Centennial Precious Metals, Inc: Serving Gold Coin & Bullion Investors Since 1973
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4/02/07

A publication of USAGOLD-Centennial Precious Metals, Inc.
Serving gold investors since 1973

"The next Fourth Turning is due to begin shortly after the new millennium, midway through the Oh-Oh decade. Around the year 2005, a sudden spark will catalyze a Crisis mood. Remnants of the old social order will disintegrate. Political and economic trust will implode. Real hardship will beset the land, with severe distress that could involve questions of class, race, nation, and empire."

-- William Strauss and Neil Howe, The Fourth Turning, 1997

Introduction

Last issue we offered some technical analysis on what we believe to be the direction of the gold market over the next several months and years. If you haven't seen that, here's the link. This month we return to our traditional role of delving into the what we see as the most important political and economic forces at work in the gold market today. We think you will find this a particularly interesting issue. We put the Strauss and Howe quote in the masthead this week because so many have expressed to us their concern about the sheer volume of bad news of late -- on the economy, the domestic political scene, the financial markets, international affairs, and so on. Perhaps it's just our perception that there's more than the average amount of negativity floating about. Then again, maybe we are in the "unraveling" period -- "America's winter" as described by Strauss and Howe, and these are the bumps and bruises that go along with it. If we are in the unravelling, you can take comfort that you are a gold owner - small comfort that it is. It will carry us through, so that once America's winter has passed, we can plant seed for the inevitable spring. Speaking of which, happy spring to all and welcome to this issue of our newsletter.

Short & Sweet

China, the biggest buyer of crude oil from Iran, now pays in euros and Japan has offered to pay in yen. Teheran is moving away from the dollar for oil settlements in rapid fashion........................Barron's reports that $1.875 trillion of the U.S. national debt, or 21%, is now held by foreigners. $288 billion of that, or a whopping 15% of the total, was purchased just in the past twelve months! The total national debt now stands at $8.83 trillion -- up almost $500 billion in just the past twelve months. We are now perilously close to the statutory limit of $8.95 trillion passed by Congress just one year ago............. ................To put it another way, that $288 billion coming from foreign sources represents over half what the government needs to pay its bills...................................... Here's a scenario we need to seriously consider: If China is serious about pulling the plug on U.S. Treasuries (as stated by China's central bank governor Zhou Xiaochuan a couple weeks ago), and the Treasury Department can't find buyers for its paper, the U.S. federal government will be forced to go the Federal Reserve for financing. That's another way of saying the U.S. will print money to cover its deficits......................All the while, tensions continue to build in the Persian Gulf and the president just got another $125 billion from Congress to conduct the war....................This would be a good time to start keeping up with the how much of the national debt is being monetized and how much is still being purchased by foreigners. To do that, I have provided a couple links below that will take you to the Barron's tracking of those numbers........................ Meanwhile, last weekend, Reuters reported China signing a deal with Venezuela on a major oil production project. "The United States is a power on the way down," said Venezuelan president Hugo Chavez "China is on the way up. China is the market of the future." ..................There have been rumblings about Venezuela and China building a pipeline to the Pacific from Venezuela, or using the Panama Canal for oil transport. There have been unconfirmed rumors for years that operation of the canal had been ceded to Chinese concerns. Major American oil producers, we are told, are in the process of being thrown out of Venezuela (or nationalized). China, Russia and Iran are being invited in (For details, please see the links below.).......................................... You don't have to be a genius in foreign affairs to see this as a major threat to the United States. Venezuela ranks number five on the list of crude oil exporters to this country. Mexico ranks number three..................A day or two after China stated its intention to halt U.S. debt purchases, Japan announced it would continue to be a buyer. No doubt Japan is positioning itself to gain U.S. favor for its quiet policy of remilitarization................................Fed-watcher Adrian van Eck says "[O]f all the possible problems that might worry me about Dr. Ben Bernanke running the Fed, the subprime mortgage market or even the entire housing industry, is not even on my list of top twenty. Remember, Bernanke has been on record for many years as saying that we must never again allow a housing crash to pull down the American economy and start a general panic that will lead us into a deep recession." .................. Alf Field, who comes closest to our reading of the Elliott Wave, is calling for an "immediate third strong wave upward" in gold with a minimum target of $800."..........................Remember the crashing Chinese stock market a few weeks ago and how it sent the U.S. stock market reeling? Guess what? Chinese stocks have returned to their record high despite a rise in domestic interest rates aimed at cooling the economy...............Those who believe that they can ride out a potential economic disaster by staying in "conservative" investments like bank cd's, money markets and U.S. Treasuries might want to rethink that strategy. These items are proxies for the dollar and it's the dollar we need to be concerned about. When leading Chinese economist Xia Bin mentioned over the weekend that there was "an increasing shift out of dollars around the world, particularly by oil exporters, he sounded a warning that should not be ignored by the ordinary investor. He went on to say, "Everyone knows that they should try to cut their US dollar assets. But, of course, if China wanted to make such a move, a big cut, our losses would be large as well. That would be very difficult to do." As private investors, we are not so burdened. We have the ability to do what the big players cannot -- diversify sufficiently to protect what we have earned.

Editor's Note: How about "dragon market?" Reprinted with permission of Ed Stein

Related Reading

Top fifteen oil exporters to the United States/U.S. Department of Energy

Is China in control of the Panama Canal?/NewsMax

China in the Caribbean region: Some observations/PetroleumWorld News

Federal Reserve data bank/Barron's

American debt and deficits/Barron's

Think the nation's debt doesn't affect you? Think again/Axisoflogic

News & Views

Merrill Lynch's Rosenberg says, "Modern day stagflation? Buy gold."

"Another asset that fares well in these periods is gold, which has already rallied 6% since the latest runup in oil, widening in TIPS spreads and steepening curve took hold simultaneously. We reiterate that gold is in a secular, not a mere cyclical, bull market. Indeed, gold formed a very similar bottom formation in 1999 as the S&P 500 did back in 1982. And if this plays out like other secular bull markets have in the past - emerging markets, bonds, stocks, oil, real estate - then this is a run that can be expected to last at least another five years and ultimately see bullion break the $1,500/oz barrier. That may raise eyebrows, but gold has already more than doubled this cycle to levels that few were calling for five-, six- or seven-years ago (Marc Faber and Jim Rogers aside). And if gold had merely kept pace with inflation over the past 25 years, the "nominal" price would have already cleared that $1,500/oz threshold. And as we have already seen so far this cycle, gold has proven to be a very successful hedge against deflation fears ... and inflation fears (which is one reason why it is in a "secular" bull market)."

David Rosenberg, Economist, Merrill Lynch, 3/30/07

Editor's note: To put a finer point on David Rosenberg's number, adjusted for inflation gold would have to trade at $2223.32 to revisit its all-time high of $850 in 1980, according to Ron Griess' The Chart Store.

Central bank role in gold hampered

"I also have a very strong feeling that we are very close to a major breakout and run up in the gold and silver price. While many comment on the old 1981 high for gold around $800, this was just a short term blip, and if you use a long term monthly chart on gold, the current price has already broken above the 1981 high. Taking a look at [the] weekly gold chart, you can see that a new uptrend is established and we should soon test the $700 high of last year.

The fundamentals are also very bullish. Gold has been rising in all currencies for almost 2 years now and the central banks are losing control of the market. The recent news that IMF is changing accounting practices on how central banks report their gold holdings is probably coming at a time when it will not matter. By the time the changes are implemented, the CBs will have already lost control of the gold market and when market players learn that much of their gold holdings were actually loaned out and they can't get them back, it won't really matter. Don't be surprised if gold is well north of $800 by then."

Struthers Resource Stock Report, 3/28/07

Upward pressure on gold will be unimaginable

The long and short is that there are hardly any gold mines of size scheduled to come on stream... and we are not talking about just over the next year or two, but ever. Most people in the know see annual gold production falling from here on.

For proof, there was news recently out of South Africa, the most world's prolific gold producer. Despite the loud incentive of higher gold prices, South African gold production in 2006 dropped to the lowest level since 1922.

And, above ground, there just isn't much gold to go around either. The U.S. government, for example, possesses the world's largest gold reserves...and those reserves amount to only about $170 billion at today's prices...not even a rounding error on the trillions of dollars in debt the government has guaranteed.

Put simply, the amount of gold available to investors and central banks is like the number of beachfront home sites at Malibu - it's not going to change much. As a result, when the rush for the lifeboats begins in earnest, the upward pressure on gold will be unimaginable. As will be the profits for anyone who acts now, ahead of the crowd.

If you haven't yet started accumulating precious metals, you still have time. Start by picking up some bullion coins from a reputable dealer (silver should do as well as gold).

Doug Casey, Casey Research

Editor's note: When that upward pressure manifests itself, the supply of gold coins will dry up overnight. Many who wish to buy gold will not be able to get through on the telephone to firms like USAGOLD-Centennial Precious Metals. Take it from someone who's been in the gold market for a very long time, and has seen how the public reacts in times of distress: It is better to buy your gold now while things are quiet than wait until the scenario Doug Casey describes becomes reality.

Gold: The only wealth that can't be erased

From Juneau, Alaska comes word that a computer technician accidentally erased a disk drive containing information on $38 billion worth of accounts.

Bummer.

"That's what happened to a computer technician reformatting a disk drive at the Alaska Department of Revenue. While doing routine maintenance work, the technician accidentally deleted applicant information for an oil-funded account - one of Alaska residents' biggest perks - and mistakenly reformatted the backup drive, as well."

We will not dwell on the incident. Fortunately, the revenuers had a back up somewhere. All was well more or less.

But one of our colleagues posed a question to us that we will pose to you:

How rich would you be if Fidelity or Merrill Lynch or your pension company or your mutual fund managers destroyed all those little bits of electronic information that define your wealth?

"I was talking with an old friend of mine who is filthy rich - 8-figures kind of rich, before the decimal point," wrote our Pittsburgh correspondent, Byron King." He makes $20,000 per day just in interest on funds he has sitting in a money market account. He was musing about what would happen if somebody set off a nuke at altitude, and the EMP wrecked the world's data storage network. 'If you wiped out all the data storage at Fidelity, would I still be rich,' he asked? "We pondered the question, and he is now accumulating gold."

Bill Bonner, The Daily Reckoning

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