The Goldwatcher

 Chevrolet Malibu Hybrid. For the scrap heap? 

The G20 and the Detroit 3:

The Goldwatcher posting on the G20 get together last weekend  was held back while the Chief Executives of the Detroit 3 - GM, Ford and Chrysler - made their plea to Congress for ‘bridge’ financing. The G20 event was a blogger’s treat.  A wedding without the bride unaffeced by the Obasm that overcame the world.  But The Detroit 3’s crisis is another story.  Another consequence of the systemic financial and globalisation crises roiling financial markets. But it in this case it’s nobody’s treat. The Detroit 3 are visibly close to ruin.  Decisions taken by Congress over the next few days or weeks will have dramatic effects on the US economy and the dollar currency.  Comment will follow the decisions when the issue returns to Congress on December 2nd.

Contrarian investors and Gold Mining Shares:

The Goldwatcher book and this blog follow the line that excessive money creation, whether through debt expansion, money printing,  or any other devious means will lead to  erosion of the purchasing power of fiat paper money currencies.  Milton Friedman famously observed inflation is always a monetary phenomena.  Prospects for the dollar in a context absolutely relevant to current developments are addressed in The Goldwatcher Chapter 5.

Contrarian investors have the best track record with gold. Many among them currently see opportunities with shares in gold mining companies. Gold has performed well compared to other financial assets. Particualrly  well in currencies like the British £ that have fallen in relation to the dollar. Gold coins and other items of physical gold  are in short supply and are selling at premiums to the gold price. But the prices of all gold mining shares have been trashed. This, as we all all know, follows forced redemptions by fund managers, margin calls and other adverse factors forcing equity prices down. 

We also know that at times like this the baby often gets thrown out with the bathwater. Gold mining shares on the cheap aren’t  the sort of opportunity that will excite a day trader. Contrarian investors take a more fundamental approach and have longer investing horizons.

In an article today on a visit to the Agnico Eagle Mine Mineweb include a useful table on prices and recent price movements of Gold Mining Shares

In the footsteps of  Franklin D. Roosevelt (The Goldwatcher pages 62/66)

President elect Barack Obama’s victory speech: 

Chicago, Illinois Tuesday,  4th November, 2008 (4/11)

If there is anyone out there who still doubts that America is a place where all things are possible; who still wonders if the dream of our founders is alive in our time; who still questions the power of our democracy, tonight is your answer.
It’s the answer told by lines that stretched around schools and churches in numbers this nation has never seen; by people who waited three hours and four hours, many for the very first time in their lives, because they believed that this time must be different; that their voice could be that difference.
It’s the answer spoken by young and old, rich and poor, Democrat and Republican, black, white, Latino, Asian, Native American, gay, straight, disabled and not disabled - Americans who sent a message to the world that we have never been a collection of Red States and Blue States: we are, and always will be, the United States of America.
It’s the answer that led those who have been told for so long by so many to be cynical, and fearful, and doubtful of what we can achieve to put their hands on the arc of history and bend it once more toward the hope of a better day.
It’s been a long time coming, but tonight, because of what we did on this day, in this election, at this defining moment, change has come to America.
I just received a very gracious call from Senator McCain. He fought long and hard in this campaign, and he’s fought even longer and harder for the country he loves. He has endured sacrifices for America that most of us cannot begin to imagine, and we are better off for the service rendered by this brave and selfless leader. I congratulate him and Governor Palin for all they have achieved, and I look forward to working with them to renew this nation’s promise in the months ahead.
I want to thank my partner in this journey, a man who campaigned from his heart and spoke for the men and women he grew up with on the streets of Scranton and rode with on that train home to Delaware, the Vice President-elect of the United States, Joe Biden.
I would not be standing here tonight without the unyielding support of my best friend for the last sixteen years, the rock of our family and the love of my life, our nation’s next First Lady, Michelle Obama. Sasha and Malia, I love you both so much, and you have earned the new puppy that’s coming with us to the White House. And while she’s no longer with us, I know my grandmother is watching, along with the family that made me who I am. I miss them tonight, and know that my debt to them is beyond measure.
To my campaign manager David Plouffe, my chief strategist David Axelrod, and the best campaign team ever assembled in the history of politics - you made this happen, and I am forever grateful for what you’ve sacrificed to get it done.
But above all, I will never forget who this victory truly belongs to - it belongs to you.
I was never the likeliest candidate for this office. We didn’t start with much money or many endorsements. Our campaign was not hatched in the halls of Washington - it began in the backyards of Des Moines and the living rooms of Concord and the front porches of Charleston.
It was built by working men and women who dug into what little savings they had to give five dollars and ten dollars and twenty dollars to this cause. It grew strength from the young people who rejected the myth of their generation’s apathy; who left their homes and their families for jobs that offered little pay and less sleep; from the not-so-young people who braved the bitter cold and scorching heat to knock on the doors of perfect strangers; from the millions of Americans who volunteered, and organized, and proved that more than two centuries later, a government of the people, by the people and for the people has not perished from this Earth. This is your victory.
I know you didn’t do this just to win an election and I know you didn’t do it for me. You did it because you understand the enormity of the task that lies ahead. For even as we celebrate tonight, we know the challenges that tomorrow will bring are the greatest of our lifetime - two wars, a planet in peril, the worst financial crisis in a century. Even as we stand here tonight, we know there are brave Americans waking up in the deserts of Iraq and the mountains of Afghanistan to risk their lives for us. There are mothers and fathers who will lie awake after their children fall asleep and wonder how they’ll make the mortgage, or pay their doctor’s bills, or save enough for college. There is new energy to harness and new jobs to be created; new schools to build and threats to meet and alliances to repair.
The road ahead will be long. Our climb will be steep. We may not get there in one year or even one term, but America - I have never been more hopeful than I am tonight that we will get there. I promise you - we as a people will get there.
There will be setbacks and false starts. There are many who won’t agree with every decision or policy I make as President, and we know that government can’t solve every problem. But I will always be honest with you about the challenges we face. I will listen to you, especially when we disagree. And above all, I will ask you join in the work of remaking this nation the only way it’s been done in America for two-hundred and twenty-one years - block by block, brick by brick, calloused hand by calloused hand.
What began twenty-one months ago in the depths of winter must not end on this autumn night. This victory alone is not the change we seek - it is only the chance for us to make that change. And that cannot happen if we go back to the way things were. It cannot happen without you.
So let us summon a new spirit of patriotism; of service and responsibility where each of us resolves to pitch in and work harder and look after not only ourselves, but each other. Let us remember that if this financial crisis taught us anything, it’s that we cannot have a thriving Wall Street while Main Street suffers - in this country, we rise or fall as one nation; as one people. 
Let us resist the temptation to fall back on the same partisanship and pettiness and immaturity that has poisoned our politics for so long. Let us remember that it was a man from this state who first carried the banner of the Republican Party to the White House - a party founded on the values of self-reliance, individual liberty, and national unity. Those are values we all share, and while the Democratic Party has won a great victory tonight, we do so with a measure of humility and determination to heal the divides that have held back our progress. As Lincoln said to a nation far more divided than ours, “We are not enemies, but friends…though passion may have strained it must not break our bonds of affection.” And to those Americans whose support I have yet to earn - I may not have won your vote, but I hear your voices, I need your help, and I will be your President too.
And to all those watching tonight from beyond our shores, from parliaments and palaces to those who are huddled around radios in the forgotten corners of our world - our stories are singular, but our destiny is shared, and a new dawn of American leadership is at hand. To those who would tear this world down - we will defeat you. To those who seek peace and security - we support you. And to all those who have wondered if America’s beacon still burns as bright - tonight we proved once more that the true strength of our nation comes not from our the might of our arms or the scale of our wealth, but from the enduring power of our ideals: democracy, liberty, opportunity, and unyielding hope.
For that is the true genius of America - that America can change. Our union can be perfected. And what we have already achieved gives us hope for what we can and must achieve tomorrow.
This election had many firsts and many stories that will be told for generations. But one that’s on my mind tonight is about a woman who cast her ballot in Atlanta. She’s a lot like the millions of others who stood in line to make their voice heard in this election except for one thing - Ann Nixon Cooper is 106 years old.
She was born just a generation past slavery; a time when there were no cars on the road or planes in the sky; when someone like her couldn’t vote for two reasons - because she was a woman and because of the color of her skin.
And tonight, I think about all that she’s seen throughout her century in America - the heartache and the hope; the struggle and the progress; the times we were told that we can’t, and the people who pressed on with that American creed: Yes we can.
At a time when women’s voices were silenced and their hopes dismissed, she lived to see them stand up and speak out and reach for the ballot. Yes we can.
When there was despair in the dust bowl and depression across the land, she saw a nation conquer fear itself with a New Deal, new jobs and a new sense of common purpose. Yes we can.
When the bombs fell on our harbor and tyranny threatened the world, she was there to witness a generation rise to greatness and a democracy was saved. Yes we can.
She was there for the buses in Montgomery, the hoses in Birmingham, a bridge in Selma, and a preacher from Atlanta who told a people that “We Shall Overcome.” Yes we can.
A man touched down on the moon, a wall came down in Berlin, a world was connected by our own science and imagination. And this year, in this election, she touched her finger to a screen, and cast her vote, because after 106 years in America, through the best of times and the darkest of hours, she knows how America can change. Yes we can.
America, we have come so far. We have seen so much. But there is so much more to do. So tonight, let us ask ourselves - if our children should live to see the next century; if my daughters should be so lucky to live as long as Ann Nixon Cooper, what change will they see? What progress will we have made?
This is our chance to answer that call. This is our moment. This is our time - to put our people back to work and open doors of opportunity for our kids; to restore prosperity and promote the cause of peace; to reclaim the American Dream and reaffirm that fundamental truth - that out of many, we are one; that while we breathe, we hope, and where we are met with cynicism, and doubt, and those who tell us that we can’t, we will respond with that timeless creed that sums up the spirit of a people:
Yes We Can. Thank you, God bless you, and may God Bless the United States of America. 

 Video link to speech

# Audio & Text of President Franklin D. Roosevelt’s Inaugural Address 4th March 1933

# Added 15.11.08:  Time Magazine November 24th cover with above ‘picture’ of Obama wearing FDR’s hat, glasses and even his cigarette holder behind the wheel of a 1930s Ford V8 :

The Central Bankers Money Printing Song:

When he was a little nipper Ben Bernanke first learned about the Great Depression from his grandmother (The Goldwatcher page 60). At play school when I was a little nipper I learned the song  ’The More We are Together the Happier we will be.’  Let’s join my experience from those nipper days,  when we all believed in The Tooth Fairy,  with the lessons Bernanke learned from his Gran. We can call the new composition the Central Bankers Money Printing Song.  Here is how it goes:

The more we print together…..together…..together

The more we print together the richer we will be……

For your friends will be rich and my friends will be richer

The more we print together the richer we will be.

Of course by now we have learned to listen to  The Truth Fairy rather than The Tooth Fairy. And the messages from The Truth Fairy are that a global money printing spree can’t be a win win story and win win is anyway an oxymoron. Trust  in the fiduciary element of paper money is being lost. All that printing more can do is paper over the cracks.  (The Goldwatcher Page 189).  Yet we must expect far worse consequences if the global economy sinks into a depression again.  (The Goldwatcher Pages 181/2). And,  while investors can protect themselves from the worst ravages of a depression,  it’s not only prosperity in the Western World that’s at stake. Billions of poor people will suffer in developing and other economies and millions could starve to death in a severe global depression. It must be avoided literally at all cost.(The Goldwatcher Page 186). Hence, though an interest rate of 1% produces a negative yield on money,  if it helps fend off a depression there is a case to make that it’s the lesser of two evils.

So, how do we protect ourselves from all the money printing?

Gold can be minted but it can’t be printed:

Gold’s stateless money franchise derives from its value as a resource in limited supply. It can’t be produced without cost.  People all over the world are realising that with the global economy in an unnholy mess inflation and money printing are both on the agenda as part of the solution.

No surprise then that there are reports every day of gold coins being ’sold out’ at national mints and coin dealers. High premiums are being paid for physical gold that people can keep in their own control.  According to this report :

“One ounce and smaller gold and silver coins . . . ten-ounce and hundred-ounce silver bars (etc) have virtually disappeared from the marketplace. They’re in private hands now, and people are holding onto them, unwilling to sell them back into the market… When these coins can be found sellers are demanding (and receiving) premiums of up to 50% or more over the per-ounce spot price. ..Investors are getting a classic lesson in the laws of supply and demand. When demand increases for a declining supply of anything, the price tends to increase.’

The same law applies with money printing except its vica versa. Prices fall when there is too much supply. Only a few years ago when he was already a Fed Governor Ben Bernanke himself wrote :

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.“

The Bank of England’s  ’Financial Stability’ Report:

 Today’s s Bank of England Report  estimates losses to banks and other financial institutions worldwide at a staggering $2.8 trillion  The Executive Summary notes  instability was ’.. rooted in weaknesses within the financial system that developed during a global credit boom; rapid balance sheet expansion; the creation of assets whose liquidity and credit were uncertain in less benign conditions; and fragilities in funding structures.’

Are we out of the danger zone yet?

No.  The instability in the global financial system is described as “the most severe in living memory” by Sir John Gieve, deputy governor of the BOE,  in a speech on Rebuilding Confidence in the Financial System.  Beyond the banking crisis there are alarming risks of hedge funds and other leveraged investors being forced to liquidate holdings in tight credit markets. Insurance companies,   though they are not over leveraged, risk breaching capital adequacy problems and downgrades by ratings agencies if the value of their equity holdings continues to fall.  And private pension funds have been decimated.

The global solution:

The focus of attention is shifting now to the November 15th meeting at the United Nations to develop what commentators are calling a new Bretton Woods plan structured to avert a re-run of the Great Depression.  There is relevant analysis on the key isues that will need to be addressed in The Goldwatcher:

Chapter 4 : The Rise and Fall of the Gold Standard - Did gold cause the Great Depression?

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

Chapter 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?

Chapter 7 : The end of Cheap Oil and other Tipping Points to instability. Will alternative energy come to the rescue?

Chapter 8 : Globalisation and Global Economic Re-balancing?  Can the IMF avoid Global Financial Meltdown?

 Jim Rogers on financial instability and gold:

The immensely successful investor Jim Rogers’ challenges to the central banking establishment tend to be extreme. In this video clip challenging whether all the bail outs will work he makes a strong case for holding gold in times of financial instability.

Crisis reflation and charts that speak for themselves: 

The above charts published by The St Louis Federal Reserve illustrate  US Montary  Base Growth seasonally adjusted  since 1980 and  US Monetary Base Growth linear since 1984. The exceptional levels of money creation speak for themselves. Based on the above data  Shadowstats calculate US Monetary Base Growth year to year of 18%.

Though the charts speak for themselves three comments  and one question must be added. First the above data reflects only growth in the US.  Second Europe is following suite. Third Keynsian fiscal stimuli in 2009 are going to thrust monetary growth further into the stratosphere.

The question:

Will it be possible that reflation on this scale doesn’t lead to inflation ? ( See The Goldwatcher pages 184  to 191).

# Reference added after posting - Mineweb comment : ‘But if one wants to take a bet on the best performing commodity, as far as capital protection is concerned, in the current climate you have to look at the precious metals sector. While it may be well off its peaks gold has performed well in comparison with most other commodities and the stock market in general.’

Nouriel Roubini’s post on his Global Econominotor this morning starts

Panic’ May Force Market Shutdown. Friday Morning Update: Markets are becoming dysfunctional and S&P and DJIA futures trading already suspended.  Roubini’s comment continues:

‘Early Friday Morning Update: Yesterday Thursday I (Roubini)  gave a speech in London (see video) arguing that markets were in sheer panic and becoming literally dysfunctional and unhinged. I also made the point that policy makers may soon be forced to close financial markets as the panic selling accelerates.

Indeed, we have now reached a point where fundamentals and long term valuation considerations do not matter any more for financial markets. There is a free fall as most investors are rapidly deleveraging and we are on the verge of a a capitulation collapse. What matters now is only flows - rather than stocks and fundamentals - and flows are unidirectional as everyone is selling and no one is buying as trying to buy equities is like catching a falling knife. There are no buyers in these dysfunctional markets, only sellers and panic is the ugly state of this destabilizing game.

And while panic and destabilizing market dynamics is the driver of financial markets even economic fundamentals are awful as investors are finally realizing that a severe US and Eurozone and G7 and emerging markets and global recession is coming and will be deep and protracted. As I have argued for a while equity prices may have to fall another 30% based on fundamentals alone before they bottom out. Why so? In a severe two year US and global recession S&P 500 firms earnings per share (EPS) could realistically fall to $50 or $60. If P/E ratios fall to 12 this implies the S&P 500 index falling to a 600 to 720 range. If P/E ratios fall - as likely in a recession - to 10 then the S&P 500 index could fall as low as 500 to 600. So even based on fundamental factors alone there is another 30% or more downside risk to US equities; and now, on top of such fundamentals, thee is also an ugly and nasty panic-driven market dynamics at work. 

I was accused yesterday of being alarmist arguing that policy makers may have to shut down financial markets. But today Friday Asian markets and in free fall and European markets are also in free fall. And US equties futures have fallen so much today before the US markets have opened that trading in the S&P futures index and the DJIA futures index has already been suspended in Europe as these indices reached their daily limits of a 5% drop. So it has taken only one day for my prediction that markets will be shut down to start to be realized. If - as possible -the free fall will continue today once US markets open then automatic circuit breakers on the S&P 500 may be triggered and trading may be stopped; and if - as likely - the capitulation panic continues today and in the next few days authorities may be forced - as I argued yesterday - to close down financial markets for a week or more in the next few days. We have reached the scary point where the dysfunctional behavior of financial markets has destructive effects on the financial system and - much worse - on the real economies. So it is time to think about more radical policy actions and government interventions of the type I discussed in my London talk yesterday (see the video below that may be worth to watch in its entirety of 48 minutes). ’

Gold and financial market instability

Roubini’s dire warnings left many Goldwatcher readers asking what about gold?  Gold isn’t above $1000 where many gold bulls would like to see it.  But at about $700 gold has done far better than US equity markets pressured by hedge fund deleveraging and other funds having to raise cash for withdrawals.   While gold has reacted to dollar strength the following chart illustrates that in Euros amd Britsh Pounds gold has been holding its own.  Chart courtesy Sharelynx:

Chapter 4: The Rise and Fall of the Gold Standard associates with the question ‘Did gold cause the Great Depression?’  Ben Bernanke sides with the economists who accept Milton Friedman and Anna Jacobsen Schwartz’s conclusion that  flawed Fed policies at the time, including excessive concern with the nation’s commitments to the gold standard, caused the depression.   At Milton Friedman’s 90th birthday celebration, shortly after becoming a Governor,  Bernanke spoke for the Fed.  This was his message: ‘I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.’

Bernanke thought he had all the answers. He wrote at the time ’a smart central banker can protect the economy and the financial sector from the nastier side effects of a stock market collapse.’ (The Goldwatcher Page 61). We all know he was wrong on that one for a range of reasons.  Now,   92 year old  Anna Jacobson Schwatz has commented in a WSJ Interview , Bernanke knew history and should have responded differently when the present crisis erupted.  In her opinion ’ Today’s crisis isn’t a replay of the problem in the 1930s, but our central bankers have responded by using the tools they should have used then. They are fighting the last war…I don’t see that they’ve achieved what they should have been trying to achieve. So my verdict on this present Fed leadership is that they have not really done their job.”

Chapter 5: The Dollar Standard and the ‘Deficit without Tears’ associates with the question ‘Is the $ again America’s currency and everyone else’s problem?’ Opinions from several respected economists are discussed in this Chapter, including Nouriel Roubini’s criticism of the so called ‘Bretton Woods 2′  arrangements - the foundation for the convenient ‘America spends Asia lends’  pattern promoted by Alan Greenspan, George W. Bush and Ben Bernanke to give the illusion of prosperity.  Nouriel has been forecasting a breakdown of Bretton Woods 2 since the theory was first introduced. But  at an IMF Seminar he presented a year back he acknowledged that, in the event of a recesssion, once China  realised the extent to which it would be a loser following an economic collapse in the US,  it would be unlikely to ‘pull the plug’ on the US. (The Goldwatcher pages 86/87)  I had the opportunity to discuss this with him in June this year. That was still his view - and as far as I know still  is. It’s also consistent with the view of Frank Holmes in the post below.

# Note posted on 24.10.08 : In this Bloomberg Video of  Roubini mentioned above he argues that  if the US can’t import substantially from China it won’t have the benefit of vendor finance and will be unable to secure funding from China on favourable terms.

 Can We Save the World Economy? A Conversation with Geroge Soros, Nouriel Roubini, and Jeffrey Sachs 

This video of a discussion at Columbia Columbia University moderated by CNN’s John Roberts is essential listening for readers seeking a better understanding of the origins, potential results and possible ways out of the present crisis. Roubini (pictured above) is as usual straight talking,  pragmatic and he pulls no punches. George Soros,  who has been writing about the end of the era ‘of international expansion based on the dollar as the international currency’ explains the errors in policy and general perception that  led to the flawed belief that the market is always right. (The Goldwatcher Page 96.) Jeffrey Sachs reviews wrong  priorities over the the Bush YEARS..  A common thread they share is the need for a well directed fiscal stimulus - not only in the US, but globally. Again to an extent consistent  with the view expressed by Frank Holmes below.

For those concerned over the recent fall in the gold price it;s worth  listening carefully to George Soros’s commentary in the CNN video and not assuming the market is always right.

 Jacques Rueff & ‘The Deficit Without Tears,’ that could end in tears:

The French Economist Jacques Rueff, committed believer in a gold standard  and relentless critic of the dollar standard,  coined the phrase ‘deficit without tears.’ It describes the privileged status of the US under the Bretton Woods arrangements that made it possible for it to run a deficit that would never disappear while the dollar standard prevailed. (The Goldwatcher Page 87). Rueff’s conclusion was inevitably the dollar standard and associated deficit will lead to a global economic crisis that will end in tears and an event akin with the Great depression.  Rueff could, alas, still be proved to be right

Chapter 9: Gold price prospects and owning gold:

This Chapter on gold price prospects anticipates the Global Crisis of Confidence and ends with serious oncerns over both outcomes for the dollar and an economic crisis on the scale of the Great Depression. But it’s acknowledged  that strong leadership can still get the US and Word Economies back on track. That’s also very much the message I got from the interviews with Roubini, George Soros and Jeffrey Sachs. And it’s also what most of us, optimists a heart. expect.

But what if outcomes are not as benign as we hope they will be?  While no one can answer that question everyone can be better equipped to deal with the consequences of worst case scenarios by holding some gold as insurance against the unthinkable.(The Goldwatcher Pages 8-9)

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In an  interview with The Gold Report yesterday Frank Holmes, co-author of The Goldwatcher,  addressed key factors behind the financial crisis. He expects ’short term hesitancy in the upwatrd movement of the gold price until liquidity returns to the markets’ and  predicted gold will go up to $1000  or even $2000 over the next two years. The expected catalyst for the rise is a growing money supply following a change in Government policies.

Abuse of leverage was identified as the biggest culprit behind the market rout and the scale of the global financial crisis. In March this year The Goldwatcher blogged on the leverage disaster unfolding and hedge funds facing margin calls. 

These extracts from Frank Holmes’s Gold Rep0rt  interview are revealing:

‘… The combined impact of Sarbanes-Oxley, FAS 157 (mark-to-market regulations) and leverage abuse has cost New York its position as the world’s financial capital. No one expected this escalation of write-downs… Mike Milken spoke at a conference I attended last week in Hong Kong. He said that at the height of his career he was leveraged 4-to-1. Goldman Sachs now is leveraged 20 times, so a 5% mistake would wipe them out.  If you make a 2% mistake in the $500 trillion derivative market, that’s $10 trillion. What’s $10 trillion? Well, the world’s total GDP is $50 trillion. The total amount of U. S. dollars in circulation is roughly $15 trillion. A 2% mistake wipes out 20% of the world’s GDP…

..The dollar’s not going to collapse due to loss of Asian support. All countries will support the dollar. The reason is that they can’t afford for it to fall too far because then suddenly the U.S would be exporting products and not importing.

..All the currencies will slowly debase themselves against gold and keep the dollar as the currency for global trade…The number-one Asian analyst, Chris Wood, is advocating a 30% gold exposure to institutions. Now, this is the number-one brokerage firm in Asia and their research is excellent…It recommends a portfolio allocation of 30% gold:15% gold bullion and 15% unhedged gold stocks. When an analyst of his stature advises putting 30% of your portfolio into gold, you have to take note. We tell our clients to put a maximum of 5% into bullion and no more than 5% toward gold equities…

Last week the markets hammered every stock with liquidity. Many funds have been hit by this problem. Margin calls are driving this. It has nothing to do with the demand for gold or the supply and discoveries…Whether you have big deflation or big inflation driving the bear market, gold does well. If it’s just a normal cyclical inventory recession or whenever interest rates are above the CPI rate, gold doesn’t do well. Today, the Fed’s funds are below the CPI rate and the printing presses are busy….’

Extracts from an interview never tell the whole story. The Gold Report interview gives a better picture and is well worth reading.

Paul Krugman & Keynes: 

Nobel Laureate Economist Paul Krugman calls John Maynard Keynes (above)  his economic idol . In a 1998 article written for Fortune, in the wake of the Asian economic crisis. he wrote ’ Now I’m not saying that Keynes was right about everything. But the essential truth of Keynes’ big idea - that an economy can fail if consumers and investors spend too little, that the pursuit of sound money and balanced budgets is sometimes (not always!) folly - is as evident in today’s world as it was in the 1930s. And in these dangerous days, we ignore or reject that idea at the world economy’s peril.’ 

Chancellor Alatair Darling & Keynes:

The news now is that British Chancellor Alistair Darling has discovered Keynes.  In an October 17th F.T.article Ed Crooks writes  that falling asset prices and other economic problems being faced now are akin with those experienced in the Great Depression days. Keynes’s solutions , including greater public spending funded by borrowing are again ‘becoming popular and the criticisms that this will fuel inflation and raise budget deficits still being heard are being seen as increasingly irrelevant.’

Crooks accepts Keynes conclusion that economic expansion to get out of a depression ’should be seen as the normal state of affairs and the downturn as an “extraordinary imbecility”.  In the view of The Goldwatcher the kind of ‘extraordinary imbecility’ perpetrated  on the British economy in 1992 when Prime Minister John Major raised interest rates, unemployment soared, businesses were forced to the wall and property owners with negative equity lost their homes. Great damage was done and unnecessary hardship caused by the time Major abandoned his arrogance and stupidity. Major had little education and no economics training whatever.

Do economists have the cure for depressions nationally & globally?

In the Fortune article Krugman gives some insight on Keynes’s approach to economic depressions. ‘Instead of presenting depressions as a morality play, with villains and heroes, he portrayed them as a dangerous but treatable disease in an otherwise healthy patient. Indeed, he once expressed the hope that economists might someday be thought of like dentists–apolitical professionals brought in to resolve technical problems.’ A ‘reflationary rescue’ is discussed in The Goldwatcher Chapter 9. The suggestion is that  whenever policy makers confront inflationary or deflationary consequences they will see inflation as the lesser evil.

In an October 9th Guardian comment Professor Bary Eichengreen, another highly respected American monetary economist quoted in The Goldwatcher,  advances the case for an urgent fiscal stimulus beyond the national level to the global level. In 2004 he forecast that the end of the international monetary regime was not far off.  Now he explains  ‘The problem with using fiscal policy in a financial crisis is that it may do more to frighten than reassure investors. Worried that the government’s big budget deficits will ultimately have to be financed by printing central bank money, investors may flee the country, causing its currency to crash and creating even more serious financial problems.’  But as that won’t be the case if all governments  apply fiscal stimulus at the same time  Eichengreen supports  ‘coordinated fiscal (and not just monetary) action.’ 

# Reference added after posting: Article by Barry Eichengreen ‘Can the IMF Save the World’

Will the world’s leaders  ‘grasp the nettle’ when they meet in the US later this year following discussions between Presidents Bush and Sarkozy and the Head of the European Union Jose Manuel Barosso last weekend?  It’s likely that most attention will be focussed now on global plans until they are either concluded or fall apart. Chapters 4 & 5 of The Goldwatcher spell out the transition over the 20th century from a gold standard to a dollar standard and identify the fault lines in current arrangements that contributed to the global financial crisis being experienced now.

Gold, Keynes & Reflation: 

Not all analysts are sanguine about the effect of Keynsian policies and reflation.  Merrill Lynch are among those forecasting $1500 for gold as ‘the unintended consequence of the ongoing financial bailout will be a return of inflationary pressures to the commodity markets.”  John Embry, Chief Investment Strategist at Sprott Asset Management, reviews a wide range of vulnerabilities and risks, suggests they are ‘wildly inflationary’ and,  after careful and well argued analysis,  concludes gold prices will be propelled to a surreal price level.

It’s surely a situation where investors must hedge their bets. Probably it’s good all round that in the UK Chancellor Alistair Darling has discovered Keynes. But can we be sure his new enlightenment will make him more competent in the rescue than he was in the run up to the crisis? And what are the chances of a global package in time to head off a snowballing economic crisis?

With or without Keynsian stimuli there can be no quick fix for the global economic crisis. Gold in a portfolio hedges against  loss of value in paper currencies,  systemic faulures in banking and monetary systems,  political and administrative incompetence and geopolitical risks. Its stateless money franchise is assurance that it keeps it value globally.

#Reference added after posting:

Clear analysis on Keynsian economics by Roger Bootle:

 ‘I believe that banking institutions are more dangerous to our liberties than standing armies.

If the American people ever allow private banks to control the issue of their currency, first by inflation,  then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless  on the continent their fathers conquered.’
Thomas Jefferson 1802