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Measured against the Gold Price, the US stock-market’s huge 62% rally is less than stellar…

MARCH 9th 2010 marked the one-year anniversary of the elusive bottom of the most brutal bear market in global stock markets since the 1930s, notes Gary Dorsch at Global Money Trends.

At the time, US job losses were running in excess of 700,000 per month, and fear was rife that the US banking system was on the verge of being nationalized. American factories and miners were using 68% of industrial capacity, the lowest level since records began in 1948. Corporate profits fell sharply for the seventh consecutive quarter, the longest losing streak since the 1930s. The second coming of the "Great Depression" looked imminent.

In a final act of desperation to stop the carnage, the infamous "Plunge Protection Team" – the nickname given in the 1980s to the President’s Working Group on financial markets – unleashed the most powerful weapons in its arsenal, resorting to accounting gimmickry and nuclear Quantitative Easing.

Injecting $1.75 trillion into the coffers of the Wall Street oligarchs, the PPT sought to turn the bearish tide. Bankers were set free of mark-to-market accounting, and instead, were allowed to value their toxic assets at "mark-to-make-believe" prices, leading to a strong recovery in the financial sector.

Over the course of the next four-weeks, the Dow Jones Industrials climbed 1,500 points to close at 8,083 on April 9th, 2009. Still, there was great skepticism about the sustainability of the so-called "green-shoots" rally, the third such rally since the horrific crash of Sept-October 2008 that followed the default of Lehman Brothers and the bailout of American International Group (AIG).

Before hitting the ultimate bottom at 6,500, previous Dow rallies ended as "bear traps" that fizzled out before the market turned sharply lower again. There was a 1,500-point run-up during the week that culminated in the election of Barack Obama as US president, after which the Dow lost 2,000 points over the next three weeks.

The Dow Industrials staged another 1,500-point gain in December, triggered by Obama’s selection of Wall Street favorite Timothy Geithner as Treasury chief, before plunging 2,500 points during the first two months of 2009.

Since the Dow Industrials hit rock-bottom on 9 March 2009, US stocks have staged a $5.3 trillion recovery, one of the very biggest percentage gains since the Great Depression.

When viewed through the prism of Gold Bullion, however – and thus measured in "hard money" terms – one can see that the performance of the Dow Jones Industrials was less than stellar. The blue-chip indicator has been locked within a narrow trading band for the past 11 months, fluctuating on both sides of 9.5 ounces of gold since April 2009. (Learn more about the Dow/Gold Ratio here…)

The "green shoots" rally is, therefore, an optical illusion, simply reflecting the side-effects of the Fed’s hallucinogenic "quantitative easing" drug. Utilizing the chart above, one could argue that the value of the Dow Industrials is artificially inflated by about 2,500 points, engineered by the Fed’s monetization scheme and ultra-low interest rates. An ocean of liquidity is buoying the Dow Industrials above the 10,000-level, designed by the PPT to bolster household confidence, since the valuations of 401k retirement funds and investor portfolios can influence the propensity to spend.

Still, there are huge worries about unrelenting job losses, multi-trillion Dollar budget deficits for years to come, and the "Volcker rule", which could put the shackles on the Wall Street oligarchs, and force the liquidation of widely held stocks and commodities. But for now, the market’s climb above the 10,000-level means the possibility of a "double-dip" recession is more remote, and instead, trying to short-sell stock indexes, is like trying to push a helium balloon under water.

The broader-based S&P 500 Index of US stocks has rocketed 62% higher over the past year, a gain that would normally take five years to realize on modern trends.

The speed and strength of the stock market’s recovery caught many bond traders off-guard, and knocked US Treasuries for their worst annual losses since 1978. Most notably, the yield curve – the gap between short-term interest rates and longer-term government bond yields – rose to its widest level ever. The spread between yields on the Treasury’s 30-year bond compared to the one-year T-bill rate hit 440-basis points in December, the widest in history.

Traders reckon that the size of the US national debt – now exceeding $12.3 trillion – is weighing on bond prices, and a huge avalanche of debt still lies ahead. The Treasury is expected to issue $1.6 trillion in new debt in 2010, and $1.3 trillion the following year. Chinese central banker Zhu Min has warned it would become more difficult for foreigners to buy Treasuries when the US government has to fund its deficit by printing more Dollars. China slashed its holdings of Treasury securities by $34.2 billion in December, after months of complaining about the Fed’s Quantitative Easing scheme.

The extreme widening of the yield curve also reflects expectations that in the next phase of the Fed’s interest rate cycle, the central bank would be lifting short-term interest rates to contain an outbreak of inflation.

"When you have zero rates that go on indefinitely, you are inviting future problems," warned Kansas City Fed chief Hoenig on March 2nd. "Maintaining excessively low interest rates for a lengthy period runs the risk of creating new kinds of asset misallocations, more volatile and higher long-run inflation," Honeig said on Jan 7th.

However, the Fed is sending multiple messages to the media, that it’s determined to hold the fed funds rate steady at 0.25% through the remainder of this year. "Even though the recession appears to be over, it does not mean that we are where we want to be. Even with my moderate growth forecast, the economy will be operating well below its potential for several years," said San Francisco Fed chief Janet Yellen on Feb 22nd.

"If it were positive to take interest rates into negative territory I would be voting for that," she told reporters.

The Obama administration hailed the latest employment report, which showed a smaller-than expected loss of 36,000 jobs – and the 25th monthly decline in net jobs in the last 26 months – as a vindication of its economic policies.

For its part, the Dow Jones Industrials roared above the 10,500 level, buoyed by the "exploitation of labor" that is still widening company profits. So far then, the recovery in the economy has been limited to Wall Street’s oligarchs and S&P multi-nationals, which are profiting from trillions in taxpayer bailouts, virtually unlimited and cheap credit, exports to growing emerging markets, and the use of mass unemployment to slash the wages of Americans working in the service sector, which accounts for 85% of the US economy.

Meanwhile, top Wall Street firms paid their employees a record $145 billion in compensation last year, while social programs for the elderly, such as Medicaid and Medicare are being slashed, and millions of other jobs wiped out. The banking oligarchs, whose greed and speculation caused the crisis, refuse to expand lending to the private sector, but instead utilize zero-percent funds at their disposal to gamble in the markets, and all with the backing of government-financed guarantees.

Stock market rallies often climb along a "wall of worry". Yet despite persistent fears of a relapse into a "double-dip" recession, the most amazing aspect of the "Green Shoots" rally is the upward parabolic trajectory, was punctuated by only two brief corrections that barely caused a dent in the year-long bull market. The first correction in June 2009 was triggered by a sharp rise in 10-year Treasury yields to as high as the psychological 4-percent level. Yields have subsequently tumbled to 3.70%, far out of danger’s way, as far as market bulls are concerned.

The second correction, in January 2010, was triggered by China’s surprising hike in bank reserve ratios, plus Obama’s backing for the "Volcker rule" – banning risky trading by Wall Street Oligarchs – and a surge in crude oil prices above $80 per barrel.

However, Plunge Protection officials quickly put a safety net under the stock market, by promising to leave the Fed’s $2.2 trillion balance sheet untouched, and to maintain zero-percent borrowing costs for the biggest banks, for the rest of the year.

Thus, the Wall Street Oligarchs were able to return to the gambling table and re-engage in the most hazardous and riskiest forms of speculation. However, one of the consequences of the Fed’s ultra-easy money policies is a surge in crude oil prices above $80 per barrel, further reducing the purchasing power of Americans’ shrinking wages. And now that oil prices have latched onto the stock market’s joy ride, any attempt by the PPT to catapult the S&P Index rally above the January highs runs the risk of jettisoning crude oil into the $85-to-$90 region.

On March 10th, Saudi Arabia’s deputy oil minister, Prince Abdulaziz bin Salman, told reporters that a oil price of around $70-to-$80 per barrel was a satisfactory price for energy companies to invest in oil production capacity, and low enough for consumers that burn the fuel. Saudi Arabia, the Opec oil cartel’s largest producer, has shouldered most of the 4.2 million barrels-per-day of supply cuts adopted in late-2008. However, compliance to Opec’s output quotas, outside of the Saudis, Kuwait and the UAE, has fallen to 53%, which means the cartel is cheating by 2 million bpd.

"Energy demand is likely to continue to grow, led by rising consumption in Asia and the Middle East," bin Salman said, and the US Energy Information Agency predicts it could grow by 1.5 million bpd this year.

China, the world’s second largest oil guzzler, meantime imported 4.8 million bpd in February, the second highest tally on record. If oil prices surge to $90 per barrel – with "carry trade" speculators bidding-up prices using zero-per-cent loans from the US central bank – Riyadh could quietly increase its oil output without much fanfare to cool the market, or China’s central bank might be forced into tightening its monetary policy again.

Surging oil prices could thus ignite an "Oil Shock" for the global economy, and the Plunge Protection Team would be forced into action again, intervening in the stock index futures markets in order to limit the fallout. The PPT could also instruct the Fed to buy more T-bonds, so as to prevent yields from rising higher due to inflationary pressures emerging in the commodities markets.

And at that point, "hot-money" flows could once again pour into the precious metals markets, sending Gold Prices to record heights.

China’s manufacturing exports are growing again, up 45% from a year ago, and "hot-money" inflows are rising, adding to the pool of cash sloshing about the Chinese economy.

China’s stash of foreign exchange reserves has mushroomed to $2.4 trillion. And at the same time, in order to keep the Yuan tightly pegged to the US Dollar, the People’s Bank is buying vast quantities of US Dollars, Euros and Yen for its FX reserves, simultaneously printing equal amounts of Chinese Yuan to buy those currencies off local export companies, thus blowing bubbles in the Shanghai commodities pits and buoying the gold market.

Beijing is nurturing fertile ground for the Shanghai gold market, which has already risen 54% against the Yuan since the central bank opened the money spigots in November 2008. Gold demand in China grew by 14% to around 450 tonnes in 2009, outstripping 315 tonnes of supply. Speculation is rife that Beijing is Buying Gold from state-owned miners to avoid sending the international open-market price sharply higher.

Beijing has several "ideas and tool kits to manage inflationary expectations," warned Liu Mingkang, chief of the China Banking Regulatory Commission, on March 9th.

"Don’t get into too much of a panic or be afraid about inflation. China’s consumer and producer price index may rise slightly, but there’s only a small chance that inflation will be more than moderate," he said.

China’s consumer inflation rate surged to 2.7% in February, and factory-gate inflation surged to 5.4% last month. Thus, China’s inflation rate now exceeds the 2.25% interest rate on 12-month certificates of deposit, encouraging savers to withdraw their cash from banks and Buy Gold bars.

With food and energy accounting for half of China’s consumer price basket, soaring commodity prices are a ticking time bomb for social unrest. Yet Beijing is loath to further tighten its monetary policy, for fear of undermining the Shanghai stock market…

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Source:Gold & the Dow's "Optical Illusion"

Gold Investment demand now dominates the precious-metals market…

WE KEEP hearing from some sources that the Gold Price will tackle previous highs vs. the Dollar, only to fall to $850 an ounce, writes Julian Phillips of the Gold Forecaster.

We heard this before gold rose to $1100, with many analysts believing that there would then be a correction to $850. But it didn’t happen then either. What happened was that gold held its ground, and then broke upwards through resistance to set itself on track for higher prices.

If previous highs are hit – and if a "double top" is formed – then a major correction could come about. But there are two ‘ifs’ there, which is not solid ground on which to stand.

It is at these times when we bring in the fundamentals. Many will say that the technical picture can stand alone. But in this situation where one can only hope to read a technical picture still to come, that would be dangerous.

Fundamentally, in the last few years, the gold market has changed considerably, switching from essentially a market where there was little investment interest to one where Gold Investment demand now dominates. That investment interest has now reached sovereign wealth fund and central bank level, areas well beyond past market shapes. So the technical patterns now being set are based on a far bigger, differently natured market, too. The technical picture is still very valid, but must be tempered by the new fundamentals. So let’s not ignore these changes when assessing future price moves.

One only has to watch the media to see that it is so easy to fall victim to persuasive, if unbalanced presentation. TV journalists in particular have to present a story, one with drama and presence, simply to keep the audience watching. This can easily detract from realities.

For example, hedge-fund manager George Soros was accurately quoted as saying that gold was the "ultimate bubble". But the press interpreted that as him discrediting gold. However, to the contrary he was pointing forward to the future of gold, when it would become the "ultimate" – as in final – bubble.

How do we know? Simply because he has been buying the shares of Gold Exchange Traded Funds and shares in Nova Gold, a gold exploration company. It is more likely that he is Buying Gold with a tremendous Gold Price rise in view. This is now obvious, but to date we have not seen a change in the views on his position. He’s read them, better than they read him.

Likewise, we take the technical picture and the fundamental picture together before we come to a conclusion. Here’s the scene now…

Gold Investment demand is rising and from old money as well as new. It is buying anonymously and through the Fix in London so as to stay below the radar. Why? The problems of the Euro are not going to go away. They are structural. With national interests clashing with Eurozone interests among all members over money, only words of support are coming forward, no action. Confidence in the Euro is waning, no matter what politicians are saying.

US Dollar problems have not changed and there is little political will to attend to the ailments of the Dollar, riveted as they are on internal matters. The Dollar and the Euro will display a semblance of stability in the days ahead as it is realized they are both gliding down together in terms of confidence.

China is growing rapidly and has become self-sufficient in terms of internal growth. Exports remain important to them, hence the US Dollar ‘peg’ system they currently operate. Therefore, what they can’t afford to do is to let the Yuan rise strongly against all currencies. Yes, we do see an eventual lifting of the ‘peg’ – but only when the Yuan will not rise strongly against the US Dollar. This can only happen if Yuan are gushing out of China to such an extent that the currency will either fall or hold around current levels.

In such an environment of uncertainty and doubt, it is unlikely that there will be a great exit from gold. It is far more likely that Gold Investment will remain attractive as long as the world is in the present state.

Now look to the Indian sub-continent, where private households are well known for their caution when it comes to Buying Gold. They are very careful not to buy if there is a likelihood of the price falling heavily near-term. Thus they have been out of the market during the bulk of the consolidation we have just weathered. Last year imported gold was extremely low, and the market was supplied to a large extent by scrap gold. Now Indians are turning buyers again. History tells us that they believe we have seen the low around $1050 to $1100 and that price now forms good support.

In addition, Chinese households are inherent savers and have only recently been in a position – and a government-encouraged position, to boot – to Buy Gold. Both nations governments are steady buyers of gold as well. Certainly we would expect the central banks of India and China to treat any fall in the Gold Price as an investment buying opportunity.

So the conditions which would support a major correction in the Gold Price are not present. Should a correction from a failed attack on recent highs occur in such an environment it is likely to be a short one.

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Source:Gold Investment: New Market Shape

Whose gold is China buying? Its own, of course…

THE PRICE OF GOLD slipped last week, now trading 3.6% off its recent high, writes Dan Denning in his Daily Reckoning Australia.

Old yellow metal is trading a little above $1100 the ounce according to the April futures contract. The sense of urgency over the Greek crisis has eased. And no one thinks China is going to Buy IMF Gold. But why?

Speaking last week at the National People’s Congress, China’s foreign exchange regulator Yi Gant told a press conference that, "currently a few factors limit our ability to increase foreign-exchange investment in gold."

As we wrote in a note this weekend, most analysts immediately took that to mean China would not be a buyer of the 191.3 metric tonnes of gold the International Monetary Fund announced it would sell on February 17th. And if China were out as a major buyer of gold on international markets, speculators reckon that the Gold Price is in for a fall.

Yet as China bought 454.1 tonnes of gold between 2003 and 2009 – the last purchase reported – it didn’t have to go shopping overseas. China can buy its own home-grown gold instead, because for the last three years in a row, it’s been the world’s largest producer. China produced over 300 tonnes of gold for the first time ever in 2009, according to the China Gold Association.

That also means that last year’s domestic gold consumption – from private households alone – exceeded mine supply. Were Chinese authorities buying above ground gold too? The number of producing gold mines in China has fallen from 1200 in 2002 to 700 in 2009. You can see China is scrambling to produce as much gold as fast as it can.

This could be a case of a "Do as I do, not as I say." Why bid up the Gold Price on international markets when you can buy your own domestically produced gold? As a senior People’s Bank of China figure reportedly said:

"China should formulate a long-term plan and constantly and secretly increase its gold holdings…The People’s Bank should try to buy as much gold as possible from China’s annual gold output of almost 300 tons, while the gold needed by industries and residents could be imported."

Look, the case for gold is pretty simple. To paraphrase fund manager David Einhorn, if you believe monetary and fiscal policy across the world are sensible, sell gold and buy Treasuries. If you believe monetary and fiscal policy around the world are bad, sell Treasuries and Buy Gold.

You don’t have to a cult follower or a true believer to profit from that kind of trade. Gold made its biggest move in 1980. It peaked at $850 in early January, but what’s interesting is that 10-year US Treasury yields didn’t peak until more than a year later, hitting around 16% in June of 1981.

The speculators blew the top off the gold market, in other words, well before they were sure Paul Volcker had a lid on inflation. Once it became clear punitive US rates would kill inflation, the gold bull died.

But wait! US rates went up because the Fed was fighting inflation. And it was fighting inflation because…there was inflation! How can we expect gold to rise on higher rates if there’s no inflation to fight? The answer is that the Fed’s quantitative easing program is set to end this month.

Over the last year, the US central bank has spent over $1.25 trillion buying mortgage-backed securities. This has kept ten-year US interest rates low and mortgage credit flowing to the American housing market. The Fed has said that program will end by the end of this month.

What will happen next? Already we’ve seen investors crowding into the short-end of the US Treasury market. Treasury notes with maturities of three-years less are a nice, near-cash, highly-liquid alternative to taking any risks anywhere else. Hence lower short-term US interest rates, driven partly by the Fed and partly by the market.

With the Fed set to end its quantitative easing program, we’d expect market forces to assert themselves in the bond market. You’ll get a steeper yield curve. Without the government gaming the trade, investors are going to price US bonds based on the soundness of US fiscal and monetary policy. In this scenario, we think gold will attract more speculators (although the big ones like George Soros have already positioned themselves for this move).

Meanwhile in Europe, the news that finance ministers have agreed, in principle, to a bailout of Greece, might take a little of the urgency out of the sovereign debt crisis theme. And that, in turn, might drive the Gold Price lower. But all these things are prelude to a bigger crisis. Papering over the insolvency of the Welfare State can only last so long – and we think the dominos will begin to fall in months, not years.

In the meantime, though, the continued de-leveraging of the private sector means even larger public sector deficits. According to flow of funds data released the by the Federal Reserve last week, both US household and businesses reduced debt in 2009. The government added debt.

In fact the Fed data show that US households reduced debt on an annual basis for the first time ever in the history of the data series, going back to 1946. Household debt levels shrunk by 1.7%, with mortgage debt declining by 1.6% and credit card debt declining 4.6%.

It’s obvious at the household level, where the employment picture is awful, that Americans are preparing for less spending and less income growth. They are not borrowing from future earnings to sustain current living standards. The worm has turned.

And you can’t blame businesses for reducing debt by 1.8% either. Why borrow if you’re not going to increase capital spending or employment growth? There’s a political issue here too. You could argue that business investment is cyclical and will go up eventually. But with the US Congress deadlocked over health care legislation (that if passed might be repealed by the next Congress elected in November), there is a lot of uncertainty. You could also call that political risk.

Into the household caution and business uncertainty, the Federal government increased debt by 22.7% in 2009. It was below the 2008 record of 24.2%. But it’s clear that as the private sector deleverages, the government – under the misguided Keynesian assumption that it must support demand – is trying to fill the breech with borrowed money.

This sets the stage for the next episode of the US Dollar crisis. Right now, that may look remote, given the easing of tensions in Europe. But don’t get too complacent. The underlying fundamentals of the Dollar suck. With the Fed’s Quantitative Easing program set to end this month, a veritable monetary Pandora’s Box will be opened. Yes, the Fed could just announce it’s extending its Quantitative Easing program. But what effect would that have on the Dollar? On gold? On oil…?

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Source:Whose Gold Is China Buying?

Five per cent…? Ten per cent…? Try nearer 20% says this four decades’ veteran…

The GOLD REPORT recently caught up with John Embry, chief investment strategist at Sprott Asset Management, to get his thoughts on gold and Gold Mining stocks.

An industry expert in precious metals, John Embry has worked as portfolio management specialist for  more than 45 years; he’s simultaneously researched the gold sector for 30-plus of those years. He joined Sprott in 2003, after 15 years as Vice-President Equities at RBC Global Investment.

Here he tells the Gold Report about his outlook for strong Gold Price gains in 2010…

The Gold Report: John, in Investors Digest of Canada you recently said you’re expecting gold to gain another 30% this year…

John Embry: I would say at least 30%. I said that I thought it would be the best year to date. We’ve had nine years consecutive higher year-end prices and the best year in that span for a year’s return was 31%. I think this will be the year that we exceed it in this, the 10th year of the bull market.

TGR: Why is this year going to be the best year?

John Embry: I think we’re getting very close to the point when a greater proportion of the public realizes the degree of difficulty that sovereign debt is in. And at that point, when you can’t depend on your government paper as a safe haven, I think that fact puts gold in a much better light in more people’s eyes.

TGR: You might say the first leg down were the individuals who couldn’t pay their mortgages and that caused part of the ‘08 collapse. And now it looks like it’s the government…

John Embry: It’s very simple, actually. Private demand, as you know, was so weak that governments had to step in to maintain order in the economy and in so doing, they spent an enormous amount of money, at the same time that revenue streams fell because of the weakness in the private sector. Governments spent dramatically more money and the results are a budget deficit I never thought I’d see in my life. I’m shocked at the numbers in many places.

TGR: When you talk about gold, you’re talking about Gold Bullion. But how do you see the gold stocks? Do you think we’re going to have a pullback? Ian Gordon of Longwave Analytics and Richard Russell (Dow Theory) predict the Dow will go to 1000.

John Embry: I don’t agree with them. As much as I love Richard Russell – he’s probably been as big an influence in my career as anyone – I don’t think that deflation is necessarily the outcome when you have a pure fiat currency system. I think the far greater risk is hyperinflation because I believe that these guys that are in control today have seen the depressionary ’30s, and they will move heaven and earth to prevent that outcome. And when you’ve got the capacity to create unlimited money, I believe you can do it. So I hear Gordon and Russell and I respect them, but I’m in the camp that thinks we’ll get hyperinflation first. We’ll eventually have to clean out the debt, but I think we go hyper before that.

TGR: So hyperinflation. Would that include stocks as well?

John Embry: I think stocks will do fine. They may have a violent correction first because a lot of people don’t know what the heck we’re talking about here. And when they see inflation mounting and economic conditions being less than ideal, they’ll sell their stocks. But the fact is that if you go back and look at any hyperinflationary environment anywhere, stocks did infinitely better than paper instruments. So precious metals first, stocks second.

TGR: When you’re talking about stocks, you’re not talking just about Gold Mining stocks…?

John Embry: No, I’m talking about good businesses. I’m not talking necessarily about banks and other stuff that’s more dubious, based all on paper, but businesses like breweries, for example. People are always going to drink beer and a good brewing company will do exceptionally well in the debased currency of whatever country it’s in.

TGR: So you think that we might have a sell-off and in that sell-off all equities, including gold stocks, would go down.

John Embry: Gold stocks, maybe. I believe the next time everything goes down, gold isn’t going down. And if that were to be the case, I think gold stocks might surprise. They’ve been awful. Given what the Gold Price has done, gold stocks, by and large, have been awful.

Well, the well-promoted ones and the odd good one have done okay, but across the whole list, it’s been pretty hard slog over the last three or four years, particularly 16 to 17 months ago when it we hit bottom. I thought they were going to zero.

So many of them are trading at less than they were back in November 2003, which was the real peak of the excitement in gold stocks, if you can imagine. Six and half years ago. The Gold Price has done nothing but go up in that time.

TGR: In this next cycle are you seeing better returns for producers or the juniors that have pounds in the ground?

John Embry: Oh, I think the juniors. The whole thing is a matter of confidence. They’ve got so much volatility in the Gold Price. You get a good thrust up and you got a violent correction and I think they’ve got so many people discouraged and going the wrong way on these gold stocks that right now the degree of confidence is very low. If I’m right and the Gold Price stages a dramatic breakout in the next 12 months – and I’m talking hundreds and hundreds of Dollars on the upside – then I think the confidence will return and people will seek an outlet in gold stocks because so many of them have been beaten up. More importantly, the overall market cap of all the gold stocks is really small in the context of all the money around.

TGR: What’s the seasonality of this year?

John Embry: I think that probably we may continue to wallow around here for maybe the better part of another month. Maybe not quite that long. But, historically, mid-March to mid-May has been a really good period. When I look at the fundamentals and everything that’s going on, I see no reason why it shouldn’t be a very good period this time. And there’s one other development. I don’t know whether it will come to fruition, but on March 25th the CFTC is going to be investigating position limits in gold and silver on the Comex futures market. And if they ever put any teeth into those things and kept these bullion banks from what they’re doing on the short side with their large positions, I think that could have a salutary impact on gold and silver prices.

They’re finally going to have to address this because there’s been so many complaints about the bizarre price action on the Comex in both gold and silver.

TGR: The International Monetary Fund is going to be selling some gold, and India stepped up earlier. What are your thoughts on that?

John Embry: The whole thing irritates me. The IMF has announced the sale of this gold 500 times and every time with the express purpose of knocking the price of gold down. It was interesting the last time when the Indians actually relieved them of over 200 tons because that was what basically vaulted the market from about $1,045, which the Indians paid, up to $1,225 in the space of less than a month. That has been followed by the third significant correction in the last three or four years.

I think we’ve seen the vast proportion of the correction and I think what may be one of the factors that could get this thing going again is when somebody does relieve the IMF of the gold, the 191 tonnes still to be sold.

There’s speculation that India might be prepared to go to the plate again because the Chinese have been reluctant to step up. Number one, I don’t think they want to be seen publicly doing it. They’d probably rather do it more clandestinely because they’ve got so much money to convert into hard assets. And, secondly, as somebody pointed out, the Chinese at least have a domestic supply of gold. They can buy all their domestic output to augment their reserves, where the Indians really don’t have that.

So I think the Indians conceivably have a bigger vested interest here in taking that IMF gold. And there’s also sort of the suggestion that the Chinese wouldn’t want to be seen to be paying more than the Indians did. So they’re reluctant to step up with the Gold Price some $50 higher currently than the Indians paid.

If gold really was a free market, if they were really prepared to sell it to anybody, I think I could name any number of institutions, organizations, individuals that would be more than glad to relieve them of it. It’s not much money. It’s $6 billion. They throw it around as if it’s a big deal. Heck, given the budget deficits in some of these countries, $6 billion is literally a piss in the ocean.

TGR: What did you think when George Soros came out and said that gold was a bubble?

John Embry: I wrote about that and I got it right. I was very pleased about that because some people got all upset. The people that were negative on gold thought this was great, brilliant George Soros doesn’t like gold. But if you read between the lines, if you read really what he said, he said gold is the ultimate bubble, but he didn’t say gold is currently the ultimate bubble. I believe that it will be the ultimate bubble. I think the Gold Price is going to go crazy and at that point I’d be worried. And then it came out after the fact that Soros had been a major buyer of gold for his funds in the fourth quarter. So who knows what he was doing? The fact is, depending how you interpreted his remark, he was speaking at Davos, which is a very mainstream event, and he said something that can be interpreted any number of ways.

TGR: And, again, I think the financial talking heads used it as the negative.

John Embry: Absolutely. The mainstream guys were all over it. The guys who have never like gold have been wrong all the way up and said, oh, my god, George Soros doesn’t like gold. But I think George Soros’ remarks were misinterpreted and if you saw what he was doing, not what he was saying, he was Buying Gold…

TGR: Any last comments?

John Embry: The only comment I’d make is I really think things are sufficiently serious here in a financial or monetary debasement sense that everybody – and I have never been a table pounder – but I think every single person with a serious portfolio has got to have a reasonably significant exposure to precious metals. This isn’t something that’s just insurance for those who’ve got cold feet. This is something I think is a mainstream thing that people must have.

TGR: When you say a significant portion, what percentages are you thinking?

John Embry: I used to say 5% to 10% when it was just an insurance thing and the market was pretty sanguine. I say at least 20% now. I see the other assets as being less attractive. I wouldn’t buy a bond if you gifted me with the money to do it.

TGR: John, once again, I appreciate it.

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Source:Gold: How Much is Enough?

What first ailed the Dollar has now sent the Gold Price in Euros soaring…

THE PIECE we wrote on gold de-coupling from the Euro/Dollar exchange rate proved correct, notes Julian Phillips at the Gold Forecaster.

The action of the last week has shown that as gold rose strongly in the Euro in the Pound and is moving up in the Dollar alongside most currencies.

More than that, market commentators are now mentioning this too. But this action involves far more than these two main currencies.

To make the point, we ask you, "Which is better, a glass cracked in the higher part of the glass or cracked in the lower part of the glass.

Now replace the glasses with the Dollar and the Euro. Both are now under question.

Above is a picture of a $50 Bill as you see it today. Below is a picture of a $50 bill from yesteryear then called a "Gold Certificate".

It was exchangeable for $50 worth of Gold Bullion when gold was fixed at $20 an ounce. Note the same President’s picture there.

What would he think…?

The modern note is not exchangeable for any gold let alone 2.5 ounces. And therein lies the problem of valuing any Dollar bill. Its backing is your confidence in the government and the monetary authorities issuing it, as a reliable measure of value.

The United States is not alone, of course. The Euro is now going through a similar loss of confidence. But put in your mind’s eye a situation where the currency has the backing of gold and the government overseeing the currency. The dual support gives it far more value. Whereas today, you have a currency without the backing of gold and with the backing of a government trying to control the state of the economy by printing vast quantities of money in the belief that when the time is right they will withdraw it and re-establish monetary stability.

History alone gives us due cause to be prudent, doesn’t it…?

On my recent trip to London I was given a $100 trillion bill from Zimbabwe. It will not even buy one sheet of toilet paper. The currency is no more. And if currencies are to retain more than a captive set of users, they have to retain the inherent disciplines that gold brings. History has shown that both politicians and bankers cannot resist the power that comes with money, and they eventually distort it. The distance between currency management that reinforces the value of that money (not just stable prices) no matter what pain is involved and profligacy is a long one. Once travelled it is extremely difficult to go back as confidence has gone.

Take a look at both the Euro and the Dollar over the last few months and you can see how far along that road we have travelled. Greece is threatening to go to the IMF and Germany still has not announced it is willing to bail out the country. Now look from Greece westward through Italy and Spain and those countries that rely on tourist spending on second homes and holidays. They’re all in the same boat. Once Greece is helped, others will come too. It’s more than just Greece for sure. If the IMF bails them out the Euro will weaken.

The real issue is of course the Dollar and the Pound Sterling. As we say in our global currency slot below, we are waiting for the morning to arrive when we wake up and find one Pound for commercial transactions and one Pound for capital transactions (last time called the Dollar Premium; I started my stock exchange career as a dealer in the capital currency in 1971). As for the US Dollar, keep your eyes on those 10-year Treasury bonds to see how the Dollar is faring internationally.

If China has stopped buying T-bonds and is selling, then the yield will rise and the Dollar will fall. Or did the People’s Bank merely threaten to do so?

Sadly, Gold Prices are now a thermometer to the state of global currencies and the decay of confidence. As the Dollar weakens we are seeing gold rise. As the Euro weakens the Gold Price rises and when the Pound falls gold rises. The price of gold in local currencies is being more widely quoted now, not just a US Dollar price.

The problem is systemic. All currencies operate the same way and their health springs from the US Dollar and the Euro. Only resource producing or China oriented currencies look healthy at the moment. But even there we have to realize that national power lies with people irrevocably committed to putting their national interests ahead of global interests. A global reformation is called for!

But in this scene, global national authorities, without the dominance of one single nation, have neither the will nor the competence to rectify problems.

Extrapolate this situation and you see an increase in the level of currency crises in both severity and consequence. Suddenly the musings of the IMF head, M. Strauss Kahn on a completely new global currency becomes pertinent. Unless this road is followed and quickly, the situation will darken considerably.

This is why the Gold Price is moving now. As politics will have it, unless push comes to shove and the situation becomes dire, little will be done. Smart money, institutional money is quietly moving a portion into gold as a measure of prudence.

How far will the Gold Price run in the next move up? This section is for subscribers only…

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Source:Why is the Gold Price Rising?