Some question his timing, and why he’d begin a fund right now given that the precious metal is at all time highs well over $1,100. He, however, must be confident given that his own money is at stake on this new yellow wager. Paulson has a consistent record of buying assets at low valuations, so presumably he believes that gold’s also undervalued right now.

The fund will invest in both miners and other assets tied to the price of gold, and he has experience in the sector. He already has about $3 billion of Paulson & Co’s money under management invested in gold-related assets.

More details are available from the Telegraph in its coverage of John Paulson’s new gold fund.

John Paulson Launching a Gold Fund with $250M of his Personal Fortune originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

And today we take up a foul and disagreeable task. We ask ourselves: what if we are wrong?

If you bought gold when we first recommended it, ten years ago, you are in a very comfortable position. Gold sells for more than 4 times as much today. But what should you do now? And what if you didn’t go for broke on gold in the early ’00s? Is it too late to get in on the bull market?

To give you a warning, in the following windy ambulation we come to no conclusion we haven’t come to before. We say gold is going to the moon. If we are wrong about when…we will be delighted sooner than expected…self-satisfied…and insufferable for years. If we are right, we may have to wait a long time before saying “I told you so.”

First, the press has certainly noticed the bull market in gold. How could it not? Most reporters say gold is going up simply because the dollar is going down. In the popular press, we found no other explanation. In fact, much of the notice of gold seems to occur within articles about the dollar. We found, for example, that the dollar is at a 15 month low…and, coincidentally, gold has just hit an all-time high.

There’s something lopsided about this account of things. If the yellow metal has hit a record high, how come the dollar is down for only 15 months and not since the Flood? Makes you wonder if the dollar isn’t the whole story.

Elsewhere, we find that the dollar is trading at $1.49 per euro. Wait a minute. We remember the dollar at the exact same level…was it a year ago…more…? And it’s been at that same level, more or less, all the while gold has gone up more than 10%.

It’s not the fall of the dollar that is driving the gold market, in other words, it’s something else…it’s the fall of ALL paper currencies. For when the dollar goes down, so do the rest of them – more or less. No nation wants its currency to rise too much against the greenback. Americans are still the world’s biggest spenders. They spend dollars…not rubles…not euros…not zloties. A nation whose currency rises against the dollar is in a competitively weaker position. Its costs – in local currency – go up while its sales – in dollars – go down (it has to charge higher prices). Typically, central banks buy up dollars with money created for that purpose…thus increasing their own money supply and thus decreasing the value of their own local currencies relative to the dollar.

Since all the world’s central banks, more or less, are doing this, all paper currencies are going down together – compared to gold.

But wait, wouldn’t they be going down together against everything else too? If currencies are getting weaker…shouldn’t they be getting weaker against oil…and McDonalds’ hamburgers…and woolen underwear? The oil price is at $78 – where it’s been stuck for a while. Oil is a special case, but almost all consumer prices are stuck too. Take out energy and food, and consumer prices are deflating in the US. Put back in the energy and food and they’re just stuck. There is no sign of generalized consumer inflation – not in the USA and not in Europe either.

The only thing that is going up is gold. There is a bull market in gold and gold alone. But why?

According to the law of supply and demand, you expect the price of a thing to fall when its supply increases faster than the demand for it. In today’s news are two reports on gold production. One, from South Africa, tells that a scientist says the nation’s residual gold in-the-ground is much less than expected. It has been overstated by 900%, he says. Another report shows the output of from the gold mining industry clearly topping out. Gold supply, in other words, is increasing, but not as fast as it used to.

The supply of paper money, on the other hand, needs no new discoveries. Since there have been huge increases in the monetary base of paper money all over the world, it is reasonable to expect the price of paper money to go down. Gold, traditionally the thing that paper money is priced in, should go up. Speculators are buying it now in anticipation. Even central banks are buying again. And nearly everyone expects the price to continue going up.

As near as we can tell, gold is properly priced already. Comparisons are rough, but an ounce of it appears to buy about as much stuff as it did 2,000 years ago. You can buy a suit of clothes for an ounce of gold – no problem. Go to Wal-Mart; you can buy 4 suits.

As Roy W. Jastram wrote in his 1977 book, The Golden Constant, gold’s “price has been remarkably similar for centuries at a time. Its purchasing power in the middle of the twentieth century was very nearly the same as in the midst of the seventeenth century.”

Gold…or the people who speculate in it…may be looking ahead. Or, they are dreaming. If gold is already about where it should be why would you pay more? You must expect paper currencies to go down…to buy less stuff. In other words, you’d have to be anticipating a fall-off in the value of the paper currency.

It may come to pass exactly as they imagine it. Gold may rise and rise and rise…as paper currencies fall and fall and fall some more. In that case, we here at The Daily Reckoning headquarters as well as all of our dear readers who followed our advice 10 years ago will be delighted. Gold may hit $1,500 by the end of the year. By the end of next year it may be $3,000. By the year after, well…who knows…? “We told you so,” we will say.

But there is almost always more under Heaven than speculators think. When we look into it, we see gaudy increases in the monetary base…but only very modest increases in M2, the money that buys stuff. What’s more the rate of increase for M2 has fallen in half over the last 8 months. It’s now only about 7% annually in the US. And when we look at the CPI we see no increase at all. And despite the ‘recovery,’ unemployment is still rising and house prices are still falling. So, if speculators see the price of stuff going up in paper currency terms, they must be looking way over our heads.

To more fully describe our own state of mind, we don’t doubt that all the liquidity added to the world’s monetary system will eventually be soaked up by paper currencies. But it could take a long time; we might be dead before it actually happens.

But since we are entertaining the possibility that we might be wrong; let us look at what is going on in more detail. If there were a real recovery – as announced in the world’s newspapers and proclaimed by its stock markets – you’d expect a rising increase in demand…leading to higher prices…leading to a higher gold price.

Yesterday’s news brought word of greater retail spending than anticipated. This was greeted as more evidence that a recovery is actually underway. But upon examination, we discover that the evidence comes almost all from auto sales. We also find that the number crunchers contributed to the lift by revising figures for September. These are month to month movement numbers. So you can raise October’s number simply by lowering the number for September.

What’s more, while sales went up…auto prices actually went down – in paper dollar terms. This doesn’t sound inflationary to us.

Meanwhile, news reports said that fewer people are defaulting on credit card debt. The reports also tell us that delinquencies on credit card debt are up. So, we’d have to call that a draw.

And then there’s the news from GM. The giant, government-owned auto company says it will repay its loans from the feds earlier than expected. But wait…we also find that the company continues to lose money. How then will it repay debt? Perhaps by refinancing!

Other reports are similarly confusing and inconclusive. Profits are up on Wall Street. But wait…sales are down. You can increase profits by cutting expenses (getting rid of employees, mainly). But you can’t increase sales. And as long as sales are falling you have to expect lower profits in the future. (Stock market buyers…take note.)

Our colleagues over at The 5-Min. Forecast sent through this chart, illustrating the “recovery that wasn’t.”

“With the majority of publicly traded companies done reporting third quarter earnings,” writes 5 editor, Ian Mathias, “the trend is clear: Profits were way better than expected, revenue was flat at best.

“Of what little we recall from freshman year, Finance 101 insists that profit equals revenue minus costs. Thus there really can’t be any questions left as to how the market pulled off this quarter…companies are simply trimming the fat at an incredible clip. Not exactly a long-term plan for growth.”

The New York Times reports that job losses continue to be “deep and enduring.” Mortgage applications are running lower than they were 9 years ago. “More households report food shortages,” says a Wall Street Journal headline. And insiders are still selling their own companies.

So, it still looks to us as if we are in a depression…one that will take many years to sort out. It is unlikely that the bull market in gold will reach its final blow-off top while the depression continues. But stranger things have happened. Eventually, gold will reach the apogee of its bull market. And when it does, we want to be ready for it. We will celebrate with champagne and sparklers.

Still, we wouldn’t get out the party hats…not just yet.

Until tomorrow,

Bill Bonner
The Daily Reckoning

Gold in the Face of the Fiat Fallout originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

1. With interest rates near zero there’s basically no opportunity cost to choosing to buy gold over Treasuries.

2. The Fed is going to keep building debt, and will eventually cause “world-wide central bank inflation as the banks seek to devalue their money in an effort to keep the dollar strong.”

3. In a departure from their usual routine of selling gold, central banks around the world are now net buyers of gold. They are looking to shield themselves from the weakening dollar. 

4. Countries are increasing the amount of gold in their reserves. On the one hand, developed nations like Italy and France hold 66.6 percent and 70.6 percent, respectively, of their reserves in gold. On the other hand, nations like Russia and China only hold 4.3 and 1.9 percent of their reserves in gold. Developing countries have an easy justification for growing their holdings.

5. Few people in the US own gold. In fact, many seem more inclined to sell jewelry through services like Cash4Gold.

6. Lastly, only a few nations, like China, are encouraging citizens to buy gold for personal savings. There’s plenty of room for buying by the public to increase. As Russell pointedly puts it, “most Americans have never seen a gold coin.”

The six reasons are presented in their entirety on The Pragmatic Capitalist in its post on why Richard Russell wants to own gold.

6 Justifications for You to Own Gold originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

Yesterday, we had a couple of Fed Heads talking, but the Big Kahuna stood out and moved the markets with his statements… Here’s the skinny…

Big Ben was giving a speech, and said, “The Fed will monitor closely the currencies, and the Fed’s policies will ensure that the dollar is strong.” Now, when he first uttered those words, the dollar got bought and the non-dollar currencies were sold… But then, a few of us had this feeling… It was a feeling that we had heard all this before… And there – in the archives, circa June 2008 – Bernanke said, “In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets.” Wait! We won’t get fooled again!

In June 2008, his statements spooked the markets into believing the Fed was really going to do something to bolster the dollar… But when nothing came along, the dollar REALLY got sold until the financial meltdown of August 2008… I mean… What has the Fed done in the past 1 1/2 years to “bolster the dollar”? Near zero interest rates that will remain in place for longer than they should… Quantitative easing… A bloated balance sheet of toxic bonds.

You could see the V-8 moments on traders’ faces when they realized, yesterday, that all this had been said before, and nothing came of it, so… We won’t get fooled again!

So, then traders reversed their buying of the dollar and sent the dollar to the woodshed. You should have seen the reversal… It was amazing… The Big Dog, euro (EUR), went from 1.4970 to 1.4860, and then turned around to rise to 1.50! Now, overnight, there has been some renewed selling of the non-dollar currencies, and the euro is back to 1.4910. Crazy… But not as crazy as Big Ben spouting off about “monitoring the currencies”… Yeah, right… And what are you going to do about them when they get out of line, Big Ben? Get the ruler out? I’ll tell you what he’ll do… Nothing… Absolutely nothing!

Memo to Big Ben… Ahem… Am I on? OK, long time listener, first time caller… Big Ben… Just what policies are you talking about that will keep the dollar strong? In the future, you might want to list to them, so that people like Chuck Butler don’t rip your comments to shreds for their lack of truth, and facts.

Non-voting Fed Head, Fisher, had this to say yesterday… “Our job is to maintain the purchasing power of the dollar, while fostering the conditions that enable the economy to grow without fanning inflation.” Hmmm I would say that he’s got that right… But, apparently, somewhere along the way, the part about “maintaining the purchasing power of the dollar” got lost, eh? I mean, since the Fed/cartel was formed in 1913, the dollar has lost 95% of its purchasing power… YIKES! Most people that did their jobs that badly would be fired… These guys have had almost 100 years to figure this out, and have failed miserably… And hey! Before I get accused of, Fed Head Fisher was the one that described the Fed Heads’ job, not me!

OK… While I’m on this subject of being accused… I have been beating on the US administration for nine years, folks… I know I’ve really stepped it up with the step up of deficit spending by this administration, but I chastised the previous administration beginning with their protectionism measures in 2000, and never let up with their deficit spending… Someone even said I never talked about Cheney and his “deficits don’t matter” comments… WHAT? I’ve even repeated the same joke several times about the deficits don’t matter crowd, and that they remind me of a guy standing on the Empire State Building who decides to jump off, and as he passes the 56th floor, he says… “So far, so good!”

Yes, so far, so good, because he hasn’t hit the concrete yet… And neither has the deficits crowd… But they will, and in fact, they are getting awfully close right now!

The US economy got a boost yesterday when retail sales grew at a faster rate than forecast, growing 1.4% in October, above the 0.9% rise projected by Wall Street. The jump came on rebounding demand for cars, a sign the economy kept recovering despite climbing unemployment. Aside from automobiles in October, other sales rose just 0.2%.

But… Are these numbers suspicious? Well, when you look at the previous month’s revision, you have to question these numbers as well… September retail sales, which were reported as -1.5%, actually fell -2.3%… I wonder what this number’s revision next month has in store.

Today, the data cupboard is stocked to the brim with data prints… Producer Price Index (PPI) prints along with two of my faves, Industrial Production and Capacity Utilization… And then the Big Kahuna of the day… The TIC’s data… For those of you new to class, The TIC’s data stands for Treasury International Capital… Or… Easier to understand… It’s the fancy, schmancy name for Net Security Purchases by Foreigners… This is how we track, how well we’re doing as a county at financing our ever expanding deficit…

I made a mistake yesterday when talking about the Reserve Bank of Australia (RBA) and saying that if they didn’t hike rates in December, that they would most likely come back in January at hike them… A reader pointed out to me that the RBA doesn’t meet in January… OK… So, I guess I should have said that the RBA would hike at their next scheduled meeting!

Speaking of the RBA… They issued their latest meeting minutes, in which they sounded less hawkish than one would expect, since they raised rates at the same meeting… But this less hawkish tone, set off a round of Risk Aversion once again in the currency markets overnight… Risk on, Risk off, is reminding me of a Wayne and Garth street hockey game…

For, it’s Risk on, one day, and Risk off the next day… So, while I find that the RBA minutes did set off this round of Risk off for the currencies, I don’t see it having lasting power… Look for this all to fade, especially if we get a rogue data print in the US today…

Late last week, I came across a story on the dollar that I totally forgot to talk about yesterday… So, here you go… Oh, by the way, strap yourself in for this one, and keep your arms and legs inside during the ride…

The German government’s 5-person council of economic advisers issued a report that said, “After the massive global increase in US dollar reserves in the past years, an “uncontrolled exit”, especially in emerging economies from the US dollar as a reserve currency is a possible trigger of instability in currency markets.” The went on to say…

“Countries holding “high” dollar reserves should consider committing to selling their dollar holdings in a coordinated way over a longer period of time.”

The folks over at the Royal Bank of Scotland (RBS) think that Bernanke’s speech yesterday, basically gave the green light for a further, slow, gradual decline of the dollar… And, quite frankly, that’s what traders would prefer to see too, given that they don’t like getting whipsawed day in and day out by the Risk on, Risk off game… When assets go to fast one way or the other, it just causes strong corrections, and people get hurt by the movements… But a slow, gradual decline I would think would be the preference of the US government… That way, no one notices… It’s not like a bubble that grows and everyone notices it…

Speaking of bubbles… And if you’re like me, when I type, or say bubbles, I immediately think of Big Al Greenspan… Well, you’ll love this Fed Head statement about bubbles… Here’s Fed Head Kohn… “Asset price bubbles can be spotted when they become extreme, efforts to spot bubbles may result in seeing more than there is.”

Now that statement plays well with Big Al Greenspan, who always claimed that bubbles could not be spotted before they got out of hand… Basically, what these two are saying in different ways is that the Fed could spot them, but probably wouldn’t like it, and wouldn’t have much at their disposal to do about it, so they just turn away…

And speaking of such… Fed Head Yellen said last night that the “US stock market is not overvalued”… That’s all I’ll say about that!

OK… Hopefully, you are still with me here, and reading… And you will recall me going on and on about China and their FX currency swap agreements and how that was a baby step toward gaining a wider use of the renminbi… Well… Yesterday, there was a story, that I think Ty told me about, that talks about China preparing to float the renminbi, testing it in Hong Kong… The Chinese government has been moving to allow banks in Hong Kong to issue bonds, hold deposits, and settle trade with the mainland — all in renminbi.

However, don’t look for this conversion to a floating currency to happen soon… Financial analysts believe it will not happen before 2020… It may come sooner… But I wouldn’t get all lathered up that it happens in the next year!

One of the best performing currencies VS the dollar this year, has been the Brazilian real, with a greater than 30% gain, so far… There’s been a shakeup at the Brazilian Central Bank, and there will be a few new members, with voting power at the next meeting on December 9th… I still don’t think the Brazilian real interest rate will be moved at this meeting, but with the new members, they might want to make a “statement” about how hawkish they are… And on December 10th, Brazil will print their third quarter GDP, which I would think would be quite strong… You would have to think that the Central Bank will have privy to this report before they meet on the 9th… And with the new members possibly wanting to make a statement, there’s a whole new outlook for the Central Bank meeting…

You know… As we draw closer to the end of the year, the closer we get to the winter Olympics which will be held in Vancouver, BC.Going back to the early days of the World Markets Division at the old Mark Twain Bank, here in St. Louis, we tracked currencies from countries that were holding the Olympics, noticing that there was always a rise in the host country’s currency… If that were to hold it would benefit the Canadian dollar/loonie… Will it hold true for the Vancouver Olympics? We’ll have to wait-n-see, eh? But really… Wouldn’t it be worth a flyer, a shekel or two to see if it did hold true?

And then there was this… Were you confused by the GM announcements yesterday? I was… First there was an announcement that GM would be paying back some of the bailout money to the Government… But then later it was announced that GM posted a $1.5 Billion loss… Kind of difficult to pay someone back, when you’re booking losses, eh? Strange announcements for sure…

OK, to recap, which I forgot to do yesterday! UGH! The currencies were whipsawed yesterday by comments by Big Ben Bernanke, that we’ve heard before! The RBA issued a not-so-hawkish minutes report that spooked the markets and it’s Risk off today… Brazil might have a different outlook for their next meeting in December, and the winter Olympics are ready for Vancouver, will that mean a boost for the loonie?

Bernanke Digs Up Some Old Words originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

What we’ve been thinking is that the dollar is dead meat in the long run. But in the short run, it might have enough life in it to bite investors on the derriere.

The US stock market rose 73 points on Friday, to bring the Dow just 30 points south of the 10,300 mark. Why is this level important? It’s not really. But it reminds us that this is still just in “bounce range.” Big drops in stock prices are followed by bounces – always. A bounce of 50% of what was lost is not unusual. That’s what happened after the Crash of ’29, for example. So, there’s nothing exceptional about what we’re seeing on Wall Street.

Our comrades over at The 5-Minute Forecast provided this sobering chart in Friday’s issue.

But here at The Daily Reckoning we’re not smart enough or fast enough to play the countertrends. We want investment positions that we can ignore for years… We want to be able to go on a long trip…say, down the Inca Road or over the Hindu Kush. And when we come back, we want to find that we have at least as much money as when we left.

If stock market buyers – in the US – have more money a year from now than they have now, we’ll be surprised. The private sector is still more than 2/3rds of the economy. And the private sector has begun de-leveraging. Nothing that has happened in the last 8 months makes us think that that trend is going to reverse any time soon. There are 70 million baby boomers who need money for retirement. They’ve got to save. That means cutting back on spending. And that means less income for business. Are stock prices really going to go up when business income is going down? No.

We leave our “Crash Alert” flag flying, here at the worldwide headquarters. We don’t know when…or IF…stock prices will crash. But the downside risk is not worth the possible upside. Daily Reckoning readers should be out of all US stocks, except those they wouldn’t mind holding through a 50% correction.

The other thing we mistrust – aside from politicians, stock promoters and tap water – is the dollar. But here the story is more complicated. Because the next downswing in stocks could push the dollar up! Everyone is betting against the dollar. And most think it is a one-way gamble. But it’s not like Mr. Market to grant investors a one-way bet. He’s got something up his sleeve.

Last week, The Financial Times reported that a group of IMF economists had made a “Plea to reduce demand for dollar reserves.”

That is another way of saying: find something else to put in your vaults rather than dollars!

Why? Because a world money system that uses dollars as a reserve currency is fragile and vulnerable. It makes the whole world hostage to America’s financial problems.

“The US, at the center of the system, was under pressure to run large current account deficits in order to supply the world with the dollar assets it wants, they said, while there was no effective discipline on either the US or countries such as China that have big external surpluses to adjust their policies.”

This move by IMF economists is only the most recent effort to reduce the world’s reliance on the dollar. Everyone can see the dollar is weak. And everyone with any sense wants to protect himself from it.

On Friday, the price of gold moved up to $1,116. Gold is the obvious choice for those who wish to protect themselves from the dollar. But readers are cautioned: that doesn’t mean the price of gold is going up.

Over the long run, sure. All paper currencies eventually go to their intrinsic value, which is zero. And gold always goes to its traditional value too – at a level where a man can take an ounce of it and get himself a suit of clothes, about 30 bottles of good whisky…one horse…or a trip across the Atlantic in economy class.

But things that ought to happen do not always happen when you think they should. It could take many years – of long, drawn-out recession…a la Japan – before the Bernanke Fed gets its helicopters revved up. In the meantime, all those hot shots who borrowed dollars from the Fed in order to bet against the greenback are going to be in trouble. They’ll have to unwind their carry trade positions at a loss…and pay back more expensive dollars. The process could take years.

The Fragility of a Dollar-Based Money System originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

Wang Qing, chief Asia economist for Morgan Stanley in Hong Kong, said in a report to clients: “I consider this article an official effort by Chinese authorities to dismiss the renewed speculation of yuan appreciation in the near term.”

So much for that visit to China, eh? Put that one down next to the visit to Copenhagen earlier this year. Ahem… Three strikes and you’re out… But, getting back to the trip to China… The Asia-Pacific members had some pretty tough questions for the US President, especially regarding his commitment to free trade… And then they let him know that China is going to fight protectionism, and keep the renminbi on a leash.

On Friday, we had the currencies add a bit to their Thursday rally as the risk aversion campers were sent home without a ball. No need to go away mad… Just go away! There was a bit of interesting data reaction that happened on Friday, which only gave me some hope of returning to fundamentals… The U. of Michigan Consumer Confidence Index fell in October, which wasn’t expected one iota… And… The dollar sold off! That’s exactly what should happen when a country’s economic data prints badly! So Hurray! YAHOO! But… Just like I always say… On swallow doesn’t make a summer, and one reaction to a data print doesn’t make for a shift in fundamentals… But could it be a start? Yes, it could… But we’ll need to see more of this type of trading after data prints to indicate that the old “trading theme” has been put in our rear view mirrors, and that fundamentals have returned… But wouldn’t that be a happy day? Oh happy day…

There was good news in Asia overnight, as the Japanese printed a third quarter GDP report that showed an annualized rate of +4.8%! That was 2.9% higher than the “experts” forecast for Japan! So… Even Japan is joining the other Asian and pan-Asian countries (Australia) in posting strong economic growth!

The Asia-Pacific leaders pledged to keep stimulus measures in place until there’s “durable growth.” Hmmm… Here’s hoping that the Asia-Pacific leaders let us know when that happens, because 4.8% annualized growth for Japan sure seems like “durable growth” to me!

And… In keeping with our hopes that fundamentals return to currencies and commodities… The strong economic data for Japan did not quash the yen (JPY)! In fact, the yen has traded stronger versus the dollar overnight!

And speaking of trading stronger versus the dollar overnight… Have you seen the price of gold? WOW! Gold has set yet another all-time record high overnight of $1,133! It has since given back some of that to trade at $1,127… But still… WOW!

About 10 days ago, the dollar was looking as if it was going to make a comeback/correction… I even saw a poem a trader wrote about it being the end of euro strength… But here we are 10 days later, and the dollar is looking quite weak again. The euro (EUR) is back to pushing the envelope to 1.50 versus the dollar, and I just told you about gold’s run versus the dollar.

Of course this doesn’t mean that a correction couldn’t take place today, tomorrow, or the next day… I’m just pointing out something that I’ve told you all about for years now… And that is: short term forecasting for currencies is usually wrong! So then, people ask me… Why do you write a daily letter about currencies, Chuck? Ahhh, grasshopper, because, someone has to make sense of this daily noise, and… You never know when a “turn” might happen in the currencies.

The Aussie dollar (AUD) spent the overnight sessions trying to get past 0.9350, but failed to do so, especially on the back of a note from a local bank analyst who went out on a limb and said the Reserve Bank of Australia (RBA) would be on hold at their next meeting on December 1st… Well, that may be… But I still believe the RBA will hike rates in December! But if they don’t, then we could look for an even larger hike when they come back in January! So, this keeping the Aussie dollar below 0.9350 won’t last long, in my humble opinion!

We could get some traction from the euro and other Euro-type currencies this week, as the Euro Finance Week in Frankfurt will take place with top leaders speaking on the financial crisis and lessons to be learned from it… German Chancellor Angela Merkel, who’s always good for some interesting quotes, will speak, as will European Central Bank (ECB) President, Jean-Claude Trichet.

Speaking of Euro-type currencies… The Norwegian krone (NOK), continues to follow the Big Dog, euro… But when the euro gets going, the krone normally outperforms it… So… The euro is the key here.

OK… For some time now, I’ve been trying to point out to you that monetary inflation is going to sneak up on us and rip apart our investments… My good friend, David Galland, had this to say in his Friday letter… Here’s David!

“Just because it’s not readily apparent doesn’t mean it’s not there. Of course, I’m referring to the government’s monetary inflation, which, thanks to a combination of factors, still hasn’t jumped out of the closet to scare bond markets into cardiac arrest.”

David then went on to show his readers a table that had useful details on the progression from normal to very much not normal, leading up to the German hyperinflation of the early 1900s… David then says, “As you can see, the situation in Germany was not so bad – until it was.”

OK… You know, the soaring gold price has been mostly tied to the weak dollar… But, you would have to think that “smart investors” with an eye on this monetary inflation is having some push to the price of gold too… I know that’s why I own gold… The weak dollar thing is just icing on gold’s value in my opinion… The inflation hedge… The deflation hedge… Or… As I call it… The “uncertainty hedge”.

And then there was this… The other night I was discussing the health care stuff, and told the person I was talking to that the stimulus bill, you know the one that was pushed through so fast last winter because we as a country were “near total collapse”? Well, the stimulus bill had hidden in it, part one of the Obama Health Care Plan… Hmmm didn’t know that? Well, yes, grasshopper… It’s the “death panels” as Sarah Palin coined them… They are called the rationing and enforcement board. And… The President has already funded them with $20.6 billion of taxpayer money!

Now… I’m not going to get into a discussion of the health care here… My point was simply to show that when bills are passed, it is important that they are read aloud to the people, to keep from “hiding” things in the bills… $20.6 billion of money that the government did not have!

OK… Enough of that… My good friend, Dr. Dave Janda, was the first to expose this “hidden gem,” and he’s been on the speaking circuit trying to get anyone who will listen to understand what’s going on.

China Says “No” to Currency Flexibility originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

And far beyond “here and there,” his biggest concern is of inflation “here, there and everywhere.” He cites Bill Fleckenstein to explain…

“[I]n a period where fears of deflation rage and too much capacity exists for so many products, it is possible for government policy and money printing to produce inflation here and there. The only question is, when will we finally evolve to the point where inflation is here, there and everywhere?”

A sampling of recent inflationary developments he’s tracked:

* A 15 percent increase in health insurance premiums for small businesses

* A 50 percent increase in car rental costs

* A 15 – 25 percent increase in long-term care insurance rates for California retirees

This inflation is likely to continue and grow in the long run. When that’s the case, it’s gold, silver and other similar assets that can offer appreciating value and a useful defensive hedge.

Duru describes why he finds the Consumer Price Index (CPI) inadequate and offers more insights in Real Clear Markets’ coverage of inflation here, there, and everywhere.

Where You Find Inflation in a Deflationary World originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

It just makes me laugh out loud, when I write that the “safe haven currencies” during risk aversion trading are the dollar and yen… These two countries have debt up to their eyeballs, pay no interest on their deposits, and have a leadership deficiency.

There was good news out of the Eurozone this morning… Both Germany and France followed their previous quarter’s growth, with stronger growth in the third quarter… The Eurozone’s two largest economies continued to recover from recession in the third quarter, as exports boosted both German and French gross domestic products. I say that, and I want to spit out a raspberry to all those that claim the European Union will collapse because of the strong euro (EUR)! The largest economies of the Eurozone can grow with strong exports and even with a strong euro!

Germany’s GDP rose 0.7% in the three months to September 30. In France, GDP also grew for the second consecutive quarter, rising 0.3%.

So… Of course this data from the Eurozone put a floor under the euro’s decline from yesterday. It will be interesting to see how the US guys look at these growth numbers. The European guys liked them… But the US traders can be very fickle.

And more than that, I think this might be the thing to put the risk aversion to bed… Recent history tells me that whenever risk aversion has crept into the markets, any sign that global growth is back on track and will lead investors to higher yielding assets, the risk aversion ends abruptly… Let’s hope that’s the case today with these two growth reports from the Eurozone!

Yesterday’s data in the US showed that the Weekly Initial Jobless Claims remain above 500,000 per week, and that the budget deficit was even worse than the forecasted $160 billion! The budget deficit for October totaled $176.4 billion, which annualized puts us over $2.1 TRILLION! That awful, folks! And you should be writing, calling, or making your way to your representative’s next meeting and demanding that they STOP SPENDING MONEY THEY DON’T HAVE!

You know that letter that I said I was going to write to my darling granddaughter, Delaney Grace, apologizing for the lack of freedom and tax burdens that were left to her generation to deal with? Well, I started writing it the other night… What this and the previous administration is doing is immoral, when it comes to leaving the debt to be dealt with by future generations.

OK, it’s a Friday, I need to try to remain calm here, and be upbeat! Hmmm… Usually that means that I pull out a story on gold… But yesterday was not a good day for the shiny metal. After reaching a new all-time record level of $1,118, it fell more than $10 in the aftermath of the risk aversion… See how stupid the risk aversion people are? I mean, if you wanted to avert risk, wouldn’t you buy gold?

Anyway, colleague Don Ries, sent me a story that he came across regarding gold that I thought was quite interesting… The Daily Telegraph in the UK printed a story about how Barrick Gold believes we may have reached “peak” gold already… And by “peak” I’m talking about the mining of the shiny metal!

“Aaron Regent, president of the Canadian gold giant, said that global output has been falling by roughly 1m ounces a year since the start of the decade. Total mine supply has dropped by 10% as ore quality erodes, implying that the roaring bull market of the last eight years may have further to run. There is a strong case to be made that we are already at ‘peak gold’,” he told The Daily Telegraph at the RBC’s annual gold conference in London.”

WOW! Did you get the line about how this lack of mining implies that the roaring bull market of the last eight years may have further to run? I think that’s putting it conservatively for sure! “May have further to run?” I would say it stronger…

OK… That put me back on track to be more upbeat for this Fantastico Friday! Today’s data cupboard will yield the monthly trade deficit data, and the U. of Michigan Consumer Confidence index… The trade deficit overhang continues to be a problem for the US, obviously not as bad a problem as it was during the go-go days for the consumer…

Traders have become “comfortably numb” with the deficit figures in the US, which is a bad thing, folks… Traders need to make a stand, and not allow this stuff to just slip under the door, thus allowing larger and larger deficits in the future!

I see the President is in China… I bet he thinks his presence will be the thing that will move the Chinese to allow greater currency flexibility. I just don’t see the Chinese getting caught up in the “show” to give in and allow flexibility in their currency, just because the President of the US showed up.

The currencies are rallying this morning versus the dollar. Since I began writing, the euro has climbed higher – albeit a small move higher – and thus has stopped the bleeding that began yesterday morning.

I’m surprised the Aussie dollar (AUD) isn’t really hitting on all cylinders this morning, considering the growth numbers in the Eurozone… But I think we might have to wait for the US traders to see the rally in the Aussie dollar, this morning… It is Saturday in Australia!

The Swiss franc (CHF) got caught up in the risk aversion trading yesterday, and has backed off its ascent to parity. The franc is trading around 0.9855 this morning, which is more than 1-cent lower than yesterday morning… Wink, wink…

And a country/currency that I drop the ball on all the time when it comes to talking about it in the Pfennig is the Norwegian krone (NOK)… Long time readers know that I truly like Norway for their fiscal and monetary surplus prowess… And most recently, for their absence from the rolls of those countries that got involved in subprime and bad lending practices. Earlier this month, Norway’s central bank, the Norges Bank, hiked rates 25 BPS, and is expected to raise them again in a month or two. So, now we have a country that has a strong fiscal and monetary position, no bad banks or loans, and a strong positive interest rate differential to the US… Hmmm…

And then there was this… Neil Barofsky, the special inspector general for the $700 billion TARP bailout said the program will “almost certainly result in a loss to taxpayers.” “We need to temper or be realistic about our expectations, a dollar-for-dollar return is just highly unrealistic.” Barofsky also said that he’s conducting 65 investigations of possible fraud.

OH MY! You’re telling me that with the $700 billion TARP funds that there could have been some fraud involved? I wouldn’t have believed it! NOT! The whole TARP was fraud to begin with! So, with all the corruption and scandals that have gone in before, the thought that there could be some fraud, should have been a belief that there “would be fraud for sure” when the TARP was issued!

Risk Aversion Fuels Yesterday’s Dollar Rally originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

For the past 60 years, corporate debt has grown faster than the economy – 4.1% annually for debt, compared with only 2.7% for the economy as a whole. In short, more and more debt went toward producing each dollar of GDP growth.

What if this 60-year trend reverses?

In fact, I think that is the likely scenario. The deleveraging will take some time…and it won’t be fun.

“Today’s overleveraged assets will become tomorrow’s underleveraged assets, and vice versa,” QB Partners, a hedge fund, explained in a recent letter to shareholders.

What will this new world look like? More people will save more money. And they will focus more on preserving that wealth than on making a big score. We’ve been here before. Michael Farrell, the chairman of Annaly, says the psychology of people will change as it did for those of 1930s, as he discussed on his company’s first-quarter conference call:

Exhausted by the uncertainties of the 1930s and 1940s, the older generation just felt lucky to be alive and they settled into a time of saving, preservation of capital and lowered expectations as consumers.

If that kind of financial orthodoxy takes root, then leveraged assets like real estate and bank balance sheets face a long period of stagnant returns as they continue to deliver – that is, as borrowers and lenders ratchet down the debt on these things. (I find it ridiculous that government officials want us to believe that the US banking system is OK at 25-to-1 leverage. The banking system’s insolvency will become more apparent as it continues to take losses from bad debts made during the bubble.)

Deleveraging puts pricing pressure on leveraged assets. Banks must raise capital, diluting their shareholders and hurting their stock prices. Real estate owners must sell property to raise capital to defend other properties, thus putting pricing pressures on real estate assets. And so on…

So as an investor, it will pay better to stick with the unlevered assets, which face no such head winds. After all, there is no pressure to sell an asset with no debt, no ticking clock. “What are the most underleveraged assets?” you ask. QB Partners gives the answer: hard assets and natural resources.

The ultimate unlevered hard asset may be humble old gold.

In fact, something important is happening in the gold markets right now. All through the 1990s to the present day, the world’s central banks were net sellers of gold. Europe’s central banks, for instance, have sold 3,800 tonnes of gold in the last 10 years. According to The Financial Times, this move has cost them $40 billion, and that’s with gold at $900 an ounce.

Well, too bad for them. But suddenly, that recent habit of selling gold is changing. Last year, central banks sold only 46 tonnes, which was the lowest amount in 10 years.

As the FT reports: “Sales in Europe have slowed to a crawl and fresh demand is emerging elsewhere and the financial crisis has helped to highlight gold’s value in turbulent times.” In fact, we may soon see central banks flip to net buyers of gold.

China has doubled its holdings of gold this year and is now the world’s fifth largest holder of the metal. China is likely to be a buyer of gold for years because its gold holdings are still very small relative to the size of its total reserves. Gold represents only 1.6% of China’s reserves, versus a global average of nearly 11%. To further diversify its reserves – just to get to average – would require significant amounts of gold.

In a post-2008, deleveraging world, it is the unleveraged assets that will outperform against those saddled with debt. It’s another plank in the case for gold, which just seems to get stronger with each passing month. “A new chapter has begun in the gold market,” the FT opines. Indeed, it has.

The International Monetary Fund, never known as a wise handler of money, is selling a bunch of gold. India bought half of it. A number of emerging market central banks are also upping their gold exposure. Maybe these CBs are onto something.

Russia’s gold holdings now make up 4% of its foreign reserves, compared with only 2.2% at the beginning of the year. Smaller central banks are also being crafty. Ecuador’s gold holdings have more than doubled since the start of the year – to 54.7 tons, from only 26.3 tons. Gold now represents 32% of that country’s reserves. Even Venezuela is buying gold. Gold now makes up 36% of its reserves, compared with only 23% in 2009.

So who is the sucker here?

Perhaps central bankers see more clearly than most what the effect of all their money creation will be. In recent months, we’ve seen a truly unprecedented boom in bank reserves. Bank reserves drive money creation. More money means money buys less – and the gold price should rise.

Then there is this chart of the Shadow Gold Price. In the old days of the Bretton Woods Agreement, countries had to maintain certain ratios of gold against their currencies. The Shadow Gold Price aims to replicate this discipline. So for the US, the Shadow Gold Price is Federal Reserve Bank liabilities (bank reserves) plus money in circulation divided by US gold holdings. Also on the chart, you can see the spot price of gold.

The important thing here is that you see how massive amounts of money creation have barely made an impact at all in the gold price – so far. Gold is fundamentally cheap compared with all the money added to the system in recent months.

As Paul Brodsky and Lee Quaintance of the hedge fund QB Partners write:

“If one allows for even a small probability of a future monetary system that reflects more honest/tangible money, then a quick glance at the graph above makes it easy to conclude that spot gold is fundamentally cheap. Even if this is too far a stretch for market participants skeptical of such a radical change in monetary policy, it is reasonable to conclude that the prices of spot gold and the Shadow Gold Price should converge somewhat over time.”

They note that the spot gold price has never been so cheap compared with the Shadow Gold Price. For parity to set in, gold would have to trade for $16,000 per ounce! No one is predicting $16,000 per ounce gold. In any case, it shows you the risk of holding paper – and bonds – on the eve of a massive devaluation of the dollar. Maybe the central bankers of Russia, Venezuela and Ecuador understand all of this better than they let on and that’s why they are buyers of gold.

It seems pretty obvious to me that if you create a lot of money, you are going to destroy the value of that money. And in that case, you want to own something other than that money.

Regards,

Chris Mayer,
for The Daily Reckoning

Another Reason to Buy (More) Gold originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

There is a risk in holding cash in an environment of asset price inflation – a condition that usually occurs when governments create large fiscal deficits and inflate the money supply. The practice is endemic to banana republics and declining empires…and it is happening in the US at this very moment.

The global recession and financial crisis have refocused attention on government stimulus packages. These packages typically emphasize spending, predicated on the view that the expenditure ‘multipliers’ are greater than one – so that gross domestic product expands by more than government spending itself. Stimulus packages typically also feature tax reductions, designed partly to boost consumer demand (by raising disposable income) and partly to stimulate work effort, production and investment (by lowering rates).

The existing empirical evidence on the response of real gross domestic product to added government spending and tax changes is thin… But the evidence is quite strong that these policy responses usually trigger inflation.

I suppose that even someone without any common sense might understand that a “strong currency” over longer periods of time reflects a high degree of prosperity and economic success, whereas a chronically weak currency is symptomatic of economic imbalances, such as a lack of competitiveness or overconsumption, arising usually from excessive supply of money and credit.

I would also suppose that even if someone never travels overseas, he would understand that if the US dollar loses 50% of its value against all the other world currencies (everything else being equal), it means the US is 50% poorer relative to the rest of the world. (Now, this is not entirely correct, since the US has overseas assets that would appreciate in value in USD terms).

Moreover, stock price movements become extremely volatile and erratic in countries with a depreciating currency. In the long run, the depreciation of the currency will usually more than eliminate the gains in local currency terms. So, whereas in 2007 both the Dow Jones and the S&P 500 exceeded their previous highs reached in 2000 in US dollar terms, these indices failed to make new highs in Euro terms. In addition, whereas the US economy expanded in US dollar terms between 2001 and 2007, in Euro terms it actually contracted!

Even with the S&P 500 having shot up since the beginning of the year by over 25%, it has merely kept pace with the price of gold. And during the last 10 years, the S&P has lagged behind the official US inflation rate…while lagging VERY far behind both the euro and gold. Sine the end of 1999, the S&P 500 has delivered a total return after inflation of about MINUS 25%.

Unfortunately, the US is not the only country that is busily debasing its currency. “Everyone” is doing it. Because of the current collective debasement of all paper currencies by central bankers, I believe that precious metals and mining companies will maintain their purchasing power.

In the 1980s the US dollar was a very strong paper currency compared to the Mexican Peso. Today, there is no paper currency that is as strong relative to the US dollar as the US dollar was relative to the Peso in the 1980s! The only “currencies” that have a chance of becoming as strong against the US dollar as the US dollar was against the Peso between 1979 and 1988 are precious metals such as gold, silver, platinum, and palladium.

Also, I should add that precious metals could appreciate even if the US dollar miraculously recovered strongly against foreign currencies for an extended period of time. Such dollar strength would probably be a symptom of some horrible economic or political problems around the world, which could be friendly to precious metals.

Central bankers and pundits seem to believe that they have averted the second Great Depression, while ignoring the fact that more and more debt produces less and less GDP and fewer and fewer jobs.

For now, though, the low ten-year bond yield is the lifeline from which all support flows. Much of the investment universe holds together because money can still be had for cheap – not by the volition of a cooperative private sector, rather induced by a US government that simply distributes money for free. Such an ill-conceived idea could only have been born in the test tube of a central banker.

Private lenders comprehend the difficulty of making profits when being forced to lend for nothing, so the government increasingly finds itself to be the interest-free lender of last resort.

Ultimately, if central bankers continue this process for long enough, it is the dollar, and any currency or economy still pegged to it, that could eventually crash. Therefore, we investors find ourselves in the precarious position of having to maintain sufficient liquidity, but not too much in case the real value of these liquid reserves is wiped out by politicians and central bankers gone mad.

Regards,

Dr. Marc Faber,
for The Daily Reckoning

When Currencies Crash originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.