By Zhang Fengming 2008-2-15

CHINA surpassed the United States as the world’s second-biggest retail gold market after India in 2007 by volume despite rocketing prices of the metal.

Total consumer demand in China’s mainland, Hong Kong and Taiwan reached 363.3 tons, up 23.5 percent from a year earlier, the World Gold Council said in a research report.

India had a gold demand of 773.6 tons last year, while the figure in the US sat at 278.1 tons.

Mainland gold demand, including jewelry and retail investment, topped 326 tons, up 26 percent from 2006, and the first time it surpassed the 300-ton level. Mainland gold-jewelry demand reached 302 tons in 2007, a year-on-year growth of 23.5 percent.

What makes the Chinese market stand out is the growing demand in the fourth quarter, when most other markets saw demand drop as costs soared.

Gold prices hit a three-decade high and topped more than US$900 an ounce on concerns over inflation, global economic uncertainty, the likelihood of an American recession and a weak US dollar.

In the fourth quarter, mainland gold demand rose 18 percent to 94.3 tons. In India gold demand tumbled 64 percent to 83.9 tons and in the US it fell 15 percent to 110.7 tons.

“It’s a milestone for China’s gold industry with demand surpassing the 300-ton level,” an industry veteran said yesterday.

Concerns over domestic inflation and the volatile stock market also added to the investment drawing power of gold as a haven.

China’s gold demand this year is again unlikely to be affected by rising prices as Chinese tend to buy at high prices in the hope of even further increases, World Gold Council veterans said in January.

Chinese gold demand was stagnant during the late 1990s and early 2000s but started going upward from 2003. China’s gold sales volume stood at 207.6 tons in 2003, a 2.0 percent rise to end a five-year wane.

The gold-sale rise is also in line with the country’s economic take-off.

China is expected to have a gold consumption of 600 tons in 2010, according to industry insiders.

The nation last year surpassed South Africa as the world’s biggest gold-mining country.

Beginners Guide to Gold and Silver Investing – Free

http://www.shanghaidaily.com/article/?id=348714&type=Business

By LIU JIE

CASH might be king, but gold could again rule.

Amid a struggling stock market, rising prices and uncertain prospects in the property sector, many Chinese people think that gold is the safest and most reliable asset.

A range of developments over the past year seems to show the increasing allure of gold: At the 2007 China Gold and Precious Metal Forum held last December in Shanghai, the China Gold Association estimated that more than a million Chinese then had gold investments.

In Beijing Caishikou Department Store, the capital’s largest gold jewellery, accessories and decorations retail store, two tonnes of gold bars commemorating the Lunar Year of Rat, retailing at 238 yuan a gram, sold out in under two hours in November.

The store says the sale included 4,000 orders and on-site purchases of over 200 kg of the gleaming metal, all of it together valued at nearly 60 million yuan.

The Beijing Organizing Committee for the Olympic Games and the China Banknote Painting and Minting Corp jointly issued a series of gold and silver bars to commemorate the Olympics.

The fifth and last set of Olympic gold bars hit the market on Jan 2 to complete the entire collection that spells out “2008” in the image of a dragon. With their provenance the price of Olympic gold bars has risen dramatically since they were first issued two years ago. The first set is now worth more than triple its initial price.

China’s first gold investment instrument, CGS Standard Gold Bars, sold 2.7 times more bullion last year than in 2006. First offered to individual investors in 2003, the 99.99% pure gold bars come in weights ranging from two to five to 10 ounces.

Minted by CGS Ltd, a joint venture between mainland and Hong Kong bullion traders, pricing of bars is based on the daily rate of the London Precious Metals Exchange with quotations on the Shanghai Gold Exchange serving as a reference.

Gold investment on paper is also enjoying enormous popularity.

Three of China’s commercial banks – the Bank of China, Industrial and Commercial Bank of China and China Construction Bank – offer the products, which had two-digit month-on-month price increases last year.

Gold futures trading was officially launched in China on Jan 9 at the Shanghai Gold Exchange, but now open to only institutional investors.

“Gold futures will open to individual investors sooner or later and is expected to be a white-hot investment tool for aggressive investors,” says Chen Jinhua, deputy general manager of Jingyi Gold Investment Co.

Beijing citizen Tang Jianming, a pioneer in buying stocks and funds in China, earned big returns early last year due to the extraordinary bull market. He says he is lucky to have put the bulk of his earnings in CSG bars and gold treasuries from the Bank of China before May 30, the day the Shanghai and Shenzhen exchanges had a dramatic slump.

He estimates that paper value of his gold has increased by 20% since due to rising international gold prices, depreciation of the US dollar and domestic inflation.

According to Hou Huimin, vice-chairman of China Gold Association, investment enthusiasm for gold is promising in China because the nation currently lacks diverse financial instruments.

As gold prices often react inversely to other assets, buying gold is a way to preserve capital value when the stock market is bearish or the US dollar is weakening.

“The real value of gold is not that it provides a quick, speculative fix, but its capacity to provide a sure and steady means of protecting wealth and to enhance risk-adjusted returns,” Hou says.

“So investors should include gold in their portfolios to diversify their investments and serve as a balance to shares.”

http://biz.thestar.com.my/news/story.asp?file=/2008/2/11/business/20263505&sec=business

Buy Gold and Silver Bullion

By J S Kim

Technically, gold futures contracts are showing a bearish rising wedge pattern so there is the imminent risk of a minor correction now.

I say minor and not major, because I just can’t see gold retreating all the way back to $800 an ounce. I just think that such a significant retreat, given the vast problems in the global economy, and particularly in the U.S., has a very small probability.

My downside projections for a correction are somewhere within the $850-$860 range if we see a correction, but should gold retreat to this range, I believe that this retreat will be very short lived as savvy investors will definitely view such a correction as a buying opportunity and jump into the market at this point to drive the price of gold higher again.

As far as the “gold is too high” believers, even if gold doesn’t retreat by $40 or $50 an ounce, I believe that even at $900 an ounce, long term buyers of gold and those that have already been buying for years will be just fine adding to their current gold bullion positions at this price.

At every step of the way during this current gold bull run, gold has been “too expensive”. It’s been “too expensive” at $400 an ounce, at $500 an ounce, at $600 an ounce, at $700 an ounce, at $800 an ounce, and now at $900 an ounce. The fact is that this gold bull run has a long long way to run.

As far as why I believe any such correction, if it happens, will be very short-lived, China provides some of the answers.

A gold futures market just opened up in Shanghai on January 9th, with apparently plans for a silver futures market on the way as well. The Shanghai futures market may not have a lot of impact for now in the global market for gold, but it is an important global development as it definitely raises visibility of gold as an investment vehicle in China.

With A-shares (shares of Chinese stocks available only in the Chinese mainland) still trading at ridiculous valuations and at 80% premiums to their H-shares counterparts (the shares of the exact same Chinese stocks that trade in Hong Kong), Chinese investors that are now sitting on 300% to 400% profits on their stock portfolios in just several years will be well served to take their profits and seek a new home for much of that capital.

Gold may just be the winner in this rebalancing equation.

http://www.commodityonline.com/news/topstory/newsdetails.php?id=5308

Buy Gold and Silver Bullion

Port’s hurry to deliver ‘black gold’
By Michael Bristow
BBC News, Qinhuangdao

Giant coal movers at the port
Men and machinery at the port have been working desperately
Throughout the night, workers at China’s largest coal port are busy loading waiting ships with thousands of tons of “black gold”.

These vessels mostly deliver their precious cargo to ports all along China’s south-eastern coastline.

Qinhuangdao is now working overtime to supply southern areas that are experiencing their worst winter weather in more than 50 years.

There is a desperate need for coal at power stations that have had to limit electricity generation because a shortage of supplies.

The snow has revealed just how much China relies on its most abundant energy source.

In Qinhuangdao, port mangers and workers have one main task to complete – ship as much coal south as quickly as possible.

“We’re not suffering like people down there so it doesn’t matter if we have to work over Chinese New Year,” said a port railway worker as he watched another coal train trundle passed his signal box.

Chinese President Hu Jintao paid a flying visit to Qinhuangdao last week to tell the port authority to increase the amount of coal it handles.

“Your efforts are very important to ensure electricity to disaster-hit areas,” he told enthusiastic dockside workers.

The port, in Hebei Province, has become an increasingly important transport hub since China began its economic reforms in the late 1970s.

It expanded three times in the 1980s and again in 2004. It mostly handles coal from the northern provinces of Shanxi, Shaanxi and Inner Mongolia.

Dirty legacy

The coal is dealt with quickly when it arrives.

Giant machines lift whole train wagons into the air before depositing the coal onto conveyor belts that take it to waiting ships.

On Monday we worked day and night to ship 250,000 tons of coal
Zhu Shangdong, head of engineering

Some of the coal is exported, but most is shipped to southern China, where the country’s main manufacturing base is located.

It leaves behind its dirty legacy: across Qinhuangdao’s port district thick coal dust clings to every surface.

Lin Song, of the port’s publicity department, told the BBC that the port handled an average of 600,000-700,000 tons of coal a day in January.

That figure increased by 100,000 tons a day from 1 February after President Hu called for more shipments.

“Only by delivering this increased amount of coal can we satisfy the needs of power companies in southern China,” she said.

The next few days are the most vital, according to Zhu Shangdong, head of the engineering department at just one of the port’s coal handling companies.

“On Monday we worked day and night to ship 250,000 tons of coal. It gave me a very good feeling,” he said from the end of a wharf that juts far out into the icy sea.

Ship awaiting cargo
Ships take the much-needed coal south to power stations

Mr Zhu said men and machines were working at maximum efficiency.

The port had managed to cut the time it took to move coal from train to ship, added the man who shook the president’s hand when he visited.

Despite the enthusiasm in Qinhuangdao, the current weather crisis has revealed flaws in the country’s energy supply chain.

Writing in a national newspaper this week, Zhang Guobao, deputy head of the National Development and Reform Commission, said it should serve as a wake-up call.

He said the country is over-reliant on coal and needs to develop alternative energy sources, such as wind and nuclear power.

The core problem is that energy supplies are having trouble keeping up with the expanding economy, which grew by 11.4% last year.

Small mines closed

Even without this year’s unusually cold weather, the authorities would have had difficulties meeting energy demands.

This situation has been exacerbated because the government has also closed many small and illegal coal mines that were deemed dangerous.

In what appears to be a change of heart, the government last week said some of these closed mines could reopen, but only if they were safe.

However much the government wants to develop other sources of energy, it admits it will have to rely on coal for a long time to come.

That is bad news for China, but good news for Qinhuangdao.

http://news.bbc.co.uk/2/hi/asia-pacific/7229443.stm

Buy Gold and Silver Bullion

By James Regan

SYDNEY (Reuters) – Rio Tinto Ltd/Plc’s (RIO.AX) rejection of a $140 billion all-share offer from BHP Billiton Ltd/Plc (BHP.AX) is likely to trigger rival bids from resource companies awash with cash from record commodity and stock prices.

A marriage of BHP (BLT.L) and Rio (RIO.L) would create the world’s biggest mining force, capable of controlling the global flow of fleet loads of iron ore, copper, coal and other commodities for industrial use.

Analysts said BHP Billiton’s approach may be just the first shot in a battle that could draw in other parties and push up the bidding for Rio above $170 billion.

A host of interested parties, from Chinese oil companies to Siberian nickel miners, have the potential to launch rival offers after massive stock market floats have brought companies excess funds, supplying the capital needed to finance a bid.

“If you put together a consortium of Chinese, they could be out there, as well as the Russians, given there’s a lot of oil money being generated,” said Shaw Stockbroking analyst John Colnan.

Global mining leader BHP said on Thursday it had approached third-ranked Rio with a 3-for-1 share offer, but Rio was quick to rebuff the offer as too low.

The BHP offer was initially pitched at a 14.4 percent premium. Rio shares gained nearly 16 percent to A$130.90 in Australian trade, while BHP fell 1.8 percent, putting Rio about 3 percent above the indicative offer price.

Rio would not say whether it had received other approaches, although analysts said the company’s broad range of operations and healthy profit outlook made it an attractive target.

The Rio board was open to other offers and a higher BHP bid, said a source familiar with the deal, who asked not to be named.

Only hours earlier, Rio had mopped up the last of the shares in Canadian aluminum maker Alcan, which it acquired for $38.1 billion after trumping an offer by Alcoa Inc. (AA.N).

Credit ratings agency Moody’s said it may put BHP’s rating under review for a possible downgrade if a formal offer is made for Rio, reflecting uncertainties about integration risk, regulatory restrictions and financial policies.

The global mining boom means both companies are generating piles of cash, with BHP Billiton expected to post 2007/08 net profit of $15.7 billion, while Rio is expected to post profit of about $7.6 billion.

At current prices, Rio trades at a forward earnings multiple of 17.6 times, and BHP at about 14.3 times.

REGULATORY CONCERNS

BHP has not said how it would address potential anti-trust issues, particularly in iron ore where the two companies command 30-35 percent of the seaborne market, say analysts. BHP and Rio mine a combined 277 million tonnes a year and are expanding rapidly. Only Brazil’s CVRD (VALE5.SA) mines more.

However, Rio’s acquisition of Australian and Canadian iron ore miner North in 2000 raised few alarms with regulators.

Given neither BHP nor Rio sells much into the highly regulated U.S. and European markets, Tim Barker of BT Financial Group said he doesn’t see any anti-trust issues.

“The scarcity and the difficulty of bringing on new projects, sourcing people, makes these sorts of consolidations attractive,” said Denis Donohue, senior portfolio manager of Suncorp Metway Investment Management, which owns shares in BHP and Rio Tinto.

Rio’s rich iron ore, coal and copper mines, as well as its ranking as the world’s top aluminum maker, would offer diversification from oil for China’s PetroChina (601857.SS), which has a market value exceeding that of Exxon Mobil Corp (XOM.N) and Royal Dutch Shell Plc (RDSa.L) combined.

“One possibility would be Chinese sovereign funds taking a blocking stake in Rio Tinto,” said FW Holst analyst Rob Craigie.

In Russia, the world’s biggest nickel miner Norilsk Nickel (GMKN.MM) has said it will look overseas for more assets after completing the largest foreign acquisition by a Russian company.

Norilsk already explores with Rio Tinto in the Russian Far East and with BHP in northwest Russia and western Siberia.

BHP, which merged with Billiton in 2001, almost went bankrupt in the late 1990s after a disastrous foray into copper mining in the United States, which raised the company’s penchant for spreading its commodity base far and wide.

Rio is also a combination of a merger, in 1997.

British-based Rio Tinto Co was formed in 1873 to mine ancient copper workings at Rio Tinto near Huelva in Spain. In Australia, Consolidated Zinc was incorporated in 1905 to treat zinc bearing mine waste from the outback.

Diversify Your Income

– FREE Report “10 Reasons Gold Has Farther to Run”

from Tickersense

There has been much chatter recently about the market capitalization of Chinese stocks. It is true that PetroChina (PTR) is the first trillion dollar company; however, four of the five Shanghai Composite stocks appearing in our Top 20 list are also listed on Hong Kong’s Hang Seng index. Maybe not a hugely significant fact, but while the Shanghai Composite is considered “emerging,” the Hang Seng is considered “developed.”

http://tickersense.typepad.com/ticker_sense/2007/11/twenty-largest-.html

Diversify Your Income

– FREE Report “10 Reasons Gold Has Farther to Run”

Is it a tech-stock? Is it traded on the NYSE or NASDQ? Is it even an American company?

————————————————————

PetroChina Surpasses Exxon as Shanghai Shares Surge
By Ying Lou

Nov. 5 (Bloomberg) — PetroChina Co. became the world’s first trillion-dollar company, surpassing Exxon Mobil Corp. as the shares started trading on the Shanghai stock exchange.

PetroChina’s Class-A shares almost tripled on their Shanghai debut, rising as high as 48.62 yuan from the sale price of 16.7 yuan. The listing gives mainland Chinese investors their first opportunity to own the stock.

China’s largest oil and gas producer has been listed since 2000 in Hong Kong where it advanced 78 percent this year as investors sought to profit from the world’s fastest-growing major economy. The Beijing-based company’s shares soared as the Hang Seng Index in Hong Kong rose 53 percent and the CSI 300 Index of shares listed on the Shanghai and Shenzhen exchanges increased 168 percent.

“Local investors might have a different risk tolerance level to global investors, so we may see PetroChina’s A-shares trading at a premium” to its Hong Kong stock, said Lei Wang, a co-manager of Thornburg International Value Fund in Santa Fe, New Mexico, which oversees $16 billion.

PetroChina reached 43.96 yuan at 11:05 a.m. in Shanghai, valuing the company at more than $1 trillion. Exxon is worth $488 billion on the New York Stock Exchange. In Hong Kong, PetroChina fell 7 percent to HK$18.20

`Sense Of Responsibility’

The Chinese oil producer trades at almost 60 times earnings in Shanghai, compared with Exxon’s valuation of 13 times. PetroChina’s market value is higher than Russia’s gross domestic product.

“I feel very excited today and also feel a very strong sense of responsibility,” Chairman Jiang Jiemin said at the Shanghai Stock Exchange. “This is PetroChina returning to our investors and the society.”

The company had 20.5 billion barrels of oil and gas reserves in 2006, compared with 22.1 billion for Irving, Texas- based Exxon, data compiled by Bloomberg show. PetroChina has been adding new reserves at an average annual rate of 5 percent for the past three years, a faster pace than Exxon, Royal Dutch Shell Plc and BP Plc, the world’s largest oil companies by sales.

The share sale, the world’s biggest this year, surpassed the 66.6 billion yuan generated by China Shenhua Energy Co. in September.

Mainland Chinese investors were until now prevented from directly buying PetroChina stock, missing out on a 15-fold surge as economic growth turned the nation into the largest oil consumer after the U.S. and as crude prices reached a record $96.24 a barrel in New York.

Demand For Shares

Investors applied for more than 3.3 trillion yuan of stock, almost 50 times the amount PetroChina sold. Chinese companies now represent five of the world’s 10 largest by market value, raising investor concerns that the market is too expensive.

Billionaire investor Warren Buffett’s Berkshire Hathaway Inc. sold its stake in PetroChina this year, reaping an eightfold gain that contributed to a 64 percent increase in third-quarter profit for the Omaha-based company. Berkshire had 2.34 billion shares as of the end of 2006, the largest holding after state-owned China National Petroleum Corp.

Buffett said on Oct. 24 that Chinese share prices have risen too fast.

“It’s easy to be carried away in the stock market when things are going very well,” he said in the northern Chinese city of Dalian. “We at Berkshire never buy stocks when we see prices soaring.”

`Limited Upside’

Gains in PetroChina’s Class-A stock in Shanghai may have more to do with Chinese investors seeking returns from their $2.3 trillion in savings than the outlook for the company’s exploration and production operations, or its refining business, known as downstream, said Larry Grace, an oil analyst at Kim Eng Securities Co. in Hong Kong.

“Production is static with limited upside for the next three to four years,” Grace said. “As for the downstream, the price controls and overall regulatory trend limit the company’s earnings.”

China controls fuel prices to shield consumers in the world’s most-populous nation from accelerating inflation. The policy limits the ability of PetroChina and China Petroleum & Chemical Corp. to pass on the burden of higher crude oil costs.

UBS AG’s China venture, UBS Securities Co., Citic Securities Co. and China International Capital Corp. arranged PetroChina’s Shanghai share sale.

http://www.bloomberg.com/apps/news?pid=20601103&sid=aixBdHxWY.po&refer=news

Diversify Your Income

– FREE Report “10 Reasons Gold Has Farther to Run”

by: Pluto

What follows is a collection of quotes from reports and investment signals I receive every day. Most of these are not free. In fact, I pay as much as $3,000 per year for some of my subscriptions. I’ve made selections from the past four days — to give you a peek behind the curtain.

My focus is on global markets and currencies (with side orders of petroleum and commodities). Meanwhile, the world’s focus is on deliberately kicking America’s ass (even if it hurts them in the short term). Many nations are willing to take a hard economic hit to rid the world of a dangerous invading nation with an insane leader threatening to “throw atomic bombs” at his make-believe enemies. As a result, experienced U.S. investors have been dumping their US dollars (frantically over the past ten days) — except for:

1. Investment professionals who watch CNBC — the corporate-profit-driven business cable channel with a propaganda mission to drive up the Dow.

2. Investment professionals with a case of cognitive dissonance, indecisive paralysis, senile dementia, or right-wing brain rot.

Your hand-picked selection of financial quotes appears below the fold.

THURSDAY — Get Ready for Another Dollar Bashing!

What Happened:
Yesterday, the markets got wind of the latest Durable Goods Report. Core Durables came in at 0.3%, as opposed to the 7% expected. That’s a big ouch! Durables as a whole came in – 1.7% vs. +1.6 as expected.

How Markets Reacted:
The U.S. dollar got crushed as traders heard about the less than enthusiastic numbers. They dumped the dollar with new found enthusiasm.

What It Means:
Man, the U.S. dollar just can’t catch a break. This has pushed EUR/USD back above 1.4300.

Are things going to get better anytime soon? More than likely not. Just Wednesday, Bank of America announced the layoff of several thousand employees. Motorola posted a loss this quarter in today’s announcements. Also, Daimler (Chrysler) announced a loss.

So what does this mean in currency land? The dollar is down because the market is losing confidence in the greenback fast. Plus, foreigners are taking more assets from the U.S. (selling their stock holdings of these slowing companies, selling real estate, etc.) and repatriating their money out of dollars and back into their home land.

This makes foreign currencies go up and the dollar go down. Currencies are moved by both economic and sentiment levels. Both right now are in the toilet. So until this picture changes fundamentally, all stock market rallies and dollar rallies should be sold once they start to roll over.

FRIDAY — Nations are Pouring Their Investment Funds into Asia

What Happened:
Foreign powers are now more willing to inoculate themselves from weakness in the United States. They’re doing this by establishing Sovereign Wealth Funds (SWFs), or government-sponsored investment companies. Booming countries – including major oil producers in the Gulf States as well as Russia – are going to make major changes to the way they invest. And Sovereign Wealth Funds are the vehicles they’ll use.

Nations use these government-owned investment corporations to invest surplus reserves. They’re rapidly becoming a popular way for central banks to get rid of their U.S. dollar investments, which are plunging in value on almost a daily basis.

It’s estimated that SWFs currently have more than US$2 TRILLION in assets under management. That’s quite a chunk of change! However, they are expected to exceed US$13 trillion in assets just 10 years from now.

How Markets Reacted:
Already, nations are moving their investment funds into other more stable currencies such as euros and British pounds.

What It Means:
This is just the beginning. Nations will become more aggressive in investing outside the dollar, which means currencies of other nations will get bid up in the process.

We believe the Japanese yen is one currency that will benefit greatly from this trend!

See, SWFs are going to allocate a much greater share of their investments to Asia. For some countries, it will amount to investing in their home region. For others, it will simply be going where the growth is. But all of them are likely to gravitate toward Japan, which is the second-largest economy in the world.

End result:

We will see more dollars being converted into the yen and other Asian currencies.

WEEKEND — Dollar Sell Signal Rumor from Commodities Guru Jim Rogers:

Jim Rogers broadcasted his intentions to sell ALL his U.S. dollars over the next few months. He’s using some of the profits to buy Chinese yuan instead.
According to this living legend, the “policy” of the Federal Reserve is “to debase the currency.” That’s why he’s trading in his dollars for yuan.

He used this little history lesson to point out why he’s so pessimistic about the greenback.

“The U.S. dollar is and has been the world’s reserve currency, the world’s medium of exchange. That’s in the process of changing. The pound sterling, which used to be the world’s reserve currency, lost 80% of its value, top to bottom, as it went through the whole period of losing its status as the world’s reserve currency.”

So even though it’s already been under pressure for years, the dollar still has significant downside risk, yikes! According to Rogers, the Chinese yuan (or renminbi) is “the best currency to buy right now. I don’t see how one can really lose on the renminbi in the next decade or so. It’s gotta go. It’s gotta triple. It’s gotta quadruple.”

MONDAY — A Private Trade Signal for Currency “Options” — and a High-Level Explanation of the Global Money Machine

Background:
I said last Friday that if the G-7 finance ministers didn’t make a strong statement supporting the dollar, the market may perceive it as a green light to sell the buck. Well, they didn’t, and the dollar is suffering the consequences.

The G-7 decided to let the dollar decline. That’s because a falling dollar will tend to add global liquidity to all asset markets. And that was the devil’s tradeoff for the G-7, i.e. either keep the global music playing by sacrificing the buck, or take a stand on the buck and risk a big selloff in global markets and risk more contagion.

Thus, we are in an environment that has to be labeled “The Return of Risk Taking.” And it’s a very fertile environment to hold options that bet on a continued dollar decline.

A Yuan for the Yen:

So what about the yen? Doesn’t it do badly in an environment of risk taking? Well, it used to, but I think the game has changed there, too.

Though the G-7 did not support the U.S. dollar, it did collectively bash the Chinese currency, complaining the Chinese yuan is significantly undervalued. This was the first time we saw the U.S., Canada, and Europe together in such a forceful manner on this issue. I think they are finally getting serious.

The Chinese currency is at least 40% to 80% undervalued against the U.S. dollar according to most analysts — and it could be a lot more than that. The political pressure on China and the inflationary pressures in China, are growing rapidly, thanks to the policy of currency manipulation. We may have finally reached that stage where it is in the best interest of China to act, and let its currency float much higher, much faster.

Why is a stronger yuan good for the Japanese yen?

Japan competes with China on exports to the West. A stronger yuan will allow Japan to implicitly let its currency move higher. I think this will now clear the way for the Bank of Japan to finally hike interest rates. Artificially lower interest rates in Japan have suppressed the yen for a while, as you know. It has been the catalyst for the carry trade.

Thus, we now have another reason why the carry trade in the yen could become unwound, besides just risk. That’s why I am still very bullish on the yen even in an environment of risk appetite.

(This signal goes on to tell investors to buy March Yen at a certain strike price…)

For those playing along at home — I wish I could tell you that if you invest in “international funds” through your mutual fund at work — that somehow you are in the “foreign” market.

Nothing, however, could be further from the truth. As long as your investment is demoninated in dollars, you are losing money every hour of the day.

The big problem this week, is that on Wednesday the Federal Reserve may lower interest rates (to keep the U.S. corporations happy with the Dow Jones Averages) — this will simultaneously cause the dollar to lose a great deal of value around the world. But most Americans won’t notice — yet. And on Friday, an important report on U.S. employment comes out (it’s called the Nonfarm Payroll report). If this shows the U.S. is losing jobs this month (doh!) it will signal to the world that the U.S. economy is in trouble, which will kick the dollar even further down in value.

http://www.docudharma.com/showDiary.do?diaryId=1841

Buy Gold and Silver Bullion

Road to Ruin (Excerpt)

Road to Ruin:
The gentlemen at Pimco are, once again, the leading cheerleaders for another round of easier “money.” Calling for the Fed to cut rates to 3.5%, Bill Gross commented Wednesday on Bloomberg television: “The nominal [third quarter] GDP number was 4.7%. Any time you get a nominal GDP growth less than 5% the economy is basically struggling. The U.S. needs at least 5% nominal growth in order to pay its bills on a longer term basis.”

I will, once again, take the other side of their analysis. First of all, 4.7% traditional nominal GDP growth would have easily in the past “paid its bills.” It doesn’t get it done today – even with 4.7% unemployment – specifically because of a long period of gross monetary excess. For some time now, the U.S. economy has been hopelessly finance-driven, and the greater and more protracted the Credit excesses the greater the “transformation” of the economic structure. And it is the underlying real economy that today cannot “pay its bills” and is therefore hooked on ever increasing Credit inflation. This should by now be recognized as the Road to Ruin. Contemporary finance and its operators should be held accountable.

The majority of contemporary “services” economic “output” is intangible in nature. The system creates various types of new financial claims (Credit), and this new purchasing power spins today’s economic wheels. It seemingly works wonders during the boom, but the end result is an endless mountain of financial claims backed by insufficient real economic wealth-creating capacity. Nominal GDP would “pay it bills” today only in the context of monetizing additional debt – or inflating the quantity of Credit to inflate “purchasing power” to inflate incomes and earnings – all in order to service previous borrowing excesses.

Admittedly, the Fed has opportunely administered several bouts of “reflation.” We have, however, reached the point where another round will be self-defeating. To throw out some numbers, from the Fed’s Z.1 “flow of funds” report we know that Total Credit Market Borrowings (non-financial and financial) expanded at a $3.75 TN annualized rate during the first half. To put the immense scope of recent Credit inflation into perspective, Credit Market Borrowings expanded on average $1.233 TN annually during the nineties (see chart above). Total borrowings accelerated to $1.694 TN in 2000, $2.013 TN in 2001, $2.365 TN in 2002, $2.767 TN in 2003, $3.085 TN in 2003, $3.380 TN in 2003, and $3.825 TN last year. It is this degree of Credit creation – and the associated Risk Intermediation – that is today untenable and unsustainable at any interest rate.

Before I dive into the U.S. Credit system fiasco, I was struck by a story by Jamil Anderlini from today’s Financial Times:

“The murder of a man who jumped a petrol queue in China’s central Henan province on Wednesday is the stuff of nightmares for the authoritarian Chinese government. Faced with worsening fuel shortages across the country Beijing raised petrol, diesel and jet fuel prices at the pump by almost 10% yesterday, in an effort to boost domestic supplies and exorcise the spectre of social unrest. The policy reversal came as shortages spread to the capital, which is usually immune from the country’s periodic supply crunches. But the government is unwilling to allow prices to rise too much because of a morbid fear of spiralling inflation, which has a history of toppling governments in China and is currently running at a 10-year high, above 6%… Soaring global crude oil prices…pose a serious dilemma for Beijing, which last raised its tightly controlled fuel prices in May 2006. China is the second-largest crude oil consumer after the US and although it was a net exporter as recently as 1993 it now relies on imports for nearly 5% of its crude supply. The current shortages, particularly of diesel, result from a combination of high global oil prices and strict government controls, causing huge losses for Chinese refiners that must pay more for oil but cannot raise prices at the pump.”

I pose the following question for contemplation: How much would the Chinese government, with their $1.4 TN stockpile of chiefly dollar reserves, be willing these days to pay for the necessary energy resources to sustain their economic boom and stem social unrest?

The legacy of years of runaway U.S. Credit excess includes many trillions of dollar liquidity balances circulating around the globe. Chinese reserves, for example, have inflated almost seven-fold in just five years. On the back of unprecedented global Credit and liquidity excess, energy, food, precious metals and other commodities now attract intense demand and virtually unlimited purchasing power. Our economy – our financially stretched consumers and vulnerable businesses – will now have no option other than to bid against highly liquefied competitors for a lengthening list of resources. Failure to recognize that this situation is a major inflationary problem is disregarding reality. The same can be said for suggesting that we can continue on this current course – with massive Current Account Deficits and rampant speculative financial outflows to the world fueling myriad dangerous Bubbles and maladjustment on an unprecedented global scale.

Today’s backdrop is unique. There are literally trillions of dollars of liquidity slushing around the world keen to hold “things” of value. Liquidity sources include the massive central bank reserve holdings as well as funds at the disposal of the sovereign wealth funds. Importantly, the more apparent becomes U.S. financial fragility, the keener they are to stockpile real “things”. There is as well a global leveraged speculating community, in control of trillions of liquid purchasing power. The speculators are also keen to acquire (non-dollar) “things” as opposed to our securities. Indeed, it should be noted that this is the Federal Reserve’s first attempt at reflation where U.S. securities are not the speculators’ or foreign central banks’ asset class of choice.

Not only is the pool of potential global buying power unparalleled in scope. It is fervidly attracted to tangible assets – as opposed to U.S. securities – and is highly speculative in character. At the same time, an unwieldy global boom is stoking unprecedented demand in China, India, Asia generally, and the other “emerging” markets including Russia and Brazil. Throw in various weather related issues and energy production constraints and the prospect for some very serious bottlenecks and shortages has developed.

Granted, these dynamics have been evolving for some time now. What has changed is the speed and breadth of financial crisis enveloping the U.S. financial system. When I read of mounting energy and food shortages and witness the unfolding run on the U.S. financial sector, as an analyst I must contemplate the likelihood we have entered a uniquely unstable monetary environment at home and abroad. In short, the backdrop exists where incredible dollar liquidity flows could be released (from myriad sources) upon key things (notably energy, food, metals and commodities) already in severe supply and demand imbalance. Again, how much are the Chinese willing to pay for energy? The Russians for food? The Indians for commodities in general? How much will investors be willing to pay for precious metals as a store of value? How aggressively will the speculators “front run” all of them? Can the Fed afford to continue fueling this bonfire?

I have so far this evening purposely avoided the unfolding U.S. financial crisis, a historic fiasco that took a decided turn-for-the-worst this week. I’ll admit that I am rather amazed that key financial stocks – including the financial guarantors, “money center banks”, and Wall Street firms – were hammered yet the market maintained its composure. NASDAQ was actually up on the week, as major technology indexes added to their robust y-t-d gains. I’ll assume there is a confluence of great complacency and gamesmanship, with operators determined to play aggressively through year-end (bonuses and payouts).

I wouldn’t bet on the stock market holding 2007 gains for another eight weeks. The Credit meltdown is now moving too fast and furious. Importantly, confidence is faltering for the entire Credit insurance industry, including the mortgage insurers and the financial guarantors. This is a devastating blow for the securitization marketplace, already reeling from pricing, liquidity and trust issues. The Credit system has lurched to the edge of meltdown, while the economy hasn’t even as yet succumbed to recession. It’s absolutely scary. Last week I wrote that subprime and the SIVs were “peanuts” in comparison to the CDO market. Well, the CDO marketplace is chump change compared to Credit Default Swaps and other over-the-counter (OTC) Credit derivatives that, by the way, have never been tested in a Credit or economic downturn.

The scale of the Credit “insurance” problem is astounding. According to the Bank of International Settlements, the OTC market for Credit default swaps (CDS) jumped from $4.7 TN at the end of 2004 to $22.6 TN to end 2006. From the International Swaps and Derivatives Association we know that the total notional volume of credit derivatives jumped about 30% during the first half to $45.5 TN. And from the Comptroller of the Currency, total U.S. commercial bank Credit derivative positions ballooned from $492bn to begin 2003 to $11.8 TN as of this past June. It today goes without saying that this explosion of Credit insurance occurred concurrently with the expansion of the riskiest mortgage (and other) lending imaginable. It’s got “counter-party fiasco” written all over it.

The stocks of Ambac and MBIA collapsed this week. I can only surmise that part of the selling pressure emanated from players caught on the wrong side of rapidly widening Credit default swap prices. Since these companies have limited amounts of bonds trading in the markets – in debt markets generally suffering acute illiquidity – those needing to hedge rising default risk in this industry had little alternative than to aggressively short the stocks. And the faster the stocks declined, the wider the CDS spreads and the more “dynamic” hedge-related selling required. This dynamic could play out throughout the financial sector and beyond. The “dynamic hedging” (shorting securities to offset increasing risk on derivatives written) of Credit risk today poses a very serious systemic issue.

The general inability to hedge escalating default and market risk has become and will remain a major systemic problem. Liquidity has disappeared, and there now exists an untenable overhang of risky securities and derivatives to be liquidated and/or hedged. Most playing in the Credit derivatives market lack the wherewithal to deliver on their obligations in the (now likely) event of a systemic Credit bust. The vast majority were “writing flood insurance during a drought, happy to book annual premiums while expecting to purchase reinsurance/hedge if and when heavy rains ever developed.” Well, it all happened at a pace so much faster than anyone ever contemplated. So abruptly, the flood is now poised to wreak bloody havoc the scope of which was unimaginable – and there’s no functioning reinsurance market.

Unlike this summer, this week saw the Credit crisis engulf the epicenter of the U.S. Credit system. Not surprisingly, the Fed rate cut only seemed to exacerbate market tension, with oil, gold and commodities spiking and the dollar faltering. Those arguing that the Fed needs to cut rates aggressively to avoid recession are disregarding the much higher stakes involved. There is today no alternative to a wrenching recession. The economy is terribly maladjusted, while the financial sector is at this point incapable of intermediating the massive amount of ongoing Credit necessary to keep this Bubble Economy inflated. Wall Street “structured finance” is today faltering badly, now leaving the highly vulnerable banking system with the task of sustaining the ill-fated boom. The least bad course for the Federal Reserve at this point would have a primary focus on supporting the dollar and global financial stability.

http://www.prudentbear.com/index.php?option=com_content&view=article&id=4812&Itemid=55

Diversify Your Income

– FREE Report “10 Reasons Gold Has Farther to Run”

Alex’s Notes: My main reason for posting the article below is to note what the Chinese are doing in preparations for their massive upcoming natural resource needs.

Between China and India, there is a rapidly growing group of some 1 billion people with new middle class incomes. When all of these people all decide they each want a car, a microwave, a new refrigerator, a new LCD TV, and all the amenities some of us in the western world take for granted, the natural resources requirements to fuel this wave of improved lifestyle will be staggering.

This is just one more example of how China and India thinks ahead, preparing generationally, for what is to come.

Proverbs 13:22: A good man leaveth an inheritance to his children’s children: and the wealth of the sinner is laid up for the just.

By contrast, what does the USA do?

We spend trillions supporting a worldwide military complex under the mantra of ‘national defense’. I still occasionally ponder how exactly projecting military power into another sovereign nation is defending yourself, but we have fallen that far.

We do not engage in the kind of future looking programs that will adress our educational, oil and energy needs of the future. Not to mention the staggering elder care and knowledge vacuum problems we face as our baby boomers enter retirement and remove a massive pool of knowledge, experience and know how from America’s workforce.

We have lost our generational thinking and planning long ago. While highschoolers in India study crammed 100 at a time into small sweltering rooms 7 days a week just to get into a technical college, we create programs like ‘No Child Left Behind’. New Middle Class from India and China work tirelessly with hopes of profiting in the digital future economy, and have no qualms about putting in 12 hour days. What have we taught our kids to do? Lets hook it up with more MTV, and spend our time drinking, doing drugs, having sex, and playing video games. Policies that discourage competition in our schools will have the effect of producing invalid, incompetent, and non-competetive workers that are not equipped to compete nor have the work ethic to do so even if they were equipped, while hard working knowledge workers from China and India take their jobs and leave them in poverty.

The moment we allowed ourselves to create entitlement programs that would enslave future generations because we were to lazy to accept personal responsibility for our retirement needs is the moment we lost our Moral Authority, and it was then that we lost our edge as world leaders. We are only beginning to see the results now. Just wait and see what the next 20 years holds if we do not change our tune.

We have allowed our government representatives to spoon feed us a utopian future, where everyones needs are cared for, just ‘elect me and I will pass legislature that will take care of everything’. What they did not include in those slogans was all the spending they would tack on to those bills for their personal interests, nor did they include the astronomical costs and damage to future generations that their ‘utopia legislature’ would create. Social Security and Medicare are hurtling towards a trainwreck of an event that many Americans are completely oblivious of, and even worse apathetic to. Most people in America still think there is money in the Social Security fund that hasnt been plundered for some other government program. HAHAHHAHAHAHA, thats a good one.

As faithful American citizens we of course voted these people into office and cheer as they provide a means of saving us from our own stupidity. What we are seeing now is only the effects of decisions we have made, and allowed our leaders to make in the past.

The consequences of our choices to spend now by our government will also not have to be dealt with by us, but by Americans who have not even been born yet. Our future generations will be born into a world with hundreds of thousands in National Debt burden from the moment they leave the womb. In our ‘I want it now, I will spend now, regardless of the cost’ culture – we have created a generational habit of instant gratification that may feel good now, but that our grandchildren will pay the price for.

Whats the solution? To take back our personal responsibility and forward looking planning on an individual level, to elect like minded officials, and to labor to create our own financial future versus relying on someone else to do it, and forcing our childrens children to pay the bill. We need to let go of the idea that the government is going to take care of us – let me let you in on a hint, they arent there to help you, they are there helping themselves, and using your tax money to do it.

Granted, now and then we see someone in government who believes in personal accountability and taking steps to improve the future of our chidrens children such as Ron Paul, but why should it be that he is an anomaly versus the norm?

Wake up America, the entire world is surging forward while we stagnate, and its economies are largely fueled by our willingness to becomes slaves to debt. If we allow a government that has no qualms about taxing the ever-living crap out of you to do what feels good for themselves, we are asking for it. If we at some point do not rise up and take back our own future, it will be dished to us on plates that will not taste good. No, they will not taste good at all.

/rantoff. We now return you to your regularly scheduled programming.

———————————————————

Written by Nicholas F. Benton

nfbenton@fcnp.com

My exclusive interview this week with a leading health official from the U.S. working on the AIDS crisis in Zambia, Africa, revealed conditions on the ground there almost too horrible to describe. There is no one critical problem there that is not interlinked with at least a half-dozen others and the conventional wisdom is that the best case scenario for a turnaround is at least 40 years away.

But as far as the U.S. or any Western interests are concerned, that day will likely never come, since their current foreign policy vacuum in that region has left it to strident and persistent advances by the Chinese.

China is moving into the most ravaged areas of Africa with no humanitarian intent. On the contrary, the Chinese are capitalizing on the corruption at the top of governments there to trade financial payoffs for titles to massive chunks of land rich in untapped natural resources.

The U.S. has turned its back to this process, from combined diplomatic, geopolitical and financial aid standpoints, because of its preoccupation with Iraq, the official said.

So the unspeakable human crisis there is not only a matter of concern for the people in that region, but for the wider global interests of the U.S., as well. The U.S. is stuck in the Iraq quagmire, having expended over $500 billion there to date, in an intended oil grab against perceived Russian and Chinese designs. Yet because of that, it is permitting access to even more vital resources in Africa and elsewhere to the same strategic competitors, over the poverty-stricken and disease-riddled rotting bodies of millions.

It is impossible to imagine anything but a massive shift of focus by the U.S. and its allies to turn this regrettable inevitability around.

As it is now, up to 40 percent of the population of Zambia and surrounding countries is infected with the HIV virus that causes AIDS. In Zambia, because of AIDS, the average life expectancy has dropped from 57 to 37 years of age in 20 years.

One out of every two children born there today will die from AIDS-related factors before age 24.

The death rate has created a massive displaced children problem and the local government has no interest in setting up orphanages. Instead, these AIDS orphans either move in with extended family members, live on the streets or are periodically rounded up into military camps.

These children are then either recruited into the exploding trend of child soldiers used as fodder in genocidal tribal wars, or into global human trafficking networks, shipped around the world and forced to become sex workers. The primary destinations of these networks are the large coastal urban centers of the U.S., the official said.

Neither condoms nor AIDS drugs are working in arresting the spread of HIV in Zambia, she added, noting that cultural mores and a pervasive sense of despair make them ineffective.

People living in conditions of extreme poverty have no energy to think beyond how they’re going to eat from day to day, and have no sense that they could work for a better future for themselves, or their children, in the long term. There is simply no notion of opportunities for a better life.

Foreign aids organizations are treated with great suspicion, with Afro-Americans from the U.S. being considered “white.” The suspicions are fueled by local witch doctors whose prescriptions for virility encourage sexual practices by adults with young children too heinous to describe explicitly. Polygamy, without the formality of marriage or commitment, is the norm.

Corrupt local leaders hold aid efforts at bay, demanding huge bribes and diverting resources for their own uses. And there is simply no way the U.S. or any other outside nation can carry out programs in those countries without the blessings of those leaders.

There appears to be no sweeping proposal for a “silver bullet” to fix all this. The only way to start, however, would be for the global community, most importantly the U.S., to begin fixing its gaze on what’s happening there, not only from a humanitarian but from a geo-strategic standpoint.

Diversify Your Income

– FREE Report “10 Reasons Gold Has Farther to Run”

By Mary Anne & Pamela Aden

Gold is glittering, soaring more than $100 since mid-August, to a new bull market high and to its highest level since January 1980. The six year bull market is strong and solid.

Crude oil, platinum, lead and wheat have been even more impressive, reaching record highs. Lower interest rates have given the commodity markets a boost. A mega rise is underway and it’ll likely last for years.

REASONS WHY GOLD AT NEW HIGH

Weak Dollar

The most obvious reasons why gold surged higher is due to the falling dollar. The dollar index fell to a record low when the Fed cut interest rates, which helped push gold up sharply. If the Fed continues lowering interest rates to ward off a slowing economy, this could cause gold to soar as the dollar falls further.

Lower rates this year could spur other world central banks to do the same and if so, it could also boost demand for gold as an alternative to all currencies.

Uncertainty & Crisis

Once again, an economic crisis caused gold to rise. An unsound financial system with monster deficits is good for gold. Easy money is good for gold. The world is slowly moving out of the dollar, which is another plus for gold. Tensions in the Middle East are good for gold. Basically, gold rises during times of uncertainty and crisis and that’s currently what’s happening.

Inflation fears have also pushed gold up. The record high in oil and other commodities is helping to fuel these fears, which are unlikely to end any time soon.

Growing Demand

Demand for gold is growing rapidly, which is also bullish. Gold buying in Asia and India is up sharply. Our good friend Brien Lundin says that India expects demand this year to be 50% above last year’s levels. That goes along with the idea that
India’s growth is following China’s.

Physical demand from the West is robust as well, based on the massive buying in the gold exchange traded fund (GLD). Plus, some central banks have been buying, and the Fall is a strong holiday demand season when the gold price tends to rise.

GOLD’S BULL MARKET

There are several ways we’ve been measuring gold’s bull market.

When gold first turned bullish in August 2001, we identified steps for the new bull market. The steps began to develop as the 1999 and 1990-96 prior peaks were surpassed.

The big moment for the bull market was when gold broke above the $500 level in December, 2005. This took gold into the fourth and final step, which is where it’s been trading since then. This reinforced that the bull market was solid.

With gold now at levels last seen in 1980, gold is on its way to completing this step. Once it rises above $850, the fourth step will be complete and that’ll be the next big milestone. Gold will be at a record high and it will then enter a new super strong bull market phase.

Gold has been a great investment. It’s up nearly 200% since 2001 and it’s up 20% so far this year. Even so, gold could still go much higher. Within gold’s big picture, the mega bull market is still young.

GOLD TIMING: On track

Over the past year, many investors worried that the bull market was about over. Six years, as the thinking went, was a long time for a bull market to last without a decent correction.

This could be a legitimate concern but all bull markets crawl a wall of worry. Most important, gold has stayed solidly above its 65-week moving average since August, 2001. This means gold’s trend is up and it will stay up above this average now at $653. This is a simple yet very effective way to stay invested with the major trend.

Within this uptrend gold has intermediate highs and lows, which is where our timing indicator comes in (see Chart 3B). This chart helps identify when gold in at an intermediate high or low level and what’s likely to occur next.

For now, gold’s been rising in what we call a C rise since June 27. Gold held firm in mid-August when most markets fell and it’s now at a new bull market high, reinforcing that this is a strong C rise, which is very important.

Remember, C rises in a bull market tend to be gold’s best intermediate rise when it moves up to a new bull market high, and that’s been the case since 2001. So the current C rise has essentially completed its purpose.

If gold now continues on to test or surpass its record high, then this C rise will become spectacular. But if it ends and stays below $850, that’s okay too. Keep an eye on $700 this month as gold will remain strong in a C rise above that level.

http://www.kitco.com/ind/Aden/oct182007.html

Diversify Your Income

– FREE Report “10 Reasons Gold Has Farther to Run”

by Gary Dorsch

For the past five years, the official mantra of the US Treasury has been a “strong dollar is in our nation’s interest,” while at the same time reminding traders that “currency values should be set in a competitive marketplace based on underlying economic fundamentals.” Most traders interpret that riddle to mean the US Treasury favors an “orderly devaluation” of the dollar, and won’t intervene to support the greenback as long as its descent doesn’t turn into a nasty rout.

The US dollar has lost more than a third of its value against the the Euro since 2002, and half its value against the Brazilian real. The latest blow to the “strong dollar mantra” occurred on Sept 18th, when the Bernanke Fed slashed the fed funds rate by a larger than expected 0.50% to 4.75%, knocking the US$ Index below the psychological level, and to its lowest level in 15-years.

US Treasury chief Henry Paulson is focusing on booming US exports, which rose to a record $138 billion in August, up 38% from five years ago. A weaker US dollar also inflates the earnings of S&P 500 companies, which earn roughly 44% of their revenue from overseas, mostly in Euros. And Mr. Paulson, the commander and chief of the “Plunge Protection Team,” aims to offset weaker US homes prices with an inflated stock market to keep the US economy from slipping into recession.

But the Bernanke Fed’s rate cut to 4.75% also ignited double-digit price increases for agricultural and energy commodities around the globe, and lifted gold 18% higher to $765 /oz, it’s highest in 28-years. The price of West Texas Sweet crude oil has increased by $19 per barrel since Mr. Bernanke began to flood the world with cheap US dollars. Soybeans have climbed 25% to $10 per bushel. Thus, Fed rate cuts, designed to bail out Wall Street brokers and bankers translates into sharply higher food and energy costs for the US and global consumers.

Foreign investors are rapidly losing faith in the Bernanke Fed and its cheap dollar policy, and dumped a net $163 billion of US securities in August, a record outflow. Net sales of long-term securities such as bonds, notes and equities hit an all-time high of $69.3 billion. Foreign central banks unloaded a net $29.7 billion of Treasury bonds in August compared with net sales of $6.9 billion in July.

Japan was a net seller of $24.8 of Treasuries, and China trimmed its holdings to $400.2 billion in August from $409 billion in July. Foreigners also sold $40.6 billion in US equities, a sharp reversal from net purchases of $21.2 billion the prior month. Foreigners are convinced that Mr. Bernanke has just begun a rate cutting campaign that can drive the dollar sharply lower, and are shifting their capital elsewhere.

While foreigners have nightmares about Mr. Bernanke’s control over the US money supply, which is expanding at an explosive 14.7% annual rate for M3, its fastest in history, the Bundesbank is warning that it’s too early to write off the chance of further tightening in Euro-zone interest rates. The European Central Bank has left its repo rate on hold for the past three months, but is now telegraphing a rate hike to 4.25% sometime in the fourth quarter.

“Risks to price stability are on the upside and, I would add, that they been have augmented in early September. We will do what is necessary to counter these risks. It is too early to dismiss the need for a future monetary policy response,” warned Bundesbank chief Axel Weber on Oct 18th. “Monetary policy has to do what is necessary to guarantee price stability. In a phase of robust growth around potential with little spare capacity, monetary policy no longer needs to support the economy, but instead should focus on risks to price stability,” Weber declared.

The US$’s interest rate advantage over the Euro has shrunk from +240 basis points a year ago to +37 basis points today, based on their respective six-month Libor rates. The shift in interest rates differentials in the Euro’s favor has lifted Europe’s currency from $1.260 in June 2006 to $1.430 today, a record high. The Bundesbank understands that higher food and energy prices are inflationary, and is ready to combat strong money supply growth in Europe with a tighter monetary policy, even at the expense of slowing down the local economy.

The US dollar fell to a seven year low of 1.785 Brazilian reals, after Brazil’s central bank kept its overnight Selic lending rate unchanged at 11.25% on Wednesday, pausing for the first time after 18 consecutive rate cuts. The Bank of Brazil has cut its Selic rate by 8.5% since August 2005, but has been unable to arrest the slide of the US dollar. The central bank intervenes regularly in the foreign exchange market to buy US dollars, boosting its FX reserves by $112 billion since January 2006.

The Bernanke Fed’s rate cut to 4.75% ignited a big increase in global commodity prices, which can boost Brazil’s exports and its currency. The local economy grew 5.4% in the second quarter from a year earlier, and exports in the first half of this year were $73.2 billion, up 20% from the year earlier period. The Bank of Brazil left its Selic rate unchanged at 11.25% due to higher inflation, which hit 4.15% in September, just below the bank’s 4.5% upper target.

The US dollar appears to be sliding in a bottomless pit in Brazil, and another round of Fed rate cuts would make Brazil’s high interest rates more attractive. Carry traders who borrow funds in Japanese yen to buy assets denominated in higher yielding currencies such as the real, have plowed money into the Bovespa Index, which is up 41% so far this year.

http://www.financialsense.com/Market/wrapup.htm

Diversify Your Income

– FREE Report “10 Reasons Gold Has Farther to Run”

Alex’s Notes: I find it interesting to note, that the history of the word inflation, and where it seems to be headed, dont add up.

No, inflation is not prices going up, although that is a symptom.

No, inflation is not interest rates changing, that again, is a symptom.

Inflation, has always been, and always will be, adding more money supply to the economy (not by earning it, but in our current economy by printing it and ‘creating it out of thin air’).

The current ‘definition creep’ that you can see by looking up the word,is, in my opinion, nothing more than another attempt to continue dumbing down America. A stupid and uneducated people, are an easily controlled people.

Wikipedia: Inflation is measured as the growth of the money supply in an economy, without a commensurate increase in the supply of goods and services. This results in a rise in the general price level, as measured against a standard level of purchasing power.

Dictionary.com: Inflation: Economics. a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency.

Why is this important? Because it serves to distract people from the problem: the fact that the Government is completely out of control printing money till the presses smoke and destroying the buying power of our dollars.

Then people scratch their heads and wonder why the value of the dollar is plummeting?

Supposedly well versed analysts who are reporting on our financial markets do not know what it means either:

Real inflation, a sustained rise in the general price level, is due to an excess supply of money — too much money chasing too few goods. Responsibility for inflation, therefore, must rest with the People’s Bank of China, not with the price of pork.

While this writer is partially correct, he is still missing the point that inflation IS an excess supply of money, not the prices going up.

To the point of the entry, China and other seemingly well to do economies are also suffering massive inflation.

There are many who feel that a good strategy to hedge against this rapid devaluation of the US Dollar is to move it into other currencies. This brings an image to my mind that Simon Heapes of Anglo Far-East shared with me:

“There is a big ship in the middle of a bunch of other ships, they all have holes in them and they are all sinking, and the rats are jumping from ship to ship trying to figure out which one isnt going to sink.”

While this may make some profits if done as trades in the short term, in the long term, every major currency in the world continues to inflate and will ultimately fail as history has shown, over and over. Another argument for why Gold and Silver are the true hedge and investment right now.

——————

When the 17th National Congress of the Communist Party of China convenes Monday, President Hu Jintao will be confronted with some serious challenges. Foremost will be to ensure steady economic growth and price stability.

Inflation is now at a 10-year high, reaching 6.5% (year over year) in August as measured by the consumer price index. Actual inflation is probably much higher given the defects of the CPI, which does not accurately reflect the consumption pattern of the present market-oriented system.

Housing prices and other asset prices are increasing at double-digit rates, but housing is underweighted in constructing the CPI (it only accounts for 13% of the index, compared with more than 40% in the U.S.). Moreover, some consumer goods are still subject to price controls.

Full article on Investors dot com here.

Mr Practical
Oct 10, 2007 9:33 am

Mr. Practical,

Rather than be angry, I would be better served to look for clarity. If in fact credit/debt is the way the US economy is driven, why then is this not explained in terms people can understand by the leaders in the country?

“We should acknowledge the source of our vibrant economic growth,” was Fred Thompson’s reference to tax cuts and economic policies.

I listen to the discourse very closely on many topics. The source and view of those I trust have become few and far between.

Can you comment on trade and the contention that increasing exports (shrinking dollar) will grow the economy? Also, tax cuts as they apply to revenues? Are corporations over taxed in U.S.?

-Minyan Skins

P.S. Adding to my skepticism is the fact that yesterday I entrusted my 19 year old son to the U.S.M.C. for 5 years. Bright enough, just cannot be in a classroom. “I’m going to get my resume.” I believe the economic current in the middle class swept him away.

Minyan Skins,

Ron Paul does explain it. “Those with ears will hear.” Almost no one has ears.

The U.S. economy used to manufacture things, have production, which created income for the middle class to save and invest, primarily in their homes.

But over time the U.S. has migrated toward a type of globalization that is insidious to the middle class of America, who are paying a high price. In the U.S., those who own companies outsource cheap/slave labor to increase profits. The Chinese economy benefits as they export and their standard of living rises. The U.S. middle class loses jobs to China as a result and must go into debt to pay for higher living expenses as the dollar falls relative to other currencies. The dollar is falling because debt is rising and that debt is external: it is owed to other countries like China that incrementally demand more and more dollars to lend.

Alex’s Note: Couldnt help it, have to comment on this. The dollar isnt dropping in value because of external debt, yes of course that plays a role, the dollar is dropping from the basic fundamental of supply and demand, we continue to make more dollars (literally, I am talking about printing money into existence not earning it), and then wonder why it goes down in value. Anything that has tremendous supply will drop in value, this isnt rocket science here.

As the U.S. middle class is now dependent on spiraling debt to finance consumption.

Tax cuts further make the rich richer and don’t help the U.S. middle class or poor.

As the dollar falls, nominal stock prices (priced in dollars) rise further helping the rich and hurting middle class who don’t own that many stocks (but encourages them to take this risk even when they can’t afford losses because they are so in debt).

Every time the Fed lowers interest rates, they de facto lower the dollar and further accelerate the process of transfer of wealth from U.S. middle class to Asia. The Fed must be careful to keep this process “slow” and “incremental” so U.S. middle class doesn’t really catch on to how their wealth is being taken away and given to exporting countries like China.

The U.S. rich support this as they are getting wealthier.

Eventually, the U.S. middle class will become poor. Because they are in debt they will be slaves to those who have lent them money. They will lose their assets (foreclosure) but won’t lose their debt, thus becoming indebted servants.

http://www.minyanville.com/articles/debt-US-China-middle+class-tax/index/a/14415

by Bob Chapman
The International Forecaster
Thursday, 11 October 2007

US MARKETS

As you all know, the government statistics for employment are totally bogus. That said; let’s take an introspective look at the latest machinations.

They tell us that yoy average hourly earnings are up 4.1% and that they are growing at a 5% compound rate for the past few months. We call this simple wage inflation, which was a long-time coming.

Officially 110,000 jobs were created in September compared to a revised gain of 89,000 in July and August. Don’t these massive revisions just warm your heart, 110,000 increases, which is bogus and in and of itself is totally inadequate? The economy needs 150,000 to 200,000 new jobs monthly just to stay in place. Increases over the last three months have only averaged 97,000. In the last four months the ranks of the unemployed have officially risen 400,000. Can you imagine what the real figure is, perhaps 1 million? The BLS has only removed 200,000 from the rolls. That is why we contend the uncounted unemployed are well over 13%. 4.7% is a fairy tale. Of the 73,000 new jobs in the private sector, 58,000 were in healthcare and in the food service industry. Retail and finance supposedly lost 19,000 jobs. 20,000 part-time jobs were lost as well. Why part-time jobs are included we will never know. They should be reported separately. As you can see the private jobs created were all at the lower end of the pay scale. Those jobs are for our fellow citizens who lost their $32.00 per hour jobs to free trade, globalization, and offshoring and outsourcing, so they could take these $10.00 per hour dead end positions.

They expect us to believe that unemployment for 8-19 year old females fell from 14% to 12.4% in one month, which is ridiculous. If they are going to lie at least try to make it believable. Yes, equally as preposterous is the fall in unemployment for women over 55, which fell from 3.4% to 3%. The bottom line is 97,500 of these new phantom jobs were all $10.00 per hour jobs or less in services, bars, restaurants, kitchens, nursing homes, etc., or 89%. Although bogus it is still dreadful. Worse yet the rate of unemployment for all men under 45 is up and that for 18-19 year olds is 16%.

You ask what does all this mean? It means we are already in a recession and have been for some time. Our government lies to us about everything so why should economic matters, such as unemployment be any different?

The FED is creating money and credit at a 14.1% rate or 48% annualized and they cannot readily make the economy grow.

Inflation is over 11% because of the Fed’s policies so we are not gaining- we are losing even if wages are up 5%. Worse yet, next year inflation, real inflation, will be over 15%. Over the last 50 years growth has been 3%. Even with the Fed’s outsized growth of monetary aggregates real growth is running at 1.5%, and it is headed much lower. Payroll jobs growth is only 1.6% and those figures are false. We have had negative job growth for some time. Payroll, real payroll numbers, run parallel to GDP growth. The 4th quarter will be terrible. Lower or no Christmas bonuses and plunging house prices will certainly dampen results. How can real estate prices remain constant when builders sell inventory for 35% to 50% off aggregate prices. Homebuilders are not just losing money many will go under. That is why we are still short suppliers and builders.

Real statistics are mind boggling as the stock market reaches new highs. There are almost three million mortgage holders with ARMs of one kind or another. These subprimes made up $1.3 trillion, or 73% of ARMs in the first quarter and 57% of mortgages in ARMs were unable to refinance loans in August. We still project overall losses at 50% of ARMs for $750 billion to $1.3 trillion, never mind the losses for those holding CDO bonds. Do not forget we projected these figures a year ago while the experts slept. Even they now only project 20% in foreclosures. The do not get it. These people shouldn’t have had loans in the first place. They are unqualified for new loans. They have negative equity and no cash and many, many cannot make the payments. Those payments are going up on reset and interest rates are climbing. Now that Congress is about to reverse the tax liability of debt forgiveness on foreclosed homes, even more homeowners will walk away. Many have seen their neighborhoods deteriorate due to many foreclosures and some see massive numbers of legal and illegal aliens moving into their neighborhoods suppressing prices and destroying the local culture. Most foreigners are here today for the money. They are still Chinese, Koreans, Indians, Pakistanis, Mexicans and Argentineans only in America to make money and leave. One subscriber told us in his development there are many foreign festivals for holidays, but none of the American holidays are celebrated. In real estate you can bypass the early and late 1980s, we are going to the 1930s. The 30 hot area homes are going to correct 30 to 60 percent. Many areas are already off 30%. They will fall for 2-1/2 to 4 more years. We have been right, the experts have been wrong, not only about real estate but everything else. Our next stunner is that 60% of republicans now agree with us that free trade is a loser and that we need tariffs back on goods and services ASAP. Why does it take so long for people to wake up? And, why don’t they listen?

It is important that we note that the dollar has already broken a 26-year support level and that it is headed lower probably to the 72 to 75 area on the USDX. That has been caused in part by lower interest rates. The Fed has effectively abandoned the dollar to rescue Wall Street and the banking and hedge fund industries. Yes, we are in a recession. Now traders and experts believe the interest rates are headed lower. If that is so then the dollar will fall further. The added liquidity will help the aforementioned professionals, but it will do little to help the economy. The Fed has been pouring money and credit into the economy for four years and growth has been slightly above average as inflation has eaten up any gains made in any investments or in wages. The Fed is risking the dollar’s status as the world’s reserve currency, as one country after another begins to sell dollars and unpeg their currencies from the dollar.

The psychology in real estate has been broken. The only event to figure out now is where the bottom in this market is. Real estate is worth $19 to $21 trillion, and in the majority of the market, the former 30 hot areas, prices will fall 40% on average. That reduces the net value to $11.4 trillion or $12.6 trillion. In construction alone this time around we could see 50% unemployment and a 60% drop in home construction. That is 3.3 million people without jobs plus the illegal aliens laid off and all the people in support industries and real estate. The real estate collapse is going to be devastating. We estimate 460,000 have already been laid off if you count the illegals. Thus, the credit crunch and a failing economy, in spite of it being overwhelmed by money and credit, has the Fed, Wall Street and the banks in a state of panic. They know there is no way out. It is no wonder they abandoned the dollar. They are on a sinking ship and they know it. Real estate will fall until the inventory is absorbed and people can again afford to buy homes as places to live and not as investments. Sir Alan Greenspan sees an extraordinary period of disinflation ahead, but he knows the Fed will inflate first until they cannot anymore.

Inflation is coming at us from all angles, but strangely no one at the Fed or Wall Street, in government and in corporate America seems to be able to see it. They should take a look at the Baltic Day Index that over the past year rose from 4,000 to 9,474.

The US dollar is weakening and all major currencies are rising against it. Europe and the UK are slowing down. Their cheap currency days are over. Wait until the world finally realizes that the top 18 of 20 central banks are doing what the Fed is doing in creating massive money and credit. Two and a half years ago gold broke out against every major currency and that is because it is not only the dollar it is all the major currencies that have problems. In time there will be a massive flight to quality from all currencies to gold. It will become the only safe haven.

For now we will have to fight the fed, the Plunge Protection Team and the yen carry trade, but in the end we will win. The Fed can monetize all they want via special deals with other nations, but that will just push gold prices higher and buy some time.

Instead of banks writing loans now a days they originate loans, or warehouse them on their balance sheet for a short time and then circulate, distribute or bundle them to investors using collateralized dent obligations. That means banks require less capital, because they do not hold the loan for the full term. The game is profitable as long as liquidity doesn’t dry up and that is what has happened recently and US banks are stuck with $400 billion in loans. As we said earlier they are lending buyers money and then selling them the CDOs with leverage just to get them off their balance sheets before they are out of capital computation.

What this new money game has brought is elevated risk. As loans are sold off, more loans have to be written and larger volumes are necessary to maintain profitability forcing banks to rely on brokers. As the game goes on volumes increase, which is reduced capital available to absorb risk and the result is lower credit quality. These loans are bought by insurance companies, pension funds, asset managers, banks and private clients. Hedge funds also play in search of higher returns based on leveraged structured credit instruments. These loans have little liquidity and are very risky. Hedge funds borrow from the banks to affect these trades, or they engage in the yen carry trade to raise funds. That is why that trade is so crucial to the US markets. The Japanese fund $1.5 trillion of this action. Our financial markets are debt addicted. This is purely a pyramid scheme. It is no wonder gold keeps hitting new highs. It is only a matter of when before the collapse comes. This is what bank deregulation has brought us. It’s back to the 1930s. The bankers haven’t learned anything more than how to become greedier. They were let loose by the Fed to target the poor and write loans for them that they were entirely unqualified for. As a result of the liquidity perpetuations we saw AAA rated CDOs and ABSs that were really BBB- and the house came trembling down. If you can, get a bid real AAA’s are bid at 80% of face value and AA’s and A’s lower. Most CDOs are bid 15% to 30% on the dollar. The subprime CDO and ABS problems after two months are still frozen and half of the commercial paper has no market.

GOLD, SILVER, PLATINUM, PALLADIUM AND URANIUM

We continue to receive reports of other investment mediums salespeople trying to get people to sell their gold and silver coins and shares. In the final analysis you are going to end up in gold. You are far more vulnerable in other investments. Do not let people talk you out of your gold and silver coins and shares and do not believe the talk of confiscation. It could happen, but probably won’t. Americans do not own enough gold and silver coins or bullion to make it worthwhile. This is not the 1930s and if they want gold and silver they would take the ETF’s assets first. Gold and silver shares have never been confiscated, although for a time markets could be shut down, all markets. Remember, government can take anything it wants from you, including your wife, children and your dog. You are a fool if you are talked out of your gold and silver assets.

Gold ETF’s have set a new high of 759 tons, up 21% since the end of June and valued at $18 billion. Since June the top gold and silver shares are up 28.4% with your AEM, Agnico Eagle, leading the way. The stocks are finally showing leverage to the gold price. Remember, the MS64 Saint Gaudens went from $500.00 to $5,000. This is the time for leverage as we approach $850 and the beginning of phase 2 of 3 or 4 upside bull market phases in gold and silver. Anyone who owns Barrick Gold should sell it. In their hedge book they are still short 9.5 million ounces.

Just as we predicted, the cartel’s rally to wash out protective derivatives is now under way. On Tuesday, after weakening the yen into the 117 handle on Monday and Tuesday morning, they pushed the Dow up 120+ points to a fresh all-time high of 14,164.53, although they also managed to push the XAU to a fresh all-time high of 173.44, which must have ticked them off to no end. The HUI was also pushed to within a few points of its all-time high, closing at 398.39, so it looks like gold and silver will get a lot of PM stock support while the cartel orchestrates its yen-call-destroying, stock-index-short-killing rally of general stock markets by its weakening of the yen to bring in carry trader support. You could see the rally coming after the cartel used the soft holiday, Columbus Day, to hit gold in order to keep it from jumping to new highs on Tuesday when the stock rally was commenced. On Monday they took gold all the way from its Friday close of 741.30 all the way down to 731 before it rallied briefly to 734 and then settled in at 732, still above its 2006 high, while the Dow lost about 22 points. The weakened yen supported the stock markets until the cartel’s jaw-boning, which took the form of minutes of the September 18 Fed meeting at which they agreed to kill the dollar to save Wall Street, a day that will live in infamy, was released to the stock markets on Tuesday. The rate-cut friendly, dollar-killing Fed-talk, together with some typical end-of-day brute force pushing by the PPT, propelled the Dow to new heights, and rallied the general stock markets, including the resource sector as mentioned above. Gold also benefited by the weakened yen and rallying PM stocks as carry traders opted for some safe-haven protection and Indian jewelers took advantage of Monday’s dip which continued in the early going on Tuesday. As the Dow reached new heights on Tuesday, gold almost completely took back Monday’s losses, driving up $14 dollars per ounce all the way to about 740, after receiving a further beating from the cartel which brought it as low as 726+ earlier, before settling in at about 737. Silver has likewise benefited.

After being hammered by the cartel from a high Monday of 13.40 all the way to a low Tuesday of about 13.10, silver had an extraordinary recovery all the way to 13.55 before settling in at 13.43.

We spoke of this coming stock rally in our two previous issues, and warned large specs to get out of any leveraged and/or short-term yen calls and stock index puts and to replace them with un-leveraged, longer-term derivatives. Those who heeded our advice stand to make a fortune when the upcoming follow-up crash occurs, which will happen after the October options expire. To those who did not heed our advice, if the cartel succeeds with their plan, well, all we can say is, we hope your Chapter 11 works out for you, and that its been nice knowing you. The cartel is going to try to wash out the shorter-term protective derivatives which large specs have purchased to protect their PM positions by pushing the Dow to 14,300+ or so by the end of this week and to 14,600+ by the time October options expire late next week in a rally similar to the one they used in July. At least that is their plan. Whether they can pull this plan off is very questionable, given the ongoing credit-crunch and abysmal third crunch-quarter earnings reports which will continue to hit on a daily basis now during earnings season. Also, PM’s and their related stocks could explode from liquidity released to large specs to support the rally which could very well destroy the commercial shorts before the stock rally reaches the cartel’s planned objective. Unlike in July, they will have to weaken the yen to accomplish this since July was pre-crunch and the yen at that time was already at very weak levels, and this will help power PM’s. In addition, in order to help the stock markets to recover after the planned crash, the cartel will have to weaken the yen even further just as they did in July to help the crashed markets recover at that time, providing yet more support for PM’s. Since Monday the yen has hit the 117 yen per dollar handle, a level of weakness not seen since August 15. And now, early on Wednesday morning, the yen has now also weakened against the euro, breaking into the 166 yen per euro handle, a level of weakness not seen since July 24. Both moves in the yen are just as we predicted. Unfortunately for the cartel, the Dow has been down today, Wednesday, by as much as 80 points already as of the time of this writing based on profit warnings and a Chrysler strike while spot gold has rocketed up to the 746 to 747 range, within inches of its all-time high of 747.75, and while the XAU and HUI have already broken their previous all-time intra-day highs like they did not even exist and will probably set new all-time closing highs today as well. OOPS!!!

The reason they are going to try to elevate and then crash the stock markets is because the cartel hopes that this will generate massive margin calls for the large specs after they leverage themselves to the hilt in order to take advantage of the rally. We could see a crash from 14,500+ to just below 14,000 on the Dow before a very quick recovery to 14,200+. Large specs who have had their protective derivatives washed out would then be forced to liquidate their PM positions. We cannot tell how many large specs have heeded our advice. Only time will tell. Large specs might also consider some short-term stock index calls to take advantage of the coming rally. If the large specs are ready for the cartel, gold will blow into the stratosphere as the mountain of shorts created by the commercials does the Mount St. Helens-Mount Vesuvius thing, utterly annihilating the hapless commercial shorts in a short-covering rally without historical precedent. We would like to point out to the non-US members of the cartel and the myriad of other parties who have been screwed and decimated by the fraudulent and diabolical CDO contagion initiated by the US cartel members, that if you were looking for some payback, a chance like this will not happen again in your lifetime. Your participation in the implosion of the US cartel’s gold derivative positions on the COMEX and the TOCOM will provide you with a cherished and most satisfying memory which you can carry with you to your grave. We just thought we would mention this in passing, just in case you were interested.

The cartel’s current objective is to drive PM’s down into the subbasement so they can get out from under their ominous mountain of shorts, which on the COMEX alone has reached new heights as evidenced by the astonishing all-time high in gold futures open interest set on Monday, a mind-blowing 451,753 contracts. If the cartel breaks gold, the Fed will cut rates in October and propel the stock markets higher while they reestablish their mountain of shorts to continue the suppression of gold. If gold breaks the cartel, gold will slash past 850 like a knife through butter and you can forget about rate cuts for the rest of 2007 unless the stock markets threaten to go into a complete meltdown, which very well could happen. So you can see that what happens in the tiny, little gold market is now determinative of what will happen in the much larger stock, bond, currency and derivatives markets. Not bad for a barbaric relic, eh? What few in the world realize is that we are seeing “Clash of the Titans” on steroids in the gold pits right now, and the outcome will influence the future of financial markets like no other event or battle in the world.

The cartel’s desperation is also showing in gold lease rates, which have elevated recently since the credit-crunch to levels not seen in well over a year. This has been caused by both a decrease in supply and an increase in demand. From the supply side, central banks are afraid to loan out more gold as they may never get it back if the bullion banks get blasted in a short-covering rally as their mountain of shorts grows a cauldron and spews out commercial short-annihilating molten gold and silver lava. At the same time, from the demand side, commercial shorts, many of which are also bullion banks, need to get their hands on gold bullion to cover their ever-growing and ever-burdening mountain of shorts without driving up gold prices by purchasing gold in the open market. We believe the commercial shorts are going to be catastrophically decimated, that the gold owed on many gold leases will never be returned to the central banks, that the central banks will then have to write off their phantom paper gold reserves and that this will put the ongoing credit-crunch on steroids and threaten a worldwide meltdown of financial markets. Gold and silver will then become the go-to assets as they blast through the Einstein-DeSitter radius at the outer visible bounds of the universe.

http://news.goldseek.com/InternationalForecaster/1192114980.php

By Robert Morley
October 9, 2007

European, Asian and Middle Eastern corporations are taking advantage of a weak dollar to grab technology and wipe out American competition.

The dollar is taking a pounding. It is sharply down against the euro, pound, Swiss franc, and the yuan—almost every major currency. The dollar is also down against gold and silver, as well as against wheat, corn, cotton and many other commodities.

Nobody seems to want dollars anymore. Consequently, more dollars are needed to convince people to part with their goods. About the only thing in America that is not costing more in dollar terms these days are homes, which are now rapidly falling in price across the nation (though home prices are still much higher than they were five years ago).

Why such an abundance of anti-dollar sentiment? According to Peter Schiff, president of Euro Pacific Capital Inc., it is because the dollar is “a basket case.” He warns that America is “going to pay the piper for years of having the underlying fundamentals of our economy disintegrate beneath our feet.”

Part of that price is the flurry of foreign takeovers that America is experiencing. But who can blame the foreigners? America is home to some of the most technologically advanced and profitable companies in the world. And with the dollar so cheap, many of them are practically a steal.

In July, theTrumpet.com noted that during 2006, foreigners spent $147.8 billion snapping up U.S. businesses—up 77 percent from 2005. At that time, the U.S. Department of Commerce reported that Europeans led the way, spending an astounding $109.9 billion—almost double what they did in 2005.

Nationally, Germany, which spent $22.7 billion, was the largest single buyer of U.S. corporations. Middle Eastern investors, due largely to higher oil profits, spent $12.4 billion purchasing U.S. businesses, more than twice 2005 levels. In Asia, Japanese corporations spent $8.7 billion taking over U.S. rivals.

Now, recent data indicates that foreign entities have spent even more money purchasing U.S. corporations in 2007. In fact, as of October, a whopping $257.4 billion has been spent snapping up U.S. assets. That is more than during any full year since the dot.com boom in 2000, and despite the fact that global credit markets drastically tightened in July.

“We could be looking at the world’s largest tag sale if we continue to see declines in the dollar,” said Donald Klepper-Smith, chief economist at DataCore Partners.

As the U.S. dollar falls, U.S.-based corporations become inexpensive compared to their foreign counterparts. Those holding non-dollar currencies have seen their U.S. purchasing power increase drastically as the dollar has fallen.

“Put simply, the U.S. is on sale,” notes MarketWatch.

The latest large deal aided by a weak U.S. dollar was Canada’s Toronto-Dominion Bank’s $8.5 billion purchase of New Jersey-headquartered Commerce Bancorp, announced on October 2.

In June, Spanish power company Iberdrola bought Energy East, a Maine-based utility supplier, for $4.5 billion in cash. One of Energy East’s subsidiaries provides 80 percent of the power for the state of Maine.

In April, Italian energy company Eni bought a chunk of Dominion Resources natural gas fields for $4.8 billion. During that same month, another high-profile takeover occurred when the German-based Deutsche Boerse announced it would assume control over the New York-based International Securities Exchange Holdings Inc. for $2.8 billion. The New York-based company is one of the largest domestic options exchanges in the United States.

Though Europeans were the dominant foreign investors in the U.S. last year, America will probably experience increased takeovers from China and the Middle East. Chinese and Middle Eastern interests are less affected by the banking credit crunch currently plaguing America and Europe. These countries also hold trillions’ worth of dollar assets, such as U.S. government treasuries and bonds. As the dollar has sunk in value, the pressure on these nations to diversify their holdings has increased in proportion. Today we see these nations dumping their dollars in favor of U.S. corporate assets.

In May, China made what was probably the first of many future U.S. investments when it purchased a $3 billion stake in the private-equity firm Blackstone Group. China holds approximately $1.2 trillion in foreign currency reserves, most of which are U.S. dollars. Word from top Chinese officials indicates further dollar spending is on the way as the nation seeks to diversify its holdings.

More recently, the United Arab Emirates concluded a transaction that landed them a 20 percent stake in the Nasdaq as well as a 28 percent stake in the London Stock Exchange. In a separate transaction, the Abu Dhabi government just purchased a $1.35 billion stake in U.S.-based Carlyle Group.

Some economists are quick to suggest that foreign buyouts of American corporations are a good sign, and just mean the U.S. is an attractive place to invest. But just because foreigners benefit from investing in America doesn’t mean that all foreign investment is favorable for the average American citizen.

It is quite natural that foreign entities want to purchase American companies, says Alan Tonelson, a research fellow at the trade group U.S. Business and Industry Council. “They want leading-edge technology, and the United States is still the technology leader. But when they buy these companies, they’re acquiring control over the most dynamic pieces of the American economy, and they’re acquiring control over America’s future.”

Once U.S. technology is acquired, the incentive to maintain American operations often diminishes, especially in cases where inexpensive off-shore labor can be used. For example, the French telecommunications equipment maker Alcatel bought its U.S. rival Lucent Technologies in 2006. Last month it announced it would cut thousands of jobs. Similarly, the outsourcing provider Caritor, which has its head offices in California but most of its employees in India, said that it would be cutting more than a quarter of the U.S.-based staff from the Boston head office of the technology services company Keane it purchased in June.

Another often unreported downside to foreign ownership is that once the domestic company is sold, its future dividends and profit streams are more likely to then flow outward from America to the home nation. After all, the whole job of these foreign corporations is to invest overseas and repatriate the profits for the benefit of their own shareholders.

With the dollar at lows not seen for more than a generation, the U.S.-asset fire sale will likely continue.

To give an idea of how big the wave of foreign takeovers could become, according to the Daily Reckoning China’s “$1 trillion on hand … is enough to buy a controlling interest in all 30 of the Dow Jones Industrials” (May 29). That includes Boeing, ExxonMobil, Citigroup, General Electric, Microsoft, JP Morgan Chase, Wal-Mart, General Motors, plus 22 more of America’s biggest and best companies.

America may not be fretting the wave of foreign takeovers now, while economic conditions are still comparatively good. In times of peace and prosperity, foreign control of domestic industries and infrastructure may not be an immediate threat. But during major economic recessions—or, worse, times of geopolitical upheaval and war—the loss of ownership and full control of national industries will really be felt. America will yet rue the day that it embraced an economic policy that included giving up its corporate birthright.

China No.2 in billionaires as assets boom: researcher
Copyright 2007 Reuters
October 9, 2007 11:15 PM ET

SHANGHAI (Reuters) – China has more billionaires than any country except the United States, as soaring stock and property prices helped to boost wealth among the country’s super-rich, researcher Rupert Hoogewerf said on Wednesday.

The number of Chinese worth $1 billion or more jumped to 108, from 15 last year, growing much faster than in western countries, Hoogewerf said in his 2007 China “rich list,” which ranks the 800 wealthiest individuals in the country.

The average wealth of those on the list doubled from a year earlier to $562 million.

“There’s still plenty of growth opportunity as China’s top entrepreneurs turn their sights to the vast underdeveloped and largely unregulated economic hinterland,” Hoogewerf said.

Yang Huiyan, 25, tops the list after receiving $17.5 billion from her property developer father, the report said, echoing another China rich list published by Forbes magazine on Tuesday.

Last year’s champion, Zhang Yin, fell to second place even as her wealth tripled to $10 billion after a surge in the share price of Nine Dragons Paper (Holdings) Ltd , in which she holds a 72 percent stake.

Zhang, the world’s richest self-made woman, continues to widen the wealth gap with western counterparts such as U.S. television host Oprah Winfrey, eBay Inc founder Margaret Whitman and Harry Potter author J.K. Rowling, according to the report.

In a sign that China’s economic growth is largely driven by construction and manufacturing, rather than by science and technology, seven of China’s 10 richest people are mainly or partly in the real estate business.

Xu Rongmao, owner of Shimao Property Holdings Ltd , ranked number three with $7.5 billion in wealth.

Huang Guangyu, who founded GOME Electrical Appliances Holdings and owns unlisted property businesses, is China’s fourth wealthiest person with $6 billion.

Surging share prices created much of the wealth of those on Hoogewerf’s list.

Nine made the list due to shareholdings in Minsheng Banking Corp — the most prominent creator of super-rich of any Chinese company.

Ping An Insurance (Group) Co , China’s second-largest life insurer, and Western Mining Co , a zinc and lead miner in China’s far-flung western region, were each responsible for the wealth of seven on the list.

Shanghai Reuters

By Alexander Green

In 1999, the price of gold hit a 20-year low near $250 an ounce. It stayed below $300 for the next two years.
But a genuine bull run began in the first half of 2001. Gold reached $720 last year. And the spot price hovers near $740 today.

Is it headed higher still? Although the price of “the barbarous relic” is notoriously unpredictable, there are good reasons to think so. Here are just a few:

1. The U.S. dollar is weakening. That makes the metal, typically denominated in dollars, cheaper to buy in other currencies. (Euro-denominated investors think gold still looks cheap.) Gold traditionally rallies as the dollar falls.

2. Inflation fears. Only a few months ago, Bernanke was openly fretting about the possibility of higher inflation – and saying the Fed’s bias was toward tightening rates. Yet he has cut rates dramatically to lessen the credit crunch resulting from a meltdown in mortgage-based securities. Needless to say, the Fed’s action was inflationary. And gold is an excellent inflation hedge.

3. The emergence of China and India. A flourishing middle class in both emerging giants is increasing the demand for gold. (Jewelry fabrication was up more than 50% in India alone last year.) People everywhere like gold watches, gold coins, and gold wedding bands.

4. Supply constraints. Around the world, discovery rates are falling. Mines are being depleted and mining companies are producing lower grade base metals.

5. Geopolitical instability. There are plenty of hotspots around the world today. But gold is viewed as a safe haven during times of political or economic calamity. (That’s one good reason we own it in our Oxford Anti-Terror Portfolio.)

6. The trend is your friend. Good traders know better than to fight the broad trend in an asset class – and clearly gold is on the rise right now.

So it looks like an excellent time to own gold. But how?

—————————————————————-

For those of you who follow the ideals of Contrarian Investing, consider that paper currency and anything based on paper will not be redeemable if there is a crash of any sort. Part of the idea of investing in gold is as an ‘insurance policy’ so to speak if the whole deal goes to hell in a hand basket. If we have a ‘economic event’ of any sort, anythig that is paper backed may not be redeemable, which includes ETF’s and shares in mining companies. A good strategy to consider is to hold some bullion in allocated storage, some coin on hand, and after that if you so decide some certificates and other paper instruments tied to gold, silver and other metals.

In addition, not everyone realizes that there is a 28% tax burden on gains of anything that is considered a ‘collectible’ – which happen to include Gold ETF’s.

This is where I shamelessly plug Anglo Far-East . Why AFE? Because gold investing if done right, doesnt have to make gains of over 40% just to be ahead of the game when it comes to your gains taxes. Investigate, its good for your wallet.

———————————————————————-

The physical metal – especially in the form of bullion or numismatic coins – is lovely to behold. But keeping a large quantity of the metal at hand is risky. If you store it safely, there are costs associated with that, too.

As a result, many investors are turning to the safety and convenience of exchange-traded funds or ETFs. Two examples are StreetTRACKS Gold Shares (NYSE: GLD) and iShares Comex Gold Trust (AMEX: IAU). These funds hold, store and insure the physical metal. But the ETFs trade like stocks so they offer easy liquidity. (Both have relatively low expenses of .4% a year.)

The tax impact of these funds may surprise you, however. If you sell a gold ETF for a long-term gain, you won’t owe the bargain 15% tax rate you’d owe on a stock. You’d owe 28% on that gain. That’s because gold ETFs are taxed like collectibles, which have special rules.

Another alternative is to own gold shares in an ETF. Why? Historically, gold stock moves are three to five times as much (up or down) as the price of the metal itself.

That’s because gold-price movements create larger moves in the profitability of mining companies, due to their largely fixed costs.

I especially like Market Vectors Gold Miners (AMEX: GDX).

Market Vectors is linked to the AMEX Gold Miners Index and owns all of the world’s leading gold and silver mining companies. That means you can capture the performance of the entire sector in a single, well-diversified investment.

The annual expense ratio is one half of one percent. The shares can be margined or sold short – and there are options available for traders who prefer to play gold more aggressively.

The top 10 holdings include Newmont, Freeport McMoran, Barrick Gold, AngloGold, Harmony Gold, Kinross, Yamana, Gold Fields, and Agnico.

Don’t overdo it, of course. Gold is volatile and often trades unpredictably in the short term.

But the long-term trend is already in place. And there appears to be plenty of upside ahead.

Good Investing,

Alexander Green is Chairman, Investment U and Investment Director, The Oxford Club

Diversify Your Income

– FREE Report “10 Reasons Gold Has Farther to Run”

Dubai, UAE

The Road to Perdition
By Bill Bonner

How the middle and lower classes in America and Britain lost it…

Alan Greenspan is widely quoted in the world’s financial media. The former head man at America’s central bank is promoting his book, The Age of Turbulence. We espied the book at Waterstone’s in Piccadilly this weekend, in a huge pile right out in the front lobby.

Thumbing through Greenspan’s oeuvre, the first section appeared rather engaging. The great man recounted the details of his early life in a matter-of-fact way. But when he began to write about economics, the words fattened…the sentences stretched…and the thoughts thinned. Pretty soon, the language was so obese you could barely get around it. And if you did, you found nothing on the other side:

“If my suppositions about the nature of the current grip of disinflationary pressure are anywhere near accurate,” he writes, “then wages and prices are being suppressed by a massive shift to low-cost labor, which, by its nature, must come to an end…”

He then continues, “A lessening in the degree of disinflation suggested by the upturn in prices of US imports from China in the spring of 2007 and the firming of real long-term interest rates as this book goes to the press raise the possibility the turn may be upon us sooner rather than later.”

Speaking to the BBC, he made the same point:

“I’m reasonably confident that the inflation tranquility that we have experienced throughout the world actually for the last 20 years is not something we can hope to readily replicate as we move into the future.”

First, we translate: Low cost Asian labor has been holding down prices. Watch out, because this trend may be coming to an end now.

Second, we add value: If you’re not rich, you’re probably not going to like what happens next.

Rest assured, dear reader, what we are working on here is not a serious quibble with modern macro-economic theory; we rise only to mock and ridicule its most famous theorist.

The former chief of the U.S. Federal Reserve system is right about globalization. It suppressed prices; every sentient being on the planet knew it. Labor at $5 a day was bound to build cheaper products than labor at $50 an hour. He’s right too about it coming to an end. Sooner or later the $5 a day man wants $6. The latest news from the middle kingdom tells us of shortages of labor in the coastal cities. All of a sudden, the Chinese working man has some bargaining power. Now, he also wants a little more butter on his toast. We greet the news like a teenager spotting his first pimple; it is a sure sign of ugliness to come.

While wages in India and China increase about 10% per year, real incomes in America and Britain are mostly stagnant. And now the Asians are getting uppity. They want more than
a few pieces of paper with green ink on it. They want the world’s real resources – the kind a central bank can’t print. Meat, corn, gas and gold – all are at or near record highs. All of a sudden, people in the occidental world are not the only ones using gasoline…and eating beef.

In the United States and Britain, too, the proles increased their standards of living. But not like the Asians, who made things and sold them at a profit. Instead of earning more, they borrowed more. And now, while the skinny Chinese and Indians race along at 10%annual GDP growth, our countrymen stagger under the weight of their own heavy debt. How can they hope to compete with the heaving masses of Asia for jobs, for food, for capital, and for fuel?

The Yank and the Brit could not be less prepared or more poorly positioned. They already live beyond their means. They can expect no wage gains. Their costs are rising. And with three billion Asians hard on their heels, they can’t expect a breather – prices will continue to rise; wages will not.

What’s worse, the street value of their most cherished asset – their houses – is going down. Already, house prices in America are down 3.5%, according to the latest Case/Shiller report; futures indexes traded on the Case/Shiller numbers imply further declines through the year 2010. In merry old England, meanwhile, prices fell in September for the first time in nine months…with much more to come. The English have even more debt than Americans…and are more vulnerable to a fall in housing prices.

How did they get into such a tight spot? Who is to blame?

“What are you looking at me for?” Mr. Greenspan seemed to say last week. As to the charges – that he was spotted at the scene of the crime – the former Fed chief pleaded ignorance and impotence:

“It’s really not something which central banks any longer have control over,” said Mr. Greenspan to the BBC, “…we have never really successfully been able to forecast significant turning points in the economy.”

Alan Greenspan told investors in the late ’90s that new communications technology had created a world of higher growth and more permanent prosperity. Then, panicked by a micro-recession in 2001, he cut rates down to their lowest level in 60 years and held them there for over a year. And then, he urged homeowners in 2004 to take advantage of innovations in mortgage finance, such as the new, subprime ARM. And what was he thinking when he claimed that new collateralized debt obligations made the financial world a safer place, because they spread the risk around?

What got the householders into such a fix was a combination of good luck and bad central bank stewardship. As to the good luck, you can hardly blame Mr. Greenspan or Mr. King if the Asians wanted to work for nothing…save their money…and then lend it back to us. But as to the stewardship…our central bankers might show a little contrition. Maybe they did not force the working man down the road to perdition; but they gave him a little shove.

The Daily Reckoning
Buenos Aires, Argentina
Monday, October 8, 2007

Welcome back, dear reader.

We had an agreeable weekend, mostly spent catching up with old friends in Buenos Aires.

Americans are happy down here; it is one of the few places where the dollar is not going down. You go into a restaurant and you are pleasantly surprised, rather than depressed, as you are in London or Paris.

How come the dollar and the peso stick together? It is partly because the Kirchner government controls the peso/dollar exchange rate – trying to hold the dollar at around 3.15 pesos. And partly because, north of the Rio Grande and south of the Rio Plata, both governments are destroying their currencies at about the same rate.

We have no figures for Argentina, but M3 – the broadest measure of the money supply – has been increasing in the United States at a 14% rate, the fastest in 35 years. Thirty-five years ago, the U.S. government was struggling with trying to pay for “Guns & Butter” at the same time. That is, the Johnson administration had decided that it could have a war in Vietnam and a war against poverty at the same time. It lost both of them. And one of the costs was domestic inflation, which rose throughout the ‘70s to a peak of 12%.

Gold reacted to the rise in inflation by rising too…it went up 20 times – to over $800 an ounce. Imagine if you had just looked ahead at the (now obvious) consequences of the Nixon administration’s decision to cut the dollar loose from gold in ‘71. You could have bought gold at, say, $50 an ounce…buried it in the ground…and you would have beat every other asset class or investment category that we can think of. No commissions. No taxes. No worries. No hassles. You would have avoided the collapse of U.S. stocks in the ‘70s…the rise and fall of Japanese stocks in the ‘80s…the dotcom euphoria of the ‘90s…and the housing bubble of 2001-2006.

Then, if you sold your gold your now…you’d have 15 times as many dollars.

But wait? Why would you want to hold dollars now? And if it doesn’t make sense to hold dollars now…when will you EVER want to hold dollars? And if your wealth just sits in the ground, like a forgotten tomb, what is the point of having it at all?

You’re right, dear reader. You’re better off playing the ups and downs of the markets. It’s more fun…if you like that kind of thing.

But, if you’re like us…and the thought of playing the bipolar markets isn’t exactly your cup of tea, we know of a very interesting way to pad your portfolio with gold – for only a penny per ounce. No joke. So, if you’ve been wary of investing in the yellow metal because of the recent near-record highs, fear not…

Meanwhile, speaking of housing, there are a lot of long faces among house sellers this morning. According to the weekend news, the story just becomes more and more depressing.

“American Dream turns to a Nightmare,” begins the report in the Arizona press.

(A modest suggestion to financial journalists: find a better headline. We’ve read that same headline at least 20 times already. This downturn in the housing threatens to last for years. You can’t keep using that same line. Please try to think of something new.)

The Phoenix market was so hot it attracted buyers from all over the country. Now, the buyers have disappeared. Houses are empty. Foreclosures are rising. Who could have guessed that it would turn out this way? Well, anyone who bothered to think about it…but apparently none of the thousands of people who bought houses did! According to the report, people bought houses in 2006 for $250,000…fully expecting that their places would be worth $500,000 in five years. Prices were rising steeply; they couldn’t imagine that it would ever stop.

In Las Vegas, meanwhile, there are still some 568 subdivisions in various stages of building and marketing. An estimated 48,000 houses are already on the market, with more coming.

How things have changed! Just two years ago, buyers lined up for a chance to pick up lots and houses. People would camp out overnight to be first in line. Sometimes hundreds of potential buyers would show up for only a handful of lots. And builders had to limit the number of lots per customer. Buyers always said “yes” and lenders never said “no.” It was paradise for builders.

But now, Business Week reports that builders are desperate to clear away inventory. On September 14th, for example, Hovnanian, one of America’s big nail drivers, announced a “72-hour Deal of the Century,” in which it cut prices by as much as $100,000 in 19 states.

“Massive…six-figure price cuts” are becoming common, says BW. Standard Pacific offered $20 million in discounts at about the same time.

The builders are making a simple business decision; it’s better to get rid of inventory than to carry it. Houses – and here, dear reader, we let you in on a fundamental insight, are a WASTING ASSET, not an appreciating asset. Let them sit around in the desert sun for a while and you see how fast they waste away. The curtains fade; property taxes must be paid; paint chips and cracks; the lawn must be watered and mowed. They might as well be a crop of lettuce.

Better to make them someone else’s problem, the builders concluded.

And so they unloaded them at steep discounts. And then, all the neighbors got to see what their own houses were really worth.

“China oil imports soar,” comes the headline.

The 1950s…the 1960s – what a great time to grow up in the United States of America! You could drive some huge land barge down the wide-open streets…while smoking a cigarette and drinking a can of beer at the same time. The world’s oil…you had it practically all to yourself. Steel too. And rubber. The good things that came out of the earth were loaded onto ships and sent to the USA. Everybody else was either too broke or too hopeless to be able to use them. The communist Chinese were still going around in dunce caps…and trying to make steel in backyard barbecues. The Indians were making a mess of things too – and everyone thought they were going to starve themselves to death.

You had to worry about keeping these morons alive – not about competing with them for a job! It never occurred to us that they would someday take our factories and our work. Back in the ‘50s and ‘60s, the Japanese were just beginning to make inroads into the U.S. market. But their products were still cheap and often shoddy. If you wanted something good, you had to “Buy American.”

All that has changed. Kids growing up today think that American-made products are cheap and shoddy. They want foreign-made cars…and gadgets that come from overseas too. And they know that for every one of them who can remember what a quadratic equation is, there are hundreds…maybe even thousands…of Asians who can actually do the math better, cheaper and faster.

And they know, too, that every time they drive up to a gas station, there are thousands of Chinese, Indians and other Asians…bidding for that same tank of gas.

Until tomorrow,

Bill Bonner
The Daily Reckoning