Got Gold?

The Daily Reckoning PRESENTS: Gold has been on quite a tear lately, hitting a high not seen since 1981. This, of course, makes our Mighty Masked Economist very happy…

GOT GOLD?

We Americans are increasingly alone in this “gold is a barbaric relic and only lunatics and idiots like The Mogambo are stupid enough to buy gold” world, as we read in an article by Sean Brodrick in the Red-Hot Canadian Small-Caps newsletter, who writes, “The reopening of China’s gold market to investment after 50 years of Communist suppression is one of the great forces driving gold today. So, it comes as good news that China is planning to loosen its import/export laws on gold.”

So, why in the hell should you care about Chinese import-export laws on gold? Well, I was just waiting for you to ask that, because I have this terrific answer! It’s all about how a third of the world’s population is being encouraged to buy gold, the same third of the world population that has a tradition of 3,000 years of historically high regard for gold. This means that the Chinese are going to be buying a lot of freaking gold, and supply, even today, is not enough to satisfy current demand except by central bank dis-hoarding, and how that means that gold will necessarily rise mightily in price, and then people who have gold will be rich, rich, rich! And I even had this fabulous tagline at the end where I say, “The future of gold is golden!” whereupon I expected you to spontaneously break into wild applause with lots of cheering. But before I could gather my notes together or even open my mouth to speak, Mr. Brodrick jumps up like a little showoff and says, “Since China already consumes more gold than it produces, this couldn’t be more bullish for gold, in my view,” which was, although brief, far better than the confused little speech I had prepared. So, I sat down in a grumpy huff, and was in a bad mood for a long, long time.

What are these new Chinese laws on gold? Real snippy-like because I am still sulking, I say, “Ask Mister Expert over there!” Mr. Brodrick hears this and says, “The People’s Bank of China has recently published a draft of new rules which would allow any company with more than $3.6 million in capital to start a gold trading firm.”

But this is not only about China, as Mr. Brodrick goes on to say, “Meanwhile, in India, the Forward Markets Commission (FMC) said it would allow both foreign institutional investors and mutual funds to begin trading bullion futures at national commodity exchanges.”

I guess Jas Jain heard us speaking about India, and he says, “The Indian financial system will definitely collapse because of its bankers, who are desperately pushing debt for higher current profits, a common disease around the world but worse in India. Ignorance about the future consequences of debt-driven consumption is mind-boggling. Indian banks and governments will collapse one after another and there will be massive riots. Indians will pay the price for badly copying Americans.”

Well, that’s pretty damned spooky to have a nation with nuclear weapons be in that kind of shape, but as spooky as that is, if you recall, we were actually talking about gold. And in an odd way, he was talking about gold, as he goes on to say, “Safety should be your number one concern in the coming years of the collapse of the current world economic and political order. The world could not have had two more ignorant and dangerous men in power than Bush and Bernanke.” Man, I heard that, loud and clear!

What is the one thing…the one sure thing…the one guaranteed thing that all people, of all generations, in all nations, in all of history have turned to when their governments destroyed their money and the world was on the brink of the “collapse of the current world economic and political order?” The Mogambo smiles as he says, “Harken to me, my darling dudes and dudettes. Gold! Got gold? Get gold!”

Thanks to Barb at 321Gold.com, we got a link to Neftegaz.ru, which is some kind of Russian site (although it is in English, so naturally I am suspicious as hell) that had an article headlined “Russian Gold Reserves Increased by $50bn.” In the body of the text, we find out, “The Central Bank of Russia official said Monday that Russia’s gold and foreign currency reserves have reached $173 billion,” and that, “[The] reserves have increased by $50 billion since the start of the year and would have grown by $70 billion if not for foreign debt payments.”

We learn that inflation is going to increase a lot in Russia, as we read, “The increase in gold and currency reserves has expanded the monetary base by 24%, whereas money supply has increased 40%, according to the bank official.” With monetary inflation like this, price inflation in Russia (which is already 10.4%), is going to get a lot worse.

Thanks to SafeHaven.com, we linked to Kommersant.com, another Russian business daily, also in English, also suspicious, where we read the headline “Bank of Russia Will Re-Evaluate Gold” by Dmitry Ladygin. Hmmm! Interesting!

However, the reality is a lot more prosaic, and the Russian central bank is merely going to change the way they account for their gold holdings: “Instead of previous fixed prices, the CB will start to appraise the precious metal according its own quotes, which are close to the market price.” Mr. Ladygin, or Comrade Ladygin or whatever in the hell they call themselves, writes, “For the first glance, it looks logical – currently the gold in state coffers is appraised by the CB fro $300 per ounce. The same quotes were in the market in 2002. Since that time, the price for gold went up by 1.7 times. For instance, yesterday prices for the gold on world market were $520 – $524 per ounce.”

The reporter sees something more than that afoot, and writes, “However, it looks like in reality the Central Bank (CB) is getting ready to buy massive amounts of gold, and the market prices will allow the bank to avoid accounting mistakes.”

As grubby speculator trash, my Sensitive Mogambo Big-Move Detector (SMBMD) is going, “beep beep beep! Beep beep beep!” I rush over to the printer, and the computer printout says that the salient point in all of that was: “the central bank is getting ready to buy massive amounts of gold.” Now, holding that thought in your mind, think about that basic cornerstone of economics, the demand/supply dynamic, and you will realize that a vastly increased demand, encountering a relatively static supply, is equilibrated by a higher price! I love this economics stuff!

Until next week,

The Mogambo Guru
for The Daily Reckoning
January 9, 2006

Mogambo Sez: Although the Hulbert Digest did not report it, the performance of the Mogambo Guru newsletter should have been at the top of the heap again this year, seeing as how I have been consistently screeching about precious metals and commodities (especially oil) for the entire time, which are two of the top-three big winners (the other being some foreign stocks), according to the Lipper Indexes. And to make it easy on you and the Hulbert Digest people, my top picks for this year are the same two categories, with a Big Old Mogambo Emphasis (BOME) on gold, silver and oil.

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, and a vocational exercise to heap disrespect on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications.

“Do you really think the end is nigh?”

We were on the phone with an Irish radio station this morning. We explained our thoughts:

“You can never know when important trends will turn around, but there is reason to worry that both the U.S. Empire and the U.S. economy are peaking out. When the numbers are finally tallied, we think they’ll show a decline in real incomes for Americans in 2005 – coincident with a negative savings rate. We haven’t seen anything like this since the Great Depression. In the depression, it was obvious why people were drawing down their savings: they needed the money to eat. A quarter of the workforce was out of a job.

“But why would the savings rate go negative in 2005, when the U.S. economy is said to be expanding and everyone is supposed to be getting rich? I’ll tell you why. [Remember we were on the radio; a certain amount of glib bluster is de rigueur] It’s because the whole thing is a fraud. Only the rich are getting richer [we thought this populist demagoguery might have a certain appeal during drive-time].

“At the middle and lower ends of the economic food chain, people are having a hard time making ends meet. The only way they can keep up with the Joneses is by borrowing. In 2005, about $200 billion was “taken out” of house-price equity. But it looks as though these marginal borrowers are going to be squeezed from several directions in 2006. Interest rates are rising. Lenders are being forced to increase minimum payments and stiffen credit policies. Energy costs are twice what they were a year ago. And the hottest housing markets seem to be cooling off.”

Also on the line was the station’s pet economist from a university in Dublin. He offered listeners a rebuttal: “Yes, Americans have borrowed too much. But the United States has a huge, rich, dynamic economy with many assets overseas, etc. Besides, some nations operate with a negative balance of trade for many years. And people have been predicting an imperial over-stretch for a long time. Not a very original idea. We haven’t read Mr. Bonner’s book, but…” We tried to follow his point or his logic, but we couldn’t keep up with it. As near as we could tell, he hadn’t read our book, but he was sure he wouldn’t like it.

“What do you have to say to that, Mr. Bonner?” asked the show’s host.

What could we say, dear reader? For a long moment, we couldn’t think of a single sentence that didn’t have a four-letter word in it. But we doubted that that was the sort of honest response the station wanted. So, we gave more figures…more talk of trade deficits and other economic mumbo-jumbo.

We were just about to explain the difference between productive debt and debt used for consumption, but our time was up. It was on to something more important – the sports coverage!

The banking industry has done a great thing, says another smug economist from the American Banking Association. By encouraging people to borrow against their houses it has helped people “free up illiquid assets.” In 2005, they helped people “free up” $200 billion worth of illiquid assets. Surely, they should get a Nobel Peace Prize for that! Imagine all those poor people who have been liberated from their own houses. Last year, they owned a roof over their heads, or “illiquid asset.” Now, they own last year’s hit CDs and have fond memories of last year’s vacations in Las Vegas. Of course, they now have a deeper, more meaningful relationship with a lending institution, too.

As recently as the first Reagan administration, America’s personal savings rate was nearly 10%. By the first Bush administration it had fallen closer to 5%.In the second Bush administration, the rate has gone negative…to minus 0.20% in November. Over the last five years, debt levels in America grew twice as fast as incomes. Now, “savings have practically disappeared,” says Paul Volcker. We have, “an economy on thin ice,” says the former Fed chairman.

“On thin ice,” is a metaphor suitable to the season and the situation. It does not tell us if the nights will grow colder or warmer. It does not tell us when the ice will crack. The end may or may not be nigh, but readers are reminded to be careful.

More news from our currency counselor…

Bill Bonner, back in London with more miscellany…

*** Wow! Look at the gold price. Instead of falling back in a correction, it has soared to a new high – over $541, a price not seen since March of 1981. Back then, of course, gold was on the way down, after hitting a high of $830 a year earlier. Now, gold is on the way up. Will we get no further opportunity to get in below $500? We don’t know.

*** Gold is rising against all currencies, but it is rising against the dollar slightly more than against the euro. It looks as though the dollar’s rally may be over. This may not be the first time we’ve said this and it may not be the last, but our hunch is that 2006 will not be a good year for the dollar. The Fed is unlikely to continue raising rates. Consumers are under pressure. And China just announced that it would lighten up on its dollar holdings. Sell the dollar, dear reader.

And buy what? Ah…gold, what else?

[Ed. Note: Another great thing about the yellow metal: it’s the only commodity that restricts fiscal irresponsibility…something we explain in our latest tome, Empire of Debt. The book has been on the NY Times business bestseller list for two months no.

*** Yesterday, we got into the family car and drove out in the pouring rain to Tweseldown Raceway. It was the first time we had driven in Britain in many years. We had to remind ourselves to stay on the left-hand side of the road. It is easy to do as long as you are on a divided highway or following another car. But when you have no car ahead to guide you, and when you have to react quickly, the results can be unpleasant. Your instincts work against you; you will want to drive directly into the path of an on-coming car. On a roundabout, for example, you are likely to head off in a counter-clockwise direction, while everyone else goes at it in the other way.Fortunately, we still have our French license tags, so the British raise their fists and curse the “damned French” on their roadways. We reply with a Gallic shrug.

When we finally got to our destination, about an hour outside London, we felt that we were at last seeing the real English in their native element. London is full of jumped-up parvenus and foreigners. Here in the country was the real thing – the mad English. It was raining so hard the roads were flooded. Any sane group of people would have canceled a steeplechase race, but the English fans stood their ground like Wellington at Waterloo – drenched head to foot, teeth chattering and up to their knees in mud.

“What are we doing here?” Henry wanted to know.

“I know; this is horrible,” his mother replied. ” But pretend we are naturalists or ethnologists. We’ve come to a strange island. Now, we’re watching the natives perform a strange ritual. They’re going to stand in the cold winter rain and watch horses run around in a circle.”

“What is the point? Just because they are crazy doesn’t mean we have to be crazy,” Henry continued, water dripping from his nose.

“Yeah, this has got to be the dumbest thing we’ve ever done,” added Edward.

“Well, just make the most of it. We’ll watch one race and then we’ll go.”

We mucked up to the top of a hill so we could see. But even there we could only make out the beginning stretch and the home stretch. The rest of the racecourse, with its many hedges and water obstacles, was lost in fog, rain, and distance.

“They’re off,” said the announcer. We could see that for ourselves. The horses proceeded cautiously on the muddy track. Then, they were out of sight. We stood in the rain, listening to the commentary.

“They are making their way around the south course. Lazy Shuffle is in the lead by two lengths. They are approaching the water obstacles.

“Oh no! A nasty fall…now another. The ground is just so wet and waterlogged. Oh my, we have a complete wipeout at the fourth jump. Let’s see who’s left. Well, it’s My Opinion in the lead…actually Lazy Shuffle is still in the lead, but there is no jockey on the horse.”

When the horses finally came back into view, the field of riders had been greatly reduced. My Opinion won easy. Half the other riders had been unhorsed on the fourth jump. Eventually, all of them came back to the starting line, soaking wet and covered in mud.

“Well, the old tea pot is going to get a workout this afternoon,” said a nearby English fan as he deserted the field.