Gold In Flux And The China Syndrome

August 23, 2009 Inflation, Physical Gold, Politics No Comments

Fall approaches with gold in flux and the China syndrome starting to rumble. Things are coming to a head with gold in flux, holding the mid$900′s and the China syndrome picking up steam.

As we get ready to roll into fall, I think a word of caution is in order. There is the possibility of one more correction in the price of gold before a final bottom is reached. This decline, if it should occur in September or October which are typically some of the best months for gold, may last many months. The reason for my caution is the unprecedented manipulation of the dollar. I am amazed at how events are spun in the dollars favor. If housing prices go down it’s good for the dollar because investors run to the dollar for safety and if they go up it’s good for the dollar because it shows that the market has bottomed and things are turning around.

If this correction occurs, it will be the last opportunity to accumulate gold, silver and precious metals stocks at reasonable prices for some time. I am not calling this correction, but merely pointing out that the possibility is there. We live in an age of incredible hype and spin and, to put it mildly, out right distortion and spin regarding the financial situation in which the world finds itself. The dollar should be toast now and should have been toast 6 months ago, but due to the powers that be, it is hanging in there and may even rally from here.

On the bright side, there is just as good a chance that the next up leg in gold starts shortly and the bottom has already been put in. Either way, the time is coming soon for gold and the entire precious metals complex.

I have been accumulating the dips, and if this one materializes, I will continue accumulating. I may have been early to the table, but I do not regret that in the least. I do wish that I had kept my powder dry a little longer, so that I would have had the opportunity to acquire more for less, but that is 20-2o hindsight. What ever you do, I would not panic and unload shares if this correction materializes, because the $1000 level for gold will move into the rear view mirror on the next up leg. I am in this for the long run and I am not trying to day trade the gold market.

Jim Sinclair of www.jsmineset.com posted a great video that explains the difference between deflation and inflation which I fear far too many people do not understand. I highly recommend Jim’s website if you want to keep up with what is going on in the “joined at the hip” worlds of gold and the dollar.

Inflation is the creation of liquidity and deflation is the failure of financial instruments.

You now understand the difference between inflation and deflation, so keep that in mind as you read the media spin from here on out. The definitions are simple and anytime that you hear them changed, it is pure spin.

The World And The China Syndrome

With no spin involved, a trip around the world’s economies is quite revealing. The second quarter showed Germany, France and Japan with small but positive economic growth. In Canada, July housing sales were the highest ever recorded. Germany and Japan have high personal savings rates, which coupled with stimuli, enabled them to avoid the worst of the slump. France and Canada have banking systems that were not as caught up in the debt and derivative bubbles which triggered the financial crisis as were the U.S. and Britain.

The American, British, Spanish and most eastern European economies are having to cope with severely impaired debt systems and weak savings rates. The first three have the added burden of housing prices that are still plummeting. The American consumers are contracting at the same time the Chinese are learning how to borrow, and lend. The Chinese have long been savers while the Americans have been living on debt and credit. High savings rates generate capital for investment and promote lower interest rates. High savings rates are the foundation for industrial growth and China is set to be the engine that drives the world’s economy for the foreseeable future. This is beginning the emergence of the China syndrome as the dominant economic force in the world.

China recently signed an agreement with the ASEAN group, the economies to its south and southeast, to simplify and encourage cross-border investment. India also signed a similar accord with this group ahead of their annual meeting. In essence, this group is forming it’s own banking system and eliminating it’s dependency on the western banking system. This falls in line with China’s call for a basket of currencies to replace the dollar as the world’s reserve currency. China is methodically building the platform for a change in the world’s reserve currency.

Those in the media that are predicting major slowing in China’s growth have no clue what is coming their way. China’s economy will drive the world’s recovery from this recession/depression. All of the pieces of the puzzle are beginning to come together as the China syndrome blossoms up and out rather than imploding in on itself like the western nations.

China cuts US Treasury holdings in June

(chinadaily.com.cn)
Updated: 2009-08-18 10:45

NEW YORK: China reduced its holdings of US Treasury debt in June by the biggest margin in nearly nine years, according to a US Treasury Department report issued on Monday.

China cut its net holdings by 3.1 percent to $776.4 billion in June from $801.5 billion in May, the report says. This is also the first large-scale reduction of US Treasury debt by China so far this year.

However, its June holdings were still larger than April’s $763.5 billion and $767.9 billion in March, according to the statistics of the Treasury Department.

Reuters data show the drop in China’s Treasury holdings in June was the biggest percentage reduction since a 4.2 percent cut in October 2000.

On the other hand, Japan, the second-largest holder of US Treasury securities, increased its holdings to $711.8 billion in June from $677.2 billion in May.

The United Kingdom, the third largest holder, also increased its holdings to $214 billion in June from $163.8 billion, a surge of 30.6 percent.

On the U.S. side the picture remains bleak and there are ample signs that wave two of the slow down is rolling down the pipe. Gold and silver will run as this recession gets deeper. It is time to see through the spin and realize that it is not a light at the end of the tunnel, it’s the train!

Mortgage delinquency rate hits all time high in 2Q

Aug 17 02:39 PM US/Eastern
By EILEEN AJ CONNELL

NEW YORK (AP) The delinquency rate on U.S. mortgage loans hit an all-time high in the second quarter, but the pace of growth for the rate slowed, a possible sign the mortgage crisis may be beginning to turn the corner.

Data provided by credit reporting agency TransUnion shows the ratio of mortgage holders who are 60 days or more behind on their payments increased for the 10th straight quarter, to 5.81 percent nationwide for the three months ended June 30.

That’s up 65 percent, from 3.53 percent, in the 2008 second quarter.

Deliquency of 60 days is considered a precursor to foreclosure, because of the difficulty homeowners would have coming up with two back payments to bring themselves current.

While the delinquency rate hit a new high, however, the increase from the first quarter to the second was 11.3 percent. In the two prior quarters, the rate jumped nearly 16 percent.

Joblessness spurs foreclosure fears

Published: Aug. 17, 2009 at 11:36 PM

WASHINGTON, Aug. 17 (UPI) Worsening joblessness is taking the place of subprime mortgages as the major cause of U.S. foreclosures, financial industry professionals say.

Citing Mortgage Bankers Association figures, The Washington Post reported Monday that the largest share of foreclosures during the first quarter of 2009 shifted from subprime loans to prime loans indicating larger numbers of unemployed Americans going to foreclosure. Bankers and economists are concerned growing unemployment will further complicate efforts to unwind the foreclosure crisis, the newspaper said.

Citing a report on Moody’s Economy.com, the newspaper said an estimated 1.8 million homeowners will lose their homes in 2009 up from 1.4 million in 2008. At the same time, the federal government has encountered more difficulty helping people keep their homes after job loss than in the case of mortgage payments shooting up due to higher interest rates.

Mark Calabria, director of financial regulation studies at the Cato Institute, a libertarian think tank based in Washington, told the newspaper (foreclosures caused by) unemployment are a “much harder nut to crack.”

“It’s much easier to bash lenders than to create jobs,” he said.

As I said earlier a word of caution is in order because, by definition, the unexpected occurs when you least expect it. That statement is kind of like “deja vu all over again”. If the markets go as they should, then we will see a significant run through the $1,000 level in gold in the 4th quarter. This article points in that direction.

Indicators suggest gold poised for big breakout by end Q3

In an assessment of the current gold market, Donald W. Doyle, chairman of top coin dealers Blanchard & Co. sees very positive signs for the gold price in the short term.

Author: Blanchard & Co.
Posted: Tuesday , 04 Aug 2009

The slow trading months of summer are usually a time when gold prices decline, but economic analysts at Blanchard and Company, America’s largest precious metals investment firm, say that indicators this year have them believing the metal is poised for a big breakout by the end of the third quarter.

Specifically, inflation, possible hyper-inflation, dollar weakness, and supply/demand and investor demand fundamentals are all positive for the price of gold toward the end of the summer, says Donald W. Doyle, Chairman and CEO of Blanchard and Company.

While gold remains range bound, it does so at levels above $900 per ounce, which Doyle says he sees as a springboard to greater price gains, and even new record highs, through the remainder of the year – and beyond.

“Gold is performing strongly at the same time the stock market is making a mild rally and as the dollar continues to stay at a level that we consider to be inordinately high,” Doyle says. “Typically, gold would be declining – but that’s not happening, and there are solid reasons why.”

Doyle says demand is central to gold’s current sustained high price levels, with Chinese and Russian central banks adding to their holdings and investor demand continuing at record levels.

“The fundamentals for gold, and particularly investment demand, are very strong,” Doyle says. “Sales of gold by the U.S. Mint, which have always been a good proxy for U.S. investment demand, are approaching those of all of 2008 – a banner year for gold – and it’s only the beginning of August.”

Through July of 2009, the U.S. Mint has sold 756,500 ounces of gold as compared to 247,500 ounces through July 2008 – an increase of more than 300 percent for the same time period. The Mint sold 860,500 ounces of gold during all of 2008.

The other catalyst for gold’s future price rise, Doyle says, is the likelihood of inflation and dollar weakness, both of which are very real considering the record amounts of liquidity and stimulus that are making their way into the global economy.

“For some time now, we have been in the middle of a disinflationary recession, hardly a propitious time for gold to boom,” Doyle says. “However, despite the short-term outlook for inflation, the longer-term picture looks to be just the opposite, particularly in the wake of record government deficits and extraordinary easing in monetary policy.”

Doyle also says the case for gold now is being made by people who, in the past, recommended only stocks. In Merrill Lynch’s “Metals Strategist,” Merrill predicts that the unintended consequence of the bailouts will be a return of inflationary pressures to the commodity markets. If the Fed fails to keep foreign capital interested in financing its twin deficits, the U.S. dollar could spiral downward, providing strong support to commodity prices. The weaker dollar will then help gold break through to new record price levels of $1200-$1500 per ounce.

“Morgan Stanley’s analysts are divided on which threat is worse for the global economy, deflation or inflation, but say that gold is a safe bet in either outcome,” Doyle noted. “Morgan Stanley looked at the possibility of hyperinflation hitting the U.S., and their conclusion is an interesting one.”

“With policymakers around the world throwing massive conventional and unconventional monetary and fiscal stimuli at their economies, we think that it is worth exploring the black swan event of very high inflation or even hyperinflation. While such an outcome is clearly not our main case, the risk of hyperinflation cannot be dismissed very easily any longer, in our view.” -Morgan Stanley research note, via Financial Times

Doyle added that gold is renowned as a hedge against inflation – as inflation goes up, the price of gold goes up along with it. The five highest years of inflation in the U.S. from the end of World War II were 1946, 1974, 1975, 1979, and 1980. During those five years, the average real return on stocks, as measured by the Dow, was minus 12.33 percent, while the average real return on gold was 130.4 percent.

One thing is perfectly clear, with gold in flux and the China syndrome gathering steam, the future is very bright for gold, silver and precious metals stocks.

Till next time, good luck and good trading!