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China is cutting its Dollar holdings, just as the Fed vows to devalue the currency further…


NEARLY ALL the commentary we have heard on this question says the same, writes Julian Phillips of The Gold Forecaster.

"Yes, the prospects of a Double-Dip recession have increased but it remains unlikely that it will happen."

We feel that there may be just a hint of self-interest in these answers. The shockwaves that will reverberate should some say it is going to happen, or if the news confirmed that it had started would rattle the markets hugely. Despite the ability to disseminate news instantly, we have to wait a month before reliable figures are published to confirm one way or the other that this is or is not the case.

On the other hand a recession or depression has become a state of mind too. If consumers believe it is coming, it will come and at the moment that is the mood out there among the consumer. He is saving because he could become a victim if he hasn’t cut debt and save. No doubt the sight of a neighbor being evicted stimulates thrifty habits. And that’s what is coming from consumers now. They aren’t spending. It’s becoming a financial winter out there and we believe consumers minds are bringing on the recession again.

Surely that’s bad for Gold Investment?

As we now live in a global economy national economic climates heavily impact the global scene and particularly the US national scene. Look from outside in as a foreign investor that doesn’t have to invest there, what would you do? Well, China is right there and this is what they’re doing:

• US Treasury data show that China has cut its holdings of Treasury debt by roughly $100 billion over the past year to $844 billion. Discreetly, the main surplus countries, China, Japan, and the UK (actually Mid-East petro-dollars) have been slowing down in the last two years. In August they bought the least amount of US debt this year;
• China is diversifying as it continues to hold down its currency, buying record amounts of Japanese, Korean, Thai, and no doubt Latin American bonds, in place of US Treasuries;
• It is also ‘limit’ Buying Gold in quantity through the London bullion banks, buying scrap ores or buying direct from miners such as Coeur d’Alene in Alaska;
• Excessive Dollar holdings are also going to more hard assets such as strategic reserves of oil and coal, and probably industrial metals. State entities are buying up natural gas reserves in Africa and Central Asia, or oil sands in Canada, or timber in Guyana.

There are considerably more activities by countries and institutions that are Dollar diversifying that we don’t have enough room to describe here, but it all leads to an expectation of a falling Dollar. The trouble is that so many dependant currencies will try to fall with it to protect their trade relationship (watch the Yen) that the fall will not be easily apparent in exchange rates, but in the falling buying power of the Dollar. When we describe this we are not talking about a change in exchange rates but changes that will bring about structural changes in the current monetary system based on the US Dollar.

Then what?

Don’t think for a moment that the US will follow the path of Japan. Deflation is not an option for the consumer driven economy of the United States. We believe that the path Mr. Bernanke has chosen for the US has to be followed all the way. Today [Friday 27 Aug] he stated that he was ready to act to defeat deflation, should it arrive.

Quantitative Easing will lead to inflation. Inflation is an acceptable alternative to deflation, because it is easier to cure inflation than deflation. But the government of the US is likely to wait until deflation is biting before they act, then the stimuli will have to be heavy as will consequential inflation. This prospect is bringing tremendous doubts about the value of Dollar and other currencies.

US monetary authorities will place US interests well ahead of any others, so don’t expect a globally coordinated policy against deflation. It will be every nation for himself. The surplus nations will, as they are doing now, follow the defensive measures described above. But it may take weeks before this is accepted. So now is the time to act.

And Gold Prices? Big picture, the long-term could not look better for gold. Gold has proved capable of performing well in deflation, in uncertainty, in fear. Internationally it is liquid in all parts of the world. It is internationally acceptable cash. More than that, it is an effective counter to the devaluing of currencies through quantitative easing or currency devaluations.

Looking to Buy Gold today…?

Source:China, the Fed and Gold

Gold rose in New York, heading for the fourth straight weekly gain, on speculation that demand for raw materials will increase as the global economy recovers.

Source:Gold Futures Rise, Heading for Fourth Weekly Gain, on Commodities Demand

Gold futures rose to a one-week high on speculation that a growing global economy will boost demand for raw materials.

Source:Gold Futures Advances on Speculation Demand for Commodities Will Increase

Stocks say recession, bonds say depression. And what about Gold…?

INVESTORS have changed their minds, writes Dan Denning in his Daily Reckoning Australia.

Instead of pricing a second half recovery in the global economy, they’re now pricing in a recession in the stock market and a Depression in the bond market. What gives?

As PIMCO bond guru Bill Gross points out in his latest missive, stocks are reflecting what he calls the "New Normal". It’s a long period of lower than average economic growth, household and business and even public sector deleveraging, re-regulation (less leveraging in the financial sector), and de-globalization.

It’s actually the last point that interests us most – that the end of artificially cheap capital and cheap energy is straining all the connections (trade, finance, and logistic) formed during the last thirty years. Contractions can be painful when you’re giving birth to a new world order, or so we’ve heard.

Gross makes several other worthy points. One is that debt is no longer productive in boosting living standards. When it was, households were happy to borrow and so were businesses. But each addition Dollar of new debt taken on in the economy is producing less and less real growth. Indeed, each additional Dollar taken on is going, at least part of it, to service previously borrowed money. Unhealthy.

Gross also makes a great point about what "bringing forward" consumption does in the long run…

"Consumption when brought forward must be financed, and that financing is a two-way bargain between borrower and creditor. When debt levels become too high, lenders balk and even lenders of last resort – the sovereigns, the central banks, the supranational agencies – approach limits beyond which private enterprise’s productivity itself is threatened."

We appear to have reached those limits. Or that is the proposition investors are weighing up.

But what about that gold bubble? We had hoped to take Rory Robertson and Michael Pascoe to task for being so wrong about gold. But since we’re busily preparing to debate Macquarie Bank’s Rory Robertson in Sydney…and tell him why he’s so wrong about house prices instead…our colleague Greg Canavan stepped into the crease last night and hit Pascoe for six.

"First, let’s kick off with an update on gold," Greg wrote to readers of his Sound Money.Sound Investments report. "Michael Pascoe wrote an article on Monday in The Age and SMH quoting Macquarie’s Rory Robertson saying that gold is in a bubble. As contrarians this sort of stuff is music to our ears.

"Apparently Robertson thinks that most people are buying gold simply because it is going up. While no doubt some traders are playing the momentum game, the vast majority buy gold because it is a time-honoured protector of wealth.

"Only those ignorant of financial history disparage gold with bravado. Take this piece of ignorance for example: ‘The interesting thing about gold – beyond it being a much-loved ‘pretty rock’ that several generations ago was at the centre of the global financial system – is that it has no ‘running yield’, so there is no anchor, no firm benchmark for valuation…The price will be whatever investors are prepared to pay. How long is a piece of string?’

"To many people this is a very persuasive argument against gold and we have heard it trotted out for years. But it is so wrong it’s not funny. Especially coming from a financial professional.

"No anchor, no benchmark for valuation? Gold is the benchmark. Its value doesn’t change. What changes is the value of the various fiat currencies gold is measured against. It is the error and habit of the media that gold is quoted in terms of US Dollars. US Dollars should be quoted in terms of gold. That is, one US Dollar can now buy you 1/1245th of an ounce of gold, compared to 1/35th of an ounce back in the early 1970’s when the US was last on some sort of gold standard.

"And like the paper notes in your wallet (cash) gold has no running yield. So what? Gold is money and money in its purest form has no yield. Yield is the reward or enticement for you to part with your cash and give it to a bank. At this point it ceases to become yours. It is a liability of the bank.

"Gold is no one else’s liability. It has no counterparty risk. It therefore generates no yield. It’s simple when you think about it. Why is that so hard for seemingly intelligent people to understand?"

Good question!

Ready to buy gold today…?

Source:Gold in a Bubble? Really?

What does the G20 meeting mean for Gold Prices short-term…?

THIS WEEKEND’S G8 and G20 meetings began disappointing the press before they even began, says Julian Phillips at GoldForecaster.

The US approach to growth, sovereign debt containment and debt repayment contrasts sharply with the European approach. This division should be added to fears that sovereign debt cut backs will not be achieved in the end.

The global financial mood is depressing, and is giving rise to falling confidence in the future of the global economy. Despite the best efforts of governments and the media, few are now convinced that growth will rise significantly. However, no currency or economic collapses are likely soon in our opinion. Instead, the dangers of GDP slipping from the current "L" shaped recovery back into recession are growing.

Government action should be coordinated globally if its present problems are to be resolved. And as China continues to grow – and as such a lot of the growth inducements are coming from Western governments – it is clear now that a Yuan revaluation is going to be well within single figures at best, until China is ready to place the Yuan firmly in international markets.

Is this background by itself enough to make Gold Prices rise?

The market mood for gold at present sees it completing a particular step of short-term consolidation after hitting record highs last week. But inside the Gold Price, what is there from which we can answer our question?

This is traditionally a quiet season for buying gold amongst the biggest consumer market, India. But it is clear that there are very large buyers in the Gold Investment market who are seeking to buy large amounts without chasing prices. These players have identified themselves to some extent as central banks. Not all of them are visible, however, nor are the sovereign wealth funds who are buying gold too visible. Their buying practice is to set price limits that they will pay and then wait for the offers of gold. Hence they too are not clearly visible when prices don’t move.

Large long-term investors are buying price exposure through Exchange Traded Funds, and have bought 124 tonnes so far in the last month. They tend to Buy Gold as the price starts to rise.

Traders, in contrast, have changed their practice from one of pushing prices and leading the market (as they did five years ago) to following the direction of the market and profiting when others move the price. They find current conditions more difficult as a result. The net result has been that prices don’t fall as far as the charts might indicate, but are rising higher than expected.

The meeting this weekend of the G8 and G20 will have no more effect, we expect, than past ones. Encouraging statements will be made about good intentions, but with no believable plan of action. As now is the time for them to act, the climate of uncertainty and fear will continue to persist. Unfortunately, politicians have other matters on their agenda and don’t perform well, until a crisis is upon us. So we will have to wait for that crisis. Crises then tend to appear out of nowhere, hitting markets hardest and producing differing levels of panic.

To emphasize the point, markets have looked to governments to calm them when financial uncertainty persists. Government actions to date, taken inside the financial markets have not turned the global economy back to strong growth in the last three years. Banks have succeeded in softening most of the new regulations that will apply to them emasculating their effectiveness. Political considerations often precede effective reformation and regulation as a result. This discourages markets.

So, all in all, the G8 and G20 will likely add to the fears that markets presently face and encourage more Gold Price rises.

On the other side of the market, there is almost no flexibility in gold supplies. Gold Mining is extremely inflexible, so tends to remain unchangeable in the short-term. Only by inciting sellers to come to the market can new supplies arrive. That takes a price sufficiently high to convince sellers that now is the time to sell. When this selling comes it is called ’scrap’ sales.

But scrap supply is only as flexible as the Gold Price rises. Too low, and no scrap sales come through. Too high, and scrap sales can swamp the market. But there are no hard and fast rules to that formula. If the general expectation is for a $1500 price, then hoarders will keep a tight grip on their gold until that price is reached even when they want profits.

What’s more, in this day and age, gold owners are holding Gold Bullion and coins, as well as jewelry across south-east Asia and India, as a counter to the uncertainties in other markets. This support is literally priceless!

Put another way, if you want the Gold Price to come down, then regain the confidence of the consumer and rectify the national economy. If you don’t, people will continue to buy gold.

Demand is growing through a broadening of Gold Investment demand. In different countries and through new different investors the market is deepening. This investment demand is coming from people in different walks of life. As confidence decays, new investors appear. This type of demand is now controlling the bulk of the market. Where jewelry demand had waned last year, we now see it return to activity, but with its gold content firmly in the buyer’s mind. In fact, as gold is not consumed but usually recovered, gold in all uses should be categorized as investment gold.

We continue to believe that new investors will keep coming, and coming over time from central banks right down to Joe Citizen. Their driving reason will be that they want to have gold for rainy days when it can be used to provide value where currencies don’t. That force is global and growing!

So will the Gold Price rise short-term? Yes, it will. But beware; there are surprising changes about to happen in the gold market, as we explain to subscribers of GoldForecaster…

Bullion Vault – start buying the safest gold at the lowest prices today…

Source:Gold Prices After the G20 Meeting