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USAGOLD NewsGroup Alert
September 26
 Top China officials in FT: "Gold purchases
under consideration"
The trillion dollar question:
China is grappling with how to deploy its foreign exchange riches;
top officials openly say government is considering gold acquisitions
to hedge dollar
Richard McGregor/Financial Times - 9/25/06
"At the top of the semi-public
shopping list funded out of existing reserves are raw materials,
something confirmed by both Mr Wen [Jiabao, prime minister] and
Mr Zeng [Qinghong, vice president]. The reserves could, for example,
pay for importing the oil to fill a long-planned strategic reserve,
the tanks for which are near completion. The government is also
considering whether to buy gold, considered a hedge against the
potential of a falling US dollar."
USAGOLD Comment: China knows that the Financial Times
is a primary conduit to policy makers and major market participants
in the west, so these comments by officials at the very top of
its government were not placed casually or accidentally. Gold
is now definitely on the policy agenda for China. This revelation
of Chinese establishment thinking, I believe, marks a watershed
for the gold market, and something that will have to be factored
into decision-making in London and New York's gold trading rooms
from now going forward. The old threat of central bank gold sales,
for example, used often to deter prices would have to weighed
against the new threat of central bank purchases. This is a detailed
treatment of how China views its nearly $1 trillion in dollar
reserves and what it might do with them in the future. Gold (and
oil) are mentioned toward the end as potential beneficiaries.
If nothing else, China is giving gold a new psychological advantage
in its bull market arsenal. It is well worth the time spent to
digest this longish article, and that's why we are sending it
as a stand-alone entry for the USAGOLD NewsGroup.
September 19 Note: We think you will find this issue's
eclectic mix both enjoyable and enlightening -- the educational
is mixed with some interesting developments in the world of "funds"
that may have an effect on the gold market moving forward. MK
_______________________________
 Major hedge fund on ropes, loses $4.6 billion
Phil Davis/Seeking Alpha- 9/19/06
* * * * (Keep an eye on this)
"This is one of the smartest
funds on the planet and they got clobbered by oil's move last
week, the carnage may be indescribable as this thing continues
to unwind. The CEO of Shell estimated that there is $100B of
speculative plays on oil alone. When you add in gas (Amaranth's
downfall), gold and other metals, we could be looking at upwards
of $500B on the wrong side of a trade!"
USAGOLD Comment: Over recent weeks with the commodity
complex tracking lower, some commentators have warned of possible
problems with hedge funds on the wrong side of various markets
-- oil, natural gas, copper, gold, etc. Amaranth is the first
problem to surface. What else might be bubbling below the surface?
Trading funds are interlocked with each other through counterparty
credit schemes. When one goes, another is threatened, which threatens
still another, and so on down the line. The hedge fund situation
in general and the Amaranth situation in particular are probably
worth keeping on the radar screen for the interim period -- at
least until we get clarification on the wider systemic effect.
In a Washington Post article on the Amaranth meltdown, Boston
University economist Mark Williams said "The speed with which
leveraged funds can evaporate is mind-boggling."
Serving
the lie: Why the gold conspiracy isn't all it's cracked up to
be
Michael J. Kosares/Precious Metals, Denver - 9/12/06
* * * *
"Little do some analysts
know how well they serve the lie by making others believe that
those who are perceived as powerful can have their way unchallenged.
In my view, a group can conspire to make a market do something
but cannot continue for long if it is against the primary trend
-- and cannot continue for long without substantial expense.
As any student of ancient Greek literature knows, there is always
a price to pay even if you dine with the gods and goddesses amid
the clouds on Olympus.
We should ask ourselves a question:
If the anti-gold conspirators are so powerful, how did we get
from $250 gold to $730 gold?"
USAGOLD Comment: This essay received quite a bit of
play around the internet. We include it here in case you missed
it at the USAGOLD Forum.
Money
and Politics in the Land of Oz
Quentin P. Taylor/The Independent Review - Winter, 2005
"The story of 'The Wonderful
Wizard of Oz' was written solely to pleasure children of today"
(Dighe 2002, 42). So wrote L. Frank Baum in the introduction
to his popular children's story published in 1900. As fertile
as his imagination was, Baum could hardly have conceived that
his "modernized fairly tale" would attain immortality
when it was adapted to the silver screen forty years later. Though
not a smash hit at the time of its release, The Wizard of Oz
soon captured the hearts of the movie-going public, and it has
retained its grip ever since. With its stirring effects, colorful
characters, and memorable music (not to mention Judy Garland's
dazzling performance), the film has delighted young and old alike
for three generations. Yet, as everyone knows, The Wizard of
Oz is more than just another celluloid classic; it has become
a permanent part of American popular culture.
Is Oz, however, merely a children's
story, as its author claimed?"
USAGOLD Comment: We were intrigued with this discussion
of "The Wonderful Wizard of Oz" as a political and
monetary allegory. So much so that we sought permission to include
it in our special archive of timeless writings on finance and
economy. It's fun to speculate what Dorothy, the Tin Man, the
Scarecrow, the Lion and even the yellow brick road itself symbolized.
We hope you enjoy Professor Taylor's essay as much as we have.
Nation's largest pension fund poised to enter
gold market
Gilbert Chan/New York Times - 9/16/06
"Since joining CalPERS
in June, chief investment officer Russell Read has stressed the
importance of broadening the fund's investments and going beyond
domestic stocks and bonds. In the summer, he said the strategy
would assume an increased international flavor and move deeper
into the private markets. The trend includes commodities. 'There
is nothing wrong with investing in these. You have to build a
diversified portfolio,' said Paul Lapides, director of the Corporate
Governance Center at Kennesaw State University in Georgia."
USAGOLD Comment: Despite the recent downturn in commodities,
pension funds are looking for a way to boost returns and meet
their payout obligations. Diversification is a key factor in
various funds going to alternatives like gold. This, in turn,
will likely have a profound effect on the demand side of the
gold market equation. Calpers, poised to enter the gold market,
is leading the way in what could become a new wave among pension
fund managers.
Sept 5th Note:
"The discriminating
observer would look at gold not just as an investment the glitter
of which can be tarnished by central bank gold sales. He would
also look at it as an insurance against disaster caused by recklessness
at the helm, whether the boat of the world economy is run onto
a reef or whether it is run into an iceberg. For the prudent,
gold is an insurance policy the importance of which increases
with the dangers and uncertainties growing in the world with
the passing of every day. The price of gold is of secondary importance.
A low gold price simply means that insurance is momentarily cheap.
Why is it cheap? To put it bluntly, it is cheap because foolish
people are selling their lifesavers while staring at the iceberg
which is about to hit the 'unsinkable' Titanic."
--Antal E. Fakete, economist
This USAGOLD NewsGroup is lengthier
than usual, but we think you will gain from the unified theme
which threads through all of these articles. Gold is up $11 as
we prepare this e-mailing, coming out of the summer
doldrums with a flourish. Reuters reports, It is quite
a sharp jump when you consider oil is well entrenched below $70
and the U.S. dollar at $1.28 against euro is relatively strong,'
said Bernard Hunter, a director of precious metals trading at
ScotiaMocatta in Toronto. 'Gold's reaction is probably breaking
away from those traditional indicators.'
_______________________________
Gold may rise as demand from jewelers outpaces
growth in supply
Pham-DuyNguyen/Bloomberg - 9/4/06
(Timely)
"Gold may rise for a second
straight week on speculation demand from jewelers and investors
this month will recover, outpacing production from the world's
mines."
USAGOLD Comment: Some initial evidence that the summer
doldrums may have officially come to a conclusion.
 Even the sophisticated are attracted by lure
of autumn gold
Ambrose Evans-Pritchard/London Telegraph - 9/4/06
"Quietly, Moscow is buying
[gold] and Russia's foreign reserves ($258bn and rising at $12bn
a month) will soon match those of the entire euro-zone."
USAGOLD Comment: Another analyst says the doldrums
are over. Discussion of Russian gold purchases goes back to President
Vladimir Putin's remark last year that Russia should increase
its gold holdings. The problem for any official sector buyer
of gold is finding enough quantity to fill its needs. Uniquely,
Russia has begun building its gold reserves by purchasing internally
from its own miners. As such, a major supplier will keep its
gold within its own borders. At one time Russia was the world's
second largest gold producer, but production plummeted after
the Soviet Union toppled. On the rebound, Russia now ranks sixth
at 170 tonnes per year -- about half the production of world
leader South Africa.
Robert Mundell: Ahead of his time
Interview/Laura Wallace/ Finance and Development Magazine - 9/1/06
"If Mundell could have
his way, the entire world would be one big optimum currency area,
sharing a global currency. But he admits that political rivalries
make it difficult for this to happen because a necessary condition
for the creation of a monetary union--global or otherwise--is
the creation of a security area. He believes that, in a world
where war is a possibility, an international monetary system
based on a fiat world currency wouldn't work unless it were backed
by one or more of the precious metals. Gold could still be used
as a reserve asset in a reformed international monetary system
in the 21st century, but it would be a far cry from the international
gold standard that prevailed before World War I."
USAGOLD Comment: If the world's nation states were to
move ahead with Mundell's advice on using gold as a reserve asset,
as they seem to have done with optimal currency zones, it would
translate to a major positive for gold owners. First, much of
the world's future gold production would be taken up by central
banks in zones with insufficient reserves (such as Asia). Second,
the supply would be limited by keeping existing central bank
gold off the market. Third, gold will have come full circle --
returned in both the public and private financial realms to its
rightful place as the ultimate representation of savings and
wealth. That in turn would solidify investment demand for years
to come. I don't think any of us could quarrel with that.
The myth of the new American gold standard
Antal E. Fekete/Financial Sense Online - 11/15/05
(Dated but important)
"When a weak central bank
is selling gold to meet its maturing liabilities, it is acting
logically. It is using gold to maintain its credit standing.
That is what gold is for. But when strong central banks, such
as the Swiss National Bank and the Bank of England are falling
over themselves to sell monetary gold from reserves under the
full glare of publicity, knowing that the inevitable result of
the fanfare will be the worst sales price for the asset on the
block, then logic is turned upside down. The lame explanation
that gold sales are designed to raise funds to perform good deeds
is for simpletons only."
USAGOLD Comment: This older piece (from which we extracted
this issue's masthead quote) remains relevant today and ties
in with Bundesbank's Axel Weber's observation:
"The Bundesbank reserves
the right to reallocate some of its gold reserves into foreign
currencies but does not plan to sell any to help overhaul Germany's
public finances. We've never said that we don't want to sell
gold in general. It's conceivable that our reserves could be
reallocated somewhat -- from gold into foreign currencies. But
we don't want to draw on Germany's currency reserves. It's not
a good idea to touch the substance. It would be better to consequently
push for the reduction of debts. Gold is an important factor for confidence
in the stability of the euro."
Vindication of Austrian economists and their
theories
John Dizard/Financial Times - 9/5/06
"If you do believe - or
come to believe - in intertemporal misallocation, you will decide
that continued tactical flexibility is important to making or
preserving your money. As long as policy makers are torn between
conflicting imperatives, you should anticipate their next, politically
driven, move. Right now, Mr [Bernard] Connolly of Banque AIG
thinks that means buying US Tips inflation-indexed bonds, since
long-term real rates will have to come down again, over time.
Both of us are also bullish on the longer term prospects for
gold."
USAGOLD Comment: As this article suggests, many who
subscribe to the views of the Austrian School of Economics are
"goldbugs." This vindication will play as sweet, soulful
music with our readers. Learn the meaning of the words, "intertemporal
misallocation."
 Talk of a monster recession
Dan Dorfman/New York Sun - 8/28/06
"Given his bleak outlook,
Mr. Roubini sees bad days ahead for stock prices. More specifically,
he expects the market to begin falling sharply next month, with
the S&P 500, between then and June of 2007, plummeting some
15% to 20%. A combination of recession signals and falling stock
prices, as the good professor sees it, will undoubtedly impact
mid-term elections and is surely very bad news for Republicans,
who, he thinks, could well lose control of Congress because of
these developments."
USAGOLD Comment: Monster recessions generally follow
monster inflations. Even if one were to substantially upgrade
government inflation stats, we still haven't had the kind of
inflationary blow-up one would expect as a prelude to the sort
of thing Mr. Roubini is suggesting. The current economic mix
remains more reminiscent of the 1970s than the 1930s and we should
be careful not to discount too heavily the power of the printing
press in a fiat money economy.
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