Centennial Precious Metals, Inc: Serving Gold Coin & Bullion Investors Since 1973

8/01/05

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

Financial Times

China says revaluation over
China's central bank yesterday insisted there would be no more government-led revaluation of the renminbi, saying that the currency's exchange rate was already reflecting market forces. . . . . . . (More)

Related:

Unexpected effect: Reserve changes will cause Chinese gold demand to rise by 20%

A golden solution to the China syndrome (Forbes)

 Short & Sweet

One more useful snippet on the new China Syndrome - this one from Bloomberg (for those who would like to dig a little deeper for the reasons why China is reluctant to play ball with Washington on the yuan): "China won't make its currency fully convertible for at least five years because it worries that hedge funds may force the yuan to plunge, much as happened to the Korean won and Thai baht during the 1997 Asian financial crisis, said Li Deshui, a member of the central bank's monetary committee. There's more than $800 billion to $1 trillion of hedge funds in the world and the Chinese financial system is relatively weak," Li said in an interview. "If the (yuan) becomes fully convertible, it would be attacked by these hedge funds." . . . . . . . . . . . . . Even with the ready availability of financial information via the internet, I still like to sit down with Barron's on a Sunday afternoon and review its weighty Market Laboratory section. Here in one place is everything you need to know about the economy. . . . .These items stood out at last reading: Foreign-held debt is up another 16.4% year over year at $1.437 trillion. . . .The CRB is up nearly 15% on the year with energy related commodities leading the way -- up 43.7%. . . . . . .Neither the bull nor the bear has taken control of the stock market -- more like the squirrel who dashes to the middle of the street and then quickly dashes back again. . . . .The Dow Jones Industrial Average has gone nowhere over the past year floundering around the 10,000 level. . . . .Gold on the other hand is up over 5% year over year. . . . . . . . . One year CD's are in the 4% range while inflation (if you believe the Labor Department's numbers) is in the 3% range. Even if you accept government inflation numbers, the real rate of return remains negative on most yield instruments after taxes and inflation . . . . . . . . . . . . . . .Mark your calendars. Newmont's CEO Pierre Lassonde says that gold "does not want to go below $420" and that it will trade at $525 "within the next six months." Problems on the supply side of the market will fuel the rise, he says. Mine production is falling and it takes 7-10 years to go from exploration to production.. . . . . . . . . . . . . . . That's it for this issue. . . Until next time, Happy Trails . . . . .MK

"All of the above observations are very bullish for gold. Someone should show this chart to Gordon Brown, the British Chancellor of the Exchequer who will be remembered for his appallingly bad decision to sell one-half of Britain's gold reserve at the bottom of the market.

As gold continues to climb from here, his decision will look even worse, which no doubt will adversely Brown's political fortunes. His ambitions to succeed Tony Blair as leader of the Labour Party are well known. But why choose a political leader whose bad decision has already cost British taxpayers hundreds of millions of pounds?

But it is not only the British who should take note of the above chart. The strength demonstrated by completing the milestones noted above is another sign to everyone that gold is in the early stages of a major bull market that will take it higher against all national currencies, and not just the British pound."

-- James Turk, Freemarket Gold & Money

"I've learned more about the Capital Asset Pricing Model (CAPM) by collecting stamps than I ever learned at business school. . .What I've found by collecting stamps - and this is where it merges somewhat with CAPM - is that high quality stamps appreciate (with considerable volatility) with nominal GDP growth or the annual growth in national income."

-- Bill Gross, Pimco Fund

"Greenspan appears to be a victim of the same lack of modesty as all central bankers throughout history have been. Every generation of central bankers seems to believe that they have not only learned from the mistakes of the past, but also imply that no new mistakes will be made. During World War I, the German Reichsbank's central bankers -- all educated men --, believed financing a war is 'exogenous' and non- inflationary to the economy; hyper-inflation a few years down the road proved them wrong. Nowadays, former Fed Governor and possible Greenspan successor, Ben Bernanke, has not ruled out throwing money out of helicopters to stimulate the U.S. economy; and Greenspan's policies have contributed to the greatest financial imbalances in world financial history. And these are U.S. central bankers. What about Asian central bankers that were burned just a few years ago by a major currency crisis?"

-- Axel Merk, Merk Hard Currency Fund

"The G-8's priorities and solutions were so misdirected and wrong the conference can best serve as an example of gross incompetence. . . Let's start with their priorities. Top of the list was the reduction of 'greenhouse gases' presumably responsible for "global warming" and massive debt relief to African nations. The attack in London was a stark reminder that the first priority of the West is the defeat of Islamic fundamentalism and its proponents."

-- Alan Caruba, intellectualconservative.com

Important article links:

Gold Derivatives: Skewing the World
by Reg Howe with Mike Bolser

Editor's Note: This article is for those wishing to dig deeper into the mysteries of gold pricing.
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NEW! At USAGOLD.com

The USAGOLD Reference Library - Includes monthly gold prices from 1970 to 1973 and the daily London gold fix from 1973 to present. And much more. Worth a look just to know where you can find some of the important data and research you've been looking for.

The Gold Coin Shop Bulletin Board - Practical information, USAGOLD's current offers, etc.

New at the Gilded Opinion:

Greenspan-Paul exchanges updated - "And, indeed, since the late '70s, central bankers generally have behaved as though we were on the gold standard."

Extraordinary Popular Delusions and the Madness of Crowds - The seminal work by Charles MacKay on herd behavior for easy reference.

A Speculation on Gold and the Credit Cycle
by John Hathaway

 

D is for Diversification: Now more than ever

(Excerpt)

Diversification - distributing one's assets across a spectrum of investment alternatives-is one of the hallmarks of prudent portfolio management. For most, diversification amounts simply to dividing one's available capital among stocks (including mutual funds), bonds, and cash savings. However, if gold is excluded, such a division of assets is superficial at best, because it fails to take into account the corrosive effects of currency depreciation on the overall portfolio.

Chairman of the U.S. Federal Reserve Alan Greenspan has made many favorable comments about gold over the years. Even as chair of the Fed, he has remained one of the most eloquent defenders of gold, a position he has maintained for most of his life. The following comment, given during congressional testimony some years ago, goes to the heart of the issue with respect to gold's overall portfolio role:

"I do think there is a considerable amount of information about the nature of a domestic currency from observing its price in terms of gold. It is a longer-term issue. It is an issue which I think is relevant, and if you don't believe that, you always have to ask the question why it is that central banks hold so much gold which earns no interest and which costs them money to store. The answer is obvious: they consider it of significant value, and, indeed, they consider it the ultimate means of payment, one that does not require any form of endorsement. There is something out there that is terribly important that the gold price is telling us. I think that disregarding it is to fail to recognize certain crucial aspects of the value of currencies."

This brief but revealing statement from a man who spends a good part of his day worrying about currency values illustrates the importance of gold in portfolio diversification, for private investors as well as central banks. As a matter of fact, if you were to ask a hundred gold buyers why they own gold, a respectable majority would immediately answer, "For diversification." Most investors equate diversification with peace of mind. Diversification implies preparation for a variety of potential economic events. If the portfolio is properly structured, it matters not if stock markets crash, bonds lose value, or currencies suffer debasement. The hard assets of the portfolio will pick up the slack.

Traditional Swiss money managers, renowned for their ability to handle money and who manage investments for some of the world's wealthiest people, traditionally recommend a diversification into gold of 10 to 20 percent for good reason. Beyond the normal risks of market fluctuations associated with stock and bond investments, there is the additional danger of depreciation in the currency underlying the stock or bond. Denominated in a domestic currency (pesos, yen, euros, and dollars), these investments rely on sound central bank and government currency management policies to maintain their value. It is conceivable that a corporation or municipality, for example, could be perfectly managed, yet its bonds could still erode in value due to politically expedient currency debasement on the part of federal authorities.

More - Order book here

Archives

NEW Disturbing Trends: Is Now the Right Time for Gold?

2005 Gold Market Forecast - "I foresee two potential scenarios for the gold market in 2005. One involves a see-saw market which culminates with a roughly 20% gain on the year in keeping with the average over the last three years. This would take gold to the $525 level. The other involves a substantial price spike resulting from an uncontrolled deterioration in the value of the dollar. In that scenario, gold would threaten and probably exceed the $600 level."

Market Update 7/05/05 - Traditionally, the summer months have been the best time for investors to buy gold. The past two summers serve as an illustration. In the summer of '04, gold traded in the $390 range. As the year ended, it hit its high for the year at $455. Similarly, in the summer of '03 gold hovered in the $360s. In December gold traded in $415 range. In fact, during the past two years, most of the gold's upside occurred between August and the New Year.

Market Update 6/08/05 - "The question might legitimately be asked, 'Russell, why only 15% of assets in gold?' And my answer runs like this -- Every fiat paper currency in history has ended up in the ash can. The dollar and the euro and the yen will end up the same way unless they are ultimately backed by something real like gold. Therefore, why not be invested say 50% or even more in gold? The answer is timing. And nobody on God's green earth knows the correct timing." -- Richard Russell, Dow Theory Letter

Market Update 6/01/05 - The European Union will muddle through, and the euro will plug along, but gold is likely to become one of the key longer term beneficiaries of Sunday's rejection of the constitution. It could take years for Europe to sort out the repercussions from the French referendum, and the unforgiving financial markets will begin to wonder immediately what is going to happen between now and then. Investors too will be checking to see if they are still in one piece once the smoke clears. These are the sorts of events which usually send investors to gold as a refuge, but because of the coupling of gold and the euro in recent years, the initial reaction may be negative. At the same time, to think that a good many Europeans would not go to gold coins and bullion with these new uncertainties darkening their door is to overlook the lessons passed down in continental families for generations. I would suspect that many a preliminary inquiry is being made into gold this very day. Though I doubt that any renewed European interest in gold would affect the market radically in the near term, over time it will become a major factor on the bullish side of the ledger -- every bit as important to the international gold market fundamentals as Chinese demand (if not more so). European investors are in the same boat as Americans. They must hedge their portfolios against the possibility of a currency breakdown. That may have always been the case, but after Sunday's vote, the immediacy resonates with the clarity of a Stradivarius.

MarketUpdate 5/23/05 - The threat of a dollar crisis and rolling financial breakdown continues to dominate the financial pages. This issue, like the last two, focuses on the reasons for this concern and related developments around the world.

MarketUpdate 5/16/05 - The madness of crowds can pop up anytime, anywhere. No era is immune; no individual beyond its unflinching grasp. And crowd madness pays no heed to intelligence or experience. In 1841, Charles MacKay wrote an important book titled "Extraordinary Popular Delusions and the Madness of Crowds -- the book that Bernard Baruch called the secret to his incredible wealth. In it MacKay points out that Roger Bacon, "by far the most learned man of his age" believed that the philosopher's stone could turn lead to gold. (Book link provided)

MarketUpdate 5/09/05 - Last week systemic risk was in the air. General Motors and Ford's bonds reduced to junk status. Rumors of at least one hedge fund and possibly others on the ropes. Talk of several major American corporations in financial trouble. Amidst all of this, the Chairman of the Fed raised the specter of systemic risk citing Adam Smith's "invisible hand" and the forces of chaos and creative destruction in the market.

MarketUpdate 5/02/05 - The brief history outlined in this week's masthead quote speaks volumes why gold makes sense for the average investor. The graph to your immediate right supports Mr. Bonner's reference to the "5¢ dollar." Modern nation states have a way of running their currencies into the ground. Germany, Turkey, Argentina, Mexico, Brazil, Russia, Poland, Greece, Hungary, China, Austria, Thailand, Chile and Yugoslavia (just to name a few) experienced wipe-out inflationary episodes in the 20th century. The damage was significant enough to leave an indelible mark on the indigenous population for generations to come.

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