This is a follow up to the 2009 year forecast issued on January 16, 2009.

In the first quarter of 2009, we reached the climax of US banking and financial collapse.

The US dollar has several forces going against it.

Financial Bailout

In the last 5 months, the Federal Reserve has printed over $1 trillion to buy out soured mortgage assets from private enterprises.

As I toured around the world to talk about the merits of gold during the last several years, the same question was posed to me over and over again:

"John, oil is $80, $100, $150 a barrel, why hasn't gold lived up to its reputation as a hedge against inflation?"

I originally wrote this article in 2005, but the same argument pertains today:

It's fascinating to study and observe the distribution of wealth. History has shown great nations and companies that rose to the top from nothing and subsequently fell to nothing.

In September two significant events happened that will mark the month as the most financially significant in US history by far

1. Fannie Mae and Freddie Mac were nationalized; this was no surprise as I predicted in November 2007.

Part I: About Zinc

History of Zinc (from International Zinc Association)

Centuries before zinc was discovered in the metallic form, its ores were used for making brass and zinc compounds, its ores were used for healing wounds and sore eyes. It is believed that the Romans first made brass in the time of Augustus (20 B.C. - 14 A.D.). In the 13th century Marco Polo described the manufacture of zinc oxide in Persia. At Zawar, India, both zinc metal and zinc oxide were produced from the 12th to the 16th century. From India, zinc manufacturing moved to China in the 17th century where it developed as an industry to supply the needs of the brass industry.In 1743, the first European zinc smelter was established in Bristol in the United Kingdom. A major technological improvement was achieved in Germany which led to the erection of smelting works in Belgium and Germany. In 1836 hot-dip galvanizing, the oldest anti-corrosion process, was introduced in France. Zinc production in the United States started in 1850.

The U.S. Mint announced Monday that it would resume taking orders of American Eagle coins on a limited basis after last week's sales suspension. At this very moment in time, orders on gold coins are taking weeks or even months to fill.

From Reuters' report (full version available here):

Sometimes people are so caught up in short-term action that we don't look at the long-term picture.

“Another lesson I learned early is that there is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again. I've never forgotten that. I suppose I really manage to remember when and how it happened. The fact that I remember that way is my way of capitalizing experience.”

--Jesse Livermore, Reminiscences of a Stock Operator

Oftentimes I talk to investors, even sophisticated ones, and I realize that they treat metals as a group. Particularly in the subset of base metals, most point out the price action of copper and conclude that all base metals are in a raging bull with no signs of slowing down.

Close examination of correlation between various metal prices reveals a very different story, as we shall illustrate. (most charts here are from my friends at Kitco.com)

In October 2007, when gold was USD 750/oz and a US dollar fetched 7.5 Chinese renminbi yuan [RMB], I published an article titled “Gold and RMB – Last Shoe to Drop for the dollar”, in which I said:

For a US family that spends $300 to $500 a month on Chinese goods, a further 40% appreciation of the RMB will translate into a $100 to $200 monthly cost increase. The logic of asking the Chinese to revalue their currency upwards is no different from asking the Saudi’s to jack up their oil price further, which is no logic at all for a US consumer. Holding Dollars is like playing musical chairs. When the music stops, the one holding the most Green IOUs, loses.

Money serves as a medium of exchange and store of value. Price provides an important clearing mechanism in a society. Here we are going to explore the interesting dynamics between money and price.

In a free market, when the quantity of money is fixed, the fact that the price of an apple is $1 and that of a Parker pen is $2 has tremendous implications. It takes knowledge, ingredients and time to grow an apple while it involves branding, material, and capital to produce a Parker pen. What the market says here is that the total efforts put into producing the pen are worth twice as much as the efforts of growing the apple. There are thousands of valuations communicated through the market by this simple exchange. Over time, with advances in technology, it takes fewer efforts to produce more goods. The same farm that used to grow 10,000 apples can now grow 20,000 in half the time. While the ratio of exchange between apples and pens might still be 2 to 1, since it also takes less to produce a pen, in a world where the quantity of money is fixed the price of both apples and pens should decrease (i.e. 80 cents for an apple, and $1.60 for a pen).

I just returned from sunny Calgary where I spoke at the Cambridge Conference (See more details at my Travel Diary). It is surprising to me how many gold analysts predict the complete of fallout of US housing and how that will crash the stock market, world growth and commodities.

Subprime Securities Firesale finished:

The price of rice doubled in the last 2 months raising fears of fresh outbreaks of social unrest across Asia, where the grain is a staple food for more than 2.5 billion people (See article in FT.com here).

This should come as no surprise since grains, energy, and just about every other commodity prices have risen a minimum of 50% in the last 6 months. And a strong physical demand and lax monetary policy will continue to fuel high commodity prices.

In August of 2004, when silver was $6 and gold was $380, I wrote the following four reasons for liking silver more than gold:

1) Supply and demand

Like beauty, the value of gold and the dollar are in the eye of the beholder, which at times can be entirely subjective, arbitrary, and irrational. This is much akin to financial speculations throughout history from stamps to sea shells.

Everyone has their theory on why the US dollar is sagging – huge deficits, slowing economy, high inflation, artificially low interest rates, subprime issues etc.

Mr. Joseph E Stiglitz, a Nobel Prize winner in 2001 for his work on the economics of information, recently attended the World Economic Forum in Davos and wrote an article published on February 5th, 2008 titled Sub-prime crisis has led to the humbling of America.

The article highlights were:

We have written a series articles dating back to March 2007 tracking the U.S. debt implosion, which are available here.

The story started out in early 2007 with the blowout of Novastar (NOVS) and New Century, the multi-billion non-bank intermediary mortgage brokers. In summer of 2007 we witnessed the collapse of American Home Mortgage (AHMIQ), America’s largest subprime mortgage issuing bank. Then we saw a series of subprime write-offs amounting to hundreds of $ billions by banks, funds, and institutions around the world. Then the trouble moved up in the chain of the mortgage complex, with Fannie Mae (FNM) and Freddie Mac (FRE) announcing surprising losses. In 2008, the problem struck core as Countywide (CFC), America's largest mortgage issuing bank plunged into the single digits on the rumors of impending bankruptcy. The Countywide saga then ended last week with an orchestrated buyout by Bank of America (BAC).

Fundamental and Technical Update For Gold

Confidence in Fiat Currencies

The fundamentals for gold relates to the confidence level in paper currencies. When demand outstrips supply of dollars, the value of dollars goes up. The supply of dollars has been rising steadily at an average of 10% annually from less than $1 trillion in 1980 to over $12 trillion today. The fundamentals for gold thus have much to do with the lessening demand for dollars.