“Currency Wars” is the term widely used to explain the fact that global currencies, floating versus the US Dollar, are forced to devalue over time to retain the ability for its host country to compete in foreign trade. If a country’s currency becomes to valuable versus others, then the export sector suffers as goods become to expensive for other countries in their own currencies. One way to visualize it is that if the worlds currencies were an atom, the USD would be the nucleus and the other various currencies are electrons orbiting it. As the US goes down in value, the other currencies follow it.

Gold is not really rising on speculation, what its doing is signaling a problem in the global system of exchange, which demands a stable currency for use in international trade.

Brazil is preparing a range of additional measures to stem the damaging rise of the real as the global currency war shows no signs of ending, according to Guido Mantega, the country’s finance minister.

Speaking to the Financial Times in London, Mr Mantega said the Group of 20 leading economies was still a long way from achieving its goal of agreeing new guidelines for managing currencies, there were “struggles between countries” such as the US and China, and the global currency war was “absolutely not over”.

Slow growth and low interest rates in advanced economies continued to put upward pressure on Brazil’s currency, Mr Mantega said, forcing the authorities to consider further intervention in currency and derivatives markets to limit overshooting.

“We always have new measures to take,” he told the FT, indicating on the sidelines of an investor conference that these would not be pre-announced, but would include market intervention. On Tuesday, the Brazilian central bank also announced a spot auction to buy US dollars in another move to boost foreign exchange reserves and stem the upward pressure on the real.

The Brazilian currency has been close to 12-year highs against the dollar in recent weeks, but fell by 0.7 per cent on Tuesday.
Brazil’s actions to limit currency appreciation highlight the dilemma faced by many fast-growing economies – including Turkey, Chile, Colombia, and Russia – since allowing currency appreciation limits domestic overheating, but also undermines the competitiveness of domestic industry.

“I gave a speech to investors and I hope they did not receive it too enthusiastically,” Mr Mantega joked, “ because there is a tendency for too much capital to enter”.

Brazil had to take other actions, he added, because domestic interest rates were already high, so as to curb inflation, and further rate rises alone tended to encourage further capital inflows. Brazil has already instituted a number of measures, including taxing bond portfolio inflows, to try and curb the real’s appreciation.

“Monetary policy is very tight in Brazil and the level [of interest rates] in real terms is higher than in other [emerging] countries,” Mr Mantega insisted.

With the main policy rate at 12.25 per cent, he rejected the notion that Brazil was overheating, saying the economic growth rates were sustainable, inflation was falling and the fiscal deficit was coming down. The economy is forecast to grow by 4 per cent this year after expanding 7.5 per cent in 2010.

Credit growth – at 15 per cent this year – was lower than the 22 per cent rate in 2010, he added, partly as a result of government restrictions on banks borrowing cheaply at low interest rates from the US, but he looked forward to the day when lower inflation allowed “monetary policy more flexibility”.

Mr Mantega’s comments highlight the low-level currency war between emerging and advanced economies that has unsettled global financial markets. This will be one of the issues facing Christine Lagarde, who started work as managing director of the International Monetary Fund on Tuesday.

Brazil supported the new French managing director over her Mexican rival, Agustín Carstens, but Mr Mantega insisted there was no “regional rivalry” between Latin America’s two biggest economies. Mr Mantega said he felt Ms Lagarde would be more effective at advancing the cause of developing nations.

Article Source

It is interesting to note the timing here – QE2 is scheduled to end and just as Libya oil is off market for at least all of 2011, and the combined force of less oil and more paper money in the economy has caused the price of food to skyrocket, causing addition social unrest. These oil stocks are being sold off and are hard assets belonging to US Citizens, at prices that will never be seen again and the reserves will likely never be replenished.

The International Energy Agency announced it would inject 60 million barrels of government-held stocks in the global market, immediately increasing world supply by some 2.5 percent for the next month and sending prices spiraling, with U.S. crude prices erasing all of the year’s gains.

“This supply disruption has been underway for some time and its effect has become more pronounced as it has continued,” said the IEA. It said expectations were that Libyan production would remain off the market for the rest of 2011.

“Greater tightness in the oil market threatens to undermine the fragile global economic recovery,” it said.

The IEA release, at 2 million barrels per day (bpd) over the next 30 days, is more than the daily loss of Libya’s 1.2 million bpd exports and comes despite a broad view that the world is not now short of crude — although many analysts and agencies also agree that markets will tighten later this year.

The release includes 30 million barrels of light, sweet crude from the U.S. Strategic Petroleum Reserve — the same quality that markets have lost due to the Libya disruption.

Article Source

JOHN C. HATHAWAY, CFA – Senior Managing Director & Portfolio Manager, Tocqueville Funds

John Hathaway, Senior Managing Director, is a Portfolio Manager and a member of the Investment Committee at Tocqueville Asset Management L.P. He is also a Director of Tocqueville Management Corp., the General Partner of Tocqueville Asset Management.

Mr. Hathaway, who has 39 years of investment experience, manages the Tocqueville Gold Fund, Tocqueville Gold Partners and separate accounts for individual and institutional clients following a gold strategy.
Prior to joining Tocqueville in 1998, Mr. Hathaway began his career in 1970 as an Equity Analyst with Spencer Trask & Co. In 1976 he joined the investment advisory firm David J. Greene and Company, where he became a Partner. In 1986 he founded and managed Hudson Capital Advisors followed by seven years with Oak Hall Advisors as the Chief Investment Officer.
Mr. Hathaway has a B.A. degree from Harvard College, an M.B.A. from the University of Virginia and is a CFA charter holder.

The Toqueville Gold Fund is a $2.7 billion USD fund.

From King World News:
With a continuation of gold and silver volatility, today King World News interviewed one of the great ones, 40 year veteran John Hathaway of the Tocqueville Gold Fund.  When asked about the volatility in both gold and silver Hathaway had this to say, “We’re in a shakeout now and frankly it isn’t as scary as the one in 2008, but I think there’s no foundation whatsoever for solid, robust economic growth and that’s the realization the markets are coming to.  I think we’re past the point of no return.”

Hathaway continues:

“I’m sure the vast majority of investors think that somehow we can restore fiscal sanity to the federal budgeting process, that it can be done democratically, but I kind of doubt that.  When you go to somebody and say we’re going to have to go on an austerity regime…that’s socially contentious…they don’t want to hear that.  That’s why you’re seeing rioting in Greece and that’s why you’re going to see the same sort of thing here (in the US) if we go the austerity route.”

Hathaway presented a Dow/Gold ratio in his latest piece and believes we are headed ultimately to a one to one ratio which would put gold today at over $12,000.  When asked if $12,000 gold was achievable Hathaway replied, “Sure, because that would reflect more damage to the integrity of the currency.  The number that they (Dow & Gold) cross at is going to probably be in the high 4 digits or low 5 digits, if it happens in the next couple of years.

…You know here’s the problem, we have negative interest rates today, negative real rates of around two percent, two and a half percent…If we did have a Volcker moment when you had somebody at the head of the Fed who said, ‘We are going to restore integrity to the currency’, you would have to raise real rates to something like three percent to make it easy.  So negative three (percent) to positive three means six percent nominal times $14 trillion in debt which is $700 or $800 billion, on top of the federal deficit that is already $1.6 trillion.  I mean those are the numbers that tell you that we’re basically bankrupt.  That’s why I say…that we’re past the point of no return.”

When asked what the price of gold would have to be to get back on a gold standard Hathaway stated, “It would have to be much higher.  I mean basically you have to make paper preferable to gold, and in this climate that means in a way you have to sort of bid for all of the gold, get people to trade in their gold for paper.

The market says you can’t get it at $1,500.  Maybe they’ll try $2,000 or $3,000, but the reality is unless that bid for gold is backed by credible measures to restore integrity to government finances, the real number is going to be what we talked about earlier, something in the five digits.”

Jim Sinclair stated the price of gold would have to clear $12,500 to balance the foreign debt of the United States.  When asked about Sinclair’s $12,500 number Hathaway said, “Yeah, that ($12,500 for gold) is really what it would have to be.”

Just like the Jim Sinclair interview, here you have one of the great ones, John Hathaway, talking about the end game, essentially the end of the currency system as we know it.  This is probably Hathaway’s most compelling interview on King World News for that reason.  There is so much more information in John’s segment than the small portions above, so be sure to return to hear the complete interview.

As western nation debt continues to escalate, this trend of Central Bank buying will likely continue, because gold is indeed money.

Gold is not in a bubble, fiat currencies and sovereign debt is in a bubble. The comment parroted so often by those who have not taken the time to study history or the underlying factors is that gold is overpriced, the problem is what they are comparing it to. This view most often stems from the common western idea that gold is a speculative commodity, and not money.

This view is changing fast, evidenced by massive Central Bank buying. If you compare the price of gold relative to the explosion in money supply gold is incredibly cheap. Smart investors are starting to make this switch, and are comparing gold now to currencies instead of stock market performance. The inability for many people to even as an experiment consider gold as money, is the reason so many are incapable of understanding golds recent and likely future performance. Only those who are able to think outside of what our current generations have accepted are the ones who are able to grasp it.

“Gold is a possession and not a promise. A government that owns an ounce of gold does not have to ask the United States or anyone for permission to cash it. The gold supply is finite; that is its monetary significance.” – Sir Rees-Mogg, The Times, Dec. 12,1979

The above quote is the exact opposite of what those incapable of grasping that gold is money has to say about gold. The common claim is that gold cannot be money because there is not enough of it. If a person exercises their common sense they will see this is a ridiculous statement. The reason any money has value at all is due to its scarcity. If dollar bills were as common as rocks on the ground, how valuable would they be? Yet those who have a hatred of gold as money bordering on paranoia would suggest that creating infinite amounts of paper notes is a better idea?

It took almost 100 years for the Dow to hit 1000, yet  it took only 16 years to hit 10,000 from 1983 to 1999. It is important to note that the money supply of the US was about $1.5 trillion for the majority of the US’ prosperous years – all of the hospitals, bridges, etc were built with that limited stock of money – all the way up to about 1971 when gold was severed from the USD – since then the money supply has exploded by over ten fold, arguably carrying the equity markets with it.

This same effect can be seen by comparing the recent QE to the SPX as this excellent chart from Zeal LLC shows:

So the question must be asked, are the equity markets really rising or is that just a symptom of an explosion in paper money printing?

If the (Continuous Commodity Index) CCI has risen an average of 14.4% each year for the last decade, is that really the value of food and other commodities increasing or the value of the paper money decreasing? If your portfolio increases by 10% in nominal USD terms, but you lost 14.4% in buying power, did you really move forward or backward?

If you expand the money supply 10 fold, can gold not go from $350 to $3500, a ten fold increase? It seems it is easy for financial commentators to accept that the money supply measured in M3 is well beyond $14.5 trillion, yet cannot fathom dividing those dollars by the number of ounces of gold in the US treasury to arrive at a price north of $50,000 per ounce.

The biggest subject that must be decided upon by financial professionals is to realize that gold is actually money and stop comparing it with the stock markets and other speculations. Gold is not rising on speculation, gold is rising on the fact that it is  now and always has been the measurement by which all value is compared to.

(Bloomberg) Mexico, Russia and Thailand added gold now valued at about $6 billion to their reserves in February and March as prices advanced to a record, the dollar weakened and Treasuries lost investors money.

Mexico bought 93.3 metric tons since January, adding to holdings of about 6.9 tons, according to International Monetary Fund data. Russia increased its reserves by 18.8 tons to 811.1 tons in March and Thailand expanded assets by 9.3 tons to 108.9 tons in the same month, the data show.

Central banks are expanding their gold reserves for the first time in a generation as purchases by billionaire investors including John Paulson contributed to bullion extending its longest winning streak since at least 1920. Countries were also boosting their holdings in 1980 when gold rose to a then-record $850 an ounce, only to fall for most of the next 20 years.

“Central banks have good reason to buy gold,” said Peter Morici, a professor of business at the University of Maryland in College Park and a former economic adviser to the U.S. government. “The dollar is no longer a safe asset for backing currencies. Treasuries are not a sound investment” and budget and debt issues mean central banks should buy gold, he said.

Gold for immediate delivery climbed to a record $1,577.57 an ounce on May 2 and traded at $1,539.29 by 3:04 p.m. in London today. Prices are up 8.3 percent this year and have gained the past 10 years. Global holdings of gold by governments and official institutions such as the IMF stood at 30,523 tons by April, according to the World Gold Council.
Lowest Level

The dollar today slid to the lowest level since July 2008 against six major currencies. Treasuries lost investors 0.14 percent in February and March, according to Bank of America Merrill Lynch indexes.

Bullion earlier today dropped after the Wall Street Journal reported Soros Fund Management LLC sold precious metal holdings because of a reduced risk of deflation, citing unidentified people close to the matter. The Soros fund held shares in the SPDR Gold Trust and the iShares Gold Trust equal to about 508,800 ounces as of Dec. 31, a U.S. Securities and Exchange Commission filing on Feb. 14 showed.

Soros described gold at the World Economic Forum’s meeting in Davos, Switzerland, in January last year as “the ultimate asset bubble.” In a Nov. 15 speech in Toronto the 80-year-old said conditions for the metal to keep rising were “pretty ideal” and at this year’s Davos forum he said the boom in commodities may last “a couple of years” longer. Michael Vachon, a spokesman for Soros, declined to comment today.
Thailand’s Reserves

Since the end of 2009 countries including India, Sri Lanka, Mauritius and Bangladesh have bought gold. Before this year’s purchases, gold accounted for about 0.2 percent of Mexico’s total reserves, and 2.6 percent of Thailand’s reserves. The metal accounts for more than 70 percent of reserves of the U.S. and Germany, the biggest holders, World Gold Council data show.

“Mexico’s gold accumulation confirms the demand of emerging market central banks to diversify their reserves,” said Bayram Dincer, an analyst at LGT Capital Management in Pfaeffikon, Switzerland. “They will be the big buyers for years to come.”

A call and text message seeking comment from Thailand Central Bank spokeswoman Sirithida Panomwan Na Ayudhya was not returned after business hours.

Kazakhstan reduced its bullion holdings by 1.55 tons to 67.3 tons in March, the IMF data show.

This kind of public pressure on Central Bankers with weaker economies only makes sense if other Central Banks want the gold. Regardless of the common misconception among financial commentators that Central Banks sell their gold to the market at large, all such transactions in recent years have instantly been gobbled up by massive demand from Central Banks of developing economies in direct Central Bank to Central Bank type sales.

Any such sale would never see the marketplace.

I do however predict that we will see more of this as the debt burdens of western nations causes re-structuring of sovereign finance and gold is again admitted to be money.

Watch what they do, not what they say. Gold is indeed money. You don’t see Central Banks holding coffee or copper. They hold Gold.

Should the Golden Goose Be Plucked?

By DAVID COTTLE (Wall St. Journal)

Why shouldn’t cash-strapped European countries be forced to liquidate their gold holdings, German politicians have been asking.

Prices, after all, are close to historic highs. Moreover, bullion is the ultimate hedge against an economic rainy day, and it’s certainly pouring down in Greece, Portugal and Ireland.

The first two are sitting on substantial gold reserves. Portugal has nearly 383 tons and Greece around 112, according to the World Gold Council. Indeed, Portugal’s hoard comes to about 9% of its GDP, which is the highest proportion in Europe. Greece’s is a much lower 1.7%.

Portugal’s holding would be worth $18 billion at current market rates, which would be a handy offset to the €78 billion ($108 billion) bailout it has just accepted from the European Union. On the face of it, there is an absurdity here. How many of us would toss a dime to a beggar if we knew he had an ingot or two stashed under his sleeping dog?

Not Norbert Barthle, Germany’s governing coalition budget speaker, it seems, nor his counterpart Carsten Schneider from the Social Democrats. They have urged Portugal to consider selling some of its gold pile to ease debt woes and therefore reduce the cost to German taxpayers of bailing it out.

Unfortunately for the pair, market economics are never quite as simple as they look, even when considering arguably the simplest asset of all.

Both Greece and Portugal have signed central-bank agreements not to destabilize the gold market, and announcing an imminent dump of their reserves would certainly do that.

Moreover, as one gold dealer said: “Selling reserves has a finality about it; you never get them back. Governments can tell their people that there is some benefit at the end of austerity and reform, but not at the end of selling gold to plug a debt hole.”

Even so, central banks in cash-rich exporting countries are accumulating gold despite the high prices. The Bank of Mexico snapped up a hundred tons between February and March, so there’s clearly an appetite for large amounts.

Monument Securities strategist Marc Ostwald is one analyst who doubts a straight gold sale is likely from either nation, as it would be too destabilizing for a market already looking nervous at such lofty peaks.

But there is no reason, he said, why the gold of debtor states shouldn’t be used as collateral in repurchase agreements, lent out and bought back later at a small premium, which would represent the interest on the cash paid.

“I think some sort of repo deal using gold might make sense,” he said, “although of course this would really be no more a long-term solution to these countries debt problems than the bailouts are.”

In the end, Europe’s debtor states, perhaps, are haunted by the memory of the last high-profile national gold seller, the U.K. Deeming the metal too volatile to its Treasury, under then Chancellor of the Exchequer Gordon Brown, it sold off nearly 400 tons between 1999 and 2002.

Prices were at their lowest in 20 years, and advance notice of the U.K.’s intent drove them lower by 10%, to $252 an ounce, by the time of the first sale in July 1999.

Twelve years on, and with gold trading in the vicinity of $1,500 an ounce, that nadir is still remembered as “Brown’s Bottom.”

Article Source

This weeks correction in silver has been a huge move. Looking back a few years, this weeks decline was even steeper in slope that the globally fear induced crash of 2008.

The unique set of circumstances leading to this acute correction do not occur very often.

1. Margin requirements with CME for silver have occurred 5 times in 8 days. This has resulted in smaller traders being forced out of their positions and provided easy and cheap momentum for institutional players to pile on the short action. This was extremely convenient for the elephants to stomp out the little guys and gobble up some profits. Bear in mind, silver margins could be raised to cash before this is all over.

See this excellent chart from Zero-Hedge:

2. With silver in overbought territory since roughly $36, this has been due for a pull back for some time now

3. With a massive dollar rally, all commodities were getting sell signals across the board creating further downward pressure

Finally, silver does tend to follow what gold is doing, and gold has had a powerful bounce and is up $20.10 as I write this.

For those waiting for an entry point in precious metals this is smelling like a good one. Note: silver could still drop down ultimately a bit below the 200dma which is currently 28.29 before going back into an upward leg but this doesnt happen very often

Ultimately, our long term view on gold and silver has not changed. Gold fundamentals are actually getting stronger as we progress, not weaker, and gold over the next 3 to 5 years has a long way to run. Western nation debt and alarmingly large federal budget deficits appear to be normal policy now – there is no doubt this must eventually have its consequences in the marketplace. We look to history to tell us what those consequences are – and thus far the answer has always been the same. Whether the modern alchemists of our Central Banks globally today with Bernanke as the head alchemist can truly transform paper into gold is yet to be seen. Our money is with history.

Silver fundamentals are also getting stronger with GFMS estimating all annual silver production will be consumed by industrial demand by the year 2015, leaving existing investment supply as the sole place to buy for new investors – having strong positions in PHYSICAL silver before this timeframe may be a smart idea.

Silver this week has had a large pullback approaching 30% off the last peak – if you take intraday highs above 49 or at daily closes of 48.7.

As I write this silver sits at $35.89 and my comment at the beginning of this week was that $34.65 would be a 30% correction from the intraday peak.

This may seem brutal to those who are new to precious metals but it is in line with previous behavior in silver once silver reaches a certain level above the 200dma.

If you purchased right before this correction, take a deep breath and go back to the fundamentals. I am talking to long term holders not traders.

Alex’s Notes: Some background for those of you who are new to precious metals – for almost 20 years Central Banks have sold gold – on average these sales have added roughly 500 tons per year to the gold supply side of the global supply demand equation. As of last year this 20 year some odd trend of selling has shifted and Central Banks have become net buyers of gold.

This is important, because not only does it take 500 tons per annum on average out of the supply equation, it also places buying pressure by adding a tonnage requirement on the demand side. This is a major sea change in the gold supply demand equation. This is a very powerful fundamental driver for the future of the gold price.

By Jack Farchy in London

The central bank of Mexico bought nearly 100 tonnes of gold in February and March, the latest emerging market country to turn to bullion as a means of diversifying away from the faltering dollar.

The purchase is one of the largest by a central bank in recent history. The gold, worth $4.6bn at current prices, is equivalent to about 3.5 per cent of annual mined output.

The central bank has not been publicly announced the move, but has reported it both on its own balance sheet, posted online, and to the International Monetary Fund’s statistics on international reserves.

Central banks became net buyers of gold last year after two decades of heavy selling, a dramatic reversal that has helped propel the price of bullion to a series of record highs.

On Wednesday morning, gold was trading at $1,535 a troy ounce, down from the nominal record of $1,575.79 touched on Monday.

Mexico follows other booming emerging market economies, including China, India and Russia, which have all made large additions to their gold reserves in recent years.

Matthew Turner, precious metals strategist at Mitsubishi, the Japanese trading house, said the purchase “seems to confirm there’s an appetite now among emerging economies with large forex reserves to add to their gold reserves. Gold is seen as one way in which to diversify away from the dollar- or euro-denominated assets.”

The dollar has plunged 10 per cent since January against the world’s major currencies and is trading near an all-time low. Robert Zoellick, president of the World Bank, has suggested that gold should form part of a new international monetary system.

China announced in 2009 that it had bought 454 tonnes of gold over the previous six years; India bought 200 tonnes of gold directly from the International Monetary Fund in October 2009; and Russia has bought just less than 400 tonnes on the open market over the past five years.

However Mexico’s buying in February and March, which amounted to 93.3 tonnes of gold, is one of the most rapid programmes of accumulation on record. Apart from India’s off-market purchase in 2009, the 78.5 tonnes bought in March is the largest monthly purchase by a central bank in at least a decade, according to data from the World Gold Council.

The Bank of Mexico could not be reached for comment on Wednesday morning.

Article Source

We currently are watching a major silver pullback – as of this moment we are 16.35% off the recent peak – this has been expected ever since silver passed $36 – granted it has run faster and farther than we thought possible up to $49.5 territory

Looking at a recent chart from my friend and colleague Duncan Cameron, he points out that very toppy “flagpole” suggests its time for a pull back. I want to point out he sent this chart to me last week so was dead on in his view.

It is equally important to understand that this is completely normal for those of you who are new to the silver market. Each time silver runs up past 1.4x the 200 DMA it is common to see a correction ranging from 10% up to even the extreme of 30%.

Assuming a peak was hit in 49.5 territory a 25% pullback places us at $37.13 and a 30% pullback places us at $34.65.

This is not a prediction we will pullback that far, at the moment what will determine how far this comes back is new buying to provide a support level.

For those of you who have bought right before the pullback dont fret, if silver stays tight with gold through the seasonal doldrums months of June and July it may feel like a long ride to positive but our long term view is that silver is likely to continue to track gold – and all fundamentals are still pointing to a rising gold price over the long term even if we see a correction in gold through the summer.

Alex’s Notes – we did predict this shift in Chinese foreign reserves several years ago. It is speculation as to how much of China’s war chest would be used to buy gold directly. You can have a deeper look as to our reasoning by subscribing to our Global Insider, as we provide some basis for this in our April Edition.

(Bloomberg) – Central banks that were net sellers of gold a decade ago are buying the precious metal to reduce their reliance on the dollar as a reserve currency, signaling demand that may extend a record rally in prices.

As developing countries accelerate purchases, gold may reach $2,000 an ounce this year, compared with a record of $1,569.80 today in New York, said Robert McEwen, the chief executive officer of producer U.S. Gold Corp. Euro Pacific Capital’s Michael Pento, who correctly predicted gold’s highs for the past two years, forecasts a 2011 high of $1,600.

Prices reached a record 15 times this month on demand from investors seeking an alternative to the dollar after the currency slumped to the lowest since 2009, U.S. debt widened, and the Federal Reserve signaled April 27 that borrowing costs will remain near zero percent for an extended period. The economy in China, the biggest foreign holder of U.S. Treasuries, grew 9.7 percent in the first quarter.

“China is out to have more gold than America, and Russia is aspiring to the same,” McEwen said yesterday in an interview at a Bloomberg Link conference in New York. “When you have debt, you don’t have a lot of flexibility. China wants to show its currency has more backing than the U.S.”

In 2010, central banks became net buyers for the first time in two decades, adding 87 metric tons in official-sector purchases by countries including Bolivia, Sri Lanka and Mauritius, according to World Gold Council data. China, with more than $3 trillion in foreign-currency reserves, plans to set up new funds to invest in precious metals, Century Weekly reported this week. Russia purchased 8 tons of gold in the first quarter.
China’s Gold Reserves

China, which has just 1.6 percent of its reserves in gold, may invest more than $1 trillion in bullion, Pento said. “China wants to be an international player, and they need to own more gold than they currently have.”

The U.S. Treasury Department projects the government could reach its debt ceiling of $14.3 trillion as soon as mid-May and run out of options for avoiding default by early July. The Fed has kept its benchmark rate between zero percent and 0.25 percent since December 2008 to help stimulate the economy, driving the dollar down 11 percent against a basket of six major currencies during the past year.

“Until monetary policy changes, you’re going to continue to see gold go up,” said Michael Cuggino, who helps manage $12 billion at Permanent Portfolio Funds in San Francisco.

“Ultimately the best thing we can do to create strong fundamentals for the dollar in the medium term is first, keep inflation low, which maintains the buying power of the dollar, and second, create a stronger economy,” Fed Chairman Ben S. Bernanke said on April 27.

U.S. Reserves

As of April, China was the sixth-largest official holder of gold, with 1,054.1 tons, according to World Gold Council estimates. The U.S. has the most, with 8,133.5 tons, or 74.8 percent of the nation’s currency reserves, council data show.

Central-bank buying may have the same impact on gold as the introduction of exchange-traded funds, Cuggino said. Prices have more than tripled since the SPDR Gold Trust, the biggest ETF backed by bullion, was introduced in November 2004.

Central banks in emerging markets may aim to hold 2 percent to 8 percent of their foreign-currency reserves in gold, Francisco Blanch, the head of commodities research at Bank of America Merrill Lynch in New York, said in an interview.

Gold is “close to” its cyclical high, said Blanch, who expects the metal to average $1,500 this year.
Gold’s Enemies

“The enemies of gold are rising interest rates and a balanced budget,” said Pento of Euro Pacific Capital in New York. “I look for a summer swoon once Bernanke exits the bond market. You’re going to have a temporary rise in real interest rates.”

The Fed said it would buy $600 billion in U.S. Treasuries through June.

The Federal Funds rate would have to rise to “Volcker” levels before gold enters a bear market, said Gold Corp.’s McEwen, who expects the metal to rise to $5,000 over three to four years.

Prices have advanced 10 percent this year, extending a decade of gains in which gold jumped sixfold from a low in 1999. The all-time inflation adjusted record is $2,338.92, based on the value on Jan. 21, 1980, according to a calculator on the Web site of the Federal Reserve Bank of Minneapolis.

Former Fed Chairman Paul Volcker ended gold’s rally to a then-record $873 by raising borrowing costs to 20 percent in March 1980.

Article Source

University of Texas Professor calls the Fed “corrupt” in an interview on Bloomberg.

Fed secrecy has been an ongoing subject of debate in the financial world, and this interview sheds some light on how exactly the Fed is maintaining that secrecy.

Friday was one of the stranger trading days we have observed. I cant seem to recall a day where gold is up almost 2%, in this case gaining 29.90, and silver is actually down 1.11% on the same day.

The typical pattern has been if gold is up 1%, silver is up closer to 2%.

*Update: I think this may explain the down silver day – from our good friend David Morgan:

The Chicago Mercantile Exchange on Friday (April 29th) raised its margins on one contract of silver from $14, 513 to $25,397, an increase of 75%.

This type of increase produce significant movement in the price of silver.

Be prepared for some very interesting action in the silver pits soon. See: http://www.cnbc.com/id/42828370

The USD is still being crushed, with the line holding at approx 73, yet this does not seem it will be able to stop what seems like a relentless tide of downward pressure on the dollar. Once this goes below 72 there is no support to speak of and it is unsure how far it could fall.

The clamors regarding QE3 often over look the fact that the Feds balance sheet is so large, that just rolling over maturing financial instruments on its books will give the Fed somewhere in the neighborhood of $750b to play with and continue buying treasuries. This of course doesnt change the basic nature of the scam of debt monitization that is ultimately paid by the prosperity of people who usually dont even realize why its happening to them.

If you ever want to know if the general public has finally figured this out, just watch to see if they are storing their wealth in paper or tangible items. We are a LONG way from a bubble top in gold.

A few of the better charts I have run across in the last month or so:

1. Chinese Yuan versus USD – Yuan denominated bank account, anyone?

Chinese Yuan versus USD

2.The percent of a typical pension fund that is in gold or gold stocks – Does this really look like a bubble to you?

Percent of portfolio that is gold in the typical pension fund

3. The amount of gold and gold stocks as a percentage of global assets during the last few bull markets – I guess we have a ways to go yet?

Gold as percentage of global assets in previous bull markets

Fidelity Capital Markets Overseas Update

0746 Hours -6GMT  Overnight Japanese markets sold off with the Nikkei 225 (NKY) index posting its biggest two-day drop since 1987, Euro markets have also been hit and commodities are selling off as I write this.

Gold has sold off as much as $44 and then coming back a bit to sit now at $1387.20 for a current slide of 2.86%

Silver has sold off $2.23 and currently sits at $33.73 for a pullback of 6.2%

Keep in mind these are the immediate knee jerk reactions of the market trying to price in the recent events. Underlying fundamentals have not changed. A pullback into low $30 silver or even down to $27 I would view as positive as silver has been in need of a breather.

Japan brings money home to rebuild

By Burton Frierson

NEW YORK (Reuters) – Shaken by the prospect of nuclear meltdown after a devastating earthquake and tsunami, Japanese investors will dump overseas assets on Monday and bring their money home to help finance reconstruction.

Positioning for this could send the dollar plummeting versus the yen on Monday and lead to a sharp slide in Treasuries since U.S. government bonds are a favorite asset of Japanese investors, market analysts said.

Stocks also are likely to come under pressure.

Japanese insurers will probably sell some of their most liquid foreign assets such as U.S. Treasuries so they can respond to the worst disaster since World War Two.

The crisis could lead to insured losses of nearly $35 billion, risk modeling company AIR Worldwide said, making it one of the most expensive disasters in history and nearly as much as the entire worldwide catastrophe loss for the global insurance industry.

Traders braced for just such an outcome on Friday, when the yen surged and Treasuries fell. The Bank of Japan probably will add money to the system to limit the liquidation of assets. But the big question remains of how much follow-through selling is yet to come.

Dan Fuss, the vice chairman of $150 billion Loomis Sayles, told Reuters on Sunday that his best guess is that Treasuries will continue to see losses.

Because Japan is the second-biggest holder of U.S. government debt and they have nearly $900 billion in dollar reserves, Fuss said Japan will likely use reserves for rebuilding.

“A big buyer of bonds is taken out of the market,” Fuss said, adding that Japan “will be less able to add to their reserves and less able to buy Treasuries.”

TAKING STOCK

Japan’s crisis may also provide a new reason to press on with the long-awaited retreat in stocks.

A lot will depend on the price of oil, which fell on Friday on concern that the Japanese earthquake would hit global economic sentiment. It came off recent highs reached on the revolts in North Africa and the Middle East, but upheaval in the region over the weekend continued — notably with a protest in Saudi Arabia.

Investors will also engage in the grim exercise of determining which companies will benefit from helping the world’s third largest economy rebuild.

“You could expect to see industrial infrastructure companies do better. As for the overall markets, I don’t see it having any long-term negative impact,” said Paul Hickey, co-founder of Bespoke Investment Group.

“I remember after the last big tsunami in Indonesia there was a widespread view that it would be devastating, but there were no big impacts. Granted this is a much more developed region and certain insurance companies will have bigger exposure than others but outside of that region business will continue to go on.”

Equities have generally remained relatively resilient amid a wide range of risk factors in recent weeks. World stocks .MIWD00000PUS have come off highs, but are still clinging to year-to-date gains, thanks primarily to the developed markets.

Prime Minister Naoto Kan described the crisis as Japan’s worst since 1945, as officials confirmed that three nuclear reactors were at risk of overheating, raising fears of an uncontrolled radiation leak.

The disaster may also put some pressure on the Bank of Japan, which said it was cutting short its upcoming two-day meeting to just Monday.

It can do little with rates per se, even if it wanted to, because the current target is just 0.05 percent. It has, however, promised to ensure market stability.

FIGHTING YEN STRENGTH

Many expect the Bank of Japan to pump even more liquidity into the system, and for the government to try to fight any rise in the yen. A strong yen would add to the economic woes of export-dependent Japan as it struggles to recover from the disaster.

“I believe we have reached a critical point where the disaster is so severe the BOJ will engineer liquidity mechanisms that will reduce the likelihood of forced selling in the Treasury market,” said Christian Cooper, head of U.S. dollar derivatives trading at Jefferies & Co. in New York.

Even if the BOJ does undertake massive liquidity injections, an action expected before the U.S. Treasury market opens on Monday, most analysts still expect to see further selling pressure on U.S. Treasuries, at least initially.

Japan’s stock market, meanwhile, has been something of a favorite with global investors this year. The broad TOPIX index was up more than 8.5 percent for the year in mid-February before the recent pullback and Friday’s quake-related sell-off.

Analysts suggested that companies based in and around the main damage area could suffer losses on Monday but that construction firms would get a boost.

Electronics giant Sony Corp has suspended operations at eight factories. Nissan Motor halted output at all four of its domestic a assembly factories and said restarting them could depend on whether it can get parts.

Losses could be limited though. Financial markets bounced back fairly quickly after the 1995 quake that devastated Kobe and caused $100 billion in damage.

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I recently ran across an excellent article regarding the nature of inflation.

It refutes common misperceptions about inflation such as:

1. Inflation Spurs Growth
2. Inflation Decreases Debt Burdens
3. Inflation Increases Asset Values
4. Inflation Offsets Unemployment
5. Inflation Promotes Exports

In my view, the only way to truly understand what is happening in the economy and more importantly how it affects your personal wealth, you must understand these principles.

You can read the article in it’s entirety here: You Call it Inflation, I call it Theft, by Bill Flax

By Lawrence Williams, Mineweb.co.za

Latest reports out of China put consumer gold demand in the first 2 months of the current year at a phenomenal 200 tonnes – and buying momentum is still continuing.

LONDON – In amongst all the comment and analysis regarding the effects of the various Middle Eastern and North African power struggles on the gold price, the latest news on Chinese domestic gold demand has almost passed by unnoticed.  According to Peer Hickson, the global commodities strategist for gold-focused Swiss Bank, UBS, in a report by Bloomberg, Chinese gold demand hit no less than 200 tonnes in the first two months of the current year.  If that is extrapolated over a fill year – and the gold purchasing momentum caused by inflation-nervous purchasers suggests that there is even a possibility that demand could rise – this would mean that the Chinese consumer could be in line to buy close on 50% of global mined gold (and this does not include what the country’s Central Bank may be salting away as well.)

The 200 tonnes in two months figure is MASSIVE.  We recall that only a couple of months ago we were reporting that Chinese gold imports in the first 10 months of 2010 totalled 209 tonnes, itself a 500% increase on the previous year.  It now seems that demand by individuals is reaching almost frightening levels.  Not only is jewellery demand seen as being up by 70% year on year, but investment demand (coins and bars as opposed to jewellery, which has been the main outlet for gold purchases in the past) is also coming on strongly from virtually nothing a couple of years ago to a WGC estimate of close on 180 tonnes in 2010.  If the pace of growth continues investment demand alone could reach as much as 300 tonnes in 2011!

If the Chinese Central Bank is absorbing domestic production, as many believe then total Chinese demand this year could soar past India’s.  The potential is almost beyond belief.  Indeed Chinese offtake is more than matching any disposals from gold ETFs, and with the continuing justified worries about inflation in China the momentum is likely to continue regardless of the gold price elsewhere.

This area of demand is something which has only really come to life in the past two years, and it seems that many observers and analysts are just not feeding this information into their predictions.  As we’ve noted here beforehand this kind of demand level – particularly as it is not from a population which trades in and out on price, but holds its bullion and jewellery as insurance against really hard times – does tend to limit downside risk in the gold market.

But what of the Chinese Central Bank?  There is evidence that China is positioning itself to make the yuan at least a part of any new reserve currency package which might replace the still-declining U.S. dollar in global trade.  There is the strong suggestion that it needs to build its gold reserves as backing for this at least to levels approaching those of the biggest European Central Banks, which suggests a doubling of Chinese gold reserves at the very least in a relatively short space of time.  We know that China has been buying on gold price dips as various officials have confirmed this in the past, although we have no idea of the volumes involved.  Maybe the country will announce another revaluation of its reserves in the near future, even though it tends to be cagey about such announcements as it knows any significant increase will affect the global gold price and while it may be soaking up excess gold it still wants to buy it at what it may see as bargain prices!

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(Telegraph) – Precious metals were the top performing investment for the second consecutive year last year, with their value soaring by 42pc as people sought a safe haven from inflation, research has indicated.

It was the fourth time in the past five years that precious metals have topped the tables for the best asset class, as continuing uncertainty over the prospects for the global economy caused investors to flock to gold, silver and platinum, according to Lloyds TSB’s Assetwatch survey.

The report coincided with a new record high in the gold price. The metal reached $1,445.70 an ounce on Monday – a rise attributed by traders to the unrest in the Middle East.

The value of precious metals has surged by 365pc during the past 10 years, Lloyds TSB’s survey found, nearly double the increase for the next best performing asset during the same period – residential property, which made a gain of 198pc.

The steep increase in precious metal prices seen during 2010 was driven by silver, with its value jumping by 80pc, significantly outstripping the 29pc rise in the price of gold and the 20pc increase for platinum.

Lloyds said the price of silver had been boosted by pressure on the supply of the metal, as demand remained high from both investors and the industries which use it.

Commodities were the second best performing asset class during 2010, offering returns of 30pc, while they were the third best during the past decade, with a 176pc increase in value.

They were also the best performing asset during the first two months of 2011, driven by a 38pc jump in the price of cotton since the start of the year, owing to a combination or rising demand from Asia and falling supply as some of the major cotton producing countries were hit by flooding.

All nine asset classes produced a positive return during the past year, although people who held their money in cash would have seen it rise by just 0.6pc, while residential property did little better with a gain of 1.2pc.

UK shares and commercial property both returned 14.5pc, while the value of international shares increased by 10.6pc.

Suren Thiru, an economist at Lloyds TSB, said: “It is unsurprising that precious metals were the top performing asset class in 2010. Investors looked to protect the value of their investments amid the renewed uncertainty over the global economic outlook including the debt concerns in the eurozone and rising inflation.

“The level of demand from emerging economies, particularly from China and India, is likely to remain an important determinant of many assets prices as well as the pace at which the global economic recovery continues.”

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This is no small development.

By Jennifer Ablan

NEW YORK (Reuters) – PIMCO’s Total Return Fund, the world’s biggest bond fund, has dumped all U.S. government-related securities, including Treasuries and agency debt, a source familiar with the fund’s holdings said on Wednesday.

In January, Pacific Investment Management Co.’s $236.9 billion Total Return fund slashed its U.S. government-related debt holdings to the lowest level in at least two years and increased cash and debt holdings from other developed nations.

Government-related securities include Treasuries, Treasury Inflation-Protected Securities, agencies, interest rate swaps, Treasury futures and options, and corporate securities guaranteed by the U.S. Federal Deposit Insurance Corp.

The Total Return Fund’s cash holdings had surged to $54.5 billion as of February 28 from $11.9 billion at the end of January. A PIMCO spokesman declined to comment for this story.

Bill Gross, the fund’s manager who helps oversee more than $1.1 trillion as PIMCO’s co-chief investment officer, has often railed against U.S. deficit spending and its inflationary impact. He has advocated buying bonds with “safe,” higher yields — such as corporate bonds — that can withstand possible erosion of returns by inflation.

In December, PIMCO said it may start investing up to 10 percent of its assets in “equity-related” securities, such as convertibles and preferred stock, after the first quarter of 2011.

“It’s certainly an important signal in the sense that they are allocating away from Treasuries in favor of a higher spread product,” said Christian Cooper, head of U.S. dollar derivatives trading at Jefferies & Co.

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