The Government Bubble that's Driving Gold

By Simon Avery

The price of gold is on the verge of the longest rally since 1982. It needs to close up Thursday to match the old record, but an upwards turn in the value of the U.S. currency during the day had pushed bullion prices down $8.60 to $1106 by mid-afternoon.

Initially, gold’s rise was attributed to nervous investors seeking security. But in recent days a new catalyst has emerged, in the form of central banks buying up the precious metal.

Last week it was the Reserve Bank of India saying it has purchased 200 tonnes, then the government of Sri Lanka said it intended to buy. Analysts said other governments would likely follow, too. Likely candidates include Russia, China and Brazil.

The world’s central banks look to be net buyers of gold this year following two decades of selling. Since 1991, central banks have reduced their gold holdings by 10%, the Wall Street Journal reported on Wednesday. It added that India’s $6.7 billion purchase from the IMF was the biggest by a central bank in 30 years.

Why? Because countries are no longer comfortable leaving their reserves in dollars and euros. Instead, they are looking for ways to diversify their holdings.

“The greenback’s recent decline has spooked many countries sitting on big dollar assets,” writes the Journal’s Carolyn Cui.

China holds most of its foreign reserves in U.S. Treasury securities. But there’s growing perception among some that the risk of holding U.S. and other nations’ government bonds is rising, even though rates of return are not. Economist Ed Yardeni, who runs his own research firm in New York, said in his morning note Thursday that the cost of insuring government bonds from Japan against default has doubled in the last three months. Japan is in a mess and Britain and the U.S. could be going down the same path, he wrote.

Some analysts have begun suggesting that the price of an ounce of gold could hit $1,300, or even $1,500, by next year. Many more now agree that sub-$1,000 prices are behind us.

“No wonder the price of gold is soaring to new highs. There is a worldwide bubble in government,” Mr. Yardeni said.

Comments

[The Recusant:]

"there’s growing perception among some that the risk of holding U.S. and other nations’ government bonds is rising"

Some? Perhaps more likely "most". India's purchase of gold with $6.7 billion in U.S. dollars is proof in the pudding that it's time for dumping at least the dollars. The only reason foreign central banks hold onto greenbacks is to gently get the dollars out of their vaults without them devaluing too much in a hasty sell off. But if just one of those central banks begins to dump our dollars in disregard to any G-20 secret agreement, a panic could ensue that would leave some countries or the IMF holding bags of greatly devalued bucks. More than likely however, they will just start buying up more gold or U.S. assets with our own money. Gold will continue to rise along with other commodities when the banks retrench to securely backed currencies.

Nov 12 03:23 PM

[CLH:]

Gold will not take the place of the dollar. Its just the govts. buying at he wrong time again. Central banks were selling in 2000 as gold bottomed. Don't follow central banks. They always waste our money.

Nov 12 03:58 PM

[FlyBy:]

The Chinese leaders can teach our President a great deal about capitalism. Let us hope Obama listens closely when he visits his experienced uber-Socialist mentors.
The US/China relationship is undoubtedly the greatest economic dynamic in the world today. While there is great potential good therein, there are also grave economic risks. While the Chinese leaders rightly chide America for its wastefully ineffective spending and profligate debt, it is mainly to distract from their own egregious economic culpability. Bear in mind that the Chinese are the root of US economic problems. And, thus, the World.
The Chinese have chronically and artificially manipulated their Yuan to be grossly weak vis a vis the US$. Chinese labor rate is roughly 75 cents per DAY. Now that is a capital vortex; but add: Bush-granted Most Favored Nation tariff treatment. No wonder all US industry is leaving North America to go to China and taking production and know-how, FOR FREE, along with the business flight to China. Over the last 5 quarter years, the US economy shrunk approx. 12%. China is growing currently at 10% this, one of their slowest quarters. Then you factor in Obama’s Bush-On-Steroids deficit Trillions, wasteful stimulus Trillion, wrong headed NO Jobs For America policy, Cap and Trade Tax energy policy, and you see why capital and jobs are flying out of America. Finally, add in the No Flu Shots but all-in bet on Health Care tax, which is the cherry on the Marxist Socialist Obamanomics Anti-American Program, and you have your answer to your question. The US stimulus Trillion has found its way ultimately to Asia.
So, how do you trade the US Money Supply Bubble: Trade in China! It’s the ObamaAmerican thing to do.
Short the US$ ETF. Long on the Aussie and Loonie, gold, copper, coal for Chinese energy production. This is THE investment strategy until the US wakes up and listens to Volcker AND implements a REAL US Jobs Program in the US private sector. America is shackled by Obamanomic Marxist Socialism while Chinese capitalism is flying circles around US!!!! The unwise Chinese are at the root of US economic problems, but destructive Obama deficits, taxes, wasteful wrong headed spending of $Trillions, are an oxy-acetylene torch on the fragile idea of America. So sad...yet profitable. Yet Sad.
The World and I loved the idea of America.
Pray to God that He turns His watchful eye back to America before the idea of America is irrevocably destroyed.

Nov 12 11:34 PM

[RJK1:]

FlyBy

You hit it on the head for the most part. What's shocked me is that there is clearly a group of Mega-Power brokers that own the Democrats and Republicans , vis-a-vis the ridiculus campaign finance rules + not so covert grafting that occurs to our politicos. I'm waiting for the day an honest news reporter decides to track avg net worth of politicians going into government vs their current net worth or post government service net worth.
Whats worse is that this self serving financial whoring is legal and people seem to accept it as an unavoidable consequence of "the system".
I believe in the people of the United States. We certainly have our problems but I still am holding out the belief that we will wake up and cleanse this corruption out of governement, roll up our sleeves and start getting back to the business of making things and creating value for ourselves and the rest of the world. We need low taxes, people that have read the constitution and understand it and a return to personal accountability.
Lastly, people need to figure out that the Stock Market is essentially the most elaborate Casino ever invented and like any good casino, the odds favor the house. In this casino, the house sees your cards, controls the payouts and changes the rules on the fly when necessary to protect the till. The people that make money are those in the slipstream of the casino owners, whether they realize it or not.
The reason that Gold is rising is that people are beginning to figure some of this out. I hope we figure it out soon , for the worlds sake.

Nov 13 07:10 AM

[The Recusant:]

Flyby wrote, "Bear in mind that the Chinese are the root of US economic problems."

Not in a long shot. WE are the root of our economic problems. WE allowed the government to create a fiat currency and then print our way out of every problem since the Great Depression. It was OUR unregulated banking system that provided loans to risky clients and continue to play both the government and the population for the banking institution's own profits.

No doubt the Chinese take advantage of the situation like any country would, and have. But if manipulating currency and underpaying employees is a capital crime, then WE in the U.S. are equally as guilty. A more grevious crime is to allow lobbyists to influence our government and to allow the intertwining of business and government.

On a political scale of one mile, Democrats and Republicans are about one millimeter apart when compared to the possible extremes. And our problems always arise when we deviate from the moderation of socialistic capitalism to either a more capitalistic or a more socialistic policy. If you want to point a finger of blame, look in the mirror.

Nov 13 05:05 PM

[5142152-337:]

I'm sorry posters out there, I can' t let this one pass unscathed:

CLH: Your first sentence makes you the A$$ of the week! Keep it up, your close to the monthly award!

Nov 14 04:12 PM

[FlyBy:]

Dear Recusant: I agree with a great deal of what you stated above, esp. re: lobbying Congress root. However, your 1st sentence and much of your 2nd para. give me profound pause. I have previously noted, above:
1.That Bush granted Most Favored Nation (MFN) trade status to China.
2. That Obama Administration policy direction is an oxy-acetylene torch to the delicate flower of the idea of America.
3. That, essentially, America is in many ways its own worst enemy.
That said, your 2nd para. is grossly minimizing of the international economic responsibilities and policies of the Chinese govt. Under the circumstance of MFN, American workers are competing with Chinese workers earning less than $1 a DAY. US unemployment U6 measures 17.5+% now. PAIN! While China is growing by at least 10% now. With MFN and with the artificially weak AND linked $/RMB exchange rate, America is an economic vortex directly TO Asia. That giant sucking sound Perot predicted with NAFTA is now ongoing to Asia. Along with it, China (and Asia) are gratefully accepting 200 years of time tested systems and processes which capitalism is shipping out of America and GIVING it to China FOR FREE to put into the factories American business is building in China. This is the real tragedy to the world, but esp. America. The Chinese ripoff everything they get their hands on. Within 5 years those "American" factories in China will be stolen by Chinese owned factories of production.
Is that not a capital crime. If these roles were reversed, would there not be a hot war. Isn't war far worse than a capital crime. Isn't worldwide (except Asia) economic devastation far worse that a capital crime. One murder is a capital crime, sir; warring nation states destroy entire POPULATIONS. That is what I am seeing.

Aside issue: America is already warring in geo-areas where many empires have ended, throughout several millenia. America is way out on a limb, and Obama is sawing furiously. We need to PULL BACK IN. Be Pro-American in policy:
1. Bring our soldiers home from around the globe.
2. True energy independence. America CAN DO THIS. We have 200 years of coal to gasify, and 150 years of NatGas and infrastructure.
3. Put USA workers on THIS NOW.
4. SHRINK Federal Govt. expenditures as 1,2, and 3, above, are getting done.
When America looks in the mirror, it sees vigor, determination, confidence in a strong future.
But that is not the Marxist/Socialist Obama Plan (MSOP).


On Nov 13 05:05 PM The Recusant wrote:

> Flyby wrote, "Bear in mind that the Chinese are the root of US economic problems."
>
> Not in a long shot. WE are the root of our economic problems. WE
> allowed the government to create a fiat currency and then print our
> way out of every problem since the Great Depression. It was OUR unregulated
> banking system that provided loans to risky clients and continue
> to play both the government and the population for the banking institution's
> own profits.
>
> No doubt the Chinese take advantage of the situation like any country
> would, and have. But if manipulating currency and underpaying employees
> is a capital crime, then WE in the U.S. are equally as guilty. A
> more grevious crime is to allow lobbyists to influence our government
> and to allow the intertwining of business and government.
>
> On a political scale of one mile, Democrats and Republicans are about
> one millimeter apart when compared to the possible extremes. And
> our problems always arise when we deviate from the moderation of
> socialistic capitalism to either a more capitalistic or a more socialistic
> policy. If you want to point a finger of blame, look in the mirror.

Nov 17 12:06 AM

[The Recusant:]

FlyBy wrote: "1. That Bush granted Most Favored Nation (MFN) trade status to China. 2. That Obama Administration policy direction is an oxy-acetylene torch to the delicate flower of the idea of America. 3. That, essentially, America is in many ways its own worst enemy. ...your 2nd para. is grossly minimizing of the international economic responsibilities and policies of the Chinese govt."

And any of the above points, or all of the above points, are the result of what, the Chinese voting in these people? No, WE voted them in and allow them to undermine the long term goals of prosperity for short term goals of being re-elected. As for those imports from China, WE limited our use of tariffs and quotas and WE enacted the NAFTA and TAFTA. Nobody was twisting Uncle Sam's arm when WE fell for the "what's best for capitalism is best for America" and let them pass those trade abominations. As for "When America looks in the mirror, it sees vigor, determination, confidence in a strong future.
But that is not the Marxist/Socialist Obama Plan", well, America is looking a little shabby around the edges right now with our failing economy. No doubt we will prevail, but not until we can do some major house cleaning, and that's in BOTH parties. (Marxist/Socialist? You've been watching too much political TV. Take the Republican shades off.)

Nov 20 06:34 PM