Inflation, Deflation, Barrick and China

September 19, 2009 Inflation, Politics, Predictions No Comments

What do inflation, deflation, Barrick and China have in common. All but one of them have big things in their future. Rather than beat around the bush, I’ll tell you right now that deflation will not have the same impact as inflation, Barrick and China in the future!

INFLATION or DEFLATION?

To understand the inflation deflation debate we need only look back on the dot. com bubble. The dot.com bubble was a speculative bubble covering roughly from 1998 to 2001. It peaked with a Nasdaq high of 5132.53 on March 10, 2000. The Internet sector and related fields were not considered too big to fail and consequently they were allowed to fail under the normal bankruptcy laws.

Companies that were not profitable were liquidated through the bankruptcy courts and the strong survived and absorbed the best assets of the failed companies. As a result excess capacity was removed from the system. The result was virtually no inflation. The overcapacity had been removed from the system and the companies that survived were leaner and meaner and best of all world’s, they were profitable.

Now compare that with what we have just witnessed during the financial crisis. Almost the exact opposite occurred. The government stepped in and declared certain companies “too big to fail” and propped them up with money printed out of thin air. The excess remains in the system, and institutions with failed business models continue squandering capital with their new partner, the U.S. Government. Nothing has been fixed while the problem has been pushed down the road for the next generation to deal with. The only winners in this charade are the “progressives” also known as the Socialists and Marxists, who have taken advantage of the situation to grow government and their control over it.

Make no mistake about it, there is massive inflation bearing down on the U.S. economy as soon as the financial institutions start lending all the rescue money that they have temporarily parked in U.S. debt. The rates paid on government debt will not satisfy the banks for long and then watch out!

091809 Close Inflation, Deflation, Barrick and China

U.S. Dollar Holding On To .76

While the dollar struggles to maintain .76, it’s options are not too good if it fails. When .76 fails, .72 will roll up quickly. In Friday’s trading, the dollar closed at 76.425 up 0.206 (+0.27%).

Misc Gold Bars Inflation, Deflation, Barrick and China

Gold is Performing as Money!

Gold has appreciated at double-digit rates this decade against all of the world’s currencies. That is because gold is doing what money is supposed to do: preserving purchasing power. Gold is real money that reflects the loss of purchasing power in the national currency by which gold is measured. Gold’s current price of $1,006.50 is telling us that the devaluation of the U.S. dollar has begun in earnest. The $1,000 dollar per ounce mark is now the floor for the gold price and no longer the ceiling.

THE GOOD NEWS AND THE BAD NEWS FOR BARRICK

The Good News!

The world’s largest gold producer, Barrick Gold (NYSE: ABX), announced on Sept. 8, that it intends to pay off its entire book of fixed-price gold hedges and a portion of its floating hedges to gain greater exposure to the market price of gold. This decision comes, coincidentally, just as gold convincingly breaks the $1,000 level. One would think that Barrick must think gold is going higher if they make this decision now instead of waiting for gold to correct back down. Remember, this is the world’s largest gold producer, they must have some pretty good knowledge on which to base this decision. Just a thought from an average gold investor, but it is worth pondering.

Barrick’s fixed price contracts alone (3 million ounces) are equivalent to reducing total annual gold production for the world’s gold producers by about 4 percent. When you add the floating price hedges (6.5 million ounces or 7% of total production) the total comes to 11% of annual world gold production. This is gold taken out of the market place and is very bullish for gold when you consider China’s recent statements regarding gold.

The Bad News!

The big question for Barrick is, where will they purchase the gold to retire their hedges by delivering the metal? It looks like the open market is where they are going to go to get the gold. If they are looking at IMF gold bullion, they will have to compete with China. Any way you look at it, their de-hedging will put upward pressure on the price of gold. Their operations have suffered from the capital that has been used for balance sheet repair, instead of mine acquisitions and development and their share price and shareholders have suffered accordingly. What might come next may be the least attractive result of their ill timed hedging program for the company, but it may be the best thing for the shareholders.

In attempting to raise the funds to retire their hedge book, Barrick is seriously diluting its shares and leaving themselves open to a hostile acquisition after a bear short raid on its impaired stock, which raiders can scoop up at reduced prices. I am staying away from Barrick until this whole mess sorts out, or until the stock’s price is really driven down.

China Sees The Future An It Is Now!

CHINA

China encourages its citizens to buy gold and silver

Sept. 5, 2009

By: Dennis Mangan

The Chinese government has recently started to promote the ownership of gold and silver to its citizens, including through TV ads. While this development has implications for investors, more interesting is what this says about differing attitudes toward money in China versus the U.S.

China can see the writing on the wall: the United States is currently in the process of massively debasing the dollar. Since the dollar is the world’s reserve currency, and since the Chinese currently hold more that $700 billion in U.S. Treasuries – with Japan holding another $700 billion – they would like to protect their hard-won wealth. If, when the dollar tanks, the Chinese bond holdings will be at risk, and gold and other precious metals will soar in value. The Chinese aren’t stupid; they’re tired of financing American deficits and can see that there’s no end in sight to them.

Compare what we’ve been doing in this once-great nation: printing money, encouraging citizens to borrow more (e.g., Cash for Clunkers, the $8,000 housing credit). Our dear leader wants to socialize health care at a cost of trillions of dollars. The Fed is taking worthless assets from the banks as collateral.

Instead of forcing the trillions in worthless debt out into the open, instead of liquidating it, the government wants even more debt, and is prepared to thoroughly debase the dollar to do so.

The Japanese recently elected a new party into power for the first time since 1955, and this party is making noises about selling their treasuries too. It looks as if the world is starting to see our government as cut from the same mold as Madoff, and are determined not to be had like Madoff’s clients were.

If the U.S. had a responsible government, it would be encouraging its citizens to be prudent, like the Chinese government is doing. Instead, it’s spend, spend, spend, have no thought for the morrow, and God will provide.

Which seems a pretty risky, not to mention dumb, strategy to me.

China is encouraging it’s citizens to immunize themselves against a possible dollar collapse by purchasing gold and silver bullion. You would think that the U.S. Government would issue the same warning to us, were it not for the fact that they are concerned about their survival rather than ours!

Financial Sense reports the following.

“As recently as 2002, the private ownership of gold was prohibited in China. You could be jailed if caught with any in your possession. Beginning in 2009, in a stunning about-face, the central government removed all restrictions. In fact, as Mineweb and other sources report now its actively pushing folks to buy some personal metal, with China’s Central Television, the main state-owned television company, running news programs cum infomercials, letting the public know just how easy it is to purchase gold and silver as an investment. It truly is as simple as can be, because every bank sells gold and silver bullion bars in four different sizes to individuals. (Try to find the same the next time you make the trek down to Wells Fargo.) Mining companies are reportedly encouraging employees to convert some of their wages to gold on payday. Gold is traded in some form 24 hours a day. And paper proxies for the metal are also soaring in popularity. There are persistent rumors that the export of silver has already been banned. Gold could be next. Thus China, which only yesterday was the lowest per-capita consumer of gold in the world, is bidding to become the biggest. Some analysts believe it will pass India â€“ the top dog since forever as early as 2010. Clearly, the government believes the country is strengthened if everyone who can holds some hard currency. All this suggests a mania in the making, and only in the formative stage. Imagine if hundreds of millions of new consumers climb on that particular bandwagon!”

China is doing everything in its power to preserve and expand their wealth, while the U.S. continues to squander its wealth on political ideologies that have been proven wrong time and time again. In another move that will put pressure on gold shorts, Hong Kong is taking delivery of all of its physical gold holdings from foreign depositories in London. This move alone will make it much harder for Western Governments to attempt to control the price of gold.

Dan Norcini has continually reminded readers of Jim Sinclair’s MineSet newsletter, that taking position of your physical gold restricts the shorts ability to manipulate gold prices.

“Nothing will unnerve the paper gold shorts more quickly and do more to undercut their confidence than to strip them of the real metal and force them to come up with more hard gold bullion to make good on deliveries. “Stand and Deliver or Go Home” should be the rallying cry of the gold longs to the paper gold shorts.” –Trader Dan Norcini

How true that statement is. Now, with China acting on that very principle, gold’s base will be above $1,000 per ounce. As every week unfolds, the outlook for gold is looking brighter and brighter.

It is clear that inflation, deflation, Barrick and China are all connected as this generational bull market in gold moves forward. Three are about to see major changes as one fades into the background.

Till next time, good luck and good trading!