BullionBuzz eNewsletter February 13, 2013

“With the exception only of the 200-year period of the gold standard (1714 to 1914 in Britain), practically all governments of history have used their exclusive power to issue money in order to defraud and plunder the people.”

-- F.A. Hayek

CHART OF THE WEEK

To download chart

http://www.gold-eagle.com/editorials_12/chapmand020713.html

“The above chart shows the ratio of the US monetary base to the US population. Despite growth in the US population, the monetary base has been rising at an even faster rate. Since October 2008, the US monetary base has gone up 194% from roughly $949 billion to $2,796 billion. Gold has gone up only 102% rising from $828 to $1,672. This suggests that the US monetary base can now buy more ounces of gold at current prices then it could in October 2008. Alternatively, put another way it would take a higher gold price to match the ratio that was seen in October 2008. Gold today would have to be $2,400 to match the ratio seen in October 2008.”

-- David Chapman

VIDEO OF THE WEEK

GOLD

China’s Gross Shortage of Gold Reserves

Vronsky

Compare the total foreign reserves of the world’s major countries: China: $3.3 trillion; US $150 trillion; Germany $256 trillion; Italy: $187 trillion; France $190 trillion.

This means China’s FOREX risk is infinitely greater than any of the other countries, because only a tiny fraction of its total foreign reserves are in gold.

Assuming that China embraces the merits of gold's FOREX diversification, its central bank would need to buy an additional 44,600 tonnes of the shiny yellow. Put this into perspective by comparing it to two benchmarks: The world's total existing aboveground gold (about 172,000 tonnes), and the world's total yearly mine production (about 2,600 tonnes).

China's gold deficit represents 26% of the total existing aboveground gold. If it were to buy up all the newly mined gold in the world, it would take the next 17 years to accumulate 44,600 tonnes (which would leave nothing for anyone else).

The longer China procrastinates over increasing its gold reserves, the longer it suffers purchasing power losses in its TFR portfolio, today estimated at $5 trillion and counting.

China needs to buy gold in the open market from existing holders, and to buy up newly mined gold when available. This will inexorably forge new yearly all-time record highs in the value of the yellow metal.

The need for China to increase its gold holdings will grow apace with its bigger trade surpluses, which rise relentlessly year after year.

This means there will never be a peak gold price. There will certainly be corrections, but these will be temporary and will mean buying opportunities for investors who have just  ‘discovered’ gold's incredible total return as compared to all other investment vehicles.

Since 2008, the Fed’s QE policies fueled gold up 100% without any help from Chinese buying. And the Fed has said QE will remain in effect indefinitely. Soon, China will soon be buying gold hand over fist to reduce its US dollar exposure. Consequently, we may see gold over $6,000 per ounce by 2016.

http://www.gold-eagle.com/editorials_12/vronsky020813.html

The US Monetary Base and Gold

David Chapman

A sharp rise in the US monetary base 2008 coincides with the implementation of various quantitative easing programs.

We’ve already experienced QE1 and QE2. Under QE3, the Fed is purchasing $85 billion per month in mortgage-backed securities and US Treasuries until the unemployment rate falls to 6.5% while keeping inflation under 2%..

Since October 2008, the US monetary base is up 194% while gold is up only 102%. This suggests that the US monetary base can now buy more ounces of gold at current prices then it could in October 2008. Or, it would take a higher gold price to match the ratio in October 2008. Gold today would have to be $2,400 to match the ratio in October 2008.

Gold is also closely correlated to the US debt. In October 2008, US public debt was $10.7 trillion. Today it is $16.3 trillion, a 65% increase. As the debt limit is increased, the price of gold should rise accordingly. The US is adding roughly $1 trillion annually to the deficit. Of course, these are official figures. The unofficial figures are much higher.

The US reports 8,133.5 metric tonnes of gold in their reserves. If it were to use gold to back the US monetary base, gold would have to be $9,745 per ounce. Even backing 40% of the US monetary base, gold would need to be $3,898 per ounce. This assumes that US gold reserves exist; there has not been an audit since 1953.

It has been suggested that in order for the US to get its monetary house in order it should back the dollar with gold. Chapman’s research suggests that, whether looking at the US monetary base per capita compared with gold or using the US gold reserves to back the US monetary base, the price of gold is too low. So while gold has been trading in a range for the past 15 months that could soon end. As the US monetary base rises and the US debt rises, gold should go up with it.

http://www.gold-eagle.com/editorials_12/chapmand020713.html

Putin Turns Black Gold to Bullion as Russia Outbuys World

Scott Rose & Olga Tanas

Russian President Putin says the US is endangering the global economy by abusing its dollar monopoly, and he’s not just talking; he’s betting on it. Not only has Putin made Russia the world’s largest oil producer, he’s also made it the biggest gold buyer. Russia’s central bank has added 570 tonnes of gold in the past decade, a quarter more than runner-up China.

“The more gold a country has, the more sovereignty it will have if there’s a cataclysm with the dollar, the euro, the pound or any other reserve currency,” said Evgeny Fedorov, a lawmaker for Putin’s United Russia party.

Gold has soared almost 400% in the period of Putin’s purchases. Central banks around the world have printed currency to escape the global financial crisis, sapping investor appetite for dollars and euros and setting off a scramble for safety.

In 1998, the year Russia defaulted on $40 billion of domestic debt, it took as many as 28 barrels of crude to buy an ounce of gold. That ratio tumbled to 11.5 by the time Putin first came to power a year later and in 2005, after it touched 6.5—less than half what it is now—the president told the central bank to buy.

Quantitative easing by major economies to support financial asset prices is driving demand for gold in the emerging world. Before the crisis, central banks were net sellers of 400 to 500 tons a year. Now, led by Russia and China, they’re net buyers by about 450 tons.

Russia’s total cache of about 958 tons is only the eighth largest, however, after the US, Germany, the IMF, Italy, France, China and Switzerland. 

For now, with more than five years left in Putin’s term, Russia plans to keep on buying. “The pace will be determined by the market,” said First Deputy Chairman Alexei. “Whether to speed that up or slow it down is a market decision and I’m not going to discuss it.”

http://www.bloomberg.com/news/2013-02-10/putin-turns-black-gold-into-bullion-as-russia-out-buys-world.html

CURRENCY

Asian Currencies Tumble. Yes, This Is a Global Currency War

Gordon Chang

Market participants believe that the People’s Bank of China, the central bank, is behind a surprising accumulation of US dollars. Traders also believe that recent dollar purchases by China’s state banks are really on behalf of the central bank.

Since early December, the meddling of the People’s Bank in the currency market has been evident. Last quarter’s intervention is estimated at around $34 trillion.

China’s dollar buying is understandable in the context of the downward movement of the yen, which has fallen against every major currency in recent months. It has, this year, lost 7.09% of its value against the dollar and fallen 8.57% against the euro. Japan’s Prime Minister Abe has made yen depreciation a centerpiece of his controversial economic program, so there are expectations of aggressive tactics from the Bank of Japan.

Of course, everyone has noticed Tokyo’s new currency policy. Europe and South Korea in particular have complained, but China by and large has not.

Why complain when you can engineer the value of your currency?  From all outward appearances, China, Japan, Taiwan and South Korea are all engaged in competitive devaluations. China started a decade ago.

It may be too late to rescue the system of free-floating currencies. Abe’s plan to cheapen the yen is a defense against the fixed yuan and the falling greenback. The Fed’s dollar-weakening moves, which hurt the US, are in retaliation against Beijing. Beijing will not relax its grip on the renminbi. Of course the yuan is not, because the Chinese central bank is continuing to determine exchange rates.

We are witnessing the beginning of a currency war, which will not be confined to Asia. Governments see short-term advantage in intervening in the market, but in the end everyone will be hurt.

http://www.forbes.com/sites/gordonchang/2013/02/10/asian-currencies-tumble-yes-this-is-a-global-currency-war/

Chavez Risks Backlash after Venezuela Devalues Bolivar 32%

Charlie Devereux & Corina Pons

Venezuela, South America’s biggest oil producer, devalued its currency for the fifth time in nine years, a move that may undermine support for ailing President Hugo Chavez and his allies.

Venezuela will weaken the exchange rate by 32% to 6.3 bolivars per dollar starting February 13, 2013, the 30th anniversary of a similar event known as Black Friday.

The devaluation will help narrow the budget deficit by increasing the amount of bolivars the government receives from oil exports, but also threatens to accelerate annual inflation that is now 22%.

The central bank’s so-called Cadivi system, which sells dollars to importers at the official exchange rate, will provide $35 billion this year, the same as last year. The Sitme exchange, which sold at a weaker, parallel rate and will be discontinued, provided about $8 billion last year.

While a weaker currency may stoke inflation, it may also ease shortages of goods because the government was restraining the supply of dollars it allocated to the private sector as it waited for a more favorable rate.

The weaker exchange rate will give the central government an additional 84.5 billion bolivars ($13.4 billion) in revenue, mostly from oil sales done in dollars.

Chavez last devalued in December 2010 when he weakened an exchange rate on so-called essential goods by 40%. In January 2010, he had created a multi-tier exchange system in an attempt to spur non-oil exports and curb the consumption of luxury imports. The move prompted Venezuelan consumers to rush to buy appliances including flat-screen televisions before prices were adjusted.

While devaluing the currency will reduce the government’s budget deficit by half, the government will likely have to take further measures within the next year.

http://www.bloomberg.com/news/2013-02-08/venezuela-devalues-currency-from-33-to-6-30-bolivars-per-dollar.html

ECONOMY

The Results Are in: The Price of Down Is Up

Dennis Miller

“I bought a down jacket from L.L. Bean four years ago for $100. Today, that same jacket is $250. You know you have inflation when even the price of down is up!” noted a participant in Miller’s online inflation survey.

The weighted average for Miller’s reader-reported inflation rate is (rounded) 8%; it may be unscientific, but he trusts his readers more that the Bureau of Labor and Statistics. Some more responses:

“I track all my expenses using Quicken. My expenses in 2012 have gone up as follows: Groceries, +10%; utilities and property taxes, +9%; gas/diesel for vehicles, +1%.”

“A one-pound bag of Lay's Potato Chips used to cost $0.99. It is now 10.5 oz. and costs $4.99 if you can't find it on sale.”

“Stroh's beer cost me $4.39 a 12-pack at Food Lion before I left for Australia for 17 months in April 2011. It now costs $8.89 – up 100%. Schlitz and Pabst Blue Ribbon also went up 100%.”

“Nuts that used to cost $9.99 at Costco now cost $18.99.”

“My favorite cheese (Hoffman Sharp Cheddar) had a price jump of about 12% – about the same for Bass Ale.”

“The cheapest wine in California known as ‘2-buck Chuck’ recently went against its famous name and raised the price from $1.99 to $2.49! That's a 25% increase.”

Eggs, meat, bananas, pet food, grade-school tuition, restaurants in general and fast food in particular were all areas where people have noted rising prices.

In the US today, people are waiting for the other shoe to drop. They feel uneasy, but they can’t put their finger on exactly what is wrong. They feel that something is in the wind, but they are not sure what, or why. They should take this opportunity to head for higher ground.

http://www.millersmoney.com/money-weekly/the-results-are-in-the-price-of-down-is-up