Elmer Sutton’s eyebrows shot up when he saw the ad proclaiming gold stocks might make you wealthy.

It sounded like the perfect solution for his stock portfolio, loaded with investments going nowhere. He vaguely recalled hearing a little about gold, but if what the ad said was true, he thought he could make a killing.

So he called the broker and made an appointment for the next day. The broker seemed very knowledgeable and took the time to explain why he felt gold stocks were one of the best investments right now. He said this was not a get-rich-quick scheme, but that if you stuck with it, you could see potentially enormous profits. It sounded good. Elmer wrote a check for $2,500, and the broker bought three gold stocks for him.

The very next day, gold took a big drop and his spankin’ new gold stocks sold off hard. Not only that, there were riots in South Africa, where one of the companies was located. Elmer was instantly disgusted. He was losing money yet again. This time, however, he’d play it smart and get out before he lost it all – something his wife made sure he understood – so he hastily called the broker and told him he wanted his money back.

“Elmer, you can’t do that,” the broker told him. “This isn’t Woolworth’s.”

“I’m not buying them!” he yelled to the broker and slammed the phone down. Elmer wanted out, and that was that. He wasn’t about to lose any more money in the stock market.

Three years later, long after he’d forgotten about that broker, newspaper headlines were screaming about gold. Everyone at the party Elmer attended the night before was talking about how well their gold stocks were doing. His co-workers bragged about the good deals they were getting buying gold and silver coins. Everyone was talking about precious metals.

Elmer panicked; he didn’t want to be left behind. He scrounged around the house until he found the original confirmations of the trade he’d broken with “that broker”: 1,500 shares of Grootvlei at 35¢, 500 Anglo American at $2.50, and 1,000 Leslie at 50¢. He grabbed his newspaper and saw that Anglo was up 500% since then, and the others were paying dividends – this year alone – totaling more than he would have paid for his shares in 1976.

As the newspaper went limp in his hands, he had a vague recollection of the broker he met with and quickly tracked down the phone number. “I want to buy some gold stocks,” he breathlessly panted to the secretary answering the phone. She said the broker wasn’t in, and that while they would be happy to buy a stock for him, they were actually recommending investors sell their gold stocks.

Elmer couldn’t believe it. How ludicrous! Everyone he knew was buying, and he was personally acquainted with many people who were getting rich. He pushed on. “Look, everyone’s into gold right now. It’s on the front page of the paper, for crying out loud. So I want to buy some gold stocks right away.”

“That’s fine, sir, but I think you should talk to the broker first,” the secretary replied. “We really don’t recommend you do that.”

“I don’t care!” Elmer screamed, which he didn’t mean to do, but panic was setting in. “What’s this clown’s name anyway?”

“Doug Casey,” she replied.

Please Don’t Crowd the Emergency Exit

This true story explains how Doug Casey bought gold stocks at the very bottom of the market, as he took on those abandoned shares from Elmer. But today’s lesson underscores what Doug Casey saw back in the late 1970s: there’s certain to be a rush into gold and silver, and buying before Main Street catches gold fever is the only way to play this trend.

Because when Midas fever hits, prices will explode to the upside, for both the metals and the stocks. How do we know that?

First, let’s look at gold. If we added up all the gold ever mined on the planet, its total value would equal no more than $5 trillion at today’s prices. Yet, look at how this compares to the debt and bailouts and other monetary mischief of current governments…

Let’s make this chart very clear. Of the $5 trillion in gold ever mined…

• The U.S. government has thrown over twice as much at the economy in the past 12 months.

• The U.S. debt is more than double this amount so far this year.

• Total global government bailouts are almost four times larger (and this is a conservative figure; one estimate puts it at $24 trillion).

I intended to include annual gold production as one of the comparisons, but the chart isn’t big enough and neither is your monitor: 2008’s global gold production equaled about $73 billion, and to make that figure discernable on the chart would require the Global Bailouts bar to hit the ceiling above your head. That’s how small the gold market is.

The implications are undeniable: when the greater public rushes into gold – whether in response to inflation, dollar woes, war, whatever – the price will be forced up by an order of magnitude.

A Picture Is Worth a Thousand Dollars

While physical gold will protect our wealth, it’s the gold stocks that can potentially make us wealthy.

Once again, to get a sense of the Lilliputian size of the gold industry, I compared it to several other leading industries and stocks.

The value, as measured by market capitalization, of all gold producers around the world is less than Walmart’s. Every gold stock would need to nearly double just for the industry to match ExxonMobil. The oil and gas industry is about 12 times bigger.

When your neighbors and relatives and co-workers and friends all start clamoring to buy gold stocks, the pressure on prices will be enormous, rocketing our positions upwards.

Meanwhile – and admitting we’re first and foremost gold bugs – the picture for silver is even more dramatic. The potential for silver stocks is jaw-dropping.

If the gold industry is tiny, then silver’s $9 billion market cap makes it a nano industry. The entire silver industry is over 21 times smaller than gold’s! If gold explodes, silver will go supernova.

Consider these macro-facts about a micro-market and what they reveal about silver’s enormous potential:

• There are over 200 companies in the S&P 500 with a market cap larger than the entire market of silver producers

• There are five times more gold stocks than silver.

• Total silver production in 2008 was valued around $10.3 billion (at today’s prices). That represents just 1.5% of the $700 billion bailout last year, and 0.006% of the current U.S. monetary base.

• Of the 20 largest silver producers, only five actually call themselves a “silver” company, due to the fact that about 73% of all silver mined is a byproduct of other metals mining.

Any flood into the silver market would overwhelm it. In other words, the rise will be stunning. While it’s not going to happen tomorrow, I strongly suggest you get on board before that rocket ship takes off.

Just putting these charts together stirred my feelings of restlessness, making me anxious for the mania in precious metals to arrive. But the timing is not up to us. Be patient, because if you’re invested in gold and silver and the respective, high-quality stocks, you’re on the right side of this trend.

Regards,
Jeff Clark
Senior Editor, Casey’s Gold & Resource Report

November 20, 2009

Gold Mania Means a Niagra Falls of Dollars Through a Precious Metals Market Garden Hose was originally featured on Whiskey and Gunpowder

And counter to our prediction of an imminent, counter-trend U.S. dollar rally, the dollar is most definitely not surging. Take a look at the chart below. We’ve been writing about the decline of the dollar for nigh on ten years. So we looked at a ten-year chart to tally up the damage. It is considerable.

Dollar Index Threatens New Lows

What’s at stake with the interpretation of this chart? If the dollar rallies on short covering from the dollar carry trade (a BIG if), then other “risk” assets like gold, stocks, and emerging markets would probably sell off.

The chart shows that the index’s 50-week moving average is set to cross below its 200-week moving average. That is mixed news. The first time it happened on this chart was back in early 2003. That was the early days of a long decline in the index. The second time, though the move failed to confirm the “flight to safety” rally of 2008 had staying power in 2009.

Once the fear that gripped markets in 2008 went away, the investment world sold the dollar and started borrowing en masse to buy other, higher-yielding currencies and assets (like the Aussie dollar and resource stocks). That’s where we are now.

But based on the chart, is the next move down in the dollar index a new low, which the crossing of the long-term MA by the short-term MA would suggest? Or is it a false move? Will the dollar quickly and violently rally for some reason (geopolitical perhaps) that currently remains unknown to the human beings of this world?

“It’s an interesting chart,” said our technical analyst Murray Dawes. “But it is not useful for timing your moves out of or into trades related to the dollar’s movement.”

“So you’re saying our chart doesn’t have any useful information from a trader’s perspective?”

“Not really.”

The one piece of important information communicated by our chart is that the dollar’s trend is down. But there IS a catch.

The catch is that when this many people are this uniformly bearish, everyone is probably wrong. Consider this a warning then, that a dollar rally is just the sort of thing that will lead to a correction in the gold price and the stock market. We won’t speculate on the sort of things that could lead to a dollar rally. But surely they’re out there and sooner or later they’ll come.

The other possibility is that the dollar is in its death throes and that this is the big one, in currency terms. That is such a momentous and disastrous event that people consider it both kooky and unlikely, not to mention undesirable to a predictable and comfortable world. But it IS possible.

And do you get the feeling that this kind of manic melt up rally is the sort of irrational frenzy that comes just before everything goes haywire? Haywire is not a precise financial term. So what do we mean?

We meant that the world enjoyed a 20-year economic relationship based on a fundamentally unbalanced global economy. Manufacturing capacity migrated to Asia where wages were lower. For awhile, this was mostly good news in Western countries. Goods got cheaper but jobs didn’t vanish.

Now the situation is not so pleasant. The world is awash in manufacturing over-capacity, especially in China. Wage deflation (in the Western world) looks like a long-term trend, leading to a lower standard of living. This wage deflation is occurring at exactly the same time that Western governments are encountering demographic crises of ageing populations.

We all knew the ageing of the Boomers would put pressure on public finances right around now. But no one reckoned on a global financial crisis further saddling the public balance sheet with debt. And no one reckoned that Western wages and incomes would be falling at just the time people needed them most. And no one reckoned that savers would lose the most from low interest rates on fixed income — even though those low rates are keeping the American housing sector on life support.

It’s a bit of global impasse. America’s needed structural adjustment has come. Households and businesses are reducing debt, trying to live within their means. But the net adjustment to the American balance sheet is not happening because public sector debt is growing so fast.

Meanwhile, the other obvious adjustment is that the Chinese currency ought to be allowed to strengthen. For political and social reasons though, China will not allow this. It means China is actually adding to its industrial over capacity. It is conjuring up the world’s largest ever bubble in fixed asset investment, including commercial real estate.

It is easy to see why China is reluctant to allow a stronger Yuan. Exports account for 39% of Chinese GDP. The Chinese economy, and probably the Communist Party itself, cannot survive on unleashed Chinese domestic demand. They need American markets. But American consumers — in addition to reducing debt — are now realising that the focus on finance over manufacturing from American policy makers has worked out for Washington and Wall Street, but not terribly well for the average American worker.

Where do we go from here? How about the blame game. U.S. Treasury Secretary Tim Geithner once blamed the Chinese for being currency manipulators. He back-tracked later. And yesterday, Liu Mingkang, the chairman of the China Banking Regulatory Commission, had a go at America.

“The continuous depreciation in the dollar, and the US government’s indication that, in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation.” He is blaming the U.S. for fuelling a destabilising global bubble.

Of course that bubble is felt most acutely because China pegs its currency to the dollar. China is right to blame the U.S. for manipulating its currency to try and improve its competitive position. And China is right to worry about the value of its dollar-denominated assets in a world of exploding U.S. debt supply.

But China has put itself in this position. And here we are at the end of 2009 with a world still fundamentally un-adjusted to a new, workable currency arrangement. The world remains burdened by trillions in assets purchased with debt. Those assets linger on bank balance sheets, on government life support but fundamentally lifeless at fictitious book value prices.

And meanwhile, the China-US currency arrangement has fuelled a global bubble. The question is how it will end. In the U.S., the housing market looms as the Achilles heel of the economy. It could strike households, banks, and the government again in the next 12 months are more mortgages reset at higher rates (with lower home values).

If the event that pops this bubble comes from America, look for the supply of credit to the emerging world to dry up again. If the bubble pricking comes from China, what then? Well, China does everything big. So a Chinese bust would be world-class.

Regards,
Dan Denning

November 18, 2009

Editor’s Note: This article originally appeared in the Daily Reckoning Australia as “Dollar Rally the Sort of Thing that Will Lead to Correction in Gold Price.” To view the original article, please click here.

Will a Dollar Rally Lead to a Gold Correction? was originally featured on Whiskey and Gunpowder

But when the sun disappears and inky darkness fills the sky, Dubai’s cityscape lights up and takes on a magical quality.  Crowds fill its restaurants in the evening, the apple-scented smoke of the shisha in the air. “I love Dubai at night,” my host and friend — let us call him Andy — said as we sat out drinking and chatting on the balcony of his flat. “It’s like something out of Arabian nights.”

Andy is an example of what Addison Wiggin (my publisher and companion on this trip) and I have come to call a Penthouse gypsy. They go where they are treated best, wherever in the world that may be. They have money, own businesses and invest in real estate. They are smart and independent and value their privacy. And they aren’t living in the U.S. or the U.K or Europe.

Andy’s apartment sits on a man-made island in the middle of a man-made lake. It’s called The Old Town Island, even though it’s brand-new, because it looks like a part of old Arabia — or at least the old Arabia of Hollywood and Westerners’ dreams.

The Old Town Island stands in sharp contrast with the ultra-modernity of Dubai’s signature buildings, with their curves and sail shapes washed in multicolored lights. These structures give Dubai the air of an eccentric rich man’s playground. There is a casual indifference to costs. Only the rich could build such things in deserts.

For example, The Old Town Island sits next to the Burj Dubai, which is the world’s tallest building, at 2,684 feet. That’s nearly twice as tall as the Empire State Building. (The Middle East, by the way, held the record for tallest building for 3,900 years — thanks to the Great Pyramid of Giza — before the West took the crown.)

The Burj Dubai hotel will open soon. It is a symbol of Dubai, of its ambition and can-do spirit, its boldness and its wealth. By 2008, Dubai had as much property under development as Shanghai — even though the latter has a population six times as large. Everywhere in the world, there is a tug of war between utility and a desire to build pretty things. In Dubai, though, utility seems to lose. Instead, the goal is to make the largest, longest, tallest — you get the idea.

At the Burj, the smallest suite is 7,200 square feet. The electricity needs of this building in the desert are enough to power a small city. Think of just the power needed to pump water to its upper floors so you can flush a toilet. No wonder Dubai and the UAE (of which Dubai is a part) are starved for power.

No wonder, too, that the UAE has the largest carbon footprint per capita of any place on Earth. People here also use more water — 145 gallons per day — than any other people anywhere. Yet there is no river and hardly any water resources. The water resources Dubai enjoys comes from turning seawater to fresh water.

One question I kept asking myself on this trip was how sustainable all this is or could be. But that leads to some interesting and surprising answers about why Dubai exists at all.

Four Reasons Why Penthouse Gypsies Love Dubai

Don’t assume that Dubai is like Las Vegas, a sort of Arabian Disneyland in the middle of the desert. There was a reason why people settled here long ago — and why the Penthouse gypsies do so today.

The old Dubai actually had the best of the creeks of the southern Gulf. I visited the twisted old creek while in Dubai. Dhows still make their way across the Gulf to Iran, India and East Africa and back again, as they have for centuries. There isn’t a container in sight in this old port. The big commercial port in Dubai now is Jebel Ali — the world’s largest man-made port. But in this old port, goods are offloaded by hand, largely on the backs of Pakistani and Indian workers. The goods are stacked right offshore — sacks of pistachios, crates of cigarettes, boxes of toothpaste and other goods.

Dubai, then, is a port city. Its main business is trade. The ruling sheiks opened up Dubai as a free port to the world — no taxes, no hassles. “Free trade was mother’s milk for Dubai,” writes Jim Krane, author of the excellent City of Gold: Dubai and the Dream of Capitalism. Trade is what made Dubai wealthy. Dubai has more in common with the Venice of the 12th century… or with Singapore or Hong Kong today.

As with all free ports, it has had a history of being a haven for smugglers. Early on, traders would smuggle gold through here on its way to India. Gold, guns, slaves, diamonds, drugs — all ran through Dubai.

Of those, gold is the key driver. Dubai is still called the City of Gold. There are gold souks all over. People here seem to love their gold. While I was there rumor spread that the GCC — along with China, France, Japan and Russia — were having secret meetings in which they were planning to stop pricing oil in U.S. dollars. (The GCC stands for Gulf Cooperation Council and is made up of the six Gulf states, including the UAE.) Instead, a basket of currencies would replace the dollar. This basket would include gold. True or not, it helped generate some buzz in the gold market, sending gold to a new all-time high.

Today’s real boom in Dubai depends on a few key factors, and it’s not all about oil money. After spending some time here, chatting with Penthouse gypsies like Andy, I would boil it down to four successful ingredients:

Low regulations, low tax. This has probably been a Dubai advantage for a hundred years, but people here told us repeatedly how easy it is to set up shop in Dubai and how your privacy is protected. There are also no income, property or corporate taxes. Zero. (The city funds itself with taxes on hotel occupancy, liquor sales and restaurant meals, as well as permits for roads and such. Part of the budget also comes from the Sheikh’s business interests — such as Emirates Airlines and the aluminum smelters.)

In 2002, Dubai allowed foreigners to own property in so-called “freeholds.” That was a big milestone that kicked off a wave of immigration. So now there are these freeholds where the Penthouse gypsies live in high style in very nice communities.

The backlash of Sept. 11. Before Sept. 11, Middle Eastern oil-exporting countries reinvested $25 billion a year in the U.S. After Sept. 11, that slowed to about $1.2 billion a year. Arabs no longer felt welcome in the U.S. and feared what might happen to their wealth. So guess where the money went?

Arab wealth started flowing back to the home countries. The economies of the eight states of the Gulf Coast grew 60% from 2001–08. “Cash poured into Dubai,” Krane writes. And Dubai’s growth rate topped China’s, averaging 13% per year.

Essentially, the repatriation of Arab wealth from the U.S. was a big driver and still continues to be today. As the Middle East region gets wealthier, a good chunk of that wealth will flow through Dubai.

Finally, the UAE fixes the value of its currency to the dollar — at least for now. What this means is that as the U.S. printed dollars, the inflationary effects were exported to Dubai. That put Dubai into trouble. Lots of speculative capital flowed into building islands in the shape of date palms or creating residential communities with robotic dinosaurs from Japan. Now Dubai is suffering through a massive real estate bust as a result (to the advantage of the Penthouse gypsy).

Still, Dubai’s important position in world trade is many layered, like a wedding cake. As Krane writes: “Dubai today is the Middle East’s capital of commerce, one of its biggest recipients of foreign direct investment, its top financial center, biggest port and airport and home of the largest number of foreign businesses.”

Quite a list, considering air conditioning arrived only in 1967. Today, Dubai is a key crossroads on the New Silk Road. It fills the gap between New York/London and Singapore/Hong Kong. And as long as Dubai is kind to money, the Penthouse gypsies will come.

For investors such as you and me, the Dubai story is part of the greater New Silk Road. Dubai’s and the New Silk Road’s booming populations need food, water and power. The increasingly larger cities need infrastructure. Its growing wealth needs a storehouse of value. On this latter front, the Penthouse gypsies we met all prefer gold and/or a mix of currencies, such as Norwegian kroner and Singapore dollars.

Regards,
Chris Mayer

November 12, 2009

Penthouse Gypsies Flock to Dubai was originally featured on Whiskey and Gunpowder

In deciding to make hardly any changes to its interest rate policy or even the language from its last statement, the Fed is encouraging traders to resume the dollar carry trade. For now, it looks safe to borrow in low-yielding currencies like the U.S. dollar and invest in higher-yielding assets like the Australian dollar, emerging market stocks, and some bonds.

Go, you bubble beauties!

It’s hard to believe the Fed is willfully stupid. The market, through the price of gold, has clearly communicated that it thinks U.S. monetary and fiscal policy is lousy. But rather than defend the U.S. dollar – indeed the integrity of U.S. monetary policy itself – the Fed is choosing to support asset prices through easy credit.

It’s also possible that the Fed thinks a weak dollar will reduce America’s trade deficit, boost its export competitiveness, and lead to higher employment. We think this is a pipe dream. And we’re not talking about a lead pipe. We’re talking William Blake-style opium.

But smoke and mirrors aside, does this mean there will be no end to the dollar carry trade? If the U.S. dollar index rallied, we expected to see a falling Aussie dollar, falling Aussie stocks, and (even though it’s strange) rising U.S. bond prices. All the leveraged risk trades would unwind a bit as dollar shorts covered.

But now what? Is this the all clear for stock indices to make new highs as traders borrow money and plow it into markets to engineer huge returns for the end-of-year statements to investors? The early returns are inconclusive. The Dow was all over the shop, unable to make heads or tails of what the Fed’s non-change means. Gold futures made a new nigh, though. And about that…

Gold is very popular lately. It’s not returning our calls anymore. And when we see it in public, all it does is glitter and bask in the glow of so many newfound admirers. That makes us very nervous, and perhaps a bit hurt. We stood by it all those years when no one loved it.

We like it all the same, although we’re just friends now and it’s based on gold’s ability to preserve the purchasing power of our wealth, not any inherent beauty it may or may not have. But as a practical matter, when you enter a position as the asset is making a new high, you usually get hammered.

That’s what happens when you go along with the crowd. It’s an axiom that an asset has to make new highs…to make new highs. But it would be nice to buy gold on a correction. Perhaps, though, we are seeing a big shift in market psychology with respect to gold. India’s purchase of IMF gold is just one sign of that shift.

One interesting result from the events of 2009, Murray Dawes mentioned last week, is that gold is decoupling from the U.S. dollar. He sent over the chart below. It shows that two times in the last five years, gold (the black line) has strengthened eve as the U.S. dollar index (the blue line) rallied. And each time after this period of dollar strength, gold then took off to a new move up.

Why does that matter? Well, gold usually moves up when the U.S. dollar moves up, and down when the U.S. dollar moves up. For gold to show strength when the dollar is strong shows that gold itself may be breaking out of its correlation to the greenback. And what would that tell you?

The bigger picture: gold breaking its negative correlation with the USD would tell you that gold is being remonetized in the world financial system. It would tell you gold is appreciating against nearly all paper currencies. And it would tell you that even if we do see a U.S. dollar rally, you could still new highs in the gold price.

Above all, it shows you how valuable it is to own an asset that is not anyone else’s liability. We are entering a global sovereign debt crisis because the world’s large economies have been engaged in a multi-decade long competition to devalue their currencies. The cheaper your currency is relative to your trading partners, the cheaper your goods are and the higher your exports.

Overly the last fifty years, nearly every country in the world has engaged in some kind of currency manipulation to keep its currency cheap relative to the American dollar. That’s because the American economy was the world’s largest, and everyone wanted to sell into it.

America’s economy is still big, of course. But a lot is changing, yet the currency manipulation has not caught up with the new economy reality. And Western Welfare states are still borrowing money as if emerging market creditors will be happy to fund fundamentally flawed fiscal policies for ever. Not likely. But tomorrow is another day.

Regards,
Dan Denning
The Daily Reckoning Australia

November 10, 2009

Editor’s Note: This article originally appeared in The Daily Reckoning Australia as “Price of Gold Communicates U.S. Monetary and Fiscal Policy is Lousy.” To view the original article, please click here.

Gold Price Says U.S. Monetary and Fiscal Policy Stinks was originally featured on Whiskey and Gunpowder

For much of 2009, gold traded in the range of low-mid $900 per ounce. There was a dip over the summer, with a strong upswing starting in September. Gold is now trading well over $1,000 per ounce, in fact just under $1,100.

Turns out that the government of India was buying gold in mid-October. Over a two-week span, the central bank of India bought 200 tonnes (metric tons) of gold from the International Monetary Fund (IMF) at an average price of $1,045. The IMF — over which the U.S. holds veto power for most actions — got approval to sell the gold from — where else? — the U.S. Congress, last spring.

Previously, the government of India held 350 tonnes of gold reserves. This 200-tonne purchase is a 57% increase in India’s reserves. There’s joy in India, I’ll bet. (It makes me wonder what the Pakistanis think, now that their large neighbor has both nuclear weapons AND a growing gold hoard.)

Collapsing Economy?

Here’s what the Financial Times had to say. “Gold prices on Tuesday surged to an all-time high after India’s central bank bought 200 tonnes of the precious metal, swapping dollars for bullion as the country’s finance minister warned the economies of the U.S. and Europe had ‘collapsed.’ India’s decision to exchange $6.7 billion for gold equivalent to 8% of world annual mine production sent the strongest signal yet that Asian countries were moving away from the U.S. currency.” (Emphasis added.)

Have the economies of the U.S. and Europe really “collapsed”? As I sit here at my desk in Pittsburgh, I would not exactly say that the U.S. economy has collapsed around me. OK, so the economy isn’t booming, either.

Just yesterday, I saw that consumer powerhouse Johnson & Johnson foresees a long, continuing economic slump. J&J anticipates a slow recovery at best, contrary to the optimism of its namesake “No More Tears” brand. J&J management evidently believes that things will stay tough out there. And as if to add to the predicament, J&J is laying off about 8,000 employees.

Economic collapse or no, the point is that Indian gold purchases from the IMF are supporting the gold price. And the IMF has another 203.5 tonnes of gold yet to sell.

Who will buy the IMF gold? I’ve previously speculated that the Chinese are waiting in the wings. But now that the IMF has set a precedent for selling to a non-Chinese buyer, there are surely other players out there polishing their shoes and practicing their speech to the IMF bankers. We might see Arab countries buying. Or Russia. Maybe Brazil, with all its newfound energy wealth offshore.

China’s Golden Ambitions

Reuters news service has an interesting take on the matter. Reuters noted that it’s cheaper for China to buy domestically mined gold than to purchase bullion from the IMF at $1,045 per ounce. According to Li Yang, a former adviser to the People’s Bank, “China’s gold is much cheaper than that.”

In other words, China is the world’s No. 1 gold producer, and its mine costs are much les than $1,045 per ounce. So — China being governed by the Communist Party — why not just buy gold at “cost” from the mouth of the mine, right? Take the accounting hit and get the gold. In the long run, will it matter? (And we all know how the Chinese are able to think in terms of the long run.)

According to another Chinese Central Bank official — although with no direct authority over gold buying, “China is the world’s biggest gold producer, so there’s no urgency for us, as there is for India, to snap up big volumes whenever they come onto the global market. It’s cheaper for us to buy gold from the Chinese market, but it doesn’t help diversify our huge foreign exchange reserves.”

This Chinese official added, “To diversify our portfolio, we should spend dollars on things like gold. But the catch is that even if China bought half the world’s annual gold supply, it would only cost a few tens of billions of dollars, which is tiny compared to China’s huge reserves.”

And then the Chinese official offered this comment. “Having said that, I think China still should buy some IMF gold this time, and it might indeed do so, but it’s unlikely to take all the 200 tonnes that are left, as the price is, obviously, not particularly appealing. It would be a symbolic purchase, but better than nothing.”

Finally, Xia Bin, head of China’s Financial Department of the Development and Research Center also said China should buy IMF gold. “Why not? Even if it’s sold at a market price, we should still buy,” he said, according to Reuters, which was clearly a personal view from Xia Bin and not state policy. “India’s OK with it, why shouldn’t we be? What’s the use for so many dollars, whose purchasing power is weakening anyway? With so many foreign reserves in hand, I think China should buy, without doubt.”

What do you think it will mean for the dollar with the central banks of both India and China dumping dollars for gold?

On that happy note, I bid you adieu.

Until we meet again,
Byron King

November 9, 2009

India, China Central Banks Rather Have Gold Than Dollars was originally featured on Whiskey and Gunpowder

So, what was his reasoning: technical analysis of wave counts? falling demand? a telling ratio? sun spots? No, he noted that upscale department store Harrods in London began selling gold bullion and coins “over the counter,” ergo, the top was in. Nice try, “Bert,” but this is amateurish. You really shouldn’t be playing with the big boys if that’s the basis of your call.

Yes, gold will someday put in a top, and since the gold price is largely determined by psychology, the end of the bull run will be marked by behavioral types of signals. But calling a top in gold now is like declaring that WWII was over because the Allies won a small skirmish in early 1942. To have made such a statement, based on a small, isolated event, ignored the greater forces that had yet to play out and would have made any journalist or military strategist look foolish indeed.

And here’s why Bert looks equally silly today…

If the top were in, we’d be in the midst of an all-out Mania. Are we? Do you get the impression there’s a rush into gold by the greater public right now? Are headlines blazing the covers of major magazines pronouncing gold as the new investment king? Has Wall Street gone gaga over gold and silver? I ask because these are the true signs that a trend has entered its final blow-off top and would signal it’s time to get out.

I decided to put Bert’s prognostication to the test, and I invite you to play along.

First, I struck up casual conversations with my friends, neighbors, relatives, acquaintances, my wife’s co-workers – heck, even my seatmates on airplanes – angling to learn how much gold they were hoarding, about the killing they were making in gold stocks, and how they were getting rich from all their precious metal investments. (In fairness, I had to exclude my dad, who is an award-winning gold panner, but he’s the only one.)

I found no one – not one person – who is actively investing in anything gold or silver, let alone rushing to buy or hoard the stuff. I had two people who confided that they did own gold, but in both cases it was inherited. A few were curious how they would go about doing such a thing, and fewer asked if I thought they should. Most everyone looked at me blankly when I asked; they didn’t seem to know what I was talking about. When I got a reaction like that, it was pointless to ask about gold stocks. Of the handful I did ask, most had never heard of Barrick Gold, the world’s largest gold producer.

Now ask yourself the same thing: how many of your family, friends, neighbors, and co-workers are buying gold and silver coins? Are any of them giving you hot stock tips about a fantastic gold producer, or telling you about the latest gold discovery made by a company in China? Have any fellow investors told you they’re dumping their brokers because they can select gold stocks better on their own? Anyone telling you they’re going to night school to learn the gold mining business?

Next, I surveyed a large sampling of print media looking for some of these signals that Bert surely had spotted. Over the past couple weeks, not one of the major business magazines I reviewed had anything on the cover about gold or silver. Further, there were no articles on precious metals, such as the best ways to buy or store all this gold everyone is buying.

One magazine ran an article about ways to prepare for inflation, and gold wasn’t even mentioned! I did see an ad from the U.S. Mint in another, along with a couple small ads in the back that said they had the best prices on bullion (right beside the teasers for buying a Russian wife), but that was it. Even the portfolio allocation models recommended in the articles I read made no specific mention of precious metals (one recommended a “resource” fund, but their discussion of it was centered around energy investments).

Other than the articles you seek out, how many mainstream magazines do you see extolling the virtues of gold and silver on their cover? How many bestsellers are prominently displayed at your nearest bookstore that scream at you to buy gold stocks? Are you getting fed up with all the junk mail you get about gold and silver?

Last, I went out of my way to look for stories on gold and silver on TV and radio. About all I could find were the same ads that popped up after last year’s Super Bowl commercial by Cash4Gold. A couple programs quote metals prices, and I was able to find another that actually used the word “gold” in a sentence. It might just be me, Bert, but I can’t find any news anchors talking about the latest gold discovery or that “must own” gold stock. No in-depth special reports from investigative journalists on the hot Canadian junior mining sector. Nothing on my radio about the best ways to store all the silver every smart investor has been buying.

How about you – are you feeling bombarded by TV and radio ads and segments on precious metals? Do you have the clear impression gold and silver are the hot new investing trend around the world? Are you Tivo-ing certain TV shows because of all the great info they provide about picking the next great gold stock?

If we were in a Mania, Bert, all of this would be happening. But it’s not. Those who buy gold coins in the U.S. are still largely viewed as members of a fringe group. There is no public discussion on gold, no insider tips on the latest hot gold stock, no special reports on how to store all the bullion you’ve collected. The psychology isn’t on our side yet. One signal does not a Mania make.

Last and perhaps most important, Bert, are you sure the dollar is done falling? You’re absolutely convinced we won’t see price inflation? Our current debt load won’t pose any future problems? No more worries about foreigners buying all that debt? Obama and Bernanke really have saved the day?

Bert, send me your shorted gold positions, I’ll buy them from you. And although the gold price could see a correction in the near term, and several more along its journey to “the top,” remember that battle in early1942 and all that had yet to occur before the war was over.

And one more thing: when you finally become breathless to buy gold stocks, I just might be ready to sell them to you.

Regards,
Jeff Clark

November 6, 2009

Why Gold Has a Long Way to Go was originally featured on Whiskey and Gunpowder

Say like Coca Cola re-launches New Coke, but people actually like it. Would that mean the laws of physics had been repealed? Or would you need to change what you think…?

“Gold and bonds do not usually go up or down together. But try telling that to the markets over the last two months,” writes Mark Hulbert at MarketWatch.

“Since early August, in fact, gold bullion has risen by around 10% and the Treasury’s 10-year yield, which moves inversely with Treasury prices, has fallen by nearly 15%.

“These moves are substantial, in other words, and more than just day-to-day noise in the data. What’s going on?”

Put another way, “If the gold price is so high, why are 10-year Treasury yields so low?” asks a columnist at EuroWeek, the capital markets newspaper.

To repeat: Rising gold says people fear inflation. Or so both Hulbert and EuroWeek reckon, along with pretty much the rest of the planet. But inflation fears would mean rising interest rates and falling Treasury bonds…and that’s the very opposite of what’s actually happening to government debt.

“Either way you look at it then, recent trends are unsustainable,” says Hulbert. “Something’s got to give” apparently. And it won’t be his assumption that gold and bonds shouldn’t rise together.

“If central banks take the punch bowl away at the wrong time,” says EuroWeek, “those who have bought Treasuries will have been on the right track and we will face deflation. Whereas if they let the party go on for too long the gold hoarders will have been right…and we’ll be wheeling our cash for bread around in wheelbarrows.”

The key assumption that makes these two things impossible, of course, is that gold only goes higher on strong inflation…a demonstrably idiot claim given a quick glance at the 1930s. Or this decade’s four-fold gains. Or the 50% surge of fall/winter 2008.

Back to gold in a moment, however. Because while bonds say deflation, “Equities say reflation” as the Pragmatic Capitalist notes, together with David Rosenberg at Gluskin Sheff and pretty much everyone else. “The stock market is telling a very different story from the bond market,” TPC explains, and “unfortunately for equity investors, they have a poor record of forecasting the future when compared to bond investors.”

Yet again, these two things “don’t typically rise alongside” each other. Yet stocks have risen more than 11% since mid-June, while the 10-year Treasury yield (which moves inversely to bond prices, remember) has dropped nearly 0.7%.

“There have been 4 famous cases of such bond and stock divergences in the last 20 years. The most famous is the summer of 1987. We all know what occurred then.  The other three cases were fall ‘94, summer ‘98 and winter 2000. All three preceded declines in the market. Of all 4 instances, three of them preceded 15% declines in the S&P 500.”

Now throw in rising gold prices, and we’ve got rising stocks…rising bonds…AND rising gold. Hell, since Wednesday this week they’ve even pulled back together, too!

Is the moon made of cheese or what?

The curve-ball in all this – or so we guess here at BullionVault tonight – is not gold, nor stocks, nor even bonds. It’s the underlying guess-work, intuition, assumptions.

That gold only rises when the cost of living soars…or bonds only rise when stocks go down…or that a flood of money, created at zero per cent rates, can’t drive all things higher together, even the promise of cash redeemed in the future…lapped up by a pensions and finance industry faced with $11 trillion in Treasury-debt supplied, but a central bank vowing to step in if buying fails and cap any rise in rates.

Because right alongside, hedge funds are buying futures and options with virtually free finance. What’s not to love in this über-Reflation Rally redux…?

Regards,
Adrian Ash
BullionVault

October 21, 2009

Inflation, Deflation and Reflation at Once was originally featured on Whiskey and Gunpowder

Lately, the politicians and monetary bubbas have all been focused on big-picture stuff, like saving the world financial system. Dressed in their superhero suits, they’ve lost sight of issues like the fundamental soundness of the dollar. They’re just too busy admiring themselves in the mirror and patting their own backs about how smart they are.

Meanwhile, a single headline set the metals markets on fire. It was about how a group of Arab nations plus Russia, China, Japan and France are plotting to replace the dollar for trading oil. Sound plausible. Will that happen? Eventually, I’ll bet, but not overnight.

$1,000 Is the New $900

The point is the dollar replacement story is a monetary rumor, and we’ve heard it a zillion times before. This week, for some reason, the rumor gained traction. Why? Well, sometimes the rubber meets the right spot on the road. It’s just “time” for something to happen. And this week, it was time for $1,000 gold to become the new $900.

It’s not hard to understand why. For many years, American politicians have overspent the resources of the nation. It was one of the few bipartisan things that national leadership could agree on. Spend, spend, spend. No issue was too small for federal intervention and funding.

The U.S. dodged the monetary bullet because a) the U.S. economy was big and resilient and it appeared like the economy could deal with the hit, b) the rest of the world didn’t have an alternative to the dollar and c) most of the world wasn’t really on to the monetary con job of the U.S. writing checks that never got cashed.

The politicians spent money like it didn’t matter. Except… it did. We’ve been approaching some sort of monetary tipping point. Now it seems like we’re there. Information flows around the world in microseconds. So there’s no big con job anymore. People across the world are tired of getting jerked around by the U.S. dollar.

Thus, now we’re watching the dollar melt down before our eyes, like the Wicked Witch at the end of The Wizard of Oz.

Off to See the Wizard

Let me digress for a moment. Author Lyman Frank Baum wrote the original book, The Wonderful Wizard of Oz. The book, published in 1900, was whimsical. But among other things, it poked fun and caricatured the gold and silver debate in the U.S. in the 1890s. More broadly, Wizard was an allegory about life and political populism in the U.S. in the 1890s.

Author Baum had a keen eye for the gold-silver debate because he knew something about the subject. Baum was wealthy, and heir to serious family money that came from the 19th-century oil fields of Pennsylvania. So he took the idea of debased currency and ran with it.

Just look at just the title, The Wonderful Wizard of… Oz, where “Oz” stands for “ounces.” I’ve heard that in the real story, the “Emerald City” of Oz was a city of gold. (It became emerald when MGM Studios made the famous Depression-era movie in 1939.) The yellow brick road was a metaphor for gold. Dorothy’s slippers were silver in the book, and changed to ruby in the movie.

The Tin Woodman stood for the urban workers of America, who were left out in the cold and rain by the forces of banker capitalism. The Scarecrow stood for the farmers — and recall that he had no brain, because many East Coast snobs thought farmers were dumb hicks, ripe for the picking. The Cowardly Lion was a dead ringer for William Jennings Bryan, who made good speeches, but could not stand up to the entrenched big guys.

The Wizard was all smoke and mirrors, reflecting the political classes as a bunch of charlatans who promised much and delivered little.

Hey, Wizard is a children’s story. It’s not a cookbook for what ails us today. If there are any real answers in the Wizard book, it’s along the lines that things aren’t what they may at first appear. And the common people — workers and farmers — are smarter and nobler than the elites think.

The only thing that’ll begin to save us is if the elites realize that they’re not as smart as they think. Of course, then they have to admit it and pursue other policies that work — like not spending so much money at the federal level. That, and create conditions to rebuild the basic economy and maintain a stable dollar.

But these are politicians we speak of so I wouldn’t count on that anytime soon. Instead of hitching your cart to political salvation, you should be counting on gold, silver and oil to pull you and your portfolio through.

Until we meet again,
Byron King

October 16, 2009

Gold, Silver and the Wonderful Wizard of Oz was originally featured on Whiskey and Gunpowder

“I don’t know if I will live to see it,” said Brazil’s president Luiz (Lula) da Silva a couple weeks ago. “But Brazil has to transform itself into a big power in the 21st century. We have everything to make it happen. We are not talking about a little country here.”

No, indeed. Brazil is not “a little country” anymore. Any prudent investor has to consider how to hitch a ride on the Brazil growth story. Brazil is transforming into one of the world’s great powers in this century. It’s important to follow the news from Brazil. At the same time, you have to know where to look, and how to read between the lines.

By official count — what the Brazilian government will confirm — the rocks of Brazil hold nearly 20 billion barrels of proven reserves. That number is on par with the total for U.S. oil reserves, including Alaska and the Gulf of Mexico.

It’s an impressive number, but then there’s also the unofficial Brazilian reserve count. How much oil is “really” down there under Brazilian jurisdiction? It depends with whom you talk. Some Brazilian officials will smile and say the country has 50 billion barrels of resources. If the Brazilians can tap into this treasure, it adds up to more than twice the total reserves of the U.S., including Alaska.

Other knowledgeable — VERY knowledgeable — Brazilians give much larger estimates. I’ve seen estimates that place the resource number at “over 100 billion barrels.” This puts Brazil in with the largest of the large oil nations, such as Iraq, Iran and Saudi Arabia.

These massive oil resources offshore Brazil lie beneath deep water and thick layers of salt. And since it’s all within Brazilian waters, the government of Brazil is increasing its control over offshore development. This way, Brazil will have its own oilmen keeping an eye out for the overall national interest — and making big money for the Brazilian treasury.

The new level of Brazil’s state control over oil development is a strategic decision. Brazil is counting on the hydrocarbon resources to help propel it forward as one of the world’s major powers. And the development in Brazil will control the destiny of a good number of players in the OI portfolio.

Many companies whose fate is tied to the wheel of the Brazilian ship of state are in that portfolio. All of them have operations that span the globe. They’re not a pure play on Brazilian energy development. Just the same, it’s nice to know that they’ll be pulling down a big chunk of business in one booming region over the next couple of decades. As I see it, these firms are long-term core holdings for any diversified energy portfolio.

Gold on the Move

This week, the price of gold touched $1,040 per ounce. Silver also took the elevator to higher floors, to now over $17 per ounce. It’s been good news for all of the gold and silver miners in the OI portfolio.

We’re way up on many of the miners I’ve added this year to the OI portfolio. Some of the beaten-down guys are also showing us their inner Lazarus as precious metals prices soar.

What’s with the Rising Tide?

I just love it when the stocks in the OI portfolio are going up. It beats the heck out of what we experienced last October with the meltdown, that’s for sure. And it makes it easier to be the editor of a financial newsletter that focuses on precious metals, energy and other natural resources.

What’s going on? What’s with the rising tide? I believe we’re seeing some short covering in the precious metals arena. It has always amazed me in the past couple of years that there were people out there shorting gold. Huh? It’s like that scene from the movie The Deer Hunter in which Robert De Niro is playing Russian roulette with a pistol holding bullets in the chambers. You don’t have to be crazy to short gold, but it helps.

I may not have the same eyesight today as back when I flew Navy jets. But how close do you have to look to see that the U.S. dollar is in trouble? Yet people still want to bet on the dollar and against gold? Hey, it’s a free country. And I’ve spent the past few years feeling pretty lonely at times as I described my vision of monetary gloom and doom.

So now the dollar is dropping due to bad news on many fronts. The U.S. economy is NOT “recovering,” contrary to the propaganda from Washington. Unemployment is up, and it’ll stay up for a long time. There’s a structural readjustment going on within the U.S. economy, and it’ll take years (maybe decades) to play out. Meanwhile, U.S. tax policy, energy policy and the overall political process are a train wreck in living color. Can anyone explain to me how this has a happy ending?

The world, of course, is noticing. Now we read about a group of nations (the usual suspects, but add in modern allies Japan and France) trying to figure out how to ditch the dollar and use some other medium of exchange to trade oil. It’s not exactly a new rumor, but now it’s getting traction. And like people smelling smoke in a crowded theater, dollar holders are looking for the exit signs.

Is anyone surprised at this? How much fiscal and monetary abuse can the greenback stand? Hence, the precious metals prices are levitating.

We’ll probably see a pullback in precious metals prices, but that’s just going to be profit taking and the market working its magic. Long term, the metals are still going up.

It’s part of the long-term thesis of Outstanding Investments. Go with precious metals. Go with energy plays. Go with solid resource plays.

Until we meet again,
Byron King

October 8, 2009

Energy, Brazil, Gold: What More Could You Want? was originally featured on Whiskey and Gunpowder

A short series of secret memos, published and dissected at ZeroHedge, provide the “smoking gun” of gold-market manipulation. Apparently.

And given this little slew of dusty archive-digging – throwing up three documents from 1968 to 1975, each one declassified within thirty years – then “If over 40 years ago the Fed and the members of the gold ‘Pool’ were openly intervening in the gold market, one can only imagine what the situation is now…”

Go on, just imagine. Because imagination is what you’ll need if you’re going to nail type-written notes from before the Moon Landings as primary, original-source evidence that the United States’ official gold reserves – variously sold, lent, swapped or simply given away since the early 1990s – have been mobilized to suppress prices, pushing gold down from $250 an ounce a decade ago to, ummm, more than $1000 today.

These memos fret about shrinking gold reserves and the world’s gold-driven money supply…Britain’s failed deflation policy of the late ’60s…whether South Africa will sell its new mine supply on the open market…German border taxes…and the “gold-like” qualities of the proposed Special Drawing Right (SDR). Such prehistory matters, yes. But it’s a world away from demonstrating what newcomers to gold today may mistake for good cause to steer clear.

The little history these scattered notes sketch does echo today, however faintly. Are central banks buying gold at market prices – then France, now Beijing through via its domestic gold output? How to replace the abiding monetary standard – then gold, now the Dollar? And like the Fed memos reviewed on blogs elsewhere this year, the notes republished by ZeroHedge certainly prove one thing, at least:

Just how awkward gold became long before the collapse of the Bretton Woods monetary system. Bluntly put, it was a pain in the arse – and not only for Washington.

“Gold was causing such a rumpus that most authorities wished it would go away and stop bothering them,” as the late Peter Bernstein wrote in his 2000 history, The Power of Gold. But with so much of the world’s gold stacked up in their vaults, slipping away was impossible, and the world’s monetary system instead “lurched from crisis to crisis” says Francis J.Gavin, University of Texas at Austin’s professor of international affairs, in his 2004 monograph, Gold, Dollars and Power.

“There was not one year between 1958 and 1971,” Gavin finds, “when the Dollar and gold problem was not the most pressing issue of American foreign economic policy.” Or as President Kennedy put it in August 1962, “My God, this is the time…

“If everybody wants gold, we’re all going to be ruined.”

Luckily for JFK and the Dollar, not everyone wanted gold. Like Washington, the British government would have quite happily seen its former “badge of honor” turned to dust and swept away, too. Their private citizens were barred from owning gold, with strict controls applied across most of the rest of the developed (and communist) world. Yet with so many new US Dollars flooding the world…and with the Dollar-exchange clause of the 1944 Bretton Woods treaty still in force…less pliant friends increasingly asked for, and got, gold over dollars.

One nation actively sought to bring on the crisis. “There can be no other criterion, no other standard, than gold,” announced French president Charles de Gaulle at a press conference on February 4, 1965 – “gold that never changes, that can be shaped into ingots, bars, coins…that has no nationality and that is eternally and universally accepted as the ultimate fiduciary value par excellence.”

De Gaulle spoke in French, naturellement, in the gilded Salle des Fêtes of the Elysées Palace. But the White House’s least Francophone staffers could get the message loud and clear when, six days later, de Gaulle’s finance minister – future French president Giscard d’Estaing – announced in a lecture at the University of Paris that, from now on, France would swap every new Dollar it accumulated for gold bullion from the Federal Reserve.

The major powers, he said, should “make a solemn and unequivocal declaration” to likewise settle all their international payments in gold. Which was an easy thing for France to declare, given its large balance-of-trade surplus.

To drive the point home, France then made headlines around the world by announcing it would not only swap all new Dollars for gold…but immediately ship that new gold straight to France, too.

What could the United States do? As we’ve noted time and again, the final collapse of the Gold-Exchange Standard – put out of its misery in Aug. 1971, when Richard Nixon canceled America’s gold-for-dollars obligation – came because the US government wanted to keep hold of its gold. The legerdemain of then “demonetizing” it through occasional sales and amendments to the IMF treaty only hid this plain fact; it didn’t deny it.

The international promise signed after the Second World War made defending that hoard impossible given America’s domestic Dollar-inflation. Producing more dollars than the rest-of-the-world needed to finance its trade, the United States also invited a drop in the Dollar. That in turn invited withdrawals of gold from its vaults, effectively sparking a “run on the United States” as one advisor called it in the mid-60s’ phase of the crisis.

“The kind of transcending value attributed to the Dollar,” Charles de Gaulle had said at that 1965 press conference “has lost its initial foundation, which was possession by America of the greater part of the world’s gold.” Never mind that de Gaulle himself knocked out that support. What mattered was the abiding idea – gold equals power. Thus US dominance was clearly ebbing away.

“The French this year have been cashing in dollars for gold at a $54 million-a-month rate,” reported Time magazine in mid-1966. “Last week the Bank of France reported that as of Aug. 1, France had hoarded $5.13 billion in gold. Gold now constitutes 86% of all French reserves, compared with 73% at the end of 1964.

“Moreover, the [French] government is squirreling away the precious metal at such a rate as to account for the entire net US gold drain so far this year.” Hence de Gaulle’s jibe at the Dollar’s fall became self-compounding. By demanding gold over dollars, he proved the value of metal, not paper. But only on the old tattered Gold Standard logic. Losing its dominance as the gold-hoarder par excellence, the United States still retained the supreme currency. The “exorbitant privilege” of which de Gaulle’s advisor, Jacques Rueff, had complained, would now take America’s economic power as its foundation. Depriving the US of its bullion backing, the promise to redeem Dollars for gold was replaced with the promise to redeem Dollars with interest.

Fast forward to the fall of 2009, and the United States remains the world No.1 holder of physical gold (the potential for secret sales, swaps, loans and outright gifts to Wall Street notwithstanding), but while France and the rest of Europe turned seller, Russia and emerging Asia began re-stocking this decade. Moreover, “The United States would be mistaken to take for granted the Dollar’s place as the world’s predominant reserve currency,” as World Bank president Robert Zoellick told an audience at Johns Hopkins University in Washington this week.

“Looking forward, there will increasingly be other options to the Dollar…The future for the United States will depend on whether and how it will address large deficits, recover without inflation that could undermine its credit and currency, and overhaul its financial system.”

Zoellick naturally mentioned the Chinese Yuan, noting that “Over 10 to 20 years [it] will evolve into a force in financial markets.” He just happened to speak on the very same day, as Reuters observes, that Beijing issued its first Yuan-denominated bond open to foreign investors. Yet all the World Bank chief did, however, was confirm today’s abiding idea – that monetary power builds on an economy’s strength.

Maybe a new or even old idea will emerge in the next two decades or so. “The manner in which [this crisis] is resolved may well determine the shape of the world’s monetary arrangements, and therefore our economic and political interests over the next generation,” as then-Fed chief Arthur Burns memo’ed President Ford in June 1975, but the problem of excess Dollars was never quite fixed.

Still, we guess it’s more than coincidence Beijing is now buying gold – as well as frantically powering its non-stop economy – as the world’s monetary standard slides into crisis mode.

Regards,
Adrian Ash
BullionVault

October 2, 2009

Gold, the Dollar and Smoking Guns was originally featured on Whiskey and Gunpowder