Warren Buffett on Gold vs. Hommel on Gold!

Warren Buffet explained why he does not see the value in gold in his annual report from 2011.
http://www.berkshirehathaway.com/letters/2011ltr.pdf
 
http://ivanhoff.com/2013/04/15/warren-buffett-on-gold/
 
It was republished by ivanhoff, and came to my attention last week, which gave me this occasion to respond.   Here I go.

Buffett:
The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer’s hope that someone else – who also knows that the assets will be forever unproductive – will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century.

Hommel:
Buffett is claiming that Gold's value exists only because other people will buy it.  True.  True of all assets.  And this is exactly why gold is a good thing, because of all things, gold is most likely to be valuable in more places to more people than nearly any other item that you can consider, precisely because it is money.  But Buffett presents this as a bad thing, calling gold "unproductive".  Well, let's see, how is gold productive?  It can go up in value, just like stocks or bonds or housing, or any other asset.  People recognize that gold has value not because it gains value, but because it does not decay or rot or go bad.  Food makes a horrible form of money, partly because it goes bad.  One of the longest lasting kinds of food is the wheat kernel, which can last up to twenty years.  Gold lasts 6000 years, with no decay.

Buffett:
This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further.  Owners are not inspired by what the asset itself can produce – it will remain lifeless forever – but rather by the belief that others will desire it even more avidly in the future.

Hommel:  True, gold buyers do not buy gold for what gold will produce, but most of my gold buyers are buying gold because they do believe it will go up in value, because they do believe that others will see what they can see, that gold is special, and cannot be printed to excess like paper money is being created to excess these days.  Gold buyers buy gold also because they recognize that gold does not decay, because it has a very high value for the weight and density which makes it portable, and because it can be hidden.

Buffett:  The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

Hommel:  True, gold is not procreative.  But this does not mean that gold cannot go up in value.  Gold does have a use.  The use is as a store of value.  The use is to communicate value over time.  Gold has three primary uses: as a store of value, as a unit of account, and as a medium of exchange.  These days, it is not used much as a medium of exchange, because no government on earth is issuing gold as circulating currency, but because all nations issue paper money.  This is making gold an excellent store of value, because gold is increasing in value more than all the paper money being continually printed.  The key use of gold in our times is not only in that it holds value, but gains value.  This is because the new supply of gold is far less than demand.  The world prints nearly $5 to $10 trillion worth of paper money per year, which is $5,000 to $10,000 billion.  In contrast, the world mines about 83 million ounces of new gold, at $1334/oz, is worth only a mere $111 billion.  Clearly, there will be more and more buyers of gold in the near and far future.

Buffett:  What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth – for a while.

Hommel:  Gold buyers are derided as "fearful" by Buffett.  And he notes this has recently been correct.  But also wise.  He could have written, "The ranks of the wise will grow".  Perhaps more apt.

Buffett:  Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the “proof” delivered by the market, and the pool of buyers – for a time – expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: “What the wise man does in the beginning, the fool does in the end.”

Hommel:  True, bubbles happened in stocks and houses.  And probably still are in a bubble.  Is gold in a bubble?  When less than $100 billion is being mined each year?  I think not.  His buddy Bill Gates could buy half the world's annual gold production, and would probably become a lot more wealthy if he tried.  I say tried, because there is no way he would succeed, because his stock is not liquid enough to sell that much, and the gold market is too tight to buy half the gold market without pushing the gold price up, too.  My point is that the gold market boom is still in the beginning stages. 

Buffett:  Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.

Hommel:  Today, one to two years later, gold prices are down to $1335.  Buffet was right for one year out of a thirteen year bull market in gold.  Buffett will likely be wrong next year.  But 170,000 metric tonnes at $1335/oz. is x 32,151 oz/tonne is $7.3 trillion today. 
The tiny size of the cube of gold in pile A also explains why gold is valuable.  It contains a lot of value in a small space, making it very portable.  Some people wonder why gold should be any different than copper or any other metal, asserting that the other metals could be used just as easily as silver and gold.  Really?  Well, I have a 33 kilo block of copper that cost about $300, about the same as a ten oz. bar of silver.  Which would you rather carry to the grocery store?  Also, the copper has a spread on it to buy and sell of over 50%.  Or, would you prefer a quarter oz. of gold for about $330?

Buffett:  Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Hommel:  Can you imagine an investor with $7.3 trillion to begin with?  There are no investors who are worth so much, are there Mr. Buffett?  Besides, even if there were, there is no evidence that the entire world supply of gold is being all offered at the current asking price for gold.  The vast majority of gold does not trade each year.  World annual mine supply ads only about 1.5% to the pile per year.  Well, let's calculate it.  http://www.goldsheetlinks.com/production2.htm  170,000 tonnes in existing stock.  World annual production about 2600 tonnes.  1.529%.  Yup, still the same after all these years.
But Buffett's point is that he cannot imagine any investor buying the gold instead of the farmland and oil companies.  But let's compare more clearly, $40 billion x 16  Exxon Mobils is $640 billion, plus the $200 billion from crops, which means the oil companies and land produce about $840 billion.  Well, how much does the pile of the world's gold produce?  Gold is likely to exceed $1900 in the next year or two, from $1336 today.  As it does, the pile of gold will go up from $7.3 trillion to $10.4 trillion.  Now let's compare shall we?  $640 billion gain in the oil companies, and $3.1 trillion, or $3100 billion in the gold pile.   I think I've made my point, but let me go further.  In actual fact, 16 Exxon Mobils don't exist.  It's a pure fantasy choice, as in, "not real".  The gold is real.  That makes the gold choice not only several times better, but infinitely better, doesn't it?

Buffett:  Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion.  Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.

Hommel:  As we have seen, the existing annual production of gold is now $111 billion, and being purchased not by "frightened individuals, or speculators", but by "wise investors," and even central banks now!  And again, with $5000 to $10,000 billion dollars worth of currency being printed world wide, I think the new gold will have plenty of ready buyers for decades to come.  In fact, Gold is acting not only as a value preserver, but value gainer, for those investors who don't want be robbed by governments.

Buffett:  A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Hommel:  I'd wager that a century from now, none of the world's currencies today will have any value at all, but the gold still will.  Gold is not a choice between oil and gold, it's a choice between paper money and gold.  No investor will ever go out and buy 100 barrels of oil at $103/barrel to store on his lawn, to preserve $10,000 worth of paper money value, because the oil is extraordinarily inconvenient, and expensive to store and ship for the relative value.  But anyone can buy 7 gold eagles that will fit into the palm of your hand for $10,000, which takes up about 1/10th of the space as a stack of 100 of the $100 bills.

Buffett: Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.

Hommel:  In contrast, I'm supremely confident that the world's pile of gold will increase in value far faster than oil.  The reason is that gold has been money for about 6000 years of human history, and mankind has only been using oil for about 160 years or so.  Furthermore, the world's bankers began attacking gold as money about that far back, so the world has never had a good historical gold to oil ratio in place during a time when the world used gold as money!  Therefore, we have to use intuition to determine a proper value for gold as compared to oil, assuming the world returned to using gold as money, and it probably will.  I would supsect that the world's gold production should be valued more than the world's oil production, because the world'd gold production must be spend on more than "just oil".  As it is, oil is no more than 5-10% of the world's economy, but let's assume oil were as much as 50%.  Well, then, the world's gold production would be worth about twice as much as world oil production, because people would need some gold left over to buy everything else.  That would assume a value for gold as follows:
World annual oil production is about 90 million barrels per day.
x 365 days/year x $100/barrel =
That's about $3.3 trillion per year in dollar value, of oil production.
If world gold production of 83.5 million oz. were worth $6.6 trillion per year, that divides out to $79,000 per oz. for gold!
Oh yes, in the last five years, gold and silver have solidly outperformed Birkshire Hathaway stock.
http://finance.yahoo.com/q/bc?t=5y&s=BRK-A&l=on&z=l&q=l&c=slv%2C+gld&ql=1
And I suppose gold and silver have significantly outperformed BRK in the last 13 years.
https://www.google.com/#q=brk.b
Since the year 2000, BRK.B has gone from $40 to $114, an increase of 2.85 times.
Since the year 2000, Gold has gone from $255 to $1314, an increase of 5.1 times.



I strongly advise you to take possession of real gold and silver, at anywhere near today's prices, while you still can.   The fundamentals indicate rising prices for decades to come, and a major price spike can happen at any time.

Please note our new shorter hours, I'm working in each shop every other day.

JH MINT in Grass Valley
Open 11AM to 4PM Pacific Time, Monday, Wednesday, Friday.
Closed Tuesday, Thursday, weekends and bank holidays.  (Also Closed from Dec. 25th to Jan 1st)
13241 Grass Valley Ave
Grass Valley, CA 95945
 (530) 273-8175 
www.jhmint.com

Silver Stock Report : 6 Myths of Inflation

6 Myths of Inflation (Six myths regarding infaltion and hyperinflation in the USA!) by Jason Hommel, August 20th, 2013

1. As the currency goes down, everything else goes up at roughly the same rate. Not true. 2. The law today will be the law tomorrow during hyperinflation. Not true. 3. I'll be able to ride it out here in the back woods of Colorado or Alabama during hyperinflation. Maybe, and maybe not. 4. There is no risk of inflation when the bigger risk is deflation. Not true. 5. The dollar will not go down in value, because everyone who owes dollars has a short position on the dollar that must be covered. Not true. 6. The amount of currency must expand to have an expanding economy. Not true. 1. As the currency goes down, everything else goes up at roughly the same rate. Not true. Or, in other words, if bread goes up ten times in price, and if silver goes up ten times in price, it does not matter what I buy, and does no good to buy silver... Not true. Put $100,000 into bread, try to find the storage place to store it, and watch your investment turn moldy before your very eyes! Or else, keep your money in cash, and watch 90% or more of the value vanish. Silver going up at the same rate of bread is still 100% better than buying bread, and ten times better than cash! In the last twenty years, fruit prices for apples and oranges have been a steady $1-2 per pound. But silver has moved from a low of $5 to a high of $50, and back to $23 today. Silver prices have already dramatically outperformed the price of fruit over the last decade. It has been mostly true that for most hyperinflations, that the price of things as denominated in foreign currency, has been somewhat stable. But the other hyperinflations will be significantly different from the inflation in the US, because of the size of the US economy, and by the education level of the populace, and by the options available. As there was hyperinflation in Zimbabwe, consider... how many coin shops were there in Zimbabwe offering silver to their people? None? There are 4500 coin shops across the USA! And then there is the difference in buying power. The people of the USA have enough money, and enough buying power, to significantly change the world market price of silver, but not the people of Zimbabwe! There is barely $2 billion worth of annual investment demand for silver. When the people of the USA decide they want silver, and can actually buy it, silver demand will actually significantly increase, and it will really move the silver price, and it already has! But consider also. Merchants raise their prices at different rates, such as whenever they feel like it. There is no national governmental council board directing industrialists and capitalists and businessmen on when to raise prices to devalue the currency that government prints! Some express another version of this myth. They say, "it does not matter what asset I buy to protect myself from inflation; housing, stocks and bonds, all are assets, and all will go up at similar enough rates." Not true. Bond values collapse as interest rates rise to match the inflation rate. Housing values collapse if there is capital flight and too many liberal policies in government, such as happened in Detroit. Stock values collapse if tax rates go sky high or during nationalist confiscations or socialization or communism, or even by bankruptcy! And we have seen all of that in this past decade alone during this bull market in silver and gold! The point is that silver and gold will outperform nearly all other things. Monetary demand will not flow into food items. Monetary demand will not flow into bonds that are being sold due to rising interest rates. Monetary demand will flow into silver and gold, the only forms of true money. People will not be buying cowrie shells by the tens of billions of dollars. People will not be buying beaver pelts by the tens of billions of dollars. They will buy silver and gold. Like they always do when they can, and should. 2. The law today will be the law tomorrow during hyperinflation. Not true. Laws will change dramatically as the governments collapse, and can get much worse, or much better, after a change in government or liberty led revolution. This is why I consider education, specifically political education on the topics of freedom, liberty, and libertarian ideals, to be as important, if not more important, than advocating the purchase of silver bullion to protect yourself from inflation. But yes, buy silver bullion too! This way, the owners of the wealth of tomorrow will be more able to form a more free society in the future after the demise of the current forms of government around the world that rely on paper money for the source of their power. 3. I'll be able to ride it out here in the back woods of Colorado or Alabama during hyperinflation. Maybe, and maybe not. Many times, most of the wealthy people are forced to flee the country before or as things are really deteriorating. Many fled communist China and ended up in Hong Kong. Many fled Nazi Germany, even officers in the military, as depicted in the classic movie "The Sound of Music". God's great grand plan might be for most people to flee to Israel. Israel is said to grow rich in gold and silver in the time of the end. Ezekiel 38. Zechariah 14. So, again, buy silver and gold! But remember, that might not be enough. 4. There is no risk of inflation when the bigger risk is deflation. Not true. Deflation is a non existent risk when government prints money to bail out the banks. Deflation only happens when banks fail, and when deposits go "poof" and vanish with the failing bank. Banks may be failing, and are failing, and are often merged into larger banks. But no depositors deposits are going "poof" and vanishing! The entire point of there even being a Federal Reserve is to prevent deflation, and they do. They do more than that, they create inflation. Deflation only happens when there is a gold standard, and when there is not enough gold to back up the deposits. Then, the total amount of "currency" can go down, back down the limited amount of gold. But deflation cannot happen when on demand deposits are not backed by gold, and they are not today. Instead, if people want gold or silver, they have to go to a bullion dealer, and when they buy silver and gold, they cause the value of their dollars to go down and gold and silver go up, which is the exact opposite of deflation, which would happen when they go to the bank and redeem their deposits for gold. 5. The dollar will not go down in value, because everyone who owes dollars has a short position on the dollar that must be covered. Not true. Defaults happen! People actually fail to repay their debts! Can you imagine that?! Yes, the Federal Reserve bails out banks to prevent their failures. But who bails out individuals who must pay down debt? Nobody. When they fail to repay debt, it's the lenders who lose, but when those lenders are the banks who get bailed out, then no deflationary forces take place. Furthermore, look at the nature of this argument. Is debt like a short position on dollars? No, it's not. Consider the differences. The investor who puts on a short position in futures markets must deliver or buy it back, or their brokerage must, or the exchange must. A person or nation who owes dollars does not have two other wealthy and solvent entities who have signed on as co-lenders to securitize the debt. Also, most dollar denominated debt is collateralized, such as by housing. In contrast, a short position in the silver market does not necessarily have the corresponding silver to back it up. Also, consider who is short silver. It's the banks. They will not likely be able to ever buy the ten years worth of annual production of silver to give to people who are content to let the large banks store their non existent silver for them. Since the banks know they will not be able to cover, they never will. They may cover some shorts in the futures market from time to time to create extra volatility, and to earn an extra income from moving the market around, but they will never call up all their silver depositors and say, hey, we are delivering your silver to you for free, and now it's up to you to store it yourself! Never. But the people might wake up, and either demand delivery, or cash out, and buy silver elsewhere. And who is short dollars, or in dollar debt? Many nations around the world? Many cities? Many states? Many of these are sovereign entities who have the right and duty to their people to default and not pay dollars. Many have defaulted already. Many have the legal right to declare bankruptcy, and they will. Did Argentina move heaven and earth to buy dollars? No. They defaulted and devalued their currency. Same thing will happen all over. Debts are not always paid, they are often defaulted, bankrupted, or simply not paid. Dollar denominated debts that are not paid do not prop up the dollar. They devalue the dollar, because they drive up interest rates as bond values crash. 6. The amount of currency must expand to have an expanding economy. Not true. This is a lie! The value of money can go up as the economy expands. In fact, that is exactly what took place in America for over 100 years, from 1776 to 1913. There was consistent deflation at about 2% per year, and America grew from nearly nothing to becoming the powerhouse of the world that won World War I! All on deflation! Deflation is the natural birthright of increased productivity. As productivity goes up, prices go down. This is not a function of money, but rather, something that masks the hidden forces of inflation. I absolutely hate the simple myth in the gold community that an ounce of gold has always been worth about the price of a man's suit. Utter nonsense! By the time machines could make clothes, the value of a man's suit came way down! For over 100 years, gold was $21.66/oz.! Here is evidence online that it was $3-6 for a man's suit in 1903. http://www.gti.net/mocolib1/prices/1903.html Another way this myth is stated, is that if gold itself expands at 2% or less, then businesses, on average, cannot expand more than 2% growth rates, and thus, nobody would ever invest money into the economy and thus, there would be no economic growth. Well, the experience of the United States from 1776 to 1913 is proof that this is not true. Simply because the average returns are 2% does not mean that nobody would ever invest. Some businesses make more, others make less. Some businesses lose money. Yes, losses actually take place, and yes, some businesses go bankrupt! That creates more opportunities for others who can buy things at distressed prices, and other businesses who no longer have to compete against failing businesses! If the 2% investing rule were true, nobody would ever buy bonds that pay less than 2%! Yet many people in today's world do exactly that! And I would wager that everyone who buys bonds that pay less than 2% is not actually even getting 2%, but rather, they are actually losing money, because that's so much lower than the real inflation rate, yet people continue to choose to make decisions that guarantee an economic loss, because that seems safer than earning nothing in cash, and safer to them than "volatile silver" or "mysterious barbaric gold". Read full Article here

Q4 Commodity Outlook: Tricky Road Ahead as Dollar Strengthens

Commodity markets will continue to be driven by worries about the potential impact of a slowing global economy. A solution to the sovereign debt crisis has still not been found and with governments running out of fresh ideas this has caused tremendous stress on the financial system. Cyclical commodities like energy and base metals have suffered as a consequence while safe haven flows and adverse weather have been the main reasons for gains across precious metals and agricultural commodities.

We believe that renewed dollar strength during September will continue into the last quarter and this could potentially have a dampening effect on the performance of commodities, ensuring a relative flat 2011 performance of the major commodity indices.

Energy: The dramatic spike in oil prices earlier this year has been a major reason for the surprise slowdown in economic activity witnessed during the past six months. The price of Brent crude, which has taken on the role as a global benchmark for a majority of global transactions, has so far averaged 111 dollars in 2011, well above the averages for the previous three years. Despite not reaching the record levels seen in 2008 it has nevertheless already spent more days above 100 dollars during 2011, thereby squeezing private consumption.

Increased demand drove prices higher in 2008 while this time supply disruptions and constraints have been the culprit for higher prices. Libyan oil production will be limited for months while supply disruptions from Nigeria, Syria and the North Sea have ensured higher prices compared with WTI crude which has stayed at depressed levels over the summer.

All of the growth in oil demand is now stemming from Emerging Market (EM) economies and in order to determine future price movements the economic well-being of these economies will be the decider. We expect the price of Brent crude to remain range bound for the remainder of the year between 100 and 120 with an end of year target of 105 dollars.

Precious metals: The rally in gold, which has now lasted for more than 10 years and has returned nearly 21 percent annually, is undoubtedly the world’s most powerful trend. Investors and central banks have all been competing for the yellow metal over the past two years as the global financial crisis has triggered an exodus out of other asset classes into “safer assets”, such as gold and silver.

During the third quarter record high prices led to increased volatility which dented some of the lustre for gold as it became increasingly difficult to trade. As a result we saw investors pulling out of long positions, both in ETFs and futures during August and September and we began to see 100 to 200+ dollar corrections. The super trend however remains firmly intact and only a move below 1,500 could spoil the party for investors holding close to 3,000 metric tonnes through various investment vehicles. We believe that gold may have another push to the upside reaching the magical 2,000 dollar level in early 2012 before a period of consolidation sets in.
Continued volatility could trigger additional margin increases on the major futures exchanges and force some investors to scale back positions even further. We see gold trading in a 1,650 to 1,950 range with an end of year target of 1,900. Silver has gone from being a driver to a follower of gold since the April price collapse. Given the weakened outlook for industrial metals we see silver potentially weakening further relative to gold with the value of one ounce of gold going from 50 to 55 ounces of silver.

Agriculture: Despite record planted acreage this crop year poor weather and reduced quality has led to a reduced U.S. production of corn and soybeans. This has caused a strong rally of the two over the summer in order to force demand rationing through higher prices. This rationing now seems to have begun having an impact on both feed demand and export. On this basis we believe that the prices of soybeans and corn have already peaked and could settle into 13 to 14 and 6 to 7 dollar ranges respectively for the remainder, also given our forecast for a stronger dollar which could dampen exports even further.

Weekly Commodities Update : Commodities in September - What a Mess

Global markets suffered serious setbacks during September as investors’ nerves were tested on numerous occasions. Hopes are now pinned on the fourth quarter which historically tends to support prices but continued uncertainty about the Eurozone debt crisis and the economic slowdown that is impacting the global economy will not go away anytime soon. The commodity area has seen elevated one-sided bets being reduced which leaves individual commodities in a much better position to react to price supportive news.

The three major commodity indices are currently down between seven and ten percent year to date after individual markets suffered heavy losses across the board over the last month, as seen below. Hardest hit has been the base metals sector with the LMEX London Metals Index down 21 percent year to date with copper and nickel particularly suffering heavy losses. The near six percent rise in the value of the dollar during September also hurt the sector, given its inverse relation to commodity prices.

Hedge fund redemptions receiving some attention
 

Many hedge funds have been struggling with their performance this year. The HFRX Global Hedge Fund Index is currently down 7.5 percent year to date and this has lead to increased risk of investors pulling their money out. An example of this was Man Group, the world’s largest listed hedge fund manager, whose share price dropped 25 percent this week as it said clients pulled 2.6 billion dollars during the third quarter. Similar redemptions from others could have an adverse impact on commodities as positions would need to be scaled down in order to reflect reduced levels of assets under management.

Metals stabilising after a week of records
 

Gold is heading for its best quarterly run in at least four decades despite the experience in August, the worst monthly performance since October 2008. Overall the past week in metals has been one for the record books. Silver dropped by 34 percent in a matter of days, its sharpest drop in 30 years. Gold meanwhile corrected by 20 percent from its peak, which has only happened twice before during the last decade.

Copper entered into a bear market having corrected by one third from the February high as hedge funds reversed their positions into shorts for the first time in more than two years. This resulted in the largest quarterly loss since Q4 2008 as concerns over Chinese demand, the world’s largest consumer of industrial metals, had investors changing their perceptions of industrial metals.

What triggered the sell-off?
 

The reasons behind the sell-off are numerous: risk adversity, a scramble to realise cash to cover loss-making positions elsewhere, economic slowdown reducing demand for industrial metals, hedge fund redemptions and not least another margin hike by CME, the world’s largest futures exchange. Added to this there has been market talk about heavy selling by Chinese investors. They have been focusing on the strength of their domestic economies and have been caught out by the slowdown elsewhere.

Since early August gold volatility has been stubbornly high indicating increased uncertainty about its future direction. A new record high at 1,921 was reached on September 6, but already before then (and after) professional investors have been reducing their exposure despite global stock markets going into reverse. Several 100 dollar corrections during the last month added to the unease among investors who had viewed gold as the ultimate safe haven asset.

Risks ahead?
 

It took 18 months to reclaim a new high during the previous two major corrections in 2006 and 2008; investor redemptions from exchange traded funds (ETF) have so far been very limited and as such carry the risk of further selling should that type of investor decide to scale back as well. Lastly and probably most importantly we need to see volatility reduced as excessive volatility poses the biggest risk to gold’s safe haven appeal.

Technically gold held and bounced strongly off its 200-day moving average, currently at 1,532 dollar, and this has returned some of the confidence that was lost during the rout. However, as long as we stay below 1,700 dollars per ounce there will be a risk of testing the support once again. The arguments for holding gold have, if anything strengthened during August so once this nervousness subsides gold could shine once again. Physical demand from a number of central banks has moved up a gear during the sell-off and that should also help cushion any further setbacks.

Oil declines on outlook for reduced demand
 

Oil prices saw the biggest quarterly drop since the 2008 financial crisis as attention shifted from tight supply issues towards slowing demand. Growth across the main oil consuming nations has been slowing and even China has not been able to avoid a slowdown. Most of the major oil trading houses have as a result been slashing their 2012 price forecasts in quite a dramatic fashion. 

So far support levels in Brent crude at 100 dollars have been holding but further signs of weakening economic activity could put this level under some near-term pressure, especially if the dollar continues its recent surge higher. For now though the sector continues its very nervous trading pattern as it tends to react to every little piece of news that hits the wire as traders search for clues about the future direction.

U.S. grain stocks higher than expected
 

Grain markets which have been anything but immune to the carnage over the last month fell further on Friday as a Grain Stocks report from the United States Department clearly showed the impact from reduced demand as both wheat and especially corn stocks were higher than expected while soybean stocks was as expected. The price of corn for December delivery having broken below the 200 day moving average also broke below the uptrend from July 2010 signalling near-term risk of further long liquidation.

Gold Margin Increase Triggers Rout

The past week in metals has been one for the record books. Silver dropped by 34 percent in a matter of days, its sharpest drop in 30 years. Gold meanwhile corrected by 20 percent from its peak, which has only happened twice before during the last decade. Copper corrected by one third from the February high as hedge funds reversed their positions into shorts for the first time in more than two years.

The reasons behind the sell-off are numerous: risk adversity, a scramble to realise cash to cover loss-making positions elsewhere, economic slowdown reducing demand for industrial metals and not least another margin hike by CME, the world’s largest futures exchange. Added to this there has been market talk about heavy selling by Chinese investors. They have been focusing on the strength of their domestic economies and have been caught out by the slowdown elsewhere.

Since early August gold volatility has been stubbornly high indicating increased uncertainty about the future direction. Up until and following September 6, when a new record high at 1,921 was reached, professional investors had begun to reduce exposure despite global stock markets going into reverse. Several 100 dollar corrections during the last month added to the unease among investors who had been viewing gold as the ultimate safe haven asset. 

The rout happened last Friday as rumours about an imminent CME margin hike on the gold futures contract pushed it below 1,700, only to accelerate Monday when Far Eastern investors could react to the new situation. Silver extended the sell-off that began in early May and gold reached but did not breach the line in the sand being represented by its 200-day moving average. 

In our article “Heads up! Gold futures margin could be raised again” from August we argued that the ongoing volatility and daily price swings probably warranted another hike to between 8,200 and 9,000 dollars per contract. On Friday the margin for holding a gold futures contract was raised to 8,500 which means an investor at the current gold price needs to pay 5.2 percent of the contract value to maintain a position. 

Such a margin is historically relatively high and unless we see a further escalation this should probably be enough for now. Technically gold held and bounced strongly of its 200-day moving average, currently at 1,530, and this has returned some of the confidence that was lost during the rout. The arguments for holding gold have if anything strengthened during August so once this nervousness subsides gold could shine once again. 

What are the risks from here? It took 18 months to reclaim a new high during the previous two major corrections in 2006 and 2008; investor redemptions from exchange traded funds (ETF) have so far been very limited and as such carry the risk of further selling should that type of investor decide to scale back as well. Lastly and probably most importantly we need to see volatility reduced as excessive volatility poses the biggest risk to gold’s safe haven appeal.

Commodities Weekly Update : Commodities Sink into Red as Confidence Saps

Riskier assets such as commodities and stocks were seriously shaken this week as the U.S. Federal Reserve failed to lift investor confidence. At its long awaited meeting it delivered the now famous “Operation Twist” whereby it will be supporting the long end of the yield curve thereby attempting to keep borrowing costs low. What spooked the market however was the comment that the U.S. economy was facing “significant downside risks”.

As my colleague wrote after the announcement: “With the Fed launching Operation Twist Bernanke furthermore runs the risk of arriving too late at the party with a solution for the second time in 10 months as his QE2 programme last November came so late that the economy had long rebounded and the programme fuelled a massive commodity rally instead, which ultimately weighed on U.S. consumers in the first half of this year and forced the economy into a halt yet again.” Full text here.

By avoiding a new QE2 style liquidity injection Bernanke at least removed the fear that another round of galloping commodity prices could be on the cards. This could help consumers and manufacturers who have been struggling amid higher prices of anything from copper to gasoline but at the same time confidence is being hit by the ongoing sell-off in equities.

Changing investor attitude towards dollars
The European debt crisis helped the dollar climb to a seven-month high thereby weighing down the whole commodity complex as it became more expensive for buyers using other currencies. Last week the speculative dollar position held by hedge funds through IMM currency futures moved into positive territory for the first time in 14 months showing how the attitude towards dollars has changed dramatically over the last few weeks.

Commodities suffered the worst setback in more than four months on worries that a global recession could hurt demand for metals, energy and food. The Reuters Jeffries commodity index lost 8 percent in the week as every single commodity moved into the red. Interestingly gold, which has otherwise been viewed as a safe harbour amid stormy seas, also took a beating.

Gold falling victim to excessive volatility
Over the last month gold has made a new record high twice but has also been exposed to three 100+ dollar corrections. This has at least near-term reduced the safe haven flows as the increased volatility has made it increasingly difficult to trade and has prompted some gold bulls moving to the sideline to wait for lower prices and hopefully calmer trading conditions. During the same time investors in ETFs and futures have reduced exposure to gold by nearly 300 tonnes to 2,935 tonnes as cash and/or bonds have met increased demand.

LBMA expects gold at 2,019 next November
This week bankers, traders and investors at the gold industry’s largest annual gathering in Montreal predicted that the decade long Bull Run would continue into 2012. The 500 people attending the conference of the London Bullion Market Association predicted that gold would be trading at 2,019 dollars per troy ounce in November 2012. Last year when gold traded at 1,298 they predicted a price of 1,450 at this meeting, a 25 percent undershot from the 1,805 traded this Tuesday when the poll was made.

Having dropped more than 10 percent from the record high support is again being sought with 1,650 followed by 1,600 being the next major levels to look out for. Further dollar appreciation could trigger such a move but the positive long term projections for gold should help cushion any further setbacks.

Industrial metals suffer the most
Metals related to industrial use however have been the main losers with copper, silver and palladium suffering deeper setbacks. Silver lost an unprecedented 20 percent in just two trading days while copper, a gauge for global economic activity, fell into a technical bear market having lost more than 20 percent from the February high. Platinum is trading at the widest discount to gold in almost two decades as recession fears has removed some of the demand from industrial users which normally caters for more than 50 percent of platinum consumption. Investors looking for an economic recovery should watch this ratio closely as platinum has traded at an average premium to gold of nearly 40 percent over the last decade.

Oil markets confined to wide range
Crude oil, having failed to break higher last week, was caught up in the torrent of negative macro-economic news and dropped the most in two months. The surging dollar and the U.S. Federal Reserve’s failure to pull another rabbit out of the hat left traders focusing on reducing exposure. The moves go somewhat against the fundamental background as continued tightness especially in Brent crude, combined with a continued fall in inventories at Cushing, the delivery hub for NYMEX WTI crude, failed to receive much attention.

The overall worry is that demand for energy in the U.S. and China, the world’s two largest consumers, may fall as their economies slow down. These two nations, according to BP Plc, were responsible for 32 percent of global oil demand in 2010 and if adding the 17 countries using the euro this percentage rose to a total of 44 percent.

The civil war in Libya, which removed high quality crude from the market, has now almost ended. Experts on the ground are now predicting that oil could begin to flow in decent quantities much sooner than originally expected. These additional barrels will hit the market at a time where demand is softening and could force OPEC to address their current output levels. They do not want to see a repeat of the price collapse from 2008 to 2009 given the much higher need for revenues to balance their budgets.  

For now the most likely outcome of the market action is one of continued range trading. Brent Crude having been rejected at 117 went looking for support and should find some at 100. Meanwhile WTI crude having revisited the 80 dollar mark will now find resistance at 85 and support at 75.70, the August low.

Grain speculators suffer blowout
Hedge funds and large investors, who up until recently increased their long exposure to soybeans and corn, suffered heavy losses this week as the commodity deleveraging also hurt the grain sector. The price of new crop soybeans which only recently traded at 14.65 dollars per bushel suffered its biggest weekly loss in more than two years touching 12.50, as the surging dollar combined with signs of demand destruction took its toll.

The stronger dollar has led U.S. growers to face stiff competition on the international grain market with Russia still winning the big wheat tenders while Brazil, having seen its currency drop 16 percent, has stepped up its export of soybeans at very competitive prices.

Warning Flags: Gold … and Emerging Currencies

Two Thursdays ago President Obama threw a crack at South Korea:

“… while they’re adding teachers in places like South Korea, we’re laying them off in droves. It’s unfair to our kids. It undermines their future and ours. And it has to stop. Pass this bill, and put our teachers back in the classroom where they belong.
“If Americans can buy Kias and Hyundais, I want to see folks in South Korea driving Fords and Chevys and Chryslers.”

Come on, Mr. Obama — what did South Korea ever do to you?

Maybe it was a patriotic sucker punch, since South Korea is now bolstering its industrial sector while the U.S. economy is fighting to keep its alive. After all, he needed to rally the troops for passage of his jobs bill.

But sticking with South Korea, and the rest of Asia for that matter, things are going fairly well. This shouldn’t come as too big a surprise since there are plenty of analysts who love to point out Asia’s economic growth superiority.

Asia has been spotlighted as leading the charge out of the global recession that followed the 2008 credit crunch. Since then growth has never been a concern for Asia in the way it has for the West. But there has been a concern with the global currency wars.

I’m willing to bet you’ve heard about the Federal Reserve’s weak dollar policy. And we know that China has suppressed the value of its currency for the sake of its export competitiveness. The Bank of England has been very soft on monetary policy; so has the European Central Bank.

The result of action taken by these major central banks, plus the unattractive growth backdrops of their economies, is that capital (hot money) seeks returns — conservative and speculative — elsewhere. That elsewhere has been emerging markets, particularly in Asia.

And that’s when we start having a problem …

Hot Money Can Stoke Inflation

Inflation can wreak havoc on an economy. Just ask Brazil. Their finance minister was the first to officially call out the games being played between central banks as a currency war, even though the dynamic was not new. Brazil even found it necessary to enact capital controls, to keep money from flowing in too quickly, inflating the assets, appreciating the currency, pressuring Brazil’s consumers and reducing their export competitiveness.

But Brazil is a big, important, and well-known player in the global economy. They are one of the famous BRICS.

While some smaller emerging economies in Asia, such as Thailand, engaged some form of capital controls, Asia has so far been able to mitigate the impact of global currency wars; though inflation is still a concern.

A bigger concern, perhaps, is that these capital flows reverse. This is from a Reuters’ columnist:

“A stampede for safety has sent many of Asia’s currencies diving and the cost of insuring its debt soaring. The retreat says less about the region’s financial health than Europe’s. It’s a reminder that hot money is most dangerous not when it pours in, but when it pulls out.”

As for the cost to insure the debt, here are the 5-yr credit default swaps (CDSs) of Thailand, Indonesia, Korea, India and China:

Pretty substantial increases relative to the last 12 months. But for a gauge on how much further these CDSs could climb, let’s pull back to include 2008 data:

Hmmmm. Now, there’s nothing guaranteeing these CDSs will climb to 2008 highs; there’s nothing guaranteeing these CDSs will climb any further at all. But if a confluence of expectations and economic data signal a real credit crunch in Europe, you could safely bet these have not yet peaked.

BRICS to the Rescue?

Months ago at some indistinct point along the timeline of the euro zone’s slow speed financial train wreck, China pledged to purchase sovereign debt in an attempt to support confidence in Europe’s debt markets. And courtesy of the Brazilian Finance Minister, the BRICS nations will discuss the potential for similar efforts now.

It is not sure whether the BRICS nations will come in and simply buy European government bonds or if they’ll use sovereign wealth funds to recapitalize banks, thereby acquiring some influence in important European banks. Even if it happens, the impact will likely be negligible anyway.

You can’t fault Russia, China, and even Brazil for being worried about a collapse in the euro-zone economy — the euro zone represents a huge chunk of demand for Chinese goods; Russia is already very much exposed to euro-denominated securities; and Brazil’s fate rests very much on its largest trading partner’s (China) access to euro-zone demand.

It is believed China will avoid a hard landing and keep the broader Asian economy from a significant slowdown; but China cannot save the euro zone from recession.

I’ve said it many times before and recently brought it up in a webinar I delivered: In an environment of deleveraging and aggregate demand deterioration the deficit nations (particularly those with a domestic consumer base like the U.S.) hold the highest hand … as the surplus nations growth model suffocates.

That is what’s happening now.

George Soros, an extremely smart (but equally misguided) man admits it. On several occasions he’s come out warning of the dire consequences Europe faces if they cannot enact some type of bailout, or reform, or restructuring, or whatever. He recently came out with this:

“The political will to create a common European treasury was absent in the first place; and since the time when the euro was created the political cohesion of the European Union has greatly deteriorated. As a result there is no clearly visible solution to the euro crisis. In its absence the authorities have been trying to buy time.”

A common treasury in the euro zone among sovereign nations would be a step in this experiment aimed at creating global centralization. Too bad the BRICS will ultimately find it unappealing and their potential support efforts futile.

Maybe this is why German Chancellor Angela Merkel is sticking to her guns, saying:

“Eurobonds are absolutely wrong.
“In order to bring about common interest rates, you need similar competitiveness levels, similar budget situations. You don’t get them by collectivising debts.”

In other words: Germany, who is most tied to the troubled euro-zone nations, doesn’t want to be forced into an arrangement where they must bear the majority of the burden in supporting the troubled periphery nations.

And if the problem is not fixed soon …

Gold and Emerging Currencies
May Reveal the Markets’ Fate

Take a look at this chart of select European banks’ credit default swap (CDS) rates:

This CDS insurance now costs nearly as much as it did at the height of concern during and immediately after the 2008 financial crisis. Keep in mind, though, the 2008 crisis and concern emanated from U.S. banks and the U.S. subprime mortgage market.

This time the euro zone is ground zero.

And I point to the banks not because they are some dark and hidden risk of which only I understand the potential consequences. No — the chart above shows that investors are well aware that there are major risks among major banks in Europe … and to a lesser extent in the U.S. Here is another chart to that point:

Rising interbank lending rates signals credit markets growing tighter. We all remember how Libor was heavily watched back in 2008 as an indication of a tightening or loosening credit market. This time it is Euribor (the average rate of borrowing amongst 50 European banks) that needs to be watched:

Euribor has risen dramatically this year; and it has tacked on 35 basis points (almost 30 percent) in August alone. This means banks are growing stingier with their money when it comes to lending to other banks, highlighting deterioration in confidence.

The reason I mention all of this is to show the parallels to 2008 — a credit crunch, a banking crisis. What’s more, gold and Asian currencies took a dive back then, even though the former represents a safe haven and the latter pose solid underlying economic fundamentals.

Gold circa 2008:

Emerging currencies circa 2008 (Singapore dollar, Korean Won, Brazilian real, South African rand, Turkish Lira, Hungarian forint):

Will it be déjà vu all over again? In short: Tread carefully.

Best wishes,

Jack Crooks

Real Estate Becoming Bigger Bargain Faster in Terms of Gold

• Gold's looking an awful lot like money...
• Especially in real estate!
• At least to one major real estate mogul...
• But real estate isn't done falling yet...not by a long shot
• How you can make the most of the gold and silver bull market...and the real estate collapse

Gary Gibson, Geneva, Florida...

Gold used in a bona fide major real estate transaction?

American Precious Metals Exchange (APMEX) has a new home in one of Donald Trump's buildings. And you won't believe what the Donald accepted as a security deposit...

"Donald Trump, for the first time ever, accepted Gold bullion as a security deposit on the commercial office space that APMEX will occupy in the Trump Building at 40 Wall Street. 'The legacy of gold as a precious commodity has transcended to become a viable currency and an accepted universal monetary standard,' said Trump. 'Central Banks around the world are holding gold as a reserve asset. It is also a terrific, potentially lucrative diversifier in a portfolio, especially with such volatility in the stock market.'"

It's almost as if gold is money...or something...

This reminds us of a theme we've visited frequently in these pages. Silver for houses.

Recall these charts we shared with you a while back:

Years ago we came to the conclusion that a $1000 face value bag of 90% silver pre-1964 U.S. coins--about 715 ounces of silver--would one day buy a nice three-bedroom house in a decent U.S. neighborhood. In 2006 the price of that bag of silver coins and that nice American house started to move aggressively toward each other.

Comparing silver and real estate prices may seem arbitrary, but it's not. The news of Trump accepting gold for a security deposit underscores the point. Gold--and silver--are bound to become mediums of exchange. That is, they are bound to be seen as money again.

You may not even have to convert your gold and silver into other currencies first in order to transact. Folks--like the Donald--will simply accept your metal as money itself.

So hold your silver and wait. Silver probably has quite a bit of upside left while real estate has a bit further down to go...

But how far down are we talking here? Today's featured article answers that question for 10 U.S. markets that are on their way down. And today's Parting Shot has some more ideas to help you make the most of real estate's remaining fall.

Whiskey & Gunpowder
by Michael B. Sauter and Douglas A. McIntyre

10 Housing Markets That Will Collapse This Year

The real estate market is already in the deepest depression in modern U.S. history. If you think it can't get any worse, think again.

In several cities, the real estate market is about to drop even more. Home values in many of those cities, such as Las Vegas, have already collapsed as unemployment has shot higher. And with no hope of quick recovery, housing prices are expected to continue to fall. 24/7 Wall St. identified ten housing markets that are expected to drop by at least another 10 percent by 2012.

Methodology: We used data from the Fiserv Case-Shiller Indexes, which track real estate activity in 380 cities. We selected those that are forecast to have the largest percent price drop between the first quarter of this year and the first quarter of next. We added several other pieces of information to our city-by-city information, including June unemployment levels, median household income, and when home prices are expected to reach their troughs in each market.

Median household income in these cities tended to be near the U.S. median, and in some cases well below. We expected to find high unemployment in these cities. This turned out to be the case. In all but one of the cities we examined, unemployment was well above the national average. The rate was over 18 percent in two of the cities. This link between unemployment and expected future drop in home prices shows again how insidious the housing price problem is.

Home prices fell from all-time highs in 2006. Home equity tapped by second mortgages had been a tremendous source of income then for families who used it for retirement saving, education, and simple consumer purchases. Three years later, many of those homes were worth less than their mortgages. A large population of homeowners still owed a second mortgage. The burden of those two home loans happened to come at a time when national unemployment rose from 4 percent in the mid-2000s to 10 percent. The mix of unemployment and high mortgage payments ripped the home market apart.

The ten markets on the 24/7 Wall St. list of "Housing Markets That Will Collapse This Year," and several other like them, may not see a full recovery in home prices for years. Inventories in these markets tend to be large. Demand tends to be low as the unemployed cannot be buyers.

Finally, fear of further price drops all exacerbate the problem. No person or organization, including the federal government, has been able to help support the housing market, although the administration has tried. Not a single plan has built even a thin net under home values, despite the best efforts of the best economic minds in the world.

10. Fort Lauderdale, Fla.
Expected price drop: -11.1 percent
Median family income: $58,800 (194th highest)
Unemployment rate: 11.8 percent
Median home price: $196,000 (55th highest)
Projected to hit lowest level: Q2 2013

Since 2006, home prices in Fort Lauderdale have dropped by nearly 50 percent. A full 28 percent of that drop occurred in 2009 alone. As was the case throughout most of Florida, the collapse of the housing bubble decimated the construction-based economy. The unemployment rate of nearly 12 percent is evident of the construction sector's disastrous decline. The value of the 686,000 homes in the Fort Lauderdale area is expected to get even worse through at least the second quarter of 2013. Between Q1 2011 and Q1 2012, the median home price is projected to decline an additional 11.1 percent. Between 2012 and 2013, that number will further decrease by 8.7 percent.

9. Bethesda, Md.
Expected price drop: -11.5 percent
Median family income: $114,100 (the highest)
Unemployment rate: 5.1 percent
Median home price: $417,000 (5th highest)
Projected to hit lowest level: Q3 2012
Bethesda, the extremely wealthy D.C. suburb, has the highest median family income in the country — $114,100. It also has the fifth highest median home price, at $417,000. That position may change, however, as Case-Shiller projects home values will drop by more than $60,000 by next year.

8. Salinas, Calif.
Expected price drop: -11.8 percent
Median family income: $62,100 (145th highest)
Unemployment rate: 12.8 percent
Median home price: $240,000 (34th highest)
Projected to hit lowest level: Q2 2012
Salinas is a small coastal city located 25 miles south of San Jose. Since 2006, the median value of the of the 125,000 houses there decreased in value by more than 61 percent. This is the fourth biggest decline from peak home value among all major American cities. More than 40 percent of this drop occurred in 2009, the year after the housing bubble burst. Unemployment in the city is at 12.8 percent, well above the national average of 9.2 percent. Several companies in the area, including food processing company Romco, expect to continue to lay off workers in the coming months, which should serve to further depress home values.

7. El Centro, Calif.
Expected price drop: -12.1 percent
Median family income: $43,300 (10th lowest)
Unemployment rate: 28.6 percent
Median home price: $130,000 (70th lowest)
Projected to hit lowest level: Q1 2012

El Centro is located five miles from the Mexican border, and is one of the poorest cities in the country. Median income is just $43,300 per family, the tenth-lowest in the U.S. Unemployment is at a staggering 28.6 percent. Between 2006 and 2011, home prices decreased by more than 50 percent. According to a report in the Imperial Valley press, one home was sold in the El Centro area before the recession for $390,000. In 2009, that home was listed at $200,000. Prices are expected to drop an additional 12.1 percent by the first quarter of 2012.

6. Miami, Fla.
Expected price drop: -13 percent
Median family income: $47,800 (32nd lowest)
Unemployment rate: 13.4 percent
Median home price: $175,000 (76th highest)
Projected to hit lowest level: Q2 2013

At 13.4 percent, Miami has one of the highest unemployment rates of any major American city. Home values are above average, but are down by more than 50 percent since 2006. Partially as a result of the staggering unemployment rate, the value of the city's homes are projected to decrease by another 13 percent by the first quarter of 2013. What's more disturbing, prices will then likely fall an additional 10.1 percent. If this second drop occurs, it will be by far the greatest depreciation of property values in the country in an area already decimated by current low prices.

5. Merced, Calif.
Expected price drop: -13.2 percent
Median family income: $42,900 (8th lowest)
Unemployment rate: 18.6 percent
Median home price: $112,000 (38th lowest)
Projected to hit lowest level: Q2 2012

Merced has a median family income of just $42,900, placing it among the ten poorest major cities in the country. In 2008, the city's property lost 46.1 percent of its value. This was the second-greatest depreciation in home value for a city since at least 1980. The city's median home prices are expected to drop an additional 13.2 percent by the beginning of next year.

4. Detroit, Mich,
Expected price drop: -13.4 percent
Median family income: $49,000 (47th lowest)
Unemployment rate: 12.7 percent
Median home price: $42,000 (the lowest median home price)
Projected to hit lowest level: Q2 2012

Since the recession began, Detroit has been the horror story for plummeting home values, foreclosures, vacancies, and unemployment. To date, Detroit's median home price of $42,000 is the lowest among all 385 major metropolitan areas. While the motor city has been languishing for some time before the recession, the drop in home value has been more steady, as opposed to the rapid drop-offs seen in cities in Florida, Nevada, and California. Detroit's already record-low values are expected to drop an additional 13.4 percent by the first quarter of 2012.

3. Las Vegas, Nev.
Expected price drop: -13.9 percent
Median family income: $58,900 (196th lowest)
Unemployment rate: 12.4 percent
Median home price: $140,000 (90th lowest)
Projected to hit lowest level: Q4 2012

Las Vegas was one of the center points of the meteoric growth in the first half of the 2000s, only to be followed by a catastrophic fall in the second half. Between 2008 and 2011, home prices in the city dropped by 42.3 percent, the second greatest decline in the country. Although home values in the city are already more than 58 percent off their peak, they are projected by Case-Shiller to drop an additional 13.9 percent by Q1 2012, and then 6.3 percent more by Q1 2013.

2. Riverside-San Bernardino, Calif.
Expected price drop: -15.6 percent
Median family income: $59,700 (190th highest)
Unemployment rate: 13.7 percent
Median home price: $181,000 (70th highest)
Projected to hit lowest level: Q1 2012

Like so many industrial cities in California, Riverside-San Bernadino is being affected by the recession and housing crisis more than most other parts of the U.S. Unemployment has hit 13.7 percent, home vacancy and rental vacancy rates are high, and home values are plummeting. Median home prices are down more than 55 percent from their peak in 2006. By the beginning of next year, prices are expected to drop an additional 15.6 percent, or nearly $30,000.

1. Naples, Fla.
Expected price drop: -16.6 percent
Median family income: $62,800 (137th highest)
Unemployment rate: 10.5 percent
Median home price: $225,000 (40th highest)
Projected to hit lowest level: Q4 2012

Like much of southwest Florida, Naples was one of the fastest-growing communities in the country as it prepared for the millions of baby boomers on the cusp of retirement. When the housing bubble burst, however, the thousands of construction projects for condominiums and retirement communities were halted or lost money, and home values plummeted. From peak home value in 2006, prices dropped by 55 percent. They are expected to keep falling through next year more than any major city in the country. By Q1 2012, home values will drop an additional 16.6 percent, or nearly $40,000.

Regards,

Michael B. Sauter, Douglas A. McIntyre

Michael B. Sauter is research editor of 24/7 Wall Street.

Douglas A. McIntyre is the former Chairman and Chief Executive Officer of On2 Technlologies, a leading video compression company. He was chosen to be one of the members of the inaugural Streaming Media All-Star team, the 25 people who had the most impact on streaming media over the last 10 years. He was also the Publisher of Financial World Magazine from 1983 to 1995. McIntyre has also been President and Chief Executive officer of FutureSource, LLC and President of Switchboard.com, which was, at the time, the 10th most visited website in the US. McIntyre is a magna cum laude graduate from Harvard.

Republished with permission from 24/7 Wall Street.