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The Bullion Buzz - August 25, 2009

The Bullion Buzz – August 25, 2009

"My reading of history convinces me that most bad government
results from too much government."
Thomas Jefferson


“Roughly 45% of Canada’s gross domestic product (OTC:GDP) is linked to foreign trade, and 77% of its exports are sold to the United States. Each day, more than US$1 billion worth of goods crosses the US-Canadian border. So it’s not surprising that the Toronto Stock Index (TSX) usually moves in the same direction as the Dow Jones Industrials, most of the time. However, the TSX outperforms when commodities are rising, which in turn pushes up the Canadian dollar. Because Canada holds the second-largest oil reserves in the world, foreign capital inflows into and out of TSX energy companies are key drivers moving the Canadian Petro-dollar.”


Central Bank Gold Agreement
Adam Hamilton

European central banks recently extended their landmark agreement on gold sales, having signed the third Central Bank Gold Agreement. CBGA 3, like its predecessors, has major implications for gold that investors need to understand. Due to their propensity to sell their gold, central banks have long sparked fear and suspicion among gold investors. While central banks absolutely add supply, thus affecting gold’s price, the misinformation disinformation surrounding these institutions is often overdone. Instead of fearing them, taking a pragmatic perspective is the wiser course. Ultimately, central banks are just large gold investors. They manage portfolios of reserve assets, the most important of which is gold. They are influenced by greed and fear, they strive to maximize the values of their portfolios, and they need to diversify and rebalance from time to time. As this secular gold bull continues higher and gold becomes more attractive as an investment, central bank buying from the East should eclipse central bank gold selling in the West. Worldwide, central banks will become net buyers of gold before this secular bull ends. If central banks really wanted to crush gold, they wouldn’t have agreed to 15 years of orderly sales via the CBGAs. The three CBGAs prove the world’s biggest gold-selling central banks are not trying to drive gold to zero. Over the span of the first two CBGAs, within which gold nearly quadrupled, the banks stuck to their word and sold in a measured and orderly fashion. Based on this, it is illogical and naïve to fear central banks today. This secular bull, driven by growing global investment demand, will continue powering higher no matter what the central banks do with their gold. Every tonne of gold they sell lowers their current market share and future influence in the global gold market. And outside of Europe and the US, most of the rest of the world’s central banks have too little of their reserves portfolios in gold so they will likely become big buyers. 

Schmidt’s Gold Thoughts
Ned Schmidt

The VIX is low; paper asset investors are enthusiastic once again; the world has been saved and unlimited growth lies ahead. But history shows that no market that has been run up by a credit bubble avoids a long, painful, ongoing lateral correction that lasts for years. Coincidentally, the US Presidential Approval Index is falling almost as quickly as the VIX, and this makes the longer-term view more positive for gold. The Obama Administration will attempt to bolster its collapsing political position, and Fed Chairman Ben Bernanke is in reelection mode. Together, these factors mean more US government spending and more Fed monetizing of the deficit created by that spending. Technical analysis shows that the rate of growth in the US money supply rose dramatically from late summer of last year through to March 2009. That rapid increase pushed the price of gold up dramatically. Then US money supply growth stalled, capping the gold price. But slowing money supply growth means slower economic growth, regardless of what recent statistics show. Without aggressive monetization of the US government deficit, US money supply growth will continue stagnating. This does not fit the political agenda of either President Obama or Chairman Bernanke. The Fed has no choice but to move toward direct financing of the Obama deficit. The equivalent of cash delivery from the Fed to the Treasury is about to begin. The US money supply will begin climbing again. Owning gold may be the only way to protect wealth from the political agenda of the Obama Administration and the Fed’s printing of dollars without restraint in order to fund that agenda.


Credit and Credibility – Chapter 4
Richard Karn

This is the fourth in our series of five chapters from Credit and Creditability, a book by Emerging Trends Report. These chapters deal with the “Big Picture” assessment of the five most pressing issues facing the US and global economies. Chapter 4 deals with Karn’s contention that the world has had its fill of “financial innovation”, and the only way the US economy can recover will be through its traditional strengths in agriculture, manufacturing, invention and hard work. An excerpt: “These matters [discussed in the previous chapters], though patently contributory to the current global financial crisis and ultimately debilitating, operate in the background of the current crises, rather like the way a cancer consuming a body’s energy and resources weakens the immune system to the point it is increasingly susceptible to colds and influenzas – and interventionist policies are designed to treat a cold or flu, not the cancer. But armed with these insights, we may now proceed to the general effects we believe the credit crisis and climate change policy will have on the US economy and in turn on our investment universe; our nine original Emerging Trends Reports are each included in their entirety, then re-evaluated and updated within this context in subsequent chapters of this report.”

US Credit Card Trap
Jennifer Barry

US household net worth is down $14 trillion, and Congress has belatedly taken action by passing the Credit Card Accountability Responsibility and Disclosure Act. But for those who carry revolving balances, it’s no time to relax. The law comes into effect in February 2010, giving card issuers a window to jack up fees and interest rates. It fails to set an upper limit on these charges, so credit issuers can continue to charge any rate they wish. This permits banks to borrow from the Fed at a fraction above 0%, paying ridiculously low yields on deposits, while charging their credit card customers many times that percentage. In any event, it is naïve to expect the US government to take aggressive action against financial institutions, as both political parties receive ample campaign contributions from banks like Goldman Sachs. For years, Americans have allowed the banks to rake in obscene profits on the backs of the taxpayer, but lately there has been some pushing back with protests and angry constituents confronting their elected officials at town hall meetings. Unfortunately this awakening is too late to prevent the destruction of the US dollar. The debt bubble has already burst, and attempts by the Fed to reflate it have created an enormous burden on the US taxpayer. Bailout obligations have ballooned from approximately $2 trillion to an incredible $23.7 trillion according to the special inspector general of the TARP. Don’t expect any government agency to protect you from the coming hyperinflation depression in the US, writes Barry. Now is the time to reduce debt, sell off unwanted assets, and live below your means. During times like these, paper assets have historically performed poorly, so move savings into hard assets like precious metals instead.


Pessimism Still Grips Wall Street 
Gerry Shih

US equity markets have enjoyed a 42% rise since mid-March, despite troubling news of bank loan defaults, mixed corporate earnings reports and lukewarm forecasts from the Fed. Then, on news that battered US businesses, hamstrung by tight consumer spending, will struggle for revenue growth this year, investors sent the major markets into a tailspin. Acknowledging continuing weakness in the economy, the Fed and the Treasury announced they will extend the Term Asset-Backed Securities Lending Facility (TALF), which was scheduled to expire at year end. Adding to Wall Street’s pessimism were jittery Asian investors, who feared that a sustained weakness in American spending would threaten recovery in export-dependent countries like Japan and China. Markets in Shanghai and Tokyo posted their worst one-day drops in months; the Shanghai composite index dropped 5.8% in one day, taking its total decline since August 2008 to 17%. The sharpest declines were in mainland China, were uncertainties about the direction of bank lending helped deflate a rally that many analysts warned would be unsustainable. Other corporate news reinforced the belief that consumers are in poor shape: Bank of America and Capital One Financial said credit card defaults rose in July; Intel and IBM both saw their shares dip after economic growth in Japan trailed forecasts. As stock prices sank, investors headed for the relative safety of government debt, driving up bond prices. The price of oil has fallen somewhat, as consumer outlook undermined future energy demand despite the looming threat of hurricanes and tropical storms that could curtail supply.


Canadian Dollar Rattled by Shanghai Meltdown
Gary Dorsch

Investors are hoping that emerging economic giants – Brazil, Russia, Indian and China – will pull the G-7 economies out of recession. Billions of dollars poured into BRIC stock markets this year, while traders withdrew $61 billion from developed stock markets. BRIC countries accounted for nearly half of global growth in 2008, and for more than 90% of the rise in consumption of energy and metals. Canada is strengthening its trade ties with China in order to reduce its dependence on the US economy, thus the gyrations of the BRIC stock markets are of great interest to speculators in the Toronto Stock Exchange, which is natural resource and high-tech heavy. As such, it represents the middle of the road between high-flying BRIC investing, and the sluggish markets of Europe, Japan and the US. Since 45% of Canada’s GDP is linked to foreign trade and 77% of its exports are sold to the US, the TSX usually moves in the same direction as the Dow, but the TSX outperforms when commodities are rising, thus pushing up the Canadian dollar. Most Canadian exporters are hard hit by a stronger loonie since they receive much of their sales revenue in US dollars. Should a rising loonie put the economic recovery at risk, the Bank of Canada may begin sales of the Cdn dollar for the first time since 1998. In addition, the Bank’s Mark Carney hinted that if the Cdn dollar remained persistently higher than 87 US cents, it may resort to Quantitative Easing, the minting of vast quantities of loonies, in order to buy government bonds. This news has shored up the US dollar as the Fed and the Bank of Canada play the old game of competitive currency devaluation. The hibernating Toronto gold market will soon react to the explosive growth of Canadian M2 money supply, combined with the ultra-low Bank of Canada loan rate, the possibility of currency intervention, and Quantitative Easing injections. For all these reasons, buy gold on dips near support at C$950 in the weeks ahead.

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