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April 16th: Gold Reacts to Soaring Inflation - A Little Fundamental Reality...

Introduction: Good endings tend to come from good beginnings. And to start right one needs to be properly informed. Let's take our understanding of the inflation rate as an example. If one were to believe inflation was running at 4%, as the government suggests, it would encourage one set of portfolio decisions. If, however, one were to believe that the inflation rate was running at 12% as Shadow Government Statistics suggests, a wholly different set of decisions might be made. The primary goal of all investing is to provide a real rate of return after inflation and taxes -- something gold has more consistently achieved over the past seven years than any other major asset grouping.

Read on, fellow seekers of wisdom. . . .

"Why is now an appropriate time to drink to gold? Because gold is possibly near to shaking-off a sustained and coordinated attack on its monetary credibility by some of the world's most powerful central banks. Investors could win back an asset that offers protection against the financial abuse of governments." -- John Brown, financial analyst and former member of Britain's parliament

The fading American economy
Paul Craig Roberts - April 9, 2008

"Government employs 22,387,000 Americans, 8,744,000 more than manufacturing. Even the category leisure and hospitality employs 13,682,000 Americans, slightly more than manufacturing. There are as many waitresses and bartenders as production workers. . .Is this a portrait of a super economy?"

USAGOLD Comment: Every once in a while it pays to step back and make an assessment where we have been and where we are going as an economy and a country. Paul Craig Roberts, a former assistant secretary of the Treasury, does a very good job of that in the article linked above. He concludes darkly that the United States "has been in a recession for most of the 21st century."

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Government stats and the shadow reality
John Williams' Shadow Government Statistics

"Have you ever wondered why the CPI, GDP and employment numbers run counter to your personal and business experiences? The problem lies in biased and often-manipulated government reporting. We offer an exposé of the problems within the reporting system, and an assessment of underlying economic reality. . ."

USAGOLD Comment: What is the M3 number since the Fed abandoned reporting on it? What is the real inflation rate? The real unemployment rate? Real GDP? The answers, contained in the group of graphs linked above, amount to a wake-up call. Williams, as Paul Craig Roberts points out, employs the methodology used by government agencies "prior to decades of spin."

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The Black Death of financial collapse
James Cumes - 4/10/08/ - Asia Times

The financial and economic crisis now upon us is by far the most menacing of the past century - even more so than the Great Depression of the 1930s. It is not just a 'subprime' crisis; it is systemic -- affecting the entire financial system. It is also global, affecting various countries in various ways but affecting them all.

USAGOLD Comment: Though written to an Australian audience, this article resonates to America, Europe and beyond. It also challenges the growing consensus, and perhaps wishful thinking, on Wall Street that somehow we are out of the woods on the credit crisis.

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Wholesale prices soared in March
AP - April 15, 2008

"Inflation at the wholesale level soared in March at nearly triple the rate that had been forecast as energy prices kept rising and food costs posted a much bigger jump than anticipated."

"The Labor Department reported Tuesday that wholesale prices rose by 1.1 percent last month, the largest increase since a 2.6 percent rise last November. The November gain in the Producer Price Index was the biggest one-month jump in 33 years."

"Analysts had expected a much more moderate 0.4 percent rise in wholesale prices for the month. However, food costs, which had fallen by 0.5 percent in February, leapt by 1.2 percent last month, propelled upward by big gains in vegetables and beef and the biggest increase in rice prices in more than five years. Those were far higher increases in food prices than expected."

USAGOLD Comment: After a little while, fundamental reality asserts itself no matter what. Just as this NewsGroup was being prepared for mailing, the Labor Department published its latest wholesale inflation numbers. A rise of 1.1% translates to 13.2% annualized. Double digit inflation has arrived even by Labor Department standards! The inflation news explains in a large measure gold's performance today -- up $20 at this writing. Note, too, the unpleasant side bar that the components which pushed the rate to this level -- rice, vegetables, beef, et al, (and let's not forget about oil) -- are unlikely to stabilize any time soon. In fact nation states are acting to restrict the flow of key food commodities as a matter of self-defense. This will only add to the problem.


European NewsGroup April 16th: Banking system bailouts and positive fundamentals bode well for gold

Taxpayers Forced to Cover Risk of Banks' Folly
Wolfgang Reuter - Der Spiegel - 10-Apr-08

"Writedowns from the global financial crisis spurred by the American subprime meltdown are mounting in Germany, causing the deepest financial crisis seen here in decades."

"The writedowns continue to mount and, in a worst case scenario, could leave taxpayers with a bill as high as ?30 billion."

"In the end, the taxpayers always get stuck with the bill."

USAGOLD Comment: That last statement says it all. The German government has continued to offer guarantees to banks taking writedowns that stem from losses that are ultimately traceable back to the American subprime crisis. The central banks appear prepared to do whatever it takes to prevent a major bank from collapsing. If that first domino were to fall, there's no telling where it might end. Efforts to bail out the banks are leading to global currency devaluations. While a little relief in the form of a weaker euro might be viewed as a good thing within the Eurozone, the dollar is being debased at a much faster rate. Nonetheless, the purchasing power of the euro is being eroded as evidenced by the recent gains above ?600 per ounce versus gold. Gold offers a liquid and convenient hedge against inflation and debasement of the euro. This article also highlights the systemic risks to the European banking system.

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Why the euro is unlikely to eclipse the dollar
Barry Eichengreen and Marc Flandreau - Financial Times - 02-Apr-08

"Theoretical models of network externalities are in fact wholly inappropriate to our 21st-century world. The advantages to an individual central bank of holding its reserves in the same currency as other central banks range from slim to none. The real reason the dollar so dominated reserve holdings after the second world war was that only the US had liquid financial markets. Only the US market was free of capital controls. The dollar dominated foreign exchange reserves simply because there were no alternatives."

"The dollar lost its role as a reserve currency in the 1930s, albeit temporarily, because of disastrous mismanagement of the US economy. Equally disastrous mismanagement today would certainly cause the dollar to disappear from the international scene, leaving the euro as the only international currency standing. That said, no matter how difficult the current situation and how contentious the US policy response to the crisis could prove to be, we are still very far from that point."

USAGOLD Comment: An interesting theory, suggesting that in today's day and age there are no real advantages for a particular central bank to hold its reserves in the same currency as other central banks. The "exorbitant privilege" has its costs, so it is doubtful that the powers-that-be in the Eurozone would even want the euro to become the world's next reserve currency. Nonetheless, as the dollar becomes increasingly less attractive, the euro and gold do offer an alternative. Some central banks have made no secret about their desires to acquire gold and euros as reserve assets and this reallocation is generally coming at the expense of the dollar.

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Golden Gut Check
Mike Kosares - USAGOLD.com - 07-Apr-08

"I cannot remember a time when the fundamentals have lined up more favorably for gold."

"Demand, as reported copiously by the mainstream financial press, continues to grow steadily on a global basis. It is on the supply side of the equation, however, where we now find the strongest arguments for resumption of the bull market. To come to the point, fundamental trends suggest that the gold market may be moving from a period of general scarcity to outright shortages. Unless some formidable source for gold is suddenly found, the period of shortages could come to full flower as early as 2008."

USAGOLD Comment: At the risk of sounding like a sycophant; this article written by the President of USAGOLD is about as good an article as you will find highlighting the supply/demand dynamics for gold. Mike builds a very strong case for a potential gold shortage. This article is a must read for any gold owner and anyone considering becoming a gold owner.

-- Regards, Pete Grant

April 7th: Market Update -- Golden Gut Check

Clients & Friends,

This link takes you to the latest USAGOLD Market Update featuring "Golden Gut Check:  Why gold is likely to keep moving higher over the long run"  by Michael J. Kosares, founder of the firm and author of "The ABCs of Gold Investing:  How to Protect and Build Your Wealth with Gold."

Golden Gut Check
Michael J. Kosares - April 7, 2008

USAGOLD Comment: Remember the golden rule!


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