Who Wants to be a Jillionaire?

The Mogambo Guru holds the key to eternal happiness and prosperity. Unfortunately, before he can share this information, he must gnaw through the hand being held over his mouth… Never fear readers, a mouth that big can’t stay contained for too long…

The World Gold Council reported that Argentina bought 42 tons of gold bullion recently. Of course, there are those of us who hope that the Argentines have decided to go back to using gold as money, so that the citizens of Argentina will never again have to suffer the woes of inflation and crushing debt.

And then maybe people in other countries will take note of how happy and prosperous Argentina is, and they will also demand to start using gold as money, and then the next thing you know everybody is on the gold-as-money bandwagon, and the world is suddenly full of happy people, and beautiful and fragrant flowers are springing up, and every day is sunny and bright, and everyone lived happily ever after because governments no longer had the suicidal option of printing up excess money.

Who hopes this? Well, me, for one. And maybe David Morgan, of Stone Investment Group, too, who writes, “With Argentina’s leadership there is little doubt that other countries will buy gold to secure some type of stability in a world awash in all types of paper currencies. In fact, I would go as far as to state this is a clear signal that we are not too far from a perceived currency crisis.”

And it is not only the Argentines. The guys at the World Gold Council and China Financial Services think that maybe the huge appetite for gold in China could cause the sales of that metal to soon rise to 600 tons, from the current 200 tons, a year. They figure, “That would add about 12% to current world demand.”

Gold Price Manipulation: The Writing on the Wall

They didn’t mention those who live in India or Argentina, who are also buying more and more gold, and they didn’t mention you, dear reader, whom I assume is also buying lots of gold because you are smart enough to see the writing on the wall.

In a similar vein, Drew Hasselback wrote an article for the National Post entitled “Price of Gold Manipulated.” He writes that John Embry, who was a senior money manager at the Royal Bank of Canada and is now chief strategist at Sprott Asset Management Inc., lays out the case that the price of gold is being held artificially low. This means that one day it will rise in price to its natural level, and thus those who own gold will, at that exact point in time and space, make a jillion dollars in profit.

One of the reporters in the back of the room raises his hand, and asks, “How did the manipulation scheme work?” I say, “It worked very well, thank you!” and then notice that nobody is laughing at my spontaneous witticism.

Embarrassed, I sit down in a huff and throw the microphone at Mr. Hasselback, who deftly catches it in midair and explains, “They worked like this: Central banks would lend gold at extremely low interest rates. Borrowers would take that gold, sell it short and then invest the proceeds in bonds paying higher interest rates than those charged by the central banks. The borrowers were therefore making two gambles: the gold price would fall, making it easier for them to cover the short position, and bond rates would remain higher, making it possible to generate a profit on the spread.”

This is where I jump up out of my seat and rudely break into the conversation. I say, “Of course, most of the gold has now leaked out into the market, and there is no way that the borrowers can return the borrowed gold! So the idea is that there is a gigantic short squeeze coming, and this stark fact represents one of the best investment ideas you ever heard of!”

Another reporter raises his hand and asks, “Why are they doing this?” and I scream at him, “Because they are out to get me, you jerk! They are all out to get me!”

Gold Price Manipulation: Keep the Price Down

Richard Benson of the Specialty Finance Group slaps his hand over my mouth to try to shut me up before I embarrass myself any further. While I am trying to wiggle and squirm my way out of his grasp, Benson remarks that this very question was addressed in has his latest screed, entitled “Complacency and the Rain Dance for Money,” which touches on this whole manipulation thing.

He writes, “You might wonder why our government is so actively involved in keeping the price of gold down. Well, a logical reason would be that when the price of gold takes off, even the investment masses will focus attention on the real problems of massive trade and federal deficits and worldwide money creation.”

Well, being the Mogambo, I finally grab his hand away from my face and blurt out, “Maybe yes, and maybe no!” This set off the security guards, who instantly swarmed all over me at that point, so I didn’t get a chance to say that I know that one of the surefire things that they WILL pay attention to is the money that is being made in gold, and they will want some, so they’ll buy some, and then the price will go up even more, and then other people will notice the money that is being made in gold, and they will want some, so they’ll buy some, and then the price will go up even more, and so on and so forth for all of eternity…

And since we are talking about gold and China (well, to be fair, I was talking about gold and China, and you were sitting there with that glazed look in your eyes that means, “Will this Mogambo idiot ever shut up?”), Julian DW Phillips wrote an essay posted at the Financialsense.com site.

He says, “Considering that China and its approaching 2 billion people are growing in wealth at a dynamic rate, perhaps one of the most important statements made about gold was made this week. In no uncertain terms, the governor of the Bank of China has shown that the government of China is determined to increase the levels of gold held in China by Chinese citizens. It is a lot easier to encourage this than for the central bank to go into the open market to acquire gold for its reserves.”

The Xinhua News Agency quoted Zhou Xiaochuan, the central bank governor, as saying, “Trading in gold will provide another choice for individual investors who keep their money in bank accounts due to a lack of desirable investment options.”

Looking at transactions on the Shanghai Gold Exchange, 235.35 tons of gold valued at 22.96 billion yuan (US$2.7 billion; 2.3 billion euro) was traded last year. Compare that to the first seven months of this year, when trading volume jumped to 363.76 tons valued at 36.9 billion yuan (US$4.5 billion; 3.6 billion euro).

Got gold?

Regards,

The Mogambo Guru
for The Daily Reckoning
October 4, 2004

“We, in the United States,” observed the chairman of the Federal Reserve, unwittingly summing up the case for dumping dollar-based assets as soon as possible, “have been incurring ever-growing trade deficits, with the broader current account measure having reached 5% of our gross domestic product. Yet the dollar’s real exchange value, despite its recent decline, remains close to its average of the past two decades.”

It is all so astonishing. Even Alan Greenspan seems surprised.

We mean the U.S. economy jumped off a building 18 years ago. That was the year – only months before Greenspan first appeared at the head of the table at Fed meetings – that the country went from being one to which the rest of the world owed money to one from which the rest of the world hoped to collect. It was such a small jump at first no one noticed or cared. But as the years went by, the distance from top to bottom has grown. The current account deficit is now approaching 6% of GDP, more than half a trillion dollars per year.

America’s net external investment position, the measure of how many U.S. financial assets are owned by foreigners less the foreign financial assets that are owned by Americans, has gone from near zero when Alan Greenspan took over the top job at the Fed to nearly $2.5 trillion today.

The building has gotten taller, in other words. So far down is the sidewalk that many people have come to believe that it no longer exists. And here is the astonishing part: The longer they fall without impact…the more confident they become that they will never reach the ground floor!

“It’s not a problem until it’s a problem,” say the pros.

“We’re all right so far,” say the jumpers without parachutes.

“What, me worry?” says the lumpeninvestoriat.

“The sense of security more frequently springs from habit than from conviction,” explained George Eliot in Silas Marner, “and for this reason it often subsists after such a change in the conditions as might have been expected to suggest alarm. The lapse of time during which a given event has not happened is, in this logic of habit, constantly alleged as a reason why the event should never happen, even when the lapse of time is precisely the added condition which makes the event imminent.”

Where is the pavement? We don’t know. But we do know that a falling object gathers speed by the square of the time elapsed. The longer Americans continue to fall into debt, the more painful the eventual collision will be.

On Sept. 9, a strange thing happened: America’s tower of debt barely grew. The U.S. Treasury held an auction of its 10-year securities. Typically, foreigners buy about one-third of the notes on offer, according to reports from the Financial Times. But at this auction, the central banks of China and Japan, who can generally be relied upon to take up America’s debt, were oddly quiet. When it was over, they had bought less than 3% percent of the total.

If they had bothered to look down, investors could have probably seen the sidewalk coming into focus.

More news, from Tom Dyson on the East Coast…

____________________________

Tom Dyson, reporting from the heart of Baltimore…

– The markets are telling us something…the Nikkei was up nearly 300 points by Monday morning – a gain of 2.68%. In Europe, the bourses have all pushed higher. The FTSE made fresh new two-year highs, and the DAX followed. On Friday, the Nasdaq closed 2.4% higher, gaining 45 points, to 1,942.

– Are the markets anticipating another growth spurt, like we saw during April and May?

– There’s a presidential election in four weeks. A dusting of economic feel-good and a few new jobs would be just the ticket for George W. Bush. Or maybe it was just time for a swing in sentiment – deflation and a faltering recovery were the main themes of late summer – but like the seasons, sentiment ebbs and flows in cycles. “It’s October,” says Mr. Market, and like the summer, Greenspan’s “soft patch” is history…for this year.

– Bond markets agree. Ten-year rates reached a six-month low on Tuesday at 3.96% before reversing sharply higher. They have been soaring ever since. Yields closed Friday at 4.19%, and on Monday opened another 4 basis points higher, taking the yield to over 4.22%.

– And so do the energy markets. Crude oil took the spotlight last week by punching through the $50 mark for the first time ever. The press attributes crude’s appreciation to troubles in Nigeria and other supply-related threats. But your contrarian editors at The Daily Reckoning see it differently. The move, we think, reflects higher demand for energy consistent with expectations for a temporary surge in global growth.

– Nymex WTI closed last week at $50.12 a barrel. In early Monday trading, the November contract had slipped 55 cents, to $49.57. But crude oil wasn’t the only highflying commodity of the week. Industrial metals, like aluminum, lead and copper, all made significant new multiyear highs.

– “The renewed focus on commodity markets follows recent economic data showing that the global economy is growing better than expected,” says the FT, “causing the International Monetary Fund to increase its 2004 global economic forecast to 5%, a rise of 0.3% on its previous forecast.”

– “Maybe now we are getting some answers to the question, ‘Why would China take such a debased currency in such hideous volume in return for its exported goods?'” writes Gary Tanashian, of Biiwii.com.

– “As long at the U.S. dollar remains functional as a medium of exchange,” Tanashian answers, “China’s hundreds of billions of dollars will obviously come in handy as it seeks to secure the natural resources it needs to continue to phase two of its rise to industrial powerhouse.”

– “China’s planners are not so dumb after all,” he continues. “They’ll use an advantageous labor arbitrage and currency peg to gain global industrial production market share, ship en masse to the largest consumer engine in the world, receive payment in the heretofore most-trusted world currency, and for the master stroke, turn around and recycle those dollars into the very commodities, goods and resources that will be necessary for their continued growth and climb to world power.”

– Dumb Chinese planners? It’s dumber to underestimate one’s competition. And here at The Daily Reckoning, we’d never call the Chinese dumb. Quite the opposite. We think Chinese policy is deliberate…and smart. It only seems dumb to lend hard-earned money to Uncle Sam at current rates, like the Asians do, if you don’t look at the bigger picture.

– China’s stash of Treasury bonds is an investment in its future, and a good one, we think.

____________________________

Bill Bonner, back in Paris…

*** A “fake-out?” Or the real thing?

The most interesting story in the financial world is the curious performance of bonds. Everyone thought they would go down – after all, Alan Greenspan’s Fed is increasing interest rates. The Fed, of course, can set its lending rate anywhere it wants, but there is slim proof that it can set any other. While the Fed raised its rate, other lenders lowered theirs. Bond yields fell, in other words, while bond prices rose.

What did it mean? We took it as evidence that a long, slow, soft depression was setting in…a la Japan. Others saw the bond bull market as a “fake-out.” Now bonds are falling again…and no one is sure.

*** “What is the bond market telling us?” Again, we don’t know. And even if we could interpret its strange whispers, we don’t know if we would pay attention. Bond buyers can be as wrongheaded as stock buyers.

Ultimately, bonds will signal how the current free fall ends. If we are right that the economy cannot float on air forever, then some day it must stop…and head off in some other direction. Bonds will go down if the new direction is inflationary. They will go up if it is deflationary. Currently, the Fed tells us, “Inflation and inflation expectations have eased in recent months.” The risks, as feeble as they are, are said to be “roughly equal.”

Our guess is that America’s consumers will run out of purchasing power…and Asian enablers will stop providing vendor financing. This will mean a contraction of credit -or a deflation.

But an even stronger hunch is that the risks – which may or may not be roughly equal – are surely greater than expected…and that this period of weightless optimism and habitual stability will come to a sudden and bone-crunching end.

*** The price of oil closed over $50 a barrel for the first time ever on Friday.

A Daily Reckoning reader, Chief Moon Tracker:

“Is $50 a barrel of oil ‘kindness?’ What will it be when it reaches $100? I think kindness is a thing of the past. I am an 80-year-old Cherokee Indian, and what the white man has done to this country is unbelievable.”

*** Anything called a “Patriot Act” must be full of mischief.

But thank God, at least in someone the United States has the courage to say so.

This from The Sovereign Society: “At long last, a federal judge has ruled a major part of the U.S.A PatriotATRIOT Act to be unconstitutional. There have been several prior United States court rulings with similar decisions on lesser parts of the act, but this one goes to the heart of the illegal search and seizure powers of the FBI. The court ruled unconstitutional the FBI’s power to demand information from Internet service providers without judicial oversight or public review.

“The court specifically voided the FBI’s use of a type of administrative subpoena known as a ‘national security letter’ that does not require court approval, and even prohibits targeted parties from revealing that the FBI demands were ever made.

“Four U.S. lower courts have now ruled [parts of the law unconstitutional], and hopefully, the U.S. Supreme Court will affirm those wise decisions.

“That’s the way that it looks from here.”

*** “Didn’t you see them? We stayed up ’til three in the morning to watch the debates.”

An American friend in Paris reported that he thought Kerry had done well. He seemed overjoyed about it.

“You must vote,” said one of the other Americans at the dinner party. “We need every possible vote to get rid of this awful man. Bush is such a numbskull. He’s a national disgrace.”

“Yes, but if I were going to vote, I wouldn’t know whom I would vote for,” we replied. An arctic wind seemed to come through the open door. All of a sudden, the conversation refrigerated like a Siberian mammoth with a buttercup in his mouth.

Americans overseas are lathered up. By and large, they despise George W. Bush. They seem ready to overlook John Kerry’s faults, simply because he is not George W. Bush.

It doesn’t seem to bother them that Kerry espouses the same doctrines, supports the same programs and votes for the same bills.

Still, asked what they didn’t like about him, the Bush haters become apoplectic. They cannot find words foul enough to describe their distaste.

“They regard him as a traitor to their class,” Elizabeth explained later. “He’s from one of the best families in America…with plenty of money and the best Ivy League education you can get. But he pretends to be a cowboy. He sounds like an anti-intellectual…anti-East Coast sophisticate…anti-internationalist…anti-elitist.”

No one is more the product of the elite establishment than George W. Bush, but as John Mauldin told us, you can’t be elected governor of Texas by drinking Bordeaux and talking about Camus and Sartre. Bush pitched his tent on the other side of hill…directly opposite to all the things the American elite overseas believe in.