A few key points about this week that I would like to recap on:

1. Gold finally broke a big resistance and clear the 885 resistance and closed just around 900usd:



2. Gold against Euro is extremely bullish



3. Gold against 10y is working against the resistance of the down channel. We look for clear break of this down channel to support our trade recommendation.



4. Finally, the US Mint released the Ultra High Relief Gold Coins this week. It is priced at $1189 with backordered to 2/6/2009. Unofrtunately it is limited to one per household. (Link to US Mint)

This news will be bullish for our long WTI versus UST trade. This is the first official comment from China this year regarding reserve accumulation in natural resources mirroring national interest. I may argue that it is probably a much better time for China to buy/accumulate natural resources since they are long cash and will have strong negotiating power in this weak global economy.

(Just in from Bloomberg).


BN 11:35 *CHINA TO BUY COPPER VIA `VARIOUS WAYS,' JIANGXI'S WANG SAYS
BN 11:33 *CHINA COPPER BUYING DEPENDENT ON TIMING, METHOD, WANG SAYS
BN 11:33 *CHINA `WILL BUY COPPER FOR RESERVES,' JIANGXI'S WANG SAYS
BN 11:29 *CHINA UNLIKELY TO BUY COPPER FROM DOMESTIC SMELTERS
BN 11:29 *CHINA COPPER PURCHASES NOW WOULD 'SUIT NATIONAL INTERESTS'
BN 11:27 *CHINA COPPER COMMENTS FROM JIANGXI COPPER'S WANG CHIWEI
BN 11:27 *CURRENT COPPER PRICES `ATTRACTIVE' FOR CHINA STATE BUYING
BN 11:26 *CHINA HAS `VARIOUS OPTIONS' TO BUY COPPER, INDUSTRY GROUP SAYS

It is worth noting that the Gold has managed a 9th year Y-O-Y high.

Happy New Year to you all!

Year End Closing Price

2000 272.25
2001 278.95 +2%
2002 348.05 +25%
2003 415.45 +19%
2004 438.45 +6%
2005 517.00 +18%
2006 636.70 +23%
2007 833.92 +31%
2008 881.45 +6%

(Source Bloomberg)

I have been exchanging emails with one of our reader about 2009 investment.

The conversation started with how the market has punished Russia. The Russia Rubble has depreciated back to its 2004 /2005 level.



We talked about how powerful the open market is in punishing Russia. I then compared the situation with China. I argued that China has a comparatively closed economy and fixed currencies since State controlled a lot of the money flow and definitely where currency is pegged.
My friend argues that both countries had export and reserve, now exports are suffering in global recession, reserves are slowing down and both equity markets are down 62-72% this year - how can China be immuned?

Then this is how the rest of email exchange went:

BigApple- It is a poker game. Russia was bluffing his bets since the flop was showing a straight draw (oil, oil, more oil). Now, some body called the bluff and went all in. Russia unfortunately was playing the game with borrowed money. The same thing goes with China. The flop was "export, FDI, Olympics", now the turn is "consumer/ domestic stimulus". No one has a better hand at the moment, so no one has called bluff. the problem is the river maybe a "doom" card. ... Put it this way, when you are called at the poker table, you will need to show your card and give up/win the money. When you lose, you will need to pay. But if you are on borrowed cash, you will need to sell something. it was a one way bet for Russia with oil. But for china, can you pin point a easy asset which they can sell. ie something that you can push down and force their hand? I cannot for now. whereas if you spike up commodity, they will be in more of a trouble.... they are importers of "needs"

Friend - We are dealing with GLOBALIZATION and now competitive FX devaluation where EVERYONE owns USD. Whether it be Russia, OPEC, US,China: everyone is in the same boat. There is no more "credit" and the consumption driven economic model is in taters. I would venture to guess that there will be deals between CHINA and OPEC and LATAM and ASIA to get things "righted". Since OIL backed OPEC FX, its easy to seehow it could come together. We are entering a reflation trade notbuilt upon growth, but built upon RE-rating of FX values. This is the real NEEDs over WANTs trade. OPEC and the rest of these regimes NEED higher CRB. China and ROW has too many USDs that need to bespent without "rocking the boat".

BigApple - ok. so you are suggesting weakening USD will hurt China... i agree

Friend - USD is going to be a 2009 story...UST is going to be a problem. CRB is going to spike. For the first time I feel like I need to invest USD outside.



We then talked about investment ideas:

1. short USD
2. long Commodity - especially Agricultural goods, oil.
3. long Gold
4. short Treasury

All pretty much in line with our earlier assessment of 2009 investment landscape.

Related Posts:

1. Deleveraging Creates bubble in Treasury - 24 Dec 2008
2. US Debt Approaches Insolvency - 25 Dec 2008
3. James Grant Questions Dollar Validity - 22 Dec 2008
4. SafeHaven - Obama's Spending Spree Won't Rescue the US Economy from Recession - 28 Dec 2008
5. Marc Faber reiterates Buying Gold and Gold Stocks - 21 Dec 2008
6. Marc Faber sees bankruptcy for US - 6 Nov 2008
   

Gerard Jackson at SafeHaven.com (Safe Haven - Obama's Spending Spree Won't Rescue the US Economy from Recession - 28 Dec 2008) wrote a detailed analysis of Obama's spending spree and explained why it is inflationary and may not boost our economy as intended. I particularly agree with him regarding the point that you cannot promote employment in an industry which is not profitable. That does not sound like good long term investment. Therefore unless the car or manufacturing industry can become competitive and profitable, the bailout money will prove to be only a temporary fix for the economy. As for Obama push for green projects, unlike the article, I believe that if directed correctly and managed tightly, R&D is America's strength and can bring long term prosperity back to US. Finally, I cannot agree more with the monetary inflation argument. Therefore, we still recommend Gold as not only a hedge to financial and economic uncertainty but also to long term inflation threat.


Here are 3 of our recent posts agruing that all these bailout and devlveraging creates a bubble in the Treasury market and questions the validity of all these money printing:

1. Deleveraging Creates bubble in Treasury - 24 Dec 2008
2. US Debt Approaches Insolvency - 25 Dec 2008
3. James Grant Questions Dollar Validity - 22 Dec 2008
   

Here are some excerpts from the article (my emphasis in Bold):

... Now that it is apparent that Obama has conceded -- at least for now -- that raising taxes could sink the US economy it seems he is really only left with the printing press, so to speak. Considering that his coterie of economic advisors are Keynesians who, in turn, consult only other Keynesians we should expect to see a huge monetary surge in the near future. Bernanke has already laid down the foundations for such a strategy. Since last January the money supply has grown by about 18 per cent. And just to prove to Obama's economic advisors how big a Keynesians he is he raised the monetary base from $980,914 billion on 8 October to $1,233,679 5 November, a 24.7 per cent increase in a matter of four weeks. These are dreadful monetary figures and one should never lose sight of that fact.

... I'm afraid Americans are stuck with what is going to be a highly inflationary policy that will have disastrous consequences if persevered with. Part of the problem is that as Keynesians Obama's team will be focused on the rate of unemployment and this will be used to justify their spending program. The target of 2.5 million so-called green jobs is evidence enough of their line of thought. This policy could generate a consumer boom that would only add to the imbalances that the economy has accumulated.

The idea that focusing on jobs through consumption will fuel a recovery in manufacturing displays an enormous ignorance of capital theory. What the US could end up with increased consumer spending while manufacturing stagnates. The same goes for his so-call alternative energy investment schemes. The more resources directed to these malinvestments the greater will be the damage to the capital structure. This is the kind of interventionist thinking that helped prolong the Great Depression.

Finally, what about interest rates stimulating manufacturing? The view that investment is a simple function of the rate of interest has led to the dangerous notion that economic growth can be promoted by forcing down interest rates. But this is precisely what causes the boom bust cycle. And as we can see, US manufacturing is still contracting even as interest rates fall to historic lows. One should have thought that this phenomenon would have given Bernanke second thoughts. Apparently not.

Lower interest rates cannot stimulate investment without the prospect of profits. No profits, no investments. Slashing corporate taxes while simultaneously abolishing the capital gains tax could help spark an investment-led recovery. By setting his face against this policy of expanding capacity and to rely entirely on monetary expansion to promote recovery while at the same time promising higher energy prices in the future and a huge tax hike in 2010 or 2011 Obama will be fuelling uncertainty as well as inflation.

Adam Hamilton wrote a fantastic article on Seeking Alpha (Seeking Alpha - Gold Poised to Move Higher - 28 Dec 2008). He argues across the following points about his Gold Bullishness (I have added some of my thoughts where appropriate in italics):

1. Supply - Mined Supply - new supplies are hard to bring onboard and will take time.
2. Supply - Central Bank Sales - even though CB owns 18% of the above ground gold, their sales are limited by the Gold Agreement and Asian CBs are interested to buy from them or the IMF to bring their Gold allocation up in their reserves.
3. Demand - Investment Demand - as we have reported, physical gold premium is at its historical high and simply very hard to find coins at the moment.
4. Demand - Monetary Inflation - Money Printing Machine is ON!
5. Demand - Negative Real Interest Rates - Central Banks need to promote credit lending and investment rather than saving. With such a large economic recession, I expect to see negative real rates to continue into 2009/2010.
6. Demand - Secular Dollar Bear - I think that technically we are close to seeing a resolution in the next leg of the Dollar. While it is still in a major bear trend, further Dollar strength can change this technical picture.
7. Demand - Secular Stock Bear - While I acknowledge the outperformance of gold and gold stocks over S&P, we prefer not to make an outright call on the stock market.
8. Demand - Secular Commodities Bull - even though we are cautiously bullish in commodities from the point of view that 1. CRB has massively under-performance Stocks and other assets, 2. during recession and depression, government spending will orients around what their citizens need - we are bullish on water, agricultural products, some metal links to infrastructure projects; we are fully aware that the overall commodity investment space is in a deep sell off driven from the deleveraging activities and government selling from certain emerging markets to raise cash.
9. Supply and Demand - Technical Proof - for an array of charts pls see Gold Boom Doom - Gold Outperformance to continue in 2009 - 26 Dec 2009

Even though we don't agree with all the points from Adam's article, it consolidates a lot of thoughts out there about gold and gold stocks. It is well worth a read in planning your 2009 investment allocations. (see Gold Boom Doom - Gold Outperformance to Continue into 2009 - 26 Dec 2008)