Chinese Golden Eye

The Daily Reckoning PRESENTS: The Bank of China has recently announced that they plan to launch a dollar-denominated certificate that is linked to the price of gold. What exactly does this mean? Is this just a bet on gold – or the Chinese equivalent of a gold ETF? The Mogambo explores…

CHINESE GOLDEN EYE

The price of gold is (to coin a phrase) a-fixing to go a-booming. It’s also a-fixing to go a-zooming and we’ll all be rich, rich, rich, cha cha cha. The reason for my frivolity is that on Fin24.co.za, we read the headline: “Chinese Eye Solid Gold.”

Of course, we immediately think, “Duh! Big deal! Who doesn’t? Why are you wasting my time? Are you trying to start something with me by wasting my precious time, punk? Is that what you want? You want a piece of The Mogambo? Huh, punk? Is that what you want? Huh?”

But, methinks that maybe we are a little too hasty, as right off the bat we learn “Chinese banks are expanding the options they offer rich depositors in the face of greater competition from foreign banks.” What is this new option for the Chinese rich? “Next month,” the article reveals, “the Bank of China plans to launch its newest product, dollar-denominated certificates linked to the price of gold.”

Hmmm! Suddenly, my brain is going every which way! This is very, very interesting! On the one hand, this seems to prove that rich Chinese people are no more sophisticated than the rest of us clodhopper bozos out here who mess with dollars. I mean, these rich Chinese people are supposed to be so dull that they will line up to buy a certificate, denominated in dollars, a currency that is due to fall in purchasing power because of massive over-creation by the Federal Reserve over decades, that is also linked to gold? Huh? Why? Isn’t this merely a bet on gold, which these foreign people will naturally price in their own currency anyway, which will also trade up and down against the dollar in the currency exchange markets, negating the gain made in dollars using these certificates? What’s the point?

Or, much more excitingly, perhaps this is actually the Chinese equivalent of a new gold exchange-traded fund! If so, wow! The impact of gold ETFs on the price of gold has been, so they say, significant in producing the stellar performance of gold. And if it is, and here is another one – a potentially enormous one – to add to the impact!

Naturally, I am wondering, “Are these Chinese gold certificates, paid for with dollars, going to be backed by physical gold, newly bought with the investor’s dollars?” If so, like I said, wow! A Chinese gold ETF! Animated by glee, with the lithe, sinuous grace of a panther, I dance the Forbidden Mogambo Dance Of Love (FMDOL) in celebration that my bullish stance on gold is apparently vindicated!

If the certificates are not going to be backed up with physical gold bullion, then who is so incompetent, or insane, that they would take the other side of that trade, in essence going naked short? Or, is there a derivative hedge that can be laid on? Is this some kind of government scam? In frustration, I scream out, “What is happening here?”

And if not that, then I fall to my knees, pleading, pleading, pleading with that pathetic look in my eyes, my lower lip trembling, and my hands clenched together as I beg you to please, please, please tell me what in the world is the attraction of these certificates, linked to gold, denominated in dollars, to rich Chinese people?

As I crumble, blubbering at your feet in what is probably my greatest dramatic performance ever, I suddenly think to myself, “Wait a minute! Maybe it has something to do with how Nick Godt, writing about gold at TheStreet.com, reports, ‘With all the uncertainty surrounding the dollar, gold bugs believe that the precious metal will increasingly act as a hedge for countries, such as China, which seek to invest a surplus of savings in financial assets.'”

So, energized, I leap to my feet, my Bright Mogambo Eyes (BME) shining with excitement, because the way I figure it, the plan is that if Chinese businessmen will accept gold for their accumulating dollars (thanks to the trade deficit and their financing of our budget deficit) instead of asking for them to be converted into yuan, then the government does not have to print so many yuan to keep the dollar/yuan exchange rate from changing! And thus, too, their overheated economy is somewhat cooled by reducing the expansion of the money supply! And, China also winds up, believe it or not, with the gold of the United States at a huge discount! My head is spinning!

On the other hand, this germinates into my new idea for a great Tom Clancy novel, starring the larger-than-life her The Mogambo Guru. He is the popular and handsome head of the Economic Stupidity Task Force To Wipe Out The Aforementioned Economic Stupidity (ESTFTWOTAES), bravely tangling with the dark forces of fiat-money evil, like Congress, the U.S. Federal Reserve and the Supreme Court. The plot is that perhaps there is a lot more going on here than meets the eye! Economic warfare kinds of stuff!

The camera pans in to the office of The Mogambo, just as the phone rings. A voice calls out from offstage, “If that’s my wife, tell her I’m not here! And, if it is the police, tell them that I have been here all morning, and you are willing to testify to it!” The phone keeps on ringing and ringing, until finally The Mogambo enters the room. He reads the note left under the phone, and he recognizes the handwriting of his own secretary as she scrawled, “Dear Creepy Pervert, I quit! I hate you! Expect a lawsuit! Yours truly, Yolanda.”

Again the phone rings. Distractedly, The Mogambo picks up the receiver. Immediately, a voice comes over the phone line saying, “Mr. Mogambo, your mission, should you decide to accept it, is to check this out: perhaps these Sneaky Chinese Dudes (SCDs) have realized that the idea is not to make money (as in ‘wealth measured in dollars’), but in painlessly and effortlessly obtaining astonishing amounts of U.S. dollars! See, as the purchasing power of the dollar falls and falls, and falls, thanks to the U.S. Federal Reserve creating so many of them, the price of gold goes up. As those dollars wind up in China, thanks to the trade deficit, pretty soon any Chinese dude (or dudette) with a handful of gold could own whole swaths of everything in America! Welcome to the future, dudes! Hahaha!”

I slam the phone down, springing to stage front. I tear off my disguise (mild-mannered reporter for the Daily Mogambo Planet newspaper) and begin to sing my first aria as the orchestra begins playing and the stage fills with beautiful dancing girls. My voice belies my Breaking Mogambo Heart (BMH) as I croon, “You thought that the debasement of the dollar by the over-creation of them was going to be so painless (chorus sings ‘Painless! Painless!’) that you laughed (chorus: ‘Ha ha ha!’) and scorned (chorus: ‘Ho ho ho!’) the Founding Fathers because they deliberately made it a Constitutional requirement that money would be only – only! – of silver and gold…precisely so the government couldn’t do that? Hahaha! Morons!” The chorus melodically echoes “Morons! Morons!”

And if the audience thought they were going to get off with that one short aria, they were wrong! I silence the orchestra with a wave of my hand, and the operatic patrons were deathly silent in rapt attention as I went on to say, darkly, like the voice of doom, booming from Hades, “You thought the promise of an ‘elastic currency,’ the very antithesis of gold, was going to be so terrific that you let them create the Federal Reserve? And then, you let FDR and a cowardly, traitorous Supreme Court rule that the Constitution was wrong, and that money did NOT have to be gold? Hahaha! Morons!” And the chorus replied “Morons! Morons!”

The sound of my crazed laugher echoing down the hall, I majestically went on to bellow the tragedy of: “You thought Jefferson was crazy when he warned that the use of a fiat currency/debt-based economy would cause us to wake up as slaves in the very country that their fathers gave to them? Hahaha! Morons!” And the chorus again returned, “Morons! Morons!”

Drawing myself to my full height and repeatedly adjusting my oversized codpiece so that everybody gets the point, I gravely intone, “I scorn you all!” The curtain falls, and another lovely evening of grand musical theater comes to a close.

Until next we meet,

The Mogambo Guru
for The Daily Reckoning

P.S. Regardless of the audience booing and angrily demanding their money back, in that one power-packed operatic scene alone are three more very good reasons to own gold, to add to the thousands of other perfectly good reasons to own gold, right now.

Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.

One of the little-appreciated advantages of living at a high altitude is that you don’t have to drink so much to get drunk. We discovered this our first night at Colomé. We had a couple of glasses of the local wine – a torrontes – and were woozy within minutes. A couple more glasses with dinner and we were practically under the table. Little did we realize that we would be guzzling the stuff a couple of days later, not for pleasure, but simply to dull the pain from a horse-riding injury. And so, now we are in bed, unable to move either to the left or to the right. Only our fingers work without violent pain.

But, we get ahead of ourselves…

Let us continue our story, one step at a time. In order to get from the airport in Salta city to Colomé, we had to pass over some of the most dangerous roads we have ever seen, in a fog so thick we could barely see the car in front of us. To make matters worse, it was bitter cold. This was not the kind of weather we expected for a vacation, nor the kind we wanted.

But it was what we got…until we finally crossed over the summit and headed down the other side. Then, a remarkable transformation occurred, one similar to the change in the early 20th century when World War I gave way to the Spanish Flu. The terrain and the weather changed almost immediately from lush and wet to sparse and dry. In a few minutes, the sun was out and we found ourselves in a desert, where scarcely a blade of grass would grow.

“This is pretty desolate,” remarked Elizabeth, after a moment. “Is the ranch going to be this dry?”

The ranch she referred to was the one your editor had bought without consulting his wife. He saw the place briefly, in winter. The place seemed to him to have a “Wuthering Heights” feel to it…that is if Wuthering Heights had been in the middle of Death Valley. It had a forlorn, romantic character…isolated from the world. He figured it would make a nice place to have a mental breakdown. There, no one would know or care.

“You’d have to be crazy to want to live in a place like this,” said Henry.

“Well,” said father, as always looking on the bright side, “that’s what’s so nice about it. You can go crazy here. The local people will think you are normal.”

“Seriously,” repeated Elizabeth, sticking to her question, “is the ranch you bought this barren and desolate?”

“More so,” your editor replied.

“Then why are we going there?” asked Maria.

“Why? We go because it is different. It will be an adventure. And, it was cheap.”

Per acre, the ranch in question was very cheap: less than $3 per acre – absurdly cheap. But, you can imagine what kind of land you get for that kind of money – the kind we were looking at out of our car window, only worse.

When it comes to investments, your editor follows his own muse. He has been told that he would do better to follow the muse in matters of music and art, but he has a way of doing things that is different from most people. He has an analytical approach to the arts. He saves his poetic spirit for his investments.

“What can I say?” began his explanation. “We always wanted to take a vacation at a dude ranch. Well, I figured we could save money by buying the ranch. That way, we can take a vacation every year…without paying for it. Besides, Argentina is coming up in the world. It could be a good investment. And, most important, I just liked the place.”

“If it’s all like this, they should have just given it to you,” said Señora Bonner.

“If we stayed at a real dude ranch, we’d have good meals, and people to clean the rooms and do the laundry, ” continued Maria, “and maybe a health spa or something like that.

“And you’d have heat, ” your editor suggested.

“What! There’s no heat?” asked a family growing more and more mutinous.

“No, I told you there was no heat.”

Maria quickly replied, “But you also told us that it was warm.”

“Well, it’s supposed to be warm this time of year, but it’s all relative, isn’t it? It is warm here – compared to the North Pole, ” was your editor’s response.

“Oh, Da-a-d…”

But old Dad isn’t so dumb. He’s been a Pater Familias long enough to know when evasive action is required. Having taken his family to a very primitive ranch, a five-hour drive from a provincial city, itself a two-hour flight from Buenos Aires, at the end of 13 hours of flying from Paris, which took an hour to get to from London, he knew he would get some resistance from the near and dear…maybe some sulking…a few bouts of ill temper. So, although he did not know before hand how it would manifest itself, he was ready. Instead of going directly to the ranch, he took the mutinous troupe to a luxury resort, not too far from the said ranch.

Thus, Colomé …

Colomé is a very small place, a vineyard. It began about 150 years ago and was taken over recently by a very rich, very ambitious and very accomplished vintner from Switzerland. He spent a fortune on the place, and it shows. He has a stunning resort – with spectacular views and all the latest comforts.

“Oh I like this place,” said Maria.

Why would she not? It is a beautiful little oasis in the high desert, with the snow-capped Andes in the distance and a first-class restaurant close at hand. Of course, to help run the vineyards, the owner had also brought over some handsome young men from France.

But of the young men, we took little notice. The vineyards themselves are magnificent, nestled in a little valley, alongside ancient Quebracho trees and watered by streams running down from the mountains.

“These vines are very special,” the owner told us. “They are 150 years old.

“And since they were in this isolated little valley, they were not touched by the epidemic of phylloxera that wiped out vineyards in Europe. Plus, it is very high here; we have one of the highest vineyards in the world, which gives the wine a remarkable quality.

“The sun is so close and so hot during the day that the grapes pick up a lot of flavor – concentrated in the skin. And then, at night, the temperature falls a lot more than it does in France. We don’t know why it is, but these daily temperature fluctuations also seem to give the grapes more flavor than you’d get elsewhere.

“You have some very high grapes, too.”

This last sentence reminded us of something. We had been told by the previous owner that he had planted some grape vines, as an experiment – about five acres of them.

We had forgotten.

“Yes, the old owner asked us to pick the grapes and process them at our winery. I just went up there a few days ago to check on them. There are a lot of grapes, but they haven’t been managed very well. So, you will not get a very good wine, at least not this year,” said our Swiss friend

“You know,” he went on, “I was offered a chance to buy that land – several times – but I thought it was too high and too windswept for good grapes.”

“Hmmmm…we’ve never seen the place, ” said Elizabeth.

“Well, it’s right next door…only about a 30-minute drive from here.”

“We can’t wait to see it,” came the reply.

More to come…in the meantime; let’s see what our currency counselor has to say…

————–

Chuck Butler, reporting from the EverBank world currency trading desk in St. Louis:

“The G-7 called for faster appreciation of the currencies in the Asian region. The G-7 even went so far as to say that it was ‘critical’ for the Asian currencies to let their currencies rise versus the dollar.”

For the rest of this story, and for more market insights, see today’s issue of The Daily Pfennig

————–

Now, over to Short Fuse, reporting from Baltimore…

*** “The Housing Bubble Has Popped” reads the headline on MSN Money this morning.

The article goes on to say what we’ve been predicting for the last year; that the steam had to run out of the housing boom at some point, and when it does, the number homeowners defaulting on loans will skyrocket, as will the number of foreclosures.

In fact, exactly one year ago, seven colleagues from the Daily Reckoning’s HQ crowded around a table at Baltimore’s Café Hon to discuss the pros and cons of getting involved in the real estate market.

*** Addison will be giving a lecture at University of Baltimore’s School of Law on national debt, and how it will play itself out a the local, regional, national and international level.

If you’re in the Baltimore area, check it out. The lecture will take place from 4:45 – 6:00 p.m. in UB’s Law Center 211.