James Grant gets to the
heart of the matter: Why Kuwait dropped the dollar peg
Concerns about international
inflation seem to have invaded the mainstream press. Lately,
quite a few articles have surfaced pointing to the potentiality
for rapid money supply growth translating to not only inflation
in the United States but contemporaneously on a global basis.
James Grant [Grant's Interest Rate Observer], who is one of the
more learned gold spokesmen, has written a compelling and pleasantly
brief portrayal of the problem for the Financial Times which
we have linked below. Grant starts with the problem Kuwait experienced
via its dollar peg and what it is doing to counter it. He then
goes on to explain what the US overproduction of dollars means
for other countries. In the end, as we have suggested repeatedly
here, it really boils down to the possibility of global inflation
and a consequent global rise in gold demand for the long term.
Here's a neat summary from
Mr. Grant article, "Kuwait split raises questions over longevity
of the dollar":
"Hard-working Asians (and
oil-blessed Arabs) consume much less than they produce. Americans,
on the other hand, produce much less than they consume. But the
savers and spenders do have something in common. The workers
are happy to receive dollars, and the consumers are more than
happy to print them. Unlike the solidus, a greenback has no intrinsic
value. It is faith-based. Here is a new idea in the world. Certainly,
the unsystematic world monetary system is a new arrangement.
Up until 1971, the dollar was collateralized by gold. If you
were a central bank, $35 would get you an ounce on demand. The
system gave good, durable service until the US started to run
out of bullion. On August 15 1971, the dollar became uncollateralised.
Exchange rates started to float - or to sink or be pegged. Governments
made it up as they went along."
James Grant: Kuwait
split raises questions
Spain the next Argentina?
Spain is selling off its foreign
reserves -- gold, U.S. treasuries,
British gilts, baby, bath water -- anything they can get their
hands on. The Banco de Espana, reports London's Daily Telegraph,
refuses to comment on the wholesale liquidation which, as of
this writing includes 80 tonnes of gold. This kind of news, to
those of us who have seen this sort of thing previously in places
like Argentina, Thailand and Indonesia, will not be taken it
lightly. These are the activities that usually come just before
the banks close down, stock markets collapse and the populace
ends up taking a major financial hit.
Needless to say, all of this
argues for gold ownership but few in Spain at this point foresee
a problem. All -- with the economy seemingly perking along and
the real estate expansion still in progress -- still seems to
be as it should be. The bright lights, however, could be blinding
investors as to what's ahead. "The current account,"
says Spanish economist Alberto Mattelan, "is completely
out of control. We [Spain] have the worst deficit in our history
and worse than any other country in the western world. It has
not yet become a 'street concern', but I can assure you that
it is of great concern to us economists. This will turn bad over
the next 18 months."
Implications for the European
Union: Taking this
a step further, Tim Congdon, a name familiar to those who read
these pages [America's Deficit, the Dollar & Gold,
USAGOLD Gilded Opinion, one of Britain's "wise men"
advisors to the government on economic policy] points out that
Spain's problems raise some interesting issues for the European
Union. In essence, since there is no federal government in Europe,
the possibilities for a bailout are minimal. In other words,
if there is a real banking crisis, there is no one to guarantee
bank deposits, or save the Spanish stock market, unless the European
Union somehow recalibrates itself to deal with it. As such, the
International Monetary Fund has warned in the past that the EMU
is exposed to "systemic financial risk." Add to this
a descent in housing prices from lofty highs and you have ingredients
for a full blown financial crisis in Spain sometime soon with
consequent effects on the rest of Europe and beyond.
European Central Bank puts
gold sales on hold through September
The recent sharp upward correction
in the gold price can be traced directly to the European Central
Bank's announcement this past Thursday that it would not be selling
any more gold through September. Demand had already been on the
rise as the price dropped over the past 30 days, and the ECB
announcement simply added fuel to the fire. The refinery, MKS
Finance SA in Switzerland, reports in a Bloomberg article that
buyers must line up in a "queue" to get the metal because
of ramping demand in India and other parts of Asia. Throughout
this period we have been advising our clients that the recent
downtrend would be a good time to purchase gold due to the fact
that the announced sales would be confined within the 500-tonne
annual sales limitation of the European Central Bank Gold Agreement.
In other words, the sales for the most part have already been
factored into the gold price. We have been suggesting there could
be a slingshot effect and that is exactly what happened late
last week. Recent activity proves once again (as we have been
saying all along), "In this bull market, it pays to buy
the dips."
Dan Norcini, who does a good
job analyzing Comex stats and calling the trends at JS Mineset,
had this to say about last week's gold market action:
"Gold looks to have put
in a bottom here with today's strong performance. That ECB news
is going to have some strong reverberations going forward as
it will serve to embolden the bulls. What is also very encouraging
is to see the gold holdings in the Streetracks ETF rise nearly
5 tons yesterday. If the gold disgorging has ceased in there,
the market will also gain further confidence that the worst is
behind us for gold and will come to the view that the low $650
region is the new and higher level of major support. When you
toss in what seems to be shaping up as a stellar performance
for the HUI today, gold has a type of Trifecta going for it right
now. Solid technical charts, increase in the ETF gold holdings
and a massive upside weekly reversal in the HUI. All in all,
this week will sure go a long way to soothing the hearts of weary
gold bulls who will probably be seen walking around town with
a much lighter step than they possessed last weekend."
Recommended reading
Dan Norcini's full article at S Mineset
Julian Phillips on China's
gold diversification
"Will [China] invest in
gold? We believe they will, but the sheer size of their reserves
makes it impossible for them to go into the open market to buy
gold, after all a tonne of gold only cost $20 million, 50 tonnes
a $billion. What will be easy for them to do is to buy gold for
their reserves via the purchase of local production, now around
250 tonnes a year [a mere $5 billion], but this will be paid
for with Yuan. The Chinese want to keep the surplus away from
the Chinese economy and avoid increasing the inflationary printing
of money, so they will be cautious when going this. Such caution
will, of course, be tempered by a continuous expansion of the
local money supply to accommodate the larger economy and its
consequential demand for more money. So the purchase of local
gold is certainly on the table of choices in front of the Bank
of China. A more appropriate way to ensure that there is gold
in China is to expand the size of the local Chinese gold market
through the widening of the gold market and direct encouragement
to the Chinese citizens to buy gold and we believe they want
to do this. After all the holding of gold by its citizens, still
leaves that gold within its reach."
Recommended reading
Julian Philips' GoldForecaster
Editor's Note: When you think about it, China's removing
250 tonnes from the already tight supply/demand equation by itself
is no small matter.
Some interesting observations
of who owns the gold and why from Antal Fekete
"The last time in history
when huge quantities of gold were going into hiding occurred
during the twilight of the Roman Empire. It was an ominous portent
of bad tidings. People were withdrawing gold coins from circulation.
They declined to spend them hoping that saner and safer times
would come. As a rule people do not spend their gold coins unless
they see that they will be able to get them back on the same
terms. As saner and safer times did never come, these ancient
hoards were forgotten and remained buried in the ground throughout
the Dark Ages. Present day archeologists still keep finding them
fifteen hundred years later. . .
The present episode of gold
vanishing into private hoards is no less ominous than the previous
one that was followed by the collapse of the Roman Empire, and
the lights going out in the civilized world.
As this 'agonizing reappraisal'
shows, the days of the dollar are numbered. Whether it be a large
number or small, the coming Dark Age looms large on the horizon."
Recommended reading
Gold vanishing into private hoards
by Antal Fekete
Editor's Note: I have written Dr. Fekete on the sections
in his essay where he refers to "gold income" inquiring
whether he means the imputed income that comes from gold rising
as currencies depreciate, or some other form of income (like
that which comes from a gold deposit with a bullion bank.) His
answer I am sure will be of interest to advanced readers of these
pages and I will publish his response at a later date.
Swiss Novartis fund buying
metals
Swiss portfolio managers have
long advised diversification into gold and other precious metals.
Now the Swiss-based pharmaceuticals giant -- Novartis -- announces
that it intends to invest 4% of its nearly $11.5 billion pension
fund in gold, silver, platinum and palladium. As inflation continues
to heat up globally, the strategy to diversify into something
of real value is likely to gain new and unexpected buyers of
gold and the other metals.
What do you do when the
inflation rate hits 3714%?
The New York Times ran
an editorial over the Memorial Day weekend on the devastating
hyperinflation in Zimbabwe where the annual inflation rate recently
hit 3714%. According to the article by Bill Marsh, if the current
rate of growth holds, inflation could hit 410,000% annually.
There is a lesson here to be learned by savers, particularly
savers who neglect to fortify their portfolios with gold. "Savings
and pensions have been devastated, " writes Marsh. "With
interest rates officially a few hundred percent, but far outpaced
by inflation, the actual rate of interest amounts to minus
3500%. Nest eggs, where they existed, have disappeared."
To most of us, facing a hyperinflation
on the scale Zimbabwe suffers seems a bit far-fetched. However,
we should keep in mind that inflation on any scale has a corrosive
effect on the portfolio -- even double digit inflation can be
devastating when yields run in the mid single digits. Beyond
that, as the Zimbabwe experience shows, things can get quickly
out of control once faith is lost in a currency and a government
finds itself backed to the wall.
Zimbabwe's problems began a
decade ago when land reform drove productive farmers off their
land. Following this, Zimbabwe began printing money to repay
loans to the International Monetary Fund. Things got progressively
worse until they ran out of control. One 70-year old Zimbabwean
is quoted in the article saying, "I shall have to work until
the day I drop." One cannot help but consider where that
same individual might have stood had he put even a small amount
of his savings into gold coins and bullion.
The real cause of the housing
slump
Adrian van Eck puts an interesting
spin on the subprime mortgage/housing downturn problem. He says
that the "house flippers" are the real culprits. "A
significant number of the affected flippers," says van Eck,
"were men and women who had a connection to the real estate
industry, either as Realtors or as bankers acting on their own
account. That is so because they were intimately aware of how
fast housing prices had been rising, and with their contacts
they were able to arrange financing with little or no money down."
Now he says this group is "stuck" because builders
are cutting prices to unload unwanted inventory, thus driving
down new home prices across the boards, and the Fed is out to
"punish the speculators" Brings to mind the day-traders
who quit their day jobs and mortgaged their homes to speculate
in the stock market. In the end, they too ended up losing their
shirts.
"There is no greater
disaster than greed." - Lao Tzu
_____________________________________
Keep an eye on the upcoming
G-8 conference in Germany which could prove to be a contentious
affair -- on ALL sides and in a myriad of international relationships.
The chilling television coverage of the street riots could be
matched by equally chilling meetings between G-8 members faced
with a range of pressing issues and competing interests including
the battle over the climate and the on-going economic/currency
wars. As much might be gleaned from what's not reported as what
is. I would be hard pressed to remember a time when the G-8 nations
were more at odds than they are now. The various investment markets
could be rattled . . . . . . . . . . . . . . Happy Trails, my
friends. More in a few weeks. MK
