An often heard knock on gold and silver is that they do not pay interest. Consequently, many investors eschew the precious metals and seek to achieve asset appreciation by compounding interest, a proven path to wealth, assuming things remain normal and the interest and the funds loaned are secure. However, today “things are not normal” as the subprime mess spreads.

Cameco Corporation, which boasts of being the “world’s largest publicly traded uranium company and a growing gold producer,” has indeed been successful, so successful that it had funds to invest. Monday, however, Cameco (NYSE: CCJ) announced that funds it had invested in asset-backed commercial paper market paper were not forthcoming.

Further, according to resourceinvestor.com, other Canadian miners are exposed to the asset-backed commercial paper market and could get hit hard if banks and trusts prove unable to pay. No wonder the gold mining stocks sank as the subprime mess spread. (See the August 15 post Financial meltdown averted.) We can expect, because of the Cameco announcement, a plethora of disclosures by other mining companies as to whether or not they are exposed to similar investments.

Investors tempted to invest in gold shares instead of gold bullion or gold bullion coins, need to learn from the Cameco situation. Management can make mistakes, and gold mining shares carry risks beyond holding physical gold and silver.

Investors who like to “earn interest” need to keep in mind that interest is something you receive for doing without your money, for taking the risks of lending it. When you hold gold and silver, you are not entitled to interest because you are not doing without your money. Further, you are not taking the risks that are inherent in “interest earning” investments.

It is not hyperbolic to say that last week the world’s central banks averted a worldwide financial meltdown. And, it is not an exaggeration to say that the public’s response was a yawn.

The central banks prevented the meltdown by “injecting” massive quantities of freshly-created monies into the markets. No new wealth was created, but billions of intrinsically-worthless fiat currencies were brought into existence to handle the financial contagion that was brought on by the subprime mortgage mess. Jochen Sanio, Germany’s Financial Regulator, called it “the worst banking crisis in Germany since 1931.”

The mortgage industry created the mess by lending money to people who were not capable of repaying it. (Remember the ads: If you can afford to rent, you can afford to own?) To get rid of this low quality paper, which has been dubbed “toxic waste” in financial circles, the industry, with its cohorts on Wall Street, rolled the paper into CDOs (collateralized debt obligations) and sold them to banks worldwide.

When it became evident that the subprime CDOs were not worth their face value, the overnight lending rates between banks spiked as banks became nervous about lending to each other. In stepped the central banks, doing only what they are capable of doing in a monetary crisis: print more money.

According to a Reuters report, the Fed “provided” the banking systems with $38 billion on Friday, August 10, the largest single amount of “liquidity” added in the aftermath of September 11, and that was the second day of intervention, with $24 billion having been “infused” Thursday. According to Bloomberg, the ECB loaned 61.05 billion euros ($83.6 billion) after injecting a record 94.8 billion euros of funds the day before.

Worldwide, central banks injected at least $326.3 billion within 48 hours “to prevent markets from spinning into a global liquidity squeeze.” Inflating with the Fed and the ECB were the Bank of Japan, the Reserve Bank of Australia, and the central banks of Norway and Switzerland. Denmark, Indonesia and South Korea said they were ready “to provide cash.”

What we just had was massive inflation of the world’s money supply. But, will the dollar sink because of this specific inflation? Perhaps not immediately because other central banks around the world inflated their currencies right along with Fed. Actually, the ECB inflated the euro in greater quantities than the Fed inflated the dollar.

I suspect the public’s response (non-response?) was because of its lack of understanding of the severity of the crisis. Further, the public seems to accept the notion that central banks are all powerful, capable of handling any monetary crisis. And, why not? Isn’t that the impression conveyed by establishment financial publications, such as The Wall Street Journal, which are staffed by writers supposedly knowledgeable about economics and financial matters? Isn’t Ben Bernanke, the present Fed head, the most brilliant economist alive today?

Besides, didn’t the world’s central banks just avert a crisis? Yes, they did, but not without a price, which will be paid in the future as the massive, newly created intrinsically-worthless fiat currencies circulate through the world’s economies and bid prices higher. Monetary inflation begets price inflation, as surely as night follows day. The greater the money creation, the worse the price inflation. It’s only a matter of time.

Perhaps, what has really come out of the subprime toxic waste mess is that the central bankers have revealed their only solutions to monetary crises: print more money. Jean-Claude Trichet, president of the ECB, said it is “giving the markets the appropriate liquidity.” But, more on target was the assessment by Alice Rivlin, a former Fed vice chairman who’s now at the Brookings Institution in Washington, “The Fed has almost unlimited ability to supply liquidity if they feel that is appropriate.” Perhaps more telling that central banks stand ready to print is the story about how Fed head Ben Bernanke got the moniker of “Helicopter Ben.”

In a 2002 speech before the National Economists Club in Washington, D.C., when Bernanke was a member of the Board of Governors of the Fed, he talked about deflation. Basically, he said that no one should fear deflation because “control of the means of production for money implies that the government can always avoid deflation by simply issuing more money.” Then he alluded to a statement made by Milton Friedman about using a “helicopter drop” of money into the economy to fight deflation.

As the subprime mess was addressed with helicopter flights, so will all other future financial crises. Inflation is the future. As more and more people learn the true nature of today’s monies, it will usher the dollar and the world’s other fiat currencies further down the road to the graveyard that awaits all fiat currencies. Gold bullion and gold bullion coins and silver bullion are appropriate investments for the times.

For many years, gold enthusiasts have known about the shenanigans of the Plunge Protection Team (PPT) in the gold market. Now, Eric Englund, in an article on lewrockwell.com, discusses the PPT’s handiwork in the stock market, via a manipulation of the Dow Jones Industrial Average through purchases of General Motors stock.

A few interesting notes from Englund’s article:

Analyzing General Motors’ 12/31/06 FYE financial statement, you will learn that

• GM’s “as stated� net worth is negative $5.4 billion;
• By fully discounting intangible assets, which includes deferred tax assets, GM’s net worth is arguably negative $48.5 billion;
• GM’s as stated working capital is negative $3.7 billion;
• By fully discounting current deferred tax assets, GM’s working capital drops to negative $14 billion;
• General Motors’ total liabilities amount to a staggering $190.4 billion
• GM’s net loss, in 2006, was nearly $2 billion.

Not exactly the place you would want to put widows’ and orphans’ monies. Yet this past quarter was a barnburner for GM’s stock.

For the quarter, the Dow Jones Industrial Average was up by 8.5% while GM was up by nearly 23%. During the trading week of June 25th, when Wall Street was really feeling the heat of Bear Stearns’ meltdown, General Motors’ stock closed the week up by 6.6%. For the week just ended, GM’s stock hit a 52-week high which tallies up to nearly a 43% gain from its 52-week low

As Englund noted, General Motors’ stock closed this last quarter with a magnificent performance that served to steady a jittery stock market. And, quarter endings are important on Wall Street for the quarterly performance reports that go out, especially to mutual funds holders who now total in the tens of millions.

Englund goes on to discuss the members of the PPT. An interesting read, and an enlightening read for investors not familiar with the Plunge Protection Team and its behind the scenes activities.

Investors following the housing and the bond markets will find Ambrose Evans-Pritchard’s “Banks set to call in a swathe of loans” an interesting, if not frightening, read. “The fast-moving crisis at two Bear Stearns hedge funds,” the article notes, “exposed the underlying rot in the US sub-prime mortgage market, and the vast nexus of collateralised debt obligations known as CDOs.” (The article is on a forum-type site, and the older this post gets the further down the site viewers will have to scroll.)

The article further notes that Bear Stearns has now put up $3.2 billion, a quarter of its capital, to rescue one of its hedge funds. This is the biggest bail-out since the Long-Term Capital Management crisis in 1998.

For readers not following the bond market in 1998, the Long-Term Capital Management crisis so threatened the bond market that the Fed engineered a bailout.

Any wonder that the large commercials recently reduced their long dollar positions? (See June 26 post below.)