The Economy, Ketchup And Precious Metals

It’s fair to say that the U.S. economy is showing an improved heartbeat, compared with recent quarters and years.

There’s even the proverbial “big news” on Wall Street. Last month, for example, Warren Buffet’s $23 billion take-over play for the H.J Heinz Co., an iconic food brand.

Is the Buffet play, for Heinz, a harbinger of better days ahead for stock markets generally, versus the future fortunes of the world’s flinty gold buyers? Even more optimistically, will this takeover play kick off the next nirvana for deal-makers?

Well, let’s give Herr Buffet credit for his excellent sense of timing. He’s a great picker of old-line companies with durable names, competitive advantages and predictable earnings. That’s Buffet’s gig, and he’s very good at this game.

Still, let’s take a clear look at what Buffet is buying. H.J Heinz is global, to be sure, but not really “international” in the way that, say Boeing or General Electric arc across the world. That is, Heinz is mostly a trans-national collection of local facilities.

The basic business model for Heinz is to own food-processing factories in dozens of countries. Heinz buys into local and regional brands, across a multitude of nations, ethnicities and cultures. Heinz then produces products derived from local agriculture, under tight hygienic standards, and emplaced into cans and bottles. In other words — and as the people who work at Heinz will be the first to tell you — it just doesn’t pay to ship tomato-flavored water, in bottles and cans, all that far.

So Buffet buying Heinz is good news, in many respects, to deal-maker wannabes. Heck, any big deal is a good deal, as long as the bankers and lawyers get their fees.

Yet the Buffet-Heinz hook-up seems limited in scope. It reflects an evolving world economy at, literally, the grass-roots level. More and more people have more and more money to buy higher quality, branded food items from factories that are located not too far away. That’s good, but it’s not necessarily the signal for a new global boom.

How’s That Global Economy?

Aside from the market for beans and ketchup, how’s that global economy doing? I can’t help but ponder some strange bits of information I keep seeing.

For example, last year the German central bank asked the U.S. Federal Reserve to arrange an audit of German gold on deposit in the U.S. The Fed people declined to permit that. Odd, right?

Then in January, the Germans asked for part of their gold hoard back from the Fed bank in New York. And despite the fact that there are plenty of armored cars around, and many daily air flights across the Atlantic Ocean, it’ll take seven years for the Fed to make the gold transfer. Like I said, it’s strange. Or, not to put too fine a point on it, where’s the gold?

Here’s something else. Consider Russia’s Vladimir Putin, and his effort to acquire gold for the Russian central bank. Under Putin, Russia’s central bank has added 570 metric tons of gold to its asset base over the past decade, a quarter more than runner-up China, according to data from the International Monetary Fund (IMF), as compiled by Bloomberg News. (China’s gold holdings are MUCH larger than they admit-to, I suspect, which is the subject of a major new trend I’m developing.)

Just last year, in 2012, Putin made news when he stated that the U.S. is “endangering the global economy” by abusing its dollar monopoly. Perhaps it’s bluster, but then Putin is putting money where his mouth is. Late last year, Putin instructed the Russian central bank not to “shy away” from buying gold, according to a press release from the Kremlin. “After all,” said Putin, “they’re called gold and currency reserves for a reason.”

Looking ahead, the Kremlin plans to keep on buying gold. According to Russia’s first deputy Alexei Ulukayev, “The pace (of gold buying) will be determined by the market.” He added, with characteristic Russian secretiveness, “Whether to speed that (buying) up or slow it down is a market decision, and I’m not going to discuss it.”

Too Big to Sail

So could things change quickly in the precious metal markets? Could metal prices melt-up from the current levels? Yes, because human psychology can change quickly.

As a rule, people act on what they know. Right now, a lot of people seem to think that the world economic system is working alright. Buffet bought Heinz, right? Sure, the world economy could be better. But generally, the evidence indicates that the world economic system does the job, day to day. At least, goes the thinking, the economy is not falling apart.

Yet consider the passengers on last month’s ill-fated Carnival cruise ship that just pulled into Mobile harbor. Last week, everyone was looking forward to a nice, relaxing Caribbean vacation afloat. What could go wrong?

Then the ship had an engine failure. Within hours — certainly by the second day — people descended to pushing and shoving over stale onion sandwiches.

What do stale onion sandwiches have to do with the price of silver or gold? Well, do you usually eat stale onion sandwiches? Do you expect to eat stale onion sandwiches when you’re on a luxury cruise ship, with storage lockers below-decks, filled with provisions?

When things go awry, however, the previous rules go away. Yes, the cruise ship had food in the hold, but nobody could use it. There was no power to run the kitchen, let alone to cook and serve meals. People descended a hurry, and gave the media a true spectacle.

What’s the analogy? Well, perhaps some of these new cruise ships are just too big to sail, in the same way that many large banks are too big to fail — until they actually fail. Then we can all fight over the stale onion sandwiches.

Thanks for reading. Have a good weekend.

Byron King

Original article posted on Daily Resource Hunter