Markets closed up on Wall Street: DJI +1.66% SP500 +1.66% Nasdaq +1.65% Gold +0.16%

The markets were up big because:

• Federal Reserve Chairman Ben Bernanke said the US Central Bank will remain economic silver lining. “Should further action prove necessary, policy options are available to provide additional stimulus.” Check out the entire speech from Jackson Hole >
• GDP came in at a hobbling 1.6% growth. However, analysts were expecting 1.4%, so Chairman Bernanke’s aforementioned speech overshadowed the otherwise scary GDP slowdown. Don’t Miss: Your Ultimate Cheat Sheet to GDP >
• US Credit Card losses are surprisingly slowing. The Financial Times says, “The divergence from past experience reflects bank efforts to weed out risky borrowers, moves by consumers to pare back debts after the excesses of the past decade and new credit card rules intended to discourage reckless lending.”

Months ago we wrote about the true causes of hyperinflation. We proceed to expand upon our views as we disagree with the views put forth by John Mauldin, Mike Shedlock and now Jim Rickards who all focus on velocity and/or bank lending as important causes of hyperinflation.

The reality is that hyperinflation is first and foremost set in motion and driven by a deteriorating fiscal situation. In fact, significant economic weakness and deflation is a precursor to hyperinflation. Too many analysts believe that there has to be some economic demand or some consumption to stimulate inflation or hyperinflation. Printing money to try and stimulate your economy or excessive credit growth is what leads to inflation. Printing money because you are broke and can’t service your debts is what leads to hyperinflation.

Recently Jim Rickards wrote about how a change in velocity can trigger hyperinflation or severe inflation.

At Mises.org, Henry Hazlitt educates us on velocity:

For example, it is frequently said that the value of the dollar depends not merely on the quantity of dollars but on their “velocity of circulation.” Increased “velocity of circulation,” however, is not a cause of a further fall in the value of the dollar; it is itself one of the consequences of the fear that the value of the dollar is going to fall (or, to put it the other way round, of the belief that the price of goods is going to rise). It is this belief that makes people more eager to exchange dollars for goods. The emphasis by some writers on “velocity of circulation” is just another example of the error of substituting dubious mechanical for real psychological reasons.

Indeed! The focus on velocity may have led you astray over the past 10 or 15 years. Take a look at this chart of velocity from Dr. Lacy Hunt of Hoisington Investment Management.

As you can see, velocity actually increased during a time of disinflation and has been muted throughout most of the bull market in commodities. Moreover, despite in recent years, the sharp drop in credit growth and bank lending in the West, Gold and Commodities have powered higher. We know that Gold has made all time highs against every currency. Yet, take a look at this chart.

Priced in Euros and Pounds, Commodities have rallied back to their 2008 high! Priced against a basket of currencies (ex US$), Commodities are 9% below their 2008 peak. Not bad considering the crash in 2008 and ensuing deflationary environment.

Why are Gold and Commodities performing so well if we are in a deflationary environment? The greater the deflation and the worse the economy gets, the greater the worry about sovereign bankruptcy, which will come via default or hyperinflation.

Certain government bonds are rallying because they are safe-havens relative to other government bonds.

The point is, precious metals are outperforming and commodities to a lesser extent even without a rise in bank lending, a rise in credit growth and a rise in velocity. As we already explained, deflationary forces and a weak economy ultimately exacerbate the ability of various governments to service their ongoing and growing debt burdens.

Hyperinflation is a fiscal phenomenon borne out of a bankrupt state that can’t service its debts. Monetization is a trigger while a rise in consumption and velocity is a psychological effect as Hazlitt notes. After all, if massive inflation is coming, what is the first thing you want to do? You’ll position yourself in hard assets well ahead of thinking that “I need to spend now because this money will be worthless later.”

In our premium service, we have paid little attention to inflation-deflation or money supply or velocity. Instead, we correctly focus on the fiscal health of various governments. As that deteriorates, it brings us closer and closer to the eventual end game, which is a new currency regime. For what it is worth, I do believe we will see severe inflation but note that hyperinflation of the Zimbabwe or German kind is out of the question due to the deep and liquid bond markets that we, Europe and the UK have. If you’d be interested in more clear analysis and how you can reap big profits while protecting yourself, consider a free 14-day trial to our premium service.

Jordan Roy-Byrne, CMT

Jordan@thedailygold.com

http:/www.thedailygold.com/newsletter

There are a lot of Gold (NYSE: GLD) haters out there. But governments keep printing cash and sovereign debts are completely out of control. Seems like some people understand reality:

If you are ready to make winning investments in Gold & Silver Stocks, try a free trial to our Gold & Silver Premium service by Chicago Mercantile Exchange commentator Jordan Roy-Byrne CMT.

German Chancellor Angela Merkel said she would not provide a final decision on bailing out Greece “until the International Monetary Fund works out a plan of cuts with Greek government.” Merkel said Germany’s bailout of the defaulting Greece is contingent on Greece’s acceptance of “tough” budget cuts and fiscal policy.

Is this a foreshadow of what China and Japan will demand from the United States? Although the US has not defaulted on their incredibly high debts to the nation’s largest creditors, both China and Japan hold a similar power as Germany when it comes to threatening to diversify out of inflating US dollars.

The US faces major monetary issues with 0% interest rates, trillions of dollars of debt, and an imminent crisis with Social Security and Medicare. If you want a glimpse of the back room negotiations between the US and its larges creditors, play close attention to the demands Germany makes on the Greece.

In recent commentaries, we’ve focused on the macro factors that will drive acceleration in the precious metals sector. Namely, the gradual exodus from both government and corporate bonds as authorities are forced to monetize debts in an effort to avoid rising interest rates, which would hasten default and bankruptcy. This, and not bank lending or consumer demand, is the cause of severe inflation.

Predicting the timing is more difficult then the actual event. Luckily for our subscribers we constantly pour over numerous technical charts and sentiment indicators in order to advise as to favorable entry and exit points. In analyzing Gold, we find that intermarket analysis is an essential tool. Intermarket analysis is analyzing a market by comparing it to other markets.

For Gold, the first study is a comparison with the S&P 500. In this chart I show Gold next to the Gold/S&P 500 ratio.

Every large or impulsive advance in Gold was accompanied by a similarly large move in the Gold/S&P 500 ratio. Currently, the short-term trend for Gold is higher but the trend for Gold/S&P 500 is lower. Simply put, before Gold can embark on an impulsive move, investors will need to favor Gold over stocks. Gold can only rise so much if money is moving into stocks at the same time.

Another important and obvious example is the US Dollar. In the chart we show Gold plotted next to the inverse of the US Dollar.

Gold can rise at the same time as the US$. We all should know that by now. Also, Gold can perform very well even if the US$ is flat. However, the point here is that as long as the US dollar is rising, it will be difficult for Gold to embark on its next impulsive advance.

Relatively speaking, Gold is performing well against other markets like commodities, various currencies and treasury bonds. However, it is clear that the yellow metal will need to regain its footing against stocks and the US currency will need to peak or pause for months before we can expect Gold to make an impulsive advance to $1500 and beyond.

In our premium service, we dedicate ourselves to analyzing technical and sentiment factors so that we can keep our subscribers ahead of market developments. Moreover, we combine technicals and fundamentals to help traders and investors find and stay in the best junior companies. Consider a free 14-day trial to our premium service.

Jordan Roy-Byrne, CMT

http://www.thedailygold.com/newsletter

Jordan@TheDailyGold.com

A few weeks ago we wrote about the true cause of hyperinflation, which is a major break or failure in the bond market. It has nothing to do with demand, bank lending or the velocity of money as many have suggested. It is a confidence issue. It is not a rise in inflationary expectations but a loss of confidence in a country being able to repay its debts. As confidence is lost, interest rates rise. Monetization occurs when the cost of servicing the debt consumes too much of the overall budget, so that the government can’t provide basic services or loses its ability to function on a day-to-day basis.

The important point to note is that deflationary forces lead to hyperinflation. Once again, it is not demand, bank lending or increased velocity. Those things do not trigger severe inflation; they merely can be a symptom after the trigger. And by the way, increased velocity is basically another form of increased demand. Fundamentally, they are no different.

Is anyone paying attention to the first domino in the sovereign debt crisis? Take a look at this Bloomberg Story:

http://www.bloomberg.com/apps/news?pid=20601087&sid=awXzaHHx8T6M

Iceland’s Economy Shrinks 8% as Prices rise by 11%. Deflationary forces are causing severe inflation, as Iceland’s government is bankrupt. Moreover, bank lending in both the US and the UK has been sliding, yet we see price inflation increasing in the UK and starting to pickup in the US. Even amidst deflation in the private sector, Gold has risen to an all time high against both the Dollar and the Pound and also the Euro.

The deflationists have it backwards. As we’ve illustrated, severe deflation is what leads to hyperinflation. Debt crisis’ go hand in hand with currency crises. In fact, if we had an increase in bank lending, consumption and velocity, we’d be assured we wouldn’t have hyperinflation. We’d end up with rising price inflation for certain, but not hyperinflation. Hyperinflation has never occurred at a time of strong or growing demand.

So what is the real debate then?

The debate and discussion should be about the bond market. If one were against the hyperinflation scenario, then they would have to think the bond market is going to hold up. If one believes we will see severe inflation then they have to believe in a major break in the bond market. We don’t believe in Weimar or Zimbabwe style hyperinflation. That is just too extreme. We do believe that we will see severe inflation worldwide as a result of a loss of confidence in governments and currencies. Falling bond markets and rising interest rates will reflect this.

For Gold watchers, now is the time to start watching the relationship between Gold and bonds. According to Wikipedia, the worldwide bond market is $82 trillion and the US bond market is $34 trillion. Clearly, the crowded trade is bonds. Gold’s bull market will accelerate when money starts to move out of bonds and into Gold.

First let’s take a look at a Gold/Bonds ratio. This is Gold against the Barclays Corporate Bond Index. Against stocks, Gold us up more than five-fold, yet against this bond index, Gold is up less than three fold.

Here we show Gold against the Dow Jones Corporate Bond Index, which is a total return index. Gold has broken past its 2008 peak against literally everything except the Yen and Corporate Bonds.

A breakout in this ratio will be very significant for global capital markets. If and when we see Gold breakout against Corporate Bonds, it will be a major signal that inflationary expectations are increasing. Moreover, it should be a major catalyst for Gold as the fixed income markets dwarf the tiny Gold market.

For more analysis like this and complete coverage of Gold and Silver stocks, consider a free 14-day trial to our premium service.

Jordan Roy-Byrne, CMT

Jordan@TheDailyGold.com

Although the economy absolutely sucks for job hunters, the fierce competition has caused a counter-intuitive phenomenon: students are now paying to get unpaid summer internships!

Last week the Chicago Tribune uncovered the new trend and showed how companies such as Fast Track and University of Dreams are charging anywhere from $799 for a standard internship to $10,895 for an internship at the Washington Center in DC.

If you or your parents have the money to burn, by all means pay to work. However, this type of arrangement is just another example of money wasted on excessive schooling in an economy where most students remain heavily in debt long after flipping their tassel to the graduate side.

This weekend my wife and I were discussing this very topic. We know people with expensive graduate degrees in social work from Columbia University. These friends are now complaining they will need decades to pay off their debts. Some of them have even become pharmaceutical sales reps in hopes of paying off the debt and starting their desired career in social work.

Paying money for an unpaid internship creates the same problematic mindset. Don’t get sucked in. There are millions of people who are very successful in their career and they never paid for internships or went to expensive schools. Instead, they used common sense, worked their asses off, and got ahead by doing valuable things.

I don’t think these internship services are a “Fast Track” or “University of Dreams”. Rather, they are a fast track philosophy which leads to bankruptcy or the fulfillment of deadbeat dreams. If you want a fast track to success, find a job that pays you!

What do you think about paying for unpaid internships? Let us know in the comments below or click here to chat in our new Forum.

I think I’d shoot myself. [Laughing] I don’t think I’d go to work in the morning.

All along, the problem has been that we haven’t been willing to take any pain. So, after all the Greenspan years we always come in and support the markets with low interest rates. At first they cut rates to three percent, then one percent in the 2002-4 time frame. Now it’s zero percent and we have negative real rates.

Each time we cut this low, we never let the free market forces work their magic. The free market forces would be painful. They would lead to a recession. If this had been allowed to happen — meaning, the government would have not interventioned over the last couple of decades — we would probably have had very brief and sharp recessions … but they would have ended quickly.

Now, we’re in such a mess that the pain will be severe. That’s why I don’t think the Fed will raise rates. We can’t take the pain. They’ve almost gone past the point of no return.

If I were Chairman of the Federal Reserve I would let free market forces unfold. I would let rates rise to where they should rise. These are not normal rates that we have now. I would have to raise rates. I’d have to do it over time.

On the other side, I would need some help from the Congress. They would have to cut spending. Over the last eleven years or so federal spending went up 110%. Inflation went up 27%. This is not a sustainable path. The Fed has been funding this. They’re monetizing the Nation’s debts.

I wouldn’t monetize the debts. I wouldn’t buy mortgage bonds and treasury bonds. I wouldn’t be quantitative easing. I would get rates to a normal level. So, we would take pain for the first time.W e have a recession going on now, but once again we stepped in with ever more dramatic means to try to keep the pain from being too great. Therefore, stock markets never correct themselves completely — they don’t go to your traditional bear market levels.

It’s the cleansing of the system that brings in value buyers like me. We haven’t had too many opportunities. Normally, bear markets end with P.E. ratios between six and eight. That didn’t happen this time — not even close. However, that’s what would happen if the free market system was allowed to correct itself. We would have a giant bear market. The market would go to low levels. We would cleanse the system, and buyers would come in. That’s what I would orchestrate as Federal Reserve Chairman.

Last year, the US Dollar was the butt of monetary jokes. In fact, some suggested it was worth as much as toilet paper. With Trillion dollar deficits and 0% interest rates, those with common sense looked to other currencies for capital preservation.

In a moment of cosmic irony, some global investors are now fleeing to the safety of the US Dollar. Headlines about Greece possibly defaulting on their debt has investors wondering which is truly the worst of all possible worlds?

Last week, Ben Schott put together an incredibly valuable chart showing the S&P credit ratings of countries and US states. This is an excellent resource to keep on hand for those Candide moments when your mind wanders:

(Hat Tip: Barry Ritholtz)