18-9-2010 Gold & Guns !!!

"Llegó el tiempo – ya estamos en él – en que solo valen el oro y las balas "

Getting a Read on the Gold Market
Examining gold’s relationship with fiat currencies, especially the US dollar
Joel Bowman
Joel Bowman

Reporting from Buenos Aires, Argentina…

What a week it has been for gold investors! It seems as if each new day brings with it a new record high, albeit in nominal terms.

Still, there are plenty of lingering questions for even the most diehard of Midas Men (and/or women).

Why now? The underlying economic fundamentals upon which gold investors have built their positions have not changed dramatically since 5 PM last Friday, so why all the brouhaha this week? Could it be that the recent highs are merely premature speculations? And, if so, is there still room for dollar-shy investors to edge into the metal at these seemingly lofty prices?

Reports from the frontline are mixed, as our mates over at The 5-Minute Forecast observed this morning:

"At this stage of the game, ‘Fiat money has no place to go but gold,’ according to former Fed chief Alan Greenspan, addressing the Council on Foreign Relations (CFR) two days ago. Mr. Greenspan’s statements have always been a conundrum wrapped in an enigma, but this like he was channeling his 1966 essay on ‘Gold and Economic Freedom.’

"We’re not sure what to make of it yet," continued the 5ers, "except to file it under the same category as George Soros declaring, ‘Gold is the ultimate bubble’ while loading up on gold positions."

Indeed, it is difficult to get a hard read on the goings on in the gold market. Part of the reason for the recent spikes, as we pointed out earlier in the week, has to do with the increasing skepticism, and subsequent weakness, of the US dollar. The once-mighty buck was under attack again this week, departing rather unceremoniously from the lockstep correlation to gold we saw earlier in the year. The 5 presented this chart a few days back, which makes the point pretty clearly:

Gold and Dollar Index

That trend, worrying as it is for greenback enthusiasts, comes at least partly due to China’s on-again, off-again (but mostly off-again) relationship with the US bond market. After amassing the world’s largest holdings over the past decade or so, China has been more than a little trigger-shy at Fed auctions during the last year.

What then for the dollar and its – once again inversely correlated – historical hedge? In today’s issue, we present two essays to address the question. In the first, our resident geologist and man of letters, Byron King, scopes out the geopolitical landscape and uncovers some worrisome, militaristic murmurings coming from China. In the second, BullionVault’s Adrian Ash fades out some of the dollar-denominated noise to measure the precious metal’s decade-long run against the world’s central banks’ "race to debase." Please enjoy their thoughts, below…

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The Daily Reckoning Presents
Chinese Dollar Torture
Byron King
Byron King

Recently, the US Treasury Department released data showing an 11% decline in official Chinese holdings of US government bonds during the past year. For US dollar holders, this is a troubling trend. Not so much for those holding gold.

To put it simply, the Chinese government isn’t adding to its US bond position, at least not in any meaningful way. Nor is it rolling over its previous purchases.

According to the latest Treasury International Capital report, China resumed net purchases in July for the first time in three months. China’s US Treasury holdings rose $3 billion. Dollar bulls looking to cheer the modest purchase may first consider the following, longer-term trend: Between September 2009-July 2010, Chinese holdings of US bonds fell from $938.1 billion to $846.7 billion, a drop of over $91 billion over nine months.

In short, the Chinese are backing away from US debt. They’re reducing their exposure to the US dollar, and by extension their vulnerability to a declining US economy.

What’s going on? Is the decline in Chinese holdings of US bonds strictly an economic assessment? Or is there something else afoot? What factions are driving this decision? And what does all of this mean for precious metals?

First let’s note how, in recent years, China has exhibited a newfound measure of international confidence, if not swagger. It’s easy to understand why.

China’s leaders see that the US suffers from a weak economy, hampered by chronic overspending on consumption and underinvestment in new capital. In the wake of the global financial crisis of the past few years, Chinese leaders have concluded that US-style democracy and Wall Street-style capitalism are discredited.

In other words, to use a Chinese term, the US is a "sunset power." China, on the other hand, sees itself as a "sunrise power." The Chinese are going places in this world. The Chinese have developed a different approach to development than other nations, and they have the economic statistics to back it up.

The Chinese are not afraid to trumpet their success, either. Recently, for example, the German magazine Der Spiegel noted, "All around the world, from Africa to Asia to South America, Beijing is trying to tout its model of authoritarian state capitalism as the better alternative."

One way to look at things is that we’re watching historical waves unfold. China is on the rise, while US power and influence wanes. But in a nation and culture as complex as that of China, it’s also useful to take a close look at how and why things happen.

One key source of influence within China is a hard-core military faction. The Chinese military offers a viewpoint that almost always holds sway on issues of supreme national importance. Such issues definitely include areas of so-called "core Chinese interests" that cover Taiwan and Tibet, as well as the South China Sea and the Yellow Sea.

It’s common knowledge, for example, that Chinese military advisers are incensed over US arms sales to Taiwan. No amount of US diplomacy ever is enough to smooth the troubled waters that divide mainland China from Taiwan. Indeed, the Chinese view their relations with Taiwan as an "internal matter" and consider most US activities that touch on that relationship as "officious meddling."

In a new development this summer, the Chinese military expressed outrage over joint US-South Korean military maneuvers in the Yellow Sea.

That is, the US and South Korea announced plans to conduct military exercises in the waters west of South Korea where a South Korean warship was sunk – apparently by a North Korean torpedo – in March of this year. The Chinese military, in turn, went ballistic (so to speak).

One recent article on the state-run Xinhua news website warned the US not to move the aircraft carrier USS George Washington into the Yellow Sea. The author of the article took care in his choice of words, but left no room for doubt about the Chinese position:

Offending Chinese people is not in the fundamental interest of the US. Any activity aimed at pushing a country with a 1.3-billion populace with enormous potential would be inadvisable.

On another news site, People’s Liberation Army Daily, Rear Admiral Yang Yi, former head of strategic studies at the Peoples’ Liberation Army’s National Defense University, was no less forceful, stating:

On the one hand, [the US] wants China to play a role in regional security issues. On the other hand, it is engaging in an increasingly tight encirclement of China and constantly challenging China’s core interests.

Adm. Yang believes that the US threatens China. Earlier this year, he said:

The US is the only country capable of threatening China’s national security interests in an all-round way… Japan has no such ability, while Russia has no such motivation and India is more worried about China.

In a recent editorial, Adm. Yang expressed dismay over US policies, stating, "Rarely has there been such wavering and chaos in US policy toward China." Adm. Yang expanded the point in another article in China Daily, China’s main English-language newspaper: "Washington will inevitably pay a costly price for its muddled decision."

Not to be outdone – or perhaps simply to offer a consistent message – Maj. Gen. Luo Yuan, deputy secretary-general of the People’s Liberation Army Academy of Military Sciences, added his authority to the discussion. In a scathing editorial in the Chinese newspaper Global Times, Gen. Luo said that moving the USS George Washington into the Yellow Sea was a "deliberate provocation" toward China and that the US should "think twice about the maneuver."

Gen. Luo followed up with this comment: "Imagine what the consequences will be if China’s biggest debtor nation challenges its creditor nation." China is the "world’s largest market," and "offending China means losing, or at least decreasing, market share."

I don’t think we have to "imagine" the consequences at all. I believe we just have to look at the decline in Chinese holdings of US bonds – or "decreasing market share," like the man said.

Thus, I believe that in addition to the Chinese economic concerns about the future of the US economy and US dollar, the Chinese military is also pushing its leadership to back away from holding US dollars. There’s a component of military strategy to the decline in Chinese bond holdings.

Then next question is if the Chinese are NOT buying US bonds, then who IS buying them?

My hunch is that it’s the US Federal Reserve. That is, the Fed is covering China’s retreat from the dollar. For reasons both economic and military, China is gradually exiting is dollar position. The Fed is allowing this to happen quietly, without causing a dollar panic.

Meanwhile, the consequence is that the Fed is monetizing the US national debt. Over the long term, this can only lead to the further decline of the U.S currency. Looking out over the medium and long terms, it can only mean higher prices for precious metals.

And that, for our money, is exactly where the sunrise investors will want to be.


Byron King,
for The Daily Reckoning

Joel’s Note: The ongoing, escalating tension between the world’s biggest trading partners is not the only geopolitical chokepoint Byron has his eyes on right now. In his brand new presentation, Mr. King takes a look at the troubles brewing in Iran and explains both why recent developments there could soon rocket oil to over $200 per barrel and, more importantly, how you can make a tidy sum when it does.

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The Daily Reckoning Presents
Gold – All About the Dollar?
Adrian Ash
Adrian Ash

Gold is suddenly all about the dollar again. Or so you might think. The race to debase only looks set to raise gold’s global appeal still further…

After its longest run of moving in tandem with the trade-weighted Dollar Index since midsummer 1991 (45 trading days; average correlation +0.58), the gold price in dollars resumed its commonly-assumed relationship with the greenback last Friday, moving opposite to the currency’s forex fluctuations.

Tuesday then brought the first of this week’s three new record highs. Only the Indian rupee, to date, has suffered a similar fate.

What next? History says to expect further dollar-led gold action ahead, at least in the headlines. Because any approach of the strong, positive correlation achieved this summer is typically followed by a stretch of strong negative correlation, with the dollar and gold moving in opposite directions.

Gold vs. US Dollar Index

But that doesn’t mean non-dollar investors won’t also see fresh gains or highs in gold, however – not with gold continuing what remains a powerful long-term uptrend against all major currencies, and not with central banks everywhere desperate to devalue their own money against the greenback.

"There’s certainly investor nervousness about monetary policy around the world since the yen intervention," as Mitsubishi’s new precious metals strategist Matthew Turner (formerly at the VM Group) tells Reuters.

"A lot of people are sensing a race to the bottom by central banks to print more of their currency, to reflate their economies, and gold is getting support from that."

The Bank of Japan is now actively selling yen to buoy the dollar, while the Bank of England has held real sterling interest rates below zero for 24 months running. Whatever the political rhetoric during May’s Greek deficit crisis, France and Germany would rather see a weak than strong euro, while Beijing’s new "flexibility" – a prelude, perhaps, to its new yen buying strategy – has so far delivered only a 1.4% rise in the yuan’s dollar value since June.

That’s barely a ripple compared with the yuan’s 4.8% rise of Q1 2008, and nothing against the 5.5% rise in the kiwi, 8.7% rise in the Aussie, or 15% rise in the Swissie of the last 3 months.

Bullion Vault's Global Index

Longer-term, as you can see, gold’s bull market to date hasn’t really been about any particular currency. It really is about all of them.

Gold has quadrupled and more against all the world’s money since the start of 2000, as our Global Gold Index shows. (It maps the daily gold price in the world’s top 10 currencies, weighted by size of economy and starting at 100 on New Year’s Day 2000). And most critically for traders trying to second-guess the dollar gold price, throughout 2010 to date – and also across the last four decades as well – gold’s correlation with the Dollar Index is statistically insignificant (+0.02 and minus 0.15 respectively).


Adrian Ash
for The Daily Reckoning

Joel’s Note: Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the mining-sector’s World Gold Council research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.


Una respuesta to “18-9-2010 Gold & Guns !!!”

  1. pennystockstwitter Says:

    The key to trading penny stocks is learning how the game is played. The game has always been and will always be controlled by the MM’s (market makers) These are the people we used to trust to make a market for any stock even in the roughest times.
    However times have changed especially in pennystocks, Very little regulations and oversight has turned these market makers into nothing more then market manipulators, manipulating any penny stock however they see fit for personal gaines.
    Now most smart investors have learned you can’t beat them at their game. They have to much power and control. The best we can do is watch them and learn their patterns, Each MM has its own style of manipulating. and they will react in their own predictable way to different situations. Once you learn this you will truely have the advantage. Trading penny stocks is much like playing a game of chess against these MM’s. If you know their techniques and strategys then you can easily predict where they will take a stock. Watch them carefully on L2 , and watch charts at the same time you will see some MM’s react to certain indicators, some only react to buy and sell pressure. And some even work in teams and are truely there to take as much money as they can from you using all the dirtiest tactics including naked shorting, Paid message board bashers, and fake PR releases. (I.E. PUMA, NOBL, SSGI, STXG, CHDN). If you are in a stock with them you are in trouble take profits fast and get out , they will NSS it down to nothing faster then you can blink an eye.


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