The Case for Gold Today

by: Charlie Bottle posted on: July 28, 2008

“With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people.” - Friedrich Von Hayek

I’m not advocating a return to the gold standard but when governments lose on printing money, as is the case today, investors should buy gold.

The analysis set forth in this article is focused on gold but the same conclusions are largely applicable to the other precious metals with monetary characteristics: silver and platinum.

Gold has been trading in a $900-$1,000 which all time high, slightly above the 1980 brief peak above the $800 range, however, on an inflation adjusted basis (please see chart below) it is still way below the peak and average range during the stagflation period of the seventies; a period that greatly resembles of current macro-economic setting.

I expect gold to continue to appreciate substantially in the medium and long term, with strong chances of moving in a sustained fashion above $2,000 within the next two to three years.

There are perhaps about 130,000 tons of gold above the ground, with about half in jewelry, 40% in bars and coins (of which 30% with central banks and 10% with individuals) and the remaining 10% are in dental and industrial applications.

The total annual demand of gold is currently just under 4,000 tons and breaks down roughly as follows:

• Industrial and Dental: 400 tons (10%)
• Consumer: 3,600 tons (90%)
  o Fashion jewelry: 800 (20%)
  o Investment jewelry: 2,600 tons (60%)
  o Investment (bars and coins) 400 tons (10%)

This demand far outpaces mining production of 2,600 tons, and is met by the following supply:

• Mining: 2,600 tons (65%)
• Net central bank net sales: 800 tons (20%)
• Scrap: 600 tons (15%)

Demand growth should accelerate fueled by the need for a hedge against increased inflation, and against ongoing political and financial uncertainty, as well as growth in emerging markets middle class income.

Gold as an inflation hedge and insurance against political and financial distress

The point on inflation is self-evident as many emerging markets have double digit inflation rates (e.g. Russia 15%, Vietnam 20%, Turkey 11%, Chile 10%, Argentina 10%), or close to that (China 7%, Brazil 6%, India 8%).

In the United States, headline inflation is at about 5% and the public is becoming increasingly aware of the lack of accuracy of the reported inflation figures.

There is much controversy about the effectiveness of gold as an inflation hedge, with substantial research pointing to real estate and stocks as being better hedges. Even if this is the case, considering the ongoing bursting of the real estate bubble and negative trend in equity prices, it seems quite likely that gold will be the preferred hedge. In any case, there is consensus that there is a negative correlation between the value of the dollar and gold prices (see chart below) and that gold substantially maintains its buying power over long periods of time.

The risks of insolvency of the domestic financial system, with a growing number of financial institution bankruptcies, and the resulting risk of ballooning US government debt (from propping up GSEs and possibly in the near future FDIC and Federal Home Loan Bank systems), provide politically expedient incentives for the US government to keep interest rates low and print money to inflate its way out of this crisis.

With growing unemployment and the social costs of high inflation, protectionism and international political instability will be on the rise.

In times of uncertainty, investors turn to gold as a hedge against unforeseen disasters since gold is one of the few investments that is not simultaneously an asset and someone else’s liability.

Emerging Asian middle class income growth

Growth of middle class incomes in emerging economies in Asia with a traditional strong appetite for gold will favor demand growth, independently of the above cited factors.

Indian middle classes have strong appetite for precious metals jewelry. India is already the largest worldwide consumer with annual demand of 650 tons. India, China and Turkey, for example, spend a much higher % of their GDP in gold than the US or Western Europe) and witness the reaction of the Vietnamese public to inflation, at least until a government ban became the largest worldwide importer of gold bullion.

Gold ETFs

The emergence of gold and precious metals ETFs such as GLD, CEF, and several others, and their growing availability to investors around the world is also likely to fuel demand. The first gold exchange-traded fund to trade in the United States, the StreetTracks Gold Shares (GLD), was launched in November 2004 and has been a success since. By the end of 2007 GLD reported holdings of 600 tonnes of physical gold bullion held in trust for its investors. If GLD was a central bank, it would nearly make the top 10 in the world for gold holdings. Gold ETFs provide the same economic benefits, although not entirely, of holding physical gold for ultimate insurance against extreme scenarios when the four horsemen of the apocalypse are unleashed and physical ownership is irreplaceable.

Gold supply

Supply is growth is likely to lag demand as central banks, which have been heavy until recently, are likely to curtail their sales of gold and will likely become net buyers (more on this below). Increased mining production and scrap recovery is unlikely to make up entirely for this.

Gold production has been rather flat for the last ten years (please see chart below) in spite of healthy price growth which indicated there is limited spare capacity. Brand new mine locations, especially the larger ones, can take 8-12 years for production to commence. Smaller mines can begin more quickly but if in the newly discovered category, they require eight years as a probable minimum. Open pit operation start-ups are faster, but not that much faster, and re-opening former operating mines requires the permitting process to start all over again, adding several new layers of paperwork not formerly encountered.

Chart courtesy of GFMS, Ltd.

Also, to some extent, the same problems as the oil industry arise with the gold industry. Gold mines are located in many regions where the political climate (see chart below) makes it difficult for private sector investment, particularly foreign investment, as the risks of nationalization are high. On the other hand, government owned companies often lack the skills and incentives to invest in exploration and adding capacity.

Central banks: from net sellers to net buyers.

We are presently witnessing a change of financial paradigm with the diminution of the dollar’s role as the single dominant global transaction and reserve currency, and the emergence of a multi-currency system, where gold as a percent of global reserves will increase.

Gold as a percent of monetary mass may also increase, but this does not necessarily mean a return to the gold standard. However, it may be the natural reaction to the excesses that are currently being committed by monetary authorities in the United States.

Central banks held relatively little foreign exchange [FX] reserves sixty years ago - the bulk of their reserves were in gold. FX reserves totaled $10.96 billion in 1949, gold reserves were just shy of 28,879 tons, and the gold reserve ratio was over 70%. Today it has declined to under 10%. This is decline is likely to reverse as emerging market economies diversify their reserves and increase their gold holdings. The IMF is a big seller as it uses up its reserves to make up for its operational deficit, reflecting the reduced need for its lending.

Below is a raking of central bank gold reserves:

Emerging markets have remarkably low ratios of gold reserves, particularly China. China’s foreign exchange reserves, the world’s largest, hit 1.53 trillion dollars at the end of 2007, around 70 percent of which is believed to be in U.S. currency-denominated assets, particularly U.S. Treasuries. Thirty years ago China held 95% of its foreign reserves in gold.

For example, the Qatar Central Bank quadrupled its gold holdings in the first quarter of 2007. It didn’t have much to begin with but now it has more - but not nearly as much as it had back in the 1980s according to World Gold Council statistics.

Russia announced a couple of years ago a long term goal of increasing its gold holdings to 10% of total reserves. India, Turkey and the Middle-East have also been important buyers.

Investors choosing to ignore these trends do so at grave peril to their wealth. As Churchill once said: “The time for procrastination and delays and excuses is over, we are into a period of consequences”.

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Interview with Nick Barisheff: Gold is Money

by: Pierre Daillie posted on: July 27, 2008

This week we interviewed Mr. Nick Barisheff, President & CEO, Bullion Management Group, and discussed with him the importance of gold bullion. Mr. Barisheff founded Bullion Management Group Inc. in 1997, and is the portfolio manager of BMG BullionFund, Canada’s only open-ended fund investing purely in gold, silver, and platinum bullion.

GreenLightAdvisor.com: What’s the most important thing people need to understand about gold?

Nick Barisheff: Many people think gold is a commodity like copper, zinc or pork bellies, but it has 3,000 years of history as money. It was money that no government created by edict. It was just adopted for usage by itself, and it was and still is the best form of money. Currently, we have a 37-year global experiment in paper money. All prior paper money experiments ended in hyperinflation, with the currencies becoming worthless. All previous hyperinflations were contained within a single country, but this time, because of the reserve status of the US dollar, it is likely to be global in nature.

Right now, the price of gold is rising while most currencies are losing purchasing power as well as their value against gold. Gold comes back into its monetary role when there’s a loss of confidence in the financial system or in paper money, and that’s when people are attracted to it.

Before 1971, the monetary system was governed by the Bretton Woods Agreement. Under that agreement, the US dollar was backed by gold, and other currencies were pegged to the dollar. Other countries could trade their US dollars for gold. Essentially, US gold indirectly backed all other currencies. Then things changed. As the US was getting into the Vietnam War and into President Johnson’s policy of guns and butter, US gold reserves started declining.

Countries holding dollars were presenting their US dollars and asking for gold in return, and that led to US gold reserves dropping from a peak of 22,000 tonnes to 8,800 tonnes. On August 15, 1971, President Nixon “closed the gold window” and stopped the exchange of US dollars for gold. Closing the gold window was a euphemism, but basically the US declared bankruptcy. When you can’t meet your obligations when they are due, that’s what it is. So from that point in time, we’ve had 37 years where the entire world has been on a global fiat currency monetary system.

Since 1971, when the dollar was freed from the constraints imposed on a currency backed by gold, the US has experienced increasing federal government and current account deficits. The US is now borrowing $800 billion annually to fund its consumption of foreign-made goods and commodities, and the federal government is running a deficit of almost $350 billion. At some point, foreigners will become unwilling to continue funding US expenditures, forcing the Federal Reserve to expand the money supply at a faster pace. This will result in rising inflation, rising interest rates and a continuous decline in the US dollar.

GLA: We’ve had the fastest money supply growth in almost 40 years that’s resulting in increased inflation. Why would an investor want to go into T-bills, given that interest rates don’t even cover half of the stated inflation rate, which we know isn’t even the real inflation rate?

NB: For the first time in history, we have an unlimited ability, by all central banks, to print, however much money we want, so to speak. Apart from the US M3 money supply growing at about 20%, we also have India and China growing theirs at about the same rate. China is at 18%, India is at 20%, and Russia is at 45%. As China or India sell goods to the US, they take in US dollars and they print yuan or rupees against those US dollars. Japan’s a little different; there, individuals and corporations can take their US dollars and buy US assets themselves. In China you have to turn your US dollars in to the central bank.

In today’s inflationary environment, many who invest in fixed income investment do not appreciate that instead of being “safe” investments, they are in fact guaranteed losses of purchasing power when you take inflation and taxation into account. We have done some analysis into a systematic withdrawal from our Fund for those investors requiring income. Based on the fact that precious metals have a long track record of staying ahead of inflation, an investor would be far better off in precious metals in terms of maintaining principal after inflation and having more after-tax cash flow to spend.

GLA: What did you think of John Embry’s (Sprott Asset Management) recent article about the manipulation of the price of gold? His assertion was that the central banks are deliberately keeping gold below $1,000 per ounce.

NB: John and Eric Sprott have recently written an extensive report called Not Free, Not Fair. The report brings forth a great deal of evidence that the precious metals markets may be manipulated. While it may seem like there’s a conspiracy to suppress the gold price, I think it’s simpler than that. It’s a well know fact that it is the job of central banks to manage their country’s currency, that’s part of their mandate. Central banks understand that gold is a currency, but one that they can’t expand as easily as paper money. I don’t think there is any lack of understanding on the part of central bankers that gold is an alternative currency.

GLA: Isn’t gold considered to be just a commodity with no real monetary role anymore?

NB: I’d like to refer to an article by Tony Fell , and it’s particularly interesting, given that he was chairman of RBC Capital Markets at the time of writing. He talks about how gold has three attributes: it’s a commodity, a store of value and a currency. He says so many people now think of gold only as a commodity or jewellery, or as an archaic relic, that there’s a feeling of “who needs it anymore?” People don’t think of it as money.

However, the daily sales volume gives a conclusive indicator that gold is much more than an industrial commodity. The physical turnover of gold by members of the UK’s London Bullion Marketing Association is about *$25 billion per day. We’re talking about net turnover between the LBMA members. The volume is estimated at 7-10 times that amount.

It’s pretty clear that these are currency transactions. That’s why gold, silver and platinum trade on the currency desks of all the banks and brokerages, not the commodity desks. What people need to know is that gold is a currency [like dollars or euros or yen]. Gold is not trading at these volumes as a commodity or as some archaic relic.

GLA: What are your thoughts on technical analysis, given that gold is a currency?

NB: Technical analysis works if you’re looking at widely distributed stocks like the S&P 500, for example, where there are many, many transactions that accurately reflect public sentiment. The price of gold, however, can be impacted by one country, or one very wealthy individual who wakes up one morning and decides to buy, and then you can throw the charts away. Or when a government decides to sell or a government intervenes. I’ve looked at technical analysis for gold in the past and tried to back-test with various techniques and found that they don’t work more often than they do. In the most recent case, there is no justification for the drop in gold price; it should have been rising because nothing has fundamentally changed. In fact, the fundamentals got worse and the gold price should have rallied. None of the problems went away; nothing was solved; the conditions are as bad as or worse than they were previously. So the drop in gold’s price has been a false decline.

GLA: So, it’s the value of paper currency that changes, not the value of gold [so to speak]?

NB: One of the attributes of gold as money is that you can’t simply create it at will, like paper money. It’s no one else’s promise of performance and it’s not someone else’s liability. It’s not going to zero, no matter what. And, whether we’re moving the measuring stick of inflation or deflation really doesn’t matter, because the way gold should be measured is in terms of purchasing power. It doesn’t matter if gold is priced at $1,000 in paper money per ounce or $2 in paper money per ounce, it will retain its purchasing power in either circumstance.

The first important step in the big picture of understanding gold is that it is a store of wealth with a 3,000 year history, and it’s money. Over the long term, it retains its purchasing power. That’s why they say that an ounce of gold will always buy a man’s suit.

Apart from that, the US dollar is down 85% in purchasing power since 1971. In 1971 you could buy a car with 100 ounces of gold; a car was about $3,500 and gold was $35 an ounce. With 1,000 ounces, or about $35,000, you could buy a house. Today, you could buy several cars or a luxury car with 100 ounces, and a mansion with 1,000 ounces. You could also buy more units of the Dow Jones Industrial Average with your ounce today than you could in 1971. So that ounce has preserved its purchasing power while currencies have lost over 80% of their value.

GLA: Apparently, in the last 40 or 50 years, there’s only been three years that there was net selling by gold investors, three years out of almost half a century. Is this true?

NB: People who hold bullion tend to hold it for a long time, as the core of their entire wealth. It’s not sold once you understand its basic characteristics, because you have to have a reason to sell it, you have to use it to buy something better. I tend to look at investment performance as to whether I end up with more gold ounces or less gold ounces rather than percentage returns; you get a different conclusion then. For example, if you had invested 44 ounces in the Dow in 2000, you would now get back only 14 ounces.

This current cycle is not a conventional bull market in precious metals; I think we’re in the midst of a change in the global monetary system. This is not going to be like a typical commodity cycle where we go up for four years and down for four years; I think we’re witnessing a transition into another monetary system, whatever form that may take. At the end of this period the US dollar will no longer be the world’s reserve currency.

GLA: What happens if the US dollar ceases to be the standard?

NB: What happened when the British pound ceased to be the standard? It just ceased to be the standard. Its decline in value is still ongoing. It’s happened to every empire throughout history: the British, the Roman, the Greek, the Spanish, the Persian, and the Chinese. Every single empire ended up debasing their currency in order to maintain the empire.

GLA: Is gold likely to increase further going forward or has it topped and investors have missed out?

Currently, we have a lot of noise in terms of the credit contraction, real estate bubble, record high debt at all levels, dangerous derivatives vulnerabilities and unsustainable US current account and trade deficits. These could still blow up into bigger problems at any time. However let’s hope they get resolved or at the very least postponed somehow.

But there are two factors that are not changeable in all of this.

First: The US has to print money on an accelerating basis. Has to – because of the underfunded Social Security and Medicare obligations – which at present are about $60 trillion. If you took all of the net earnings of US individuals and companies it would not be enough to pay that off. You can’t tax people enough and politically you cannot tell everybody, “Sorry, we can’t give you your Social Security – we don’t have the money. And no Medicare either.” So they have to keep printing money.

Second: The issue of Peak Oil – it used to be a debate as to when the production of oil would peak. Now it looks like that has already happened, in March 2006. As a result we have a situation where oil production is declining while demand is increasing, particularly from India and China. This will result in ever-increasing oil prices, and also increasing prices for almost every product and service.

As these two forces – increased money printing and peak oil – interact, the result is a declining dollar alongside constantly increasing oil prices. This leads to even greater oil price increases in an effort to offset the dollar decline. These two highly inflationary factors are working in tandem, and they can’t be changed.

Therefore, as oil rises and the dollar declines, commodities – and particularly precious metals – will continue to rise.

GLA: What’s the relationship between oil and gold?

NB: There’s not necessarily a great deal of correlation between the two in the short term. However, in the longer term, the correlation has been in the order of about 16 barrels of oil for every ounce of gold.

GLA: Has that been consistent long term and what is the outlook for precious metals?

NB: With only short-term fluctuations, this ratio has held up over the long term. At this point the price of gold is undervalued compared to the price of oil. Gold should be closer to $1,500 an ounce if you use this measure.

On top of this kind of inflationary issue eroding financial confidence, we’re at peak production in gold. When the price of gold was low, miners employed high-grading to get the most easily attainable gold out of the ground. As the price rises, miners resort to lower-grade mining, which has become worthwhile – but in some cases you have to sift through tonnes of ore for each ounce.

Platinum, for instance; it takes six months to get an ounce of platinum out of roughly 10,000 tonnes of ore. Right now, almost all the platinum produced originates in South Africa, and the mines are miles underground, and electricity intensive. Power shortages in South Africa are interfering with production and slowing things down. All these forces are coming together, slowing production and driving up prices.

With silver, most of the aboveground reserves have been depleted – most of the silver that is produced is consumed each and every year. Silver also has two demand drivers – monetary and industrial. The number of industrial applications are growing every year while the monetary demand has also been growing in the past few years. It is important to remember that “silver” means “money” in several languages.

GLA: Why is gold so important as an element of diversification for investors?

NB: Take a look at the cycle from 1968 to 1982 – during that time it took stocks the whole 14 years to break even. If you factor inflation into it, it actually took until 1995. So stocks didn’t look so good in the past cycle, and they are not looking very good now. The DJIA is well below its inflation-adjusted highs. Its performance is much worse when measured in gold ounces. The DJIA has declined from a high of 44 ounces of gold in 2000 to about 14 today, but if you look at a chart the Dow appears to be at new highs. It’s like taking the Zimbabwe stock market and saying, “Look how well Zimbabwean stocks have done; the market was up 8,000%.” But what if we adjust for the 100,000% inflation in that country? Not so good, is it?

BMG BullionFund is internally diversified. We buy physical gold, platinum, and silver in equal amounts. While some people like to focus on gold, they would miss out on the fact that silver and platinum have both outperformed gold since the beginning of this cycle in 2002.

GLA: What do you do about inflation?

NB: First, it is important to look at real inflation. What is real inflation? The real number is around 9%, not 3%. The calculations the government uses for the Consumer Price Index [CPI] are really meaningless as a true inflation indicator. The real definition of inflation is an increase in the money supply that leads to an increase in prices. Prices do not increase on their own unless you have a shortage; when you increase the money supply, what you’re really doing is debasing the currency, and as the purchasing power of the currency declines prices appear to be rising. So with the US money supply (M3) growing at 20%, Canada’s growing at 9%, and most other countries’ growing at around 15%, that’s going to result in rising prices and real inflation.

If you take real inflation into account, Wainwright Economics suggests that the appropriate bullion allocation for a bond investor’s portfolio is 18%, and for the equity investor’s portfolio 40%, and that’s just to break even with inflation. Although this may sound incredible, think of the 1970s. How much bullion was required just to break even in an equity portfolio? Bullion went up 2,300%, while equities were flat on a nominal basis. Inflation was 15%.

So without even getting wrapped up in a discussion about the complex subject of money, those two points are fairly straightforward. Ibbotson Associates confirmed that precious metals are the most negatively correlated asset class to the traditional financial assets, so it gives the biggest bang for the buck for the least amount of allocation. In the process you also achieve a more balanced, diversified portfolio. Advisors would do well to have an allocation to precious metals to protect their clients from under-diversification.

GLA: Do you think this pullback in gold is an opportunity to add to positions at this time?

NB: Yes as long as there hasn’t been a major change in the fundamentals that drive the price. When these pullbacks occur, you always get some technical interpretations, whether it’s conventional technical analysis or Elliot Wave, coming out with the idea that the bull market in precious metals is over and that it’s now going down forever and so on.

When these things happen, you have to ask if anything changed fundamentally to justify that decline. If nothing changed fundamentally, the only conclusion you can draw is that something’s wrong in the technical interpretations. In all likelihood the technical interpretation is wrong because there’s been an intervention by monetary authorities. Technical analysis only works when the markets are working freely.

GLA: Well, whatever it is they’re trying to do to knock the price down, once again, he who wins in the end is he who has the most ounces and the most shares. It’s got to have been a good year for you with gold prices up 10%, silver up close to 19% and platinum prices over 30%.

NB: Yes, it has. We have grown assets year-over-year by 80% this year alone, so it’s been a substantial increase, and performance-wise, we’re about 20% year-to-date.

GLA: Thank you very much for sharing your knowledge with us.

*All amounts expressed in US dollars, unless otherwise noted.

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Alex’s Note’s: This pattern will only continue into the future as the baby boomers retire. The smart ones are all firing up Self Directed IRA’s and getting into commodities, energy, and precious metals while there is still something left.

Report: Pensions Plunge by $170 Billion
Alan Rappeport
CFO.com | US
July 24, 2008

A rough year is erasing gains from the last five and may force companies to spend more on their plans.

The value of pension plans for S&P 500 companies has plunged by $170 billion thus far this year, reducing a $60 billion surplus from 2007 to $110 billion deficit, according to research by Credit Suisse.

Defined-benefit pension plans have been stung by the turbulent equity and bond markets this year. Plans rely on solid returns to meet their payout obligations, so declining asset values hits them especially hard.

advertisement With the steep decline in asset values so far this year, “pension plans may have given up some of the hard earned gains from the past five years,” the report said.

The most painful impact may be on the balance sheets of corporate pension sponsors. The funded status of pensions appears on company balance sheets and must be marked-to-market annually, showing the extent of a fund’s decline. Also, pension costs that rise beyond expectations could put added pressure on earnings, and companies may have to contribute more to the plans, according to the report. In turn, that could detract from money that could otherwise be used to pay dividends or service debt.

“If the plans get weaker the companies that sponsor them could get hit from a number of angles,” the report said.

Struggling pension funds affect all companies differently, depending on their exposure, the researchers observed. Some companies, such as General Motors, Ford, Eastman Kodak, and Goodyear have benefit obligations that are larger than their market capitalizations, according to Credit Suisse.

Credit Suisse’s projections for 2008 are based on market performance so far this year, in which equity prices are down by 10 percent. Companies have been shifting where they allocate their pension fund assets in the last year, reducing their exposure to the equity markets and investing heavily in fixed income.

This year’s pension problems began in January, when 100 of the biggest U.S. companies saw their defined-benefit plans lose more than a full year of 2007 gains in the first month of the year, when funded status fell by $63 billion, according to Milliman, a pension actuarial firm.

Last year companies with big pension plans enjoyed the income-statement effects of a hefty cut in plan costs. With big asset losses of 1999 through 2002 having mostly worked their way through the pension system, plan expenses dove by $19 billion, boosting company earnings by $8 billion, Milliman found.

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I have written on several occasions in the past in regards to how the US is currently “borrowing” up to $2 billion a day to keep the government running. I have also suspected, that when the foreign funding stops, our government and financial system will run a real risk of hyperinflation.

Today, we find ourselves one step closer to the funding stopping. The day that the world loses final confidence in the credit worthiness of the US, is the day foreign governments stop buying US paper instruments.

When China and other major trade partners make this decision, be prepared for a huge slide in dollar value, and many overseas USD coming back to US shores. The effects of this will be higher food and gas prices, and higher prices of all commodities for not just Americans, but people the world over as dollar denominated goods that are required for basic life will see dollars flood into those markets. There are Trillions of USD now currently held in national reserves of China, Opec, Japan, Russia. The time will come when the holders of those reserves will no longer be willing to sit on them and watch them burn as the dollar devalues at 12%-18% a year.

Governments the world over will be looking for a safe harbor as the value of USD plummets. They will likely turn first to the Euro, but over time as they realize it has no true strength behind it, and that it is just one more fiat currency, may eventually find their way back to gold.

The Credit Rating of America:

Steps taken to calm investor fears over agency debt

By Jamil Anderlini, Charles Clover, Krishna Guha, Kathrin Hille, Song Jung-a, Michiyo Nakamoto, James Politi, Saskia Scholtes and Henny Sender

Published: July 24 2008 03:00 | Last updated: July 24 2008 03:00

Last Thursday the Kuwait Investment Authority, the world’s sixth-biggest sovereign wealth fund, received a call from the US embassy to reassure them that bonds issued by Fannie Mae and Freddie Mac were sound, according to one person with knowledge of the matter. The call came after Kuwait’s minister of finance announced that the KIA was not planning to invest in their debt in future.

The Treasury was unable to comment on the specific episode but said US officials had been in contact with other governments throughout the market turmoil as part of their regular responsibilities.

“This certainly includes providing information on the steps we’ve proposed to provide temporary authorities to give confidence to markets and create a strong, independent regulator for the government-sponsored enterprises [GSEs],” said the Treasury.

Foreign investors - particularly in Asia and Russia - have been among the biggest buyers of so-called agency debt, which they viewed as a safe investment. In recent years this debt served as an important conduit for recycling global trade and petrodollar surpluses into US housing investment.

A key objective of the rescue plan winding its way through Congress is to calm global nerves shaken by the plunge in Fannie and Freddie stock prices. The plan appears to be succeeding for now, but an undercurrent of unease remains.

“Two weeks ago there was nothing more stable than Fannie Mae and Freddie Mac. These were not considered risky assets. In the last 1½ weeks we have seen this view corrected,” Alexander Vinokurov, chief executive of Kit Finance, a Russian investment bank, told the Financial Times.

Executives at many sovereign wealth funds believe the Federal Reserve and US Treasury have lost credibility with international investors in recent months.

If foreign governments were to scale back their buying of GSE paper, even at the margin, it could have a significant effect on US mortgage rates.

A senior Fed official told the FT: “Central banks are asking themselves, ‘Where is the upside?’ They are increasingly thinking about and questioning the size of their holdings and the rationale behind those holdings.”

Still, most financial officials contacted said they were reassured by the strengthened promise of government support for Fannie and Freddie. Chinese officials and government economists said Beijing was satisfied with the moves to prop up the agencies. China may hold as much as $400bn to $600bn in Fannie and Freddie debt, most of which is held by the State Administration of Foreign Exchange.

Bank of China has an estimated $20bn in Fannie and Freddie debt, according to investment bank CLSA. Li Lihui, the bank’s president, said the bank “will be able to fully manage the risks related to this matter”.

Kang Sung-kyung, head of the Bank of Korea’s reserves management planning team, said: “We don’t think that we are exposed to big credit risks with our investment in the agency papers.”

Meanwhile in Japan the Financial Services Agency denied reports that it was discouraging banks from investing in Fannie and Freddie debt.

“Generally speaking, we have been encouraging banks not to invest in products simply on the basis of a triple A rating, but we do not tell financial institutions what they should or should not invest in,” an FSA representative told the FT.

Reporting by Krishna Guha and James Politi in Washington, Henny Sender and Saskia Scholtes in New York, Charles Clover in Moscow, Jamil Anderlini in Beijing, Michiyo Nakamoto in Tokyo, Song Jung-A in Seoul and Kathrin Hille in Taipei

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Chart Painting 101      Author: Dan Norcini

Dear Friends;

The following is a series of headline alerts and a stories that came down my wire this AM. The reason I have included them is to reinforce what we have been saying about “CHART PAINTING”. You would be a bit surprised to learn that I receive emails from people out there who categorically deny such a thing is possible or that it even occurs in the US markets. They condescendingly assert that our claims about the tactics of the short sellers, both in the Comex gold arena and in the stocks, is merely a case of sour grapes from a frustrated bull. That is naive at best and just plain ignorant at worst.

While this story deals with the oil market, the tactics employed are identical and reasons behind them are the same in all cases. Why is that? Because todays markets are dominated by technicians who pride themselves on having no fundamental view whenever they approach a market but claim that all that is necessary to make money is a knowledge of technical analysis. Some of them actually go so far as to boast about their ignorance of the markets that they trade and revel in the fact that they could care less!

We have maintained that those who have no fundamental view are rudderless ships on the ocean of the trading floors. They can be easily blown about by every wind of price behavior. When prices move lower during a price retracement in a bull market, they become morosely bearish. When prices move higher, they are wildly bullish buying blindly into upside strength. Price action alone dictates what they believe! Since this is now the vast majority of traders/investors, it takes little imagination to understand why chart painting on the close is so important to market manipulation schemes.

It is a fact that the closing price is the most important price in any commodity or stock for that day session as nearly every single technical price indicator or oscillator uses the closing price in its calculations. Move that strongly in one direction or another, push it as far as possible off the session highs if you are attempting to force price downwards, and all of the technical analysis programs that millions of investors are using will register your efforts. The result is that those software programs then do your work for you as they HERD the INVESTING PUBLIC in the direction you wish them to go.

Manipulation such as is charged above, “banging the closing period”, has ONE PURPOSE in mind  to move the closing price in the direction that the perpetrators desire so as to AFFECT THE MAXIMUM technical damage or effect to a market and to psychologically devastate those on the other sides of the trade.

Now do you see why it is necessary when trading gold to understand the tactics of our trading enemies and to also get a grip on your emotions when trading as well as having a firm fundamental view? Once you understand how the game is played you can also spot the tipoffs that alert you to their activities and protect yourselves accordingly. You can also profit accordingly by using the inevitable lemming like response to your advantage.

Dan