Comparing gold price to an Index Fund is a delusional construct based on bad data

Lets start off with how inflation is calculated to give a frame of reference.

When calculating CPI, well documented flaws in the calculation methodology compromises the integrity of the data used. Changes in the measurements and values of the basket of goods used to determine pricing has resulted over time in a series of data creep having a cumulative effect of the reported statistics no longer matching with what is observed in reality.



These changes include Geometric Weighting, Hedonic Adjustment, and Substitution.

Substitution is where a government analyst might remove some item such as salmon, and replace it with say, catfish (hat tip to Chris Martenson). The items in the basket are picked at the pleasure of the person(s) determining the basket to reflect reality in prices for everyone.

This can be compared to the way an Index fund reports its view of value.

An Index fund is trying to match the performance value of a basket of items, however cannot ever accurately achieve this task. The fund manager is performing an iterative task where he is selling and buying instruments in a portfolio with the intention of matching a basket of items based on a spreadsheet decided upon by some analyst. The problem is, that as the Index changes, the fund manager must sell from his portfolio and add the new items in the index. The loss/gain on those trades is the delta from the actual Index performance if no trading were taking place. The cumulative effect over time is substantial creep from a base value measurement. The net result is just garbage data if one is trying to compare an investment in an Index Fund versus gold.

The second problem with trying to measure gold performance versus an Index Fund, is that the index itself is composed of a basket of arbitrarily decided items, it is not measuring a single item such as the USD gold price. Therefore, using it to compare performance with gold is an “apples to oranges” comparison. The comparison that is almost always used (I have never seen otherwise) focuses on USD / Gold as the trading pair. To be a fair comparison, the Index Fund performance, which we already know is questionable data for this purpose, should be compared to an Index of Gold in various currencies. The numbers used would have to be gold across a basket of currencies, and the “Gold Index” would have to allow for substitution of various currency pairs in the trading basket based on the whims of the Index Manager.

So for example, in 2014 I might drop USD/Gold from the basket and add EURO/Gold – this would clearly give a different performance value, and the cumulative effect so much more pronounced.



Comparing the USD gold price to an Index Fund is therefore disingenuous at worst, and naïve at best.

So the next time you hear someone parroting up this meme, keep this in mind.




Media Spin on Swiss Referendum over Gold Reserves Getting Ridiculous

If you do not know already, the Swiss are voting on a referendum which will force its government to pass legislation to the following effect:

  • Back 20% of its reserves in gold,
  • Repatriate the gold that Switzerland owns from abroad,
  • Prevent the Swiss National Bank from selling off any more gold.

The Swiss have a very interesting form of government, where the people can vote directly to force their government to create legislation. A majority of more than 50% of the Cantons must agree.

The reason this is so important, is that if this measure passes, it will force the Swiss National Bank to purchase gold from the market, which is already stretched thin on the supply side. According to a note from the SNB, they would have to buy roughly 10% of annual mining supply each year through 2019. Some estimate this to be over 1700 tons of gold, over a 5 year period.

This is where it gets dicey. Since gold dropped below the average global cost of production in June ( ) , the amount of gold available in the supply pipeline has been getting tighter. To make matters worse, according to the CEO of the worlds largest mining company, because the price has dropped so low mining exploration has taken a huge hit and will result in less gold production moving forward. He claims the industry will hit “Peak Gold” in 2015 ( ).

I have read a few articles which claim that if the physical supply was tight, then the price would reflect that because as we all know, traders who deal in these markets are efficient, and above all very smart, therefore gold should be priced in a way that reflects its true market value…kind of like triple A rated mortgage backed securities….right?

Just in case anyone has forgotten what financially incentivized traders are willing to do, I present without comment the following recent articles:

1. Regulators in US and UK mete out record fines after finding a ‘free for all culture’ on currency trading floors at RBS, HSBC, Citibank, JP Morgan and UBS

2. Six Banks to Pay $4.3 Billion in First Wave of Currency-Rigging Penalties

3. Swiss regulator finds “clear attempt to manipulate fixes in the precious metal market

4. UBS agrees to settle charges in gold and silver manipulation

5. Reuters: EU fines JPMorgan, UBS, Credit Suisse for taking part in cartels

6. SEC charges High Frequency Traders with Fraud manipulating prices

There are many more recent examples in this fact freight train, but I am sure you get the point.

Vote Yes Argument

The group that wants this initiative to pass says that if it is not passed, then Switzerland’s economy will be dictated by the EU, the Swiss Franc will (continue to be) tied to a weak Euro, inflation will increase dramatically, the Swiss National Bank will print hundreds of billions of Francs (to maintain the Euro/Franc 1.2  peg), the Swiss Franc will weaken, and the Swiss citizens will be stuck with hundreds of billions of devaluing Euros.

A few comments:

  • Even if the measure passes, the SNB might still print hundreds of billions of Francs to retain the Euro 1.2 peg, it will just have to buy an amount of gold equal to 20% of the Euro’s it buys. This shouldnt be that much of a problem, they do have a printing press, they could just do what my friend Jim Rickards says and print fiat / buy gold. It would of course create other problems, explained below.
  • Yes, if it doesn’t pass, the Franc will weaken, but that is the entire point of currency wars and the reason the SNB (and the government) hates this idea, aside of course from the fact that it destroys the credibility of the Central Bank (not just the SNB, but globally).
  • What will happen if this measure passes is the Swiss Franc will be reinforced as being a safe haven currency with real value, and that will cause a massive inflow into the Swiss Franc in times of fear, which does indeed create problems – the Swiss have experienced this in the 1970’s and were forced to resort to negative interest rates (charging you to hold your money instead of paying you interest) to discourage capital flow into the Franc. The amounts of Euros the Swiss would have to buy to maintain order could end up being …I have no words for it…huge…and therefore also force them to be big buyers of gold. In time, this could erode confidence in the entire system as the pressure could cause the price of gold to skyrocket which would cause people to start asking questions.

Vote No Argument

For this section, I am going to reference an article in Yahoo today which closely reflects the attitude and presentation of other articles I have read regarding this subject.

For starters it says “economists warn a ‘Yes’ vote could wreak havoc in financial markets” – but then conveniently fails to reference those economists or why they think this.

“Industry organisations have also warned that the move would tie the central bank’s hands and damage its credibility” – With the loss of credibility part I agree. After all, if the central bank itself starts buying gold to support its currency as demanded by the citizens, then it messes with their job stability doesn’t it? Are central bankers really needed if all you have to do is buy gold and call it good? This may be why the Fed has tried to convince the world that gold has no monetary use for the last 45 years. It would not, however “tie their hands”. They could still print up all the Francs they wanted and buy Euros to maintain the Euro peg, they would simply have to buy more gold when doing so, which comes back to that destroying their own credibility thing again.

Most observers expect the Swiss to snub the motion, and low global gold prices indicate investors agree – Some facts here would be nice.

According to the Swiss Central Bank Chief Thomas Jordan, if the measure passes then “The central bank’s capacity to take action would be weakened. This would also lead to higher unemployment”. – Not weakened, again it would reduce credibility because actions taken to devalue the currency intentionally by printing and buying other currencies would force them to buy gold.

He has appealed to Swiss voters to pay attention, warning that if the gold initiative passes the consequences could be disastrous. – Yes, for the credibility of the central bank.

However, “if the ‘Yes’ side wins, gold risks reacting strongly, since the market is not expecting that result,” Nannette Hechler-Fayd’herbe of Credit Suisse. – I also think the gold market will react strongly, but not because an affirmative vote is unexpected, further explanation coming up.

Strategists at Commerzbank (Xetra: CBK100 – news) said the ban on selling gold would put the very credibility of SNB at stake. – Near the end of the article, and there we have it. Economists are heralding doom, but cant seem to be found in the article after that. This whole thing about concern over a loss of credibility is pretty consistent though. If people start looking at gold as money, then that paper becomes less important, and if that happens then so does the role of the paper printer.

If SNB’s gold “reserve can no longer be sold in the event of a crisis it no longer constitutes a reserve in the stricter sense,” they said, stressing that “if the gold reserves cannot be sold they are ‘lost’ for the Swiss.” – You can always take one last swing at this issue with a straw man. This is complete non-sense. Central Banks have been using their gold reserves in a leasing capacity for decades, it serves as collateral of the highest caliber bar-none and can be put to use as such without being required to sell it.

Talking to the Swiss

Last night I was having dinner with a Swiss client and the subject of the gold initiative came up. He said that in the early part of the month it did not seem anyone was taking it seriously. Since then, there has been alot of debate, and the issue is gaining more awareness to the point that his feeling is the Swiss Government and SNB are now panicking. They are advertising in the trains to vote no, while the group that wants the measure to pass had its donation accounts frozen.

You have to know a Swiss to understand this. They are a stubborn and fiercely independent people. The idea that they are becoming lackeys to the Euro is disturbing to them. His comment to me was that if the people think the government is panicking, they will vote yes by instinct, even if they do not fully understand the underlying issues.

Gold Physical Supply

Once a year (or more often as needed) AFE travels over to Switzerland to participate in the audits of the gold in custody, as well as handle other administrative work and meet with our strategic partners. Each time we do this we are able to talk to key people within the industry.

One of the gentlemen we regularly meet with is a Director for one of the largest refineries in the world. He has perhaps one of the best views into global physical gold flows from a practical hands on perspective than any other I am aware of, and has more than 30 yrs experience under his belt. The way he puts it, paper trading in gold (on exchanges such as COMEX) is being done by young men who have no interest in the physical fundamentals, and have very little concern nor care about physical movements. My thought is he may be right, after all despite what is happening in physical flows, reservoirs of gold such as COMEX which should act as a gauge on available physical don’t seem to move much, regardless of moves in the price.

We will be doing a round table interview soon with the Board of Directors of AFE where we go into more detail about this, but I will make a few comments about the available physical gold float now.

In October, backwardation re-entered the gold market

The best explanation of backwardation in gold I have found is this, hat tip to Bron Suchecki of the Perth Mint (from ) :

Negative gold forward rate (GOFO) is a true backwardation of gold prices.  It means participants can sell physical gold now and instantaneously buy it for delivery in 2 months time at a 0.145% discount.  Not only that, but the entrepreneurial arbitrageur can also invest the proceeds from the spot sale in risk-free securities over the period.  In two months time, they will have their gold back, have banked 14.5 basis points profit, have banked the risk free security return and will have save on 2 months storage and insurance of the physical gold.

This is why backwardation of gold is so fascinating, it just should not happen.  The arbitrageur may not be so smug if the future delivery never occurs (in trying to make 0.145% he has lost 100% of his gold), and that is the risk which backwardation effectively prices in.

It implies a very tight physical gold supply in what we call the “float”, which is gold available for sale. It is important to bear in mind that the amount of gold in the “float” changes, based on the price of gold and if owners of existing gold turn into sellers. Float gold consists of gold from mines, gold outflows from ETF’s such as GLD if they are selling, scrap, and also from an estimated 165,000 tons of gold above ground which was mined since antiquity, all of which can come available for sale if the price is high enough.

A point some of you may find interesting is that the LBMA has decided to stop reporting GOFO as of Jan. 30th 2015, claiming banks do not want to report rates dues to increased regulatory scrutiny ( ).

I will not say more on this topic at this time as we are reserving some important information we have to share for the upcoming round table interview, but I will say that if the current situation in the physical float continues and then this referendum passes, it will have a substantial impact on price and it will not be because “it was not expected”, but because the float is so tight right now.



New Audio Interview – 4 Urban Myths About Gold – Available for download

In today’s fast paced lifestyle, sourcing high quality, relevant news and information has become increasingly difficult. AFE Audio delivers to you quality, accurately filtered news, intelligence and information, domestically and globally, as well as interviews with content that impacts you. These audio files bring you the information you need to get correctly positioned in a rapidly changing and increasingly uncertain world.

This free audio download is available here: Four Common Urban Myths About Gold – Audio

Great New Words From Egon Von Greyerz

Great New Words From Egon Von Greyerz
by Egon von Greyerz – October 2012

1. Worldwide money printing continues unabated

2. Just In 10 years $120 trillion have been printed making global debt $200 trillion

3. World GDP has gone from $32 trillion to $70 trillion 2001-2011

4. Thus $120 trillion debt is required to produce a $38 trillion annual increase in GDP

5. The marginal return on printed money is negative in real terms

6. Thus the world is living on an illusion of paper that people believe is money

7. This illusionary paper wealth will implode in the next few years

8. The initial trigger will be the collapse of the world’s reserve currency – the US dollar

9. The dollar is backed by $120 trillion of US government debt and probably NO gold

10. All currencies will continue their race to the bottom and lose 100% in real terms against gold

11. This will create a worldwide hyperinflationary depression

12. All assets financed by the credit bubble will go down in real terms

13. This includes stocks, bonds, property and paper money of course

14. The financial system is unlikely to survive in its present form

15. The banking system including derivatives has total liabilities of around $1.2 quadrillion

16. With world GDP of $70 trillion, the world is too small to save a financial system which is 17x greater

17. This is why there will be unlimited money printing and hyperinflation

18. The only asset that will maintain its purchasing power is gold Click here for chart

19. Gold has been money for 5,000 years and will continue to be the only currency with integrity

20. Western countries’ 23,000 tons of gold is probably gone. See recent article by Eric Sprott.

21. The consequence is that most of the gold in the banking system is likely to be encumbered

22. This means that Central Banks one day will claim it back against worthless paper gold IOUs

23. Thus gold and all other assets within the banking system involve an unacceptable counterparty risk

24. Gold should be held in physical form and stored outside the banking system

DOW passes 10,000 – Talking Heads Rejoice – Dont Get too Excited

The DOW moves back above 10,000…..

Problem is that its measured in dollars…so if you factor in the rate of money creation and assume that affects buying power you get a DOW thats worth about 5000 in buying power.

When measured against gold however, it looks more like this:

DOW / GOLD Ratio Chart - 10 Yr

DOW / GOLD Ratio Chart - 10 Yr

That tiny little uptick is what all the Wall St cheerleaders are excited about.

If history repeats and the DOW and Gold meet at a 1:1 ratio at the top of golds run up, and the DOW keeps rising (due to inflated dollars more than anything else) , then where is that meeting point going to be? Maybe these guys calling for a 20,000 DOW are right…but what also does that mean for gold? What also would that mean for the buying power of the dollar?

To me that looks like a buying opportunity in a major trend.

US Government Bails out Wall Street, Who Bails out the US Government?

This week has seen the US Government bail out a growing number of Wall Street firms, the largest insurance company in the world, and finally end at printing money without subjecting the backing instruments to international market scrutiny.

(Treasury is now selling T-Bills DIRECTLY to the Fed, no pretense of going through an investment bank anymore)

This is pretty shady stuff, and thats being kind.

To understand why this is BAD, we have to understand why inflation is bad.

Yes of course, inflation is bad because prices go up, but that is not what inflation really is, prices going up is just what happens AFTER inflation occurs.

Put simply, inflation is when you add more currency to the currency supply.

Price increases happen, because when you add more currency then each unit of currency already in existence becomes worth less.

So prices rising arent so much because what you are buying is worth MORE than it was a year ago, but simply because your dollar is worth LESS.

Dollar Devalue Debasement

So, the reason I explained that to you, is so you can understand what happens when the Government “bails out” all these failing financial institutions.

Really, two things happen:

1. The government creates Treasury Bills, which it then sells to someone, usually an investment bank and now, the Federal Reserve. In exchange, Congress gets currency from the investment bank, or the Federal Reserve, to spend on Bridges to no-where, military toys, and bailouts of corrupt, overpaid, Wall Street Slicksters who are their buddies.

Guess who gets to pay for that? Thats right, US Taxpayers! Arent you excited?!

2. The second thing that happens is, “liquidity”, which is a fancy term for more money, gets injected into the currency supply because this currency was essentially just “created” in order to bail out these silly greedy Wall Street slicksters and the firms who happen to be buddy buddy with our Congressman and Senators.

Ok, so, what happens when we inject all this currency into the system? Thats right, you guessed it, the value of your dollar goes down, prices go up!!!

So essentially, each time one of these Wall Street firms gets bailed out, the value of your dollar to buy groceries and gas, GOES DOWN, so groceries and gas become more expensive.

Now obviously, if you are a Wall Street Slickster,  you are happy with this deal, because you get to do all kinds of stupid things, then get some silly taxpayer shmuck to pay for your severance package of hundreds of millions of dollars anyway.

If you are a Congressman or Senator of course, this is all good, because lots of cash flows into your tax haven bank accounts from your Wall Street buddies, you get to ride around in fancy cars and go to fancy fundraiser dinners, and you get a HUGE pension for life, even if you dont do crap your entire time in office.

AWESOME! Its good to be the King. Or in this case, a Congressman or Senator.

Now now, Mr. taxpayer, dont complain, you should just shutup and eat your gruel, and be happy to get it! Peasants! Your lucky we dont raise taxes to 85% and then make you WALK to work!

But whats really got me miffed right now, even beyond the fact that our “leaders” have no problem raping the wealth of US Citizens to bail out a bunch of greedy, stupid, people who are already rich anyways, all the while destroying the buying power of the common man AND taxing the common man on top of it to pay for all this shenanigans…

Is that just when we think its IMPOSSIBLE for our leaders to get any more stupid, this happens:

Exchange Stabilization Fund

President Bush approved the use of existing authorities by Treasury secretary Hank Paulson to make available as necessary the assets of the Exchange Stabilisation Fund for up to $50 billion to buy more illiquid mortgage assets.

When the Government bailed out the the Government Sponsored Enterprises it promised to buy illiquid mortgage backed securities, but this announcement extends that pledge.

The ESF was created after the Great Depression and uses the US gold reserve as collateral for financial stability.

So what does all that mean?

Basically, it could very well be the dumbest thing any group of government officials has ever done, in history.

This is a quote from the website of the US Treasury describing what the “Exchange Stabilization Fund” is:

The Exchange Stabilization Fund (ESF) of the United States Treasury was created and originally financed by the Gold Reserve Act of 1934 to contribute to exchange rate stability and counter disorderly conditions in the foreign exchange market. The Act authorized the Secretary of the Treasury, to deal in gold, foreign exchange, securities, and instruments of credit, under the exclusive control of the Secretary of the Treasury subject to the approval of the President.

This is my translation:

This thing gives Mr. Paulson, who already has WAY to much authority, the ability to sell off the gold stocks of the United States, manipulating the gold price down, to prop up the US Dollar and make all the sheeple think that gold is falling and the markets and USD are rallying, so all the stupid people can pour more money into the markets, bail out the corrupt Wall Street Slicksters, impoverish and steal the wealth of US Citizens, and perpetuate the scam that the USD which happens to be backed by nothing is actually worth something insteading doing whats smart and backing our currency in gold.

They are going to sell off gold into the international market, which is going to depress the gold price, and use the money to prop up the US Dollar, the stock market, and to try and ‘neutralize’ all this garbage derivative crap that Wall Street has been creating over the last ten years or so.

This isnt just any gold mind you, its the reserves of the United States, belonging to citizens of the United States.

So not only are these guys willing to tax you to pay for bailouts, which then adds currency to the currency supply, which then reduces your buying power, but now, they are selling off the bedrock of the nations financial health, the gold stocks that belong to YOU as a US Citizen, to again save a bunch of fools who probably should have been hung from the gallows a long time ago.

If that does not infuriate you, well….

A brief prediction.

I dont like to make predictions, because predictions usually make a guy look stupid later, but here it is:

The gold price will drop, they will use this as another means to manage the gold price, stocks and the USD will rise or remain level, they HOPE through the elections in November.

This of course is only short term. A band-aid on a gushing severed limb, if you will.

They are willing to sacrifice the nations financial future, and the well being of our children and grandchildren, just to get one more US President in office and perpetuate the non-sense.

But at what cost?

Ultimately, Gold ALWAYS revalues to match the amount of currency that gets pumped into a currency system.

This is not a theory, its not conjecture, history proves it happens over and over, every single time, as predictable as the seasons.

Over the long term we will see the US Dollar devalued, the gold stocks of the United States depleted just when they are needed the most, the common citizen robbed of everything he has through inflation and taxation to bail out those who do not deserve to be saved, and worse case scenario, it could cost citizens of America our freedom and form of government in the end.

We will see the government start to directly monetize debt as a matter of habit, and once that occurs the United States is on the road to hyperinflation.


Anchor your finances in gold and silver now while you still can.

“Unjust weights and measures are an abomination unto the Lord” – What is an unjust weight and measure? How about a piece of currency that changes in value constantly? If something is a “measure” it has to remain constant, not change in value.

If you were a carpenter trying to build a house, and the tape measure you used to measure your cuts changed all the time, how solid would your house be?

I am of the opinion that if this thing goes down the tubes, and there is no indication that Congress, the Senate, The President, The Secretary of the Treasury, or the Federal Reserve Chairman have any inkling as to how to prevent it based on recent decisions, then the ONLY safe place in this coming storm is gold and silver.

Those who have gold and silver, will see a huge transfer of wealth to them. Those who dont….well….sorry. Get used to gruel and string vests.

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Gold as Money Means A Potentially Massive Rise In Valuation

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 . 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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Gold is Money, and Nothing Else

Gold is Money. Its been said before, notably by the late JP Morgan. Yet today we find ourselves forgetting that gold is money.

Jim Sinclair has made some very accurate calls in his time, and is one of the most recognized experts in gold today. A recent message from Mr. Sinclair, I have bolded where he says gold is money:

As far as I am concerned:

  1. I do not anticipate a one month or more drop in gold. Neither does Monty Guild, so be careful not to read his general commodity comment ass-backwards.
  2. The worst case scenario is a chop after the low of April 28th set in, and the rally high in the low $950s. Following this the chop gives way to a break above $1034 on its way to $1200 in 2008. Write that down for the dark night of your gold soul.
  3. Gold is a currency, not a commodity.
  4. Gold while remaining as a currency is now more tied to the euro than the USDX.
  5. Weakness in crude, if you can call any price above $100 a barrel weak, helped gold be prone to lower prices.
  6. Gold?s real help moving lower was a push by COT that triggered the mindless black boxes which are as nuts on the upside as they are on the downside.
  7. If tonight you curse gold, keep this in mind when it crosses$1034, and please leave never to return.
  8. Hold my hand when you feel low as gold takes a beating, and when you feel high as a kite when higher highs happen. I will moderate both for you.
  9. The greatest technical analysis trick is simple to learn. Whatever your emotions say to you is totally wrong. Whenever you want to margin to the rafters it is time to eliminate debt.


Modern economic alchemy has labeled gold nothing more than a commodity, a bygone relic, with no industrial or commercial use in todays world of paper and electronic markets.

But what happens when those who are in charge of those paper and electronic systems abuse it? What happens when people lose confidence in it? What happens when the paper becomes ever more worthless in the eyes of the world?

Quite simply, a return to gold is money. It has been money for over 5000 years. Human beings have this interesting tendancy to forget history, and what we have learned from societies past.

Economies, and nations, both regional and global have gone back and forth from ‘easy money’ to ‘disciplined money’ in a recurring pattern that so far has shown no reason of stopping.

Governments of course favor easy money, because they can print as much as they like, and spend as much as they like, with no sensible restraints on wars, emergency relief, subsidies on foolish programs, and social welfare that dwarfs the entire global gdp combined.

The bad part of course, is this propensity to print and create tens of trillions of dollars out of thin air is called inflation, and it is spreading around the globe like a cancer. Food riots, oil heading to $200 a barrel, $5.00 a gallon gas, and the sad part is, this is just the beginning.

There are, however, solutions. Investigate gold and silver. Learn why gold is money. Most importantly, learn why the cycle is again shifting back to gold is money, and what it means in terms of how high gold will truly go.

Do your research, because for the ones who bury their heads in the sand and fail to see it coming, there will be terrible losses as stock markets come down from baby boomers sucking their money out as they retire in hordes.

Some however, will be gathering wealth because they were smart enough to learn from history.

Unexpected inflation?? You have got to be kidding me

Alex’s Notes: Unexpected inflation?? You have got to be kidding me.

It does not cease to amaze me how often main stream media financial analysts are either completely ignorant of how the economy works, or are deliberately creating spin to keep consumers fat dumb and happy.

The bottom line is we have added over 14 TRILLION dollars to the money supply and currently the rate of adding money is only increasing. We are about to hit 19% in terms added change to money supply.

How anyone can expect that we will not see price increases under such conditions and call themself a financial analyst is beyond my comprehension.


India’s Inflation Unexpectedly Accelerates on Food
By Cherian Thomas

May 16 (Bloomberg) — India’s inflation rate unexpectedly rose to the highest in 3 1/2 years, adding pressure on the central bank to raise borrowing costs further to tame prices.

Wholesale prices rose 7.83 percent in the week ended May 3 from a year earlier, after gaining 7.61 percent in the previous week, the government said in a statement in New Delhi. Economists surveyed had expected a 7.55 percent increase.

Increasing borrowing costs will check the flow of money to speculators in the commodities market and rein in food prices, former central bank Governor Bimal Jalan said in parliament last month. The government, to augment monetary policy action, has persuaded steel and cement makers in the past week to cut prices and help slow inflation.

“More monetary tightening cannot be ruled out,” said Rajeev Malik, senior economist at JPMorgan Chase & Co. in Singapore. “More measures are likely as inflation is expected to remain above the central bank’s target of 5.5 percent.”

The index for fruits, vegetables and other food items rose 0.5 percent, while that for manufactured products gained 0.3 percent, today’s statement showed.

The rupee declined to 42.73 against the dollar from 42.65 before the data was announced. The yield on the benchmark 10- year bond was little changed at 7.88 percent, holding near this week’s high.

China Inflation

India and China, the world’s fastest growing major economies, are battling rising prices stoked by consumer demand and high food costs. Wholesale prices in China rose 10.3 percent in April from a year earlier, the fastest since at least 1999.

India’s central bank twice asked lenders to set aside more funds last month, raising the so-called cash reserve ratio to 8.25 percent, the highest since March 2001, from 7.5 percent. The Reserve Bank of India may raise the ratio for a third time this year to control inflation, according to six of nine economists surveyed by Bloomberg News on April 30.

India’s cement makers joined steel producers on May 14 in pledging to cut prices after Finance Minister Palaniappan Chidambaram said the government will take “administrative action” against them for behaving like cartels.

Chidambaram yesterday said there is significant scope for further reduction in cement prices. Steel Authority of India Ltd. and other Indian steelmakers on May 7 agreed to lower prices for a second time since April.

Indian Elections

The Associated Chambers of Commerce and Industry, an Indian trade organization, says it expects the combination of steps taken by the government, central bank and companies to slow inflation to 6 percent in the next four to six weeks.

Prime Minister Manmohan Singh’s government has been stepping up measures to cool prices in Asia’s third-largest economy to improve his re-election chances in a vote that must be held before May 2009.

The government wants to bring inflation down to 4 percent, to protect consumers in a nation where the World Bank estimates half the 1.1 billion population live on less than $2 a day.

Over the past two months, the government scrapped import duties on edible oils, steel products and banned the export of cement, pulses, rice, wheat and edible oil to contain prices.

Last week, under pressure from its communist allies, the government also banned futures trading in soybean oil, rubber, chick peas and potatoes to reduce speculation. It halted wheat and rice contracts last year and lentils in 2006.

Today’s inflation rate may be revised in two months when India’s government reviews the figures after receiving additional price data. The Commerce Ministry today increased the inflation rate for the week ended March 8 to 7.78 percent from 5.92 percent.

                       Week Ended    Week Ended     Percentage
                         May 3         April 26        Change

Primary articles         239.3         238.6           0.3
Fuel, power              345.4         342.5           0.8
Manufactured products    198.9         198.3           0.3
Food products            204.3         202.8           0.7
Edible oils              186.6         187.9          -0.7
Cement                   220.8         221.6          -0.4
Iron & steel             354.6         360.6          -1.7
Pulses                   241.8         243.9          -0.9
Fruits & vegetables      253.2         247.1           2.5
Total                    228.6         227.7           0.4

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Simon Heapes: In ages past it was the Byzantine Empire, today is it China and OPEC?

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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Inflation, Spanning Globe, Is Set to Reach Decade High

April 10, 2008; Page A1

Inflation is back.

After several years of relative stability, a wave of rising prices is washing over the world economy.

It comes at a most inconvenient time. The Federal Reserve is sharply cutting U.S interest rates — the opposite of the usual response to rising inflation — to prevent the housing bust and credit crisis from causing a deep, prolonged recession. That’s making the global response to inflation more complicated.

Consumer prices in the U.S., Europe and other rich countries are projected to rise 2.6% this year, the highest inflation rate since 1995, the International Monetary Fund said Wednesday. In the U.S., consumer prices in February were 4% above year-ago levels. The 15 countries that share the euro currently see inflation of 3.5%, a decade high and well above the European Central Bank’s preferred range. Even Japan, long plagued by flat or falling prices, is seeing modest inflation.

Rising prices for food, energy and other raw materials account for much of the pickup in inflation rates. High food and energy costs hit developing countries — where consumers spend a larger share of income on those necessities — particularly hard. In recent weeks, protests over rising costs have shaken countries from Vietnam, where prices are up 19.4% from last year, to Egypt.

On Wednesday, the World Bank estimated global food prices have risen 83% over the past three years, threatening recent strides in poverty reduction. The IMF forecast consumer prices in emerging and developing countries will rise 7.4% this year, the most inflation since 2001 though still well below the double-digit levels of the recent past.

Some of the factors driving inflation vary from country to country: union-negotiated wage hikes in Germany, pork shortages in China, an electricity squeeze in South Africa, pay rises for civil servants in India.

But the fact that inflation is rising almost everywhere suggests some of its causes are global. As crops are sold for alternative-energy production, food prices have soared: The price of rice, the staple for billions of Asians, is up 147% over the past year. Increasing demand for natural resources among developing economies such as India and China has pushed up prices for raw materials world-wide. Oil-supply constraints have sent crude-oil futures surging above $112 a barrel Wednesday, a new record, resulting in rising fuel and transportation prices.

The weakening U.S. dollar is another source. Not only is it pushing up prices of American imports, it is transmitting inflation to the dozens of economies that link their currencies to the U.S. dollar, from Saudi Arabia to Hong Kong to Mongolia. Because of their currency pegs, these economies are forced to track Fed rate cuts even if they aren’t facing recession. That is putting upward pressure on their prices. Additionally, years of easy credit earlier this decade — the result of a global quest to avoid falling prices, or deflation — are a contributing factor.

An increasingly global economy may also be a culprit. Globalization got some credit for low inflation in recent years: The economic rise of China, India and the former Soviet Union helped expand the global work force and increase manufacturing capacity, holding down the prices of many goods. But the economic boom in emerging markets also means their currencies and prices are steadily rising, boosting the prices rich countries pay for imports from those poorer countries.

“Overall, the effects of globalization have ceased — probably in the long term — to be spontaneously disinflationary,” Christian Noyer, governor of the Bank of France, said last month.

Rising prices cut consumer spending power, especially among the poor. They can also stir bad memories of dislocation caused by previous bouts of inflation. Fears of inflation, in turn, can spur more of it: If households and companies come to think of rising prices as normal, that can create self-fulfilling expectations that keep inflation high. Inflation clouds the price signals that let market economies function and makes it harder for businesses to plan.

“It’s hard to reverse inflation expectations once they’ve risen,” says Kenneth Rogoff, a Harvard University professor and former chief IMF economist.

Food and Energy

For now, rising food and energy prices are inflation’s prime drivers. Core inflation, a measure that excludes volatile food and energy prices, is not rising as quickly as overall inflation. But commodity-price gains are beginning to work their way through the global economy. Even if commodity prices stay where they are, global inflation could continue rising for months to come as companies react to previous price rises.

The world’s largest iron producer, Brazil’s Companhia Vale do Rio Doce, known as Vale, got its customers to agree to a 65% price increase on ore from its main mine this year, far larger than last year’s 9.5% increase. That led steelmakers like Baosteel Group Corp., China’s biggest, to raise product prices by 17% to 20% in recent months.

“It will have a pretty big effect on our material costs,” Jim Owens, chief executive of Caterpillar Inc., the big U.S. maker of construction equipment and engines, said on a recent visit to Beijing. Caterpillar is preparing price increases of up to 5% on its products to take effect by July.

In St. Louis, Solutia Inc. is raising prices for resins used to make laminated glass by up to 40%, blaming climbing costs for materials, energy and transportation. “We are now at a point where sourcing raw materials at continuously higher prices makes no sense for our business, unless the effects are passed on,” said Solutia Vice President Luc De Temmerman.

Kimberly-Clark Corp., maker of household goods, began raising prices in February between 4% and 7% for some paper products, including Huggies diapers, Cottonelle bath tissue and Viva paper towels. Hershey Foods Corp. raised the selling price of its chocolate bars 13% in February after boosting prices between 4% and 5% in April 2007. Hanesbrands Inc., which owns the Champion and Hanes apparel lines, has warned that sustained high cotton prices could filter through to retail prices.

Pricey Cab Rides

In Temecula, Calif., Gary Byler, owner of Southwest City Coach, has raised the fares for his four-taxi fleet for the first time in the 10 years he has been in business. His base fare has gone from $1 to $2.50 and the per-mile charge from $2.50 to $2.75. “Insurance costs have gone up 40%. Fuel prices have doubled,” he said.

Just as there is variation in the level of inflation — from 1% in Japan to 17% in Latvia — countries’ responses to it vary. Central bankers in the U.S and the United Kingdom are focusing on the risks of recession, so they are cutting rates even at the risk of fueling inflation. Others are attempting to drive inflation down: Central bankers in Australia, Chile, China, Colombia, Hungary, Poland, Russia, South Africa, Sweden and Taiwan all have raised interest rates recently.

The trade-off between maintaining growth and fighting inflation is particularly difficult in Europe, where banks are also under strain and inflation is picking up. The European Central Bank considers inflation a bigger worry than the fallout from the U.S. credit crisis. It fears soaring energy and food prices will spill over into wages and other prices. So despite persistent money-market tensions, the ECB has refused to cut rates. It is expected to hold that line in its meeting Thursday.

Flash Point

Germany’s recent wage gains are a flash point. Last week, some two million German public-sector workers won a nearly 8% pay raise over two years, their biggest settlement in 16 years. In March, some 93,000 German steelworkers won a 5.2% wage hike, while train drivers picked up an 8% pay increase spread over two years.

In Slovenia on Saturday, some 10,000 protesters from across the Continent gathered at a conference of central bankers to agitate for higher wages. They got a cold response. “It would be an enormous mistake to imitate Germany,” ECB president Jean-Claude Trichet told a news conference afterward, noting recent German wage restraint allowed workers there some space to catch up.

In the U.S., Fed officials are concerned that food and energy prices have increased inflation even though the economy is sliding into recession. But they are generally confident that inflation will recede as rising unemployment prevents workers from winning wage increases.

Handling social pressures from inflation is tricky. China has raised minimum wages to moderate inflation’s impact on living standards, but Premier Wen Jiabao has also promised the government will ensure that average inflation this year won’t accelerate past last year’s 4.8%.

That’s intended to reassure people like Monica Li, a 40-year-old travel agent in Beijing. She says her daughter’s kindergarten just raised its fees to cover higher costs for lunches. Now Ms. Li is worried that costs for health care and housing are also headed upward. “It could really be a problem for us if inflation today, which is mainly in food and other necessities, leads to a series of chain reactions,” Ms. Li says.

Countries have long tried to buy stability by fixing their currencies, more or less tightly, to the U.S. dollar. Now those decisions are contributing to inflation in Asia and the Middle East. Central banks in countries with strict dollar pegs must follow the Fed’s rate cuts: If they don’t, investors seeking higher returns would move money to these countries, placing upward pressure on their currencies and imperiling their dollar pegs. Hong Kong has mirrored the Fed’s recent rate cuts, igniting the local property market. Housing prices there were up 31% from a year earlier in January, and rising rents are now feeding inflation.

Countries that both peg their currencies and export commodities are experiencing an inflationary double whammy. As nations from the Middle East to Mongolia earn income from selling resources, rising commodities prices are stimulating the local economy and feeding inflation. Meanwhile, these economies are feeling the effects of rising global prices for food and raw materials. Inflationary pressure is further heightened as their central banks match Fed rate cuts.

Problems in Mongolia

This complicates life even on Mongolia’s steppes, where many people are nomadic herders and food prices tend to fluctuate by season and weather. The country’s currency, the togrog, is unofficially pegged to the U.S. dollar, boosting prices. As the country’s income from copper exports surged, inflation reached 15.1% at the end of 2007.

Similarly, inflation is stoking instability amid the Middle East’s energy-fed boom. In Qatar, a rich emirate jutting into the Persian Gulf, surging revenue from natural-gas sales have led to more government spending. This year’s budget is 46% higher than last year’s, and more than four times the spending of just six years ago. Much of that is going to build highways, airports, infrastructure and schools. Says Yousef Hussain Kamal, Qatar’s finance minister: “The surplus is huge.”

So is inflation, at 13.7% on the year in the last quarter of 2007. In part that’s because Qatar followed its currency peg and moved in step with the Fed’s rate cuts. The region’s low-paid expatriate work force was hit hard. While local inflation means higher food and housing costs, the value of workers’ savings — which they often send home to families — is sinking with the dollar. That has triggered strikes and riots in the United Arab Emirates by construction workers.

Commodity exporters with more flexible currencies have been better at containing rising prices. Inflation in Canada, a big oil producer, has been lower than expected, at just 1.8% in February year-on-year. The central bank attributes that in part to the surge in the Canadian dollar, up 17% against the U.S. dollar in 2007. Australia, a major exporter of coal and iron ore, has also seen its currency rise, and its central bank has been steadily raising rates to cool the economy. Inflation was 3% in December.

“Australia has done all right because the currency has been quite strong, and interest rates are high,” says Ben Simpfendorfer, an economist for Royal Bank of Scotland. “The Gulf might have looked more like Australia if it weren’t for the pegs.”

Absorbing the Pain

Central banks, especially the Fed, are hoping that slowing growth in the U.S. and Europe will ease inflationary pressures globally, especially when fast-growing emerging economies begin to feel the slowdown’s pain. Some economists argue that current commodity prices are higher than underlying demand can justify, and predict they could fall sharply if speculators retreat and global growth eases. And, at some point, the Fed will stop cutting U.S. rates, helping arrest the decline in the dollar and the inflationary side-effects.

“Inflation almost always falls during economic downturns. The Fed has history on its side,” says Julian Jessop, an economist with Capital Economics in London. He expects inflation to be much lower globally a year from now, and the new IMF forecast does, too. Nonetheless, he says, “The outlook for inflation is much more uncertain than it has been for a while.”

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The True Meaning of Inflation

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.

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The World’s First Trillion Dollar Company

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


PetroChina Surpasses Exxon as Shanghai Shares Surge
By Ying Lou

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

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

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

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

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

`Sense Of Responsibility’

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

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

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

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

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

Demand For Shares

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

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

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

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

`Limited Upside’

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

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

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

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

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– “10 Reasons Gold Has Farther to Run”