The source for this claim? Besides syllogism (”The ’70s gave us inflation and a gold bull market; ergo, the opposite must be bad for gold…”) it was apparently Roy Jastram’s The Golden Constant, that dry, dusty study of gold’s enduring stability across the very, very long run by the end of which we will all be deader than disco.

First published by Wiley in 1977, The Golden Constant has just been updated by Jill Leyland, former chief economist at the World Gold Council, for Edward Elgar Publishing. I’ve not seen the re-issue yet (not at £72 a pop, some $120). But unless Jill’s scrapped Jastram’s research entirely and written a wholly new monograph, the conclusions should in fact be precisely the opposite.

Gold, like silver, gained in purchasing power during deflation but lost out to inflation. The only things to rise during commodity-price inflations were commodity prices and social unrest.

Three centuries of data are hard to ignore, but it seems they can be misread – not least when skim-reading for a quick book review. (If you care for the big picture, Jastram’s charts are available at the Golden Sextant.) Those three centuries of data can also prove a real bore to analysts without a library pass, as Jastram apparently makes for “a very dense read” says a Seeking Alpha post today. (Its summary table then misses the very same deflation of 1723-1738 we skipped by mistake and haste in our essay online, Pick a Number, last week.) And all those numbers can also mislead the unwary if the key point’s neglected:

Gold, like silver, rose in value during deflation. But back then, it was still used as money, and it lost out to inflation back when that role applied, too. Since the end of WWII, we’ve not suffered the first and only endured the second…and gold has risen sharply in purchasing power as the supply of what we’ve come to call “money” has swelled by an order of magnitude or ten.

Meantime – and not coincidentally – gold ceased being money beyond offering a store of value (and money that’s free from default risk, as well). Little wonder that inflation really took off after the gold-edged limits to money-supply growth were cut by the Nixon White House at the start of the ’70s.

And we all know where that little trick got us…

“What the press and policymakers are calling ‘disinflation’ is simply deflation, the deterioration of the monetary standard characterized by falling prices,” wrote Jude Wanniski, formerly an associate editor of the Wall Street Journal and advisor to Ronald Reagan, in 1982 – slap bang in the middle of what he’d come to call the “Volcker Deflation” in honor of the tall, cigar-wielding, inflation-fighting Fed chairman.

Paul Volcker took US rates to double-digits and left them there, wringing inflation out of the system and squashing the Gold Price – then (as now) a key marker for the stable value (or not) of money.

“There is a confusion because commodity prices [in 1982] are falling even as the cost of living continues to rise,” wrote Wanniski to his Polyconomics clients. “[But] the price of gold, the ‘commodity money par excellence’, is the surest proxy for all prices, goods and bonds…[and] the recession that threatens to become depression could also swiftly turn into a major bull market if the Fed arrests the Gold Price decline at $300, signaling an end to continued deflation and the monetarist policies that have guided the open-market desk.”

Why the call for active Gold Price intervention? Because just over 10 years after Richard Nixon tried driving a stake through the undead Gold Standard’s heart, “Legally defining the official dollar/gold price and backing it with convertibility [was] the only means by which…the markets can be assured that Volcker’s successors would not be tempted to try another monetarist experiment,” Wanniski believed.

Fast forward the best part of three decades, and here we are again, trying to heat-treat the mutant spawn of a new “monetarist experiment” that’s also broken out of the lab and started to munch bystanders on the corner of Wall Street and Main.

Wanniski’s point back then was that, to prevent the end of the world, the Gold Price should be forced higher, making Dollar devaluation explicit and pumping cash into the economy that could then be lent and spent to unwind that “deterioration of the monetary standard characterized by falling prices.”

Only an idiot would pick a fight with Wanniski’s terms of reference. So please – if you’ll hold my jacket a second…

The vicious disinflation of the early 1980s stemmed the monetary crisis but failed to morph into outright deflation. That defied history as well as economists, since all previous prolonged destructions of monetary value had been naturally righted by falling prices to follow. But by the late 20th century, as today, gold was not money, not as a means of exchange, and nor did its above-ground supply dictate the limits of paper money in issue.

Absent the money-supply limits which the Gold Standard imposed on the world, people rightly guess that double-digit inflation would prove rocket-fuel for the bull market in gold. Yet the purchasing power of gold nearly doubled during the Great Depression, and it’s risen four-fold during this decade’s low consumer-price inflation as well.

Why? Because both those periods of low price-inflation saw the money-issuing authorities devalue the currency, first with explicit reference to gold but now without daring to name it. Roosevelt in the mid-30s slashed the Dollar’s gold content by 40%; the Greenspan/Bernanke Fed devalued the Dollar again to sidestep a DotCom Depression, keeping real interest rates at less than zero between 2002-2005.

The maestro’s apprentice applied the same trick in the back-half of 2008, but so far to no avail. Not on the official CPI measure, now negative for the first time since 1955. Here in the United Kingdom, the same wheeze is being used to try and avert the first fall in retail prices in five decades, and even the “vigilant” European Central Bank is pumping out money – a near half-trillion euros in 1% loans on Wednesday – in a bid to revive bank lending, swamp the FX markets with single currency, and pull Germany out of its first flirt with deflation since the 1930s.

Just such a devaluation – and again, absent any stated reference to gold – was attempted by the Bank of Japan a little less than a decade ago.

Indeed, Japan is the only developed nation since the end of the Gold Standard to have suffered an extended deflation in prices. So far, at least. Germany and Switzerland look set to try for a re-wind, and unless the Dollar can outpace the Euro’s descent, we might yet see truly sub-zero inflation in the United States, too.

But whatever that should mean for Gold Prices, all other things being equal, just doesn’t matter. Because the Gold Price will not get chance, as all other things are not equal, and the policy solution – rank devaluation – can only make gold more appealing to investors and savers, whether the “monetarist experiment” of TARP, Quantitative Easing or a half-trillion euros in 1% loans proves successful or not.

Japan’s slump into deflation coincided with the Bank of Japan’s “zero interest rate policy” (ZIRP) at the start of this decade. It also saw the Gold Price worldwide hit rock-bottom and turn higher – a move that analysts (including us) have typically linked to US monetary moves and investment cash looking for safety as the Dotcom Bubble exploded. But zero-rate money from the world’s second-largest economy shouldn’t be ignored. And today, zero-rate money is all the developed world has to offer.

This trick might not beat deflation. But it might just spur a whole new rush into gold regardless.

Source: Does the Price of Gold Rise or Fall in a Deflation?

Although it is difficult to speak while gritting one’s teeth, laughing hysterically and trying not to vomit up blood in sheer anger and outrage, The Heroic Mogambo (THM) rises to the occasion and bellows, “No inflation beyond food and energy! Hahahaha! Relax, everybody! The guys who are afraid of deflation say that you should be afraid of deflation, too, since there is no inflation beyond food and energy! Hahaha!”

And since inflation is the thing I most fear, I knew that I needed money, and fast. So I spent most of the week setting up Step One of my plan, which involved setting up a fall-guy using the DaVinci Code method to find the words “Danny in accounting will loot the employee pension fund” somewhere in the Bible, but it was pretty much a bust.

Discouraged, I found, instead, an email with some clever anagrams, and I found one that seemed to be pertinent to the times, in that nowadays every moron government and all their moronic neo-Keynesian econometric buffoons (who have been the instigators of the economic disaster that has befallen the world, thanks to them and the despicably incompetent Alan Greenspan, former chairman of the Federal Reserve) are so desperate that they are “quantitatively easing” So Damned Much Money (SDMM) that we are, in a nutshell, freaking doomed!

Anyway, the anagram that tickled me is in taking the word DESPERATION and then re-arranging the letters to get A ROPE ENDS IT! Hahaha! It works on so many levels! Hahaha!

An upshot is that all of this “quantitative easing” of SDMM, and the reference to the anagram, is that most of the money that the Fed is creating is used to buy government debt! This increases the national debt, so it is not surprising that Agora Financial’s 5-Minute Forecast reports, “Your family’s share of the government debt is now over half a million dollars. A record $546,668, to be exact”!

Naturally, I am thinking that at 5% interest, each family owes, in addition to the $546,668 principal, a princely $27,333.40 in interest this year alone!

Fortunately for the government, they do not have to actually tax each family $27,333.40 this year because the government will just sell more Treasury debt, bought by the Federal Reserve with money they created just for the purpose.

Unfortunately, the family will pay it anyway, except in the form of higher prices as all this new money creates inflation in consumer prices!

The 5 says that they were quoting a USA Today study, which claims that each American family’s share rose 12% in 2008. That’s $55,000 in new government debt last year for every U.S. household – thousands more than the median household annual income.”

Perhaps as a result of all this bankrupting idiocy, the London Times reported that Treasury Secretary Geithner told the students at Peking University during his visit to China that “we believe in a strong dollar,” and that all the trillions of dollar’s worth of US debt owned by the Chinese “are very safe.”

If he had been addressing the usual kind of American morons that big-shot officials usually address, like the Economics Club of New York, Princeton, Harvard or Congress, then the audience would have sat there, dumbfounded, before applauding politely and saying, “Duuuhhh! Okay!”

But in China, Geithner’s speech was greeted with laughter! Hahaha! This shows that the Chinese are very perceptive and not stupid, in contrast to the USA, as this is the kind of response that it really, really, really deserves.

If Mr. Geithner really wanted to act smart, he would ask the Chinese why they have suddenly added their growing hoard of gold to their money supply. And if the Chinese wanted to be gracious hosts, they would have told him.

If he had asked me why I am buying gold, I would have told him, “Because this investing stuff is easy when a Federal Reserve creates 13% of GDP so that the federal government can spend a third of GDP! Whee!”

Source: An Economy at the End of its Rope

From this, he calculates that $33 trillion is equal to “about a third of total global savings,” which is one hell of a lot of money, which is more than my wife can spend in a whole weekend.

Of course, this brings us to “Why You Should Be Worried About The Bond Market” by Dominic Frisby at Money Week, and instead of going over that old stuff about how bond prices move inversely to interest rates, I will skip right to the crux of the matter, which he notes is that “A collapsing bond market means higher interest rates,” which is weird because I just said I would skip that part!

It must be more important than I thought!

Anyway, one of the Big Freaking Mysteries (BFM) that I ponder when I lock myself in the Big, Beautiful Mogambo Bunker (BBMB) while I am idly looking out of the periscope to survey the perimeter (and keep an eye out for my wife because that last fluorescent light in the bathroom burned out and she is probably wanting me to go to the store and get more bulbs and fix the damned thing and waste my Whole Freaking Day (WFD)) is, “How can bond yields can be so low? What kind of moron would be bidding up the prices of bonds so high that the yield is driven to insignificance?”

Jim Grant of Grant’s Interest Rate Observer says, “The long bond is a better short than a long,” to which he adds “and gold is a better long than a short.”

Sure enough, the long bond fell and saw its yield jump 18 bps to 4.26%, and the 3.3% yield on the 10-year Treasury note is more than a full percent above its low, which corresponds to yields jumping by almost a third since the low!

The ugly side of this is that guys who already owned these kinds of bonds lost money. And with the incredible amounts of leverage that these guys use, where they buy the bonds by putting up only one dollar of their own and borrowing another twenty or a zillion dollars, they not only lost plenty, but are on the hook for twenty times or a zillion times more! Hahaha! What morons!

And it is not just bonds that are going to need a lot of money to be created with which to buy them, but corporations are issuing lots and lots of new shares to get (I assume) enough money to keep going and pay themselves princely sums until inevitable bankruptcy, and, so far, the leader seems to be General Motors, which “announced in a filing with the SEC that it is issuing 60 billion new shares, a move which, if it meets with US Treasury approval, would dilute common shareholders into oblivion.”

Sixty billion shares? Sixty billion shares? That’s ten shares of GM for everybody on the planet! Hahaha! That’s going to take a lot of money!

And if it is money you need, Bill Bonner here at The Daily Reckoning reminds us that “Normally, in a correction, the supply of money – M1 – falls. Asset values are destroyed…borrowers default…money disappears into vaults and mattresses. But this time, so vigorous has been the authorities’ response that M-1 is actually increasing at about a 14% annual rate.”

He then ominously notes that all of this new money sloshing around already has significant portent, as “The money’s got to go somewhere…” with an ellipsis at the end to add that subtle spooky undertone to the whole thing.

With nerves on edge because of that ellipsis thing, I gotta ask, “So what in the hell is going on? And I thought there was going to be a free buffet and an open bar!”

Ignoring my rude outburst, he noted, “Equity losses last year were worse than those of ’29. It stands to reason that the next phase – the economic decline – will also be worse than the ’30s,” mostly because “the U.S. economy carries about $20 trillion of excess debt. Until that debt is eliminated, the idea of a healthy boom is a mirage.”

To my horror, he went on, “Getting rid of that debt either involves a long, hard period of work and sacrifice – as debts are paid down. Or, it involves something much worse.”

Now you suddenly remember his use of an ellipsis! “A long, hard period of work and sacrifice”! Yikes! What in the hell could be worse than “a long, hard period of work and sacrifice” you want to know?

Well, now that you ask, many things instantly come to mind, such as the inflation in consumer prices that all this new money will create, most of them highly reminiscent of the French Revolution, only worse.

And then there is the horror of having teenage children, to name two!

Mr. Bonner says that he figures that I have nothing to worry about because “the feds – who still have no idea what is going on – will choose the second solution…something much worse.”

I gulp in dismay, as he did NOT rule out the possibility of more teenage children screaming at me that I am stupid, that I don’t know anything about anything and I am wrong about everything.

But I am, secretly, not stupid, nor am I wrong about everything, as I can easily prove by just buying gold, silver and oil, waiting a little while until prices soar because of all this money being plowed into the world economy to produce Mr. Bonner’s “something much worse,” and then shaking all that money in their smarmy little faces and yelling into those same smarmy faces, “Who’s stupid now, ya nasty brats?”

Whee! This investing stuff is easy! And sometimes fun, too! “Nasty brats”! Hahaha!

Source: The Long and Short of Bonds and Gold

Some observers are now saying that gold’s pretty much had its day and that once the recession is over, it will retreat for good.

However, the four-digit gold price we’ve seen so far is with no price inflation to speak of, no effects of the atrocious increase in the money supply, and despite a rising dollar. What happens to gold when each of those pictures gets turned upside down – high inflation, excess cash jolting the economy, and a falling dollar? After all, gold’s performance to date has been powered only by general anxiety, not by any visible erosion in the dollar’s value.

I decided to take a fresh look at calculations that could be used to appraise gold’s upside potential. No one of them, by itself, comes with compelling logic. But they all point in the same direction.

Gold’s Percentage Rise in the Last Bull Market. What if gold in this bull market repeats the percentage rise in the last bull market? In the 1970s gold rose from $35 to $850, a factor of 24.28. Our low in 2001 was $255.95. Multiply that by 24.28 and you get a gold price of $6,214 per ounce.

U.S. Gold Holdings to Money Supply: The M1 money supply consists of currency and checkable deposits. The U.S. government currently holds 286.9 million ounces of gold. If the government were to make each dollar redeemable by the amount of gold it possesses, we’d arrive at the following price for gold: $1.569 trillion ÷ 286.9 million oz. = $5,468.80 per ounce

Gold/Dow Ratio: The ratio was about “1” when gold peaked in 1980, meaning the Dow and gold were the same price. To restore that relationship at today’s stock prices would mean when the Dow is at 6,626, gold should be at $6,626/oz. Of course, we think it likely that the Dow will get a lot lower before gold peaks. But even if it drops all the way to 4,000, that would imply a gold price of $4,000/oz.

All the Money in the World vs. Gold Reserves: If the public eventually sees the paper game being run by the central banks for what it is, governments will be forced to back their currencies with gold (and perhaps other tangibles like silver). Assuming they had to go into the market and buy the gold needed to restore faith in their currencies, the numbers might look like this: Total central banks reserves (including gold holdings) = $4.8 trillion, divided by 929.6 million ounces total gold reserves held by all official institutions that issue currency = $5,246 gold price.

U.S. Gold Holdings to U.S. Foreign Trade Deficit: The size of a country’s deficit or surplus would be of no consequence if all currencies were convertible into a fixed amount of gold. However, the dollar is increasingly considered a hot potato, and when the trade balance reverses, as it must, dollars will flow back to the U.S. and fuel domestic price inflation. Based on the cumulative trade deficit of $9.13 trillion (up from $6 trillion since June ‘07!) and U.S. gold holdings of 286.9 million ounces, the corresponding price of gold would be $31,822 per ounce.

U.S. Gold to U.S. Government Liabilities: Finally, the GAO (Government Accountability Office) calculates an income statement and balance sheet for the U.S. government. As you’d suspect, it is dominated by future liabilities for Medicare and Social Security. What if they had to be backed by the supply of gold? Official U.S. government liabilities now ring in at an incredible $55.2 trillion. To make good on that would require a $192,401 gold price.

No, we don’t think gold will hit $192,000 or even $32,000. And there really isn’t any surefire way to forecast the eventual high. But it’s clear that every weathervane is pointing in the same direction. So, yes, gold isn’t going to $2,000; it’s going higher.

Witness the Breakdown

When determining how to keep your wealth safe, the state of global affairs can be a powerful reminder that gold should be part of the strategy. And today our world, essentially, is on fire.
· Eastern Europe borders on bankruptcy. Brazil’s economy is falling off a cliff. Ditto Mexico.
· Protests have erupted in Latvia, Chile, Greece, Bulgaria, Iceland, Dublin, and parts of the U.S. Workers have gone on strike in Britain and France.
· In the U.S., 36 states and the District of Columbia have proposed or implemented reductions in the civil workforce. (You think customer service is poor now…)
· An astounding one in nine homes, 14 million, sits empty in the U.S. The December median price of a home sold in Detroit was $7,500. More than 8.3 million homeowners were upside down on their mortgage in the fourth quarter. Freddie Mac’s new CEO resigned after six months on the job.
· Last quarter, 12 U.S. banks failed, bringing the 2008 total to 25, the highest one-year death rate since 50 failed in 1993. More foreboding, another 252 banks joined the FDIC’s “problem list.” So far this year, 19 banks have failed.
· The central bank of Ukraine banned the early redemption of term deposits, the most popular form of savings in the country. Bank deposits have dropped 20% since September, as bank customers dodge the risk of getting locked in.
· The projected US$1.75 trillion federal budget deficit is almost four times the nation’s previous record-high budget deficit. The Times Square debt clock reads over $11 trillion. Japan’s now reads $7.8 trillion.
· High unemployment has become a worldwide epidemic, with the infection spreading.
With world economies taking it on the chin, it’s little wonder that investor interest in gold as a safe haven is growing – a trend we expect to continue. And just wait until the dollar resumes its slide, the expanding money supply jolts the real economy, and inflation kicks in.

Both Hands on the Wheel

Given the ongoing turmoil and the swallowing darkness at the end of the crumbling economic tunnel, our recommended BIG GOLD strategy remains keeping one-third in cash, one-third in physical gold, and one-third in our selected gold stocks. New money for investment should be split among the same three categories; we just don’t see any safer places to be.

As economies around the world continue to shrink and governments continue administering larger doses of the wrong medicine, we’ll sit in relative comfort with our gold for protection and our stocks for profit. We expect the prices of both to rise as others join us.

***

Even though some of the mainstream media are already popping the champagne, cheerfully pronouncing the end of the crisis, we beg to differ. The economic quagmire the U.S. and much of the developed world is in is far from over… so be right and sit tight, as we at Casey Research like to say. And find out how you can make the most out of gold as a safe-haven investment, by clicking here.

Source: Global Economics on Tilt – How to Protect Your Ass(ets)

The U.S. Federal Reserve had been expanding the money supply more rapidly than output for more than a decade, since a policy change in early 1995. That’s why the U.S. economy underwent a series of bubbles, from stocks in 1996-2000 to housing in 2002-2007 to commodities in 2006-2008. Then, when the inevitable crisis hit in September 2008, the Fed began expanding the money supply even more rapidly.

In the six months to March 2, the St. Louis Fed’s measure the St. Louis Fed’s Money of Zero Maturity (MZM), the nearest we can get to the old M3, rose at an annual rate of 16.2%, while the M2 money supply rose at an annual rate of 15.9% (the Fed has stopped reporting the old M3, the best measure of broad money growth). Since price inflation was low during that period and the economy was contracting, almost all that extra money has been pumped straight into the economy.

While the global economy is collapsing, all the extra money will have little inflationary effect. In the United States, however, evidence is building that the economy is approaching the bottom. Consider, for instance, that:

• After several months of decline, the Institute for Supply Management indices were more or less flat in the current month;

• February retail sales – excluding automobiles – were up 0.7%; January non-auto retail sales also being revised upwards to plus 1.6%. We may still have a few months of decline to go, but it seems increasingly likely that the U.S. economy will bottom out around the middle of the year – although the ongoing banking problems and huge budget deficits are virtually certain to prevent a rapid economic rebound. As we’ve said repeatedly, once the economy bottoms out, however, the additional infused capital is likely to serve as a serious inflationary catalyst.

Since September, U.S. Federal Reserve Chairman Ben S. Bernanke has repeatedly warned of the dangers of sustained deflation – and not just a few months of falling prices (which we got in the latter part of last year, thanks chiefly to declining commodity prices), but overall price declines over a prolonged period.

What’s the Market Telling Us?

Recent price statistics make it abundantly clear that deflationary dangers just don’t exist. Both the core consumer price index and the core producer price index were up 0.2% in February, and are well above their levels of February 2008. Notably, one of the major factors was a 1.3% jump in the price of apparel, one import that has been holding prices down for the last decade. In other words, rather than the sustained deflation Bernanke warned about, the latest price figures suggest that we should actually be concerned about inflation, which is clearly starting to accelerate.

Indeed, both the unprecedented budget deficits and the very rapid money supply growth point to an inflation rate of perhaps 10% per annum by the middle of 2010. The latest price-and-output figures suggest that any contrary tendency has disappeared. And that points to a strong likelihood that gold may be due for an additional upward run, which may be quite sharp and happen quite quickly.

The gold market underscored the veracity of my scenario in a very clear fashion yesterday (Thursday): Gold posted its biggest gain in six months after the Fed’s plan to buy debt hammered the U.S. dollar and reignited inflationary fears. Gold futures for April delivery actually jumped $69.70 an ounce, or 7.8%, to reach $958.80.

The yellow metal reached a record high of $1,033.90 an ounce on March 17, 2008 – a year ago this week – when U.S. rate cuts sent the greenback to an all-time low against the euro. Gold prices subsequently declined in concert with most other commodities. It’s up 8.4% so far this year, according to Bloomberg News.

If the hedge funds pile into gold, they will overwhelm the physical gold market, in which 2008’s mine output of 2,407 tons and other supply of 1,061 tons had a value of only about $98 billion at recent prices of approximately $900 per ounce. Gold’s peak price in 1980 of $875 was equivalent to $2,300 in today’s money; it is by no means impossible that the price of gold could soar well beyond that level.

Hedge fund interest in gold was demonstrated Tuesday by the hedge-fund billionaire John A. Paulson, who was probably 2007-2008’s most successful investor, thanks to a strategy to short housing assets that generated profits of more than $10 billion. Now Paulson has gone and bought 11.3% of gold miner AngloGold Ashanti Ltd. (ADR: AU) for $1.28 billion. Paulson’s on a hot streak, so there must be a good chance some of his rich buddies will follow him into the sector; that will inevitably shift the market considerably.

The Yellow Metal Hat Trick: Three Ways to Score From Gold’s Gains

There are three ways to play gold, and you should look at all of them:

• Go for the Gold: Of the three ways to play gold, the first is to buy gold outright, either in bars, or though the gold-linked, exchange-traded fund (ETF) SPDR Gold Shares (GLD). Today, GLD itself holds more than 1,000 ounces of gold, and has a market capitalization of $31 billion. The fund’s price fluctuates in concert with the price of gold, which adds a small mount of risk. On the other hand, however, buying this ETF is more convenient than buying gold bars directly, because the fund dispenses with the accompanying storage problems that comes with actually owning physical gold.

• Bet that Silver Sizzles: The price of silver generally moves in line with gold, but is currently at around $13.50, below its normal historic relationship to the gold price of about 1:30, and therefore possibly offers more upside potential (in 1980, silver peaked at $50 per ounce, equivalent to about $140 in today’s money.) That can be done through the iShares Silver Trust (SLV), which works in a similar manner to GLD, and which has a market capitalization of $3.5 billion.

• Go Deep: Third, you can follow Paulson and buy gold mining shares. I actually don’t like Paulson’s choice much; AngloGold made a loss in 2008 because of inept hedging and is mainly in South Africa, whose political risk I don’t care for. However, your big advantage over Paulson is that you’re presumably not so rich that you have to deploy your money $1.28 billion at a time. Thus, you can buy on the ordinary share market some of the other mines that are cheaper, rather than having to do a special deal with a company like the Anglo American PLC (ADR: AAUK), the British mining giant that sold Paulson the AngloGold shares from its own stake in that company.

A Look at Two Top Miners

Gold mines had a 2008 that was less profitable than you might expect. The price of gold was essentially flat over the year, while the price of oil soared to a peak in July, affecting miners’ costs badly, since fuel represents 25% or more of a mining firm’s total expenses. Only in the fourth quarter, as fuel prices declined and gold prices rose, did mining economics improve – but, even then, many miners were badly affected by write-offs in their copper operations, where prices had collapsed after a long bull market.

However, the good news is that gold prices have risen by almost 10% in the 2009 first quarter from the final quarter of last year, while fuel prices have declined even more; hence, the quarterly results to be announced in April and May could be surprisingly juicy.

So if you’re going to look at actual miners, here are two to consider carefully:

Barrick Gold Corp. (ABX) is the largest and financially strongest gold producer, with a market capitalization of $29 billion, reserves of 124.6 million ounces of gold (plus copper and silver), and operations in North America, South America, Australasia and Africa. It took a fourth-quarter charge of $779 million – because of its copper operations – but was otherwise profitable in 2008, with revenue rising 10%. For 2009, it should benefit from rising gold prices and declining costs; it currently sells on a prospective Price/Earnings ratio of 13.7, but of course as gold prices rise, earnings will rise on a leveraged basis.

Yamana Gold Inc. (AUY) is an expanding gold producer with a $6.8 billion market capitalization that made an unexpectedly good profit in the fourth quarter of 2008, and that is expanding both production and reserves (currently 19.4m ounces) with operations in Canada and Latin America. Its expansion increases its likely benefit from rising gold prices; Yamana’s shares currently trade at a forward P/E of about 12, but earnings should rise sharply if gold prices rise.

Source: Three Ways to Profit as Inflation Causes Gold Prices to Increase

…at which point I was getting my hopes up that he would mention me saying something, you know, memorable, such as, “I seem to remember that The Mogambo said something that was so deliciously, delightfully clever, and although I do not remember which it was among his voluminous bon mots, I do recall how his flashing eyes twinkled when he spoke of How Freaking Rich (HFR) he was going to be when the prices of gold and silver exploded as a result of such Federal Reserve malfeasance, including their manipulating the prices of silver and gold down to levels that are officially classified as ‘laughably cheap’ which made such riches possible by being able to ‘buy low’ now and ‘sell high’ very soon, and how we laughed – ‘Hahaha!’ – when he kept saying how we were all freaking doomed because of the constantly increasing price inflation from the constant increases in the money supply by the Federal Reserve creating so much money and credit to accommodate constant expansion of government spending!”

Alas, it turns out he did not mention me at all, but said that an interesting way to look at the economy was that “The great boom that the world is enjoying is, in effect, an enormous shorting of cash and going long on debt” which is indeed an interesting perspective, although it does not say that that bastard Alan Greenspan is directly responsible when he had the Federal Reserve keep increasing money and credit, at lower and lower rates, for so long that a constant simmering inflation resulted as people “went long on debt” by borrowing, borrowing, borrowing, including the federal government borrowing, borrowing, borrowing trillions of dollars to expand a huge, monstrous entitlement-generating government that is now So Freaking Big (SFB) that total federal, state and local governments comprise half of all spending in the USA! Half! Gaaahhh!

I am so outraged at this that I say we ought to rise up in outrage and rush to our telephones, where operators are standing by to take your order for “Mogambo Brand” Mob Supplies (MBMS), including not only the popular Mogambo Flaming Torch (MFT) and Mogambo Long-Tine Pitchfork (MLTP), but now featuring a new line of filthy rags in which to dress with which to give the whole thing a kind of surreal, repellent horror, as all politicians know that there is no more dangerous a person than a hungry, bankrupted peasant in filthy clothing brandishing a Mogambo Flaming Torch (MFT) and/or a Mogambo Long-Tine Pitchfork (MLTP)!

Mr. Price is apparently not prepared to advocate buying one of my shoddy, overpriced products or mob rule, but he might as well have, as the result of going short cash and long on debt is that “Eventually, there will be a short squeeze on cash which will have to be covered by going long on cash and shorting debt” which ought to make your spine curl up into a tight little knot when you remember that money now comes from debt, and this debt going down in price means money going up in smoke with bond prices falling, meaning interest rates are moving up (since bond prices move inversely to interest rates), which means that rolling over debt means losing more and more money while owing more and more! Hahaha!

Again, Mr. Price is not interested in my interruption or my stupid observations, and says that “Bringing all the massive liabilities of the banking system onto the Treasury’s indebtedness – while the corresponding assets are worth far, far less than these liabilities – will solve nothing” to which he adds, by logical extension of solving nothing, that “Debt must be reduced by defaults and bankruptcies. There is no other solution!” where the astute reader will notice that Mr. Price has appropriately included an exclamation point at the end to indicate special emphasis, which seems appropriate considering the sorrowful effects of “defaults and bankruptcies”!

But there is also a plethora of exclamation points for when one considers the effects of inflation in prices and the resultant civil unrest as prices rise faster than incomes rise for the people who have incomes, and the screaming outrage of people who don’t have incomes that can rise!!!!

For those of you surprised at the “plethora of exclamation points” at the end of that last sentence, you cannot say you were not warned about them in the first part of the sentence, or that you were not warned of the disastrous effects of inflation in prices, which everybody has known about for centuries and which drove the Founding Fathers to write into the Constitution that money “shall only be of silver and gold” just to make sure that it would not happen in America by the simple remedy of making money out of something that the government, nor anyone else, cannot create at its whim.

All of this brings me, as you knew it would, to gold. It’s a valuable thing that nobody can create at a whim, and that is why, as everyone has learned for the last 4,500 years, you gotta have gold or you got nothin’ when governments are acting this, ugh, way.

Perhaps this is why TheGoldForescaster.com reports, “The joint holdings of the two leading Exchange Traded Funds have grown larger than the gold holdings of Switzerland, rising to 1,272.26 tonnes up another 43.21 tonnes.”

Whee! This investing stuff is easy!

Source: Attack of the Debt Mobs

On that topic, a friend sent this item along last week…

(Gulf News Nov 12) Riyadh: There has been an unprecedented demand for gold in the Saudi market recently, with over 13 billion Saudi riyals (Dh12.75 billion) being spent on the yellow metal during the last two weeks.Demand is expected to rise still higher as more investors turn to gold as a safe haven in the midst of the global financial crisis, according to market sources.

Sami Al Mohna, an expert on the gold market, said the trend had resulted in a substantial rise in the gold reserves of Saudi investors.

Since soaring to an all-time high of $1,033.39 per ounce in March this year, gold has plummeted 30 per cent.

Gold for December delivery on Monday rose $8.60 to settle at $726.80, roughly the same level at which it traded a year ago.

“Many Saudi investors see this as the right time for making investments in gold as its price is the most reasonable one at present,” said Al Mohna.

Needless to say, the Saudis have a lot of money. Not just a lot… but a really, really, big, stupendous mountain of the stuff.

Oh, and like you and me, they’re human.

Which means they can’t help but glance through the morning’s financial news, adjust the reading glasses, and think, “Blessed Mohammed! This is getting really, really serious. Maybe just a little extra gold under the tent right now wouldn’t be such a horrible idea.”

They aren’t alone. We are getting regular reports that at these prices, demand is soaring in India (where price inflation is now running around 11%), and brisk sales have pretty much wiped out physical supplies of small coins and bars in the U.S. and Europe… among other corners of the world.

On that score, a few days ago, correspondent Jim G. sent along the following…

Most of you are probably aware that there’s a shortage of gold bullion coins at the retail level.What does that mean?

Today I decided to purchase some gold bullion coins. So I called the Northwest Territorial Mint, one of the larger operations in the country or at least the Northwest, so I’ve been told.

I called to see what the availability was. The operator put me through to sales, where I sat for 30 minutes. I finally got in my car and drove 40 minutes there, all the while still on hold. When I finally got there, a woman went in the back to see about bullion coin availability. She was told they were back ordered with 30,000. Not dollars, orders. If I placed an order today, they thought they could fill it in 16 weeks.

To sum, I’m buying… if you know a seller.

While we already know $750 is no magic number below which gold cannot fall or below which it cannot loiter, I take no small comfort in the fact that there is a clear increase in demand at that price. In time, as the dollar continues to participate in the fiat currency race to the bottom, that number will ratchet higher and higher still.

Maybe not overnight, but in the next six months to a year, certainly… or as certain as anyone can be about anything these days.

One thing that could get the show on the road pronto-like has to do with the continuing presence of the other 900-pound gorilla in the room, foreign dollar holders. Like the Saudis, the Chinese have at their fingertips a lot of greenbacks. Actually, not just a lot, but enough to remake the Great Wall.

And they, too, are humans.

And so, over their morning cup of tea, they finger the abacus while watching the daily financial news and say, “Holy Mao! This is getting really, really serious. Maybe just a little extra gold in the rice jar right now wouldn’t be such a horrible idea.”

On that front, here’s some news from Hong Kong…

(The Standard, Hong Kong. Nov 14) — The mainland is seriously considering a plan to diversify more of its massive foreign-exchange reserves into gold, a person familiar with the situation told The Standard.Beijing is considering changing its asset allocations during the financial tsunami in order to build up gold reserves “in a big way,” the source said.

China’s fears about the long-term viability of parking most of its reserves in US government bonds were triggered by Treasury Secretary Henry Paulson’s US$700 billion (HK$5.46 trillion) bailout plan, which may make the US budget deficit balloon to well over US$1 trillion this fiscal year.

The US government will fund the bailout by printing new money or issuing huge amounts of new debt, either of which will put severe pressure on the value of the greenback and on government bond yields.

The United States holds 8,133.5 tonnes of gold reserves valued at US$188.23 billion. China holds gold reserves of just 600 tonnes, worth only US$13.89 billion.

Beijing’s reserves could easily go up to 3,000 to 4,000 tonnes, Tanrich Futures senior vice president Colleen Chow Yin-shan said.

In another article from Bloomberg, the head of China’s gold association commented that he thought China could triple its reserves.

And there was this quote from that same article.

China has the world’s biggest foreign-exchange reserves at $1.9 trillion, according to data compiled by Bloomberg. It is also the largest overseas holder of Treasuries after Japan. China’s demand for gold jumped 23 percent in 2007, making it the world’s second-largest consumer.The Asian nation may buy more gold for its reserves on concern the $700 billion U.S. bank bailout will cause declines in the dollar and Treasuries, the Standard newspaper in Hong Kong reported today, citing an unidentified person.

In the final analysis, we can’t say with certainty what path gold will take between now and the time this crisis is over. But until I can see some tangible evidence that it has lost its value as money, I’m a happy holder and, at under $750, a buyer.

Source: Gold in the Low $600s?

This from Sovereign Society:

“Lenin said the day would come when gold would serve to coat the walls and floors of public toilets.” -Premier Nikita S. Khrushchev

Ancient, mysterious gold is being pushed to the forefront of investors’ minds these days, as the inflationary policies of the worlds’ central banks meet uneasily with the deflationary pressures of the housing industry’s collapse. Most expected this year’s air of uncertainty to push gold prices into the stratosphere, and all seem to be relatively shocked by the yellow metal’s lackluster performance thus far.

But for me it’s all just déjà vu…perhaps for you too. We’ve been here before. Not just during the great gold bull market of the 1970s, but way back in the 1920s, and the 1860s, and the…well, let’s not go back to Ancient Rome.

Since gold and freedom have had a long, torrid, and often clandestine affair, the market’s current attraction to the yellow metal makes it apropos that gold looms large in our discussions here at The Sovereign Society.

We hear predictions of US$1,000 or even US$2,000 an ounce. Well…before you or I are swept along in the excitement, let us analyze this euphoria through the lens of economic principles, and ponder the lessons of history.

You may have profited, as I did, in the tumultuous gold bull market of the 1970s. It was heralded in advance by my late friend Harry Browne, who saw it coming and showed investors how to get rich in his prophetic best-seller, How to Profit From the Coming Devaluation. I, too, joined the ranks of “gold-bugs,” writing enthusiastically about the metal’s glory…along with Jim Dines, Doug Casey, Howard Ruff, and many others.

With hindsight, and with gold prices currently stagnating, can we learn anything from history? Tracking the ‘real’ price of gold offers some clues.

In 1915, the dollar was defined as one-twentieth of an ounce of gold. Paper currency consisted of gold certificates that could be exchanged for gold on demand. The ‘double eagle,’ the US$20 gold piece, was one ounce of gold.

In 1915, US$20 would buy a lot. Wages were 35 to 75 cents an hour, or US$500 to US$1,000 per year. A man’s tailor-made suit cost US$25-$30 (with two pairs of trousers), while a Sears & Roebuck ready-made, but stylish pure-wool worsted suit sold for US$16.50. A movie ticket cost 15 cents (10 cents for kids).

Adjusted by the CPI, what cost US$20 in 1915 would hypothetically cost over US$450 today. Meanwhile, an ounce of gold that equaled US$20 in 1915 would cost US$726 as of this writing.

What happened? It’s known as fiat money creation.

What Happens When Paper IOUs Replace Solid Metal Currency

The prices of goods and gold diverged because the newly created Federal Reserve gave banks free reign to expand loans, massively inflating the quantities of gold certificates in circulation, with no increase in the banks’ gold reserves. As the gold IOUs flowed into the economy, boom times arrived. Prices rose and stocks and real estate soared.

Sadly, as the masses discovered, the “roaring twenties” were fueled by paper promises. In 1929, the stock market crashed, unemployment rose, people became fearful of banks, and the public began turning in their bank notes for the gold they had deposited. Of course, most banks didn’t have enough gold to cover the outstanding notes, one by one they failed, and the economy plunged into the Great Depression.

The bankers and politicians were quick to blame the free market, greed, and gold itself. Roosevelt, elected in 1933, closed the banks to stem a rising wave of bank failures, abruptly revalued gold to US$35 ounce (depreciating everyone’s dollars by 75%), and outlawed ownership of gold by U.S. citizens.

It was easy to rob American citizens at gunpoint by confiscating their gold, but what about foreigners? They could still choose between U.S. dollars and gold. The answer was to play the same game the Fed had played 30 years earlier: promise to redeem dollars in gold. In 1944, at the historic United Nations Monetary and Financial Conference at Bretton Woods, New Hampshire, every participating country pledged to keep its currency within a percentage point or two of an agreed dollar value providing the U.S. indemnified foreign central banks against a depreciating U.S. dollar by backing the dollar with Treasury gold. The dollar became the world’s reserve currency.

Credit Swells and Gold Freezes

The credit expansion began again, and the price of gold remained frozen at US$35 an ounce for another 27 years. Again, as happened in the 1920s, consumer prices began to rise. But just as worried Americans had begun to run to the banks in the 1930s, the rest of the world began a run on U.S. Treasury gold. In 1971, with Treasury holdings perilously low, Nixon abrogated the Bretton Woods agreement and gold, free of government chains at last, soared to US$800 an ounce in 1980.

At that price, it was wildly above its historic exchange value with other goods, so it was inevitable that the lines would converge again, and they did.

Politicians depend on fiat currency to fund wars and giveaway programs, and therefore always disparage gold. In 1924, in the euphoria of the Federal Reserve money bubble, John Maynard Keyes denigrated sound-money advocates by calling the gold standard a “barbaric relic.” Even after a half century of turmoil caused by fiat money, in 1975, Secretary of the Treasury William Simon continued to argue against gold due to its “destabilizing effects” on the world monetary system. The IMF formally sought ways to “insure that the role of gold in the international monetary system is gradually reduced.” Gold sales by both the IMF and the Treasury were undertaken to suppress the price and discourage investors.

Gold is a commodity…a tangible, useful mineral extracted from ore and refined for use. The very fact of its unique properties (divisibility, durability, scarcity, and its recognizable luster) make it an unmatched medium of exchange, and also a safe haven for citizens. Thus, it will always be a threat to the creators of fiat money.

What’s Next for Gold?

History teaches that gold will hold its value relative to other goods. In terms of inflating currencies, all goods, including gold, will hold their relative value to each other, and rise relative to currency. Right now, for the last 6 years the price of gold has risen more rapidly than other prices, and is now higher than the norm.

Since 1980, consumer prices have risen by almost 150%. Many analysts today assume that gold will repeat the price pattern that occurred in the decade of the 1970s, and argue that gold could go as high as US$2,000…or higher.

Warren Buffett once said that what we learn from history is that people don’t learn from history. Thus, it’s probable that the current bull market in gold is not over in spite of the fact that gold’s dollar price relative to goods is higher than the historical norm. The public has yet to discover just how much world currencies, and particularly the U.S. dollar, have been inflated in recent months and years. As this becomes apparent, dollar holders will, as they did in the 1930s, and again in the 1970s, try to redeem those dollars for tangible goods. Price inflation will return with a vengeance, and probably soon.

What are the best ways to own gold?

For myself, owning physical gold in the form of coins and bullion for conservation of purchasing power, and seeking out the shares of undervalued and overlooked gold mining companies for investment and speculative growth are the best choices.

In addition, to promote a return to sound money and to enjoy its benefits to every extent possible in the meanwhile, you should begin using “electronic” gold. The most reliable and safest purveyor of this new technology is Goldmoney. Check them out at www.goldmoney.com/?gmrefcode=sovsoc.

I opened this essay with a quote by Lenin, who argued that gold should be assigned to the toilet. Not only was Lenin an economic ignoramus, he was the ultimate enemy of individual sovereignty. Ancient, mysterious gold is the ultimate antidote to fiat money, and we can be certain that mankind’s love affair with this lustrous commodity will never end.

Source: Gold and The Lessons of History

Yesterday, China’s benchmark Shanghai Composite Index dropped 5.2 percent after economic data revealed wholesale price inflation jumped to its highest level in 12 years in July.

However, Taipan Daily editor Justice Litle says China’s long-term outlook remains strong – and some China plays look more favorable than they have in years. Here are Justice’s six reasons why the China bears are wrong…

Reason to Buy China #1: The Silly Season Is Over

Chinese investors went through a mania phase last year. There were tales of lines half a mile long snaking out from the doors of the local stock brokers. In April 2007 alone, nearly 4.8 million new trading accounts were opened in China — more than the prior two years combined.

All these new buyers led to a silly season for Chinese stocks. You could see it in the difference between Shanghai A-shares and Hong Kong H-shares…

At one point, companies with dual listings in Shanghai and Hong Kong were getting as much as an 80% premium on the A-shares price. This was a reflection of Chinese capital controls — it’s still tough for mainland Chinese to get their money out — and naive buyers who wanted to play at any price.

Now that the frenzy has subsided, real values are starting to show up again. The hot money has burned itself out, providing opportunities for those who see longer-term value and aren’t out to just flip a quick buck.

You see this pattern play out over and over again when a new opportunity comes to a place. Investors get excited and lose their heads, they push things way too far, and then the market comes crashing back to earth. That’s when the patient players get interested.

Reason to Buy China #2: Oil Is Coming Down

As of this writing, crude oil is more than 20% off its near-term highs. It looks like oil could be heading for the $100 mark — a possibility we pondered in “What If the Price of Oil Implodes.”

One of Asia’s greatest challenges has been keeping a lid on inflation pressures. It’s not easy to grow like crazy without seeing the price of basic goods and services rise too quickly.

Oil closing in on $150 a barrel threatened to swamp Asia with inflation on a local level — as the price of transport, food, and fuel went up — and also to cut into export profits as shipping costs rose.

With oil backing off, China and India can breathe a little easier. The fear that high-priced oil might kill the Asian miracle is lifting. That gives them more time to tap alternative energy solutions and build economic strength at home.

Reason to Buy China #3: The Locals Are Optimistic

The news reports mostly focus on the bad things — civil unrest, government crackdown, pollution and so on. That’s the nature of the beast mostly… for the most part, good news isn’t as interesting as bad.

But a recent survey from the Pew Research Center shows that most Chinese feel positive about where their country is headed. According to the survey, 86% are “content with the country’s direction.” (That’s up from just 25% six years ago.)

Perhaps even more surprisingly, six in 10 Chinese reported being satisfied with their jobs. And 70% were in favor of China’s shift toward a free-market economy.

The biggest concern in the Pew Survey? Rising prices. But that concern is addressed by the fact that oil is headed down these days — not marching higher as it had been for most of the year.

Reason to Buy China #4: The Growth Is Still There

China has had an amazing run, growing its economy at a near double-digit pace since the early 1980s. But the dragon isn’t done yet — not by a long shot.

Global Insight, an economic consulting firm, forecasts that China will overtake the U.S. as the world’s largest manufacturer in 2009. This is as much because the U.S. base is shrinking, even as China’s is growing… but that still counts as an eye-opening stat.

Plus for the longest time, China was seen as the world’s source for low-tech goods. Chinese factories were known more for sneakers, trinkets and cheap plastic toys than items of real value…

That’s all changing now as China moves up the quality food chain. Now we are seeing savvy companies like China Medical Technologies (NASDAQ:CMED) produce some of the most sophisticated high-tech devices in the world. As China gets better at enforcing intellectual property laws, its high-tech skills will only increase… and profit margins, too.

Reason to Buy China #5: Personal Savings and Domestic Demand

Perhaps even more impressive than China’s long-term growth rate is the personal savings rate.

Americans spent more than a dollar for every dollar they earned in 2006. The U.S. savings rate actually went negative. The Chinese, meanwhile, salt away 35 cents for every dollar they earn.

Just imagine how much extra money you’d have on hand if you’d managed to save 35% of your income, year in and year out, ever since you started working. Then just think of all the things you could buy with that cash.

Part of the reason the Chinese save so much is because there’s no real social safety net. But that’s changing, too: As the Chinese economy evolves, things like insurance and healthcare and retirement plans grow more affordable.

The upshot is, at some point, China’s big savers will feel a little bit more comfortable spending some of that cash they’ve saved up. And the newly minted middle class in China are already taking a hard look at things like cars, air conditioners, washing machines and so on.

As local economies grow, the locals themselves feel more comfortable spending a portion of their ample savings. That in turn leads to more domestic growth, which leads to a more positive outlook, which in turn increases spending. Chinese domestic demand is headed into a virtuous cycle that could run for decades.

Reason to Buy China #6: Huge Foreign Reserves

In balance sheet terms, China is rich… massively rich.

We’ve already seen what can happen when cities and counties go bankrupt. The residents of Orange County, California, got a nasty taste of that. Jefferson County in Alabama was on the brink this year, too. (As with Orange County in 1994, they took on some really dumb trades.)

So it’s not good when some regional authority — be it local or national — is running short on cash. China doesn’t have that problem. If anything, they have the opposite problem. Economist Brad Setser estimates that China has somewhere between $2.3 trillion and $2.4 trillion in excess reserves.

That’s a lot of dough… enough to make a 20% down payment on the entire U.S. economy! And hundreds of billions more roll in every quarter.

Point being, money can’t always prevent bad things from happening. But it sure can fix a lot of things. If China has to take extra steps to keep economic growth on track or keep the domestic demand side humming, it certainly won’t be stymied by lack of funds.

Source: Six Reasons to Buy China

Good day…The dollar continued its assault on the world’s currencies yesterday as the dollar index moved above the 74 handle. I pulled a chart off the Bloomberg on my way out the door last night, and it showed the only major currency which was up vs. the US$ yesterday was the Swedish krona, which managed a .07% increase. This dollar rally has legs, but I still question the fundamentals behind the dollars surge. Today may be the day we see the dollar finally make a turn, as the ECB will be announcing their rate decision.

It is not that I expect Trichet to raise rates, but I do expect him to sound hawkish and refocus the markets attention on Eurozone inflation and away from worries about growth. Two reports out of Germany this morning will bolster Trichet’s hawkish stance. German exports rose more than economists expected in June, defying a stronger euro and pushing the trade surplus to a record. Exports increased 4.2% from may, the most since September 2006. German industrial production also increased for the first time in four months with output rising 1.7% from a year earlier. The IMF last month rose its forecast for German economic growth this year and said the global slowdown linked to the US financial crisis was less severe than it expected.

The entire global economy has been dealing with commodity price inflation, but so far this raw material price spiral hasn’t spilled over to wage pressures. While the severe slowdown in the US economy won’t allow increases in wages, the European economy isn’t in as bad of shape. Lufthansa, Germany’s largest airline, just announced a 5.1 percent raise to settle a strike. And Lufthansa employees aren’t alone in securing inflationary pay deals in Germany. Negotiated wages jumped 3.5% in the year through April, the biggest gain in 12 years. This wage spiral will keep the ECB focused on inflation, with another interest rate increase possible. ECB council member Klaus Liebscher signaled there may be need for still higher borrowing costs in Europe, saying in a July 24 interview that “we haven’t exhausted our room for maneuver”.

The euro rallied against the dollar in early European trading on speculation European policy makers will continue to hold their tightening bias. One of the reasons for the spike in the value of the US$ has been a shift in interest rate expectations. During the past month, several currency traders have begun to speculate that the next move by the ECB would be a drop in interest rates, while they gambled that the next move by FOMC would be up. Recent data would suggest these speculations could be completely wrong. The economic downturn looks like it will continue in the US, keeping the Fed from lowering rates, while the ECB is dealing with a stronger than expected European economy, and spiraling wage pressures. A change in these interest rate expectations could put the dollar back on its long term trend down, and send the Euro back to $1.60 or above.

The Bank of England kept the main interest rate unchanged for a fourth month as they find themselves in the exact same position as our Federal Reserve. Inflation has been accelerating, and the economy is teetering on the brink of a recession. UK housing prices dropped the most in a quarter-century and UK services, manufacturing, and construction all shrank in July. So the economy is dramatically slowing while inflation is predicted to more than double the 2% target. BOE policy makers split three ways on which direction interest rates should move, so their only choice was to just leave them where they are. England’s economic situation has left the BOE as impotent as the FOMC!

As I mentioned above, the UK reported that house prices fell at a rate of 8.8% in July. This morning we will get a better picture of the current status of the US housing market. A report from the National Association of Realtors will probably show its index of home sales fell for another month. The inventory of unsold homes in the US stands at the highest level ever recorded. And according to economists, the inventory of existing homes and condos must fall by almost 50 percent for prices to stabilize. Theres is an 11.1 month supply of existing unsold homes at the current sales pace, up from 4.6 months in September 2005. Almost one of every 10 US mortgages was in trouble during the first quarter according to the Mortgage Bankers Association.

Those that want you to believe the ‘worst is over’ in the US economic downturn only need to look at the pending home sales numbers, which is usually seen as a leading indicator. The index of pending home resales is expected to have fallen 1% after a decline of 4.7% in May. As we have been reporting for some time now, the falling housing market has far reaching effects on the US economy. While the folks at CNBC have been telling everyone that the worst is over after Paulson and Bernanke came to the rescue of Fannie and Freddie, some very smart people (whom I agree with) are warning that losses will continue to mount.

Nouriel Roubini, the New York University professor who predicted more than two years ago that the US would fall into a recession because of the bursting of the housing bubble and rising energy prices is one who disagrees with CNBC. Ty Keough pointed out an interview with Roubini which appears in this week’s Barron’s. I would encourage any of you who are starting to ‘drink the Kool-aid’ being pushed by Paulson and Bernanke to read it. In the interview, Roubini predicts that we are in the second inning of a severe, protracted recession, which started in the first quarter of this year and is going to last at least 18 months, through the middle of next year. He goes on to say we can expect a total of $2 Trillion of debt related losses in our financial institutions. Roubini states that banks have only started to feel the effects of the housing downturn, and that consumer-credit losses and home-equity loan write offs will substantially add to their pain.

He ends the interview with this: “Leaving aside the fact that we are going to have a pretty nasty recession and international crisis, the global economy is going to grow at a sustained rate once this downturn is over. There are significant financial and economic problems in the US and that’s why I’m bearish about the US. But the emergence of China and India and other powers is going to shift global economics and politics radically, and the world is going to be more balanced in the future, rather than relying on one engine, which has been the US. ..I’m quite bullish about the state of the global economy..”

I agree with Roubini’s take on things, and the best way to protect your portfolio? International diversification. Keep a portion of your assets outside of the US$ in currencies and precious metals. Investors should view this dollar spike as an excellent opportunity to purchase currencies and metals at cheaper prices, dollar cost averaging to get your overall costs down.

Japan’s government said the economy is “deteriorating,” acknowledging for the first time that the country’s longest postwar expansion has probably ended. “There is a high possibility the economy has entered a recession,” the head of business statistics at the Cabinet office said in Tokyo today. The Japanese yen continues to come under pressure due to the weakening economy and the recent move back into carry trades. In these carry trades, investors borrow currencies at low interest rates, sell them and invest the proceeds into higher yielding investments, earning the ‘carry’. With market volatility easing over the past month, many investors have moved back into these carry trades, pushing the value of the funding currencies of Japan and Switzerland down. As in the past, these carry trades can be reversed as quickly as they are put on.

Just in, the ECB left rates unchanged. Now we just have to wait Trichet’s press conference, which will occur in about 45 minutes. Better get to the currency roundup:

Currencies today 8/7/08… A$ .9106, kiwi .7178, C$.9546, euro 1.5468, sterling 1.9517, Swiss .9474, ISK 79.83, rand 7.4390, krone 5.1734, SEK 6.0846, forint 151.84, zloty 2.0966, koruna 15.54, yen 109.45, baht 33.58, sing 1.3837, HKD 7.8054, INR 42.06, China 6.8643, pesos 9.9398, BRL 1.5775, dollar index 74.08, Oil $120.17, Silver $16.60, and Gold… $882.40

That’s it for today… Chuck traveled out to San Francisco to speak at the money show. This is the first time in several years that I won’t be there, but things are just too busy on the desk as of late. I got to see Chuck at the Cardinal game the other night, and he was excited about getting back out to San Fran and addressing the crowds. I guess Brett Favre is headed to New York. I used to really like him, but this latest move dropped him a few notches in my book. Albert Pujols hit a Grand Slam last night to propel the Cards to another win. Maybe we will have post-season baseball in St. Louis! Hope everyone has a Tub-Thumping Thursday!!

Chris Gaffney, CFA
Vice President
EverBank World Markets
1-800-926-4922
1-314-647-3837
www.everbank.com

Source: ECB to Change Dollar’s Direction?…