It appears that the worlds largest producers of oil are continuing an ongoing process of socio-economic collapse.

This will likely affect oil as well as other commodities.

Most analysts miss the fact that energy is the primary cost input of so many of the commodities in the marketplace, including gold.

The middle east producers make up as much as 56% of the worlds known oil reserves.

This chart is from Jim Sinclairs excellent website www.jsmineset.com

Saudi Arabia drafts in up to 10,000 troops ahead of protests

Desperate to avoid mass uprisings against the House of Saud, security forces have deployed in huge numbers across the region.

King Abdullah is also reported to have told neighbouring Bahrain that if they do not put down their own ongoing Shia revolt, his own forces will.

In response to the massive mobilisation, protesters are planning to place women on the front ranks to discourage Saudi forces from firing on them.

In Yemen, President Ali Abdullah Saleh set off a deadly battle for survival last night as he rejected an opposition peace proposal and ordered troops to fire on demonstrators, killing four. Efforts to suppress demonstrations by the key ally in the “war on terror” could jeopardise rising volumes of Western aid flooding into the country, diplomats warned.

President Saleh rejected an opposition proposal that would have brought demonstrations to a standstill in return for a promise to step down by the end of the year. Yemeni troops used rockets and machineguns to attack demonstrators in the north of the country, killing four and injuring nine.

Article Source

Keep in mind that this deficit is being funded primarily through purchases of US Treasuries by the Federal Reserve. This is very negative for the USD over the long term.

Until this policy changes, it will force the price of all commodities up, including oil, gold and silver.

(Washington Times) -  The federal government posted its largest monthly deficit in history in February, a $223 billion shortfall that put a sharp point on the current fight on Capitol Hill about how deeply to cut this year’s spending.

That one-month figure, which came in a preliminary report from the Congressional Budget Office, dwarfs even the most robust cuts being talked about on the Hill, and underscores just how much work lawmakers have to do to get the government’s finances in balance again.

The Senate plans to vote Tuesday on competing proposals to cut spending, but Democrats have rejected GOP-backed cuts of more than $50 billion, and Republicans have ruled out Democrats’ cuts of less than $10 billion, meaning neither plan will draw the 60 votes needed to overcome a filibuster and pass.

“We’ve all done the math and we all know how these votes will turn out: Neither proposal will pass, which means neither will reach the president’s desk as written. We’ll go back to square one and back to the negotiating table,” said Senate Majority Leader Harry Reid, Nevada Democrat.

The two sides are facing a March 18 deadline, which is when the current stopgap funding bill expires. Without a new spending agreement by then, the government would shut down.

Glen Perkins delivers copies of the fiscal 2012 budget to the Senate Budget Committee hearing room in Washington on Feb. 14. (Bloomberg)**FILE** Glen Perkins delivers copies of the fiscal 2012 budget to the Senate Budget Committee hearing room in Washington on Feb. 14. (Bloomberg)

The House two weeks ago passed a bill that would cut $57 billion more from 2010 spending levels, including major reductions in a number of domestic programs.

Over the weekend, a top Senate Democrat said his party can accept no more than $6 billion in domestic cuts, and pointed to the proposal his colleagues introduced Friday that trims from several areas.

But a new set of numbers from the CBO indicates that Senate Democrats’ proposal actually totals only $4.7 billion when measured as reductions compared with the previous year’s spending.

So far, budget negotiations have not produced much visible progress.

President Obama designated Vice President Joseph R. Biden Jr. as his point man in the conversations, and Mr. Biden convened a meeting with congressional leaders last Thursday at the Capitol. But Mr. Biden is traveling in Europe this week on a long-planned trip to meet with foreign leaders.

White House press secretary Jay Carney hinted that Mr. Biden could still participate by phone, but declined to say whether anyone else was taking the lead in the talks in his absence.

“I’m not going to specify, simply to say that a variety of staff members, senior staff members, have been in conversations with folks on the Hill about this,” the spokesman said.

Republicans argue that Congress needs to tackle not only short-term spending, but long-term growth in the costs of Social Security and Medicare as well.

“Something must be done, and now is the time to do it. Republicans are ready and willing. Where is the president?” said Senate Minority Leader Mitch McConnell, Kentucky Republican. “Suddenly, at the moment when we can actually do something about all this, he’s silent.”

According to the CBO, the government has notched a $642 billion deficit for the first five months of fiscal 2011, which is slightly less than last year’s pace. Income tax revenues are rising faster than spending, which accounts for the marginally improved picture.

But interest on the debt continues to grow, reaching $101 billion through the end of February — a 12.5 percent increase over 2010.

The nonpartisan CBO’s February deficit number is preliminary. The Treasury Department will issue the final number later this week.

February is traditionally a bad month for federal finances. The previous two records were $220.9 billion, posted exactly a year ago, and $193.9 billion in February 2009.

Article Source

Global demand for oil continues to rise while it is clear global production is in jeopardy of further decline.

Even with new technology, the cost of extraction rises and therefore forces the price per barrel higher.

Higher oil = higher gold and every other commodity, as energy is the primary cost input.

WikiLeaks cables: Saudi Arabia cannot pump enough oil to keep a lid on prices

US diplomat convinced by Saudi expert that reserves of world’s biggest oil exporter have been overstated by nearly 40%

The US fears that Saudi Arabia, the world’s largest crude oil exporter, may not have enough reserves to prevent oil prices escalating, confidential cables from its embassy in Riyadh show.

The cables, released by WikiLeaks, urge Washington to take seriously a warning from a senior Saudi government oil executive that the kingdom’s crude oil reserves may have been overstated by as much as 300bn barrels – nearly 40%.

The revelation comes as the oil price has soared in recent weeks to more than $100 a barrel on global demand and tensions in the Middle East. Many analysts expect that the Saudis and their Opec cartel partners would pump more oil if rising prices threatened to choke off demand.

However, Sadad al-Husseini, a geologist and former head of exploration at the Saudi oil monopoly Aramco, met the US consul general in Riyadh in November 2007 and told the US diplomat that Aramco’s 12.5m barrel-a-day capacity needed to keep a lid on prices could not be reached.

According to the cables, which date between 2007-09, Husseini said Saudi Arabia might reach an output of 12m barrels a day in 10 years but before then – possibly as early as 2012 – global oil production would have hit its highest point. This crunch point is known as “peak oil”.

Husseini said that at that point Aramco would not be able to stop the rise of global oil prices because the Saudi energy industry had overstated its recoverable reserves to spur foreign investment. He argued that Aramco had badly underestimated the time needed to bring new oil on tap.

One cable said: “According to al-Husseini, the crux of the issue is twofold. First, it is possible that Saudi reserves are not as bountiful as sometimes described, and the timeline for their production not as unrestrained as Aramco and energy optimists would like to portray.”

It went on: “In a presentation, Abdallah al-Saif, current Aramco senior vice-president for exploration, reported that Aramco has 716bn barrels of total reserves, of which 51% are recoverable, and that in 20 years Aramco will have 900bn barrels of reserves.

“Al-Husseini disagrees with this analysis, believing Aramco’s reserves are overstated by as much as 300bn barrels. In his view once 50% of original proven reserves has been reached … a steady output in decline will ensue and no amount of effort will be able to stop it. He believes that what will result is a plateau in total output that will last approximately 15 years followed by decreasing output.”

The US consul then told Washington: “While al-Husseini fundamentally contradicts the Aramco company line, he is no doomsday theorist. His pedigree, experience and outlook demand that his predictions be thoughtfully considered.”

Seven months later, the US embassy in Riyadh went further in two more cables. “Our mission now questions how much the Saudis can now substantively influence the crude markets over the long term. Clearly they can drive prices up, but we question whether they any longer have the power to drive prices down for a prolonged period.”

A fourth cable, in October 2009, claimed that escalating electricity demand by Saudi Arabia may further constrain Saudi oil exports. “Demand [for electricity] is expected to grow 10% a year over the next decade as a result of population and economic growth. As a result it will need to double its generation capacity to 68,000MW in 2018,” it said.

It also reported major project delays and accidents as “evidence that the Saudi Aramco is having to run harder to stay in place – to replace the decline in existing production.” While fears of premature “peak oil” and Saudi production problems had been expressed before, no US official has come close to saying this in public.

In the last two years, other senior energy analysts have backed Husseini. Fatih Birol, chief economist to the International Energy Agency, told the Guardian last year that conventional crude output could plateau in 2020, a development that was “not good news” for a world still heavily dependent on petroleum.

Jeremy Leggett, convenor of the UK Industry Taskforce on Peak Oil and Energy Security, said: “We are asleep at the wheel here: choosing to ignore a threat to the global economy that is quite as bad as the credit crunch, quite possibly worse.”

Article Source

200 tons of gold imported to China in the first two months of 2011. That is about 35% of the entire years imports for 2010. Projected out would be 2400 tons if it was consistent. I am not saying it will do that, I find it unlikely, but just putting it in perspective. Thats an entire years worth of mining supply, just about. 2011 is going to be an interesting year for gold.

(Bloomberg) Gold purchases in China, the world’s largest producer, climbed to 200 metric tons in the first two months of 2011 as faster inflation boosted consumer demand, according to UBS AG, which said the price may gain to $1,500.

“China is the big buyer,” Peter Hickson, global commodities strategist at Switzerland’s largest bank, said by phone yesterday, without giving a comparable figure for 2010. The estimate for the two-month period compares with full-year consumer demand from China of 579.5 tons for last year, according to the World Gold Council, a producer-funded group.

Bullion, which rallied 30 percent last year, surged to a record yesterday as uprisings in the Middle East, quickening inflation and currency debasement boosted global demand. China’s consumer prices rose 4.9 percent in January from a year earlier, exceeding policy makers’ 4 percent ceiling for a fourth month.

“Chinese interest is huge,” said Peter Tse, Hong Kong- based head of precious metals at Bank of Nova Scotia. “Demand for physical gold and imports has increased substantially” due to the Lunar New Year holiday, Tse said today, referring to the week-long break that began Feb. 2.

Immediate-delivery gold was at $1,429.05 an ounce at 5:08 p.m. in Singapore compared with yesterday’s peak of $1,434.93. Yuan-denominated bullion rose 0.5 percent to 303.58 yuan ($46.19) a gram in Shanghai, approaching the record 314 yuan, set Nov. 9.
‘Gold Is Attractive’

“Gold is attractive,” Hickson said. “The more the market becomes concerned about inflation or concerns about unrest in Africa, more and more people will look to gold.” The price may rise to $1,500 an ounce in the next six months, said Hong Kong- based Hickson, who’s worked for UBS since 1996.

Blackstone Group LP’s Byron Wien said in January that gold may rise to more than $1,600 this year “as investors across the world place more of their assets in something they consider ‘real’.” The price may reach $1,600 this year, Wayne Atwell, a managing director at Casimir Capital LP said the same month.

Protests partly linked to record food prices have erupted across North Africa and the Middle East this year, toppling leaders in Tunisia and Egypt and boosting oil prices. Libyan rebels braced for renewed clashes today with forces loyal to leader Muammar Qaddafi. Iranian protesters have clashed with security forces in Tehran, Al Arabiya reported.

Gold investment in China, the largest buyer of the precious metal after India, may gain 40 percent to 50 percent this year amid a lack of alternatives, Wang Lixin, China representative for the World Gold Council, said last month. He called that forecast a “conservative estimate.”
Bars and Coins

China’s investment demand in 2010 jumped 70 percent to 179.9 tons, surpassing Germany and the U.S., as buyers sought out bars and coins, the London-based industry group said. Consumption by the jewelry sector rose to a record 399.7 tons, it said. China imported more than 300 tons last year, People’s Bank of China Vice Governor Yi Gang said on Feb. 26 in Beijing.

China may be the “next big buyer” of gold, driven by institutional and retail demand, Credit Suisse Group AG analyst Tom Kendall said in Cape Town on Feb. 7. “If you’re sitting there in China with money in a deposit account, you’re losing between 1-2 percent a year through inflation,” Kendall said.

The boom in gold demand in China is driven by concern about inflation pressure and the poor performance of alternative investments, the producer-funded council has said. Premier Wen Jiabao pledged on Feb. 27 to boost food supplies to hold down costs, and to tackle surging property prices.

Spooked by Inflation

Jewelers at shopping malls across Beijing are witnessing a gold rush as residents spooked by inflation look to protect their money, the China Daily reported on Feb. 28.

Statistics from Beijing Caibai, the city’s largest jewelry store, show sales of gold and other jewelry have totaled about 4 billion yuan so far this year, a 70 percent increase from a year ago, the report said.

China displaced South Africa as the world’s biggest gold producer in 2007. Imports through last October rose almost fivefold to 209 tons from the total shipped in the previous year, according to the Shanghai Gold Exchange. Mine output reached a record 340 tons last year, the China Gold Association has said.

The Industrial and Commercial Bank of China Ltd., the world’s biggest lender by market value, started physical-gold linked savings accounts in December with the World Gold Council. Account openings have surpassed 1 million, with more than 12 tons of gold stored on behalf of investors, it has said.

Article Source

Hi Alex:

Hope you are well in spite of what’s happening in this crazy world.  I am liquidating some assets and plan on buying more gold.  The price today is above $1423 an ounce.  I check rapidtrends often, no new posting since early February – do you have a new information website I should be reading?  What’s your thoughts on the next 12-18 months?  Should I hold off a few weeks if you feel a correction back to around $1375 will happen soon?  How do you feel about silver, etc.

I sincerely appreciate your advise my friend.

John

***

Dear John, seasonal trend as well as SPX being supremely overbought suggests an SPX pullback which would cause gold and silver to pull back as well perhaps to mid March. If this happens seasonal strength would likely again exert upwards pressure coming out of March. This is a pretty big gamble however, because gold has just broken top channel resistance after consolidating in this range for a good while and is poised to jump to the next level which will be far beyond 1430.  If it doesn’t pullback and you choose to wait for a pullback which fails to materialize, you could be buying in at far higher prices. Tensions in the middle east are not showing signs of calming soon, and this is having a strong upward force on oil which sits at $100.71 as I write this. Higher oil = higher commodities in general over the longer term.

Aside from my commentary here we have a monthly newsletter you can sign up for at:  http://www.anglofareast.com/research/global-insider/

Kind regards,
Alex

As our regular readers know I have discussed this topic on a number of occasions. For Bernanke to say this is very disingenuous and is a clear indication of his motives because it is highly unlikely that he does not understand this concept…which means he is lying.

This is not rocket science. You do not need a PHD in economics to understand this. A 6 year old child with a calculator can divide the number of US Dollars in circulation¹ of roughly $1.8 Trillion USD by the number of ounces the US claims to own, which is 261,498,899.316 according to the US Treasury².

The number we arrive at is $6880 per ounce and some change. The problem is not that there isnt enough gold, its that having gold at $6880 per ounce would send a clear signal to the world that the Fed is actually totally incapable of managing the US economy, has a broken monetary policy, and that there is something seriously wrong with the US Dollar (assuming the government didn’t come right out and set us on a gold standard).

This is the typical argument presented by any Keynesian economist yet it is the weakest argument they have and takes very little logic to discredit it. For Bernanke to resort to this argument shows just how desperate and under pressure he may be.

WASHINGTON (Dow Jones)–Federal Reserve Chairman Ben Bernanke defended the central bank’s effect on the dollar Tuesday, pushing back at the idea that policy makers should consider alternative proposals like the gold standard.

Bernanke, appearing before the Senate Banking Committee, was pressed by Sen. Jim DeMint (R., S.C.) on the viability of a return to a gold-backed economy or the idea of the Treasury Department issuing bonds payable in gold. Bernanke, who has studied the issue, said a return to the gold standard wouldn’t work.

“It did deliver price stability over very long periods of time, but over shorter periods of time it caused wide swings in prices related to changes in demand or supply of gold. So I don’t think it’s a panacea,” Bernanke told DeMint.

Additionally, Bernanke said there were a number of practical issues that would prevent the return of gold as the world standard. Namely, there’s not enough gold in the world to effectively support the U.S. money supply.

“I don’t think that a full-fledged gold standard would be practical at this point,” Bernanke said, declining to opine on the gold-backed bond issue because he was not familiar with the idea.

Sen. Mark Kirk (R., Ill.) also engaged Bernanke on the currency issue, questioning whether the Fed’s $600 billion bond-purchase program is in effect monetizing the U.S. debt. Bernanke noted that the U.S couldn’t have currency outstanding if there were no Treasury securities to back it up, and that even the most steady economic times the Fed engages in the buying and selling of U.S.-backed securities.

Kirk, however, noted that the U.S. did have currency not backed by federal debt at one time in its history: under the administration of President Andrew Jackson, the nation’s seventh president.

Bernanke, appearing amused, was quick to respond.

“So this was before the Civil War, this was during the period where individual banks issued currency. We didn’t have a national currency,” Bernanke said.

Not to be outdone, Kirk asked whether it was possible for a country to have a currency without a trillion dollar debt. Bernanke said that was the case.

Article Source

¹Monetary Base

²US Gold Reserves

Gold prices settled at a new record high yesterday of $1,435/oz. Silver surged to new 30-year record nominal highs at $34.74/oz. Prices surged in dollars and all major currencies and look set to reach record highs in other currencies.

The story about Silver being physically unavailable is reaching thunderous levels of rhetoric. Numerous analysts and commentators are crying, “There is no more physical Silver!!” Be careful about allowing your emotions to get the better of you in terms of your investment decisions. It has always been greed and fear that drives people to buy and sell anything. When there is much greed, it is likely that a particular investment may be due for a pullback. I am not suggesting that Silver is not a good investment. The long term fundamental facts of the Silver market are undeniable. I am saying that those who are invested in physical Silver (including me) will tend to want to believe the story that there is no physical Silver available for investment, because it means my investment will go well, and I was a smart investor after all.

The thing to keep in mind is that these views are usually expressed by analysts and commentators in North America and are often based on limited information from a regional perspective versus a global one. The supply demand equation in Silver is in fact a global one, so to assume that North American supply and demand equals global supply and demand may be a big mistake. Can you find a single analyst from Europe saying there is no physical Silver available? Do you see Chinese investors complaining that they can’t get any Silver? China’s imports of Silver have skyrocketed year over year without a single peep about difficulty getting it. Please bear in mind that being loud does not equal being correct.

The North American viewpoint is frequently accompanied by statistics drawn from COMEX and COMEX physical inventories. These stats are often used as the foundation of the viewpoint and proof that there is no physical Silver available to satisfy investor demand. The problem with taking this perspective is that COMEX settlements in physical Silver are a small fraction of the total global trade in physical Silver. Therefore, it’s not a good indicator of global availability of physical Silver, because there isn’t really incentive to maintain large stocks of physical for COMEX delivery. COMEX clearly states that settlement of futures can be done in cash versus the underlying physical asset. Do you really think COMEX is concerned about a physical default? According to their very own rules, they cannot default since they can settle in cash. This is the fact of the matter regardless of the importance that some analysts place on physical COMEX inventory. In the London Gold Pool of the mid 60s, the demand for physical settlement grew so intense that planeloads of Gold were being airlifted to London to satisfy demand. The London market actually closed for several weeks at one point because the demand could not be met, yet Gold still traded in Switzerland during this time. This reflects the fact that anything will continue to trade if there is demand regardless if the trading is occurring on the “loudest” market. To assume that COMEX will ever be a true indicator of the actual physical trade in Silver may be a big mistake.

Much of the commentary I read continually points to sourcing through bullion banks and ‘tightness’ when doing so. I am surprised that no one has caught onto the point that the bullion banks have a good deal of potentially conflicting interest here. They participate in the paper markets to a great degree and are in some cases the largest short sellers in paper while at the same time custodians of metal for some of the reported largest physical holders. One thing that has always caught my attention is that I have yet to see a single firm that goes directly to the largest refineries in the world (who isnt also a bullion bank) complaining about ability to access physical Silver. Yes, the bullion banks go directly to the refineries, but is it possible they stand to gain on the market activity associated with possible delays and claims that they can’t get metal? If the Royal Canadian Mint says their bullion banks are having a hard time sourcing metal, is it possible those bullion banks have an interest in having a hard time sourcing metal? Does it count if the retail outlets who source their small bars and rounds are all complaining about lack of product if it’s due to fabrication limits in the North American market? Do the fabricators in North America also go through these same bullion banks? In a recent interview with David Franklin regarding Sprott’s new physical Silver trust, he mentioned that a good portion of the Silver they had delivered came from overseas. Is this a coincidence, or does the tightness being reported have to do with regional availability or an incentive to profit by someone in the supply chain doing the delivering?

This idea that there is no physical Silver for investment is actually similar in character to the argument that we cannot have a Gold standard because there is not enough Gold. To be frank, that is ridiculous. The view I take is that of course there is enough Gold. The problem is that most people cannot wrap their mind around what price per ounce Gold would have to be to achieve an actual Gold backing, because that price per ounce is so much higher than it is right now (think on the order of $6000+ per ounce if you are talking American Dollars). Point being, if you wanted to buy 5 million ounces of Silver from me at $40 per ounce, do not think for a moment that it could not be sourced in the wink of an eye (or at least within a reasonable time frame if the eye-winking doesn’t actually conjure up the 5 million ounces).

Perhaps someday we will indeed reach the point where there is no more physical Silver for investment because of such amazing demand over supply and the fact that as we use Silver in industrial applications, it is used up and not economical to recover. That day however, is not today.

Kind regards,
Alex Stanczyk

Hello all, just a quick note to say thank you to all of you who have been emailing me lately asking about updates on Rapid Trends.

My apologies for the sparse updates as of late, I have been working on a pretty big project the last few months which has a huge portion of my priority in terms of time.

I promise I will be updating again soon.

Kind regards,

Alex

Every now and then we run across an article that is what I call timeless – meaning regardless of current technicals and geo-political events the information in the article has value through all time.

This is one such article. It is fascinating to learn about the history of paper money in China, and to once again see how history repeats.

An interesting fact from this piece is how China has vastly more money creation going on than the United States. Granted they have vastly grater population, but it does beg the question of whether the Chinese have learned anything at all about hyperinflation in the close to 1000 years of experience they have with it.

Find the full article here:

http://www.rapidtrends.com/china-inflation-and-gold/

PANAMA, Feb. 10, 2011 /PRNewswire/ — Anglo Far-East Bullion Company is pleased to announce the launch of Anglo Far-East Custodial Company (AFECC). AFECC provides logistics and support services to institutions and funds that wish to source bullion at the core of the industry for private institutional holdings or for gold or silver backed funds and ETF’s.

AFECC draws on several decades of experience and a solid track record of providing physical gold and silver acquisition, transportation, vaulting, and liquidation of “Good Delivery” gold and silver bullion.

About Anglo Far-East Custodial Company

Anglo Far-East Custodial Company (AFECC) is part of the Anglo Far-East group of companies, and provides logistics support to institutions, funds, and trusts in the market of good delivery gold and silver bullion. AFECC handles the full range of acquisition, storage, and liquidation of good delivery gold and silver bullion on behalf of its clients.

Contact:
Alex Stanczyk
Web: www.anglofareast.com
Phone: +1 206 905 9961
Email: astanczyk@anglofareast.com

Article Source

My colleagues and I have said gold is money for years. It seems the establishment is agreeing.

LONDON (Reuters) – J.P. Morgan Chase said on Monday it would accept physical gold as collateral with its counterparties as a growing number of clients look to use bullion as a hedge against inflation.

The bank, which is one of the custodians of physical metals for some of the world’s largest precious-metal backed exchange-traded funds, said it would take gold as collateral to satisfy securities lending and repurchase obligations with counterparties.

“Many clients are holding gold on their balance sheets as an inflation hedge and are looking to make these assets work for them as collateral,” said John Rivett, collateral management executive for J.P. Morgan Worldwide Securities Services.

“By combining our collateral management and vaulting capabilities, we provide clients with greater flexibility in how they mobilize collateral.” The spot gold price, which has fallen by some 4 percent so far this year to around $1,350 an ounce, rose by 30 percent last year, in large part thanks to investors seeking protection against rising inflation pressures in both developed and emerging economies.

JPMorgan, which owns vaulting facilities for storing precious metals around the world, said the initiative would allow its clients to mobilize collateral across borders and trading activities, “regardless of the underlying obligation, to extract maximum value and manage risk,” it said.

Article Source

China will need to buy more gold for its currency to match the reserves of western nations and sit at the table of reserve currencies. Consider China the floor under the gold price. Previous statements by highly placed Chinese have indicated that $1300 per ounce is an attractive number to them. Perhaps not as good as India’s average price of $1045 an ounce, but gold may not ever touch those numbers again.

DAVOS, Switzerland (Reuters) – The U.S. dollar’s role as a reserve currency will diminish in the coming years as Asian economies like China grow and countries seek to diversify their monetary holdings, policymakers said on Friday.

The U.S. Federal Reserve’s policy of quantitative easing — essentially printing money — and a call by France to look at ways to wean the world off the dollar as the sole reserve money have put the U.S. currency in the spotlight.

“I’m more optimistic about the euro gaining strength as a potential reserve currency,” Bank of Israel Governor Stanley Fischer said during a panel discussion at the annual World Economic Forum in Davos, Switzerland.

“We ourselves are diversifying into currencies which we would never have put in the reserves before, including the Australian dollar and so forth,” he added. “I think people will diversify their reserves.”

French President Nicolas Sarkozy is trying to rally the Group of 20 powers to the idea of a more varied monetary system after decades of the dollar being the world’s reserve currency and a major unit of international trade settlement.

The dollar debate comes at a time when many countries are tempted to let their currency drop to promote exports and growth after the worst downturn since World War Two, even if that can be at each others’ expense.

Bank of Canada Governor Mark Carney and Fischer anticipated that, in the long run, Asian monies would have a greater role as reserve currencies.

“I agree with Stan (Fischer) that over time there will be more of a multi-polar system. Other currencies will play a central role in reserves,” he said. “The (Chinese) renminbi, over time, should have a role as a reserve currency.”

Turkish Finance Minister Mehmet Simsek saw the United States’ quantitative easing policy leading to a diversification of reserve holdings.

“If the U.S. continues the way it is … certainly countries will look for alternatives because you can’t print so much money and expect no consequences,” he said.

“Ultimately the center of gravity is shifting toward the East,” Simsek added. “Certainly, 10 years from now there could be a very different landscape.”

Article Source

By Simon Kennedy

China Investment Corp. Vice Chairman Gao Xiqing said that central banks’ quantitative easing policies are hurting the value of money just one day after the Federal Reserve maintained plans to buy $600 billion of Treasuries.

“You know money is gradually becoming not worth the paper it’s printed on,” Gao said at an event sponsored by HSBC Holdings Plc at the World Economic Forum in Davos, Switzerland today. Recent gains in commodity and food prices reflect the “long-term view” of investors that prices will accelerate, he said.

The Fed and the European Central Bank have kept their benchmark interest rates at record lows to spur their economic recoveries, triggering concern in emerging markets that the resulting flood of capital will undermine currencies such as the dollar and spark inflation.

“We’ve started collecting Zimbabwe notes,” Gao said, referring to an economy whose currency was scrapped in 2009 after inflation reached 500 billion percent. He noted investors are also discussing whether central banks will pursue more rounds of quantitative easing.

The Fed yesterday reiterated its intention to keep its benchmark “exceptionally low.”

Gao, whose sovereign wealth fund manages about $300 billion, signaled that while industrial nations are now more welcoming of China’s money following the financial crisis, their past criticisms may hurt their ability to attract it.

‘Long Memories’

“People have long memories,” he said. “We have this yo- yo when being treated by a few major countries.”

“In many countries we are now treated differently,” he said. “We should be the most welcome investor.”

Inflation concerns have become a new theme in the hallways of Davos’s Congress Center as emerging markets including China tighten policy and record food prices fan social unrest in North Africa. Chinese inflation ran at 9.6 percent in December.

Inflation nevertheless is not an immediate concern and prices for securities that offer protection against it are “not up there yet,” Gao said. A record $13 billion auction of 10- year Treasury Inflation Protected Securities last week attracted lower-than-average demand.

“In shorter run, you look at the numbers and fundamentals and you think there’s some inflation pressure but it’s not something we have to worry about,” Gao said.

Article Source

I do recall mid year 2010 when the buzz was some of Paulsons investors cashed out amid rumors he had lost his touch. I guess not.

By AZAM AHMED and JULIE CRESWELL

John A. Paulson made $4 billion betting against newfangled mortgage investments. But he made even more betting on an old-fashioned investment: gold.

The hedge fund manager John A. Paulson, right, invested heavily in gold on the belief that the dollar would lose value in the coming years. His gold investments are primarily done through a gold exchange-traded fund.

Mr. Paulson, a hedge fund manager who sprang to fame when the housing market collapsed, personally made about $5 billion in 2010, according to two investors in his company.

How? Mr. Paulson bought gold — lots of it. His firm, Paulson & Company, owns securities that represent the rough equivalent of 96 metric tons of the metal.

It is an outsize wager by almost any standard. Mr. Paulson’s firm does not actually own all that gold. But if it did, it would be sitting atop more gold than the Australian government. Mr. Paulson himself would be holding more gold than Bulgaria.

Mr. Paulson is known for betting big. His payday for last year exceeds the $4 billion he made for 2007. He became one of the most celebrated hedge fund managers in the business after his firm shorted subprime investments.

The 2010 income, which was first reported by The Wall Street Journal, was the culmination of a remarkable comeback for Mr. Paulson last year.

While Mr. Paulson’s firm oversees about $36 billion of assets in a range of hedge funds, the bulk of his personal fortune is invested in his funds that buy securities linked to the price of gold. Gold jumped almost 30 percent in 2010. So far this year, however, it has fallen almost 6 percent.

While some other hedge fund stars turned in strong performances last year — David Tepper of Appaloosa Management, Daniel Loeb of Third Point and William A. Ackman of Pershing Square, for instance — Mr. Paulson’s payday most likely dwarfed theirs, as he oversees funds that are substantially bigger.

Throughout much of last year, Mr. Paulson’s funds lagged the market. Amid questions about whether the funds had become too big to beat the markets or whether Mr. Paulson had lost his touch, some investors asked for their money back midyear.

But those who stayed were rewarded. In the final quarter of the year, many of Mr. Paulson’s core stock holdings rose substantially. His two largest funds, with a combined $18 billion in assets, the Advantage and Advantage Plus fund, were up 11.1 percent and 17.6 percent by the end of the year. (The difference between the two funds is that the Advantage Plus fund uses leverage, or borrowed money, to increase its returns.)

The average hedge fund gained a little more than 10.5 percent in 2010, a lukewarm year for many hedge fund managers, according to a composite index tracked by Hedge Fund Research of Chicago. Many investors would have achieved bigger gains by putting their money in an index that tracked the Standard & Poor’s 500-stock index, which was up about 15 percent last year, including dividends.

But Mr. Paulson’s personal payday was probably greater than that of many of his investors. The $5 billion he earned was almost twice the entire payroll of all Major League Baseball teams. While part of that came from his firm’s 20 percent cut of his funds’ profits — a typical “performance fee” in the industry — the bulk of his gains came from his own money he has in his funds.

Investors say Mr. Paulson has about $10 billion of his own money invested with the funds and that the vast majority of his money is invested in a special gold-share class he created a few years ago that is invested alongside his other portfolios.

So, while the Paulson Advantage fund was up 11.1 percent last year, the gold class shares of that portfolio surged 30.8 percent, according to investors in the fund, who spoke on the condition they not be named so as not to endanger their professional relationship with Mr. Paulson.

Mr. Paulson invested heavily in gold on the belief that the dollar would lose value in the coming years. His gold investments are primarily done via a gold exchange-traded fund, SPDR Gold Shares.

One of the largest E.T.F.’s in the world, SPDR Gold Shares is a trust that holds nearly 1,230 metric tons of gold bars in the vaults of HSBC bank in London.

The gold fund has attracted a lot of big investors who are looking for a hedge against inflation. George Soros and Eric Mindich of Eton Park both held substantial stakes in the gold shares trust, according to filings with the Securities and Exchange Commission.

“It’s massively popular. It’s been growing by leaps and bounds ever since the financial crisis,” said Scott Burns, director of E.T.F. research at the research firm Morningstar.

Investors in the special gold shares class do not pay an additional management fee for their stake in the gold funds, but they do give Mr. Paulson 20 percent of any profits. Only about one-third of his total investors are in the gold-shares class, many choosing instead to invest directly in the gold fund and keep all of their gains.

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By Bloomberg News

China should increase its gold and silver reserves, the Economic Information Daily reported today, citing an interview with central bank adviser Xia Bin.

Increasing gold reserves at the “appropriate time” is in line with the strategy of internationalizing the yuan, the report cited Xia as saying. “Related departments” should employ a “buy in the dip” strategy over a very long period of time, Xia said.

Bullion soared nearly 30 percent in 2010, advancing for the 10th year, as the dollar dropped and investors sought a store of value amid currency debasement. China is allowing greater use of its currency for cross-border transactions, seeking to reduce reliance on the dollar.

The report is “a positive factor for gold prices in the mid-and-long term,” Hwang Il Doo, a senior trader at Seoul- based Korea Exchange Bank Futures Co., said today. Still “it didn’t have immediate impact on prices as gold’s gain has more to do with the unrest in Egypt at the moment.”

Total gold consumption in China, the second-largest buyer, may gain 15 percent in the first half, fueled by growing demand for alternative investments and a hedge against inflation, the China Gold Association said last week.

Imports of gold by China jumped almost fivefold in the first 10 months of last year from the entire amount shipped in 2009, the Shanghai Gold Exchange has said. Shipments were 209 metric tons compared with 45 tons for all of 2009, said exchange Chairman Shen Xiangrong.

The country increased gold reserves by 454 tons to 1,054 tons since 2003, the State Administration of Foreign Exchange said in April 2009. The metal only accounts for 1.6 percent of the nation’s reserves held by the People’s Bank of China, according to the World Gold Council. China doesn’t regularly publish gold-trade figures and rarely comments on its reserves.

Immediate-delivery bullion gained as much as 0.7 percent to $1,346.27 an ounce, and was at $1,339.25 at 12:53 p.m. in Seoul. The price rose 2.5 percent on Jan. 28, the biggest intraday increase since Nov. 4 as escalating tensions in Egypt fanned concern that unrest may spread to other parts of the Middle East, increasing demand for an investment haven.

Xia’s remarks echo comments he made last month in an opinion piece for the China Business News.

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For an excellent view into the unrest in Egypt as well as how this mirrors other countries and what could happen in other places I recommend this fine article by Gail Tverberg who writes the Ourfiniteworld blog.

What Lies behind Egypt’s Problems? How do They Affect Others?
By gailtheactuary

We have all been reading about Egypt in the newspapers, and wonder what is behind their problems. Let me offer a few insights.

At least part of Egypt’s problem is the fact that in the past the government has threatened to reduce food subsidies. Now it is planning to hold food subsidies level and raise energy subsidies, but it is not clear that the dollar amount of subsidy will be enough. The government is taking steps to make food and energy affordable for most, but there is worry that the steps being taken will not be enough.

Alex’s Notes: Well well, who would have thought.

Re-indexing the US $1.7 Trillion of currency against the 261.4 million ounces of gold gives us a gold price north of $6500 per ounce.

“We have at this particular stage a fiat money which is essentially money printed by a government and it’s usually a central bank which is authorized to do so. Some mechanism has got to be in place that restricts the amount of money which is produced, either a gold standard or a currency board, because unless you do that all of history suggest that inflation will take hold with very deleterious effects on economic activity… There are numbers of us, myself included, who strongly believe that we did very well in the 1870 to 1914 period with an international gold standard.” – Alan Greenspan, Fox News January 21, 2011

Alex’s Notes: For the Chinese President Hu Jintao to formally broadcast this message is a very important point. For years many have speculated as to the path China would take in regards to the worlds reserve currency situation. This pattern has been slowly observable over the last few years as to the pieces being put in place by China.

1. Buying commodities and more importantly the ownership of the in ground resources and rights to extract them across the globe

2. Raising gold in reserves up to 1054 tonnes in a few short years

3. Signing bi-lateral agreements to settle trade in Chinese currency with some of the largest countries of the world

When China becomes the largest consumer of oil and agreements are publicly announced that China can buy oil from the gulf states in Chinese currency, these will be huge signals.

Changes of reserve currency do not occur overnight. China will need to add the equivalent of several years worth of mining supply globally to bring its foreign reserves in gold in line with that of leading economic powers in the west for the currency to have the credibility needed to take on this role. Consider China the floor under the gold price.

BBC News – Chinese President Hu Jintao has said the international currency system dominated by the US dollar is a “product of the past”.

Mr Hu also said China was taking steps to replace it with the yuan, its own currency, but acknowledged that would be a “fairly long process”.

The remarks to two US newspapers come ahead of a state visit by the Chinese leader to Washington this week.

They reflect continuing tensions over currency issues between the two powers.

The remarks to the Washington Post and Wall Street Journal came in the form of written responses to questions. Mr Hu also reiterated criticism of a decision by the US Federal Reserve to inject $600bn into the economy, which some argue will weaken the dollar at the expense of other countries’ exports.

“The monetary policy of the United States has a major impact on global liquidity and capital flows and therefore, the liquidity of the US dollar should be kept at a reasonable and stable level,” President Hu said.
‘Important contribution’

Meanwhile, he disagreed with suggestions that letting the yuan appreciate in value would help China to combat inflation.

He said inflation, which reached 5.1% in November – its highest level in 28 months – was “on the whole moderate and controllable”.
Continue reading the main story

“Making the renminbi an international currency will be a fairly long process”

“We have the confidence, conditions and ability to stabilise the overall price level,” he said.

Beijing has previously come under pressure over its currency from the US, which has accused China of manipulating the yuan to help boost Chinese exports.

On Sunday night, three Democratic senators announced they would introduce a new bill to increase penalties the US considers to be “currency manipulators”.

However, the move is unlikely to receive support from senior Republicans – who recently took control of the House of Representatives.

The new House speaker, John Boehner, voted against another bill that failed last year that would have helped US companies challenge currency subsidies.
Currency reservations

Despite criticism of the current system, Mr Hu said he believed it would be a long time before the yuan – or renminbi (RMB) – was accepted as a global currency.

“China has made important contribution to the world economy in terms of total economic output and trade, and the RMB has played a role in the world economic development,” he said.

“But making the RMB an international currency will be a fairly long process.”

Some economists suggest that China’s growth strategy – with its focus on exports and state-led investment – may be incompatible with Mr Hu’s currency ambitions.

In order for the yuan to oust the dollar as a global reserve currency, international central banks and investors would need to be able to get their hands on huge amounts of the currency.

Yet neither of the ways in which China could supply the world with more yuan is at all appealing to Beijing, according to Michael Pettis, economist at Beijing University.

He says the country could start running big trade deficits with the rest of the world – just as the US has been doing – and finance them by selling their currency to their trade partners.

Or it could allow foreign investors to pour their money into Chinese financial assets – like shares, bonds or yuan bank accounts – matched by similar Chinese investments in the rest of the world.

But Mr Pettis warns that for the numbers to add up, China would need to do these things on an unprecedented scale, which is likely to be unpalatable to the authorities.

Either of these moves is likely to go with an increase in the yuan’s value, making Chinese exporters less competitive.

And they may also fuel speculative asset bubbles in China – something that Beijing has been trying to clamp down on of late.

Original Article

Alex’s Notes: Fundamental Drivers for todays bull market in gold are still in place, there is no solution to the western debt and budget shortfall problem other than additional Quantitative Easing (modern central banker parlance for creating more money)

Temporary pullbacks in the price of gold during its 10 yr ascent is healthy, normal, and expected.

Do not allow yourself to be frightened out of your positions.

Associated Press
Monday, January 17, 2011; A13

The United States just passed a dubious milestone: Government debt surged to an all-time high, passing $14 trillion – $45,300 for every person in the country.

That means Congress soon will have to lift the legal debt ceiling to give the almost maxed-out government an even higher credit limit or dramatically cut spending to stay under the current cap. Either way, a fight is ahead on Capitol Hill, inflamed by the passions of tea party activists and deficit hawks.

Each side is blaming the other for an approaching economic train wreck as Washington wrestles with how to keep the government in business and avoid defaulting on global financial obligations.

Bills that would increase the debt limit are among the most unpopular in Congress, serving as pawns for decades in high-stakes bargaining. Until now, the ending has been the same: We go to the brink before raising the ceiling.

All bets may be off, however, in this charged political environment, despite some signs that the partisan rhetoric is softening after the recent shootings in Arizona.

Treasury Secretary Timothy F. Geithner says that not increasing the nation’s borrowing authority would be “a catastrophe,” perhaps rivaling the financial meltdown of 2008-2009.

Congressional Republicans, flexing their muscle after November’s midterm victories, say that the election results show that people are weary of big government and deficit spending, and that it’s time to draw the line against more borrowing.

Defeating a new increase in the debt limit has become a priority for the tea party movement and other small-government conservatives.

So far, the new GOP majority has proved accommodating. Republicans are moving to make good on their promise to cut $100 billion from domestic spending this year. They adopted a rules change by House Speaker John A. Boehner (Ohio) that should make it easier to block a debt-limit increase.

The national debt is the accumulation of years of deficit spending dating to the days of George Washington. The debt usually advances in times of war and retreats in times of peace.

Remarkably, about half of today’s national debt was run up in the past six years. It soared from $7.6 trillion in January 2005 as President George W. Bush began his second term to $10.6 trillion the day President Obama was inaugurated and to $14.02 trillion now. The period has seen two major wars and the deepest economic downturn since the 1930s.

With a $1.7 trillion deficit in fiscal 2010 alone, and the government on track to spend $1.3 trillion more than it takes in this year, annual budget deficits are adding about $4 billion a day to the national debt. Put another way, the government is borrowing 41 cents for every dollar it spends.

In a letter to Congress, Geithner said the statutory debt ceiling of $14.3 trillion, set last year, may be reached by the end of March – and hit no later than May 16. He warned that holding it hostage to skirmishes over spending could lead the country to default on its obligations, “an event that has no precedent in American history.” Debt-level brinkmanship doesn’t wear a party label.

Here’s what then-Sen. Obama said on the Senate floor in 2006: “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance the government’s reckless fiscal policies.” It was a blast by the freshman lawmaker against a Bush request to raise the debt limit to $8.96 trillion.

Bush won on a party-line vote of 52 to 48. Not a single Senate Democrat voted to raise the limit, opposition that is now complicating White House efforts to rally bipartisan support for a higher ceiling.

Democrats have used doomsday rhetoric about a looming government shutdown and comparing the U.S. plight to financial crises in Greece and Portugal. It’s all a bit of a stretch.

“We can’t do as the Gingrich crowd did a few years ago, close the government,” said Senate Majority Leader Harry M. Reid (D-Nev.), referring to government shutdowns in 1995 when Newt Gingrich (R-Ga.) was House speaker.

But those shutdowns had nothing to do with the debt limit. They were caused by failure of Congress to appropriate money to keep federal agencies running.

And there are many temporary ways around the debt limit.

Hitting it does not automatically mean a default on existing debt. It only stops the government from new borrowing, forcing it to rely on other ways to finance its activities.

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