World markets are discounting that something big will happen

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For my latest musings - please visit www.scottreeve.com
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This is my take on the world economy - Preserve your wealth while you still can!

The current talk is that the US and Europe may go back into recession. The reality is that they never left recession that hit in 2008. Bogus diluted statistics, such as inflation, unemployment rates have falsely portrayed the economic reality being felt by individuals in towns and cities around the world. Arguably many cities have been in depression for the last decade (look at Detroit and parts of Europe). The world economy is now on a detox diet and it will take many years, if not decades, to clean it up.

The markets are currently discounting that something very, very big is soon to happen. The markets always do this long before the average man on the street and the media realise it.

It could be a combination of things:
*country default;
* Euro monetary changes (Greece is insolvent, and other countries are close behind);
* central bank quantitative easing (monetising debt);
* major bank failure (particularly in Europe); and
* a significant slowdown in China.

All of these things are very real and we are already seeing the effects of this on world markets.


European contagion

All the major Euro countries are so intertwined lending billions to each other. A contagion will quickly spread when more of the bad debts rise to the surface.

Most of the current Euro-cris discussion is centred around Greece. By many measures its economy looks quite sick. It's sharemarket is now at its lowest level in 18 years (This is debt implosion!).

On other measures it certainly doesn't look as bad as other countries. Greece doesn't have the largest amount of government or private debts in the world, or the highest debt-to-GDP. One big difference is that it owes a much higher per cent of its debt to foreign creditors (foreign banks and countries).

Many argue that its non-sovereign entities which are clamping down on Greece. ie. the Global banking cartel led by the IMF, the World Bank, the Federal Reserve etc working in tune with the credit rating agencies (Moodys, S&P, Fitch). All I ask is what is the interests of the global banking groups? All actions to date show that they put their interests and survival ahead of everyone else. They do not care about the sovereignty of nation states.

So which countries banks' have the most at stake with Greece?

The following interactive chart I put together uses Bank for International Settlements data demonstrating which countries banks are most exposed to sovereign Greek debt as of the first quarter ending March 31 2011.

The most exposured banks are (by country):
French banks US$56.9 bn;
German banks US$23.8 bn;
UK banks US$14.7 bn;

The most exposed individual banks are:
BNP Paribas with US$7.1 bn (France)
Dexia with US$4.8 (Belgium)
Société Généralewith US$3.8 (France)

This is just the banks. When you add Government's holding Greek debt the amount is another US$145 bn.

Chart : There has been a huge widening of bony yield spreads and risk insurance on credit default swaps. Greece has gone parabolic. Portugal and Ireland are where Greece was a year ago.

or as Alan Kohler puts it, when the financial crisis hit last time in 2008, it was about liquidity (banks wouldn't lend to one another). This time around its about insolvency. There is plenty of cash around, but the banks might be broke.

Chart:
source: Alan Kohler, ABC News, Sept 2011

The dominoes are lined up

The next graph shows why the banking system is trying to fix Greece before it sets a precedent. You may have heard that Spain and Italy are "too big to fail, too big to bail". Europe bank exposure to Spain and Italy's are 6 to 7 times worse than Greece.

Chart :

The harsh reality is that no industry should be bailed out, including the banks from country to country. The ongoing debt crisis has come about because banks have lended and taken billion dollar bets to keep this unsound monetary system going (which is based on nothing but paper money generated out of nothing).

Monetary systems do blow up - why is the Euro any different?

One article I came across discuses that country default is more common than we are led to believe. There were a number of large defaults in the 1980s and 1990s in emerging countries across the Americas and eastern Europe. Economist Carmen Reinhart states that the list of deadbeat countries included

"current investor favorites like Brazil, which defaulted in 1983, went through a bout of hyperinflation in 1990 and effectively defaulted again, for the same reason, in 2000"

Reinhart and Professor Rogoff show that, on average, nations add 86% to their debt loads within three years of a credit crisis. At the same time, government revenue falls an average of 2% in the second year after the onset of the troubles. The way things are heading Greece and other Euro countries are heading down this path. Debts need to be rolled over...just like...a few snow flakes can lead to an avalanche.

The Stumble Cycle

Sovereign defaults--when a country stops paying its bills--go in waves, often following global financial crises, wars or the boom-bust cycles of commodities. Some countries, like Spain and Austria, mend their ways; others, like Argentina, are repeat offenders.

Chart :

The combination can be fatal for investors holding bonds issued by financially shaky countries like Argentina or Greece, which sell a lot of their debt outside their own borders (as does the U.S.--45% of all publicly held debt). As a nation's finances deteriorate, foreign investors sell their bonds, putting upward pressure on interest rates. That usually sets off a spiral including a deteriorating currency, which, if the bonds are denominated in foreign currencies, makes it impossible for the country to pay its debt. Greece doesn't have to worry about this last syndrome, because it uses the euro. But that might make things worse since it can't print its way out of its financial difficulties. "It's like entering a prize fight with one hand tied behind your back," Bass says. Argentina takes a different tack. Still struggling in the wake of its 2002 default on foreign-held debt, its president recently tried, and failed, to seize central-bank dollar deposits (and cashier her central banker) in order to repay overseas debt.

France

Following from earlier discussion, the big questions are which of the big European banks will go under first. The largest French banks, Credit Agricole and Societe Generale have billions in exposure to Greece and other Euro countries.

Chart : The share prices of the 3 largest French banks have fallen 73%, 87% and 87% since start the debt crisis started in 2008.



Italy

Until recently UniCredit was the largest bank in Italy by market capitalisation and a major euro-zone bank. It owns other large banks in Germany, Austria, and Poland with around 40 million customers all up. As the following charts shows, the market is dumping the two largest Italian banks. UniCredit is one of the "too big to fail and bail" euro banks and many of its depositors lie outside Italy, making and bail out practically impossible.

An ironic twist to this is that, UniCredit's predecessor was a bank called
Credit-Anstalt. This bank collapsed in 1931 which lead to a contagion which took Europe off the gold standard and pro-longed the Great Depression. Few people remain from the last depression era. Perhaps the money lessons need to be relearn?

Chart :



Australian dollar

The Australian dollar is a proxy for commodity prices and ultimately China. The Australian dollar has recently fallen sharply to 97 cents and has hit a major support level. If this fails there is another major support level at 94 cents.

Chart: The Australian dollar managed to bounce off the firs support level at US$0.97



Commodities

Overall commodity prices are not showing that China is in immediate trouble. Base metals: copper, zinc, nickel, lead etc are not in a major bear market yet. This may mean that the current correction will be short lived. If base metals start free falling and other negative signs come from China (popping of housing bubble?), than the Australian dollar and commodity prices will fall a lot (a huge amount) further.

Gold

Meanwhile, gold and silver have recently experienced a significant correction. Chart wise (USD/gold), gold's correction is not unhealthy. Gold was sitting at 11 year bull-market resistance line and its trending support line is about US$1550.

Chart:


As I posted recently, I believe the gold demand is getting stronger, and will remain strong, despite the recent price volatility. Since that post it has been reported that Mexico, Russia, South Korea and Thailand have all made large purchases in 2011 and globally, central banks are set to buy more gold this year than at any time since the collapse of the Bretton Woods system 40 years ago. The IMF even reported that European Central banks have started accumulating small quantities of gold after selling on average 400 tonnes of gold a year since 1999.

Silver

Silver plummeted last week by 34 per cent within trading days. It went straight through two key support levels and bounced back above them. After hitting a low of US$26.03, silver rebounded 28 per cent in 28 hours.

Chart: Silver fell 34 percent within 4 trading days, then bounced 28 percent within 28 hours


Is this volatility unusual? Silver is a very small market and historically has been prone to major corrections. My research shows that the major corrections in the last few years has lead to an increase in demand for physical silver (from mints and bullion dealers). I believe this will happen again.

Australia

Take away mining and Australia is in recession, and as I stated early, the key to the Australian economy is whether China can keep its economy upright. If it shows signs of weakness, commodity prices will collapse (along with oil, gold and silver) and the Australian Dollar will fall 10 or 20 cents against the USD.

China kept the world economy somewhat afloat during the global financial crisis, and is the sole reason why Australia didn't go and stay into a technical recession. One of the key barometers on the health of China is commodity prices.

Tourism has been in recession for many years now, in part to the high Australian dollar and a tightening of consumer belts.

Manufacturing has largely been in recession for a number of years except for businesses with astute management and niche business models.

Manufacturing insolvencies growing

Despite insolvencies around the world dropping to their lowest levels in nearly four years, Australia is headed in the opposite direction. This year is shaping up to be a record one for business failures on a par with troubled Eurozone countries. The most recent D&B Global Insolvency Index, ranking business failures in more than 30 key economies, found Australia's insolvency rate was on a par with indebted countries such as Italy, Spain and Hungary. Australia recorded a 12.1 per cent increase in business failures in the June quarter compared with falls elsewhere in the world of 5.7 per cent. D&B said its findings tied in with Australian Securities and Investments Commission data which pegged 2011 as a record year for insolvencies.

Business failures in manufacturing have soared 60 per cent in three years. Almost 300 manufacturing firms went broke in the first six months of this year, the business analyst Dun & Bradstreet says, and just 14 new manufacturers started up. By contrast, in 2008, 974 new manufacturers got off the ground, and only 392 folded.

Retail

Retail is finally entering recession. This has long been coming, even though the likes of Westfield (and other groups) have been creating mega-shopping centres around Australia. The whole retail industry relies on ever increasing amounts of debt (more credit cards and increasing consumption). This model is dead, and there is currently too much competition in Australia alone (before you look at internet shopping of overseas products on eBay and the like). Take electronics, there are so many major stores competing on price, and margins are getting thinner. Many of the private equity firms which bought up a lot of the retailers in recent years have failed, as over-inflated sales targets have missed the mark. In the last 12 months several major groups have entered administration: REDGroup (Borders/Angus and Robertson bookstores); Colorado Group (Jag, and shoe shops), Allied Brands (Baskin Robbins, Cookie Man), Krispy Kreme doughnuts, and Starbucks Australia. Most recently sharper falls in consumer spending has forced Harvey Normany to scrap its Clive Peeters and Rick Hart brands (7 stores to close) and David Jones announcing a 10.3% drop in fourth quarter sales and now expects a small profit for the new financial year.

Sizeable retrenchments are coming.


Housing

Chart:


Lastly, this is a very good presentation by Mike Maloney


Cheers
~ Scott

Superannuation wake up call - markets do not always work for the better good

People around the world are slowly waking up. Politicians and the financial industry have been perpetually lying to us about our retirement future.

In the US this first became abundantly clear in 2008 with the collapse of Fannie Mae and Freddie Mac, Lehmann Brothers and AiG and more recently with the smoke and mirrors game over US national debt. Likewise in Europe, the ongoing myriad of debt is rising to the surface exposing the vulnerability of sovereign nations to a poorly designed monetary system controlled by an international banking cartel which lies outside the nation's political systems. Whether Europe and the US continue to monetise debt and expose more debts, or embrace so called spending cut measures (austerity), the current monetary/economic systems will fall apart regardless. The point of no return was well over a decade ago. This point cannot be understated and it will have severe implications for everyone's every day lives, and expected future retirement years.

In Australia, the spin machine of politicians (on both sides of the fence) has perpetually endorsed the need for compulsory superannuation to fund individuals’ retirement needs. The biggest furphy of all is that “markets on average always go up” and that the Superannuation system will always work. A quick glance at one’s recent Super statement suggests otherwise. For several years I have had an agonistic view of the compulsory Superannuation system. The system is fatally flawed as it is heavily tied to the fortunes of the sharemarket, which itself is heavily influenced by changes in age demographics, major booms and busts brought about from a global debt-based monetary system and speculative malinvestments.

It was no coincidence that major changes were made to superannuation arrangements in the early 1990s, when Paul Keating introduced the "Superannuation Guarantee" in 1992 (or compulsory superannuation for individuals). The political class knew they needed to act quickly to transfer the responsibility of one’s retirement from employers (and ultimately the Commonwealth Government through old age pensions) to individuals, as by 2025 one-in-five Australian’s would be over the age of 65.

What better time for the Government to introduce a compulsory retirement “savings” system, than to do it when the largest demographic, the baby boomer generation, were half way through their working careers – there would be at least another 15 years of compulsory contributions to help prop up the Australian sharemarket.

After more than a decade of compulsory contributions, Australian workers have now amassed over $1.28 trillion in superannuation assets. Australians now have more money invested in managed funds per capita than any other economy. Sadly, markets are prone to huge swings, and people will have to revise their superannuation retirement expectations markedly - and act to preserve what they have.

As Alan Kohler stated in his article of 15 August 2011, Stranded at super’s ground zero

The aim of retirement incomes policy in Australia for two decades has been to shift the burden of risk to individuals before the next big bear market hit. It
worked quite nicely. …

Kohler further explains:

The first fifteen years since the superannuation guarantee legislation was first introduced in 1992 went extremely well. The compound annual rate of return provided by the sharemarket – like manna from heaven – was 15.5 per cent.

And Australia was, and still is, overweight equities. That is, the proportion of our retirement savings invested in shares is about the highest in the world. The OECD average is for about half to be invested in fixed interest; in Australia that’s 10-20 per cent.

If we take a quick snapshot of the sharemarket and annualised returns for the last five years are now sitting at a big - ZERO.

The reality is that the 1990s was a period of excessive credit creation across the Western World. All big booms, end in big busts, and the 90s boom gave us the NASDAQ (dot.com) bubble and bust, and later the massive real estate boom and bust in Europe and the US (and soon to be China and Australia). The superannuation system relies on a worldwide debt-based monetary system with perpetual money creation and debt rollover to function. What we aren’t told is that expansion of the monetary system erodes our purchasing power, creates inflation (cost of living pressures) and misallocates capital and labour to non-productive industries and pet projects.

The other fact is that the “compulsory” element to superannuation in Australia is inflationary by nature. With the Government forcing employers to provide 9 per cent pay, by law, into a super fund, there is a continual inflow of extra money entering the sharemarket system every year, regardless of the current state of the economy or the mood of the sharemarket. In a bull market, super funds, as a substantial proportion of market participants, compete with other buyers in the market, which ultimately leads to higher and higher share prices. In bear markets, the Super funds continue to buy companies in the S&P indexes regardless of poor market or company fundamentals (including companies with suppressed share prices due to large capital raisings to raise liquidity).

The biggest problem of all, is the finance industry itself. Whether the market goes up, down or sideways, the fund managers collect their annual fees and commissions for doing next to no monitoring of your portfolio. They get billions of dollars of inflows into their industry regardless of economic conditions, which ultimately props up the financial industry than what would otherwise be the case. The Government in effect is intervening in the market in a huge way, nurturing bad economic habits by providing the industry with lots of capital it may otherwise not have had. As a result, bad behaviours have grown over time. Parts of the financial community (particularly investment bankers) have used more and more "financial wizardry" to make particular investments more attractive (such as infrastructure assets) and more leveraged. However the catch is that all the bad money gets flushed out of the market system at some point in the future. The future cannot be permanently bought through debt (monetary promises).

Percy Allan’s recent article of 14 September 2011, Bucking the bear market, suggests that things may well get worse and stay bad for many years to come. His studies indicate that the world is stuck in a secular bear market. Secular bear markets is a period of typically 15 to 25 years of major volatility, of large upswings, and several primary bear markets. For instance, between 1965 and 1981 (as seen in Chart 1)there were four primary bear markets in the US, displaying falls from peak to trough of 25 per cent to 45 per cent.

Chart 1: Secular bear markets example

Chart 2: 100 years showing major secular bull and bear trends

Chart 3: The typical phases of a secular bear market. We are in phase 3.

Chart 4: Secular bull vs secular bear markets


The next secular bull market my not begin until 2015 – 2021

A “buy and hold” strategy (or some say a “hope and pray” strategy), which is continually flouted by the financial industry and Government can be disastrous for investor share portfolios (including superannuation) during secular bear markets. Many investors and now many superannuation accounts are spending a great deal of energy trying to recover from previous losses. What if the next four to ten years continues to be a secular bear market? Could you wait until 2021 for the major volatility swings to end?

Allen states that “the Great Depression, like the global financial crisis was the product of excess debt which had to be expunged before a bull market resume”. The 1929 bust for instance resulted in secular bear market that didn’t end until the debt deleveraging was over. Does anyone seriously believe, at this point in time, that the hundreds of trillions of dollars worth of Government debt (from the US, to Europe to China) and banking debt could magically disappear within 10 years?

There are always profitable trading opportunities for those willing to look and manage the risk. Capital preservation should be the primary goal for any trader, particular in this secular bear market. Timing is everything and those traders who have their finger on the pulse of the market, could generate substantial return from the market swings. A mechanical (non-emotive) trading plan is absolutely essential should you dabble in the market, at any stage of a secular bull or bear market.

The Government needs compulsory Superannuation

Yet another reason why compulsory superannuation is a giant rort in Australia, is the excessive taxation place on it. In FY2011 the Australian Government collected $7.1 billion in superannuation taxes, not bad from a “compulsory” system the Government itself setup (expected to rise to $12.8bn in four years time). The Government also uses lots of other calculations and methodologies to manipulate individuals financial decisions when it comes to retirement. The Government’s aim is to keep people in the workforce longer. The perseveration age is being incrementally lifted so that by 2025, no one will be able to access “their” superannuation until the age of 60. Why should the Government decide this for you? Would you wait to 60 years age if these access restrictions weren't there?


So what is the alternative?

What if the advice of your financial planner, accountants, stockbrokers over the decades ended up being totally off mark at the point of retirement or during retirement? There is no backspace button to turn back time.

The alternative is to take responsibility for your own financial decisions, and be sceptical about all the financial advise thrown around. If we invest TIME into financial education about how markets work, investment opportunities and threats become a lot more visible. Further, a basic understanding of monetary history is an absolute must (particularly precious metals). Currency (or money substitutes) isn’t the most preferred form of money in certain times and debt systems which produce big governments do not always work out for the better. We need to understand what happens to markets during transitionary periods. Monetary systems typically only last 40 years and the last change was in 1971 - so its overdue to change again. The US-reserve currency system, and the Euro will not last for many more years in their current form. All fiat currencies are A new monetary system will emerge. Will your savings be tied to the old system or the next system?

For superannuation, diversification to reduce exposure away from the sharemarket is a must - asap. If you are 100% relying on Superannuation to work by the time you retire and throughout your retirement, you are not diversified from the major ups and downs from the market at all. By diversification I mean different assets classes such as exposure to gold and silver and cash. (Not diversification between banking shares and mining shares – all shares are susceptible to the major market swings). Gold and silver have both easily outperformed the world sharemarkets and all currencies for the past decade, and this is highly likely to continue for the next decade. Gold and silver in the hand has no liability (debt promise) to anyone and is a hedge against the Government and banking inflation-machine.

Self-managed superannuation will gain in popularity as more individuals take the responsibility of retirement from the financial industry back to where it belongs, in the home. Recently in August 2011, it was reported that self-managed superannuation grew by $3 billion in three months (7,500 new accounts).

I would also be inclined to think twice before taking any Government-induced incentives before throwing money into your compulsory super account (such as the superannuation co-contribution scheme). Would you make this decision without the Government offer on the table? If not, why should the Government incentive change your actions?

One needs to change their context on investing and have a light bulb moment where your context on the economy changes. The vast majority of people are still thinking about investing with a 1970s, 1980s, 1990s, 2000s mentality. The next decade will be very different. Always remember that the market does not care if you gain or loose money!, so you must take ownership of your money and do it as soon as possible.

Alan Moir Cartoon - this is how your super works

Southpark's take on the finance industry:


Cheers
Scott

Major developments in the gold market

Precious metals demand is soaring worldwide, as the global debt crisis continues…

Timeline of articles below:
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4 May 2011 – Mexican central bank buys 100 tonnes of gold
20 May 2011 - China becomes world largest gold investment market
6 June 2011 – The Federal Reserve admits it does not own any gold
16 June 2011 – Congressman Ron Paul calls for audit of Fort Knox gold
18 June 2011 - Russia warns it will continue to sell US debt
20 June 2011 - India’s May 2011 precious metal imports up 222 per cent on May 2010
20 June 2011 – China’s central bank to mint more gold and silver coins
22 June 2011 - Greek savers rush for gold
7 July 2011 - Swiss Parliament to discuss gold franc
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plus:
Dow-gold ratio, US home-gold ratio, and interesting videos later in this post.


4 May 2011 – Mexican central bank buys 100 tonnes of gold

FT.com reports:

Mexico has quietly purchased nearly 100 tonnes of gold bullion, as central banks embark on their biggest bullion buying spree in 40 years.
The purchase, reported in monthly data published by Mexico’s central bank, is the latest in a series of large gold buys by emerging market economies intent on diversifying reserves away from the faltering US dollar.
China, Russia and India have acquired large amounts of gold in recent years, while Thailand, Sri Lanka and Bolivia have made smaller purchases.
Central banks became net buyers of gold last year after two decades of heavy selling.
As a result of Mexico’s purchase, central banks, sovereign wealth funds and other so-called “official sector” buyers are on track to record their largest collective purchase of gold since the collapse of the Bretton Woods system, which pegged the value of the dollar to gold, in 1971.
Mexico bought 93.3 tonnes of gold in February and March, according to the central bank, in a haul valued at $4.5bn at current prices and equivalent to 3.5 per cent of annual mined output.

20 May 2011 - China becomes world largest gold investment market

In 2007, China overtook South Africa to become the world’s largest gold mining nation, however it continued to lag India in overall gold demand. Despite producing 351 metric tons of gold in 2010, China’s gold demand last year hit 700 tons.

On 20 May 2011, the World Gold Council said in a quarterly report that Chinese buyers overtook Indians as the world’s largest purchasers of gold for the first three months of this year.

China's investment demand for gold more than doubled to 90.9 metric tons (mt) in the first three months of the year, outpacing India's modest rise to 85.6 metric tons. China now accounts for 25% of gold investment demand, compared with India's 23%.
The report underscores the rising appetite for gold among the growing middle-class in China. Fears of the country's soaring inflation, as well as a search for new investments, is luring investors to gold, and marketing of the precious metal has also increased in recent months.
Historically, India has been the largest investment market for gold. In 2007, just before investing in gold began to take off globally, India's physical gold demand accounted for 61% of the world's total. China's was 9%. In terms of total consumer demand, which also included jewelry, India is still a bigger consumer of gold than China, taking in 291.8 tons in the first quarter, compared with China's 233.8 tons.
Aside from having more money, Chinese investors are also focused on using gold as a protection against rising consumer prices. Unlike paper currencies, gold retains its value when prices increase. That has prompted many Chinese investors to flock to the precious metal.
Gold also is favored by savvy investors as an alternative investment vehicle to assets like shares and real estate. Chinese stock markets have been a disappointment recently, and the government has pledged to clamp down on housing speculation.
The report covers only private-sector demand, but one wild card for the world's gold market is how much gold China as been adding to its foreign reserves. Governments tend to announce their purchases after they buy.

To put this into another angle...

The not realised important fact that the people of China were banned from owning gold bullion from 1950 to 2003, means that the per capita consumption of over 1.3 billion people is rising from a tiny base.




6 June 2011 – The Federal Reserve admits it does not own any gold

Goldsilver.com reports

Video:

Thats right. The Fed owns NO gold. Zero, zip, ziltch.
For those of you who did not watch yesterday’s monetary policy hearing in the house of representatives, you most likely missed this bombshell exchange between Federal Reserve lawyer Scott Alvarez and committee chairman Dr. Ron Paul. My jaw literally dropped when I heard the Fed’s general counsel declare that the Federal Reserve owns no gold. After 1934, Alvarez explains that the Fed handed its gold over to the Treasury in exchange for gold certificates. When pressed further, Alvarez noted that the gold certificates do not represent any interest whatsoever in the gold itself. He explained the gold certificate listings on the Fed balance sheet, not as a claim to gold, but at most a claim to dollars from the Treasury. See the quotes here (and watch the videos at the bottom of the post):
Scott Alvarez: “The Federal Reserve does not own any gold at all… we have not owned gold since 1934, um, so we have not engaged in any gold swap. Before 1934 the Federal Reserve did, we did own gold. We turned that over by law to the Treasury and received in return for that gold certificates.”
Ron Paul: “…You have the securities for essentially all the gold?”

Scott Alvarez: “No. No we have no interest in the gold that is owned by the Treasury. We have simply an accounting document that is called gold certificates that represents the value at a statutory rate that we gave to the Treasury in 1934″

In any case, we can analyze the implications of the basic facts and come to a couple of conclusions:
1) The widespread notion that the Fed owns gold is false. The corollary to this is the mistaken belief that the Fed understates its gold holdings on its balance sheet by only reporting certificates based on the $42.22 statutory gold value. The Fed does not in fact own the US gold stock multiplied by the market price of gold, unless the Treasury defaults and even then its not clear. The Fed does, however, own a claim to currency totaling $11.1 billion and this value has a remote chance of going up significantly if the Treasury revalues its gold and maintains the practice initiated in the Par Value Modification Act.

2) The fact that the Fed owns no gold, nor claims to any gold, means the fundamental value of the dollar lacks any backing besides dollars themselves, not including Fed building and equipment. Dollars are in essence worth a lot less than many people thought, and the Fed is much more impotent in using the prowess of their assets, and conducting monetary policy in general, than many believed. In all, Alvarez’s clarification strengthens the case for gold’s high dollar value immensely.

16 June 2011 – Congressman Ron Paul calls for audit of Fort Knox gold

Businessweek.com reports

Ron Paul, the quixotic congressman and three-time Presidential candidate, has won a following among libertarians and government skeptics for his campaign to abolish the Federal Reserve. Now the Texas Republican has embarked on a new monetary mission: He wants to throw open the doors to Fort Knox.
Paul isn't so sure the nation's supply of gold is all accounted for and thinks it might not exist at all. He has introduced legislation that would require an independent count of the 5,000-plus tons of gold bullion that's sacked away in the Kentucky vault, as well as smaller amounts held in government facilities in Denver, West Point, and New York City. Paul also wants a lab to test the bars, to prove it's as pure as the U.S. Treasury Dept. says.
As chairman of a House Financial Services subcommittee that oversees the gold stores, Paul called a hearing on the matter for June 23. One man who's looking forward to refuting the congressman's doubts: the person in Washington who has actually held those gleaming, 27-pound gold bars in his own hands. Eric M. Thorson, the inspector general of the Treasury, is responsible for keeping track of the U.S. Mint's deep storage gold and silver reserves. Last September, he became the first outsider in 37 years to be granted full access to the U.S. Bullion Depository, as Fort Knox is formally known.
Opened in 1937, the vault is encased in 16,000 cubic feet of granite and 4,200 cubic yards of concrete. Until September, even Thorson and his team of auditors had never stood in the presence of all the gold. Their annual reviews mostly consisted of making sure the locked compartments hadn't been opened. At the time, the tamper guards were decidedly 18th century: Each door was secured with special tape and sealing wax. Thorson tried to reassure Paul that the loot is all there.
The congressman's two-page bill, introduced in April, calls on the Treasury to conduct a full audit of the gold. The Government Accountability Office would then review the results. It also orders a full assay of the government's gold reserves. A small portion of each of the approximately 700,000 gold bars would be extracted and tested for purity.

18 June 2011 - After Dumping 30% Of Its Treasury Holdings In Half A Year, Russia warns it will continue to sell US debt

The WSJ reports that "Russia will likely continue lowering its U.S. debt holdings as Washington struggles to contain a budget deficit and bolster a tepid economic recovery, a top aide to President Dmitry Medvedev said Saturday. "The share of our portfolio in U.S. instruments has gone down and probably will go down further," said Arkady Dvorkovich, chief economic aide to the president, told Dow Jones in an interview on the sidelines of the St. Petersburg International Economic Forum."

Russia has now cut 30% of its Treasury holdings in the past 7 months.

Contrast the above chart with the next chart:

The Central Bank of the Russian Federation updated their website showing that during the month of May, Russia purchased 200,000 ounces of gold for their reserves...and currently hold 26.7 million ounces of gold bullion.


20 June 2011 – China’s central bank to mint more gold and silver coins

Mineweb.com reports

According to a report by Chinese news agency Xinhua, China has been sharply increasing its output of gold and silver coins to meet seemingly ever-increasing popular demand for precious metals as people buy to protect against perceived rising inflation. Indeed it has more than doubled the maximum issuance for 2011 for some popular gold coin sizes from its previously announced levels.
China produces gold and silver Panda coins. The Peoples Bank of China (PBOC) has announced that in view of the rising demand for the coins, the number of one ounce gold Pandas will be raised from the previously announced 300,000 units to 500,000 this year. The smaller coins in the series will have their maximum circulation numbers increased from 200,000 coins to 600,000 for each series. This is a huge increase from the previously announced levels for 2011 which in turn were sharply higher than in earlier years.
And showing the big pick up in demand for silver in China, the PBOC says that it is doubling the maximum issuance of one ounce silver Panda coins from 3 million to 6 million. To emphasise this growth in demand the issuance in 2010 was 1.5 million. …
They are technically legal tender in China. The big rises in the maximum issuance for the smaller gold coins and the series of silver Pandas is yet another indication that not only is demand exploding for precious metals among the Chinese growing middle class, but also confirmation that the government is encouraging its citizens to buy precious metals. In itself this helps underpin precious metals prices.

20 June 2011-- India’s May 2011 precious metal imports up 222 per cent on May 2010

zerohedge.com reports

India's heretofore "insatiable" appetite for precious metals will need to find a new adjective to describe it, after it surged by an absolutely unprecedented 500% in May MoM, and 222% compared to May of 2010, touching on a massive $8.96 billion in imports in the past month. Putting this number in perspective the yearly average Indian imports are about $22 billion: in one month the country will have imported about half its average quota for the year! And while inflation may have much to do with it, events like the Sensex flash crash from last night certainly are not helping matters: "The gold story is puzzling" added financial analyst A S Kirolar. "Consumers are shying away from stocks and bonds and heading to safe assets like gold and real estate, but one cannot understand this given the meagre 12% growth in imports of petroleum and oil products." Granted demand is not just at the retail level as ever more institutions are buying up gold: "Analysts maintained that India's central bank, the Reserve Bank of India's decision to grant licenses to seven more banks to import bullion has helped push up demand. Karur Vysya Bank, State Bank of Bikaner and Jaipur, State Bank of Hyderabad, Punjab and Sind Bank, South Indian Bank, State Bank of Mysore and State Bank of Travancore were added to the list. As of the start of 2011, some 30 banks in India have been granted permission to import gold and silver. Jewellers are getting easy supplies which is also helping push up demand. Moreover, the flow of scrap is also expected to fall from a yearly average of 200 tonnes, which could again boost imports, underlining the insatiable appetite of the Indian consumer." Add ongoing Chinese demand for PMs, and one can see why calls for an imminent gold crash absent a global deflationary vortex are largely overblown.

22 June 2011-- Greek savers rush for gold

ft.com reports

Greek citizens are emptying savings accounts and buying gold as they brace themselves for the possibility of a sovereign default and a run on the banks.
Sales of gold coins have soared as savers seek a safer and fungible source of value.
“When the global financial crisis started, our sales of coins to investors overtook bullion for the first time,” said Harry Krinakis, at Sepheriades, a Greek precious metals trader. “Now the sales ratio has reached five to one.”
Monthly bank withdrawals were running at €1.5bn-€2bn (£1.3bn-£1.8bn) in the first quarter. Last year, depositors withdrew €30bn, equivalent to 12.3 per cent of total savings, according to the central bank. Greek deposits worth an estimated €8bn were transferred to banks in Cyprus in 2010. But the flow has dried up this year amid fears that Cypriot banks could suffer contagion.

7 July 2011 - Swiss Parliament to discuss gold franc

marketwatch.com reports

The Swiss Parliament is expected later this year to discuss the creation of a gold franc — a parallel currency to the official Swiss franc, with the fringe initiative likely triggering a broader debate about the role of the precious metal in the Alpine nation.

The initiative is part of “Healthy Currency,” a campaign sponsored by politicians from the right-wing Swiss People’s Party (SVP) — the country’s biggest — that is seeking to capitalize on popular fears about global financial turmoil and inflation to reverse the government’s current policy on gold.

Switzerland, which in 2000 became one of the last countries to decouple its currency from gold, is not the only place to contemplate a change in the precious metal’s role amid controversy over government involvement in the economy. In March, Utah became the first state in the U.S. to legalize gold and silver coins as currency, while similar legislation was considered in Montana, Missouri, Colorado, Idaho and Indiana.

Other Stuff

Dow/Gold Ratio:


Median Single-Family Home (US) Price / Gold Ratio:


Videos:

James Turk of the GoldMoney Foundation speaks about currency devaluation and the rising gold price. How the gold price is rising against all major currencies and monetary policy is political, having abandoned all pretence of seeking monetary stability. He warns of the dangers of a hyperinflationary crisis. James also explains why gold should be considered money and not an investment.
He also talks of the coming dollar collapse and the waterfall decline in the dollar, especially since Ben Bernanke’s words on QE. He talks of different examples of hyperinflation from paper money hyperinflation in Weimar Germany to deposit currency hyperinflation in Argentina. The presentation was held on 29 April 2011 in Munich, Germany.

Even ABC's 7:30 program has realised there is a major gold boom occurring in Australia and abroad with a segment called "The booming price of gold"

And lastly - the DEBT elephant remains...

~ Scott