The Goldwatcher

Since the last Goldwatcher post:

It’s almost three months since my last Goldwatcher posting the day after Goldman Sachs were humiliated in congress for putting  lipstick on a pig.  On the same day politicians in the US  gloated they had ambushed President Obama’s drive to effectively regulate the US financial services industry.

It’s probably more than a coincidence that yesterday the U.S. Senate passed the biggest overhaul of financial-industry regulation since the Great Depression and Goldman Sachs settled the SEC fraud charge for $550 million. $250 million will  be returned to bilked  investors; $300 million will  be paid to the U.S. Treasury. The settlement does not resolve SEC charges against Goldman vice president Fabrice Tourre, the joint defendant named in the  lawsuit. Getting him off the hook  may yet cost Goldman a few hundred million more.

I was surprised to find near universal criticism of President Obama while in the US recently.  In this blog I have consistently taken the view that the President has been effectively seeking solutions to an unholy financial mess and there is progress now on two key domestic fronts. But there are other open cans of financial and geopolitical worms in the US and elsewhere. Contagion risks flowing  from Greece, Portugal, Spain and other countries  still menace the security of the Euro and the solvency of European banks. Global agreements on financial regulation remain stalled. Issues on sovereign solvency are unresolved.

 Gold’s stateless money franchise:

The last Goldwatcher posting ended with this conclusion as valid now as it was when first posted:

Goldman’s worst day with this issue may have been yesterday. They may yet escape any compensation and, even if settling could cost them  $1 billion or so,  Goldman MD Blankfine indicated yesterday big sums are managable everyday issues for them.

  For most of us that isn’t the case. We need to protect our assets against contagion. Gold’s stateless money franchise ensures potection.

CLICK HERE FOR KITCO GOLD PRICES AND ANALYSIS

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Readers, particluarly those who have not yet read The Goldwatcher,  are reminded that this blog is not an advisory service. Opinions expressed are not intended as investment advice and should not be treated or used as investment advice

CLICK HERE FOR KITCO GOLD PRICES AND ANALYSIS

CLICK HERE FOR REALTIME MULTICURRENCY GOLD PRICES  

 TO BUY THE GOLDWATCHER CLICK HERE:

Gold’s stateless money franchise: 

The key message after yesterday’s Senate enquiry on Goldman Sachs is that global regulatory standards are necessary  to prevent another  financial collapse. The spotlight should be on:

 1: Partisan politics in the US  frustrating legislative progress 

 2: Contagion risks flowing from Greece, Portugal and other vulnerable Sh**ty curencies; and

3: Stalled global agreements on financial market regulation.

These developments will all take time. Gold’s stateless money franchise affords instant protection against  the risks associated with currency contagion  and vulnerable securities.

 The  Sh**ty securities questions:

After the long Senate hearing yesterday do we or don’t we think Goldman put lipstick on the pig? Their lengthy  rebuttal  made the three key points that follow in italics below. My take on what we learned yesterday follows after each point:

1:’Goldman Sachs never created mortgage-related products that were designed to fail.’

At this stage I am not convinced.  Questioned on oath yesterday Goldman Executive Tourre couldn’t even stick to the written response prepared by his lawyers and that’s not persuasive. We need to know what John Paulson and others connected with security selection and rating agencies have to say. 

 2  ‘It is critical to remember that the decline in the value of mortgage-related securities occured as a result of the broader collapse of the housing market.’

This can only be partly true.  The securities would have crashed anyway becuase  they were, as described by Goldman Executives,   Sh**ty.

3:  ..(the decline in the value of mortgage-related securities) was not because there were any deficiencies in the underlying instruments. The instruments performed as would have been expected in those unexpected circumstances.’

There were no unexpected circumstances from the time when,  to save their butts, Goldman Executives changed strategy from supporting long positions with mortgage related securities to agressively shorting  similar securities. Goldman expected, hoped and prayed for the declines.

Another key question to consider is whether any organisation, with even a tiny percentage of the brilliant minds working in Goldman, would not have been very anxious about AAA and other high credit ratings for mortgage securities that  should have been scored S** or below.

Goldman’s day in the Senate: 

Goldman’s worst day with this issue may have been yesterday. They may yet escape any compensation and, even if settling could cost them  $1 billion or so,  Goldman MD Blankfine indicated yesterday big sums are managable everyday issues for them.

For most of us that isn’t the case. We need to protect our assets against contagion. Gold’s stateless money franchise ensures potection. 

Opinions and advice:

Readers, particluarly those who have not yet read The Goldwatcher,  are reminded that this blog is not an advisory service. Opinions expressed are not intended as investment advice and should not be treated or used as investment advice

CLICK HERE FOR KITCO GOLD PRICES AND ANALYSIS

CLICK HERE FOR REALTIME MULTICURRENCY GOLD PRICES  

Eric Sprott and the IMF:

Well known for the fierce case he makes against reckless central bank money printing Eric Sprott is one of the world’s most successful gold fund managers and investors.

When Sprott offered to buy gold directly from the IMF recently he encountered a rebuff. Commentators touted the rebuff as proof of something sinister in the declared gold holdings of the IMF or its members. A direct enquiry to the IMF yesterday made by an unemotional journalist has cleared the air.  Here is his report:  

‘We spoke with Alistair Thomson of the IMF and he clearly explained his reasonings behind not being able to sell Mr. Sprott gold.  Among them:

• The IFM only goes through a specific broker.
• It only sells gold to sovereigns.
• Thus, Sprott’s desire to purchase IMF gold did not comply with ‘protocol’. 

The sting appears be out of charges suggesting the IMF was engaged in a cover up.  But Sprott’s warnings on the money printing outcomes are alarming.  Two of his recent articles  ‘Is It All a Ponzi Scheme’ and ‘Dead Government Walking’ pull  no punches. Many readers will find the conclusions unthinkable.

Unintended revelations at a CFTC Hearing:

Commentators in the gold community suggested market manipulation again at a March 25th meeting of the US Commodities and Futures Trading Comission concerning precious metals. Surprisingly the most telling revelation at the meeting  came from an ambiguous comment by Jeffrey Christian, one of the world’s foremost authorities on markets for precious metals.

In a nutshell, in response to a question on multiple gold trades based on London Bullion Market Association (LBMA) physical stocks,  he declared: ‘People say, and you heard it today, there is not that much physical metal out there, and there isn’t. But in the “physical market,” as the market uses that term, there is much more metal than that. There is a hundred times what there is.’ This is a link to a video of the testimony and this article gives a useful account of the CFTC meeting, Jeffrey Christian’s revelation and its implications. 

You should be on your guard if you own gold via an Exchange Traded Fund or other custodial or paper structure.  Imagine the consequences if anything goes wrong when you have been holding gold as a physical store of value to protect against risks associated with paper assets and you find you have an asset that’s 99% paper and 1% real.  Like the worthless  fraudulent securitized debt securities that tipped the world economy into the mire a few years ago -  but with your Government now broke and unable to bale you out!  

Is gold poised to spike?

Chart courtesy Kitco www.kitco.com 

While The Goldwatcher book was never intended as a source for gold price prediction, assessing a reasonable price for gold,  based on supply and demand fundamentals,  is key to the analytical framework outlined in Chapters 1 to 9, this blog and the following recent postings: 

September 8th 2009: $1000 Gold - Here to stay or here to play? 

November 5th 2009 : Are Goldrush Prices Making Sense?

December 18th 2009 : Gold : Motivation & Strategy (Investors Chronicle Article)

January 4th 2010:  Gold: Afghanistan and Obama’s multi trillion $ ‘naughties’ legacy

January 12th 2010 : Gold Prices, a Weak $ and a Strong China

The above chart reflects the gold price settling down over the months since the ‘Are Goldrush Prices Making Sense’ blog was posted.  Technical analysts are now pointing to signs of a breakout  - well supported by increased gold holdings in Exchange Traded Funds and with central bank support.

There may be an innocent explanation for Mr. Christian’s remark: ’But in the “physical market,” as the market uses that term….there is a hundred times what there is.’ But I have not seen him, the LBMA, the World Gold Council or any responsible custodian in the gold industry come forward with the explanation. 

A gold price spike won’t come as a surprise to me unless I have seen a satisfactory explanation on what he meant. And, if and when an explanation comes, keep these two points in mind. First  the case for holding gold as insurance against the unthinkable is compelling. Second Eric Sprott’s track record as a forecaster is formidable. It would be dumb to dismiss his warnings as a sprott of bother. 

Opinions and advice:

Readers, particluarly those who have not yet read The Goldwatcher,  are reminded that this blog is not an advisory service. Opinions expressed are not intended as investment advice and should not be treated or used as investment advice

Support for strong gold and commodity prices:

Key commodity  prices including,  among others,  gold, silver, copper and oil rose yesterday following the release of data confirming China’s growth surge. Imports surged by almost 56% and exports by 17.7%.  Both were higher than markets expected. The euro also rose to $1.4515 from $1.4414. yesterday

Gold was trading this morning at $1156.70 after peaking yesterday at $1163 and responding to a weaker $ and strong economic data from China.

High gold prices for 2009 were forecast in the LBMA analysts competition published last January.  At the end of 2009 actual gold prices outcomes for the year were a high of $1213 , a low $750 and and average of $972. The following table published by the LBMA * with 2009 forecasts illustrates how close the analysts  with the highest forecasts were to actual results. * Note added 16th January - Content in the LBMA link quoted above has been changed to display some 2010 forecasts. The most bullish of these forecasts have very high targets. The forercasts will be reviewed when the LBMA publication is complete.

Obama’s war and domestic issues:

When President Obama took office last January he inherited both an unholy economic mess and failed wars in Iraq and Afghanistan.  His administration has addressed issues with committment and energy. Achievements include avoiding another great depression.  But he still faces daunting challenges. Among the most daunting is Afghanistan where his additional 30,000 troop committment supports the view that Afghanistan is  now Obama’s war.  His critical domestic issues include weak employment data that weigh on sentiment for the $ and prospects for economic recovery - and of course his multi $1,000,000,000,000 deficits forecast for the years ahead.

When gold prices make sense:

A November 5th 2009 Goldwatcher  posting ’Are Goldrush Prices Making Sense’ commented  that renewed central bank interest,  evidenced by The Central Bank of India’s  $6.7 billion purchase of 200 tons of gold from the IMF at $1045 per ounce,  supported a positive view on gold price prospects. The IMF/India transaction,  with a margin of about 5% either way,  was the basis for the view taken in November.

In the light of developments since December the margin either way could be wider. 10% or,  at a push,  even 15% depending on newsflow. Higher price expectations will also follow news adverse for the $, economic, domestic or geo-political security.

Lower price expectations will follow if the IMF eventually sells the remaining 200 tonnes of gold it has on offer at a much lower price than India paid. Or if, in spite of much grandstanding about sales of a few tonnes here and there, the IMF  can’t sell at all at a good price.

Caveat emptor: 

Lower gold price expectations will also follow when US interest rates rise.  Realistic interest rates will make gold less interesting than it is now as a speculation. It’s also worth keeping in mind that the dollar is not necessarily ‘kaput’ as some commentators are asserting.

Indeed An FT comment yesterday makes the point that ‘the dollar is hardly expensive. On a trade-weighted basis it is three-quarters of its average level since 1980 and, using purchasing power parity, the dollar is about 15 per cent undervalued against the euro. Be careful turning your back on the greenback.’

Note added 16th January : Insightful  S&P analysis on  gold prices and the 2010  global economy with useful chart

Opinions and advice:

Readers, particluarly those who have not yet read The Goldwatcher,  are reminded that this blog is not an advisory service. Opinions expressed are not intended as investment advice and should not be treated or used as investment advice

CLICK HERE FOR KITCO GOLD PRICES AND ANALYSIS

CLICK HERE FOR REALTIME MULTICURRENCY GOLD PRICES  

TO BUY THE GOLDWATCHER CLICK HERE

Opinions and advice:

I would like to remind readers, particluarly those who have not yet read The Goldwatcher,  this blog is not an advisory service. Opinions expressed are not intended as investment advice and should not be treated or used as investment advice.

President Obama’s multi $1,000,000,000,000 debt horizons:

Just seeing the array of noughts in a trillion dollar sum should be enough for most of us to recognise we haven’t the training to relate to such a gigantic number.

But, to accomodate borrowing requirement to the end of 2010,  President Obama’s administration  sought permission  from Congress last month to raise the U.S. national debt ceiling by about $1,800,000,000,000. 

To prevent the United States  from defaulting on committments Congress agreed an urgent interim  increase  of $290 billion and thereby raised the debt ceiling to about $12,400,000,000,000. This will only cover borrowing requirements to the the end of February  Further debate will follow in Congress this month along with debate on funding requirements for  extended troop committments in  Afghanistan. Congress may raise the roof this time round before they raise the ceiling again. 

The Afghanistan debacle:

Afghanistan prospects keep getting worse.  Now,  not only has President Obama made further extensive troop committments to the war but,  following the attempted Christmas day mass murder in the Amsterdam to Detroit flight and associated security myopia,  it’s obvious  the case for fighting terrorists in Afghanistan instead of in the US is unsupportable. The terrorist menace knows no boundaries. Security systems are still flawed.

In a New York Times op-ed jihad.com published ten days before Christmas,  the columnist Thomas Friedman explains the ’Virtual Afghanistan’ threat. ‘Let’s not fool ourselves,’ he writes ‘Whatever threat the real Afghanistan poses to U.S. national security, the “Virtual Afghanistan” now poses just as big a threat. The Virtual Afghanistan is the network of hundreds of jihadist Web sites that inspire, train, educate and recruit young Muslims to engage in jihad against America and the West. Whatever surge we do in the real Afghanistan has no chance of being a self-sustaining success, unless there is a parallel surge — by Arab and Muslim political and religious leaders — against those who promote violent jihadism on the ground in Muslim lands and online in the Virtual Afghanistan.’ Keep in mind also the economic jihad  - ‘topple the economy and you topple the Crusaders.’

Gold, Afghanistan, debts and deficits.

Gold prospects will be reviewed in the light of events as they unfold. In previous postings I have commented that, in my opinion,  prices in the range $1000 to $1100 make sense.  Am still reading and reviewing commentary from sources referenced in The  Goldwatcher and other credible commentators on recent developments. When I have worked  my way through the material,  will file a posting updating analysis and previous comments. 

CLICK HERE FOR KITCO GOLD PRICES AND ANALYSIS

CLICK HERE FOR REALTIME MULTICURRENCY GOLD PRICES  

TO BUY THE GOLDWATCHER CLICK HERE

gold_ic-insert.pdf18th December 2009  Investors Chronicle article

Today’s Investors Chronicle features an article commissioned from me on ‘Gold : Price, Motivation, Timing & Strategy.’  The article  includes discussion on gold price prospects.  

This blog posting follows the I/C article, the 5th November Goldwatcher  posting Are Goldrush Prices Making Sense? and the associated September 8^th Goldwatcher posting  $1000 Gold : Here to Stay or here to Play.         

Gold isn’t a very interesting asset to own when the world is in good shape. But, sadly, as we all know, that’s not the case now. Our economies are still in an unholy financial mess. Compounding the economic problems Afghanistan has become ‘Obama’s War.’  How can we justify spilling more blood, maiming more troops and borrowing more money to prolong this disaster when all we have accomplished after eight years is boosting opium production to record levels, refinancing The Taliban and financing a corrupt government?  There is ample motivation for everyone to make gold an asset allocation priority now. 

Even in the worst of times and for millennia gold has kept its value. That’s why it is  the most enduring, best and probably the only asset to own as protection against Armageddon outcomes such as financial and civic disorder. In these situations, as carefully explained in The Goldwatcher, gold’s stateless money franchise ensures some security for you and your loved ones. But, to have this protection, you need to own physical gold. Not paper gold, shares in mining companies or shares in funds owning mining companies that won’t survive the crisis. 

The unholy financial mess that nearly ended with global financial meltdown in 2008 hasn’t gone away. It’s been aborted by global money printing on an unprecedented scale and there will be consequences.  If history is anything to go by our paper money currencies are on course  to becoming  worth less and less and they may eventually be worthless in years to come. Owning gold and other precious metals can also be motivated to preserve the purchasing power of our assets. But it’s not the only way of achieving this outcome. In most cases it also won’t be the best. Let me explain why. 

Pundits are comparing apples to potatos and tomatos.

Gold pundits proclaim that the dollar lost over 90% of its purchasing power since Roosevelt’s 1934 devaluation. But who keeps a dollar bill or a pound note for 76 years?  We spend or invest money. It’s true we will need $16 or $13 of 2008 money, depending which yardstick we use, to match the purchasing power of $1 in 1934. However it’s also true that over 76 years a comparison with the return on $1 gained from compound interest, even at the lowest ruling interest rates,  will leave gold looking sick. A comparison with investments in equities will leave it looking even sicker. 

Another patently flawed pundit claim is that assets revert to mean and, as gold peaked at $850 in 1980, it’s now set to  breach $2000.  As explained in the Investors Chronicle article $850 was a spike – a brief encounter that occurred against the background of events very different  to what’s happening in the world now. For one thing inflation then was in the double digits. Now we are fending off deflation No logical argument can be made for mean reversion to spikes. Apples can only be compared to apples.

Note added 19th December : Gold can’t beat checking account 30 years after spike

The Goldwatcher framework: 

The Goldwatcher was structured as an information  framework supporting analysis of events affecting the value of currencies and gold.  You can make your own decisions on whether or not owning gold makes sense and whether or not gold prices make sense at any time by addressing the questions associated with key Chapters and information resources in the book. 

The ten chapters contributed by me in Part One on ‘Demystifying the Gold Price’ and associated questions are: 

1: Introduction – Why gold? 

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

3:  Gold Supply and Demand - Do central banks still need gold and does gold still need central banks? (NB to read this one now)

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? 

8:  Globalisation & 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? 

I will post comments on key developments affecting gold from time to time for various websites and publications. If you would like to be informed when comments are published or have any other queries please e-mail me johnnkatz@gmail.com. All communications will be answered.

Thank you for reading The Goldwatcher.

Seasons Greetings and good luck with your investments.

CLICK HERE FOR KITCO GOLD PRICES AND ANALYSIS

CLICK HERE FOR REALTIME MULTICURRENCY GOLD PRICES  

TO BUY THE GOLDWATCHER CLICK HERE

$2000 dollar gold?

The conclusion that gold in the range of $1000 to  $1100 makes sense is well supported by: 

 1: Renewed central bank interest evidenced by The Central Bank of India’s  $6.7 billion purchase of 200 tons of gold from the IMF at $1045 per ounce  announced two days ago ; and

2: Background analysis in The Goldwatcher on when gold prices make sense and when they don’t . 

Pundits are now beating the goldrush drum with talk of prices on course to $2000, $3000 and even $5000. At present, in my opinion, these predictions don’t make sense.  Conditions will change as will expectations for gold and other currency prices.  But, while the world still faces deflation,  further dramatic price rises can’t be expected  without a catalyst for change,    

The recovering world economy:

I advanced the case in The Goldwatcher for drawing a line between the pre 9/11 and post 9/11 worlds. Now we have to draw another line between the world as it was in September 2008 when the global economy was about to plunge into the depths, as illustrated in the above Time cover,  and the world as it is now with clear signs of  recovery in some important economies.  However,  though generally showing signs of growth,  many economies are still in emergency care and won’t survive without financial life support.  In this delicate state investors need continuous advice on currencies and I don’t give investment advice. Further investors in different parts of the world will also need advice specific to their needs.   Here are some accessible information sources I rely on:

1: Kitco for live reports with charts on gold prices and analysis differentiating the extent to which price movements are attributable to $ movements and investor activity;

 2: Dr Marc Faber’s Gloom Doom and Boom report with astute comment from the perspective of a gold expert and icon contrarian investor; 

3: Sharefin’s extraordinary chart resource and regular news postings;

4:  Link deleted 10th August 2010

 5: The Bullion Buzz for well selected contributions supporting the case for gold;

6: IHS Global Insight’s Economic Outlook -  a superb resource that takes the pulse of the most important factor in the global economic equation - the US economy. Working outside the investing bank community Global Insight are free of hype.  As independent economists they are consistently rated among the world’s most prescient forecasters across the spectrum of key economies and industries;

7: Nouriel Roubini’s RGE Monitor . The gold standard macro economic commentary for those who can afford the price;

8:  Kitco Casey : the immaginative and sound resource for speculative investors focusing on the big picture and rewarding opportunities; and

9: The Goldwatcher Webliography  listing of publications contributing essential regular information and analysis.(Page 322) 

Goldwatcher commentary:

I will comment on catalysts for change and key developments affecting gold from time to time. To be kept advised on future postings to this blog,  or other contributions I make,  e-mail me:  johnnkatz@gmail.com

Note added 16th December : There appears to be a glitch with the forwarding of e-mails addressed to me at The Goldwatcher. Any message not acknowledged has not been received. I apologise for this and will respond to any messages not acknowledged if they are re-sent to me at the above address. Thank you for reading The Goldwatcher and good luck with your investments.

* Added 9th November 2009 : Video interview with Jon Nadler, Kitco, on bear market in the $ rather than bull market in gold>

* Added 11th November : Street.com interview with Jon Nadler, Kitco 

CLICK HERE FOR KITCO PRICES AND ANALYSIS

CLICK HERE FOR REALTIME MULTICURRENCY GOLD PRICES  

TO BUY THE GOLDWATCHER CLICK HERE:

CLICK HERE FOR REALTIME MULTICURRENCY GOLD PRICES  

TO BUY THE GOLDWATCHER CLICK HERE:

Motivation, Timing & Strategy:

Gold has again breached the ‘magical $1000 threshold.’ Some see this as a sign of yet higher prices to come. Others see it as another overshoot. What should investors do?

The importance of motivation, timing and strategy is emphasised in The Goldwatcher. If the motivation for holding gold is to hedge against financial, currency and security upsets current strong prices reflect the value of the holding as part of a risk protection strategy.  It’s another story if the motivation is speculative. 

The $1000 Threshold:

This comment is from a January 2009 Goldwatcher posting reviewing annual price forecasts by leading analysts:   

‘The 25 industry analysts contributing to the 2009 London Bullion Market Association survey are upbeat - but not euphoric.  Last year the most bullish among them forecast that gold would pass $1000 - which it did for  few days in March. This year, 75% of forecasters expect gold to hit record highs again, with a predicted average high of $1073.54 and overall average of $862. However, as in 2008, prices are also expected to  reach an average low of $721.46.

For gold to rise significantly there must be a catalyst.  In the previous posting on ‘Gold, Red Ink and Animal Spirits’  price is discussed in some detail.  The posting includes analysis from Goldman Sachs on price prospects and analysis on gold and deflation. This is the key comment on gold and deflation :

‘Characteristic of most deflationary periods are deteriorating credit quality and  the shift by investors from capital growth to capital preservation.  Deflations typically end after crisis conditions force policymakers to enact large-scale inflationary policies designed to counteract deflationary conditions.’

Without a catalyst high gold prices are likely to reflect a price  overshoot - overshoots and undershoots are both par for the course in currency and commodity markets.

The $

It will be a whole new ballpark for gold if central banks are buying instead of selling . A comment in The Telegraph ‘ yesterday ‘China, Bernanke and The Price of Gold’  by the astute commentator Ambrose Evans- Pritchard reviews evidence of China switching some $ reserves to gold and the prospect of Sovereign Wealth Funds holding more gold - a subject addressed in The Goldwatcher.

A recent study Is The World Losing Faith in the Dollar? published by Wharton University  opens with the comment : ’ As the global economy appears headed toward recovery, concerns are growing that the United States’ addiction to massive fiscal stimulus as an economic panacea could eventually lead to an even bigger crisis — a loss of confidence in the U.S. dollar.’

Pakistan & Afghanistan:

The following chart illustrates ‘Pashtunistan’ - the porous Afghanistan Pakistan border regions populated by  Pashtuns from Afghanistan and Pakistan :

Other factors  driving high gold prices are the Iraq and Afghanistan debacles and the realisation of an economic Jihad being waged against the West. The June 21st 2009 Gold Watcher posting Economic Jihad : How vulnerable is the $? discussed this development. 

A June 2007  Goldwatcher posting ‘Between Iraq and Another Hard Place’ addressed menacing developments foreshadowed in The Goldwatcher Chapter on ‘The Economic Consequences of 9/11 and George W. Bush.’

A soaring gold price will be sustainable only with  grass roots supply and demand support and investors must take into account that at current prices bedrock demand for phyical gold for jewellery from India has slumped.   The Goldwatcher provides a framework for fundamental analysis but does not address the technical analysis speculaltors take into account. 

The Gold Price and Fair Value 

Current prices certainly confirm the value of gold as an asset with a risk reward profile different to other financial assets. Loking beyond considerations based on fair value  Goldman Sachs analysts noted in a recent report   ’…‘just like crude oil in mid-2008, if enough people worry about the dollar and inflation, momentum can carry gold to much higher levels beyond any measure of fair value.’ 

It will be surprising if the gold price doesn’t settle down above fair value when people factor in the Afghanistan debacle and its potential effects on Pakistan, an economic basket case and a failed nuclear state.

+ Note added 9th December 2009 : New York Times Article on The War in Pashtunistan

‘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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 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.