneflek

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