The Goldwatcher

Riversimple Open Source Technology Fuel Cell Prototype: London June 2009

The Goldwatcher Chapter  ‘The End of Cheap Oil, Chindia and other Tipping Points to Instability‘ associates with the question ‘Will alternative energy come to the rescue?’  The Chapter ends with the comment: ‘..The balance of global economic power is slipping away from the US and other western consuming economies. Conservation could improve the economic balance but unfortunately it is not being taken seriously. Discussion on this subject will be continued on The Goldwatcher blog.’

Through last year The Goldwatcher agenda was hijacked by the global financial crisis , near global financial meltdown  and subsequent G20 salvage initiatives following the  collapse of the Casino Capitalism House of Cards.  These developments are  reviewed in the two part comment prepared for Stock Research Portal.   Part One addresses  pre April 2009  events and Part Two comments on developments after the April 2009 G20 leaders summit. The Economic Jihad being waged against the US and western economies is covered in the previous blog.

The ‘Riversimple’ hydrogen fuel cell car and open source technology:

Claiming fuel consumption equivalent to 360 miles per gallon  Riversimple, a fledgling British company, last week unveiled their prototype two-seater hydrogen fuel cell car.  They claim to be ’dedicated to making highly energy efficient vehicles using a radical new approach to personal mobility.’ Information on the development of the Riversimple prototype  in collaboration with Oxford University, Cranfield University  and a Shanghai company Horizon Fuel Cell Technologies. is accessible on the company website.  The British BOC Group PLC and the Piech family of Porsche founder Ferdinand Porsche  supported and funded research. 

Riversimple’s approach to open source technology has exciting potential.  Following the open source model they are inviting  ’the community’ to  develop vehicles and,  to manage cooperative relationships,  have established an Open Source Foundation.

Transition Towns:

Riversimple’s  open source approach fits well with the established and rapidly growing  Transition Towns community networks addressing the consequences of climate change and peak oil.  Their prototype is still only a tiny step on a formidably lengthy road.  But it’s a step in the right direction and, with community support following the open source model, progress could be rapid. 

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‘Topple the economy and you topple the Crusaders:’

The above graphic ’Fire of Jihad’ appears on the  cover of the online magazine ‘Al Yaqeen.‘  The symbols in the graph of the burning World Trade Center Towers  reflect the sharp decline in post 9/11 US economy.

The section in Chapter One of the Goldwatcher ‘Insight into the Post 9/11 World and the Jihad against America’ ends with the comment ’as investors we have to draw the line between the pre 9/11 world when the US was at peace and the post 9/11 world with the US at war…’

A recent article ‘War by Other Means : Econo Jihad’ addresses the sinister economic side of the conflict. The article by Professor Gabriel Weimann published by Yale Global  reveals how Al Qaeda has been tuning strategy to do maximum damage to the western economy. Even as far back as 2002,  Weimann writes,  ‘Al Qaeda claimed its strategy was to reduce America to economic ruin.’

Jihadi Internet chatter now suggests ‘both exultation about the economic crisis gripping the west and a call for what can be labeled an “Econo-Jihad,” targeting Western financial systems and economic infrastructure. The mantra is ‘Topple the economy and you topple the Crusaders.”

Insuring against the consequences of Econo Jihad:

An insurance salesman should have no difficulty convincing us we need protection against risks flowing from the econo-jihad.  And that’s where gold comes in. The section ‘Crisis and Financial Market Risk Insurance’ in Chapter One explains why,  for protection against ‘the unthinkable’,  we have to own and posess gold.  Stateless money that keeps its value even in the worst of times. 

I expect the Western economy will have the strength to resist this metastisis of terrorism and also think President Obama will prove to be a formidable protector of the interests of the U.S.  and her allies. But so what? 

When it comes to protecting our security  it doesn’t matter what you or I think.  What matters are the serious consequences that will follow if  unthinkable scenarios play out and why gold is essential insurance against real risks to our financial security. These  include risks to the stability of all fiat currencies including the dollar.

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Volatile markets:

Oil at about $70, more than 100% above its price a few months back,  and gold sliding as it fails to breach the psychologically important $1000 threshold illustrate current market uncertainties and volatility.  Oil prices usually respond to grass roots supply and demand realities. However now the IEA and other organisations comntinuously revise secular forecasts. This suggests statistical information being used may be unreliable,  inadequate or outdated and speculation affecting oil prices.

On January 22nd this year The Goldwatcher posted on price prospects for 2009 and a year ago in 2008 The Goldwatcher posted on gold under $700 0r over $1000. Both posts are worth considering now. An earlier 2008 post $1000 Gold : What’s next also discusses gold as a contrarian investment and other factors that come into play when psychological thresholds are being challenged.

The grass roots supply and demand fundamentals for gold and the technical picture appear to be weak.  At current high prices demand in India has collapsed. The price is vulnerable  if investors and speculators stop buying and without support from industrial users corrections could be steep. 

On the other hand the geo-political case for gold is exceptionally strong. With Mr. Ahmanidejad  in office for another four years Iran is likely to become a serious nuclear threat.  North Korea is already a serious nuclear threat.  Mr. Netenyahu is back in office with the same ideas that accompanied his last failed term of office. And,  while the war in Iraq may be scaling down,  conflicts in Afghanistan are scaling up as  initiatiaves to destroy Al Qaeda and the Taliban are getting nowhere fast.

Most telling for the gold price, of course, are the multi trillion dollar fiscal boosts introduced to revive economies and the inflation that may come in their wake.

Too far too fast: 

Titled  ‘Too Far Too Fast’   last week Barrons published a mid term roundtable update with comments from  their  contributors.  Some noted the $ has fallen,  yields on Treasuries have been rising dramatically and market ’insanity might be ending’ 

A key theme for the roundtable contributors was the consequences likely to follow  shifting of debt and leverage from the private sector to governments .  Some contributors advised buying gold now while others, expecting a mid term market correction, advised buying gold when it had corrected.

Gold, the consumer capitalism house of cards and challenges to $ hegemony:

The Two articles contributed for Stock Research portal in April and May are  now posted on Goldwatcher pages. Part One addresses  developments pre the April G20 London Summitt and Part Two addresses post April developments including challenges from China and Russia to the privileged role of the $ in the monetary system,  gold sales by the IMF and gold price prospects.

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 Can the G20 save the world from global financial meltdown?

The question Can the IMF save the world from global financial meltdown? is raised in The Goldwatcher Chapter on Globalisation and Global Economic Re-balancing. After reviewing initiatives on adjusting global  imbalances I concluded all the IMF really achieved was to ‘convince China and America’s other creditors that the worst thing they could do with their money would be to leave it in low interest rate US Treasury Securities - ‘knowing that the dollar will continue falling.’  I was dead wrong on that call for a while. The dollar strengthened by the time the book was published. 

But the IMF appeared impotent when the casino capitalism house of cards was collapsing last November.  It was The G20 that met urgently in Washington and secured a consensus on joint emergency actions ‘to restore global growth and achieve needed reforms in the world’s financial systems.’ 

The April 2nd G20 Summit in London has recorded  wide ranging  understandings on the spectrum of  economic and financial challenges menacing the world, including beefing up the IMF financially and operationally.

If we read the official hype in the G20 communiques we get the impression that not only can they save the world but they have. If we read the views of the commentariat we find serious challenges to these claims.

The Goldwatcher approaches the G20 initiatives as both  essential and generally positive - but by no means enough to assure that global financial  crises are resolved. Ian Campbell, the founder of the indispensable web resource Stock Research Portal.com will be publishing  a Newsletter series on gold, currencies and associated economic issues. He has invited me to write the first contribution, a two part article on:

1) Gold and the Casino Capitalism House of Cards; and

2) Whether the G20 and the IMF can save the world from global financial meltdown.

This is the link to the articles on the Stock Research Portal website. Part One and Part Two are now also posted on this website.

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 Bernanke - The Printing Press Speech: Saying what he means:

Within a few months after his appointment as a Fed Governor Ben Bernanke made his  November 2002 ‘Printing Press’ speech :  ‘Deflation : Making Sure ‘it’ doesn’t happen here.’  Prior to the speech he was a distinguished academic recognised as a world authority on the Great Depression. Outside academia  he was relatively unknown. To his credit he said what he meant but , if he had made that speech when more removed from the collegiate atmospheres of Stanford and Princeton Universities,  he would have left out the  the sensationalist words I have italicised below:

‘Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.’

‘A money-financed tax cut is essentially equivalent to Milton Friedman’s famous ‘Helicopter drop’ of money.’

Goldbugs world wide had their day in the sun when the speech was published. ‘Bernanke’s printing press’ has since been touted as absolute proof the dollar is on a slippery slope.  ‘Helicopter Ben’ became his unwelcome moniker.’ In the financial press and blogosphere the speech was met with shock and awe.

This  chart illustrates the relentless gold price climb for years after the speech - though not necessarily because of the speech:

Bernanke was also right. By engaging in what is now known as   ’quantitative easing’ the Fed can expand its balance sheet and provide liquidity even with interest rates zero bound. Bernanke did not anticipate the unholy financial mess that has erupted . He spelled out uncoventional ways the Fed could and would act to abort deflation.  The full speech is a must read for the insight it gives on current Fed actions

Will the G20 mean what they say?:

Now for the real shock and awe.  Committed to heading off of a deeper recession or depression printing presses have been turned on worldwide. Trillions have replaced hundered of billions billions as measures of expansion The Fed is literally flooding the market with enough excess liquidity to support the banking system, the shadow banking establishment and even Zombie banks.   An ever widening alphabet soup of new facilities has led to credit extended by the Fed surging from under $900 billion six months ago to  over $3 trillion now. And there’s much more to come.  Other key central banks including The Bank of England have also  been engaged in similar though less extensive activities.

A statement declaring their intent to do whatever is necessary to restore economic growth followed  a meeting of  G20 Finance Ministers and central bankers last week.   On April 2nd the G20 Head of States summit follows.

Outcomes for the G20 Summit will be crucial for the Global Economy.  Will they say what they mean and mean what they say?

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A replay of The US Global web cast hosted by Goldwatcher co-author Frank Holmes is now accessible on line.  Frank Holmes is joined in the presentation by Gregory Weldon, founder of Weldon Financial and author of Gold Trading Boot Camp and David Galland, Managing Editor of The Casey Report and author of ’The Room,’   a weekly column from Casey Research.

U.S. Global Investors ‘What’s Driving Gold’ analysis follows the range of factors affecting supply, demand and prices.Over many years it has been an accessible and insightful guide for gold investors. The current presentation, with the support of Gregory Weldon and David Galland introduces additional perspectives and will leave investors with few unanswered questions.

Gold Miners Outperform:

A report in today’s Mineweb notes the recent outperformance by gold mining shares:

‘The past 12-month performance of 947 listed resources stocks around the world shows unequivocally that gold and silver stocks not only dominate relative outperformance within the broader resources sector, but that these stocks also qualify to rank as the top outperformers across all equity sub sectors.’

Mineweb include a table with some detailed analysis of performance in the resource sector. Gold mining heads the list:

THE SPDR GOLD  ETF ALSO OUTPERFORMED:

Ranked as the next best performers in the analysis published by Mineweb are Gold Exchange Traded Funds (ETFs). See The Goldwatcher pages 33-39 and 199.  These ETFs  are structured to hold physical metal on behalf of investors but are not trading entities. The  SPDR Gold Shares ETF, with assets exceeding $30 billion,  is now the second largest ETF  in the world. The largest is  State Street’s SPDR S&P 500 ETF. 

A word of caution:

Returns on mining equities over a year will depend on the prices paid on the dates when they were bought. Raw statistics can  mislead. Share prices of even the best gold mining and other companies are volatile.  An example of recent gold mining share volatility  is reflected in the following one year price chart for blue chip gold miner Newmont:

Chart Wall Street Journal

Perspective on current and previous bear markets: 

The above chart, best seen by clicking the chart at source on d.short.com, illustrates the severity of the current and previous bear markets. Thanks to Doug Short for persmission to reproduce the chart.

Additional insight on ’irrational exuberance’ from The Goldwatcher:

 Alan Greenspan made his famous ‘irrational exuberance’ remarks in December 1996:

‘Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? […] ‘

Pity he didn’t act on his better instincts and prick the dot.com and housing bubbles. Even a blind mad could  have seen them (see The Goldwtcher Pages 146/7)

Gold and the equity bear markets:

Gold is a financial asset with a different risk reward profile to equities and other financial assets.

CNBC’S interview with Frank Holmes, Goldwatcher co-author yesterday: 

Following dramatic rises in the gold price yesterday - and even more dramatic falls  in equity and commodity markets world wide -  CNBC interviewed Goldwatcher co-author Frank Holmes,  one of the world’s most authoritative and respected voices on gold.  

The CNBC interview covers key issues investors must keep in mind and is supported by comments from CNBC analysts. Frank Holmes’s headline advice is straightforward  ’Don’t buy gold to get rich - buy gold for protection.’

 You can  Access the CNBC interview through this link.

The Goldwatcher and this blog contributed by co-author John Katz:

My content in the Goldwatcher is unbiased. I am an independent analyst and neither a gold bull or bear. In a nutshell my contributions point to when owning gold makes sense and when it doesn’t and when gold prices make sense and when they don’t. The Chapters I contribute address the questions investors interested in gold must ask,  starting with their motivation, timing and strategy for making and managing their investments.  

The most recent update on gold price prospects in this blog was posted on 22nd January

The Goldwatcher book and the blog address the issues of the day affecting demand for gold,  other currencies and other assets. They include subjects ranging from  the wars in Iraq and Afghanistan to our once rock solid British Banks now going bust.

The Goldwatcher Book Chapters follow this sequence

 Foreward by Dr. Marc Faber - starting with this comment:

‘Years from now, the events of late 2007 and early 2008 will be remembered as a classic case of the flawed thinking by Governments that choose to use monetary policy to try and sustain an unsustainable economic bubble, and how that action broadens and deepens the pain when the bubble inevitably busts.’

Part 1 : Written byJohn Katz  ‘The Goldwatcher’ in this blog -  e-mail address : john@thegoldwatcher.com

1:  Introduction : Why Gold?

2: The Gold Mining Industry : What price gives producers a worthwhile profit?

3: Gold Supply and Demand : Do Central Banks still need gold, and does gold still need Central Banks?

4: The Rise and Fall of the Gold Standard : Did Gold Cause the Great Depression?

5: The Dollar Standard and the ‘Deficit without Tears’ : Is the dollar again America’s currency and everyone else’s problem?

6: The Economic Consequences of 9/11 and George W. Bush : For how long will Asians go on lending for Americans to go on spending?

7: The End of Cheap Oil, Chindia and other Tipping Points to Instability 

 Will alternative energy come to the rescue?

(The causes and evolution  of the present economic crisis including the housing boom and bust, the CDO racket, Alan Greenspan’s misguided views on regulation  etc are all covered in the above Chapter)

8: Globalisation and Global Economic Rebalancing

Can the IMF avoid global financial meltdown?

9: Gold Prices : Inflation,Deflation, Booms and Busts

Do trees grow to heaven?

10: Investing Choices . What Gold?

Part Two : Written by Frank Holmes:

11: Inside US Global Investors

12: Investing in Gold Equities

13: Gold Mining Opportunities and Threats.

PART THREE : THE FACT BOOK APPENDIX - includes detailed analysis of global gold mining production, fabrication, scrap recovery and central bank holdings, sales and intended sales;  a Chart Book, Chronology and Webliography.

The Goldwatcher is available from Amazon and all leading booksellers

Alistair Darling

Stealth socialism:

Following a further shock loss of 11 billion pounds announced by the Lloyds TSB Group Britain’s star crossed Chancellor Alistair Darling was reported by the BBC today revealing his latest visionary discovery. The key to sorting out the Lloyds TSB - Halifax Bank of Scotland (HBOS) fiasco, Mr. Darling says,  is ’getting banks to identify their bad assets so they could be removed from the system.’  Yes Virginia. This  statement was made today by the same Chancellor who was associated last autumn with orchestrating, sponsoring and, according to some reports even forcing the merger of solvent Lloyds TSB Bank with the insolvent Halifax Bank of Scotland Group (HBOS).

When the deal was done HBOS was bust and facing liquidation. But,  if shareholders in solvent Lloyds TSB  could be persuaded to throw their capital in to support HBOS, the bothersome HBOS liquidation could be avoided.  Now, in the comment quoted above, Mr. Darling implicitly acknowledges he allowed Lloyds Bank to do the deal before he knew, with absolute certainty,  that HBOS had come clean and identified to the last penny their bad assets and removed them from the system.  And, adding insult to injury, he has since staked billions of pounds of taxpayer’s money in the merged bank, again without adequate due diligence to confirm that all bad assets are out of the books.

Plundering Lloyds TSB Shareholders.

One year chart Lloyds TSB source Wall Street Journal

The BBC also report today  the blunt comments from  Conservative Front Bencher and former Chancellor Kenneth Clark on the Lloyds TSB - HBOS merger.  It was a disaster for Lloyds TSB shareholders that ’should never have been allowed to happen….  Lloyds TSB was a boring bank, it was a steady bank, it hadn’t done silly things.’  So, we can conclude, shareholders with their savings in Lloyds shares had also ‘not done silly things.’ Where does Mr. Darling go from here?

 Will he  call in the serious fraud office to investigate the circumstances that led to  Lloyds TSB shareholders being fleeced? Will he admit, as President Obama has following a misjudgement,  that ‘he screwed up?’ Perish the thought.

Britain at the cross road of credibility: Gold stays on the agenda

Britain’s political stability, effective legal system and traditions of fair play have, by and large, supported universal trust in her financial institutions. If this trust is lost  creditors will no longer  support  borrowings and investors won’t buy British shares.

Owning gold over  the last year protected investors from the sterling and London Stock Exchange crashes and returned a handsome profit.  Each of us have to decide for ourselves now whether prospects for  investors in British financial assets are better or worse than they were a year ago.  Present revelations tend to remove  doubts about the answer.

Gold remains on the agenda.

* Note added 15.02.09 :  Speaking at the G7 summit in Rome yesterday afternoon Chancellor Alistair Darling tried to quell speculation that the Lloyds Banking Group could be nationalised. He said banks are “best run in the commercial sector and privately owned.’

* Note added 16.02.09 : Accepting that the report read yesterday on nationalising the Llloyds TSB Group was not accurate the above blog has been modified.