Posted by Dan Denning on Oct 29th, 2007
The Money Migration is turning into a Money Stampede. How can you avoid getting trampled?

There is one simple way to explain the movement in global currency and commodity markets. A number of smart investors (including Jim Rogers, Marc Faber and others) hit on it a few years ago. What was it?

That the US dollar was a dangerously flawed currency, the unbacked liability of a vastly over-extended government, and that the days of doing the world’s business in America’s currency were numbered.

Well, it all looks true now. Gold futures touched US$787.50 in Friday New York trading. Oil—riding a massive geopolitical premium and nearly unanimous bullish sentiment—trades at US$92.14. Here’s a question: are these two commodities exhibiting honest-to-goodness strength…or are they merely symptoms of the dollar’s steady march to intrinsic value?

The trouble in a world of managed exchanged rates—a “dirty float” not a “free float”—is that all currency values are relative. The US dollar is weak against everything. The Aussie dollar is strong against most other currencies. But some currencies like they Yen, are strong against one currency and not as strong against others. And then there’s China’s currency—whose strength is shackled by a managed-floating-exchange rate which caps how much the currency can appreciate against the US dollar.

The only currency that’s not managed by central bankers is gold—and there are some people who tell you gold is managed (or manipulated) from showing its real strength. But gold keeps flexing its muscles…and telling us that the whole post-war era of the dollar standard is racing to the terminus.

Still, looking at the markets today, we get the feeling a pullback in all the major trends is probably in order. The Aussie dollar has climbed to 92 cents on the dual rate prospects, a rise in Australia and a cut in America. The expanding yield spread favours the Aussie, and currency traders seem to have priced in both moves before the fact.

We always think of the old phrase, “buy the rumour, sell the news” at times like this. Parity might be the ultimate destination for the Aussie. But in the short-term, the rate differential seems to be fully priced in to the market.

And oil? Even the oil insiders are scratching their heads. Shell’s Peter Voser told analysts in London, “To be honest, we find it hard to explain the oil prices… We find it hard to explain oil at US$100 a barrel. I don’t see anyone queing for fuel and nor are there any physical shortages…The price seems to be driven by some speculation and also has a political premium in it, rather than actually some of the fundamental drivers.”

Don’t get us wrong. We’re long-term bulls on energy. But we hate it when everyone joins us on the same side of the trade. It makes us nervous. Oil—in real terms—is not nearly as expensive as it was at the height of the Arab oil embargo. That is partly explained by the fact that OPEC has less sway over global oil prices than in the 1970s, thanks to increased production from the likes of Russia, Norway, and Mexico.

But even with the non-OPEC producers adding to global production figures, there’s a wall coming. The world is barely producing enough oil to match consumption rates. Either production will have to increase—a challenging proposition—or consumption will have to decrease. Let’s call that recession in America. Or a bubble in China.

A third way is for oil substitutes to replace crude as the fuels of the future. But progress with alternatives and renewables is slow and lacking any real urgency. You look around you and people seem to be motoring along to the future, clueless that the tank is running on empty. The modern state of mind is a combination of laziness and obliviousness, topped with a healthy layering of “I-don’t-care-as-long-as-it-doesn’t-interrupt-my-plans.”

Dan Denning
The Daily Reckoning Australia

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By Tu Lei (chinadaily.com.cn)
Updated: 2007-10-22 16:18

Sources familiar with the gold industry predict imports to China to rise, according to today’s China Business News.

Zhang Weixing, an industry expert said gold in the Chinese market will be scarce next year due to investment and collection fever. “It is possible more gold will be imported from overseas,” he said.

He made the remarks in an investment forum held in Beijing on October 20.

Zhang predicted the general civil gold reserve has reached 4,000 tons, while reserves at People’s Bank of China total about 600 tons.

“Average gold consumption in China is still much lower than international levels, although consumption has increased from 0.16 grams in 2002 to the current 0.35 grams,” said Zhang.

Zhang said the price of gold has been pushed higher by a weakened US dollar, geopolitical concerns, and record high price. In China, more people are shifting to buying gold products on news of rising CPI and stock fever.

Huang Hanju, president of Xihanzhi Gold Co Ltd, said the rising gold price provides a stable investment channel for ordinary people.

The price of gold has leapt to its highest level since 1980, surging to as high as US$771.10 an ounce in trading.

The precious metal has now risen by almost 30 percent in value over the last year. The price in 2002 was around US$300.

China Daily

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The stock market rose yesterday. The dollar fell. As incredible as it would have sounded two years ago, oil now seems ready to go to $100…gold seems ready to cross the $800 mark.

Ai yi yi…the dollar is below $1.44 to the euro (EUR). But who cares? The experts tell us that the lower dollar is making it easier for U.S. exporters. American companies will prosper, they say.

The Fed is expected to favor U.S. exporters when it meets today and tomorrow. Many analysts are betting that rates will be cut another quarter of a point. Bernanke is much more worried about troubles in the housing market, they say, than about the falling dollar. They’re surely right. No one seems particularly concerned about a falling buck.

A dollar is a pound (GBP)… is a euro…is a peso. Our taxi ride from the train station in Köln to our hotel in Bad Godesburg was 70 euros. In Buenos Aires, it would have been 70 pesos. In the United States, $70 would be about right.

In Paris yesterday we had lunch with a colleague. It would have cost us about 40 pounds in London…40 dollars in the United States…or 40 pesos in Argentina. We paid 40 euros. But the real cost varies with the currencies. Americans are aghast at how much it costs to live in Europe…and pleasantly surprised when they get their luncheon check in Buenos Aires. Argentina is a cheap country.

“Well, it may be cheap for you foreigners,” Gabriela had told us, “but it’s not cheap for us.” Salaries are lower too. We’re outsourcing some of our publishing work to Buenos Aires because we can hire people for less money down there. And so as to economize your time, dear reader, we will jump directly to our forecast: soon, foreigners will outsource work TO the United States!

Aha…we’re ahead of the crowd on this one, aren’t we?

But look at what is happening. The dollar is falling. It may fall gently. It may rally. Or it may fall hard. But one thing is almost certain; it will be worth less in the future than it is today.

Everyone thinks the stock market is doing well…but look what it has done in terms of real money – gold. Richard Russell reminds us that you could have bought an ounce of gold on January 18th, 1980, for $835. On that same day, the Dow was only a little higher, at 867. In other words, you could have bought almost the entire Dow for one ounce of gold.

Oh, if only we had been around then to give you a Trade of the Decade – sell gold, buy the Dow. You could have watched your stocks go over 13,000…while gold fell below $270, at which point you could have traded your Dow stocks for 43 ounces of gold! What a trade!

Unfortunately, the Internet hadn’t been invented…The Daily Reckoning hadn’t been imagined…and your editor hadn’t the sense to make the call anyway. He was convinced, along with the rest of the gold bugs, that gold would keep going up. He was, of course, dead wrong. Gold fell and the Dow rose…not just for one decade…but for two!

But 20 years is a long time to suffer a bear market in your favorite commodity. It gives a man a reason to think…and time to do it. If he is still solvent…and still compus mentis…at the end of it, he has a great advantage over other mortals. He has made such a huge mistake for such a long time, the law of averages begins to work for him. Nobody can be that stupid forever.

Finally, the porch light comes on. ‘Hey…’ he says to himself. ‘Markets go up…and down.’

And so, with the confidence of the recently humiliated, your editor gave his legendary Trade of the Decade signal in January 2000: sell the Dow, buy gold. Since then, price of gold has more than doubled…and the Dow has edged up a tiny bit. Instead of getting 43 ounces of gold for the Dow, today, you will not even get 18.

We are only about half way through this cycle, we reckon. The Dow and gold will meet again, somewhere in the future. Probably somewhere in the middle – around 7,000…when investors have been turned off to U.S. stocks, and the Dow has sunk…and when speculators have bid up the price of gold to dizzy heights.

Then, trust us this time, dear reader, we will remember to give the ‘sell gold, buy the Dow’ signal. At least, we hope so.

In the meantime, America is probably getting cheaper. And Americans are probably getting poorer. That’s how the global accounts get settled. Americans owe a fortune to foreigners. As their paper money is marked down so is the fortune they owe. They will owe less. But they will own less too – because the value of their own dollar holdings…and dollar incomes…will go down. Foreigners will take advantage of the situation in two ways. They will buy U.S. assets at low prices. And they will take advantage of low U.S. wages by outsourcing some of their low-wage business to America.

America is a cheap country already; our guess is that it will get cheaper.

Back in the beginning of September, Frederic Mishkin, a Fed governor, estimated that housing prices might fall 20% by the end of 2008, and that it would reduce GDP by as much as 1.5% within three years.

That didn’t seem like much to us…certainly not enough to worry about. But Mishkin felt like a passenger on the Titanic; he wanted to find the lifeboats.

“Monetary authorities have the tools to limit the negative effects on the economy from a house-price decline,” Mr. Mishkin told his colleagues.

Then, in a speech October 19 on ‘monetary policy under uncertainty,’ Mr. Bernanke argued for acting sooner rather than later when risks become apparent.

“Intuition suggests that stronger action by the central bank may be warranted to prevent particularly costly outcomes,” he told a group organized by the St. Louis Fed.

The thought has been followed by the deed. ‘Strong action’ is what the Fed has already taken. Stock market investors have been reassured as a result. It’s the currency markets that are troubled. So far, so good. That is, so far no one seems to care much about the dollar losing its value. People hold trillions of them…earn them…invest them…foreigners even save them…and all of them seem convinced that this is only a temporary weakness in the greenback. Otherwise, they’d surely want to get rid of them, wouldn’t they?

Our old friend Rick Ackerman comments:

“We’ve long assumed that a collapsing dollar would take the global economy with it, but perhaps we were being too pessimistic? After all, the Dollar Index has fallen by 45 percent since 2002, but life goes on. Moreover, when the greenback slipped to historical new lows on Friday, hardly anyone seems to have noticed. Or rather, if they did notice, it was deemed reason to celebrate. The Dow Industrials shot up 135 points as stocks rose across-the-board – especially precious metal shares, which may finally be starting to reflect fears that there is nothing to prevent the dollar from slipping still lower. Perhaps much lower…

“Some years ago, when bullion turned feisty after dipping briefly below $300, [Larry] Kudlow suggested in a Wall Street Journal op-ed piece that gold would find ‘equilibrium’ at around (if memory serves) $330 an ounce. Any higher would mean that U.S. monetary policy was too loose, explained Kudlow, and any lower would indicate that money was too tight. Now, with bullion quotes about to blast through $800, we would surmise that the pathologically bullish Kudlow, and just about everyone else with a listing in Who’s Who in Economics, have simply ‘adjusted’ to that likelihood. Gold bugs have adjusted too, in their anxious but canny way, and are poised to reap a huge windfall. As that timeless trader’s adage reminds us, ‘He who panics first, wins.’”

“Time is money,” say economists. If time is money, what isn’t it? It struck us recently how shallow economic thinking is…which led us to think about how shallow all thinking is. Economists tell us that all our decision-making is, or should be, based on rational calculations involving quantifiable – or at least appreciable – results.

When a woman – or a man, for that matter – leaves the home and enters the workforce, the total output of the economy tends to go up. One more person has taken his place in the big machine…producing an incrementally observable quantity of extra output. GDP rises. Now the person is doing something measurable! Something that modern life can appreciate! And now we know that the person is worth something; he earns money. We can tell how much he is worth by looking at the money he earns.

But what about what he has given up – free time…time with the family…time for other things? Well, say the economists, he does a calculation…he figures out what those things are worth to him and compares it to what he gets out of working.

Yes, but that is where life begins to imitate academic theories. People do not make their calculations in a complete void. They make them in the context of popular tastes and attitudes, which are shaped – in part – by the dead economists who tell people how they’re s’posed to act.

Until tomorrow,

Bill Bonner
The Daily Reckoning

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By The Mogambo Guru

I thought it was significant that the Conference Board’s (1) latest release of their US indexes of Leading, Coincident and Lagging Indicators showed that the Leading Indicator (forecasting business activity 6-12 months down the road) rose 0.4, to 137.9 from a revised 137.5. Not much of a future!

The Coincident Indicator of current conditions was up 0.2, to 105.0 from a revised 124.8. And even less of a present!

The truly horrible news is just what I have been screaming about these many, many months and years, in that the Lagging Indicator reveals inflation and burdens, and it was, again, up the most, rising 0.6, taking the indicator to 129.9 from a revised 129.3.

Inflation in prices is going to kill us, thanks to the despicable Federal Reserve creating so much money and credit, thanks to the despicable Congress (except Ron Paul) who aided and abetted the Fed in this monetary inflation because they love to deficit-spend money, and thus they need this creation of excess money and credit, and thanks to the traitorous Supreme Court, which has since 1933 consciously and deliberately chosen to ignore the part of the Constitution where it says that money shall only be of silver and gold, and that no state will ever make anything a legal tender other than silver or gold, and thus the Supreme Court let the government let the Fed create excess money and credit, which will make prices rise, which destroys the economy and the lives of everyone.

Alarmed, I can see that people are gathering up their things to leave just as I am getting started with my speech! Apparently, most people have already heard my patented, “Inflation is going to eat your guts out, and eat your children’s guts out, and eat your parent’s guts out, and you will all die a horrible death as a result!” speech. They have never believed me, and they know that I think that they are idiots because of it.

So, hurriedly, I motion for Peter Schiff of Euro Pacific Capital to take the microphone and talk some sense into these idiots in the audience. I shout out, “Okay, listen up, you morons! Mr Schiff here is going to tell you about inflation!”

I step aside, and Mr Schiff says, “Inflation has only one cause and that is the Federal Reserve itself. In the United States, the supply of money and credit is regulated by the Fed. Since inflation is by definition an increase in the supply of money and credit, only the Fed can create it.”

I look out over the audience to see if anything is sinking into their heads, but all I see is people glaring at me with that familiar look of hatred in their eyes. So I mischievously ask, “What would happen if the Fed didn’t create more money and credit?”

He easily replies, “If the money supply were held constant, increases in some prices would be offset by decreases in others. The result would be no overall inflation.”

No inflation! To make sure that nobody misses this important point, I grab the microphone right out of his hand and I scream, “No inflation in prices! No inflation in prices! It’s a paradise! No inflation!”

Mr Schiff, taken aback by my sudden outburst, gingerly takes the microphone back and says that, “In fact, without government created expansions of the money supply, the natural tendency of prices would be to decline as technology allowed for more efficient production of goods and services.”

I am beside myself in anger! If it had not been for the damnable Federal Reserve, we would all have a rising standard of living, as prices would be declining in line with productivity increases! We would approach Nirvana when we could buy more stuff with every freaking dollar, instead of what we have now; a falling standard of living as we must buy less stuff with every devaluing dollar.

Mr Schiff summarizes it as “So while most regard the Fed as the primary inflation fighter, in reality it is the sole inflation creator.”

And sure enough, the proof was not long in coming, as in the October 18 issue of the Wall Street Journal, some weenie named Harvey Rosenblum (who is “executive vice president and director of research at the Federal Reserve Bank of Dallas”) penned an article titled “Fed Policy and Moral Hazard” that is actually a clarion call to rise up as an angry, drunken mob and overthrow the Federal Reserve, and (speaking of throwing) throw them all in prison for treason and treachery, making them pay for their crimes by being chained to a tree in the park and charging people a quarter to poke them with a stick.

What Mr Rosenblum actually admitted was, as un-freaking-believable as it sounds, that “The FOMC seeks to foster an economic environment characterized by low and steady inflation”!

This, of course, brings up the quote of the famous economist John Maynard Keynes, who correctly said, “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

Keeping as calm as I can be, especially given that I am agreeing with Keynes, for crying out loud, and being as polite as possible, I leap to my feet and shout “Wrong, you blubbering halfwit! The purpose of the FOMC is to have an economy where inflation is zero or less! Zero! What part of ‘zero’ is so freaking confusing to you, you despicable piece of worthless Fed trash, or do I have to come up there and slap your stupid face until you understand?”

I was happy with my performance, as I thought that I controlled myself pretty well, considering that inflation is rising even faster than Mr Rosenblum’s “low and steady” inflation. And what do they do about it? They just lie about it! Inflation is actually running about 10% right freaking now! But the Fed says that “official inflation” is at about 2%, which is bad enough, since 3% inflation in prices is the historical cutoff between people being merely scared and grumpy and people rising up to overthrow the damned government!

And to show you how this loathsome, lying and abject “see no inflation” stupidity is working out in real life, for the one-sixth of the US population that is receiving Social Security benefits, the new cost-of-living increase in their monthly benefit will be 2.3%, which comes out to about an extra $24 a month! Hahaha!

And it is not just us Americans who have a foul, monstrous central bank, as is proved by the apparent slip-of-the-tongue that came from European Central Bank (ECB) chief Francois Trichet, whom Barron’s reports as having said: “Our monetary policy stands ready to counter upside risks to price stability, as required by our primary objective.”

Immediately, my mind (like yours, I am sure) screamed out “Upside risk? Did he say ‘upside risks’? What in the hell is an ‘upside risk’ to price stability versus a ‘downside risk’ to price stability?”

Yes, it does mean that the ECB is ready to act in case too much price stability breaks out! Hahaha! That seems to be the point! Hahahaha! We’re freaking doomed!

Note
(1) The Conference Board is a non-profit global business organization supported by business executives that holds conferences, convenes executives and conducts business management research. The organization produces Leading Economic Indicators for the United States and other countries. It also produces the Consumer Confidence Index, the Consumer Internet Barometer, the CEO Confidence Index, the Help Wanted Advertising Index, and other major indicators that have an impact on both business and the financial markets. (Source: Wikipedia)

Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it.

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By Pham-Duy Nguyen

Oct. 29 (Bloomberg) — Gold rose to the highest since 1980, approaching $800 an ounce, as crude oil surged to a record and the dollar fell to the lowest ever against the euro, boosting the appeal of the metal as an investment. Silver also gained.

Gold has rallied 24 percent this year, heading for the seventh straight annual gain, as oil surged 52 percent and the dollar dropped 8.5 percent against the euro. Demand in the StreetTracks Gold Trust, an exchange-traded fund backed by bullion, is up 31 percent this year to a record 594 metric tons.

“The Fed is going to drop rates again, but inflation is extremely strong,” said Leonard Kaplan, president of Prospector Asset Management in Evanston, Illinois. “We have excess liquidity here. Investors are buying gold to hedge against the weak dollar and inflation.”

Gold futures for December delivery rose $5.10, or 0.7 percent, to $792.60 an ounce on the Comex division of the New York Mercantile Exchange. The price earlier reached $798.30, the highest for a most-active contract since Jan. 21, 1980, the day gold reached a record $873.

Silver futures for December delivery climbed 15 cents, or 1.1 percent, to $14.43 an ounce. The metal is up 12 percent this year.

The dollar fell to a record $1.4438 against the euro on speculation the Federal Reserve will cut borrowing costs on Oct. 31. The Fed lowered the overnight lending rate 0.5 percentage point to 4.75 percent on Sept. 18, the first cut in four years.

“The momentum in gold is building as the bleak outlook for the dollar becomes more apparent,” said James Turk, founder of GoldMoney.com, which had $214 million of gold and silver in storage for investors at the end of September.

Interest-Rate Futures

Interest-rate futures indicate a 98 percent chance the Fed will lower the benchmark rate to 4.5 percent this week, compared with an 84 percent chance a month ago. Five of the past six bear markets for the U.S. currency boosted gold prices.

Crude-oil futures reached a record $93.20 a barrel today. Mexico shut a fifth of its production. Middle East tensions involving Iran, the world’s second-largest holder of oil reserves, and Iraq, the third-biggest, escalated.

Still, some analysts said technical charts show the metal is poised for a decline. The relative-strength index for gold futures topped 70 for a second straight session, a signal that the price may head lower.

Speculative long positions, or bets prices will rise, are close to a record high on the Comex. Net-long positions fell by 15,555 contracts, or 7.7 percent, to 186,304 in the week ended Oct. 23, U.S. Commodity Futures Trading Commission data showed on Oct. 26.

“Large long positioning in all metals, and especially the bloated longs in gold, make us wary of recommending purchases at current levels,” said John Reade, an analyst at UBS AG in London.

To contact the reporter on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net .

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