Going Back to a Gold Standard?

Three reasons you need your own private Gold Standard, rather than waiting on "sound money" from government...

SO DID GOLD's first foray over $1,400 mean we're going back to a Gold Standard?

Nope. Not in the West, nor anytime soon anywhere, and for three simple reasons.

First, Gold Prices aren't high enough. Second, modern governments don't hold enough of the stuff – not for their tastes, at least. And third, the pace of physical monetization, out of jewelry and mined ore into coin and large-bar form, just isn't great enough. Yet.

Gold Pricing & Value
Backing the world's broad-money supply with gold – even at the 40% cover-ratio set by the United States in the interwar years – would require a price nearer to $4000 per ounce than $1400. That's with all the gold ever mined in history locked inside central-bank vaults, by the way. Full cover for a reserves-backed "bullion standard" would need prices above $10,000 per ounce.

Nor against financial assets is gold priced highly enough to warrant becoming the world's sole monetary arbiter. Now valued at $7.6 trillion, the near-170,000 tonnes of gold ever mined in history is worth only 3.9% of total investable wealth. That figure compares with well over 20% before 1930 – a valuation which at current mining-production rates (and with constant asset prices) would require a gold price of $6650 per ounce by 2015, or $6230 by 2020 on BullionVault's maths.

So, although recovering from what was, a decade ago, the weakest role it ever played in the world's financial system, gold remains dwarfed by other, more widely-held and heavily-weighted assets – most obviously the US Dollar and Treasury bonds.

Official-Sector Gold Holdings
As a proportion of the above-ground total (a cube now measuring some 20.65 meters along each edge), world governments haven't held this little gold since 1911.

Yes, that period marked high tide for the classical gold-coin standard. But with the ebb came the Federal Reserve, the welfare state, and "mixed-economy" planning – historical facts which have scarcely retreated, even as the nationalized gold stocks they first confiscated fell back.

Demolishing these pillars of "soft money" in the next five or 10 years, let alone unwinding the centralized urge to control price-levels, GDP growth and the free transfer of capital, looks less likely than even another quadrupling of gold prices.

Nor do the largest gold holders – those states nearest to a practical level of cover – show any enthusiasm for mobilizing their gold hoards as part, never mind the base of their monetary systems. The No.1 official holder, the United States, last flirted with talk of a return to gold in the early '80s. But back then, gold's private-investment weighting was six times greater than today, and double-digit interest rates gave cash savers positive real returns on their money (post-inflation) for the first time in a decade.

Such a "hard money" backdrop remains a long way off today, despite the fact that the US could actually back its currency in circulation with a 40% cover-ratio at current prices ($1390 per ounce, in fact). Money is much more than just notes and coins today, of course, and to cover M2 – meaning primarily household cash savings, held on deposit and in money-market accounts – the Treasury's 8,133 tonnes of gold would need to be valued almost 10 times higher per ounce ($13,230). Absent that kind of price, and given the deflation-fearing consensus amongst central bankers and the academics they listen to, it ain't going to happen. We need devalued currency, not sound money, believe the people who could decide such a change.

Physical Monetization of Gold
This dim outlook for a dictated return to some level of "Gold Standard" in the rich West, however, won't prevent private savers, nor emerging-economy states, from continuing to build their own gold reserves.

Demand for "monetary" gold (i.e. coin and bar) worldwide is now running at twice the pace of five years ago, eating perhaps 49% of 2010's total global-market supplies in the form of low-margin units for trading and storage, rather than as jewelry, bonding wire, dental fillings, or flakes floating in schnapps. But is that pace enough? A little under a century ago, Joseph Kitchen (he of the wonderfully-named 'Kitchen Cycle' in commodity prices) studied bullion flows and found that – in a world where gold had been money, formally, for over 200 years – monetization of newly-mined gold was running well above 45%. Jewelry recycling no doubt topped that level, while existing monetary units surely retained their form.

Furthermore, at present, a little over a third of the world's above-ground gold is currently held in coins or bars (as measured by best estimates for investment plus central-bank stocks). But even at current rates of investment fabrication, it would take 15 years to raise that physically monetized level to 44%, the average proportion held by central banks between 1945 and 1971, the first (if not last) period when interventionist, welfare states in the West yoked their money supplies to gold.

So must gold play no role in money? Indexing a notional, government-only Bancor currency or Special Drawing Right against a basket of, say, Dollars, Euros, Yuan and gold might seem wise, but it appeals to the same thinking which gave us the United States' exorbitant privilege of Dollar issuance, plus that explosion of state intervention in all economic activity which we're still very much living with today. Whereas, in time, the sheer weight of privately-held gold reserves may in fact tip us back towards the origins of the classical Gold Standard. Because that historical "accident" (as gold-market historian Timothy Green calls it in his Ages of Gold) developed out of freely-decided convention – not central-bank diktat or academic theorists sitting in Princeton, Berkeley or on Southwark Bridge – with private actors trading goods and settling debts with transfers of bullion.

Even in 1900, private holdings of Gold Coins still exceeded central-bank hoards worldwide, only losing ground as Europe's second thirty-year war drew near and nation states began hoarding for war, vaulting for victory. It wasn't until Great Britain re-introduced gold convertibility in 1925 that the Bank of England issued paper notes to represent its gold holdings – rather than enabling free circulation of metal in coin – thereby shifting the world from a gold-coin to a bullion standard.

So never say never. Because the largest hoarders of gold by far today are the newly-enriched consumers of emerging Asia's two largest economies. India's world-beating appetite is beginning to devour low-margin investment coins and bars once more (some 30% of the subcontinent's gold purchases, according to Sunil Kashyap at Scotia Mocatta). Chinese households have bought more gold in the last two-and-half years than the People's Bank holds in total – and here too, cost-efficient coins and bars are gaining fast on non-investment forms.

Actively encouraged by Beijing, China's rapid private accumulation of both gold and silver should remind economic historians that only structurally sound, growing economies have ever employed precious metals successfully as their monetary standard. We'll have to wait and see whether China quite fits that bill. But gold has never been a panacea for weak, over-indebted states, as the disaster of Britain's return to gold in 1925 proved.

Put another way...

"Our gold standard is not the cause but the consequence of our commercial prosperity..."

as prime minister Benjamin Disraeli noted in a speech to Glasgow industrialists fifty years earlier.

Still, Western investors fearing what Asia's rise could do to their own standard of living might also consider getting the jump on China's rapid accumulation of privately-held gold. For as long as gold is used to store value, rather than directly for buying and selling, then seeking out the most efficient, most secure route to owning it, and converting your gold into widely-accepted currency as you need, looks the next best thing to enjoying gold-backed currency – your own private Gold Standard in a world of central bankers hell-bent on devaluing your savings.

Food Crisis '08 Returns

In truth, the global squeeze on agricultural supplies never went away...

EACH AND EVERY month, J.P.Morgan Chase dispatches a researcher to several supermarkets in Virginia, writes Addison Wiggin in The Daily Reckoning.

The task? To compare the prices of 31 items.

In July, the firm's personal shopper came back with a stunning report: Wal-Mart had raised its prices 5.8% during the previous month. More significantly, its prices were approaching the levels of competing stores run by Kroger and Safeway.

The "low-price leader" still holds its title, but by a noticeably slimmer margin. And within this tale lie several lessons you can put to work to make money.

It's best to get started soon...because if you think your grocery bill is already high, you ain't seen nothing yet. In fact, we could be just one supply shock away from a full-blown food crisis that would make the price spikes of 2008 look like a happy memory.

Fact is; the food crisis of 2008 never really went away. True, food riots didn't break out in poor countries during 2009. Warehouse stores like Costco didn't ration 20-pound bags of rice...but supply remained tight. Prices for basic foodstuffs like corn and wheat remain below their 2008 highs today. But they're a lot higher than they were before "the food crisis of 2008" took hold.

Here's what's happened to some key farm commodities so far in 2010...

• Corn: Up 63%
• Wheat: Up 84%
• Soybeans: Up 24%
• Sugar: Up 55%.

What was a slow and steady increase much of the year has gone into overdrive since late summer. Blame it on two factors...

• Aug. 5: A failed wheat harvest prompted Russia to ban grain exports through the end of the year. Later in August, the ban was extended through the end of 2011. Drought has wrecked the harvest in Russia, Ukraine and Kazakhstan – home to a quarter of world production.
• Oct. 8: For a second month running, the Agriculture Department cut its forecast for US corn production. The USDA predicts a 3.4% decline from last year. Damage done by Midwestern floods in June was made worse by hot, dry weather in August.

America's been blessed with year after year of "record harvests," depending on how you measure it. So when crisis hits elsewhere in the world, the burden of keeping the world fed falls on America's shoulders.

According to Soren Schroder, CEO of the food conglomerate Bunge North America, US grain production has filled critical gaps in world supply three times in the last five years, including this summer...

• In 2010, when drought hit Russian wheat
• In 2009, when drought hit Argentine soybeans
• In 2007-08, when drought hit Australian wheat.

So what happens when those "record harvests" no longer materialize?

In September, the US Department of Agriculture estimated that global grain "carryover stocks" – the amount in the world's silos and stockpiles when the next harvest begins – totaled 432 million tons.

That translates to 70 days of consumption. A month earlier, it was 71 days. The month before that, 72. At this rate, come next spring, we'll be down to just 64 days – the figure reached in 2007 that touched off the food crisis of 2008.

But what happens if the US scenario is worse than a "non-record" harvest? What if there's a Russia-scale crop failure here at home?

"When we have the first serious crop failure, which will happen," says farm commodity expert Don Coxe, "we will then have a full-blown food crisis" – one far worse than 2008.

Coxe has studied the sector for more than 35 years as a strategist for BMO Financial Group. He says it didn't have to come to this.

"We've got a situation where there has been no incentive to allocate significant new capital to agriculture or to develop new technologies to dramatically expand crop output.

"We've got complacency," he sums up. "So for those reasons, I believe the next food crisis – when it comes – will be a bigger shock than $150 oil."

A recent report from HSBC isn't quite so alarming...unless you read between the lines. "World agricultural markets," it says, "have become so finely balanced between supply and demand that local disruptions can have a major impact on the global prices of the affected commodities and then reverberate throughout the entire food chain."

That was the story in 2008. It's becoming the story again now. It may go away in a few weeks or a few months. But it won't go away for good. It'll keep coming back...for decades.

There's nothing you or I can do to change it. So we might as well "hedge" our rising food costs by investing in the very commodities whose prices are rising now...and will keep rising for years to come.

"While investor eyes are focused on the Gold Price as it touches new highs," reads a report from Japan's Nomura Securities, "the acceleration in global food price is unrestrained. We continue to believe that soft commodities will outperform base and precious metals in the future."

So how do you do it? As recently as 2006, the only way Main Street investors could play the trend was to buy commodity futures. It was complicated. It involved swimming in the same pool with the trading desks of the big commercial banks. And it usually involved buying on margin – that is, borrowing money from the brokerage. If the market went against you, you'd lose even more than your initial investment.

Nowadays, an exchange-traded fund can do the heavy lifting for you, no margin required. There are at least a half-dozen ETFs that aim to profit when grain prices rise. Deutsche Bank's offering, for instance, DBA, is also easy to understand. It's based on the performance of the Deutsche Bank Agriculture Index, which is composed of the following:

• Corn 12.5%
• Soybeans 12.5%
• Wheat 12.5%
• Cocoa 11.1%
• Coffee 11.1%
• Cotton 2.8%
• Live Cattle 12.5%
• Feeder Cattle 4.2%
• Lean Hogs 8.3%

So you have a mix here of 50% America's staple crops of corn, beans, wheat and sugar...25% beef and pork...and 25% cocoa, coffee and cotton. It might not be a balanced diet (especially the cotton), but it could make for a good balance of assets if you're making your first foray into "ag" investing.

The meat weighting in here looks especially interesting compared to some of DBA's competitors, which are more geared to the grains. It takes about six months for higher grain prices to translate to higher cattle and hog prices.

You might be glad you captured that upside when you sit down to a good steak dinner a few months down the line. After all, it's going to cost you more.

Gold Prices Post-G20

With the G20 vowing not to devalue world currencies, has the Gold Price outlook changed...?

EVEN THE MEDIA now treats G20 meetings of world leaders as non-events, writes Julian Phillips at GoldForecaster.

At best, press reports highlight the emptiness of the G20's concluding resolutions. Nor should investors continue to look to them for real change or commitment. But this weekend's meeting produced more than expected in the statement that was made on Saturday – that the attending nations had agreed to avoid "competitive devaluations" in currencies.

The only nation admitting to such practices is Japan. China was not party to such statements, as it has a Yuan level that it considers right at the moment (after putting national interests ahead of international ones). The meeting didn't let the US get away with it either, and pointed out that quantitative easing is an indirect means of devaluing an exchange rate. And so it is.

With US citizens in difficult financial straits buying the cheaper adequate imported goods, much of the new money to be printed will flow out of the Dollar to other parts of the world, not least to earn more interest than charged sitting in emerging nation's government bonds. So here we are at the same place as last week, but with a few more good intentions. What has come out since that meeting is that the US and China are appearing confrontational.

The gold market expressed its disdain of the intentions issued by the G20 by moving back up to $1345 at Monday morning's London Gold Fix. We'd previously seen $1380 per ounce, and the drop off last week was sudden. Gold then resumed that drop, however, as the G20 communique was digested by traders.

So what next? To remove currency crises from our future the global currency markets need global cooperation sufficient to overrule national interests. That's not happening and won't happen in our opinion, so we expect more falls in the US Dollar once QEII kicks in. We look around the world for reasons to change the fundamental picture for gold and can't find any. We do see some saying it is time to sell gold. We know of one fund that has shorted gold. So our search for reasons to sell is sincere.

With that in mind, these are some of the questions we are asking:

• Has uncertainty and instability changed leaving us confident and certain of a stable future?
• Have the nations agreed a sound, effective, currency system that caters for local national problems on the Balance of Payments front?
• Have they agreed systems that effectively enforce this system, so that it is in national interests to subject themselves to that system?
• Has the global economy in all its major parts returned to real growth where economic imbalances are removed?
• Are we certain that the Sovereign Debt crises are over?
• Do we expect the shift in world wealth and power to Asia to be smooth and trouble free?
• Have the votes at the IMF been changed to fully accommodate India and China's proportion of economic power or will the US remain in charge irrespective of such changes??
• Have central banks turned away from gold confident and fully reliant on global currencies...?

If your answers are 'yes' to these then it is time to sell your gold.

One of the dangers in today's world is that emotion can replace reason very easily. Our own troubles can engender such hopes that we lose balance and decide based on our emotions, to our cost. That's why we prefer to use the process called extrapolation. This is where your take the values, trends and activities of today and project them forward to paint the investment scene of tomorrow. What are these?

The G20 meeting was useful, in that it showed how any real desire between governments to agree with each other just isn't there.  The US is understandably clinging to its leverage over world affairs, wanting to change other nations rather than its own behavior, being unable to change its own economic and currency situation. There are efforts there, but these have proved inadequate to date. The Fed has expressed its fear that more QE is needed to bring about not just a real recovery, but to prevent a slide into deflation that will make it nigh on impossible to get out of once it gains momentum.

On the political front the US is approaching an emasculation of power so that it won't be able to take sufficiently strong action to pull itself out of its hole. And if the mid-term elections do result in this it will be so for two more years. It's these next two years in which the developed world needs to take strong action to stay sound, as Asia rises in economic power and importance. As it stands now the developed world can't take such actions. It's not just about the Dollar and the currency world becoming stable again, it's about huge readjustments being made as wealth and power move east. The currency system is facing major strains and changes of interests and exchange rates during this time. Without cooperative action by the world's governments only friction will ensue. And that is what lies ahead if we extend today to tomorrow.

As to a sound global currency system ahead we find it difficult to see that in today's events. The Yuan and perhaps the Rupee have to gain greater positions in the world money system. It is clear that China should be able to raise its leverage inside the IMF to at least the same level of voting power as Europe. The US should relinquish its deciding vote and be capable of being overruled. Is that likely? Unless the IMF sees such changes, there will be no effective body that can arbitrate the structural changes that have begun already in the world economy and world monetary system. And that is what lies ahead if we extend today to tomorrow.

Have the nations of the world accepted that the changes that lie ahead of us all are so large that international interests must take first place in such a way that overall all national interests can be protected and no individual nation establish precedence? Unfortunately not! The world's political systems are designed to cater for national interests irrespective of the impact on international ones. It is the nature of democracy and the nature of holding onto power even where no democracy exists. That won't change. So we see a picture of nations bumping into each other's interests rather like musical chairs, where some nations just can't find a chair.

As to growth, with China and other poorer nations able to supply goods at far cheaper levels than the developed world, either wages must drop to Asia's levels or the developed world must put up blocks to their entrance into their world. Unless they do, developed world currencies will sag even as Asia's want to rise. China is gaining so much from holding the Yuan down and building surpluses that it won't change until it is ready to promote the Yuan to a global reserve currency that it controls and price its goods in the Yuan only. That process is well along now and could be tomorrow's reality in 2011. Currency crises will proliferate then, with the Dollar and the Euro in the spotlight. And that is what lies ahead if we extend today to tomorrow.

Have the austerity measures been sufficient to resolve Sovereign Debt crises? Giving the Eurozone nations the benefit of the doubt we accept that they may succeed (despite the belief in some quarters that Greece will default in three years time and the UK looks like tipping back into recession). It may be at the cost of more double-dip recessions in other countries or worse, but that's not the point. The point is that the US is just about at the top of the list of nations that are over-borrowed. What austerity measure have they undertaken or will undertake? We have to wait and see if such measure will be successful where applied. What of nations that are over-borrowed and are doing nothing about it. We need strong actions alongside strong growth world-wide before we can gain confidence that such crises will go away. We can't see it. And that is what lies ahead if we extend today to tomorrow.

Have central banks reaffirmed their confidence in the currency system we now have and continued to sell gold reserves, completely reliant of currencies? What we have seen are central banks turning from selling 500 tonnes a year to buying 500 tonnes per year or moe, as they realize that Gold Bullion is badly needed when currencies fail. And more of that is what lies ahead if we extend today to tomorrow.

Clearly then we see no reason to believe that gold has peaked. It's not about a technical picture dictating supports and resistances; it's about a globally changing and broadening market that is altering the parameters of the technical picture. With investors like central banks acquiring gold at any price, how can the technical picture dominate?

Silver "Manipulation" NOT Driving Prices

Short-term...temporarily even...an effort to suppress prices could succeed. But forever?

ISN'T THAT interesting? asks Gene Arensberg in his GotGoldReport.

Silver Prices have challenged new 30-year nominal highs, yet the largest commercial traders in silver futures are apparently not willing to take on much higher net short positioning.

Why aren't the largest futures hedgers and short sellers willing to really pile on the short side of silver futures? What signals do they see...and what is keeping them from selling the heck out of this $5.00-plus rally since the August consolidation breakout?

Perhaps not coincidentally, this week saw Bart Chilton of the Commodity Futures Trading Commission (CFTC) issue a statement regarding the silver market. Commissioner Chilton said:

"I believe that there have been repeated attempts to influence prices in the silver markets. There have been fraudulent efforts to persuade and deviously control that price. Based on what I have been told by members of the public, and reviewed in publicly available documents, I believe violations to the Commodity Exchange Act (CEA) have taken place in silver markets and that any such violation of the law in this regard should be prosecuted."

The CFTC regulator's full statement is available here. And has Commissioner Chilton opened a window for us? Could it be that silver is not being hammered in the futures markets on the short side because traders that have used their ability to game the system in the past are now under a CFTC microscope?

In which case, the futures game may have changed. But...

1. Is this a case of a regulator stepping in to alter the trading habits of futures market makers operating on the short side of the market, thus causing their opponents to take advantage of that possibly temporary influence to press their own long positioning?
2. Is this merely a case of a US regulator taking advantage of a historic rise in the silver market to grandstand – posturing to take credit for "action" that is responsible for the now apparent absence of concerted heavy short selling of silver futures by an elite few traders which have historically had access to unfair size exemptions as "bona fide hedgers"?
3. Or is silver rising purely on the basis on stepped up demand from outside investors meeting static and quite limited supply in a smallish, highly volatile market dominated by a small number of firms in the physical markets in London?

In truth we do not know with certainty which (if any) of the scenarios above are in play, but we do know that silver has not been trading anything like it "normally" does since at least the end of September.

Just below is our own chart, which we shared with subscribers in our COT Flash Report on Sunday, October 24. It shows the relative net short positioning for silver for the traders the CFTC classes as "commercial" in the legacy commitments of traders (COT) reports.

Notice that the relative net short positioning (the commercial net short positioning compared to the total open interest) actually fell as silver has been rising sharply in price.

In the three reporting weeks since September 28, the traders the CFTC classes as commercial collectively reduced their net short positioning from 65,413 to some 58,150 contracts net short silver.

In other words, the industry-side of the market went from being net short 327 million ounces to net short of 290.8 million ounces – a reduction in net short positioning of 11%.

Why is that not "normal" comparatively speaking? Because it occurred as the price of silver advanced from $21.74 to as high as $24.90, then settled Tuesday, October 19 at $23.36. So all told, over the past seven trading weeks, the relative net short positioning of the largest commercial hedgers and short sellers has actually declined from 45.4% of all contracts open to 38.5%.

The unusual part is that the commercial hedgers and short sellers reduced their net short positioning on a material increase in the price of silver. In the past that would be considered strongly unusual. Hedgers in retreat? Hedgers NOT selling into a 30-year price high? A historic change is underway in the futures markets, friends. We are witness to it right now.

But the idea that silver is now rising merely because of increased scrutiny by regulators on the short sellers is neither comforting, nor appealing, but we sincerely doubt that is solely the reason that silver has found a bid of late.

We are of the firm opinion that silver is not rising merely because of regulator's newly found desire to promote "fair" futures markets. Indeed we believe that if there is any influence from the CFTC investigation into the silver futures markets, or increased scrutiny, or whatever, that influence is at best minimal, and more likely coincident to what is happening in the much larger and much less regulated physical markets.

To be sure, we here at GotGoldReport lament the unfair advantage in the futures markets enjoyed by traders to whom the CFTC grants "bona fide hedger" status. This allows a few elite traders access to larger positioning than their long-side opponents. Nor does it take ownership of a tin-foil hat to have noticed multiple bone-crunching sell raids by those "usual suspects" in the past. All long-time traders are certainly aware of them. All long-timers have learned to survive them using one or another money management method (stops, options, nimble trading, etc.).

However, as we have said so many times in the past, one can manipulate the price of something temporarily for short periods of time – if given enough firepower, and given the "right" execution of the trading, But nothing and no one can manipulate the global market price of something – not bullion banks, nor even central banks can argue with the supply/demand/liquidity equilibrium of a global market for any length of time and certainly not indefinitely.

Our view: We believe there is a tectonic shift underway for silver. A shift of historic and generational proportions that is only just now starting to surface in a material way. We believe that global public demand for precious silver is once again returning the metal to its historic role as money – alongside its rarer cousin gold. We believe that the recent absence of concerted short selling is more likely a logical market reaction by hedgers and short sellers to the reality of much higher demand and the realization that existing and available supplies may not be sufficient to satisfy that burgeoning demand at current pricing.

If our view is correct, then it really doesn't matter if the CFTC or any other regulator is looking harder at the positioning of futures traders. If our view is correct, then the market price of silver will find its own supply/demand/liquidity equilibrium, whether or not hedgers and short sellers sell a few hundred million more ounces of the stuff in paper contracts in New York.

Would it be better if the futures markets were played on a more level playing field? One where both sides of the battlefield had the exact same rules and size limits? Where one side of the action didn't have access to many times the number of contracts – access to more "ammunition" than the other side does? Sure, certainly it would. No question about it. It might cut down on the short-term blood lettings from time to time. Maybe. But, will that make any difference in the long-term Silver Price...?

No, not really. Futures contracts answer to real demand by the population for silver, not the opposite.

We believe the story has been considerably different for gold, which is held by governments as a reserve-asset and thus has been subject to an unseen hand of "currency management" from time to time in the past, but that is another story for another time. Governments no longer hold silver – and they have all but stopped dishoarding the silver they did have. Governments have stopped supplying the silver that artificially kept the price unreasonably low for decades – and the markets are discovering that now.

New Reasons to Buy Silver

Thinking of Buying Silver today? Find three more reasons here...

WE ONCE had an ongoing series in Big Gold called "1001 Reasons to Own Gold", says Jeff Clark, senior editor of Doug Casey's Big Gold newsletter.

The idea was that there were so many valid reasons to own the metal, I wanted to track and report on them all. And if you're now invested in the precious metals arena, you will also know there have been a myriad of bullish indicators for silver this year as well.

Here's a couple new reasons to own silver that a lot of mainstream investors probably aren't aware of...

Due to increased demand from industry and investors, silver exports from China are expected to drop about 40% this year. And that's actually an improvement; customs data show exports plunged almost 60% through the first eight months. China exported about 3,500 metric tonnes of silver in 2009, but has exported only 970 tonnes through August of this year.

What a lot of Westerners don't know is that China ended export "rebates" two years ago to stem the shipment of natural resources leaving the country. As a result of the regulation, silver exports decreased in 2009 but are nothing like what they're experiencing this year. In other words, the large drop in exports is a direct result of a huge increase in demand within China itself.

According to one Chinese banker, the spike in silver demand is coming from all areas – jewelry, investment, and industrial. In his words, it's led to a "physical market shortage in the Far East."

How important is this? China is the world's third largest producer of silver (after Peru and Mexico), so the amount of silver coming to the global marketplace this year will drop by more than 74 million ounces. This represents roughly 8.3% of total annual global supply from 2009. If worldwide demand continues at its current pace, where is the extra metal going to come from? This alone tells us the price of silver will move higher.

The next item I sleuthed out was that the US Mint is expected to release a new five-ounce Silver Bullion coin this year, the first ever. The coin will be three inches in diameter and have a composition of .999 fine silver.

I've read the five-ounce bullion coins will be near-exact replicas of the America the Beautiful quarters. There will reportedly be five different designs, and the mint plans to produce 100,000 of each. I can't wait to see them.

The coins will be classified as bullion, meaning they should be available to the same dealers already authorized by the mint. This will likely create excitement in the silver market, especially when you consider its affordability. At $23 silver, the five-ounce Silver Bullion coin will cost $115, plus premium. One ounce of gold runs $1340 as I write, while five ounces will cost you $6,700 plus commission.

Perhaps most bullish is the fact that silver is vastly underpriced when compared to gold. Look at it this way: gold is currently priced 57% above its 1980 nominal high of $850; silver would have to more than double to reach its 1980 nominal high of $48.70. And that's excluding any inflation-adjusted calculation. Yes, silver's spike was partly a direct result of hoarding by the Hunt Brothers, but my question to the skeptics is this: what's keeping us from seeing similar stockpiling today? What if there are several Hunt Brothers out there?

It's true that central banks don't buy and store physical Silver Bars anymore, so one source of demand that's common for gold isn't present for silver. But let's keep things in perspective: demand for all forms of silver is rising, and we see no reason the trend won't continue. And with indicators like decreasing supply from China and increased attention from a new bullion coin, I say the big picture on the Silver Price is extremely bullish.

This silver sleuth says, Buy Silver on the next dip. There's lots of reasons, I believe, you won't regret it.

Gold Investing in a Low-Inflation Environment, Part I - 20th October 2010

Why this really isn't the early '80s recession replayed...
WHATEVER the problem is, a lack of money it ain't. Just so we're clear. Quite how more money might help, therefore, we can't say.

Still, that won't stop the world's No.1 central bank from creating yet more of the stuff. Not according to Ben Bernanke last week, nor to anyone listening or watching the Federal Reserve since America came round from his first stab at money-creation.

Instead of punching adrenaline through the chest wall again, Dr.Ben's more likely this time to put up a drip (so analysts think), flushing $100 billion or so into the system each month, and reviewing America's vital signs before changing the bag every quarter. Either way, the problem for retained wealth – meaning your savings and pension...if not (just yet) the money you hold from pay-day to month's end – is trying to second-guess what Dr.Ben's patented deflation cure will do when there's no money-deflation to cure.

Sure, the Fed can create money. But it can't create credit (from the Latin credere, "to trust, have faith"). And it sure as hell can't let America's outstanding debts – both private and public – simply get written off now, neither at home nor abroad. Not after all that crashing and banging in ER from 2007-09.

So never mind the record-large cash pile sitting at non-financial corporates. Never mind that their problem is too much debt, not the $1.8 trillion in cash they've already got. Never mind the 50-fold growth since 2007 to $1 trillion in US banks' cash holdings either. Again, debt is their problem – not a lack of money – but it doesn't matter. New money is the only fix Dr.Ben now has to hand (he's all out of interest-rate cuts). So those foreign reserves, US corporates and domestic banks already drowning in money will get flooded with more.

This, if it weren't for America's debts, would surely mean runaway inflation in prices. But there is all that debt, gnawing away on every spending decision. Hell, even US households have been re-building their cash savings...tucking away a total of $6.3 trillion by end-June, over a quarter more than they held in deposit and checking in 2005. But even after paying down debt at a record pace (2.2% annually during the April-June quarter), that still leaves a near-record volume of household debt outstanding ($13.5 trillion) with consumer leverage also squatting near historical highs – only just shy of the pre-crisis peak.

To date, the retrenchment in gearing-to-income also lags the pace of retrenchment during the early '80s, although it is approaching a similar proportion...

Still, a lot continues to separate today's retrenchment in household leverage from the retrenchment of 30 years ago...

• US households now carry twice as much debt – compared to income – as they did in the early '80s. Maybe that kind of gearing is perfectly manageable...but maybe the peak of 2006 and 2007 marked an impossibility instead. Either way, today's leverage remains much nearer the top than the pre-credit-boom levels of a decade ago;
• That bellwether of hope and growth, the stock market, sank to true fire-sale prices in the early '80s...whereas the S&P index now trades above 20 times earning, rather than the middling single digits;
• Interest rates, on the other hand, are now are record lows (as in zip – or ZIRP, depending on whether or not you're an economics professor)...whereas then, at the start of the '80s, they were at record highs;
• Domestic devaluation of the Dollar – a.k.a. inflation – stands just to the right of zero. Three decades ago, consumer-price inflation was coming off peace-time records.

That last point is the clincher, of course. Because where America's outstanding household debt has actually fallen this time around ($13.45 trillion from $13.84trn), it continued to grow at the start of the '80s ($1.576trn from $1.276trn), even as leverage fell between 1979 and 1982. Inflation in both prices and income did the heavy lifting back then. It's buckled, in contrast, since 2007.

Over the three years to end-1982, inflation ate nearly quarter of the debt which US households already owed at the start of that period. It would need to average more than 8% per year to achieve the same feat in three years today. But instead, the official Consumer Price Index rose by little more than 1.3% last month from Sept. '09.

Even if inflation had been stronger, US households would still have needed stronger wage growth to get any benefit. From 1979-1982, personal incomes rose by 34% in nominal dollars, resulting in a real pay rise of 5.6%. Added to the impact of inflation on the burden of outstanding debt, that enabled consumers to expand their nominal borrowings by nearly one third while still cutting their gearing-to-income from 62% to 57%. Today, in contrast, US personal incomes (handily annualized by the BEA's latest quarterly stats) have risen just 4.7% since 2007 – a mere 0.7% ahead of inflation (again, on the official CPI measure, and yes, still with three months of the year to run). So the current delevering has had to come almost entirely from paying down debt.

This, in short, is not the early '80s recession replayed (y'know, the one when gold, oil, stocks and bonds all sank together), much less the 1990-92 recession or 2001 slowdown. (Consumer leverage leapt as the Tech Stock Bubble collapsed; what kind of "recession" was that?) The slump of the last three years (and counting) benefits from neither inflation or wage growth. Debts must either be paid down from static incomes, or be written off by forgiving lenders. Devaluation isn't coming to help. Not yet at least.

But hey, that's why they invented the Fed, right?

Gold Price Update - 20th October 2010

New to tracking the Gold Price...? Catch-up quick here...
WHAT HAS BEEN happening to the Gold Price lately? asks Julian Phillips at GoldForecaster.

The Gold Price turned around this summer below its long-term uptrend line at $1160 an ounce, and rose in an almost straight line to $1360 before building some support at $1350. This was after almost 18 months of consolidation between $1050 and $1250.

The long period of consolidation was while the markets believed that there was a good chance that the recovery would gain traction and all would be well. Then the news darkened and fear and uncertainty in large doses returned alongside worrying actions on the US stimulation front and the world's foreign exchanges. But far more than that happened in the gold market. It was and is a combination of all these factors synthesizing that has driven the Gold Price to present levels.

With the consolidation in the Gold Price between $1050 and $1250 over such a long time came the belief in many quarters, including the jewelry sector and retail demand out of India that the Gold Price would retreat from record highs. Gradually, the high prices came to be accepted as prices failed to retreat. Jewelry demand has returned gradually. We expect it to remain as it is or improve at these high levels, unless there is a very large jump upwards in the Gold Price.

Accompanying the return of jewelry demand has been the waning of scrap sales as holders realized that prices were not going to fall but to rise. With newly mined gold now relatively price inelastic the only source of supplies of gold are from current holders of gold. This is a critical point to realize about the gold market. At current prices, demand must recede to match the drop in scrap sales for the Gold Price to fall or move sideways. Any rise in demand and the price has to rise sufficiently to incite new scrap sales.

With the various types of demand joining to place upward pressure on the Gold Price, some of it has to give way to others so that overall demand can be reduced to meet available supplies. The only way to do that is with higher prices.

Even now commentators on the gold market focus on whether the Gold Price will rise or fall. The reason is that developed world markets are focused on making money. Consequently, the technical picture of the Gold Price is critical to investors that aim to make profits from the market. But they are not the major force in the gold market any more.

From Turkey eastwards, the prime driving force behind gold ownership is that it represents true wealth and a source of financial security. Investors are concerned not with prices rising, but have a fear of prices falling. Buying is focused on not paying too much for gold, for fear it will drop just after they have bought. In India demand waited for the Gold Price to make the solid 'floor' it did between $1050 and $1250. Once convinced, buying began again.

Further east, for the first time in so many Asian people's lives, they now have a good amount of disposable income. As people who know the downside of life only too well they have a propensity to save, almost naturally. Up to 40% of the disposable income they have goes into bank deposits or into gold. As China grows, a larger and larger number of people enter the gold market for the first time. These buyers simply want to save in gold. Price is not such a consideration nor are profits. However, gold's performance is good so they become even more convinced that it is a good investment and buy more. The more they buy the more they push the Gold Price up. But even with such growing demand the Gold Price can be vulnerable to big corrections. What is there in the demand for gold that changes its nature?

What is new to the gold market and has tipped the scales to the future Gold Price has been the change in central bank selling to central bank holding or buying. A central bank by its nature only buys gold to hold for the long-term. They no longer have the concept of selling if the price goes too high. It is an important reserve asset and always will be.

Gold represents a reserve asset that comes into its own when life becomes difficult and the days extreme. When the "Washington Agreement" began in 1999 September 26, the belief that central banks were unrestrained sellers of gold stopped. A 'cap' was put on these sales. The 'cap' was sufficiently low as to allow the Gold Price to turn round from the $200 area and move up steadily over the years until 2009 when European gold sales virtually stopped. At the time the Gold Price had hit $1250.

Central banks buying began in earnest almost as a legacy of the financial crisis that had consumed the world since August 2007. Now, new crises have blossomed which led to confidence falling in the currency system itself, a fear compounded by the unfinished Sovereign Debt crises and quantitative easing. Solutions to these problems have not appeared and there is every reason to believe that we will see further decay in the global monetary system, as each nation looks exclusively after its own interests.

In the years before 2009 central bank selling supplied between 400 and 500 tonnes of gold to the market. This supply has now gone. Instead these banks, and there is a growing number of them (Korea is contemplating buying gold right now) want more gold. The only 'Official' seller of gold in the last 18 months has been the IMF that has a program to sell 403 tonnes. It only has around 75 tonnes left to sell. Once this has gone central banks have only two choices in buying gold. Either they buy local production (easily bought from locals by referring to the price in the 'open' market at the time of the purchase (that's if they have any local production of gold), or by going directly to the 'open' market to Buy Gold.

Central banks are determined to Buy Gold and will be persistent buyers until they reach their target tonnages. Russia needs to more than double its gold holdings to reach its target and emerging nation's central banks would like to have between five and ten times the gold they have at present in their reserves. That is a huge amount, particularly when you consider that the world's known underground reserves are somewhere around 22,000 tonnes only.

In the 'open' market their usual method of buying is to place a 'limit' order to Buy Gold at or below a certain price then wait for sellers to offer them gold at those prices. This way they don't know how much they will buy per month, but they don't chase prices. Thus they drain the gold market 'on the dips' and ensure that new buyers have to raise prices to source gold. In this way they underpin the Gold Price. Profit orientated buyers are the ones that push the prices up when they rise. Limit buyers then follow them up. The retail Asian tide can be seen in overnight prices moving prices gently up all the time.

So where are supplies over and above newly mined gold to come from? Current holders are the only source of new supply. Only substantially higher prices are going to release sufficient supplies from these investors, but at what price?

India Switching to Gold Bars from Jewelry - 20th October 2010

Dented by high prices, the world's No.1 gold market is switching to Gold Bars and coins from jewelry...

WITH INDIA'S festival and wedding season now at its peak, India's gold traders are busy preparing for a huge rise in demand for the yellow metal, says Commodity Online in Mumbai.
Traders across the country from Kochi to Kolkata are now adding to their stocks as they see a big boom in sales in the coming weeks. India – the world's No.1 physical gold market – celebrates Diwali, an auspicious occasion to Buy Gold, on November 5.

The traders are Buying Gold in a big way despite the high prices of the metal. Demand is still there for gold, but traders have been buying Dollars in the market as well. Gold is a Dollar-quoted asset, and as India, the world's largest consumer of the yellow metal, imports majority of its requirement, the Rupee plays an important role in determining its landed cost.

State-run Indian trader MMTC Ltd expects to import more than 200 tonnes of gold in the current fiscal year to March 2011 on good demand seen in the current festival season despite high Gold Prices. However, the sharp run-up in the price of the yellow metal has taken gold jewelry beyond common man's reach in India.

Gold sales typically peak in the October-November period due to buying for the Navratri, Dussehra, and Diwali festivals. However, this year, jewelry demand is down 25-30%. Traders in the South say sales volumes are down 30-40%. In the West and East, sales are a little better, though still down by around 20%.

Gold Prices are now above Rs 20,000 per 10 grams in India. The surge in Gold Prices has deterred customers, and they are shifting to other investment avenues. According to analysts, a revival in demand can be seen if prices stabilise at Rs19,000-19,200 per 10 gram.

Though gold consumption in cities has fallen, industry officials are optimistic about rural demand as a bumper crop output due to good monsoon, better price realization and appreciation in land value will increase consumption of physical gold. Generally, around 60% of physical gold purchases are from smaller towns and villages.

However, while sales of non-gold jewelry have been rising compared to gold ornamental pieces, so too have sales of non-jewelry gold – Gold Coins and bars – as Indian households move to lower-cost ways of accessing the metal.