I made a promise to my wife late last fall. Once the holidays were over and she was well on her way to recovery after a recent surgery, we would hit the local furniture stores and redecorate our living room.

Next time I make such a promise, I’ll research current furniture prices first. With four-digit price tags for a simple sofa, it is no wonder just about every furniture pusher is hocking no-payment, no-interest plans to unload their stock.

As a cash-only kind of guy, I didn’t fall for the gimmicks. But judging by the looks on the salesman’s face when I handed him a pile of crisp bills, I am in the majority.

For years, all sorts of retailers offered “money-saving” financing schemes to entice cash-strapped buyers into the checkout line. For somebody with the financial might to pay off such accounts before the massive interests and penalties kick in, these plans really could save some dough.

But as Congress was eager to prove recently, most Americans end up in a very expensive trap. That’s why the folks in Washington outlawed the no-payment plans starting next month. Our leaders know the dangers of getting in too deep.

Why shouldn’t they? Washington’s got $12 trillion of debt to manage that it isn’t making payments on, at least not any substantial payment.

If you and I tried what Washington is doing – paying off debt with more debt – they’d put a stop to it in a heartbeat. But because they are too concerned with the next election to listen to some geeky economist, our lawmakers keep hiking down a deadly path.

If you listen to the growing chorus of pundits (I am one of them), that path is going to lead to a dead-end in the very near future.

One look at the gold markets today (an ounce is up by more than fifteen bucks) will show you investors are once again worried about the strength of the American economy. With an employment market that is the worst since the Great Depression began (a U6 reading of 17.3%), the hopes of an easy, painless recovery are waning fast.

In an economy leveraged to the max by credit, “painless” is never an option.

While lawmakers and government policy makers are worried about propping up the average Joe, a new, virtually unstoppable crisis is building. The collapse of sovereign debt – the money owed by the world’s governments – is going to be huge.

The only way out of the situation is severe pain.  Venezuelans know what it feels like. Chavez and his politicos cut the value of the nation’s currency in half last week to battle the nasty effects of a crippling recession.

Just imagine the ramifications as this wave slowly creeps across the globe. One country after another, in a rapidly growing crescendo will be force to restructure their economy and their balance sheets to battle the natural effects of credit overload.

National banks will default. Inflation will soar. Stimulus will be a word of the past. Welfare programs will be cut.

The only good thing is the government’s natural tendency to continue growing will be destroyed.

Washington and its global counterparts will be forced to contract. There is no debate. It won’t come after months of political debate. Instead, the markets will do the thinking for them. Eventually, nobody, not even China, will lend to us or our over-burdened brethren.

When it happens, it won’t be pretty. Unfortunately, it is happening far faster than anybody predicted.

Every day, I prepare for the horrific headlines.

You should too.

***One of my favorite classes in grad school was a statistics class. I know I am not supposed to admit a fondness for the subject, but there is nothing better to shut somebody up than the right set of numbers and a statistical formula.

Correlation analysis is good for anything from finance to fisheries management. But I like it most when it proves Washington’s fiscal ignorance.

According to a recent Associated Press study, Washington’s construction-related stimulus package has done nothing to improve local economies. No matter how much Uncle Sam sent local bridge workers and road constructors, the study was unable to find any correlation to employment figures. None!

One would think that would instantly eliminate any calls for another round of stimulus, but we all know the truth. It will only force Washington to ask for an even larger sum of cash or a new set of statisticians.

The Obama administration just doesn’t get it. In an economy valued at over $14 trillion, even a hundred billion in construction spending won’t create more than a ripple, especially when the tide is gushing in the opposite direction.

The only thing saved or created by Obama’s massive spending is the notion that stimulus works. Politicians say it is worth every penny. But those of us that bother to run the numbers know the truth.

The truth is, we’re in trouble.

This kiloton of Chinese gold makes the Middle Kingdom the world’s sixth largest holder of the yellow metal. The U.S. — courtesy of President Roosevelt’s gold confiscation in 1933 – tops this list of the world’s largest gold holders, followed by Germany, the IMF, France and Italy.

How did the Chinese accumulate so much gold? China purchased it over the past six years through its State Administration of Foreign Exchange (SAFE). SAFE is quite distinct from the People’s Bank of China (PBOC). The SAFE purchases meant that the gold did not appear as part of China’s officially reported monetary reserve figures.

The Chinese gold purchases, evidently, were part of a slow and steady buying program between 2003 and the present. It makes you wonder what the Chinese were thinking back in 2003. I happen to know, courtesy of an acquaintance at the Naval War College, that the Chinese were quietly forecasting that the U.S. would destroy its dollar by going to war in Iraq.

At any rate, SAFE bought all of the gold from domestic Chinese suppliers, so the overall impact was minimal on the international gold markets. Now the Chinese gold holdings have been transferred from the SAFE books to the PBOC. Hence, the official announcement. And here’s what REALLY matters. China is monetizing its gold!

This SAFE-to-PBOC transfer marks a profound decision by Chinese government leaders. Obviously, the Chinese government has bought gold over the past six years. But the Chinese have been engaged in an internal debate over whether to add the gold holdings to the official Chinese monetary reserves. That is, if the gold was not “monetary,” then it was just another non-monetary investment commodity like iron ore or copper or petroleum.

But now, with the announcement by the Chinese Central Bank, it appears that the debate is resolved. The gold has been added to Chinese monetary reserves. This action by China is part and parcel of an under-the-radar global effort to rehabilitate gold as a monetary reserve asset.

Gold has not been a factor in global trade and currency exchange since the late 1960s. But there’s a powerful movement afoot in the world to reestablish gold as part of an international monetary system. It’s because the U.S. dollar has been so badly mismanaged over the decades. No, you won’t read about it in your local newspaper, or even in the standard, mainstream business media. But that movement is out there. It’s happening.

At the same time, for many decades, the U.S. establishment has pooh-poohed the “gold effort.” U.S. policymakers, politicians, bankers and academics were collectively smug in their empirical certainty that, as Lord Keynes once noted, “Gold is a barbarous relic.” Apparently, the Chinese don’t agree. Not anymore. Indeed, the Chinese may well be thinking that the U.S. dollar is the real “barbarous relic.”

So now the Chinese are primed to begin using gold as a monetary asset. What’s the practical impact? I expect to see central banks worldwide start to add gold to their monetary reserves. The floodgates are opening. The PBOC and other central banks from here to Timbuktu are going to become net purchasers of gold in the years ahead. And people who own physical gold, as well as shares in well-managed mining companies, will benefit greatly.

One important commentator on gold prices is Peter Munk, founder of Barrick Gold, the world’s largest gold-producing firm. Recently from Switzerland, Munk remarked, “I have to think [gold prices] are going to be significantly higher than last year, just like last year was higher than the year before.”

According to Munk, the recent injection by the Federal Reserve of new currency into the money supply is an “enormous, enormous inflationary factor” for the dollar. This will make gold and silver “more and more desirable.” In addition, “Gold has got a very strong and stable support right now as long as we have this enormous uncertainty out there. And I think this uncertainty will probably last for a while, because I don’t see any major catalyst that can turn this around.”

Finally, Munk said, “Every year in the last three years, as the world becomes less and less secure in terms of normal investments and people lose faith and confidence in bonds, stocks, secured debt instruments, people turn to gold. It automatically attracts people in direct proportion to their fear, and that is fear of losing their money.”

Founded by Munk in 1983, Barrick Gold is among the world’s largest gold miners. Barrick has pursued growth through judicious expansion and a continuing process of acquisitions. “Barrick has grown,” said Munk, “primarily through an aggressive acquisition program in the last 25 years. So of course, we’d be on the lookout all the time for strategic acquisitions or mergers…The major gold deposits throughout the world in the main have already been found, so it’s getting more and more difficult, and that’s why you see global gold production heading downward, despite higher prices and increased spending on production.”

The bottom line in all of this is that you should be sure to pad your portfolio with gold and silver, both the physical metals and shares in quality mining companies. America’s political leaders have promised to fight recession by debasing the dollar. That may be the one and only political promise you can ever really trust.

Source: Why is China Buying Gold?

The closure of the U.S. markets for the Presidents Day holiday is likely to keep traders on the sidelines this session.

Spot gold was little changed at $940.20/942.20 an ounce at 1233 GMT from $939.40 late in New York late on Friday.

Bullion prices rose nearly $30 an ounce last week as concern over the economic outlook and turmoil in the financial sector prompted investors to buy the metal as a haven from risk.

Wolfgang Wrzesniok-Rossbach, head of sales at precious metals group Heraeus, said however that with jewellery demand soft, gold was likely to consolidate before its next leg higher.

“The trend for the next hours and days is probably a little lower before we make a new attempt higher,” he said. “Between $935 and $930, there is danger that the metal will break (its) recent uptrend, and then we might head a little lower.”

But turmoil in the financial markets and economic worries are still supporting demand for gold as a safe store of value.

Equities fell on Monday after a lack of concrete action following a G7 meeting this weekend and as data showed Japan is sinking deeper into recession. Japan reported its worst quarterly contraction in 35 years on Monday.

Fear-driven demand for investment products is helping balance a drop-off in jewellery buying in traditional gold markets such as China, India and the Middle East.

The world’s largest gold-backed ETF, New York’s SPDR Gold Trust (GLD) , said its holdings rose more than 15 tonnes to a record 985.86 tonnes on Friday. The trust’s gold holdings are up more than 205 tonnes or 26 percent so far this year.

But India’s gold demand was slack on Monday as high prices put traders off purchases. “Gold demand is very sluggish, and everybody is waiting for a dip to $900-$920,” said a dealer at a state-run bank in Mumbai.

The head of the Bombay Bullion Association said on Friday that there have been no gold imports into India so far in February.

Scrap supply from India and China is rising, however, as the climb in spot prices prompts existing gold holders to cash in gains.

DIRECTION

Gold took little direction from its usual main external drivers, the dollar and oil prices.

The dollar gained ground versus the euro as grim Japanese data intensified global recession fears and encouraged buying of safer assets.

Gold typically trades in the opposite direction to the U.S. currency, as it is often bought as a hedge against dollar weakness. However, both are currently benefiting from rising risk aversion.

Oil prices were steady just above $37 a barrel, pausing after Friday’s 10 percent rally, as investors awaited further direction from the signing of a U.S. stimulus package later this week.

Among other precious metals, silver also took support from strong investment.

Holdings of the biggest silver ETF, the IShares Silver Trust (SLV) , were at a record 7,607 tonnes on Friday. Spot silver edged down to $13.53/13.61 an ounce from $13.62.

Platinum and palladium remain under considerable pressure from the sluggish outlook for the car industry, a major user of the metals as a component in catalytic converters.

President Barack Obama has decided to launch a government task force for restructuring the struggling U.S. auto industry, a senior administration official said on Sunday.

Platinum edged up to $1,065/1,070 an ounce from $1,059.50, while palladium was at $215/220 an ounce from $214.

London-based ETF Securities said holdings of its palladium-backed exchange-traded commodity rose 30 percent last week as a recovery in platinum and palladium prices cheered investors.

Reuters Monday 2/16/09