According to the U.S. Census Bureau, there are 6.783 billion earthlings. Meanwhile, CPM Group, a highly respected industry organization, estimates there are 4.8 billion ounces of above-ground gold in the world. And this includes jewelry, electronics, and dental. So, even if everyone around the world volunteered to have their chain, cross, or tooth melted into a coin, we’re already short. Those towards the end of the line are out of luck.

However, it’s worse than that. Of all the physical metal ever mined…

• 2.1 billion ounces, or 43%, is found in jewelry, decorative, and religious items.
• Private stock – gold already held by various private parties – accounts for 1.1 billion ounces.
• Official reserves (central banks, IMF, etc.) stand at 1 billion ounces.
• Industrial use accounts for 530 million ounces.

Very little of this is likely to come available for purchase in coin form. After all, you’re not selling any of your gold, and neither are many banks or institutions. Most everyone is buying.

So for those who don’t yet have a gold coin (or you greedy investors who want more than one), this pretty much leaves us with mine production and scrap sources.

CPM forecasts that total new supply in 2009 will be around 122 million ounces. Only a small percentage of this is made into gold coins and bars, but if all of it were, it would amount to less than two one-hundredths of an ounce, or about half a gram, for every man, woman, and child on earth this year. A product of this dimension is about half the size of that small button on your shirt collar.

Since this supply is only available annually, it means 0.018% of the global population – one in every 55 people – could buy a one-ounce gold coin this year. Or, said differently, it would take 55 years before everybody had one, assuming the population never increased (it is) and supply never decreased (it is).

But it’s worse than that. Actual 2009 coin production will be around 5 million ounces (excluding medallions or “rounds”), leaving two one-hundredths of a gram of gold (or 0.3 of a grain) available this year for each of the planet’s inhabitants. This is about half the size of the sesame seed that fell off your hamburger bun at dinner last night. It means that only 0.0007% of earth’s citizens – or one in 1,356 – can buy a one-ounce gold coin this year, and it would take 1,356 years for everyone to get one.

How’s that for a supply squeeze?

But it’s worse than that. Demand continues rising. Gold is more frequently in the news, attracting more customers every day. Hedge funds, which never before considered gold, are now buying physical metal (Greenlight Capital actually sold $500 million of GLD and bought physical gold). Central banks are net buyers of gold for the first time in 22 years. China is running TV ads encouraging its citizens to buy gold and silver. Last month Russia bought more gold than they actually produced. In a recent survey, 20 out of 22 fund managers bought physical gold for their personal investments. In other words, some investors are already scrambling to get it… and in big quantities.

But it’s worse than that. Most of the ramifications of the money printing and dollar debasement haven’t even surfaced yet. How will the general public react when the dollar is crashing and standards of living are threatened? What will they do when milk and gas prices surge to twice what they are now? How will the greater collective respond when they lose faith in government interventions? Where will they invest when they see gold and silver prices screaming upward and don’t want to be left behind?

The panic into gold by the general public hasn’t begun yet. Available supply is scarce and will get smaller. There won’t be enough.

Better get your speck while you can.

Regards,
Jeff Clark

Source: What if Everyone in the World Wanted a One-Ounce Gold Coin?

We began having doubts about the ‘feds inflate… gold soars’ hypothesis last year. It was too easy… too obvious. And if it were that easy to inflate a nation’s currency, how come the Japanese couldn’t get the hang of it in the ‘90s?

So, we moved towards a contrarian position – inflation, yes… but not for a while. And gold? Well, we are in it for the long run. In the short run, anything could happen.

To clarify our view on gold, the Daily Reckoning is not bearish on the metal. It is not bullish on the metal either. It is buggish. We are gold bugs. In the long run, gold will retain its value. Since that’s all we ask of it, we are always satisfied. Even if it is down in the short run – and it went through an 18-year down cycle from 1980 to 1998 – it will come back in the long run.

Gold is not a speculation for us; it is a means of saving money. As Richard Russell says, a man should count his wealth neither in dollars nor in euros; he should count it in ounces.

Our views on gold are still contrarian. But our views on the gold market have become commonplace. Now… everyone’s a contrarian. As we read the opinions and the blogs, it has become common to forecast a dip in the gold price… followed by a new, big bull market after inflation has found its footing.

And so what does gold do? It goes up!

Yesterday, gold rose $11 – still comfortably above the $1,000 mark. Is gold going up because people fear inflation? Apparently not. If they were afraid of inflation we’d see it in the bond market. But instead of selling off – which is what Treasuries should do if there were any hint of inflation – bonds are going up.

Is gold going up because people are afraid of the dollar going down? Well, maybe. But that is like saying that the dollar is going down because people are afraid the price of gold is going up. Where’s the chicken? Where’s the egg? Which is the cause? Which is the effect?

The dollar is still going down… as gold rises. Yesterday, it closed just below $1.48 per euro. It is so low now that Americans’ cost of living is among the lowest in the world. The average house sells for just $160,000. That’s just over 100,000 euros. Even out in the country… you would have to do some serious searching for a nice house anywhere in Europe that you could buy for $100,000 euros.

And what about the economy? Our contrarian position has remained unchanged. As we put it last week, there are few problems that enlightened central banking can solve; a credit contraction is not one of them. All the bankers can do is to make it worse – by delaying it, disguising it or diverting it in another direction (such as converting deflation into hyperinflation).

Yesterday, the Dow rose again – up 51 points. As far as we can tell, the rally is still on. And now, the news media and the statisticians are in full support.

House prices rose 0.3% in July. Hooray! Of course, the government is giving huge tax credits to new house buyers. Since that program began in January an estimated 350,000 houses have been bought thanks to the program.

Household net worth also is going up – at least, that’s what the papers say. For the first time in 2 years. Of course, what do you expect? The feds are pushing up asset prices – giving them the biggest push in the history of man. But remember, the market is also doing its usual post-crash bounce. When the bounce ends… so does the temporary wealth effect…

Is this still a contrarian view? Seems to us that it’s becoming more contrarian every day. The longer the rally goes on, the more people think it is the real McCoy.

If we are right, the massive effort by the feds will make things massively worse. That is the position taken by Arthur Laffer in a recent Wall Street Journal editorial, by the way:

“The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity. If there were one warning I’d give to all who will listen, it is that U.S. federal and state tax policies are on an economic crash trajectory today just as they were in the 1930s.

“The Smoot-Hawley tariff of June 1930 was the catalyst that got the whole process going. It was the largest single increase in taxes on trade during peacetime and precipitated massive retaliation by foreign governments on U.S. products… beginning in 1932 the lowest personal income tax rate was raised to 4% from less than one-half of 1% while the highest rate was raised to 63% from 25%. (That’s not a misprint!)… By the end of January 1934 the price of gold, most of which had been confiscated by the government, was raised to $35 per ounce. In other words, in less than one year the government confiscated as much gold as it could at $20.67 an ounce and then devalued the dollar in terms of gold by almost 60%. That’s one helluva tax….

“Inflation can and did occur during a depression, and that inflation was strictly a monetary phenomenon…”

“The 1933-34 devaluation of the dollar caused the money supply to grow by over 60% from April 1933 to March 1937, and over that same period the monetary base grew by over 35% and adjusted reserves grew by about 100%. Monetary policy was about as easy as it could get. The consumer price index from early 1933 through mid-1937 rose by about 15% in spite of double-digit unemployment. And that’s the story.”

We had no doubt that inflation can occur during a depression; hey, we read the papers. Anyone who has followed the Zimbabwe story knows that you can have a deadly depression… and dizzying levels of inflation at the same time.

But there’s always more to the story. Devaluing the dollar in terms of gold had the immediate effect of increasing the money supply – it was like adding zeros to the currency.

In our wallet is a Ten Trillion dollar Zimbabwean bill, with a picture of stones on it. Those words – ‘ten trillion’ – did not get printed on that bill by accident. We assume they got printed on there by a printer in the employ of a government that figured that the cost of printing a ten trillion dollar bill was less than the cost of not printing it.

That is, by a desperate government that had so fouled-up the economy that a period of hyperinflation might seem like an improvement. Besides, hyperinflation might have a therapeutic, purgative effect.

But let us not get sidetracked by hyperinflation. It is nowhere in sight. Nor is its more civilized cousin – normal, polite inflation. The money supply in America – as measured by M2 – is contracting. The banks get money from the feds, but they don’t pass it along. The chain of reflation is broken – or at least temporarily stretched. Currently, it takes a long time for money to get from one end to the other. The cash tends to get waylaid –either by the bankers… or by consumers themselves. It stays in bank vaults… or in bank accounts. Money is not being multiplied by the speed by which it changes hands. Instead, it is divided by immobility. It sits. It shrinks. It waits for a real boom.

Until tomorrow,

Bill Bonner

Source: Waiting for a Real Boom

It’s true; gold has become noticeably less unpopular during the last few months. It is still not as popular an investment as, say, AIG or the shares of almost any other incompetent financial institution. But some investors have actually begun to admit that they’ve purchased some gold.

A couple of the most conspicuous gold-buyers – the Chinese government and hedge fund manager, John Paulson – represent quintessential examples of the “new” gold buyer. This new type of buyer does not also buy ammunition, bottled water and Lynyrd Skynyrd tank tops. Nor does this new gold buyer spend Saturday nights sipping Gallo Hearty Burgundy in his La-Z-Boy, while flipping through binders full of Walking Liberty gold coins.

These new gold buyers do not LOVE gold nearly as much as they FEAR paper. But they are buying aggressively nonetheless…and leaving their tracks everywhere.

Earlier this year, for example, Paulson & Co., the hedge-fund firm run by billionaire John Paulson, became the largest holder of the SPDR Gold Trust (NYSE: GLD), an ETF that buys gold bullion. The New York-based firm owned 8.7 percent of the fund, as of March 31. Paulson has also taken very large stakes in several gold mining companies – in particular Gold Fields Ltd. (NYSE:GFI), Kinross Gold Corp. (NYSE:KGC) and AngloGold Ashanti Ltd. (NYSE:AU)

Paulson has lots of company among mom and pop investors who are allocating some of their capital to gold. As the nearby chart illustrates quite clearly, the SPDR Gold Trust ETF has been accumulating ever-rising quantities of gold bullion – all in response to investor demand.

Although this chart is a bit dated, the trend it illustrates remains firmly entrenched. As of September 21, this ETF controlled 1,563 tonnes of gold, making it the world’s fifth individual holder of gold. The Swiss central bank, by comparison, holds only a little more than 1,000 tonnes of gold.

Meanwhile, the Chinese doubled their official gold holdings last year, and have been making a lot of headlines with some very public gripes about the dollar. A couple weeks ago, Cheng Siwei, former vice chairman of the Standing Committee of the Chinese Communist Party, complained, “If [the Fed] keeps printing money to buy bonds, it will lead to inflation, and after a year or two, the dollar will fall hard. Most of our [Chinese] foreign reserves are in U.S. bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen and other currencies…Gold is definitely an alternative.”

No wonder rumors were running rampant last week that the 403 tonnes of gold the IMF is selling will land in a Chinese vault.

Interestingly, while investment demand for gold inexorably rises, mined production of gold inexorably declines. Apparently, the folks who coax this precious metal from the earth can’t coax as much of it as they might like.

According to Grant’s Interest Rate Observer (citing statistics from the World Gold Council), worldwide gold production has dipped over the last seven years. Gold production since 2002 has declined from 2,590 metric tons to 2,486 metric tons through June 30.

These divergent trends – demand up and supply down – do not guarantee a rising gold price, but they do suggest that a rising gold price may become the path of least resistance.

Obviously, substantial above-ground supplies of gold – in bank vaults, around fingers, in belly buttons, etc. – will find its way into the gold market if/as/when prices rise. Nevertheless, a powerful inflationary trend would produce enough investment demand for gold to easily absorb all sources of supply…and ALSO push the gold price higher.

“There is a growing distrust of paper currencies amid a deluge of massive government deficits since late 2008,” Roseman concludes. “The dollar might be the biggest drunk at the bar, but the euro and other currencies are also drinking their way to devaluation against gold.”

Source: The New Gold Buyer

No, this rally had another factor pushing it: our friends in the Far East. The Chinese have been quite vocal with their concern over the US dollar and have increased their official gold reserve holdings by 75% in the spring. Smart move.

In the Weekend Edition’s Highlight of the Week, Bill Bonner looks closely at where the recent rise in gold prices puts our “Trade of the Decade.” Read on…

Gold took off [Wednesday]…closing at $1020. Here at The Daily Reckoning, we’re impressed. But we’re not that impressed. Gold, of course, is half of our Trade of the Decade, which we announced almost 10 years ago. We’re bullish on the metal…have been for a very long time. But recent comments in this space have made readers wonder what the Hell is going on…so we will spend a few minutes clarifying.

First, we hope you bought gold many years ago. That would make it simpler. Then, we could say: hold! Gold is an antidote to paper. There is so much paper…and so much more apparently on the way…that the gold play seems like a winner. It’s a bet that the money system that has been around since August ‘71 is going to fall apart.

We still think that is a good bet. Our Trade of the Decade remains. Buy gold on dips; sell stocks on rallies. We’ve done well with this trade; we’ll stick with it a bit longer.

But what if you don’t own gold? The yellow stuff is now over $1,000. In fact, it looks like $1,000 could be a new support level for the metal – with most of the support coming from the Chinese. China has relatively little gold in its central bank. It must see what we see – the weakness of the dollar and of the dollar-reserve monetary system. It must worry about the value of the $2 trillion or so it has in dollars. It must also wonder how it is going to run its economy if the dollar falls apart. American buyers were its consumers of first and last resort. To whom will China sell if its most important customers’ money becomes worthless?

Recent comments by a group of Chinese officials make it clear that they are thinking of these things…and that they have decided to add more gold to their reserves. In fact, all the central banks have become net buyers. No more selling off gold reserves. That is seen as a mug’s game – which it is. Replacing gold with paper? C’mon, what were they thinking?

So China is a buyer. Trouble is, it has to be a discreet buyer. It has too much money. It could cause the price to skyrocket overnight. Then, it would be paying too much. So, perhaps it does what we do – China buys on dips! For example, the order may have gone out: buy gold whenever the price goes below $1,000.

We don’t know what their buying strategy is…but the Chinese are probably going to be big buyers over the next few years.

Should you buy along with the Chinese? Should you compete with the Chinese for each ounce of gold that comes on the market?

Good question. Unfortunately, we don’t have a good answer. So let’s try a different question: Is gold going up or down?

The answer to that is simpler: gold is going up…then down…then up again. It is going up because the feds – including the feds in China – are encouraging speculation. Then, it is going down when the next phase of the bear market reasserts itself and the speculators run for cover. Then, it is going back up…much farther and faster…when the Fed becomes desperate and finally throw caution – and dollars – to the wind. We’re confident this last stage will arrive. Our hesitation is that it will take much longer than we expect. Gold may rise in a deflation…but it soars in a period of inflation. That period could be a long way off.

The above is just an excerpt from Bill’s standout essay from this week. You can read it in its entirety here.

Well, that does it for us…enjoy the rest of your weekend,

Kate Incontrera

Source: China Gets in on the Trade of the Decade

First, we hope you bought gold many years ago. That would make it simpler. Then, we could say: hold! Gold is an antidote to paper. There is so much paper…and so much more apparently on the way…that the gold play seems like a winner. It’s a bet that the money system that has been around since August ’71 is going to fall apart.

We still think that is a good bet. Our Trade of the Decade remains. Buy gold on dips; sell stocks on rallies. We’ve done well with this trade; we’ll stick with it a bit longer.

But what if you don’t own gold? The yellow stuff is now over $1,000. In fact, it looks like $1,000 could be a new support level for the metal – with most of the support coming from the Chinese. China has relatively little gold in its central bank. It must see what we see – the weakness of the dollar and of the dollar-reserve monetary system. It must worry about the value of the $2 trillion or so it has in dollars. It must also wonder how it is going to run its economy if the dollar falls apart. American buyers were its consumers of first and last resort. To whom will China sell if its most important customers’ money becomes worthless?

Recent comments by a group of Chinese officials make it clear that they are thinking of these things…and that they have decided to add more gold to their reserves. In fact, all the central banks have become net buyers. No more selling off gold reserves. That is seen as a mug’s game – which it is. Replacing gold with paper? C’mon, what were they thinking?

So China is a buyer. Trouble is, it has to be a discreet buyer. It has too much money. It could cause the price to skyrocket overnight. Then, it would be paying too much. So, perhaps it does what we do – China buys on dips! For example, the order may have gone out: buy gold whenever the price goes below $1,000.

We don’t know what their buying strategy is…but the Chinese are probably going to be big buyers over the next few years.

Should you buy along with the Chinese? Should you compete with the Chinese for each ounce of gold that comes on the market?

Good question. Unfortunately, we don’t have a good answer. So let’s try a different question: Is gold going up or down?

The answer to that is simpler: gold is going up…then down…then up again. It is going up because the feds – including the feds in China – are encouraging speculation. Then, it is going down when the next phase of the bear market reasserts itself and the speculators run for cover. Then, it is going back up…much farther and faster…when the Fed becomes desperate and finally throw caution – and dollars – to the wind. We’re confident this last stage will arrive. Our hesitation is that it will take much longer than we expect. Gold may rise in a deflation…but it soars in a period of inflation. That period could be a long way off.

The feds can’t revive the consumer economy. Despite all you read…the consumer economy is probably going to limp along for many years. No boom in consumer spending = no inflation.

“US retail sales surge as economy strengthens,” announces a Reuters’ headline. Don’t believe it. Between the seasonal adjustments and the feds’ giveaways the retail sales numbers are meaningless. The real story is that there is little – or no – real organic improvement in the economy. The largest banks that get federal bailout money, for example, have actually reduced their lending for 6 months in a row.

But the feds can stimulate speculation. The dollar has become the ‘carry trade’ currency. The big players borrow in dollars…and use the money to speculate – against the dollar! They buy gold. They buy Brazilian bonds. They buy aluminum futures. They buy stocks.

The Dow rose 108 points yesterday. Oil rose over $72. Almost all commodities are up – except natural gas.

The post-crash party seems to be going well. It may continue. But the underlying problems of the real economy have not been corrected. They will rise up like zombies in a bad horror movie and bring the party to a close. Absent support from the Chinese, the price of gold will probably go down along with everything else. Which brings us back to the question we dodged.

“Dad, I made $2,000 just in the last couple of days…on that gold play I got in. But I’m nervous…should I sell it?”

Jules has graduated from college. He’s investing his meager savings, trying to put together a big enough stake so he can take a year off from work and concentrate on his career as a composer and performer.

“Jules…I don’t know,” began the answer. “But you’re a young guy. You can afford to speculate. If it goes your way, you make money. If it goes against you, you learn something…and you have plenty of time to recover.

“It looks to us as though this party is going to continue for a while. If I were you…I’d stick with it a while longer.”

Our advice to a man of 21 is not the same as our advice to a man of 60. The older man would get older advice:

“Gamble not thy whole wealth on the gold market,” we would say.

The older man needs gold. But he needs it as insurance…as a reserve against catastrophe…as a form of savings. The Fed has been negligent and derelict. It is not protecting America’s money and Americans’ wealth. The average fellow has to do it himself. He has to have reserves of his own…reserves of real money – gold.

He should buy. He should hold. He should buy the dips. But he should not speculate on higher prices…nor risk his wealth gambling in the gold market. Most likely, after this speculative boomlet, the price of gold will go down. How much? How far? For how long? Of course, we don’t know the answer to those questions.

We’re not buying now. But we already have our position in gold. We will add more – on the next big dip.

“Why capitalism fails” is the intriguing and misleading headline of an article in The Boston Globe. It is a reminder of the theories of Hyman Minsky, who pointed out the obvious: capitalism is inherently unstable…it proceeds in booms and busts…not steady, incremental growth. Of course, that is just the way it works – like nature herself. And that’s why people don’t like capitalism…they can’t control it. So, whenever a bust comes, they imagine that it has ‘failed’ or ‘broken down.’ Then, they propose ways to fix it.

“Since the global financial system started unraveling in dramatic fashion two years ago, distinguished economists have suffered a crisis of their own,” starts the article. “Ivy League professors who had trumpeted the dawn of a new era of stability have scrambled to explain how, exactly, the worst financial crisis since the Great Depression had ambushed their entire profession.

“Amid the hand-wringing and the self-flagellation, a few more cerebral commentators started to speak about the arrival of a ‘Minsky moment,’ and a growing number of insiders began to warn of a coming ‘Minsky meltdown.’

“‘Minsky’ was shorthand for Hyman Minsky, a hitherto obscure macroeconomist who died over a decade ago. Many economists had never heard of him when the crisis struck, and he remains a shadowy figure in the profession. But lately he has begun emerging as perhaps the most prescient big-picture thinker about what, exactly, we are going through.

“A contrarian amid the conformity of postwar America, an expert in the then-unfashionable subfields of finance and crisis, Minsky was one economist who saw what was coming. He predicted, decades ago, almost exactly the kind of meltdown that recently hammered the global economy.”

Economists went off their heads in the last few decades. They thought capitalism would make us all rich. And they thought capitalism automatically tended toward beneficent equilibrium.

Here at The Daily Reckoning, intuitively, we guessed the contrary. The system produces a kind of orderly chaos…in which the rich are frequently impoverished, the proud are humbled…and the goofballs who think capitalism fails inevitably make things worse.

Until tomorrow,

Bill Bonner

Source: The Post-Crash Party Continues

But gains were capped by a slight recovery in the U.S. dollar and by a reduction in the metal’s appeal as a haven.

Spot gold was bid at $954.40 an ounce at 1444 GMT, against $949.65 an ounce late in New York on Monday. U.S. gold futures for December delivery on the COMEX division of the New York Mercantile Exchange rose $2.70 to $956.20.

The data from the Institute of Supply Managers showed the U.S. manufacturing sector returned to growth in August after a prolonged slump, while pending home sales raced to a two-year high in July.

The news boosted U.S. stock markets, while European shares pared earlier losses.

Simon Weeks, head of precious metals at the Bank of Nova Scotia, said the news was mixed for the gold market.

“On the one hand, it is weaker as people unwind safe haven positions and put risk on again, and on the other, it is high due to increased concerns over inflationary pressure,” he said.

“There is so much going on this week in terms of data, the ECB meeting and then the G20 that it will probably be next week before people have a clear understanding of how they want to position themselves,” he added.

Analysts said ahead of the data that a positive view of the economy could help ailing jewellery and industrial sales, which have proved a drag on prices in recent months. The dollar index <.DXY> was a touch firmer after the data.

Oil prices rose more than $1 a barrel, meanwhile, after the data boosted hopes for an economic recovery, while prices of industrial metals such as copper pared losses.

Gold demand in India, the world’s largest bullion market last year, abated as traders awaited further price falls. Some buying was seen after prices slipped below $950 an ounce, but this had not persisted, traders said.

IMPORTS FALL

India’s gold imports fell to 12-14 tonnes in August from 98 tonnes a year before as high prices and weak monsoon rains dented demand, the head of the Bombay Bullion Association said.

Gold imports to Turkey, one of the top three consumers of the metal, also fell 74 percent year-on-year to 12.517 tonnes, as demand in the local market weakened.

Among other precious metals, silver firmed to $14.95 an ounce against $14.89, while platinum was at $1,234 an ounce against $1,237 and palladium was at $289 against $288.50.

Palladium rose to a year high of $291.50 an ounce in earlier trade, helped by hopes demand for the autocatalyst material may recover and strength in other precious metals.

“Palladium… has the potential to test the $300-05 area, however we remain concerned about the level of speculative longs in the market,” said The BullionDesk.com analyst James Moore.

“(These) leave the metal vulnerable to a rapid correction should those longs become spooked.”

Talks between South Africa’s mine workers’ union and Impala Platinum began on Tuesday in an attempt to end a strike over wages. Platinum’s gains have been capped by weak demand from carmakers and the perception above-ground stocks are plentiful.

Sept 1 (Reuters)

Today’s “legacy assets” are toxic derivatives; a decade ago it was gold reserves. Both are proving hard to shrug off, but for very different reasons. Both legacies also come thanks to previous central-bank history; the fossils remain only too livid today.

And 10 years from now, if not sooner, just how welcome will the current central bank must-have become – freshly printed government debt, bought with money that doesn’t exist until the central bank wills it?

Seeking first to defend against inflation and war, the West’s central banks built up huge reserves of the ultimate hard money –gold bullion– during the early-to-mid 20th century. Long before the turn of the millennium, however, these hoards grew to look quaint and expensive. Unyielding and relatively useless to industry, gold simply sat there, down in the vaults, costing money to store but returning no interest.

Who needed crisis-proof gold when Western Europe (if not the Balkans or Mid-East) was enjoying its first generation of peace-time in history? And who needed fine gold when the Nasdaq index of tech stocks was priced for 20% annual earnings growth over the next decade and more?

In short, who needed gold when we’d got Alan Greenspan, as the New York Times asked in May 1999. “The argument against retaining gold is that its day is past,” wrote Floyd Norris with uncanny timing, just two days before Gordon Brown’s Treasury announced its ham-fisted sale of half the UK’s gold bullion hoard.

“Once it was useful as a hedge against inflation that would hold its value when paper currencies did not. Now financial markets have their own sophisticated ways, using exotic derivative securities, to hedge against inflation.”

You could butter your toast with the irony. But it wouldn’t taste sweet or provide much nutrition. Whereas a further glance back at history might.

“With huge gold stocks available for sale, [governments] may discourage excessive price increases but naturally do nothing to prevent sharp decreases,” reported an investment piece for Medical Economics published in October 1977. (Our thanks to the author for finding and faxing it to BullionVault this week.)

“The government specter [over the gold market] can’t be expected to disappear quickly,” F.D.Williams continued, some 32 years ago. “Gold will continue to be part of many national reserves for a long time. The stocks are so large, they can’t all be dumped at once.”

Compare and contrast with today’s unwanted bequest – those toxic derivatives the US Treasury chooses to call “legacy assets” as if it played no role at all in producing them. Unlike state-hoarded gold, it only encouraged their creation; it didn’t want to look after the damn things. And quite unlike the market for state-hoarded gold, a ready stock of willing mortgage-bond buyers also looks unlikely to gather.

“The PPIP, which was beset by multiple delays as regulators tried to figure out the best means of removing many of the troubled assets from banks’ books,” as CNN reports, “is still not up and fully running yet.” It’s not been for lack of incentives. The $2 trillion Public-Private Investment Partnership, announced to much fanfare in March, offers huge leverage – entirely at tax-payer expense – plus some or other hold-to-maturity value to risk-cushioned investors, albeit as yet unknown. Private investment groups can use up to $1 of non-recourse loans, plus another dollar of Treasury finance, for every $1 they spend on taking toxic housing derivatives off the banks’ busted balance-sheets. Yet as a report published this week by the Congressional Oversight Panel put it:

“Whether the PPIP will jump start the market for troubled securities remains to be seen. It is also unclear whether the change in accounting rules that permit banks to carry assets at higher valuations will inhibit banks’ willingness to sell. Similarly, it is unclear whether wariness of political risks will inhibit the willingness of potential buyers to purchase these assets.”

Funnily enough, as the US authorities struggle to sell toxic debt, Western Europe’s Central Bank Gold Agreement has also stalled in 2009. This comes, however, despite prices and private-investor demand both holding near record levels. First signed ten years ago this September, back when no one at the New York Times, Economist, Financial Times or big central banks could see a use for the metal (simply owning this secure, liquid store of value is use enough, by the way), the CBGA capped annual gold sales and made them plain in advance for the coming five years. It aimed to avoid a repeat of May 1999, when the UK Treasury’s announcement drove prices down to what then proved their floor. In contrast to Washington’s PPIP, however, central-bank gold sales weren’t arranged in the hope of achieving maximum price, but merely curbing a rush for the exits instead. And as it is, they needn’t have bothered.

Gold prices have since risen three-fold and more against all major currencies, even while the 16 signatories to date sold almost one-fifth of their hoard in aggregate. Thus gold’s weighting in their reserves portfolio has doubled regardless, rising as gold outperformed all other assets from the start of this decade.

Hence the dramatic slowdown in central bank gold sales since the financial crisis began in August ‘07. Because it’s tough selling gold when its use becomes so clear, so present. Here in the fifth and last year of 2004’s renewed CBGA, “Net central banks sales likely to be in the order of 140 tonnes this year, down from 246 tonnes in 2008,” reckons London market-maker Scotia Mocatta. Yet the annual ceiling for CBGA sales currently stands at 500 tonnes!

The new agreement – just signed and due to commence on Sept. 27th – tips its hat to the facts, reducing that limit by one fifth. But who’s left to sell any way? Just as in the gold mining sector worldwide, the “easy metal” has already gone from West Europe’s vaults, pretty much emptying Spain, the UK and those excess Swiss holdings which maintained the Franc’s 100% gold-backing until the turn of this century. The two largest holders, Germany and Italy, continue to face down political calls for “mobilization”, refusing to yield one ounce so far despite signing all three agreements. France, the third largest owner, has pretty much sold the 600 tonnes from its hoard announced when it joined the central-bankers’ Cash4Gold party in 2005. That leaves only the International Monetary Fund’s 400-tonne sale, hardly enough by itself to meet the next half-decade’s 2,000-tonne limit.

Back at the Federal Reserve, meantime, tomorrow’s central-bank legacy – of freshly printed Treasury bonds bought with magic money from nowhere – continues to swell. Yes, the Fed’s stockpile of T-bonds may be smaller today than it was back in August ‘07 before the Great Inevitable broke, thanks to record Wall Street demand for the safety of Washington’s debt. And yes, the Fed isn’t quite collecting new bonds from the Treasury door directly, waiting instead a few days or so before picking them up (as Brian Benton, Chris Martenson and others have found) from those primary dealers who do bid at auction, rather than out-and-out monetizing the debt for all to see with its newly created cash.

And sure, private-sector demand for Treasuries continues to look so strong right now – what with overnight rates at 0%, plus the ongoing collapse of house prices, world trade and jobs creation – that the Fed says it will stop financing Uncle Sam’s spending in, umm, October rather than in September as previously stated.

But hoarding gold looked rather more sensible amidst the violence and misery of the mid-20th century, and no one at the Fed or Treasury guessed two years ago that they’d be offering leverage incentives to try and revive the market in mortgage-backed derivatives. When the global economy gets off the floor…or risk assets become more attractive to private investment…or China and Japan find they really don’t have any space left for US debt in their central-bank vaults, the market into which the Fed will want to sell its Treasury hoard will look very different to the market from which it’s currently buying.

Whether a decade from now, in 2010, or perhaps this fall – when the $300 billion of quantitative easing ear-marked for Treasuries is spent – trying to quit the Fed’s newest “legacy asset” could prove tougher even than finding ready buyers for today’s toxic junk. And given the soaring interest rates and potential US bankruptcy that in turn might trigger, spurred by whatever’s added to the Treasury’s $11.7 trillion of debt between now and then, perhaps buying gold will look a smart move to the Western world’s central bankers once more.

Regards,
Adrian Ash

Source: Gold Will No Longer Be a Toxic Derivative to Central Banks

Spot gold hit an intra-day high of $961.00 an ounce, its highest since June 11, and was bid at $959.10 an ounce at 1329 GMT, against $953.90 an ounce late in New York on Friday.

U.S. gold futures for August delivery on the COMEX division of the New York Mercantile Exchange rose $5.70 to $959.40 an ounce.

“At the moment we’re seeing the dollar as the key factor to movements in the gold market,” said Eugen Weinberg, senior analyst at Commerzbank.

“In the past few months (gold) has gone from being a safe haven to becoming a dollar play. The dollar right now is so weak because no one is looking for a safe haven — because corporate results are so good and stock markets are performing so well.”

Silver was at $14.40 an ounce against $13.89, earlier it touched a high of $14.47, the highest since mid-June.

“Silver tracks gold in both directions,” Weinberg said.

The dollar hit a 2009 low versus a basket of currencies, stung by buoyant risk demand. The dollar index <.DXY>, a gauge of the U.S. currency’s performance against six other major currencies, fell to its lowest since December.

Appetite for risk was boosted by rising stock markets. European shares hit a nine-month high, as financials advanced after earnings results from Europe’s biggest bank HSBC cheered investor sentiment.

Rising equity markets also boosted interest in oil, with prices hitting a one-month high. Stronger crude prices support interest in gold as a hedge against oil-led inflation.

SILVER INFLOWS

Silver took further support from fresh inflows into exchange-traded funds last week.

The largest silver ETF, the iShares Silver Trust, said its holdings rose to a record 8,828 tonnes on Friday, while Switzerland’s Zurich Cantonal Bank said its silver holdings rose 1.929 million ounces last week.

Investment demand for gold and jewellery buying remain lacklustre, however. Holdings of the largest gold ETF, the SPDR Gold Trust , fell nearly 50 tonnes in July.

ETFs issue securities backed by physical commodities, and constituted a big source of gold demand in the first quarter.

Jewellery demand was also weak as Indian consumption softened on the back of higher prices. “Traders are waiting for lower prices,” said one dealer.

Among other precious metals, platinum was at $1,218.50 an ounce against $1,207.50, while palladium was at $267.50 against $261.50. Platinum traders are awaiting U.S. car sales data due later in the day for direction.

Government measures to boost demand for new cars supported European car sales in July, data showed, with French sales rising 3.1 percent, helping to lift both platinum and palladium which are chiefly used in automobile production.

“We view the development in vehicle sales as a positive signal,” Standard Bank said in a note. “We view this as a bullish signal for platinum, palladium, aluminium demand.”

In Japan industry-wide auto sales fell 5.2 percent in July from a year earlier.

LONDON, Aug 3 (Reuters)

Silver developed the gentlest of upward trends early in London and rode that trend through the Globex, ending just off its intraday high at $13.87/oz., up 17 cents. For the week, silver is up 3.4%. (Click here for charts)

Although profit-taking kept gold from staging a big rally this week, the yellow metal should be well supported at current levels because of dollar weakness and inflation fears, analysts said.

“We are still up here in quite a high range. We don’t see any physical buying coming in at these levels, but what is supporting it is the dollar,” said Andrey Kryuchenkov, an analyst at VTB Capital.

“The dollar’s weakness and the idea that inflation expectations are on the rise are holding gold here,” Kryuchenkov added.

In company specific news, Mineweb reported that Kinross Gold (NYSE:KGC) has recently assumed stock price leadership of the loosely-defined Tier 1 global gold stocks sector, which includes 12 companies with an aggregate market value of just under $200 billion. Kinross’s stock price fluctuated between a 52-week low of $6.85 and high of $20.98 a share, with current trades around the $20.28 mark.

Barrick, the world’s biggest gold miner by value and production, is trading nearly 25% off its 52-week high. Kinross was one gold stock chosen for investment this year by US hedge fund Paulson & Co Inc., which famously scored gains of nearly $4 billion betting against banks in 2007 and 2008.

In the past several years, Kinross has transformed itself from a stodgy, higher cost gold producer to one that increasingly reports lower costs, along with a highly convincing longer-term growth profile.

Source: Gold Pushes Through $950

Silver traded flat most of the day, as a gentle rise and fall in London and the same in New York canceled each other out perfectly. The metal finished exactly where it started at $13.70/oz., up/down 0 cents. Overnight, silver is trending higher. (Click here for charts)

Despite big gains in oil yesterday, which is usually gold supportive, the yellow metal fell as it took its cue from rising equities and a slightly stronger dollar.

“We have a tug of war here between those who dare to buy at these levels and people who got in at previous levels. If it breaches $960 [an ounce] it might make a quick run to $975, or it might swing back to the lower end,” said Jon Nadler, senior analyst at Kitco Metals Inc.

If Treasury auctions or GDP data coming next week prove dollar supportive, “it would bring gold down to the $930s at a minimum,” Nadler continued.

While Peter Grant, a senior metals analyst at USAGOLD – Centennial Precious Metals, Inc., believes inflation to be a “legitimate risk,” Nadler calls the jury very much out. “Right now we’re still grappling with deflation if anything.”

In reality, we’ve already had massive inflation (meaning expansion of the monetary base), but it hasn’t manifested in prices yet because the banks are holding the funds in reserve rather than lending them out. Once that money hits the market, however, (and there’s no telling when that will be exactly) you can and should expect huge price inflation to follow. This will be extremely positive for gold.

Source: Gold Takes a Step Back