Bloomberg latest article on Gold paints a bullish picture (28 Nov 2008 - Bloomberg - Gold Poised for Biggest Monthly Gain Since 1999 as Dollar Drops)

Gold headed for its biggest monthly advance since 1999 in London as a weaker dollar increased the appeal of the metal as a hedge against further declines in the U.S. currency. The dollar is poised for a third monthly decline against the yen and its first monthly loss versus the euro since June. Gold prices have also been buoyed by demand for physical metal and exchange-traded funds. Gold demand rose 18 percent in the third quarter, the World Gold Council said this month. "The dollar weakness is one reason but demand has also turned out to be stronger than expected in the third quarter," said Dan Smith, a Standard Chartered Plc analyst in London. Gold may reach $850 an ounce by the end of the year, he said.

***** Update 28 Dec 2008 - for latest news and charting for Gold and Gold stocks, please check updates from our blog: Gold Boom Doom - Gold Related Blogs

Trader Dan at Jim Sinclair's Mineset (21 Nov 2008 - JSMineset - Trader Dan Comments On The Ongoing Comex Liquidation) gave a great summary of the effect of deleveraging in paper gold market.

He wrote " ... more than 50% of the players who moved towards gold over the last 2 ½ years are gone from the market. ... the shorts were more eager to get out than the longs were which is really saying something when we consider just how much hedge fund deleveraging and index fund redemption related selling has been occurring. When you have reports of unprecedented demand for gold bullion, shortages in the spot market, mints closing down sales, etc., as a short in the paper market, you simply no longer have any ammunition with which to bolster your side of the argument. You realize that you are flirting with the devil since the only thing you have going for you is long liquidation and that in and of itself cannot last indefinitely as even a paper market must eventually align itself with the real fundamental world.

What is important to note now is that gold has tripped several technical indicators into a “buy” mode and has also taken out several very important technical resistance levels. Things of such nature generally bring in technical based buying and with open interest so low and so many players having pulled out to sit on the sidelines, there is the potential for quite a bit of buying to come into the Comex should these folks decide to play that game again. I am most anxious to see the open interest numbers from today’s session that we will get Monday morning to see what might have transpired today. I do hope that we have seen an end to the drop off in open interest in gold as it is simply not possible to sustain any rallies for long without more new buying coming into the market. Maybe, just maybe, we have reached that point where the dreadful liquidation is over..."

***** Update 28 Dec 2008 - for latest news and charting for Gold and Gold stocks, please check updates from our blog: Gold Boom Doom - Gold Related Blogs

This article continues our theme of panic buying in Gold Coins (22 Nov 2008 - the Australian - Mint suspends orders amid rush to buy bullion)

Here is the article with my emphasis in bold.

FEARS of the unknown long-term effects from the global financial crisis have sparked a new gold rush.

With retail and wholesale clients around the world stocking up on the precious metal, the Perth Mint has been forced to suspend orders.

As the World Gold Council reported that the dollar demand for gold reached a quarterly record of $US32 billion ($50.73 billion) in the third quarter, industry insiders said the race to secure physical gold had reached an intensity that had never been witnessed before.

Perth Mint sales and marketing director Ron Currie said the unprecedented demand had forced the Mint to cease orders until January, with staff working seven days a week, 24-hour days, over three shifts to meet orders.

He said Europe was leading the demand, with Russia, Ukraine, Middle East and US all buying -- making up 80 per cent of its sales. One European client purchased 30,000 ounces for $33 million.

"We have never seen this before and are working right at capacity. And we are seeing it from clients in the shop buying one ounce, right up to 30,000 ounces from overseas clients," Mr Currie said.

Robert Jaggard, manager of bullion and rare coins dealer Jaggards, said business had picked up strongly and he expected it to increase further.

"All around the world there has been a heavy run on physical gold and there is a shortage of supply," he said.

Mr Jaggard, who has been dealing in gold for 40 years and is an agent for the Perth Mint, said some clients were buying up to $1million worth of gold, paying a premium above the spot price.

Late yesterday afternoon, spot gold in Sydney was trading at $US747.30 an ounce, up $US8.15 on Thursday's local close.

"Professional business people who have previously bought small amounts now want more gold because they are suffering in other markets," Mr Jaggard said.

At a conference this week in Munich, delegates were lined up 30-deep to purchase physical gold. And reports out of the Middle East suggested that there had been unprecedented gold buying in Saudi Arabia during the first half of November, with an estimated $US3.5 billion purchased in recent weeks.

The World Gold Council, releasing its global demand trends yesterday, said identifiable investment demand, which incorporates demand for gold through exchange-traded funds and bars and coins, was the biggest contributor to overall demand during the quarter. It was up to $US10.7 billion, double last year's levels.

The figures showed retail investment demand rose 121 per cent to 232 tonnes in the third quarter, with strong bar and coin buying reported in Swiss, German and US markets.

The quarter also witnessed widespread reports of gold shortages among bullion dealers across the globe, as investors searched for a haven. Overall, quarter three saw Europe reach an all-time record 51 tonnes of bar and coin buying. France became a net investor in gold for the first time since the early 1980s.

World Gold Council chief executive James Burton said gold's universal role as a store of value had shone through during the quarter, helping attract investors and consumers to all forms of gold ownership.

"The rise in demand for gold bars and coins has been impressive," he said.

Demand in India, the largest market for gold, recovered during the third quarter, encouraged by lower gold prices, a good monsoon and the onset of the festive season. At 250 tonnes, total consumer demand was 31 per cent higher than the same period last year. In value terms, demand hit the record quarterly sum of $US5 billion.

With the Gold strength today, Gold stocks managed to continue its outperformance versus the S&P. The technical picture remains strong and well supported. The Ratio has broken the interim resistance at 0.1 and looking for 0.12 resistance from the down channel. Both MACD and RSI shows bullish pattern.

We have argued on our Nov 5 post (5 Nov 2008 - Gold Boom Doom - Gold Juniors more to meet the eye) that even though there may be reasons that the gold stocks are trading cheap, there are of good value especially since Gold stocks are undervalued versus Gold and Gold is breaking out by itself (21 Nov 2008 - Gold Boom Doom - Gold Breaking Out!) or versus S&P. Technically speaking, Gold stocks are consolidating versus Gold prices while RSI is confirming a possible bottom, we would like to see MACD confirmation before adding more to this trade.

Read 21 Nov 2008 - Mish's Global Economic Trend Analysis - I Like Gold Here

Gold is trading strong today! We just cleared 797, the 55d moving average, now trading above 800.

We are seeing good buying flow on the back on USD weakness, continual talk of China/Middle East buying and real physical market shortage. Given COMEX delivery is coming up next week, I think that we can get a good squeeze to 910, especially if cta turns to buy.

Today's chart:

Daily Chart from Nov 2007 to Nov 2008:





***** Update 28 Dec 2008 - for latest news and charting for Gold and Gold stocks, please check updates from our blog: Gold Boom Doom - Gold Related Blogs

Roubini sums it all up:

19 Nov 2008 - RGE Monitor -
The Latest Bear Market Sucker’s Rally Has Gone Bust as We Are Headed Towards Stag-Deflation

With major US equity indices free falling over 6% today Wednesday, ending below their October lows and now being back to 2003 levels the latest bear market sucker’s rally is now officially over. A cacophony of delusional bulls – including allegedly savvy investors such as the Sage of Omaha and other luminaries – were spinning for the last month the fairy tale that markets – especially equity markets – had fallen so much that a bottom had been reached and that this was the time to start buying equities. Some of us never believed this self-serving spin and warned repeatedly that both equity markets and credit markets had further severe downside risks (20% to 30% lower for equities)....

I added Berkshire Hathaway's share price chart below:

Just want to post this for the record:

Global Equity


Global Commodity


Global Bond Market


VIX


Global FX


CitiBank Stock

The global economy is in a mess. The only solution that the Governments of the developed world is to spend our way out of it. Unfortunately our Governments are massively in debt already which means they have to print our way out of it. The main creditors Japan and China are going to stop lending to us. We have already discussed the problem of leveraging on the taxpayers which is what these bailouts are all about. FED balance sheet has completely inflated and printing machine pushing out paper at the highest speed. Interest Rate will go to ZERO and we question why one would invest into this economy with no interest. We are worried about the prospect of US Dollar and the credit quality of the US Economy.

This article from Walker Todd calls for the Gold Standard which we support. (Our emphasis in bold)

17 Nov 2008 - Christian Science Monitor - Forget Bretton Woods II – We need a gold standard.

Without the integrity and restraint a gold standard provides, America may be headed on a path to hyperinflation.

By Walker Todd
Chagrin Falls, Ohio - Too much credit and easy money. Those were the biggest culprits behind this financial crisis. Yet, appallingly, the government's rescue attempt is built on more credit and even easier money. That's like giving a procrastinator a deadline extension. By choosing this course, Washington has steered us on to the "road to Weimar" – the road to runaway inflation.

It didn't have to come to this. And it still doesn't. But the proper remedy will take tremendous political courage: Bring back the gold standard. That, more than any Byzantine regulations that emerge from the Bretton Woods II conference this weekend, would provide stability and safety for nations and individuals around the world.

Sadly, current policy seems to reflect a desire to weaken the dollar as quickly as possible.

The Federal Reserve's own data tells the story. The headline is the doubling of Federal Reserve credit, the main component of the US monetary base. Since Labor Day 2008, it's risen from $894 billion to $2.2 trillion.

That's the greatest monetary expansion in the Fed's 95-year history. How the Fed is doing it matters almost as much. It has nearly abandoned its traditional instrument for monetary policy, open-market operations, which involves the purchasing and selling of full-faith-and-credit US Treasury securities. With increasing frequency and amounts, it has relied primarily on "discount window operations" – lending to specific institutions for specific purposes instead of general injections of funds into an open market – since August 2007. This shift may weaken its ability to "tighten" monetary conditions should inflation reach dangerous levels.

A gold standard offers exactly the kind of discipline that's missing from the Fed. But its impact would be wider: Both in substance and in symbolism, gold provides integrity to the entire global financial system. Governments, however, have historically bridled at the constraint and accountability a gold standard brings. After all, when currency can be exchanged for gold, it's harder for governments to inflate the money supply, which they're tempted to do in order to spend beyond their means or cheat on their debts.

Before 1933, you could, generally speaking, trade a US dollar for a set amount of gold. That gave the dollar strength and stability. During World War I, when European governments abandoned gold and inflated their currencies to pay for the war effort, the US maintained its gold backing.

In 1933, however, to enable the Treasury to finance massive new government spending hailed as an economic recovery package – sound familiar? – President Roosevelt suspended domestic transactions in gold, and reduced the dollar's gold value. Finally, in 1971, President Nixon officially abandoned the gold standard. The dollar – and inflation – has fluctuated wildly ever since.

Today's Fed thus faces virtually no constraints. Were a gold standard in place, it could not possibly have doubled its balance sheet in only seven weeks without triggering a wholesale flight from the dollar analogous to the summer of 1971.

Weimar Germany experienced one of the greatest inflations in modern history in 1922 and 1923. Eventually, the official exchange rate reached 4.2 trillion marks per dollar. Some Germans heated their homes by burning cash, since it was cheaper than buying wood. The inflation finally was tamed by government bonds promising repayment in gold, backed by land taxes also payable in gold.

Today, if the US price level responded directly with the Fed's current rate of expansion of its own credit, then the technical conditions for Weimar-style hyperinflation could be upon us. Fortunately, Fed credit expansion acts on the domestic price level with a significant time lag. But could it tighten monetary conditions if it had to, having shifted its reliance to the discount window and the specific projects being financed there?

That's why a conversation about a gold standard is needed. But could it realistically make a comeback? Anna J. Schwartz, who co-wrote with Milton Friedman the highly influential book, "A Monetary History of the United States: 1867-1960," suggested at a 2004 gold conference at the American Institute for Economic Research that only a crisis of sufficient depth and magnitude would provoke the public to demand the stability of gold or a gold-linked currency. Such a crisis, which appeared remote at the time, may soon be upon us.

There's another significant point that Ms. Schwartz raised in 2004: The size of government itself would have to shrink radically to permit a complete return to gold. Before 1933, the share of gross domestic product represented by government at all levels was about 10 percent. Today, the national average of that share is about 35 percent. Any adjustment to economic shocks has to be absorbed by a proportionately much smaller private sector than was the case 75 years ago.

Some critics worry that a return to gold would make credit harder to come by. It's true that the kind of ultra-loose credit that fuels housing bubbles would be marginalized, but normal credit in a gold system would tend to be cheaper because concerns about the future value of repayments are diminished.

America faces a stark choice. The path back to a gold standard is rocky and uphill. The current inflationary path is slippery and downhill. One leads to integrity and stability. The other could lead to financial ruin. Which will we choose?

There are simply growing signs that China finds it hard to manage its economy with the Yuan pegged to the Dollar. (Read : 20 Nov 2008 - Reuters - Yuan ends flat vs dollar as China hints at reforms) Plus there was market rumours that Chinese central bank is thinking of selling USD to increase Gold reserved from 600 tons to 4000 tons (source: Market News Intl). Although one may note that according to the TIC data released yesterday, China has now overtaken Japan has the largest foreign holder of US debt, we have already discussed that the change in trade dynamcis between China and US may change this position. Overall, we believe that it is in Chinese interest to diversify its source of growth, FX reserve and asset exposure. All pointing to them having to buy more Gold to be inline with other Central Bank's Gold exposure.

I urge all of my readers to read up on this prediction by Gerald Celente: 13 Nov 2008 - InfoWars - Celente Predicts Revolution, Food Riots, Tax Rebellions By 2012

This bleak prediction of US can only prompt me to suggest buying more GOLD.

I absolutely agree with Seeking Alpha latest article (Nov 14 2008 - Seeking Alpha - Jeffrey Christian: Gold and Silver Could Spike).

The core reason for the Gold price divergence between COMEX and physical gold is due to deleveraging. Since COMEX plus other OTC GOLD linked products are probably carrying leverage of anywhere from 40:1 to over 100:1, with the deleveraging process, all these inventory will get dumped back into the paper market. Hence the paper Gold market has been trading so much lower than the physical.

The recent physical buying flow from 1. safe haven investors 2. Indian or Middle Eastern Investors are taking real GOLD off the market (see my recent post: Nov 5 2008 - Gold Boom Doom - Gold Buying in Middle East). So we continue to believe that this price imbalance will be corrected.

Let's all watch out for Nov 28 when you can start taking delivery of COMEX Dec GOLD contract.

China - why do we care so much: because the world is pinning on the hope that China can somehow keep growing without the exports to developed markets and hence give the financial market a glimmer of reflation hope rather than the worries of global depression in our heads. It is clear that Chinese government (like every other country) will need to spend, spend and spend. Since it is much easier to socialize/nationalize spending and rather than let public sector redirect investment through the economic system when risk aversion is clogging the money flow, we will see many more Government led initiatives in China and many other countries. If domestic growth is the top agenda, China will seek to borrow more money through developing its bond market and possibly keeping its currency strong for cheaper imports. I also expect China to start stockpile essentials commodities during this economic cycle.

Let's have a quick review of the Chinese economy:

1. Only China out of the G20 is not officially in recession. (see my recent post7 Nov 2008 - Gold Boom Doom - China Slow Down - Reflecting on Jeremy Grantham's commentary ). Chinese GDP growth is estimated to be 19% this year and Chinese government is trying to keep long term growth above 8%. The lowest 2009 GDP growth estimate is around 5%. So all in all, we are still talking about growth but at substantially lower rate which may not be enough to turn this global recession into global growth.

2. Chinese export is slowing (see 13 Nov 2008 - New York Times - Factories Shut, China Workers Are Suffering). We believe that this is unavoidable. Chinese government is also acknowledging that their growth mix will change.

3. Chinese oil import is increasing and has not decreased even with the export slow down suggesting that oil consumption is NOT entirely linked to its export.







4. Chinese has cut rate has following the world central banks and cut rate in acknowledgement of a global slowdown:




5. China has just release a $586bn stimulus package (see 15 Nov 2008 - WSJ - Beijing Reveals Small Parts of Big Stimulus. The latest information is that the stimulus is focused on the domestic infrastructure projects across China. China is also re-opening the bond market of the local governments. Something that we clearly mentioned is China (and other emerging market) needs a more developed Debt market.
WSJ says that: Yi Gang, a deputy governor of the central bank, noted at the news conference that since the reserves are foreign currency, they can't directly be used for domestic spending. "These reserves are unavoidably invested abroad," he said. This confirms 2 things in my mind: 1. they are moving towards a domestic growth policy. 2. FX reserves maybe left alone. Even though they will still need to reinvest their FX reserves, since the export is slowing, we do not know if there will be additional buying of Treasury.

6. A comparison of the present Chinese economic condition versus Asian Crisis (source WSJ).

I would like to highlight a few points from the chart below:
- Chinese is an oil/energy hungry nation. Their oil import has not slowed down (given this oil price, I suggest that they may even stockpile for their future)
- Chinese consumer consumption is very low and is not expected to be the core growth driver. We will look for large government spending to the core driver in the coming years. Therefore the stimulus package announcement this week is a very important confirmation that Chinese will do its best to keep the growth engine humming
- Even though the FX reserve and FDI are expected to slow, they are coming down from a high level which will offer some cushion to the global slowdown.

Gulf news reported that there has been over 3.4 billion dollars of gold buying in the past 2 weeks reflecting increase gold reserve amongst Saudi investors: 12 Nov 2008 -Gulf News - Gold demand rises in Saudi Arabia

Financial Sense recently posted this intriguing article (6 Nov 2008 - FinancialSense.com - The Strange Case of Falling International Reserves). I have linked their chart which summarize the biggest question: Why has the global reserve stop growing? If you read further, you will find that the conclusion of the article is monetary inflation. We have already discussed that all this all end in tears and the only way to long term stablity is having a Gold Standard to stop irresponsible money printing. Unfortunately, this solution will not help the US, UK or Europe who needs to print a lot of money or have other countries fund their debt. If no-one would like to buy their debt because of global delveraging or questioning their credit quality, the money print machine will have to keep humming.... but for how long????



chart linked from financialsense.com



This is what Hugo Salinas Price from FinancialSense.com wrote (my emphasis in bold):

Now, if the Reserves are no longer growing but diminishing, this might indicate that the exporting countries are no longer buying and accumulating more US, British and European debt. If they are not accumulating more foreign currency bonds and debt, then the fiscal deficits of the US, the Brits and the European Union countries are no longer being funded – especially important to the US, which is running an immense fiscal deficit, what with the US Treasury going into debt like a drunken sailor on account of the need to bail-out all and sundry debtors.

Now if the US deficit is not being funded, then that means that the fiscal deficit is simply being monetized by the Fed. Or what else can it mean?

The US is on track to incur a fiscal deficit of $1 Trillion, perhaps much more, in this fiscal year. If the International Reserves are not growing, that means it will be impossible to fund that deficit. That would mean: monetary inflation in spades, in the US.

I just re-read Jeremy Grantham's October 23rd commentary (free download from http://www.gmo.com/). He is definitely a lot more bearish about China than most people. Increasingly more economists are coming out to argue for negative surprise in Chinese growth (See Roubini - 4 Nov 2008 - The Rising Risk of a Hard Landing in China: The Two Engines of Global Growth – U.S. and China – are Now Stalling and Brad Sester - 6 Nov 2008 - How severe a slump in China?). CLSA is now calling for China GDP dropping to 5.5% in 2009 from 25.8% in 2007 and estimated 19% in 2008.

I think that it is very important to consider China's growth since it is the final piece of the puzzle in the global "recession" story and is in both the world and China's (social unrest and jobs) interest to keep double digit growth. But since there is no way that Chinese export can escape from the global slowdown, unless China can magically boost domestic demand (how about more infrastructure projects... *), we are facing a complete global recession. Just the thought of that, I need to take a deep breathe.

How do we get out of such a hole? Can some of the smaller economies pick up the slack as developed countries scramble to lower their cost and further outsource their businesses in even less-developed countries? Will the governments spend enough to stop this slowdown? Will competitive devaluation of the currencies benefit anyone in the end?

We have a lot of questions! But not a lot of answers since there are simply a lot more moving parts when global economy is intertwined with global politics and globally diversified human behaviors.

I would like to close this post with quotes from Jeremy's October article (my emphasis in bold):


Like a Bear in a China Shop

I suggested last quarter that it was ridiculous to expect great financial and economic skills from the Chinese government, which is faced with the spectacularly complicated task of maintaining the highest economic growth rate in history. “Surely they will stumble,” I said. Well, the more I think about it, the more likely it seems that this is both the most likely and most dangerous disappointment (even shock) that awaits the current consensus.

Moving back to our armchair at 56,000 feet (don’t you miss the Concorde?), an amateur economist could summarize and simplify the Chinese economy as 39-37-37: an astonishingly large 39% of the GDP is capital spending, 37% is internal consumption, and an amount equal to 37% of GDP is exported. (These numbers do not sum to 100 as we are not using exports net of imports because we are concerned with the vulnerability of total exports to a weak global economy.) The U.S., in comparison, is 19-70-13, disturbingly on the other side of normal; 70% consumption compared with 57% in both Germany and Japan, for example, and nearly twice that in China. China’s mix is of course an utterly unprecedented one, and comes with great advantages in booming times. Now, however, we might ask: how do you stimulate the building of a new steel mill when rows of mills are sitting empty? How do you increase exports into a global economy that is not just slowing, but is unexpectedly very weak? And are they good enough at stimulating local consumption to have an impact on such a small percentage of GDP in the face of a negative wealth effect from declining stock and housing prices in their local market?

Simple old “Econ 101” thinking would suggest that their capital goods sector will have a bigger drop than the rest of the economy, and that export growth rates might slow from very large to even nil or worse. The one openended offset might be in Keynesian or Rooseveltian government spending, upping their already massive infrastructure spending by A LOT. (This is a specialized economic term.) And they will surely do some of that.


On balance I find myself more and more convinced that this is becoming our #1 disagreement with consensus. If we are right, it will be a very important and distressing surprise for global growth. The good news is that this is far from the “near certainty” of our recent views on housing, profit margins, and risk premiums. At best, if right, it is an inspired insight straight from the armchair. At worst, if wrong, an ill-researched hunch.

* a side note : middle east is also facing the same problem of slowing oil exports and the challenge to boost domestic demand.

In an recent interview that Marc Faber gave (MINA News - 5 Nov 2008) , he outlines why the stock market will be stuck down here for a while. He also talked about the growing debt to bailout the banks/insurers/wall street and more additional monetary injection to bounce this economy.

You will find that Marc's argument clearly support our long term Gold investment. I would like to highlight a few of the Q&A from the interview (my emphasis in Bold).

swissinfo: Have we reached rock bottom?

M.F.: I think we're near it. But I also think we'll stick at this low point for a long time. Anyone who thinks that everything will soon be rosy again is naive. It's quite possible that worldwide stock exchanges will experience a similar development to that witnessed in Japan over the past two decades [the Nikkei index has fallen from 39,000 points to under 8,000].Japan also shows that the large amount of money injected to stimulate the markets didn't have the desired effect – but it did produce huge holes in the state coffers.

I have added this Nikkei chart (log scale) for reference:



As the Japan housing bubble imploded in 1990, you can see from the chart below that Nikkei underperformed Gold. Also note from the chart above, JPY was weakest (USD/JPY strongest) around the time of the bubble (Nikkei high). and Yen has been stronger even since. Can we draw any conclusion to the USD with this Credit bubble? I would caution that since this time is a global bubble and we will experience a global recession, it is not as clear anymore that additional delveraging will be coming in form of USD strengthening.



swissinfo: Governments are offering guarantees and are pumping thousands of billions into the markets. Is that a mistake?

M.F.: Yes. The losses are there and someone has to bear them. There are two possibilities. Banks go under and the stakeholders are left with nothing, as is the case with Lehman Brothers, or governments pump money into the financial system so that the incompetent financial clowns in Bahnhofstrasse [Zurich's financial centre] and Wall Street can continue to eat in fancy restaurants.I am clearly in favour of the first because the consequences of these state interventions are massive budget deficits. To finance these, governments have to acquire money. For that they have to borrow money, which makes state debt and interest payments soar. US economists have come to the conclusion from the trends that there will be a US state bankruptcy.

swissinfo: Do you share that view?

M.F.: One hundred per cent. The US government will in future have new debts of at least $1,000 billion (SFr1,165 billion). That's on top of the current state debt of $10,000 billion. And that doesn't take into account state programmes to stimulate the economy. The government will have no other choice than to print money, which in the long term will lead to inflation.

Michael Shedlock from Mish's Global Economic Trend make a great argument that the top 20 countries in the world are all in recession with the exception of China (Global Recession, Country by Country). And he suggests that China will not be able to go alone (he also referenced an excellent read: Robini's recent article on China's hard landing).

Let's think about how we are going to come out of this global recession. I think that depending on how bad the recession is, government maybe able to push for responsible lending regulations with nationalization type of overseeing in credit lending. If done correctly (especially if co-ordinate with all G20 governments), the long term economic stability will have a good chance. On the other hand, if depression hits any country, they will push for the competitive devaluation of their currencies, massive monetary injection plus government spending to boost jobs and therefore the domestic economy. The world will end up starting another round of pushing paper money around.

We, of course, argue it will all end badly and Gold will be the long term hedge of that scenario.

As questioned already in this blog about the spread between physical and paper gold price, we believe this article from Minyanville (5 Nov 2008 - Mother of All Short Squeezes for Gold?) gives an excellent summary of the Comex delivery situation and how other signs such as Lease Rate and Forward Curve is pointing towards a possible short squeeze.

Also read : 4 Nov 2008 - Jim Sinclair - Physical Delivery of Gold From the Comex Warehouse

Seeking Alpha has a pretty good article (5 Nov 2008 - Junior Gold Miners Are Dirt Cheap) about how they think the Juniors gold miners are cheap. We have already points out how cheap these Gold stocks are (see Gold versus other assets) priced versus Gold prices historically. Now Seeking Alpha has offered us another angle to see how fundamentally cheap they are, especially the Juniors. Being able to buy the ones with no debt and Price/Book below 1, is certainly attractive in a value investing sense. I caution this analysis since one really need to look at a few more factors 1. the amount of Gold reserve, 2. free cash flow. Out of the list, on the safe side, NSU & EGI looks more interesting from purely able to buy the stock for less than the "cash value". However, we need to be careful here.

I started looking at NSU's Quarterly report closely (June 2008 Quarterly Report). On page 9, you will see that a 10% strengthening in USD will impact their net income by around 140k. Canadian Dollar has weakened by 20% and South African Rand has weakened by 25% since June 30th which is the Seeking Alpha table is based on. Over 50% of the account receivable is priced in South African Rand. On top of it, it seems like that NSU may have exposure to the Eritrean Nakfa Currency. Nakfa is pegged to the US Dollar (1 USD = 15 ERN) and NSU management expects little currency risk with the ERN. Even though we do not know much much of NSU's 58mm cash is in ERN. We still wonder this economy can defend its currency peg (GDP is about 1bn USD, we need to find out the size of their FX reserve) and ensure convertibility at the pegged rate. This highlights that, with such a big move in recent FX rates, all balance sheet numbers are in question. Since we are unclear what currency risk each company in its balance and income statements, I am guessing that we will need to do more research before calling these miners a complete "free lunch".

However, I must say that if we get to buy the Gold reserve for free, given a good safety of margin to cover for possible currency translation risk, some of them still look attractive.

Also see (22 Oct 2008 - Minyanville - Dear FED: Why not buy Gold Miners).

We are seeing a couple of things so far today and reflecting on Obama's theme:



1. Crude off 6% (energy independence)
2. Euro and Sterling up slightly (Rumour : middle eastern selling Dollar... see our earlier post for possible reasons)
3. Canadian dollar and Mexican Peso off 1% (calling off NAFTA)

Given the level of CAD (presently at 1.1690 and the recent high is 1.30), maybe USDCAD is a good buy now. (see USDCAD chart below)

Democrats, and Obama is no different, like to spend. It has been traditionally true that Government needs to spend during recession (and depression) to push the economy out of the slump since private companies tend to pull back in investment and employment due to lower economic visibility and more difficult credit condition. While it is a good news that Government spending will help the US economy, we need to consider the economic backdrop of the present condition: 1. over 1 trillion dollars of bailout, 2. budget deficit, 3. fiscal deficit... Basically, our country is most debted ever in history while our ability to repay these debts looks ever so bleak. Even though US economy needs further Government spending, can we afford to spend more?

The implication is clear: 1. higher corporate taxes, 2. higher income taxes, 3. pressure on US Dollar, 4. pressure on US credit rating, 5. ultimate inflation in 2-3 years (both 4 and 5 leads to higher long term interest rates)

All in all, combined with the already large bailout package and our extreme debt borrowing, Government will still need to spend more to help to recover the economy.

Can the creditors to the US keep lending without questioning the creditability to repay the debt? We have seen the examples of "bank runs". Since bank only holds a fraction of its deposit, a run in the bank will bankrupt the bank unless FDIC comes in. But who is the FDIC of USA, IMF?

How long can we keep playing with monopoly money? How long will we play the musical chair of sovereign lending? I think that in the end, it is only responsible to have a Gold standard here in US and other countries. It will take the fear away from all sovereign lenders. In the shorter term, I expect that sovereign lenders will demand higher interest rates to lower the "leverage" of the borrowing countries. Hence TBT (UltraShort Lehman 20+ Year Treasury ETF)remains a good investment bet.

I want to keep it short today. All eyes on tomorrow's election in the US. Meanwhile, don't miss the following articles:

1. Safe Haven: Why a Gold Standard - 3 Nov 2008
2. Investorazzi: Marc Faber Sees Bright Future For Gold - 14 Oct 2008
3. FT: The Gold Conundrum - 3 Nov 2008
4. CNBC: Gold Price May Spike - 7 Oct 2008

To quote from the Safe Haven article written by Donald Grove of Casey Research:

"A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.

When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one-so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the "easy money" country, inducing tighter credit standards and a return to competitively higher interest rates again...

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves...."

I encourage my readers to read the rest of Donald's arguement for a gold standard. Meanwhile, we have to keep asking why paper money is trading at such discount to physical gold and will CME/LME experience a massive delivery spike???