“No rally can be sustained with yields and P/Es so poorly valued,” says underground investor Chris Weber, writing for DailyWealth. Chris is a very special kind of investor. When he was 16 years old, he turned just $650 (saved from his paper route) into $1.8 million through a series of remarkably insightful investments. So naturally we’re all ears when Chris gives his opinion on the direction of the market.

Chris is bearish on US stocks. (He’s mainly in cash and precious metals.) Why? Because there’s no value in the US stock market.

As of the end of July, the dividend yield on the S&P 500 has fallen to only 2.13%. When the rally began in March, the yield was over 3.5%. That is a huge fall in a short time.

Then, as stock prices have soared, earnings of companies have just not kept pace. In many cases, they are down sharply. This imbalance in price to earnings is shown in the weird spike in the P/E ratio on the S&P 500. It is now up to 127 times annual earnings, up from less than 20 times earnings at the rally’s start in March.

In other words, the dividend yield and the P/Es were not what you see at real bottoms. In really low markets, investors are shaken so much that years are required for them to regain bullishness.

Instead, I think what we’ve been seeing are the types of violent rallies within bear markets we saw throughout both the 1930s and the 60s-early 70s.

So once again, I’m just watching the stock markets. My position is that if the Dow Industrials and Transports can both better their previous record highs that they reached back in the second half of 2007, then I’ll be interested and ready to say that we are really off to the races again.

What I think is more likely is a repeat of the period of 1966 to 1975, where we’ll see a series of rallies within a bear market. In other words, this will be an easy time to lose money, and a hard time to make it.

Porter Stansberry has another take on stocks. He reckons we’re in the early stages of a “massive inflation.” Porter’s argument is simple. As long as the government keeps printing up trillions of dollars a year and holding short-term rates at nearly 0%, financial stocks are going to rise… And as long as financial stocks rise, the rest of market will follow.

Financial stocks are on a roll, as you can plainly see from the nearby chart of the financial sector ETF (XLF). Now, ask yourself a very simple question: Are investors buying financials because of their strong balance sheets and smart management or are they buying because they know that the government intends to keep pumping money into these boated behemoths?

Say what you like, US stocks are rising. All we know is we don’t like it one little bit. And we wouldn’t touch stocks knowing what we do about the market. As Chris Weber says, “This will be an easy time to lose money, and a hard time to make it.” Amen to that.

So today we turn away from the markets and focus on something more important: basic investment principles. As Alexander Green, investment director of The Oxford Club, puts it over at InvestmentU.com, “It’s not uncommon to run into investors who are knee deep in option trading, currencies, short selling, or sophisticated arbitrage strategies without mastering – or even understanding – basic investment principles.”

Here’s what Alex believes are the six factors that determine the value of your portfolio’s. Only one of these six factors is beyond your control: your assets’ annual compounded return. That means it only makes sense to focus on the other five.

1. The amount of money you save. To put it bluntly you have to start by maximizing your income, minimizing your outgoing and paying yourself first. Why? Because expenses always rise to meet the income available. As soon as you get a raise or a higher paying job, you’ll find that you need a new car, a bigger house, better furniture and a new set of Callaway irons. But you have to draw the line somewhere. You can’t save a pittance and expect your portfolio to perform miracles each year.

2. The length of time your money compounds. The sooner you start investing the better. And the longer you leave it alone the better. If you start too late – or raid your portfolio to redo the kitchen or take the kids to Disney – you’re going to have a lot of catching up to do down the road. The old chestnut is true: Don’t touch your capital. It’s like eating your seed corn.

3. Your asset allocation. Studies consistently show that how you divide your portfolio among non-correlated assets – stocks, bonds, real estate investment trusts, precious metals, etc. – determines 90% of your portfolio’s long-term return. (The rest is due to security selection.) If you’re too conservative – or too aggressive to stick with your program – you simply won’t meet your goals.

4. Your assets’ annual return. This, of course, is the great unknown. Not even Warren Buffett or Ben Bernanke can say what their portfolio will return each year. But the better your security selection and asset allocation decisions, the higher your annual compounded returns.

5. What you pay in expenses. Don’t be oblivious to what all those financial intermediaries are charging you. You can sacrifice far too much in commissions, bid/ask spreads, wrap fees, management expenses and other costs. All things being equal, the lower your expenses the higher your net returns.

6. How much you pay in taxes. Too many investors are oblivious to the tax ramifications of their investment moves. When possible, put your high-yielding investments in your tax-deferred accounts and your tax-efficient funds and individual stocks in your non-retirement accounts. (I call this your asset location strategy.) Hold positions 12 months or more to qualify for the lower long-term capital gains tax rate. Offset your capital gains with capital losses if possible.

You see what most investors don’t understand (and probably never will) is that market timing and stock picking make up only a small part of serious wealth building. It’s a secret the “ultra wealthy” have known for a long time. And they spend a lot of time and money making sure these six factors are right (and others, too, that would be too complicated to explain here). It’s how they hold onto their wealth for generations.

It’s actually what we’ve been working on while here in France. Along with my dad and your Notes co-editor, Chris Hunter, we’ve been researching these wealth preservation secrets. And we’ve discovered that wealthy families nearly always have something called a “family office.”

Most of these require massive amounts of cash to join. (One group in London my dad went to talk to was looking for a $200 million minimum!) So that’s why we decided to set up Bonner & Partners Family Office. It puts all of the money management secrets of the ultra wealthy to work… without the massive price tag.

Partners will enjoy the following benefits:

Access to what my family is doing with its money. Over the years we’ve spent literally hundreds of thousands of dollars on high-level wealth management advice. It’s been distilled into our family portfolio, which partners will have full access to.

Twice-daily market advice from full-time money manager Simon Mellon. The family has spent a lot of money, and considerable time, finding the right investment director for the family office. Simon has a resume as long as your arm. And his insight into the market is the kind that comes only with years in the trenches in New York and London.

Full-time tax planning advice from Raife Nueman. Raife went to university with your editor at St John’s College. And he’s one of the brightest attorneys we ever come across. (He has been elbow deep in the US tax code over the past two months, and he’s identified a way to drastically reduce your tax spend – to as much as 0% in some cases.)

Access to all of Agora trading advice and investment research. Family office partners will have full access to the entire daily output of Agora, the family publishing company. This amounts to 34 trading and investment research services. (A total of over $97,000 worth of subscription services a year.)

We will be sending out an invitation to join us as a family office partner this week. As a Notes reader, you can join the invitation list early by sending an email to info@contrarianprofits.com. Just make sure to put “Family Office” in the subject line so our staff will be able to quickly add you to the list before the invitation goes out…

Gold slipped on Wednesday as investors cashed in profits after the precious metal hit a three-month high earlier this week, with a recovery in stock markets indicating the beginnings of a revival in risk appetite.

Spot gold was quoted at $892.10/894.10 an ounce at 1510 GMT, down from $897.35 late on Tuesday. U.S. gold futures for February delivery on the COMEX division of the New York Mercantile Exchange dipped $6.80 to $892.70 an ounce.

Gold has been well supported by investors’ fears over systemic risk and the outlook for the economy, which sent the metal to a three-month high on Monday. But signs are emerging that this risk aversion is ebbing, prompting some profit taking.

“Technically, the daily charts are overbought and warrant profit taking after a relentless rally over the fag-end of last week,” said Pradeep Unni, senior analyst at Richcomm Global Services.

Moves in the dollar versus the euro, which usually push gold in the opposite direction, are currently being trumped by the perception of risk.

The euro rose against the dollar on Wednesday as risk aversion cooled, pressuring gold, while investors awaited the end of a meeting of Federal Reserve rate setters.

While headline interest rates are unlikely to change from their current level of zero to 0.25 percent, investors will be looking for further news on U.S. quantitative easing and details of a proposed “bad bank” to take over toxic banking assets.

European shares also ticked up for the third consecutive day, with banks leading the market higher.

U.S. stock futures also rose on optimism the new Obama administration will move quickly to stabilize the ailing banking sector.

“In the last days the gold price was moving higher despite the stronger dollar,” Eugen Weinberg, an analyst at Commerzbank, said. “The risk aversion of the market participants was playing a huge role.”

“Right now, the European equity markets — another indicator of risk aversion — are friendlier and are showing some recovery. In this case, you are not looking for a safe haven.”

Oil prices, typically another key external driver of gold, were steady at just below $42 a barrel.

Fears over the outlook for the economy and growing systemic risk are currently playing a greater role in the direction of gold than its usual drivers, oil and currencies, analysts said.

SPDR SOARS

The 7 percent rise in the SPDR Gold Trust’s bullion holdings this year is widely attributed to safe haven buying.

The trust, an exchange-traded fund which issues securities backed by physical stocks of bullion, has seen interest soar as investors seek out physical gold.

However, jewelery demand remains depressed as prices hold near $900 an ounce, particularly in key global centres such as India, China and the Middle East.

“Jewelers are not comfortable buying at such high prices,” said Harshad Ajmera, proprietor of Kolkata bullion dealer JJ Gold House.

Among other precious metals, silver prices were little changed at $12.02/12.08 an ounce from $12.01.

The iShares Silver Trust , the world’s biggest silver-backed ETF, said its bullion holdings rose more than 110 tonnes on Tuesday to a record 7,453.15 tonnes, and are up more than 300 tonnes in the first two days of the week.

“What we tend to see between gold and silver prices is that initially people will opt for gold as a safe-haven asset, but if gold prices rally too far, the cheaper option is to buy silver instead,” said Barclays Capital analyst Suki Cooper.

Platinum and palladium firmed a touch. Spot platinum was at $950/958 an ounce against $945, while spot palladium was at $189/194 from $188.50.

A Reuters precious metals survey of 56 analysts showed most believe platinum prices will remain depressed this year as an expected small supply dip fails to balance falling demand from major consumers carmakers.

LONDON, Jan 28 (Reuters)

U.S. gold futures for February delivery on the COMEX division of the New York Mercantile Exchange fell $10.30 an ounce to $898.50.

“One of the things that has really helped gold a lot has been the issues in the banking system,” Michael Widmer, an analyst at BNP Paribas, said.

“Looking at the newsflow over the last few days, there was a bit of relief after Barclays’ (BARC) announcement (on its performance),” he said. “That took away some of the immediate buying (of gold).”

On the currency markets, typically a key driver of gold, the euro ceded early gains after hitting a one-week high versus the dollar. However, this failed to pressure gold as it lifted from lows.

Gold typically moves in the opposite direction to the dollar, but its usual relationship with the currency has weakened, with both assets slipping earlier on Tuesday as risk aversion eased.

“A stronger dollar implies panic about the economic outlook but should mean a weaker gold price, in theory,” Daniel Smith, an analyst at Standard Chartered, said.

“The fact that that (relationship) has broken down highlights how worried people are about where they can put their money and who they can trust.”

A Reuters survey of 52 analysts published on Monday showed most expect gold to hold its ground in 2009 despite expected falls in other asset prices, on worries over the global economic outlook and turmoil in the financial markets.

Investment in physically backed products such as exchange-traded funds has been strong in recent weeks as investors seek a safe store of value.

Holdings of New York’s SPDR Gold Trust (GLD) inched up to a new record for the sixth consecutive session on Monday, and have climbed more than 52 tonnes since the beginning of the year.

London-based ETF Securities said its gold-backed ETFs saw inflows of 420,000 ounces last week.

SENSITIVE

However, gold jewelery demand remains weak, dealers say.

“As the demand for jewelery is very sensitive to price movements, demand for gold from India, Turkey and the Middle East, the main centres of the gold jewelery industry, should continue to weaken,” said Commerzbank.

Silver softened in line with gold to $11.98/12.06 an ounce from $12.04 an ounce late on Monday.

The Reuters survey showed most analysts expected silver prices to fare better than those of platinum and palladium, as risk aversion boosts its appeal as a safe haven.

The platinum group metals are also under pressure from gold’s fall. Both platinum and palladium suffered in recent months from fears over falling demand from carmakers, who account for around half of global consumption.

“Demand weakness is likely to weigh on the market in (the first half) and prices are likely to gain traction in line with a pick up in the economic growth towards the end of the year,” Barclays Capital said in a note.

South Africa-focused Aquarius Platinum (AQP) said it expects to report a first-half after-tax loss of $75-$85 million due to weak metals prices. Attributable production of PGMs rose 2.7 percent in December, it added.

Platinum edged down to $944.50/954.50 an ounce from $959.59, while palladium eased to $189/194 an ounce from $190.

LONDON, Jan 27 (Reuters)

Trading is expected to be muted ahead of the interest rate announcement of the European Central Bank on Thursday, traders said. The ECB is widely expected to cut rates by 50 basis points.

Spot gold was at $812.00/814.00 an ounce at 1523 GMT, down from $821.05 in New York late on Tuesday. It touched a high of $828.65 earlier in the session, but slipped as the euro retreated and European equities and base metals turned negative.

U.S. gold futures for February delivery on the COMEX division of the New York Mercantile Exchange fell $8.10 to $812.60 an ounce.

“Gold has fallen as the dollar has increased on a flight to safety after very bad retail sales numbers,” said Calyon metals analyst Robin Bhar.

“People were calling for a pretty bad retail sales number as it stood, but this was even worse than most people had feared,” he said.

December retail sales numbers released earlier on Wednesday showed total sales down 2.7 percent last month, against expectations for a 1.2 percent fall.

The U.S. currency extended gains against the euro as investors spooked by the outlook for the global economy bought into the dollar as a haven from risk.

While in the longer run risk aversion is also likely to benefit gold, in the short term currency moves will have more of an impact on the precious metal, analysts said.

The single currency also came under pressure after Standard and Poor’s cut its credit ratings on Greece’s sovereign debt.

Bullion is often bought as an alternative investment to the dollar and tends to move in the opposite direction to it.

All eyes are now on the interest rates decision of the ECB on Thursday, which will have a significant impact on the foreign exchange markets, and consequently on gold.

“Everyone is in wait-and-see mode for the ECB,” said Simon Weeks, director of precious metals at the Bank of Nova Scotia.

Data released on Wednesday showed the German economy contracted sharply in the final quarter of 2008 and euro zone industrial production plunged for the seventh month running in November.

The data suggested the recession is worsening and strengthens views the ECB will cut rates deeply on Thursday.

CRUDE SLIPS

Oil prices also slipped, giving up earlier gains, on the spate of poor economic data.

Gold typically moves in line with crude prices, both because it is bought as a hedge against oil-led inflation, and as crude can indicate interest in commodities as an asset class.

In Asia, jewellers are buying up gold bars ahead of the Lunar New Year on Jan 26, dealers said. Premiums for gold bars were steady at between 10 and 20 U.S. cents to spot London prices in Hong Kong.

“With Chinese New Year approaching it will be very interesting to hear how sales have gone and whether the strong purchases continue after the New Year holidays,” UBS strategist John Reade said in a note.

Jewellery demand in the world’s largest bullion market, India, has however been lacklustre in recent weeks, as buyers await lower prices.

Interest in investment products backed by physical gold, such as ETFs, is also healthy. Bullion holdings of the world’s largest gold-backed exchange-traded fund, the SPDR Gold Trust , remain near record levels.

Among other precious metals, spot platinum edged down to $930/940 an ounce from $941, while palladium was quoted at $178/183 an ounce against $182.

Spot silver was at $10.41/10.49 against $10.72.

LONDON, Jan 14 (Reuters)

Gold edged lower on Friday as the dollar strengthened against the euro in the wake of U.S. December non-farm payrolls numbers, but reaction to the data was muted as it came in broadly in line with expectations.

Spot gold slipped to $850.65/852.65 an ounce at 1415 GMT from $856.10 late in New York on Thursday.

U.S. gold futures for February delivery on the COMEX division of the New York Mercantile Exchange fell $2.80 to $851.70.

A government report showed U.S. employers slashed payrolls by 524,000 in December, driving the unemployment rate to its highest level in nearly 16 years.

Analysts polled by Reuters had expected a reduction of 550,000 jobs in December.

“The non-farm payrolls were only a few thousand off consensus, so that took some of the surprise away from the market,” said BNP Paribas metals analyst Michael Widmer.

Gold is taking its cues predominantly from the currency markets. The dollar turned higher against the euro in choppy trading after the data, with the single currency hitting a session low of $1.3588.

A stronger dollar tends to pressure gold, which is often bought as an alternative asset to the U.S. currency and tends to move in the opposite direction to it.

While the data was very poor, Widmer said, recent economic reports from the euro zone economies have also been weak, leaving both the dollar and the euro lacking support.

Oil prices, which also tend to influence gold, slipped more than $1 a barrel after the data to below $41 a barrel, as the rise in unemployment deepened gloom over the demand outlook in the world’s largest oil consumer.

In the longer run, concern over the prospects for the global economy continue to support gold as a haven from risk.

However, jewelery buying is relatively lackluster and strong demand for investment coins and bars is said by traders to have slackened since its autumn peak.

In India, the world’s leading market for gold jewelery, buying remains muted with prices at relatively high levels.

“There is hardly any demand at these prices,” said Mayank Khemka, managing director of bullion importer Khemka International in Delhi.

FORECAST CUT

Platinum has posted modest gains since the beginning of the year after a sharp sell-off in the last nine months of 2008, which knocked prices down 65 percent from their March highs.

However, it is still likely to suffer in 2009 from falling demand from carmakers, the major consumers of the white metal.

Investec cut its 2009 platinum forecast by 28 percent to $970 an ounce, although it said it remains positive on the longer-term outlook.

“We see downside risk to the platinum price in the near-term,” it said. “The outlook for vehicle sales, which accounts for 50 percent of platinum and palladium demand and 80 percent of rhodium demand, remains very poor.”

Spot platinum was quoted at $978/988 an ounce, down slightly from $991.50 late in New York on Thursday, while palladium was at $191.50/196.50 an ounce from $194.50.

Spot silver was at $11.09/11.17 an ounce against $11.08.

The world’s largest silver-backed exchange-traded fund, the iShares Silver Trust (SLV) , said its bullion holdings rose 1 percent or just over 55 tonnes on January 8.

LONDON, Jan 9 (Reuters)

Gold fell more than 2 percent on Tuesday as a stronger dollar dented the precious metal’s appeal as a currency hedge, but the platinum group metals rallied as investors hunted for bargains.

Spot gold was quoted at $846.50/848.10 an ounce at 1444 GMT, down from $858.90 late in New York on Monday. However, it lifted off an earlier low of $838.55 as the dollar trimmed gains against the euro after a raft of U.S. data at 1500 GMT.

U.S. gold futures for February delivery on the COMEX division of the New York Mercantile Exchange were down $10.10 at $847.70.

VM Group analyst Matthew Turner said investors were looking to the currency markets for direction. “A lot of news on physical demand has been quite poor, and that might also be weighing on prices,” he added.

The U.S. currency rose against the euro after a flash estimate of euro zone inflation data came in weaker than expected, increasing pressure on the European Central Bank to cut interest rates.

Analysts said the prospect of an ECB rate cut at the bank’s next interest rate meeting on Jan. 15 was pressuring the single currency, and consequently gold.

A firm dollar reduces gold’s appeal as an alternative investment. However, the U.S. currency trimmed gains versus the euro after data showed U.S factory orders and pending home sales dropped by more than expected in November.

DEMAND FIRM FROM FUNDS

But while the stronger dollar and reports of lackluster jewelery sales weighed on prices, demand for the metal from exchange-traded funds — which issue securities backed by stocks of physical gold — remains firm.

ETF Securities, which operates Europe’s largest gold-backed ETF, said holdings of its Physical Gold exchange-traded commodity rose 2 percent in the week to January 2 to 1.899 million ounces.

Holdings of the world’s largest bullion ETF, the SPDR Gold Trust (GLD), held at a record 780.23 tonnes on Monday.

“Gold is holding (where it is) because of investment demand for gold ETFs, rather than demand from the physical side or as a hedge against the U.S. dollar,” said Commerzbank analyst Eugen Weinberg.

Firmer oil prices, which are holding just below $50 a barrel as supply fears were fuelled by Israel’s incursion into Gaza and a dispute between Russia and Ukraine over natural gas, also lent some support to gold.

Among other precious metals, platinum and palladium rallied to multi-week highs, shrugging off a spate of poor vehicle sales news from car makers, the major consumers of the metals.

Spot palladium was the main riser, climbing 8 percent to a six-week high of $198.50. The metal was later quoted at $194.50/199.50, against $183.50 late in New York on Monday.

Platinum also climbed more than 2 percent to $967.50, its highest level for three months. It was later at $958.50/963.50 an ounce against $946.

“With the commodities basket, people are shifting out of gold and into other commodities that have been under performing lately,” said Commerzbank trader Rory McVeigh. “And palladium is probably the biggest underperformer of the market.”

Spot silver eased to $11.11/11.19 an ounce from $11.22.

LONDON, Jan 6 (Reuters)

The article talked about federal investigators looking into a Dutch-Swiss oil trader, Vitol Group.

The enforcement attorneys were trying to answer a big question: Whether or not oil speculators were behind the big price run-up this past summer — when oil approached $150 per barrel (today, oil hit $38 barrel).

The investigation by Commodity Futures Trading Commission potentially comes at an inopportune time for green investors. Green stocks began to shine with record-high oil prices. Although speculative-driven prices entered the dialogue, most experts blamed China, India, Russia and other booming emerging markets for consuming the world’s oil and gas inventories and driving up prices.

However, since hedge funds are largely unregulated no one really knows for certain the role they played (if any) in pumping up the price of oil.

The probe into Vitol may help answer that question — and determine the viability of green investments.

The Journal reported that Vitol’s trading contracts on the New York Mercantile Exchange at one point in July constituted 11% of all crude-oil bets outstanding on Nymex around the time oil was skyrocketing to new highs. The attorneys are now investigating if, in fact, the percentage of Vitol’s trading contracts were even higher than that.

If Vitol’s trade sufficiently “influenced” oil price fluctuations, some form of legal action could be pursued against the trader.

According to the Journal, Vitol made an estimated $1 billion to $1.5 billion on its record $146.7 billion in reported 2007 revenues, say traders familiar with the company. That works out to an average of $4.5 million to $6.8 million for each of Vitol’s 220 equity partners, although the top seven partners get a larger share of the spoils, the Journal said. Vitol reports its equity value at more than $5 billion.

An important distinction to make about Vitol’s trades is that they covered physical oil, not oil futures. By physical oil we’re talking about stockpiling oil shipments in tankers and other places, to keep crude off the market until Vitol could get its high price.

The Journal made sure that readers understood Vitol’s trading practices did not break the law — at least at this point in the investigation.

In August, though, Vitol emerged as the mystery trader that U.S. regulators reclassified as a large “noncommercial” trader — essentially a speculator, reported the Journal. Vitol’s trades helped reinforce the notion that indeed speculators were behind rising oil prices rather than OPEC and other producers.

This investigation could prove to be real bad timing for Vitol.

Under current SEC Chairman Christopher Cox, the agency has been lambasted for failing to protect investors from the current meltdown. President-elect Obama won’t make the same mistake.

His pick to head the SEC, veteran regulator Mary Schapiro, is expected to mop up the mess and restore confidence in the regulatory agency through new, strict guidelines.

She spent more than 20 years supervising financial markets. In her past position, she served as chief executive of the Financial Industry Regulatory Authority, a broker dealer watchdog. Schapiro has a stellar reputation for integrity and putting investors first.

What does all of this have to do with the price of green?

Well, that’s the big “What if?”

But here is how it could play out…

Schapiro digs up enough evidence to make a painful example of Vitol — and other traders like it. The backroom speculators are forced into the media glare, and pilloried for driving up oil prices.

At the same time, the economy bounces along the bottom and gas consumption stays relatively low.

Combined, these forces conspire to depress oil prices far longer than anticipated today — to the extent that OPEC’s supply cutbacks have only a negligible impact on spurring the price of oil at least here in the U.S.

Overall, this scenario is very bad news for green investors. Low oil totally crushes the economic argument for green technology.

Worse, if the economy remains sluggish for the next few years, the Obama camp could have a difficult time of imposing clean-air surcharges and penalties on American companies.

In the end, we believe that fossil fuels, and nuclear, will continue to reign in the coming years.

As a result, gold has started to shine again as a stable source of value at a time when the dollar and other commodities – like oil and copper – have fallen hard. The spot price of gold has climbed above $870 an ounce on the New York Mercantile Exchange, up about 20% from its October lows.

Gold has been on roller coaster ride in 2008, moving from its all time high of $1035 in March, to as low as $681 an ounce. Some of that decline occurred during the recent stock market plunge. Many investors were forced to liquidate profitable gold positions in order to raise money to cover their paper losses.

Its decline was then accelerated by the recent onslaught of financial bailouts, as many investors held a preference for liquidity and safety in the form of cash holdings guaranteed by the U.S. government.  That was reflected in the skyrocketing prices of government bonds and investments in government-backed banks, which also lowered yields.

But with the Fed’s recent decision to cut its target interest rate to a range of 0% to 0.25%, the dollar has suffered a significant decline. Suddenly, foreign investors who were scooping up dollars have cut back on their flight to safety, knocking the dollar index (NYBOT: DX) down 10% in the last month.  The index reflects the dollar’s value against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, and Swiss Franc.

The Fed’s interest rate cut may also have given gold a comparative boost in the eyes of investors. Gold, which never pays interest, suddenly doesn’t look so bad when compared to T-bills, which also are paying zero interest lately.

Volatility has risen this year compared to previous years, and the last few months have been the most volatile of all – an indication of investor ambivalence. But any uncertainty about the increasing price of gold may have been waylaid by the Fed’s recent rate cut and its dampening effect on the dollar and Treasuries.

Consequently, don’t expect this rally to be short-lived. As we pointed out in our 2009 Outlook Report on Gold, the fundamentals in the market hold the promise of more gains ahead.

It appears unlikely central bankers around the world will stop stimulating economies, printing money and doing whatever it takes until growth and confidence are restored – even if the cost is rampant inflation.

Consider these wild card inflation indicators that Money Morning Contributing Editor Martin Hutchinson believes will carry gold prices to $1,500 an ounce by the end of 2009:

• Over $7 trillion of freshly minted U.S. dollars are now in circulation with the aim of saving the global financial system.
• The incoming Obama administration has promised another $1 trillion or so stimulus package is on the way.
• It’s likely the Fed’s interest rate cuts will soon be followed by central banks around the world.

These economic stimuli are designed to do one thing – get the consumer spending again.

The bailout of the banks was the first step, but the banks are still keeping a tight rein on credit. Now the government is trying to get easily available, cheap money back into the hands of the consumer by running the printing presses around the clock.

“The government is pumping money in so many banks, and that money has to come out somewhere,” said Hutchinson.

Some of that money will “come out” into the economy in the form of higher stock prices. That will make consumers wealthier, and could give them more confidence in the economy. More confidence means more spending. As that happens, prices for goods should begin ticking upward, giving another booster shot to gold prices.

For instance some of that money is already going into gold bars and coins. In fact, the U.S. Mint was forced to suspend sales of the popular American Eagle and Buffalo gold coins for extended periods twice in the last year. The mint was unable to secure enough gold blanks from suppliers to match demand.

“I’ve never seen a case where demand was so high and supply was so short,” Chicago coin dealer Harlan Berk told the Associated Press.

With massive amounts of capital floating around, the time it takes to re-inflate the global economy will be far shorter than most analysts expect. Governments fear deflation more than anything.  It appears they will only fight inflation when they are assured they have won the first battle, which is growth at any cost.

When inflation kicks in, the dollar’s buying power will suffer long-term.  In fact, we expect a decline in all the world’s paper money, over time.  Historically, investors in gold have prospered during periods of weakening fiat currencies.

That leaves gold as a bright light in the investment world, making it an odds-on favorite to open a new leg of a long-term uptrend

Gold Bugs Have Fed to Thank for Recent Rally

• Crude prices rose back above $40 a barrel yesterday (Monday), as Israel and Palestinian forces exchanged fire and casualties mounted in the region. Light, sweet crude for February delivery rose $2.31 cents to settle at $40.02 a barrel on the New York Mercantile Exchange.

• A group of investment firms that includes J.C. Flowers & Co., Dune Capital Management, and Paulson & Co., is set to purchase IndyMac Bank, one of the nation’s largest failed banks, from the Federal Deposit Insurance Corp. (FDIC) according to CNNMoney. Neither the FDIC nor any of the potential buyers have commented, but the agency has said it expects the deal to be announced by yearend.

• Retailers may close 73,000 stores in the first half of 2009, the International Council of Shopping Centers said yesterday (Monday). More than a dozen retailers, including Circuit City Stores Inc., Linens ‘n Things Inc., Sharper Image Corp. and Steve & Barry’s LLC, have already sought bankruptcy protection this year, Bloomberg News reported.

• The interest rate on six-month U.S. Treasury bills fell to its lowest level ever at this week’s government auction. The Treasury Department yesterday (Monday) said it auctioned $27 billion in six-month bills at a yield of 0.25%, down from a rate of 0.285% last week, and an all-time low. The department also auctioned $26 billion in three-month bills at a yield of 0.05%, a slight increase from last week’s 0.04%.

• Commercial banks in the United States reported $6 billion in third-quarter revenue from trading foreign exchange, interest-rate and other derivative instruments, the Office of the Comptroller of the Currency said yesterday (Monday). That is significantly more than the $1.6 billion of trading revenue banks reported in the second quarter.

Source: Global Investing Roundups Tuesday, December 30th, 2008

Platinum traded up during the NYMEX session, reaching a high of $862.50/oz., before slipping during afternoon trading. Platinum ultimately finished just off its intraday low at $848/oz., down $3.

Silver rose sharply during Far East trading, but posted steady declines for the rest of the day to finish in the red. Silver ended at $10.81/oz., down just $0.01 from Friday’s close.
(Click here for charts)

Gold’s rise was largely the result of weakening dollar and declining equities.

Gold’s trading off the dollar,” wrote Frank Lesh of FuturePath Trading. “A weak economy and all-time low interest rates don’t call for a strong dollar.”

Gold saw further support from investors looking for a safe haven during these troubled economic times.

We’re not going to get any revelations on the economy soon,” Lesh continued. “Those who want to hold gold are still looking at a shaky equity market worldwide.”

Source: Gold Rises on Dollars Weakness