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The Gold War – China and the US Treasury Market

“Exceptfor U.S. Treasuries, what can you hold? Gold?” – Leading Chinese central banker, February 2009

NEW YORK CITY, FEBRUARY 11, 2009 – Luo Ping, director-general at the China Banking Regulatory Commission, gave what may be a landmark quote in the years to come ahead. Besides chastising the United States for its “laissez-faire capitalism” – at which point I distinctly remember choking on my breakfast of delicious jiaozi (I was in Shanghai eating Chinese dumplings) since Ping obviously understands that corporate cronyism is NOT laissez-faire capitalism as fellow columnist Steven McDuffie recently reminds – in retrospect another part of his speech may prove to be the most prophetic. From Reuters:

“Except for US Treasuries, what can you hold? Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”

…read much more and see charts HERE

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Gold at a Critical Level…

Gold is at one of its more critical technical levels in several years. It has formed both important bearish and bullish formations. There’s a triple top around $1,000 and a bullish reverse head and shoulders formation. It’s critical to hold $850 and the sooner it gets back over $1,000 the better. Go HERE for Peters commentary and charts on the USD and Bonds.

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On November 3, 2007 at the MoneyTalks Survival Conference, Peter Grandich of the Grandich Letter warned that “an unprecedented economic tsunami will hit American beginning in 2008”.   Peter advised publicly to short the US market two days from the top in October, 2007 and stayed short until the last week of October, 2008. He began to buy stocks in March 7th,  2009.
….go HERE to see many more postings at Peter’s Website.

Excerpt from a long 2 part article on Gold titled “Gold and the Casino Capitalism House of Cards “

The IMF is the world’s third largest holder of gold ranking only after the U.S. and Germany. It holds 103.4 million ounces (3,217 metric tons) valued on its balance sheet at SDR  5.9 billion (about $8.7 billion) on the basis of historical cost. As of March 31, 2009, the IMF’s holdings amounted to $94.8 billion at current market price. The Second Amendment to the IMF Articles of Agreement in April 1978 eliminated the use of gold as the common denominator of the post-World War II exchange rate system and as the basis of the value of the SDR. It also abolished the official price of gold and brought to an end the obligatory use of gold in transactions between the IMF and its members. And it required that the IMF, when dealing in gold, avoid managing its price or establishing a fixed price.

The April 2nd G20 communiqué confirmed a decision calling on the IMF to sell about 400 tons from their holdings and an intention to encourage further sales to fund anti poverty initiatives. The further sales are not committed at this stage and the 400 ton sale has still to be formally ratified by IMF members. Commentators have suggested the US Congress may block the sale but it’s is unlikely they will. President Obama supports it. Following advice from an IMF advisory panel that included Peoples Bank Of China Governor Zhou Xiaochuan and South African Reserve Bank Governor Tito Mboweni when the decision to sell the 400 tons of IMF gold was taken almost two years ago the panel imposed provisos that the sale should not be undertaken in a way, or over a time frame, that will disrupt the market. The IMF’s policy on gold is governed by the following principles:

As an undervalued asset held by the IMF, gold provides fundamental strength to its balance sheet. Any mobilization of IMF gold should avoid weakening its overall financial position.

The IMF should continue to hold a relatively large amount of gold among its assets, not only for prudential reasons, but also to meet unforeseen contingencies.

The IMF has a systemic responsibility to avoid causing disruptions to the functioning of the gold market. Profits from any gold sales should be used whenever feasible to create an investment fund, of which only the income should be used.

The annual sales quota under the Central Bank gold sales agreement for this year is 500 tons and the agreement has yet to be renewed beyond September 2009.  In a strong market a further 400 tons may not be a serious challenge. But in a weak or volatile market, unless the sale is concluded by private treaty between central banks, it could affect prices.

There has been speculation that the 400 tons will be bought directly by a central bank.  China’s recent announcement that it had increased its gold reserves by 454 tons to 1054 tons ignited gold prices and reversed weakness over previous weeks. If indeed China plans to significantly increase its gold holdings this will obviously have sustained long term positive effects on gold prices.  This comment from an article in the South China Morning Post puts a useful perspective on developments:

‘At the end of 2002, the People’s Bank of China (PBOC) was sitting on foreign reserves worth a total of US$286 billion, so gold made up 3.9 per cent of its overall reserves.  Today, after years of massive accumulation, Beijing has foreign reserves worth US$1.954 trillion. With gold at US$910 an ounce, the 1,054 tonnes of gold it now holds are worth US$30.85 billion. That sounds a lot, but it is only 1.6 per cent of overall foreign reserves…..’

As China is now the world’s largest producer of gold the case can be made that apart from its intention to diversify its currency reserves China has an economic interest in a strong gold price.  A case can also be made that the reason China does not hold more than a notional percentage of its reserves in gold is that it regards gold  as associated with 20th century imperial economic power exercised by the US and Europe and of little relevance now.

Considerations on the stability and future purchasing powers of the dollar and other fiat currencies, the direction of the global economic contraction, deflationary and inflationary threats, reviving the global economy  and geo-political challenges to security and stability are more likely to drive the gold price than modest IMF sales unless the IMF acts irresponsibly, and that’s unlikely.

Gold and the Supra national currency issue:

Note: The article on Zhou Xiaochuan’s speech refers to a super sovereign currency. This appears to be a translation error. He is obviously referring to a supra sovereign currency

While the G20 communiqués remained silent on the question of the global financial crisis and the need for a supra national currency, Zhou Xiaochuan, Governor of China’s central bank has been articulate. He opened a March 26th speech on Reforming the International Monetary System with this question:  ‘The outbreak of the current crisis and its spillover in the world have confronted us with a long-existing but still unanswered question, i.e., what kind of international reserve currency do we need to secure global financial stability and facilitate world economic growth, which was one of the purposes for establishing the IMF?  Zhou goes on to develop the argument that ‘A supra-sovereign reserve currency not only eliminates the inherent risks of credit-based sovereign currency, but also makes it possible to manage global liquidity. A supra-sovereign reserve currency managed by a global institution could be used to both create and control the global liquidity. And when a country’s currency is no longer used as the yardstick for global trade and as the benchmark for other currencies, the exchange rate policy of the country would be far more effective in adjusting economic imbalances. This will significantly reduce the risks of a future crisis and enhance crisis management capability.” The following are the subjects he explores in support of his argument:

The outbreak of the crisis and its spillover to the entire world reflect the inherent vulnerabilities and systemic risks in the existing international monetary system;

The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies;

The reform should be guided by a grand vision and begin with specific deliverables. It should be a gradual process that yields win-win results for all;
Entrusting part of the member countries’ reserve to the centralized management of the IMF will not only enhance the international community’s ability to address the crisis and maintain the stability of the international monetary and financial system, but also significantly strengthen the role of the SDR;

Zhou concludes his proposals ‘lay a foundation for increasing SDR allocation to gradually replace existing reserve currencies with the SDR.’

In a similar vein to the comment made on the property and debt bubbles in 1997 that a blind man could see them a blind man will see that China has a plan for ‘replacing the dollar as the dominant world currency and creating ‘an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run’.

Beyond drawing attention in this article to the G20 having left comment on this issue out of their communiqué,  without fully reviewing the dollar standard and current international monetary arrangements snippets of information will only be confusing. Chapter 5 of The Goldwatcher ‘The Dollar Standard and the Deficit without Tears’ is associated with the question ‘Is the dollar again America’s currency and everyone else’s problem?’ Chapters that follow also have information readers will find useful when taking a view on outcomes for the dollar and for gold.

Conclusion: In a room with an elephant:

G20 communiqués may sound reassuring. But wide ranging commitments generally deserve a second thought. All economies won’t benefit at the same pace, labour and capital will be affected in different ways and the G20 consensus may not last. It has been noted that the crisis has already led to contempt for policy makers, regulators, the financial establishment and the financial system itself. Members may not remain sufficiently unified to stay the course for a smooth transition from near chaos to prosperity – or even a steady shift from sliding towards an economic depression to managing a long recession.  The message in the wake of the failure of socialism and the bankruptcy of capitalism from the distinguished 92 year old socialist historian Eric Hobsbawm is ‘None of the world’s governments, central banks or international financial institutions know how to resolve the crisis’ and ‘are all like a blind man trying to get out of a maze by tapping the walls with different kinds of sticks in the hope of finding the way out.’ To address the crisis Hobsbawn expects a major shift away from free market dogma towards public action will be called for.  And it will be a bigger shift than Governments have envisaged. His conclusions are open to question but there is no doubt the global economy is in uncharted waters.
Zhou Xiaochuan’s remarks on currency reform quoted above leave little doubt that the dollar’s tenure as the global currency the US can print to order is being challenged. And, if policy makers and central banks don’t fully understand the challenges, noble as their intentions may be, we are all in a room with an elephant. OK if we know what the elephant is going to do. Likely to be crushed if we don’t. And no scope for wandering round tapping sticks on the wall to find the way out.

Of course, if we are going to experience the great new world order Gordon Brown forecast we won’t want gold and, keep in mind,  Gordon Brown sold half Britain’s gold in the late 1990s at the lowest price recorded for decades. But, on the other hand, if we expect some disruptions in the role of paper money in the International Financial system we will keep owning some gold on the agenda as insurance against the consequences of what Zhou calls ‘the inherent vulnerabilities and systemic risks in the existing international monetary system’ and what Ray Dalio identified as the likelihood of countries with excessive debt denominated in their domestic currencies inflating the debt away.

John Katz is an analyst, strategist and financial writer based in London, U.K.  To gain experience and qualifications in the Financial Services Industry he first completed the necessary exams to qualify as an approved Securities Dealer and Trader. While working for a London based hedge fund he was accredited by the United Kingdom Regulatory Authorities. He has contributed articles to the financial press, commentated for business television, and is the author of Portfolio 2001 – How to Invest in the World’s Best Companies, Random House Business Books, 1999.  John was co-author with Frank Holmes of The Goldwatcher: Demystifying Gold Investing, John Wiley & Sons, 2008.  He is also writes  The Goldwatcher blog

Excerpt from a full article posted by StockResearch Portal

What are phrases that connote safety? Two that come to mind are: “Like money in the bank” or “As safe as houses”. Given events of the past year, these two phrases no longer seem to hit the mark, do they? These days, the one word that signifies safety is “gold”, being far safer than both cash and houses. It therefore stands to reason that a more accurate phraseology would be “Like gold in the safe!” or “As safe as gold!” Yes, the barbarous relic is back… and with a vengeance. 
As our readers may have already surmised, we like gold around here, and evidence suggests the world is beginning to like it more and more too. We therefore hope our readers can forgive us for harping on the same theme over and over. For the past seven articles including this one, the subject of gold has been a dominant theme, if not the prevailing theme in four of these articles; namely, “The Phony Express” (August 2008), “Cash or Gold” (October 2008), “Surviving the Depression” (December 2008), and now “As Safe as Gold”. Although we may seem obsessed, there is a method to our madness.

Not coincidentally, the past seven months have also coincided with the worst financial crisis the vast majority of us have ever seen in our lifetimes, as well as the worst global economic contraction the world has seen since the Great Depression. As we wrote in our previous article, “So You Think 2008 Was Bad? Welcome to 2009”, the world is currently in an environment where weakness only begets more weakness, and furthermore, the olden days of economic prosperity through endless credit creation are likely never coming back. That’s right; we believe there has been, and will continue to be, a paradigm shift in the way financial markets function going forward. We believe this last point is a very important distinction to make – one that fundamentally distinguishes the current environment from a run-of-the-mill recession. The implication is that current government policies, which are all focusing on bringing the olden days back (this time through endless government credit/debt creation) are in fact ruinous strategies that will have dire implications for financial stability and investment portfolios going forward.

If one believes the above (indeed, it seems increasingly difficult not to), then it should go without saying that, from an investment perspective, these are extremely challenging times. It has become very difficult to preserve wealth, let alone create it. Just like a rising tide lifts all ships, a receding tide tends to ground them one and all. You could have bought almost anything in 2003-2007 and made money (provided, of course, you got out by the beginning of 2008!) Likewise, right now you can buy almost anything and lose money. Those who have been “bargain hunting” on the way down have been taken to the cleaners. There was a time not that long ago when big bank stocks were considered conservative and ‘safe’ investments. Today this notion seems laughable. Bank stocks are now the biggest dogs on the planet – the common equity of which, in its current form, will be shown to be completely worthless in our opinion. Thus, buying bank stocks remains a sucker’s game – at any price. But there isn’t much solace to be found elsewhere. The direction for almost everything, in any industry, remains down. You show us an investment and we’ll tell you why it’ll lose money.

There is one exception, a very rare one at that, and that is Gold. It’s the only investment that’s a no-brainer, and is therefore the only investment worth buying right now in this financial crisis cum global depression.

…. to continue reading this excellent article go HERE

INFLATE OR DIE – Why I am bullish Gold

I’ve written in the past that if you want to make ‘BIG’ money in the market, you have to take an over-sized position and be dead right on the trend. The last time I did that was in late-1958. I was very bullish on the market at that time. It was during a severe recession, but the stock Averages were singing an entirely different tune. I was so bullish that I wrote a bullish article for Barron’s — that was my first Dow Theory article for Barron’s, and that article put me in business (December 1958). At the time I had invested ALL my money in various stocks, everything from Texaco to Sparton to Avco to Baldwin Lima. The market turned up in December and never stopped climbing. Breadth was terrific, there was a huge short interest that was getting killed, and I was on margin up to my ears. Whenever I had “extra money” in my margin account I bought more stock. I did extremely well on that fateful ride, and I never again had the nerve to take that large a position — until now.

I started building my gold position in 1999. At the time gold was flat on its fanny well below 300 — what few gold mining shares were still alive were selling under $5. I wrote at the time that many gold shares were so cheap that you could buy them as if they were perpetual warrants.

My gold position now is comparable to my market position back in 1958. My gold position represents maybe 30% of my total worth. Why have I done this again?

For the following reasons.

(1) I believe gold is in a major or primary bull market. I believe the gold bull market is currently in its second phase. This is the phase where sophisticated and seasoned investors and the funds enter the market. I don’t believe the public is in the gold market to any extent. They are interested and watching the action, but they do not have the nerve to buy gold. In fact, the public doesn’t know how to buy gold, although ads are now appearing telling them of the “wonders” of gold and how they can buy the coins (at huge premiums over spot gold).

(2) If there is only one bull market in progress, it will attract broad new coverage and attention — just as Thursday’s $70 rise in gold did.

(3) I believe the bear market in stocks will continue erratically and the deflationary trends will persist. This will drive Fed Chairman Bernanke up the wall, and I think he will stop at nothing (including massive printing of dollars) in his effort to halt deflation. The real story will be as I’ve been saying for years —

“INFLATE OF DIE.”

This will serve to feed the gold bull market.

The Fed Moves To Debase The U.S. Currency More Than Any Time Since 1913. Gold Gold 30 minute chart action after the market close March 27th.

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Daily Gold Chart May 1st.

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Weekly Gold Chart Friday May 1st.

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Partial comment from the lengthy daily comment by Richard Russell of Dow theory Letters. One of the best values anywhere in the financial world at only a $300 subscription to get his report daily for a year. CLICK HERE to subscribe

The 84 yr. old writes a market comment daily since the internet age began.  In recent years, he strongly advocated buying gold coins in the late 1990’s and 2000 below $300. His position before the recent crash was cash and gold.

There is little in markets he has not seen.  Mr. Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron’s during the late-’50s through the ’90s. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-’66 bull market. And almost to the day he called the bottom of the great 1972-’74 bear market, and the beginning of the great bull market which started in December 1974. He loaded up on bonds in the early 80’s when US Treasuries where yielding 18%.

The above is a partial comment from the lengthy daily comment Richard Russell writes. One of the best values anywhere in the financial world at only a $300 subscription to get his report daily for a year.  HERE to learn more and HERE to subscribe online.

14 years after Exploration Discovery An Exciting New Mine Opens

One of the rarer joys of this business is seeing a company move a project all the way from exploration concept through development and metals output.  Last week David had a tour of Minefinders’ (MFL-T, MFN-Amex; $7.83 on T) Dolores gold-silver mine, which was followed by the mine’s official opening ceremony (including the addition of a Mexican flag display to the day’s pit blast) the next day.  We extend our congratulations to CEO Mark Bailey, VP Exploration Tench Page and the rest of the MFL staff for their 14 years of diligence in outlining the deposit and moving it on to the mining engineers.

The mine has moved through teething problems typical of a start up period, including changes to the blasting and coarse ore handling in order to deal with large pieces of ore that choke the primary crusher and reduce throughput.  A mining start on the northern end of the deposit were the ore lenses are more narrow has also hampered the move to full capacity, but the operation has generated up to 22 Kt per day of ore throughput, and should be able to move to the 18 Kt/day nameplate capacity.

Equally important, both gold and silver recovery curves are better than anticipated for this point in the start-up.  Since heap leaching strips metal from the ore over many months it will be mid year before there is a good gauge of performance, but I do think it important that the silver in particular is so far maintaining its curve since it is usually the more problematic of the two co- metals in this type of operation.  

Also of note is that the last few families still in the original mining village are expected to move to their new homes over the next month or two.  This would allow MFL to resume drill testing in the village area so that it could gather the balance of the data needed to outline the potential for shifts to eventual underground mining and establishment of a conventional plant that might also be used to treat some of the open pit ore and thereby increase overall metal recoveries.  We have always considered that likely to expand the ultimate scale of the operation.

For the reasons cited it is still too soon to confirm that the operation is working to spec, but the Dolores development is moving comfortably in line with expectations.  We expect the stock to continue gaining ground with gold and silver prices, and as the final mine development milestones are reached.  We will go into more detail on the company with a re-review in the upcoming Journal.

For the latest Updates on Minefinders Corp Ltd. and an exciting offer from Hard Rock Advisors Click on this HRA Banner below:

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The Editors of the HRA Subscribers Services
Who are these guys and how do they keep finding winner after winner before other analysts do?

The “secret” to their success is simple. It’s hard work. A LOT of it. The other key to the success of HRA publications is the background of the editors, David Coffin and Eric Coffin. They are brothers, born in a mining town and raised in the industry. They have both spent decades in the resource business. This gives them a background of real practical experience that no other editors can match. That’s why they can spot winners before anyone else. They have “been there and done that” on both the geology and the market fronts. They’ve run exploration programs, helped form and structure companies and they know what works and what doesn’t. They know everyone in the sector and can quickly check the facts and the management on new opportunities.  HRA readers profit from their special insight into metals and exploration gained from over 50 years of combined experience in the resource sector. It’s an unbeatable combination that delivers unbeatable returns for HRA readers. Not politics, not rumors, not regurgitated broker research – just hard work, real insight and real gains.