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Archive for October 4th, 2010

Gold is the final refuge against universal currency debasement

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by Ambrose Evans-Pritchard
Originally published 26 Sep 2010

STATES ACCOUNTING FOR TWO-THIRDS OF THE GLOBAL ECONOMY are either holding down their exchange rates by direct intervention or steering currencies lower in an attempt to shift problems on to somebody else, each with their own plausible justification. Nothing like this has been seen since the 1930s.

“We live in an amazing world. Everybody has big budget deficits and big easy money but somehow the world as a whole cannot fully employ itself,” said former Fed chair Paul Volcker in Chris Whalen’s new book Inflated: How Money and Debt Built the American Dream.

“It is a serious question. We are no longer talking about a single country having a big depression but the entire world.” The US and Britain are debasing coinage to alleviate the pain of debt-busts, and to revive their export industries: China is debasing to off-load its manufacturing overcapacity on to the rest of the world, though it has a trade surplus with the US of $20bn (£12.6bn) a month. Premier Wen Jiabao confesses that China’s ability to maintain social order depends on a suppressed currency. A 20pc revaluation would be unbearable. “I can’t imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs,” he said.

Plead he might, but tempers in Washington are rising. Congress will vote next week on the Currency Reform for Fair Trade Act, intended to make it much harder for the Commerce Department to avoid imposing “remedial tariffs” on Chinese goods deemed to be receiving “benefit” from an unduly weak currency.

Japan has intervened to stop the strong yen tipping the country into a deflation death spiral, though it too has a trade surplus. There is suspicion in Tokyo that Beijing’s record purchase of Japanese debt in June, July, and August was not entirely friendly, intended to secure yuan-yen advantage and perhaps to damage Japan’s industry at a time of escalating strategic tensions in the Pacific region. Brazil dived into the markets on Friday to weaken the real. The Swiss have been doing it for months, accumulating reserves equal to 40pc of GDP in a forlorn attempt to stem capital flight from Euroland. Like the Chinese and Japanese, they too are battling to stop the rest of the world taking away their structural surplus.

The exception is Germany, which protects its surplus ($179bn, or 5.2pc of GDP) by means of an undervalued exchange rate within EMU. The global game of pass the unemployment parcel has to end somewhere. It ends in Greece, Portugal, Spain, Ireland, parts of Eastern Europe, and will end in France and Italy too, at least until their democracies object.

It is no mystery why so many states around the world are trying to steal a march on others by debasement, or to stop debasers stealing a march on them. The three pillars of global demand at the height of the credit bubble in 2007 were – by deficits – the US ($793bn), Spain ($126bn), UK ($87bn). These have shrunk to $431bn, $75bn, and $33bn respectively as we sinners tighten our belts in the aftermath of debt bubbles. The Brazils and Indias of the world are replacing some of this half trillion lost juice, but not all.

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Austerity bites Ireland and Elite

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from The Daily Bell
posted Friday, October 01, 2010

Ireland’s love affair with masochism … The final bill for Anglo Irish Bank has ballooned to €34bn … A more shocking set of numbers is hard to imagine. The latest bailout package for Ireland’s insolvent banks will raise the nation’s budget deficit from an already alarmingly high 12 percent to a jaw dropping 32 percent, which will in turn send overall public debt spiralling upwards to just shy of 100 percent of GDP. Only a few years back, Ireland had one of the best public debt to GDP ratios in the eurozone at under 25 percent. The scale of the deterioration is truly astonishing, and vivid illustration of the degree to which Ireland’s “tiger economy” was built on the sand of misallocated credit. … The good news for Ireland is that these latest bailouts have the potential to draw a line in the sand, and provide a grounding from which the economy can rebuild. The other piece of good news to take from all this destruction is that Ireland has already fully funded itself until the middle of next year … [But] there must be some doubt over whether Ireland can grow its way back to health. – UK Telegraph

Dominant Social Theme:
We are shocked that Ireland has not improved. But we know it will!

Free-Market Analysis:
The EUs condition continues to deteriorate and austerity has fanned the flames of resentment as we predicted it would. Ireland is in fact a kind of poster child for the uselessness of what is occurring now. And here at the Bell, we would like to make sure that people do not misunderstand the ramifications. The EU is a core project for the power elite. It is a building block of world government. The elite in no way wants the EU to disintegrate or shrink. In fact, an additional dominant social theme might be: “Sure, we’ve made mistakes, but we will muddle through, all of us.”

The EU is still, for instance, trying to bring Iceland into the fold. And numerous other countries as well. There is debate about offering Turkey and even Russia the ability to join the EU. The EU is expansive because the elite likely had the idea that it could create three or four regional, global building blocks that could serve as a platform for some sort of one-world governance.

We don’t need any secret plans or startling admissions from insiders to tell us this. We have eyes and ears (2,000 of them!). The EU, the now-scuttled North American Union (for the moment anyway) and the planned regional enterprises in Asia, Africa and South America tell us what we need to know. This was the plan. Of course there are many, especially in the alternative news community, who will maintain that all is working just fine. That the idea all along was to introduce the EU, build it up and then destabilize it. We find this a stretch. We think the elite basically miscalculated.

Yes, as regards the EU (and many other promotions) it did not count on the truth-telling of the Internet when planning for further globalization. Order from chaos is certainly a utile strategy, but too much chaos, as we have pointed out before, can be counterproductive. And certainly there does seem to be a good amount of chaos in the EU at the present time. The Telegraph reports the following:

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LBMA 2010: Back to the future

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by Adrian Ash
Originally posted 30 Sep 2010

“Haven’t we seen this before, in 1923…?”

THE BIG MONEY FLOWS FROM THE BIGGEST TRENDS, OF COURSE. But even the brightest people, and with the best of intentions, can struggle to see today what hindsight will say you could have banked on.

By the summer of 1922, for instance, you needed 100 of Germany’s paper Marks to buy one gold coin Mark, against which they were supposed to be equal. Yet the German Chancellor “would [still] accept no connection between the printing of money and its depreciation,” notes Adam Ferguson in When Money Dies (London, 1975)… even  as the Weimar Republic’s hyperinflation pushed Berlin food prices well over 50% higher inside one month.

Indeed, “the opinion that the flood of paper is the real origin of the depreciation [in its purchasing power] is not only wrong but dangerously wrong,” said the Vossische Zeitung newspaper. So by the time the worthless currency was abandoned 14 months later, it took one trillion paper Marks to buy one golden equivalent, and German banks “turned the Marks over to junk dealers by the ton” for recycling as scrap paper.

Who could’ve guessed?
Now, fast forward almost a century. Today the value of money (like its price versus gold) is at issue once more, and missing the big trend – inflation or deflation, commodities boom or depression – is a big worry for anyone serious about defending their savings. Over the last decade, gold prices have scarcely looked back in their rise from $252 to $1313 per ounce today. US equities, in contrast, have gone precisely nowhere, while commodities have certainly rallied, but hard assets (outside gold and silver) remain off their pre-Lehman tops of 2008. Treasuries and cash-in-the-bank can barely keep up with inflation, meantime, despite the official “core” US measure slipping below 1% per year. Housing looks like the “double-dip recession” cast in concrete.

Edging above $1300 this week, therefore, it’s little wonder that “Gold: Bubble or boom?” was the big theme (both on-stage and off) at this year’s London Bullion Market Association conference, held in Berlin. Besides dealing silver and the platinum-group metals, the LBMA’s membership is the world’s wholesale gold market – the refiners, assayers, vault operators, dealers, financiers and analysts who help move the metal from mine-head to retail production, whether jewelry manufacturers, dental suppliers, chip fabricators or gold coin mints. Very much centered in London (where the Association’s biggest bullion-bank members settle some $20 billion of gold trading between themselves each day), this odd little corner of the financial market well remembers the time before today’s current rally… a miserable two-decade run of falling gold prices, falling demand, and falling returns for the market’s suppliers. And no one wants to be late in seeing that the wind’s changed direction.

“When I started in precious metals in the early ’80s,” said one head of metals trading to the 500+ delegates on Tuesday morning, “I understood that private clients would hold around 3% of their wealth in gold bars and coin…But over the next 20 years, those reserves were really liquidated, down to pretty much zero by 2000.”

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Nine main reasons to push gold, and silver, higher and higher

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by Lawrence Williams
Originally posted 15 Sep 2010

Gold expert Jeff Nichols, in a speech last week in Bangkok, Thailand, put forward nine main reasons for gold to rise and continue to rise in the short, medium and long term before, eventually,  the bull market will end and the bears may have their day – but he sees this as a long way off yet.

Nichols reiterated his predictions on the gold price which, in the short term, could even be considered conservative in the light of yesterday’s breakthrough to new highs as buying pressure exceeded that of profit-takers and those whose interests may otherwise lie in keeping the gold price down. He believes, he said, that “before long, we will see gold hit $1500 an ounce  possibly even before the end of this year… or during the first half of 2011.” And followed with “Not only will prices move substantially higher in the months ahead – but the uptrend still has years to go… with gold very likely reaching $2,000 and eventually $3,000 or even $5,000 before the gold-price cycle shifts into reverse.”

The nine major points which bring Nichols to this conclusion are as follows:

· First, inflationary U.S. monetary and fiscal policies – past, present, and future  along with a recession-like economic performance – a “double dip” or worse for years to come.

· Second, Europe’s simmering sovereign debt crisis, which has not only undermined the euro’s appeal as an official reserve asset… but has also pushed the European Central Bank to pursue inflationary monetary policies… and has pushed more investors in Europe and around the world to seek the safety of gold.

· Third, continuing – if not growing – interest by the official sector. In particular, the central banks of a number of newly industrialized emerging nations are seeking to diversify official reserve assets into dollar alternatives.

· Fourth, rising long-term saving, investment, and jewelry demand for gold from China, India, and other gold-friendly nations enjoying healthy growth in business activity and household incomes – growth that is likely to continue at least several years.

· Fifth, rising private-sector investment demand in the older industrialized nations reflecting fear of inflation, currency depreciation, and a loss of confidence in governments to deal effectively with today’s economic challenges.

· Sixth, the continuing maturation of what I call the “gold-investment infrastructure” – in other words, the development of new gold-investment products and channels of distribution in many important geographic markets.

· Seventh, the relatively small size of the world gold market compared to other capital markets – such as equities or currencies – so that even small shifts in portfolio preferences away from currencies, or equities, or real estate, for example, may have little price effect on these big markets but will have a relatively large, indeed profound, effect on gold.

· Eighth, the recent onset of global food and agricultural inflation.

· Ninth, stagnant world gold-mine production for the next five years or longer.

In his speech, Nichols went on to discuss all these points in detail, to back his conclusions and all his comments are far too comprehensive to cover here, but if you’d like to read the full text it is available on www.nicholsongold.com

As well as discussing gold, Nichols went on to talk about silver which, unlike gold, has still not managed to surpass the $21 an ounce level seen in 2008 before the huge market downturns (although its getting pretty close) – and is still hugely below its $50 all-time high of 1980 when the Hunt Brothers unsuccessfully tried to corner the silver market which makes this an anomalous situation. His main conclusion was as follows: “I suspect silver’s underperformance has now run its course – and we can expect the white metal to outperform gold over the next five to ten years. For one thing, a number of new end uses for silver are likely to boost industrial demand while investment demand for silver will continue to (increase due to) many of the same forces benefitting gold.”  again to read his full reasoning on his conclusions on silver see his website.

Overall, a pretty bullish presentation. Maybe over optimistic from the gold and silver investor point of view, but there are plenty of informed commentators out there who feel likewise – and quite a few detractors too. The economic scenario painted by Nichols, and as noted above this in itself is not a very controversial view, does suggest that precious metals could be major beneficiaries of a flight from ongoing risk, and turbulence in the currency markets which seems to be even seeing central bankers turning to gold as a reserve asset again – despite a long held feeling, perhaps stemming from Keynes’ often misquoted ‘barbarous relic’ comment – that it should have no such place in a modern economic system.  But, as witness the present situation they still find it hard to come up with a workable alternative over the long term.