Chinese have a memory of fiat currency failure as it has happened a handful of times. The chinese cultural memory goes back a long ways. Metal is flowing like a river from west to east.

There is an ancient saying of ‘He who has the gold, makes the rules’. This isnt just a cliche, but rather proven out by historical evidence. Wherever the largest stocks of gold were, the nations who have held it were usually the most influential nations of their time period.

Egypt, Rome, Byzantium, Western Europe and England, then the USA.

The US gold stocks have not been audited since the 50’s, and many analysts believe that what is claimed to be there is alot more than what is actually there.

China is still making strong strides to make the Yuan a fully convertible currency. When the veil spun by the mass media comes off, people will run to whats ultimately safe, which is gold and silver.

China May Overtake India in Gold Demand, Council Says

By Sophie Leung

July 24 (Bloomberg) — China may overtake India to become the world’s top gold consumer this year, the World Gold Council said, as the nation became the first of the major economies to rebound from the global recession.

Jewelry demand in China expanded in the first quarter while dropping in India, Marcus Grubb, a managing director at the London-based council, said today at a conference in Hong Kong. Chinese gold demand will keep rising, he said.

China’s economy grew 7.9 percent in the second quarter after a 4 trillion yuan ($586 billion) stimulus package spurred record lending and consumption. India’s gold purchases slumped 54 percent in the six months ended June after a decline in the rupee pushed up the cost of owning bullion, cooling demand from housewives and jewelers, the Bombay Bullion Association said.

“There is a possibility that China might overtake India as the world’s largest gold consumer this year,” Hou Huimin, deputy head of the China Gold Association, said by phone from Beijing today. “India’s gold consumption is reportedly dropping this year due to the financial crisis.”

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Honolulu, Hawaii
July 13th, 2009AD

Here is a little global economy roundup:

Many still think the economy is on the verge of recovery. While the rest of the developing world continues to steam ahead plowing through obstacles, the western world continues to spiral downward. This still does not take into consideration ALT-A and ARM loan resets through 2011.

July 9 (Bloomberg) — The $3.5 trillion commercial real estate market is a ticking “time bomb” that may lead to a second wave of losses at large U.S. banks, congressional Joint Economic Committee Chairwoman Carolyn Maloney said.

About $700 billion in commercial mortgages will need to be refinanced before the end of 2010 and “doing nothing is not an option,” Maloney, a New York Democrat, said at a committee hearing today. This “looming crisis” may lead to significant losses for banks, force shopping center and hotel owners into bankruptcy, and impede economic recovery, she said.

Meanwhile, the rest of the world forges onward.

The IMF  claims Asia cannot decouple from the western world economies and will not continue to grow until the west recovers…this article doesn’t agree. Also….has the head economist of the IMF forgotten that China has almost $2 Trillion in savings that it can spend?

SAN FRANCISCO (MarketWatch) – China wrestled the new-car sales crown from the U.S. through the first half of the year, topping 6 million cars and trucks at a time when the long-time global sales leader grapples with historic declines.

Do you really think the worlds leaders believe all this BS about green shoots? If they did, would they be plowing money into commodities like this? Or maybe is it, that they know that if you print $13.5 Trillion (and growing) you will see massive inflation of real prices, so they are buying while its cheap and using lip service to keep the dollar value from dropping to preserve as much buying power as possible?

BEIJING, July 10 (Reuters) – China’s imports of unwrought copper and semi-finished copper products in June hit an all-time record for a fifth straight month of 475,999 tonnes, from May’s record 422,666 tonnes, data from the General Administration of Customs showed on Friday.

Rats from a sinking ship

More Diversification out of Dollar…Japan has always been one of the biggest supporters of the USD…and now there is public discussion of diversifying out of it…this is very bearish for the USD (and very bullish for gold)…this may be a prelude to a new ‘basket of currencies’ as an index to a new global exchange currency

July 13 (Bloomberg) — Japan’s opposition party, leading in polls ahead of next month’s election, said the nation should consider shifting its $1 trillion of foreign reserves away from the dollar and buying International Monetary Fund bonds.

The next world reserve currency

President Medvedev has called for a gold backed currency over and over. This time, he isnt just calling for it, he is producing examples of it. He handed coins to the leaders of G8 delegations, a proto-type of a potential new global currency…and these coins were pure gold. Any move in this direction would be extremely bullish for gold. Read an article I wrote regarding shifting to a gold back currency to understand why.

July 10 (Bloomberg) — Russian President Dmitry Medvedev illustrated his call for a supranational currency to replace the dollar by pulling from his pocket a sample coin of a “united future world currency.”

My colleagues have been right so far, having called the current economic crisis over a decade ago. This video proves it: Millennium Money as it was produced in the mid 90’s.

Our portfolios also reflect the fact that those who listened to us over the last few years are doing quite well right now. Those who did not…maybe not so much.

I will be sending out a ‘Rapid Trends Insider’ email later today with an exclusive chance to listen in on a recent round-table discussion with my colleagues regarding the global supply / demand situation, as well as an interview we did with David Morgan, one of the worlds top recognized silver analysts.

You can join our newsletter here: Rapid Trends Insider

BRICs Add $60 Billion Reserves as Zhou Derides Dollar

By Shanthy Nambiar and Lilian Karunungan

June 8 (Bloomberg) — The BRICs are buying dollars at the fastest pace since before credit markets froze in September, protecting exports even as leaders of the biggest emerging markets consider alternatives to the U.S. currency.

Brazil, Russia, India and China increased foreign reserves by more than $60 billion in May to limit currency gains as the first global recession since World War II restricted exports, data compiled by central banks and strategists show. Brazil bought the most dollars in a year, India’s reserves gained the most since January 2008 and Russia added the most foreign exchange since July.

While Russian, Chinese and Brazilian leaders suggest substituting the dollar, the central bank purchases show just how dependant they remain on the world’s reserve currency. Russia is proposing the BRICs consider creating a new unit of exchange when they meet in Yekaterinburg on June 16. China and Brazil said last month they may look at ways of dropping the dollar for trade between the two countries.

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Alex’s Notes: More moves around the USD.

For those of you who dont know, the USD is the world reserve currency, and for decades all world trade has been settled in it.

Governments of the world are not going to stand by until the US fixes it problems, China has been steadily putting the pieces in place to conduct global trade with or without the Dollar.

If using methods of trade settlement besides the dollar becomes common practice, it means further pressure on the dollar downward…which means dollars come home.
MOSCOW (Reuters) – Russia and China should consider switching to domestic currencies in bilateral trade without going to the dollar, Russia’s president Dmitry Medvedev said in an interview with Kommersant daily published on Friday.

China has already entered similar agreements with Brazil and Belarus. The deal involves a currency swap agreement between the two countries. Trade turnover between Russia and China reached about $50 billion in 2008 and is set to increase.

“I think that we can think about such positions, for example the rouble against yuan,” Medvedev was quoted by Kommersant as saying. Russia’s own attempt to switch to the rouble in bilateral trade with Belarus has so far not been successful.

Leaders of Brazil, Russia, India and China, known by their BRIC acronym, are meeting in the Russian city of Yekaterinburg on June 16 to discuss the role of the dollar in the global financial system among other issues.

Medvedev said bilateral currency deals between trade partners ease impact of the economic crisis in an environment when many countries have difficulties tapping international capital markets.

Original Article

Just posted an excellent article by J.S. Kim in regards to golds role as a monetary balancer.

In this article, Mr. Kim goes back through Greenspans famous essay and shows clearly why gold is the only means of counterbalancing what governmental and banking oligarchies do with fiat currency systems.

An excerpt:

Today, due to the proliferation of fragile and confusing financial instruments called derivatives and the fraudulent nature of our fractional reserve banking system, hundreds of billions, and more likely, trillions of more dollars exist than claims on real assets and goods.

The comparable analogy would be if, as an Apple (AAPL) store owner, I sold the same 100 Apple desktop computers to 10,000 clients. As long as no more than 10 of my customers required delivery in any given year, then my business could operate for many years without this fraudulent scheme ever being exposed. However, the instant my clients collectively decided they wanted to take delivery of all 10,000 computers in the same month, my ruse would be exposed and my business sentenced to a fate of bankruptcy.

Almost all of us would agree that this would be an insane way to run a business, yet we readily accept the fact that all major banks in every modern, developed nation run their businesses in this very manner. However, the development of such a situation would be next to impossible with the institution of a true gold standard and this is why Alan Greenspan once made the timeless statement that economic freedom and gold are inseparable.

The full article is here: Gold is the balance to fiat currency

by David Morgan
April 17, 2009

An article on Reuters recently indicated a United Nations panel has decided much of the world would like to move away from the American currency as the world’s reserve currency. This panel wanted to look into a “basket of currencies” or perhaps another entirely different, new currency to replace the U.S. dollar. Additionally, both the Russians and Chinese have indicated similar concerns.

This event doesn’t surprise me in the least. If we go back a few years, it was only the Austrian school thinkers that stepped forward and said the U.S. dollar, or any fiat currency, was eventually doomed. Now other nations and the U.N. are saying they really don’t trust the U.S. dollar, which is what this amounts to. I wrote about something similar happening many times and one currency that I spoke about years ago was the golden yuan (renminbi). There was a meeting in Southeast Asia years ago, about a gold-backed yuan. I believe any basket of currencies tried will fail, because none of these currencies are tied to real value.

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Beijing swells dollar reserves through stealth

Last Updated: 3:24pm BST 26/08/2008
The Telegraph.co.UK

Rule changes for commercial banks are acting as cover for exchange rate intervention, writes Ambrose Evans-Pritchard

China has resorted to stealth intervention in the currency markets to amass US dollars, using indirect means to hold down the yuan and ease the pain for its struggling exporters as the global slowdown engulfs the economy.

A study by HSBC’s currency team in Asia has concluded that China’s central bank is in effect forcing commercial banks to build up large dollar reserves, using them as arms-length proxies in a renewed campaign of exchange rate intervention.

Beijing has raised the reserve requirement for banks five times since March, quickening the pace with two half-point rises in late June.

This is having major spill-over effects into the currency markets because banks in China have been required over the last year to hold extra reserves in dollars rather than yuan. The latest moves have lifted the mandatory deposit from 15pc to 17.5pc of total lending since March.

“China has used the pretext of reserve requirement hikes to help slow yuan appreciation. We estimate that the PBOC [central bank] intervened by about $49.6bn in June,” said Daniel Hui, the bank’s Asia strategist.

Beijing has also slashed the amount of foreign debt banks operating in China can hold. The effect is to oblige the banks to become net buyers of dollars, halting the flow of foreign “hot money”.

Given the sheer scale of China’s foreign reserves – now $1,800bn (£970bn) – any shift in its exchange policy now ripples around the globe. The covert buying may help to explain at least part of the explosive dollar rebound over recent weeks.

There is little doubt that the key driver behind the wild currency ructions this summer has been the blizzard of dire data from Britain, Europe, Japan and Australasia. The mounting danger of a full-fledged recession across the club of rich OECD nations appears to have caught the markets off guard.

The closely watched Dollar Index reached an all-time low in March. It crept up gradually in the early summer before smashing through resistance in July.

The world’s currency system is swivelling on its axis. Central banks in Asia and Europe have stopped raising rates, and some have begun to cut aggressively. The Federal Reserve is no longer nakedly exposed. Indeed, investors are already starting to look ahead to the next round of Fed tightening.

The 18pc slide in oil prices from a peak of $147 a barrel in July has added juice to the dollar rally. Russia and the Middle East petro-powers tend to recycle a high proportion of their vast earnings from oil into the eurozone, either by purchasing European bonds or expensive imports.

A Bundesbank study found 40 cents of every dollar spent by eurozone countries on oil imports comes back again one way or another. The figure for the US is just 10 cents. This trade bias has given oil a new character as a sort of anti-dollar driving the currency markets.

Even so, the China effect is a key ingredient in the dollar comeback. Beijing’s Politburo is clearly disturbed by the sudden downward turn in the economy as export markets freeze, and surging wage inflation in the country’s manufacturing hubs eats away at profit margins.

“They are now more worried about growth than overheating, and you are seeing that play out in the currency markets. There has been a remarkable change of view,” said Simon Derrick, exchange rate chief at the Bank of New York Mellon.

China’s PMI purchasing managers index fell below 50 for the first time in July, signalling an outright contraction in manufacturing output. Hong Kong’s economy contracted 1.4pc in the second quarter. The Politburo has rushed through special rebates for textile producers now caught in a ferocious downturn.

Much of the clothing, footwear and furniture industry has been hit, leading to mass plant closures in the Pearl River Delta.

“During the first half of this year, about 67,000 small and medium-sized companies went bankrupt throughout China, leaving more than 20m people out of work,” said the National Development and Reform Commission. “Bankruptcies of textile and spinning companies have numbered more than 10,000. Two thirds are on the brink of bankruptcy.”

Last week’s rebound on the Shanghai stock market stalled on fading hopes of a fiscal stimulus package. “It is unrealistic to expect the government to rescue the market,” said Li Ka-shing, chairman of Hutchison. “Speculators should be very cautious now. The worst is not over in the global credit crisis.”

Lehman Brothers warns of a risk that a housing slump and the 55pc equity crash since October could combine with a global downturn to set off a “vicious cycle”. House prices have already fallen 18pc in Guangzhou and 9pc in Beijing. Prices are now falling in cities that make up over half China’s population.

Interview with Nick Barisheff: Gold is Money

by: Pierre Daillie posted on: July 27, 2008

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

GLA: What do you do about inflation?

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

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

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

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

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

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

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

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

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

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

Buy Gold and Silver Bullion

One thing that the world has forgotten for the most part, is that gold is money. It has been parroted around for three generations as a commodity only, with little industrial use or demand, and no value as a currency.

Humans have this interesting tendency to forget history, even though through all of time it consistently repeats itself.

The cycle I am speaking of is the one where societies and economies cycle back and forth between paper fiat money backed by nothing but a governments promise that it has value, and currency that is backed by gold and silver.

This is not new, and in my opinion will happen again, as it always has, for thousands of years.

For a while now I have been going on about how the Chinese, OPEC, and other nations that have trillions of USD in their reserves are not going to simply sit on it and watch it devalue by 16%-20% a year because of a rampant monetary inflation policy of the Federal Reserve.

“Dollar crisis looms, says Nobel laureate Mundell
Reuters June 3, 2008 at 8:36 AM EDT

VALENCIA, Spain — A major dollar crisis could come within five years and China is discussing reforms to the global monetary system to protect its $1.6-trillion (U.S.) reserves pile, says Nobel Prize-winning economist Robert Mundell.

Mr. Mundell, who has regular contacts with Beijing officials, said they are considering proposing ways to fix major currencies including the dollar and the euro, in a system similar to the one which operated under the Bretton Woods agreement from the end of World War Two until the 1970s.”

If you were China and seeing this happen to your National Treasury, would you sit there and do nothing or look for a solution?

The answer is obvious.

“China is worried about its pile of about $1.6-trillion in foreign reserves, built up during years of U.S. trade deficits, which loses value as the greenback depreciates. “

The excerpts from the above Reuters article shows that China seems to be interested in a gold backed system. If this were to occur, we need to take a serious look at what it means for the price and demand of gold.

I will give you one simple equation, which you can then apply to any nation, or the economy at large. If the USA were to go to a gold backed standard, that means each dollar in circulation would then have to be redeemable in gold. The current measure of USD in circulation based on private firm analysis is above $14 Trillion USD. The US Treasury claims it has 261,498,899.316 ounces of gold according to its website http://www.fms.treas.gov/GOLD/current.html . If we were to divide the number of USD in circulation by the amount of gold claimed to be on hand in the US Treasury, it would make the price of gold $53,537.00 per ounce.

You can perform this calculation on any nations currency, if you know the amount of currency in circulation and the country’s claimed national reserves in gold.

The bottom line is, if the world heads to any form of gold backed currency system, or any world government chooses to make its own currency backed in gold, then two things would happen:

1. That country will be the best runner up for the next world reserve currency

2. The valuation on gold will skyrocket beyond the angels

“Without reform, the global monetary system is headed for a dollar crisis within years, Mr. Mundell believes. “

I sure hope you own some gold before that happens.

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Alex’s Notes: This quick note was fired to me from Simon Heapes, Director and Treasury Officer of The Anglo Far East Bullion Company. This was his comment and response to my post on the possibility of China holding the next world reserve currency:

2,000 yrs ago As Rome debased its currency and expanded via inflationary methods, the question must be asked who was buying the tangible productive assets?

It was the Byzantine Empire! When the Byzantines finally did over run Rome, they did not collapse it, they merely replaced Rome’s leadership with their own leadership, and effectively ran Rome as a defacto Empire keeping all the same systems in place for another 200yrs.

Finally, the Byzantium leadership broke apart from a Moral decay into the nations we call Europe today!

So the Question now, is China & the East going to do the same thing and keep the current system running further expanding globally and running inflation even further sending the cost of tangibles higher for many yrs to come? It certainly looks that way!

- Simon Heapes, The Anglo Far East Bullion Company

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Alex’s Notes: I happen to concur with the authors thought in this article. Much of the worlds international settlement systems have grown up for half a century around the dollar as the reserve currency, so it is unlikely this will change overnight.

There are, however, a few things that could accelerate the process. A run on the dollar by any country or group of nations that is a major holder of dollars as a part of their reserve base, Sovereign Wealth funds becoming even more aggressive than they are now in securing hard assets versus paper cash holdings, or OPEC/China deciding to divest its dollar holdings into something else, such as Euro or gold.

Another scenario that could rapidly accelerate the dollars demise includes the continued bail-outs of financial institutions by the Fed. If we are so simple as to believe the Wall Street talking heads that we are in the clear, we are being as silly as they are. The fact is less than half of the asset losses from the sub-prime fiasco of 2007 have been reported, and through 2011 we are going to see another mortgage related scenario unfold in the form of Alt-A and ARM resets that will make the sub-prime mess look like romper room in comparison. This would have a domino effect, in that as the Fed bails more failing institutions out, it will multiply not only US, but Global inflation.

Such a series of events would continue to devalue the dollar, and give ever more impetus to nations sitting on vast dollar reserves to get rid of their dollars while those dollars are still worth something. This means that those dollars will start coming home. The effect of that would be increased prices in the US for everything from food to gas to electricity (if you think it is bad now, you aint seen nothing yet!). The other effect of that would be accelerating the value the dollar, further spurring dollar holding nations to dump them.

Finally, any country that chooses to stand on its own and link its currency to a hard asset such as gold or silver would be a currency that is in high demand virtually overnight. Why stack billions in paper that is redeemable for nothing, when you can instead stack billions in paper that you can exchange for gold and silver? Our world’s governments are not stupid, and that’s exactly the way it would go.

The net effect of that would be of course changing gold and silver from commodity status back to monetary status. This isn’t a new idea, humans have used gold and silver linked to currency or as currency for thousands of years, because it is un-inflatable (if it remains pure), and forces governments to remain disciplined in their fiscal policies. It is only in the last 40 years that we have strayed from this wisdom, and we are witnessing its effects as I write this.

Societies throughout history have oscillated back and forth between currencies redeemable in things of intrinsic value, and paper that is redeemable for nothing for hundreds and thousands of years. As inflation continues to grow, inciting food riots and civil unrest around the world, the idea of having currencies that prevent the governments of the world from inflating the world’s currencies becomes ever more enticing.

This is not as far fetched as it might sound. I certainly consider it curious that China has invested so heavily into mining, mineral rights, and acquisition of operating gold and silver companies over the last ten plus years. They have made attempts at buying mega-mining companies such as Rio Tinto through proxies, they have been running all over Africa for years buying up mineral rights, they have become the worlds largest producer of gold, and China is among the top silver producers in the world. Metals are of course important to an emerging nations economy like China’s, yet gold can barely be considered an industrial metal, so why are they investing so heavily in it?

One of the primary reasons that the US Dollar became the world’s reserve currency in the first place is because it was redeemable in gold.

The Chinese are not stupid people, so as with all things we must apply ‘Cui Bono’, or ‘Who Benefits’, and ask ourselves, why are they doing this? The United States has enjoyed a unique ability to run massive trade deficits for half a century and borrow money from the entire world at low interest due to its currency status. The Chinese are hungry to move into a western style standard of living, so is it so far fetched that they would like to enjoy the same benefits?

Could the Yuan become the next reserve currency of the world? More importantly to those who understand how small the gold and silver markets are, is what effect would that have on the prices of gold and silver?

The results could be explosive to say the least.

—————————————————-

Dollar Reserve Status Is Tale of Fading Glory: Michael R. Sesit
Commentary by Michael R. Sesit
May 2 (Bloomberg) — Reserve currency status is like your health: Abuse it, and you risk losing it.

With the dollar’s 45 percent decline against the euro during the past six years and its 37 percent drop on a trade-weighted basis, there is a growing concern that the greenback’s six-decade reign as the world’s most important currency may be ending.

It’s not. The dollar is the world’s reserve currency, and absent some unexpected exogenous shock, will probably remain so for some time.

Nonetheless, the dollar’s premier status is under threat, especially as a store of wealth, by both foreign governments and private investors. Also, companies are using it less as a currency in which to invoice and settle international trade transactions.

Why care? Reserve currency status allows the U.S. government to borrow in its own currency, lets the U.S. run large trade deficits, and helps the government and American companies to fund themselves at low interest rates. It makes it easier for U.S. companies to do business and increases the international demand for U.S. assets.

Moreover, as the specie of choice, the dollar is blessed with seigniorage, the interest-free loan America receives from the hundreds of billions of dollars held overseas and hoarded as misfortune insurance.

Although the composition of official central-bank foreign- exchange holdings receives the lion’s share of attention when people talk about reserves, it is the private sector’s trade in goods and services that plays a dominant role in determining a currency’s international status.

Cash Reserves

Official reserves equal 33 percent of global imports, according to UBS AG. If a company in country A trades with a company in country B and the transaction is invoiced and settled in the currency of country C, that third currency will have reserve status. That’s because both companies are likely to keep cash balances in that currency.

“The dollar is the most important reserve currency in the world, but it is no longer the only reserve currency, nor even the overwhelmingly dominant choice as a reserve currency,” says Paul Donovan, a London-based economist at UBS.

When the Bretton Woods system collapsed in 1971, almost all Japanese exports were priced in dollars. Now less than half are. About 40 percent of Japan’s total exports are invoiced in yen, up from 34 percent in 2001.

Raw Materials

Seventy percent of Australia’s exports are denominated in U.S. dollars, reflecting the dominance of raw materials in their makeup. Apart from commodities, the dollar plays a smaller role. For instance, 59 percent of beverage shipments to other countries are denominated in Australian dollars, 19 percent in pounds and 16 percent in U.S. currency.

Data on country invoicing patterns are hard to come by. Still, the decline in dollars held outside the U.S. from 1.83 percent of world trade in 2002 to 1.22 percent in 2006 reflects the U.S. currency’s shrinking role as a medium of exchange.

Anecdotal evidence also suggests a trend. In November, India’s Taj Mahal said it would no longer accept dollars and take only rupees. International drug dealers are said to prefer euros to dollars.

Ditto, Copenhagen-based A.P. Moeller-Maersk A/S, whose container-shipping line, the world’s biggest, on April 1 began invoicing in euros for transporting containers from Europe and North Africa to Australia, New Zealand and the South Pacific. The shipping industry historically billed in dollars.

$4.9 Trillion

On the official side, developing countries have been steadily inching away from the dollar. Their foreign-exchange reserves surged to $4.9 trillion in 2007 from $1.2 trillion in 2000. Emerging-market countries accounted for 76 percent of total global reserves in 2007, up from 56 percent in 1997, according to the International Monetary Fund. Yet during that period, their dollar holdings shrank to 61 percent from 73 percent.

The euro has been the beneficiary, rising to 28 percent of developing-country reserves in the fourth quarter from 19 percent when the decade began.

Behind this dollar downgrade lies the U.S.’s rising debtor profile, an unpopular war in Iraq, the growing threat of trade protectionism, apprehension over the greenback’s decline and the subprime crisis.

“These factors have all conspired to weaken investor confidence in the buck and undermine the dollar’s position as the world’s top currency,” says Joseph Quinlan, New York-based chief market strategist at Bank of America Capital Management.

Asian and oil-exporting central banks also hold more dollars than they prudently need and are seeking to diversify their portfolios away from their traditional preference for highly liquid, relatively low-yielding Treasuries.

No Allegiance Owed

Many countries — including China, Russia, Kuwait, Singapore and Norway — are transferring tens of billions of dollars to sovereign wealth funds. Long-term investors with mandates to maximize returns, these entities owe no allegiance to the U.S. currency and over time their investments will probably result in their governments’ holding fewer dollars.

The durability of the dollar’s reserve-currency status owes more to the absence of a challenger than sound U.S. policies. The euro is hobbled by the lack of a single, pan-European capital market and its being a hybrid currency used by a mix of countries yet owned by none.

China’s yuan is a potential contender, but not until that currency becomes fully convertible, the nation’s financial markets more developed and internationally recognized laws more established — which is years away. Japan, meanwhile, has always resisted the yen being a reserve currency.

It isn’t ordained that the dollar surrender its position as the world’s go-to currency. Yet if Americans insist on living beyond their means, eschew sound fiscal policies, ignore the greenback’s weakness and remain tempted by protectionism, the dollar will in small bites begin to mimic the British pound — the currency of a once proud but spent imperial power.

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Alex’s notes: This is an outstanding article on inflation. Understanding what inflation truly is holds the key to understanding what is happening in our economy, and how wealth will be transferred to a select few over the next decade.

Inflation Is Baked Into the Cake
By David Galland
17 Mar 2008 at 03:45 PM GMT-04:00

STOWE, Vt. (Casey Research Advertorial) — The word “inflation” covers two different concepts, and it’s important to keep them separate. One concept is monetary inflation, which is when the supply of money increases faster than the supply of goods and services. The other concept is price inflation, which is an increase in the overall level of prices for goods and services.

The relationship between the two is the relationship of cause and effect. Monetary inflation causes price inflation. But while almost everyone sees price inflation when it happens, few people notice the monetary inflation that is causing it. And so they tend to blame the producers of goods and services for higher prices – rather than the money-creating government that is the true culprit.

And make no mistake, as government spending continues on a steep ascent, piling up debt, there is no question that the government has to continue creating money like there’s no tomorrow. This situation is not unique to the U.S. Quite the opposite: the adoption of fiat monetary systems is now universal.

The results of over three decades of unhindered monetary creation are increasingly being felt in a rising tide of price inflation, whether it be the 7.4% increase in producer prices reported by the U.S. in the most recent quarter, or the news just out of China that consumer price inflation now tops 8% and is worsening … or, in the most extreme example, Zimbabwe, where the utter lack of restraint by an insane dictator now burdens that economy with an inflation rate of over 100,000% annually.

The Casey Research Global Inflation Survey

To get a better sense of things, Casey Research recently conducted a survey of the world’s top 30 economies, broken down on a region-by-region basis. The snapshot below offers a glimpse at the big picture.

Commodities on the Rise

Most pundits focus on commodities as a central culprit in today’s higher price inflation. Why are commodity prices rising? There are many reasons, most importantly: supply and demand fundamentals, speculation and a weakening U.S. dollar, the “universal currency” in which oil, gold and many other commodities are priced.

Of those factors, supply and demand and speculation are fairly fluid. Which is to say they can vary over time based on politics (a threat to cut off oil sales by Venezuela, a war in the Middle East, legislation favouring biofuel production) or for more technical reasons (power shortages impacting mining in South Africa, or the shutdown of the Gulf of Mexico during a hurricane). This relatively short-term variability largely neutralizes the value of these factors as predictors of future inflation. Simply put: who can know the unknowable?

Instead, we look to longer-term trends. In that regard, two are apparent. The first has to do with the concept of “peak” commodities. While it has been Marion King Hubbert’s theory of Peak Oil that has received the most attention, credible arguments can also be made for peak metal (the dearth of major new discoveries), and even peak food. While these arguments have merit, they were beyond the scope of our survey, other than noting them as potentially rising in significance over time.

The second long-term trend is, in our view, of immediate consequence and worth a more detailed discussion: per above, the limitations and risks inherent in the fiat monetary systems now in universal favour around the world. It is this fiat monetary regime – the attempt to manage monetary policy based on flexible guidelines, and without the anchor previously provided by a gold standard – that we believe is the single most important driver of the rising price inflation now apparent around the world.

Losing Control

Simply, while the central banks of a handful of countries are (just) managing to contain inflation through restrained monetary and fiscal policy, the vast majority are finding the task politically inexpedient and are losing control. While we may point with some well-deserved derision at Mr. Mugabe’s comedic attempts to paper over his inflation with yet more paper, all nations are currently making the same errors, albeit at differing levels of failure.

To understand this point, we share a simple but accurate way of thinking about inflation as the result of too much money chasing too few goods. On that front, the chart just below paints a picture of the largely unfettered global growth in money since the early 1970s plotted against industrial production, a proxy for “goods” in their many varieties.

That chart begins to get under the hood of the problem, but one further view is necessary to understand what happened in the early 1970s that unleashed the tidal wave of money. The chart below presents a ratio of the above two measures, and includes a marker indicating President Nixon’s cancelling of the link between the U.S. dollar and gold in 1971 as the likely trigger. Once this anchor was removed, all that remained was a pure fiat monetary system.

While cancelling the gold standard was a U.S. policy decision, its impact was felt around the world. That is because of the historic Bretton Woods agreement struck between representatives of over 40 countries in 1944, as World War II came to an end.

Leveraging its position as “last man standing” following the devastating war, the U.S. pushed forward a wide-ranging set of agreements – the net result being that, from that point forward, the U.S. dollar would be the de facto global reserve currency, with all the nations of the world pegging their currencies to the dollar. New institutions, including the International Monetary Fund and the International Bank for Reconstruction and Development, were fathered at Bretton Woods, but they were nothing more than enforcers for the new regime, ensuring that the other countries stayed in line, buying and selling dollars as needed to maintain a stable peg.

For its part, the U.S. guaranteed gold convertibility at $35 “forever.”

But as is inevitable when dealing with governments, “forever” really means “for as long as it is politically expedient.” When it became inconvenient, in the late 1960s when the French under Charles de Gaulle decided that they’d prefer to have the gold, Nixon cancelled convertibility.

Once President Nixon cancelled that convertibility, which took effect in 1971, the world’s central bankers, left with no other immediately obvious or more viable alternative, continued using the U.S. dollar as a key component of their reserves. It also continued to be used in international trade, to price globally traded commodities, such as oil. Yet the end of gold convertibility represented a fundamental change; from that point forward the creation of U.S. dollars and, by extension, all of the world’s currencies, was restrained by nothing more than political expediency.

It is our contention that the size of the politically motivated governmental spending, spending which has no “hard” limiting factor or defined discipline, will continue apace and, in fact, significantly worsen due to compounding interest on government borrowing and the coming wave of irrevocable social commitments – on Social Security and Medicare in the U.S., for example. Against the backdrop of a global fiat monetary regime, the only limitation to government spending is that which the politicians believe will be politically unacceptable to a population. This is, generally speaking, no real limitation at all, given that the public is now apathetic about, and numb to, the real world implications of large numbers.

Inflation: Baked in the Cake

In light of the cause and effect between monetary inflation and price inflation, and given the clear findings in our “Global Inflation Survey,” we can only conclude that inflation in both its commonly understood forms is now baked into the proverbial cake.

As investors, that keeps us focused on gold, the world’s longest-serving form of money and an investment we have been profitably beating the drum about since 1999. Importantly, a quick scan now finds that gold is rising against a large number of currencies. This is a very useful view of the current inflation trend in that it demonstrates that the trend has expanded considerably beyond just a weakening U.S. dollar, and is now affecting fiat currencies around the world, almost without exception.

Are we seeing the end of the experiment in fiat monetary systems? It’s too early to say one way or another, but it’s not too late to shift at least some percentage of your portfolio into gold and, for leverage, gold shares.

© Casey Research, LLC. 2008

David Galland is the managing director of Casey Research. The above was excerpted from the Casey Research Global Inflation Survey. The full 38-page survey, which includes commentary by Casey Research Chairman Doug Casey and an interview on the inflation/deflation debate with Casey Research Chief Economist Bud Conrad, is available on request.

This isn’t some unexplained phenomenon. Martians have not invaded the US Treasury. There are real, measurable reasons behind the dollars demise, and its not rocket science.

Many of you may not remember when gasoline was .25 per gallon. There was a time, if you do not remember or were to young to remember, that this was the case.

Some people think the value of gas has really gone up ten times since then, but has it really? Or is there some other, sinister power at work here?

Interestingly, when you could buy four gallons of gas for a dollar, we also had a very different type of money.

The USD once upon a time was ‘backed’ by gold and silver, which meant that you could take a ’silver or gold certificate’ (what our money used to be called) and hand it in at the US Treasury, the the Treasury was required to give you silver or gold for it.

Todays systems is very different. If you pull a dollar bill out of your pocket, and you look at the top, you will see that is says “Federal Reserve Note”. What does that mean? Well a note, in financial terms, is a promise to pay something of value at a later time. The question here is, pay what?

Today, if you took your Federal Reserve Note to the US Treasury, and asked them to give you ’something of value’ for your ‘Note’, what do you think would happen? They would probably call the police and have you carted off, is what would happen.

So back to the point of the article, why is the Dollar Collapsing in value? The answer is, that because the dollar is no longer backed by anything of value, then the government can create as much of it as it wants, as you can see by the chart below:

So what affect does this have on the Dollar’s Value? Well simply, whenever there is more of something it is worth less. One of the fundamental requirements of money is that it remains scare. If Dollars were as common as rocks lying on the ground, they wouldn’t be worth very much now would they?

We see this taking shape in the form of less demand for Dollars, all around the world. OPEC is in discussions of de-pegging from the dollar, oil producing nations are starting ask for payment in oil in currencies other than the dollar, China has indicated it intends to diversify is national reserves out of Dollars and into other assets, and you have Trillions of Dollars in newly created Sovereign Wealth Funds, whose sole purpose is to buy hard assets around the world with ’surplus’ Dollars before the Dollar becomes worthless. It has gotten so bad, in fact, that the Dollar, once honored and coveted in China, is now seen as your neighbors garbage.

It can’t be that bad, you say. Well actually, it can. The chart below shows how far the purchasing power of the Dollar has fallen since 1913 when we created the Federal Reserve System:

So if you think about it, its not that gasoline, food, real estate, vehicles, etc have actually gone up in value, perhaps its more like your dollars buy much less than they did even 4 years ago, so maybe it takes more dollars to buy the same thing?

So now that you have me really depressed you might ask, what the heck is the solution?

The solution dear reader lies in gold and silver. Gold has retained its purchasing power for thousands of years, while governments have messed with various currencies that go up and down in value. An ounce of gold thousands of years ago would clothe a man very well. Today, and ounce of gold will also clothe a man quite nicely.

If you really want to preserve your wealth, take a serious look and investigate gold.

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While I have to applaud Mr. Greenspan for wanting to assist the poor nations of OPEC in managing inflation, it also is a bit concerning to see that my prior predictions are indeed coming true: The Oil Producers are going to de-peg and take payment for Oil in non-Dollar currencies.

Why is this an issue? Because we have front row seats to round 5 of the death spiral of the dollar.

Depegging from the dollar and then choosing to take payment for oil in non-dollar currencies will be a one-two punch for the worlds ailing reserve currency the US Dollar. By de-pegging, it signals a lack of confidence in the good ‘ole US Dollar. And a lack of confidence not from just anyone, but one of the Dollars biggest customers. If the US Dollar were a product (which it is), and the US were a corporation, we just lost our second biggest customer. The effect? The world is not likely to ‘not notice’ this. OPEC is a massive consumer of USD, as we pay for oil in Dollars, and have for many years. As the world notices that some of the USD’s largest customers have decided to move on, so will the rest of the world. Result? Continued lack of demand for the USD, and continued devaluation.

JEDDAH/ABU DHABI (Reuters) – Former Federal Reserve Chairman Alan Greenspan said on Monday near-record Gulf Arab inflation would fall “significantly” were the oil producers to drop their dollar pegs, in contradiction to Saudi policy.

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Money Tales

A precious metal that’s not just an investment but a worldview too

By Rob Baedeker, Special to SF Gate

Last week, gold hit a record high of $958.40 an ounce. In 1959, the average price of gold was around $35 an ounce. That’s the year Burton Blumert opened his Camino Coin Company in Burlingame.

To the outside observer, it would appear that the rise of gold is a success story for long-time dealers and investors like Blumert and his clients. And in many respects it is. As Blumert told me on the phone from his home in El Granada, “I retired at the top of my game.” (After giving the Camino Coin Company to a long-time employee last year, Blumert, 79, stays peripherally involved, helping out occasionally when needed).

But there is, so to speak, another side to the coin. “If you want a dismal view of the future, talk to a gold dealer,” Blumert adds. The high price of gold may represent a handsome return on investment, but it’s hardly been a steady ascent, and for Blumert and other “goldbugs” it’s also an ominous sign.

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by Bob Chapman
The International Forecaster
Thursday, 18 February 2008

The following are some snippets from the most recent issue of the International Forecaster. For the full 20 page issue, please see subscription information below.

…

The Illuminati have a huge problem. They have buried it and no one in the media is talking about it, at least not in the correct order of magnitude. They are quaking with fear as they consider the possibility of this problem being unleashed. The problem lies in the Land of the Rising Sun, or should we call it the Land of the Sinking CDO. You have already heard the tripe about there being about $400 to $500 billion of CDO and other asset-backed derivative losses worldwide, and we have already shown you that these losses are way understated and that the delays in their recognition are downright fraudulent. We also showed you that total losses on asset-backed bonds and derivatives could be as much as $4 trillion in this past issue of the IF, and that does not include the tens of trillions in potential losses in credit default swaps and interest rate swaps. So why does Japan represent a potential ground zero for the biggest financial catastrophe of all time? You saw our previous report that of the $400 to $500 billion of potential losses admitted to so far, $150 to $200 billion of those losses may have Japanese banks as their “proud” owners. Yet we don’t hear a peep from Japan.

We have Citigroup, Northern Rock, SocGen, UBS, IKB, Merrill, JP Morgan, Morgan Stanley and many others from the US and Europe who have already written off over a hundred billion with sovereign wealth fund bailouts of 75 billion and some being on their way to partial or even total nationalization, but not so much as a hiccup emanates from Japan. Could it be that Japan is also undergoing a catastrophe somewhere along the lines of George Romero’s “Night of the Living Dead?” Well, if Japan has 30 to 40 percent of the paltry $400 to $500 billion that has been admitted to, what if they have 30 to 40 percent of the $4 trillion. That could wipe out their entire forex surplus, the largest in the world, and take the whole financial system down with it when it goes. Where’s the connection to the rest of the world financial system? You need look no further than the Ultimate Yen Death-Star. When the magnitude of these losses are finally grasped by the Japanese and foreign investors alike, the Nikkei isn’t just going to tank, it is going to be vaporized! And when all that liquidation occurs, guess what happens. Everyone sells their equities and corporate bonds and toxic waste and gets yen and Japanese bonds in return (along with truckloads of gold).

That will drive the yen and gold into the ozone and the carry trade and yen shorts into the deepest, darkest depths of Mordor! Your looking at a sub-100 yen and the biggest financial double-whammy of all time as the toxic waste ignites the Ultimate Yen Death-Star in a thermonuclear pyrotechnics display that will be remembered for millennia. The hapless Japanese bankers must be sick as they gather together to discuss these problems. This is not just about saving face. They are completely and utterly terrified! We suspect wakizashi short swords may be in short supply in the not too distant future. Sepuku anyone? All that liquidity, over a trillion dollars of carry trade bets, plus leverage, will be totally drained from the system in a matter of days, and stock markets worldwide would crash and burn like the Hindenburg. This would make 1929 look like a drop of water dripped into an Olympic-sized swimming pool. Oh, and incidentally, any sovereign wealth funds or other investors who try to bail out any of these banks, investment banks and bond insurers in Japan or anywhere else in the world is a first class moron. By the time this whole thing plays out, those who try to bail these flim-flam operations out may well never see so much as a penny of their investment back again. They may as well load 100 dollar bills into earth movers and then back them up and dump them into the cauldron of an active volcano for a crispy critter Crane confetti cookout! What idiots! How about buying billions in gold instead, knuckleheads?!

Silver and oil were the big performers this week and supported gold well as it yawned at the IMF news that its perpetual gold sale was on again. Spot silver went on a rampage to a new 27-year high of 17.60 on Tuesday after gold came close to testing its all-time high on Monday, hitting about 927, only $10 per ounce short of a breakout. Oil finished the week strongly by peaking out at 96.67 and settling at 95.50. Gold and silver will consolidate along with resource stocks in the near term and we see new records being set in the weeks ahead. And don’t forget that the IMF sales, even if approved, will not take place until well after this seasonal rally is over. Economic new is simply abysmal and precious metals are going to continue to shine under these circumstances. We note that some 3000+ contracts of February gold futures are still open as of Thursday’s close. Could it be that someone is holding out for delivery? We’ll have to see. That would be a nice test case of 10 metric tonnes. Large specs must seriously start to consider building cash to demand some physical delivery. Central banks are all insolvent. Their gold is parked and it ain’t goin’ nowhere. Let’s get radical!

The Fed’s interest-rate cuts last month have failed to lower borrowing costs for many companies and households. That means soon there will be one or probably two more ½% cuts.

Taxpayers should ask Congress why they are bailing out borrowers, lenders, investment banks, bank and brokerage houses who all committed fraud?

There are urgent proposals before Congress and the neocons for a bailout of the banking, investment banking and insurance industries. This would allow them to keep profits and lay off the losses on the public. There is more than $1 trillion in loses still to be accounted for. You can be sure our Parliament of Whores will sell us out again.

Market adjustments worldwide triggered by the real estate and CDO (Collateralized Debt Obligations) and SIV (Structured Investment Vehicle) collapse and the credit crisis has triggered the loss of $5.2 trillion – 50 of 52 share indexes worldwide ended January lower.

Wait until the investors and Wall Street see the write-offs over the next two years and the drop in earnings as a result. In January the Turkish market fell 22.7%; China 21.4%; Russia 16.1%; India 16%; Paris 12.3%; London 8.9% and New York was off 6%. Just under half of the major markets lost more than 10% of their value. The FTSE in London lost 9% and 16.5% over the past three months. Paris lost 15.3% over the past three months.

Published and Edited by: Bob Chapman
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Congressman Ron Paul
February 13, 2008

Madam Speaker,

I rise to speak on the concept of competing currencies. Currency, or money, is what allows civilization to flourish. In the absence of money, barter is the name of the game; if the farmer needs shoes, he must trade his eggs and milk to the cobbler and hope that the cobbler needs eggs and milk. Money makes the transaction process far easier. Rather than having to search for someone with reciprocal wants, the farmer can exchange his milk and eggs for an agreed-upon medium of exchange with which he can then purchase shoes.

This medium of exchange should satisfy certain properties: it should be durable, that is to say, it does not wear out easily; it should be portable, that is, easily carried; it should be divisible into units usable for every-day transactions; it should be recognizable and uniform, so that one unit of money has the same properties as every other unit; it should be scarce, in the economic sense, so that the extant supply does not satisfy the wants of everyone demanding it; it should be stable, so that the value of its purchasing power does not fluctuate wildly; and it should be reproducible, so that enough units of money can be created to satisfy the needs of exchange.

Over millennia of human history, gold and silver have been the two metals that have most often satisfied these conditions, survived the market process, and gained the trust of billions of people. Gold and silver are difficult to counterfeit, a property which ensures they will always be accepted in commerce. It is precisely for this reason that gold and silver are anathema to governments. A supply of gold and silver that is limited in supply by nature cannot be inflated, and thus serves as a check on the growth of government. Without the ability to inflate the currency, governments find themselves constrained in their actions, unable to carry on wars of aggression or to appease their overtaxed citizens with bread and circuses.

At this country’s founding, there was no government controlled national currency. While the Constitution established the Congressional power of minting coins, it was not until 1792 that the US Mint was formally established. In the meantime, Americans made do with foreign silver and gold coins. Even after the Mint’s operations got underway, foreign coins continued to circulate within the United States, and did so for several decades.

On the desk in my office I have a sign that says: “Don’t steal – the government hates competition.” Indeed, any power a government arrogates to itself, it is loathe to give back to the people. Just as we have gone from a constitutionally-instituted national defense consisting of a limited army and navy bolstered by militias and letters of marque and reprisal, we have moved from a system of competing currencies to a government-instituted banking cartel that monopolizes the issuance of currency. In order to introduce a system of competing currencies, there are three steps that must be taken to produce a legal climate favorable to competition.

The first step consists of eliminating legal tender laws. Article I Section 10 of the Constitution forbids the States from making anything but gold and silver a legal tender in payment of debts. States are not required to enact legal tender laws, but should they choose to, the only acceptable legal tender is gold and silver, the two precious metals that individuals throughout history and across cultures have used as currency. However, there is nothing in the Constitution that grants the Congress the power to enact legal tender laws. We, the Congress, have the power to coin money, regulate the value thereof, and of foreign coin, but not to declare a legal tender. Yet, there is a section of US Code, 31 USC 5103, that purports to establish US coins and currency, including Federal Reserve notes, as legal tender.

Historically, legal tender laws have been used by governments to force their citizens to accept debased and devalued currency. Gresham’s Law describes this phenomenon, which can be summed up in one phrase: bad money drives out good money. An emperor, a king, or a dictator might mint coins with half an ounce of gold and force merchants, under pain of death, to accept them as though they contained one ounce of gold. Each ounce of the king’s gold could now be minted into two coins instead of one, so the king now had twice as much “money” to spend on building castles and raising armies. As these legally overvalued coins circulated, the coins containing the full ounce of gold would be pulled out of circulation and hoarded. We saw this same phenomenon happen in the mid-1960s when the US government began to mint subsidiary coinage out of copper and nickel rather than silver. The copper and nickel coins were legally overvalued, the silver coins undervalued in relation, and silver coins vanished from circulation.

These actions also give rise to the most pernicious effects of inflation. Most of the merchants and peasants who received this devalued currency felt the full effects of inflation, the rise in prices and the lowered standard of living, before they received any of the new currency. By the time they received the new currency, prices had long since doubled, and the new currency they received would give them no benefit.

In the absence of legal tender laws, Gresham’s Law no longer holds. If people are free to reject debased currency, and instead demand sound money, sound money will gradually return to use in society. Merchants would have been free to reject the king’s coin and accept only coins containing full metal weight.

The second step to reestablishing competing currencies is to eliminate laws that prohibit the operation of private mints. One private enterprise which attempted to popularize the use of precious metal coins was Liberty Services, the creators of the Liberty Dollar. Evidently the government felt threatened, as Liberty Dollars had all their precious metal coins seized by the FBI and Secret Service this past November. Of course, not all of these coins were owned by Liberty Services, as many were held in trust as backing for silver and gold certificates which Liberty Services issued. None of this matters, of course, to the government, who hates to see any competition.

The sections of US Code which Liberty Services is accused of violating are erroneously considered to be anti-counterfeiting statutes, when in fact their purpose was to shut down private mints that had been operating in California. California was awash in gold in the aftermath of the 1849 gold rush, yet had no US Mint to mint coinage. There was not enough foreign coinage circulating in California either, so private mints stepped into the breech to provide their own coins. As was to become the case in other industries during the Progressive era, the private mints were eventually accused of circulating debased (substandard) coinage, and in the interest of providing government-sanctioned regulation and a government guarantee of purity, the 1864 Coinage Act was passed, which banned private mints from producing their own coins for circulation as currency.

The final step to ensuring competing currencies is to eliminate capital gains and sales taxes on gold and silver coins. Under current federal law, coins are considered collectibles, and are liable for capital gains taxes. Short-term capital gains rates are at income tax levels, up to 35 percent, while long-term capital gains taxes are assessed at the collectibles rate of 28 percent. Furthermore, these taxes actually tax monetary debasement. As the dollar weakens, the nominal dollar value of gold increases. The purchasing power of gold may remain relatively constant, but as the nominal dollar value increases, the federal government considers this an increase in wealth, and taxes accordingly. Thus, the more the dollar is debased, the more capital gains taxes must be paid on holdings of gold and other precious metals.

Just as pernicious are the sales and use taxes which are assessed on gold and silver at the state level in many states. Imagine having to pay sales tax at the bank every time you change a $10 bill for a roll of quarters to do laundry. Inflation is a pernicious tax on the value of money, but even the official numbers, which are massaged downwards, are only on the order of 4% per year. Sales taxes in many states can take away 8% or more on every single transaction in which consumers wish to convert their Federal Reserve Notes into gold or silver.

In conclusion, Madam Speaker, allowing for competing currencies will allow market participants to choose a currency that suits their needs, rather than the needs of the government. The prospect of American citizens turning away from the dollar towards alternate currencies will provide the necessary impetus to the US government to regain control of the dollar and halt its downward spiral. Restoring soundness to the dollar will remove the government’s ability and incentive to inflate the currency, and keep us from launching unconstitutional wars that burden our economy to excess. With a sound currency, everyone is better off, not just those who control the monetary system. I urge my colleagues to consider the redevelopment of a system of competing currencies.

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I keep yammering on about inflation, because there are alot of bozo’s our there (see: Market Analysts) who keep telling people to trade in FOREX. Heres the deal, if there is a ship in the center of a fleet of ships and it is sinking in inflation (picture the USA), and there are a bunch of other ships around it and they are sinking as well, then it doesnt matter which ship the rats jump to, its still going down the crapper!

The only solid ground right now is in commodities! Gold, Silver, Energy, and Food. 15 year run.

The United States is the center of the deflationary economic slowdown, inflation is more of a worldwide phenomenon. Inflation rates in China, for example, are higher than they are in the United States. Prices of apartments in Buenos Aires…subway tickets in Paris…hamburgers in Singapore – everything is going up.

In the past, inflation has always had a national identity card. The inflation of the ‘20s was concentrated in Germany, where hyperinflation wiped out the middle class and set the country on the road to ruin. Investors…like Jewish refugees 10 years later…had to move their savings to France or England to escape it. Likewise, in Argentina, the inflation of the ‘80s was easily avoided – just put your money in a Miami bank.

Traditionally, the dollar was a haven for people wishing to protect themselves from inflation – even though the dollar itself was losing value rapidly . In 1935, a U.S. dollar had about the same purchasing power as a U.S. dollar from 1800. Then, it began a steep decline…erasing 95% of its value over the next 70 years. Still, people with money usually preferred to keep their money in dollars, rather than in…say…australs or zlotys. The dollar may have been losing value, but at least it was doing so in a gentle, “controlled” manner.

But times have changed. Now, there’s a new kind of inflation – it is practically everywhere…in every country…and it risks spinning out of control. That is why gold is hitting new highs – against almost every currency…and every other market…in the world.

News came yesterday, that the Fed has quietly lent some $50 billion to member banks using a new method – an “auction facility” that allows banks to put up unconventional collateral. The government no longer reports a figure for M3, the broadest measure of the money supply, but shadow analysts say it is going up at 15% per year – about six times faster than GDP growth.

Most of this money ends up outside the United States. That’s where most U.S. Treasury debt ends up too. The dollar is America’s leading (and highest margin) export. This has forced foreign central banks to create more of their own currencies to buy up the dollars; otherwise they would face a competitive disadvantage, in that the dollar would fall against their local currencies, making their exports more expensive on the world market.

And so, the whole world is being smothered in paper. Paper dollars…paper euros…paper rand…paper cordobas…paper money of all sorts. Where can the investor go to get away from this paper? What can he buy to protect himself from inflation? How can he get some air?

That’s right. Gold. And it’s why this bull market in gold could be even bigger than the last one. Then, in the late ‘70s, it was primarily the U.S. dollar that suffered from inflation…and primarily Americans, and perhaps Arab oil exporters, who were buying gold. The Russians were still building cars that didn’t run. The Chinese were still recovering from their Great Leap Forward of the ‘60s and dismantling their backyard steel mills. And the Indians weren’t even awake yet.

Now, the whole world is different. It is full of more paper money than ever before…and full of billions of alert people who will want to protect themselves from it. They might try stocks…or property…or Rembrandts…but traditionally, the surest, simplest solution is gold.

For those of you out there thinking that the yellow metal is too expensive to buy now, you are halfway right. But youre a smart cookie, and you will see a good opportunity for what it is. Get a FREE Beginners Guide to Gold and Silver Investing, and register to receive a crash course in why some people will benefit while others are losing their shirts, and a little known secret on how to seriously cash in on gold.

Jeremy Grantham says he thinks housing prices in the United States will go down 20% to 30% from their peak. That’s a potential loss to Americans’ implied wealth of as much as $6 trillion. This is part of what leads Financial Times columnist Martin Wolf to describe the coming slump in the United States as the “mother of all meltdowns .”

Wolf refers to the work of New York University economist Nouriel Roubini, who argues that the housing decline will put 10 million homeowners upside down, with more mortgage than house. It will lead to collapsing credit…defaults…and huge losses to lenders. It will also bring about a big cutback in consumer spending and unavoidably push the United States into a deep recession.

One of the wild cards of the doomsday scenario is the performance of the derivatives market. No one knows exactly what is in some of these instruments…and no one knows how they will hold up in a crisis.

One thing we do know here at The Daily Reckoning is that they will not hold up as expected. We know that because the assumptions behind them were, fundamentally, nonsense. The most sophisticated mathematical model in the world is not worth a campaign promise if the theory behind it is wrong. And the idea that you can model future prices on the basis of past prices with any predictive reliability is simply wrong. Speaking loosely, it is the problem noticed by Heisenberg when was trying to observe and measure atomic particles at the same time…or ethnologists when they are watching savages gootchy goo. The act of observation causes distortions. As soon as you notice “stocks outperform bonds over the long-term,” for example…you cause a distortion in the stock market. People buy stocks, expecting better performance. Buying drives up prices. Then, higher initial prices bring lower rates of return over the long run.

Using Black-Scholes pricing model…and other sophisticated tricks…the salesmen proved that they could produce higher yields with lower risk. The models, of course, depended on the future being like the past. But never before had investors been offered such opportunities to distort the price curve!

The derivative market exploded in the 2001-2006 period, with annual rates of growth (from memory) of nearly 100%. But then, subprime debt blew up…and buyers started asking questions. In 2007, the derivatives market fell apart. And so far this year, new derivative sales are off 93% from the year before. CDOs, SIVs, Monolines…they’ve all had big trouble.

“Many CDOs could be worth less than 5 cents on the dollar,” Strategic Short Report ’s Dan Amoss tells us. “Final values won’t be clear until the loans supporting these securities go through the default and recovery process.

“Many Wall Street firms cannot simply confess their final losses, because delinquencies have just started picking up from generational lows. Also, these firms may soon discover that the insurance covering defaults of their CDO holdings is worthless.”

And now comes the Financial Times with more trouble. “CPDOs are at risk,” say the FT . What are CPDOs, we had to ask? They are Constant Proportion Debt Obligations…a kind of derivative on a derivative…a bet on the derivative index.

Not knowing anything about them ourselves, we turn to someone who does for an opinion:

“If these [structured products] do get unwound en masse, the effect on the market will be horrible,” said credit strategist Barnaby Martin at Merrill Lynch. “Between $1,000bn and $2,000bn of synthetic CDOs have been issued over the last four years. Any unwinding will likely be crammed into a much shorter time period.”

Bottom line is, we have a ways to go before its all clear, and when ships cant see the harbor through the fog, smart captains buy Gold and Silver.

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The once mighty dollar is suffering more humiliation as shops in New York City begin accepting euros and other foreign currency as payment.

According to Reuters:

In the latest example that the U.S. dollar just ain’t what it used to be, some shops in New York City have begun accepting euros and other foreign currency as payment for merchandise.

“We had decided that money is money and we’ll take it and just do the exchange whenever we can with our bank,” Robert Chu, owner of East Village Wines, told Reuters television.

The increasingly weak U.S. dollar, once considered the king among currencies, has brought waves of European tourists to New York with money to burn and looking to take advantage of hugely favorable exchange rates.

“We didn’t realize we would take so much in and there were that many people traveling or having euros to bring in. But some days, you’d be surprised at how many euros you get,” Chu said.

“Now we have to get familiar with other currencies and the (British) pound and the Canadian dollars we take,” he said.

While shops in many U.S. towns on the Canadian border have long accepted Canadian currency and some stores on the Texas-Mexico border take pesos, the acceptance of foreign money in Manhattan was unheard of until recently.

This is just another sign that the greenback’s reign is ending. Years of irresponsible expansion in the nation’s money supply are taking their toll. In contrast, the euro is rapidly gaining in value and prestige. Watch for the economic leadership of the world to move from the United States to the European Union.

Buy Gold and Silver Bullion

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Alex’s Notes: Once again, why is this important? What you are seeing is a dominoe effect, where more and more countries are either de-pegging from the USD, or asking for resources such as oil in denominations other than USD.

What effect does this have on the US?

1. It lessens demand on the dollar, sending it farther down the death spiral in value

2. A further devaluing dollar becomes less and less attractive as a reserve currency, therefore will trigger futher dominoes of de-pegging and we will finally see the OPEC nations also ask for oil in currencies other than dollars, starting the cycle again at number 1 above

3. As more and more oil producing countries require currencies other than dollars for oil, it forces the USA to convert already weak dollars into stronger currencies in order to buy oil, not good for strategic or economic purposes

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20 February 2008
Posted to the web 20 February 2008

Kunle Aderinokun
Abuja

A few days after President Umaru Musa Yar’Adua stopped the payment of their share of monthly allocations and excess crude proceeds in US dollars as earlier proposed by the Central Bank of Nigeria (CBN), the 36 states of the federation yesterday said they supported the decision for the fact that the dollar is not the nation’s legal tender.

Also yesterday, the Federal Government directed the Office of the Auditor General of the Federation to carry out a comprehensive audit of all revenue inflows into the Federation Account from the Nigeria Customs Service, Nigerian National petroleum Corporation (NNPC), Federal Inland Revenue Service (FIRS), and Department of Petroleum Resources (DPR) as well as review the petroleum subsidy account.

Fielding questions from finance correspondents after the monthly meeting of the Federation Account Allocation Committee (FAAC) yesterday at the Ladi Kwali Hall of Sheraton Hotel and Towers, Ondo State Commissioner for Finance and Economic Planning and Chairman of Forum of Finance Commissioners, Chief Tayo Alasoadura, said the states’ support for the stoppage of the dollar payment was predicated more on the need to keep the country’s pride and independence than pecuniary reasons.

According to him, “We are happy with the decision. We don’t want dollar payment because we have raised the issue at the meeting that dollar is not our legal tender. Why should the highest revenue body of the country be paying money in dollar?

“We are degrading our own currency for other currencies. Let us have our money in naira. Anyone that wants to convert to dollar can go to the market to buy dollar. The legal tender of Nigeria is naira and we should be paid in naira. We are all in agreement with the President on this matter.

“Our rejection of the dollar payment is not because of depreciation of the dollar. Our decision is based on the country’s pride and our independence. We should be paid in our own legal tender. We don’t want dollar payment.”

Earlier, while declaring open the FAAC meeting, Minister of State for Finance, Mr. Remi Babalola, said that the issue of payment of statutory allocations to all tiers of Government in foreign currency had been laid to rest following the presidential directive.

“As some of you may already be aware, the President and Commander-in-Chief of the Armed Forces has directed that any plan to disburse Federation Account funds to Federal, state and local governments in foreign currency should be stopped forthwith. With this development, I believe that this matter should be laid to rest,” he said.

He added that, “the Revenue Mobilisation Allocation and Fiscal Commission (RMAFC) had written the president and my Ministry to express reservations about the proposed policy on several grounds and advising the President to stop its implementation.”

Babalola, however said on the order of the President, he had written to the Office of the Auditor General of the Federation to probe all inflows into the Federation Account with a view to ascertaining completeness as well as ensuring the integrity of balances in the account.

The directive, he said, followed series of complaints about non-remittance of accrued revenue by revenue generating agencies.

He said: “I noted at the last meeting that the issue of completeness of revenue being contributed to the Federation Account by the NCS, NNPC, DPR and FIRS was and is still a matter of great concern to the ministry.

“The activities of the Post-Mortem Sub-Committee to post-review completeness of inflows into the Federation Account did not appear to have had the desired effect.

“To arrest the deteriorating situation, and based on Presidential directive, I have written to the Auditor-General of the Federation to carry out a comprehensive audit of all inflows into the Federation Account. Additionally, the Auditor-General will review the Petroleum Subsidy Account, towards ensuring that government funds in this respect are properly utilised.”

However, speaking on the review of indices by the RMAFC, he noted that there were plans to implement the indices, which would be used in sharing of the Federation Account.

According to him, “with respect to the implementation of the new indices for revenue allocation recently submitted to the Office of the Accountant General of the Federation (OAGF) by RMAFC, I informed you that I have written Mr. President to intimate him about the situation and efforts being made to implement the new indices.

“I have set up a committee comprising representatives of the Ministry of Finance, Accountant-General of the Federation, National Planning Commission and RMAFC to look at the new indices to ensure equity, fairness and due process before implementation.

“The Committee met several times and recommended that the indices currently in place, that is the 2006 indices, should continue to be applied, while efforts are on to ensure the acceptability of the proposed 2007 indices. It should be noted that we are in sync with the NEC that the indices should be brought to currency as latest as practicable.”

After months of work, Babalola disclosed that the National Economic Council (NEC) had adopted the report of the Presidential Committee set up to review the ALGON/Primary Health Centre project. The ALGON/Primary Health Centre project, which involves the construction of a health centre in each of the 774 local governments of the Federation, was the idea of the administration of the former President, Chief Olusegun Obasanjo.
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As part of the decisions, he revealed, “the NEC has advised that the balance held with the Central Bank of Nigeria in an escrow account, amounting to N12.7 billion be refunded to the local governments on an equal basis. We are awaiting presidential directive in this respect.”

Meanwhile, the amount in the excess Crude Proceeds Account has grown to $13.9 billion as at the end of January this year.

The Accountant General of the Federation (AGF), Ibrahim Dankwambo, who confirmed this to newsmen yesterday at the end of FAAC meeting, said the amount represented an increase of 39 per cent over $10 billion accumulated as at August 2007.

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