Nothing Glitters Like Gold

Take a look at a ten year chart for gold. It almost speaks for itself.

There is no rush like a gold rush. The dye is cast. Three thousand years of history is shouting from the rooftops and making its way into our living rooms. The rush is on. Does it really matter that we have all these primitive thoughts? After all what is it that the barbarians knew that we don't? Every system in history was based on the gold standard, and when most empires removed the gold content from their coins and replaced them with lesser metals, they proceeded headlong into mediocrity.

How did all of this get started? Once upon a time some fellow came up with this idea which he designated as a bank. He was prepared to take in all types of  gold and silver, lock it away in a safe place and issue a certificate stating that he was willing to exchange that certificate for gold at any time or place. That, ladies and gentleman, was your first currency note with a gold standard.

As time went by, we invented the telephone, TV, motor vehicles and computers. The brilliance of mankind knew no boundaries. The powers that be landed a man on the moon. Imagine that?Confidence was brimming, and gathered further strength with the collapse of communism. So then along came another fellow by name Nixon and convinced us (who needed convincing?) that as long as we had the almighty American Dollar, who needs a gold standard. After all, a nation's economic power is measured by the strength of its currency, and the dollar had swept all before it. Basically, the power to create money had been removed from the limitations of a gold standard and placed in the hands of Congress and The Federal Reserve. Like placing a cat in charge of the cream. Simple but true.

It has often been said that there is a thin line between self esteem and arrogance. Somewhere along the way that line was crossed. So self esteem changed to arrogance and then greed was added to the mixture. Central banks had no need of this non-yielding asset and sold their gold, in hindsight, at ridiculous prices and replaced it with goverment debt. Everybody was coming to the party. Euphoria drowned out the solitary voices of warning. Who were these people trying to interrupt our party? Humanity has developed past this primitive ideology. Quiet! Great minds with great theories are at work here. Do not interfere. Everybody has a home, a car and a dog to prove it. Sweet talking politicians joined in the celebrations.

Fast forward to today. Central Banks have ceased gold sales and are now buying gold at a much higher price. The developing economies are now part and parcel of the same family. None of them are buying the American dream. There is a manouvering for power and new candidates are raising hands. Diversification is the name of the game. Gold is on the rise, and the once mighty US Dollar is in decline. We now ask ourselves what we have done to future generations, while the idiots in Washington hang onto power by the skin of their teeth. The chickens are coming home to roost.

Uneasiness takes hold as the markets dictate a new order, and show us that we are human, after all. History is repeating itself whilst we observe in high definition or even in 3D. Nothing glitters like gold. This was correct for centuries, and it is correct today. Despite claims to the contrary, gold remains the only "Honest Currency". Some folks legitimately ask the question "what is so special about gold?" The answer is simple. It represents the shortcomings of humanity.

Any intelligent fool can make things bigger and more complex... It takes a touch of genius - and a lot of courage to move in the opposite direction - Albert Einstein

Iran - Economy on the Brink

In Israel in the early eighties, inflation reached 1000% p.a. The black market rate for USD went crazy and people were withdrawing Israeli lira from the banks in boxes (I kid you not) and running to the arab market and exchanging the devaluating currency for USD. I happened to witness all this while working for an Israeli bank in Jerusalem. The USD were placed under floorboards, bed mattresses and in private safes at home but mainly at the bank. At the end of the day the banks collapsed, were nationalized by the government and the stock market was closed. It took years for the Israeli economy to recover, but that was then and this is now.

So much has been written about Iran's nuclear potential and the sanctions imposed, we will hurdle over the preamble and begin in the present. In order for a country to survive today's economic climate, a viable currency is required. The Iranian currency, the Rial has been devalued by 50% in the last month. Black market rates have rocketed to well above the official rate as the Iranian Government reacts and raises interest rates from 14% p.a. to 21%p.a. This in an attempt to support the currency. Official figures for inflation are probably incorrect. Prices of all imported goods will eventually have to rise by 50%. Sanctions, in conjunction with a covert war, appear to be having a strong psychological effect on the citizens of Iran, increasing economic insecurity and sending them scuttling to the black market to save what they can.

Even though Europe and the US has declared an embargo on Iranian oil, this only accounts for 30% of Iran's exports. Such is the market, that they will clearly find a buyer(s) for their oil. This is not the key problem. 95% of International business is conducted in USD and Euro, and are subject to Central Bank rules. To simplify this, If I transfer USD100 from my account at CIBC to an account anywhere in the world, that amount, by law is transferred through a correspondent bank in the home country of that currency. In this case, through a bank in the USA, where the US Central Bank can either permit or block the transfer. So Canadian dollars all go through Canada and Euro through the European Central Bank apparatus. As a result, Iran cannot participate in any international transaction using USD, British pounds or Euro. So the key problem is not the sale of oil, but how they will be remunerated for it.

Their easiest solution would be to trade oil for food or machinery etc. Or possibly try to do trades in Japanese Yen or Swiss Francs. Whether they like it or not, the US controls the International Monetary System, so banks doing business with Iran may find themselves blacklisted. Whichever way one spins it, the sanctions are beginning to bite. Its not over by a long way, but it would be fair to characterize the situation as a possible beginning of the end. Ahmadinejad is teetering and we are more than curious which way he will vacillate.

An appeaser is one who feeds a crocodile—hoping it will eat him last - Churchill W.

KISS News

1.Fitch Ratings Tuesday said Italy is the euro-zone member that poses the greatest threat to the future of the currency bloc, as the lack of a region-wide plan to prevent the sovereign-debt crisis from spreading has been coupled with the country's large debt burden and high borrowing costs. David Riley, head of global sovereign ratings at Fitch, speaking at a conference in London. "Italy is the front line of this crisis," Mr. Riley said, adding the country's elevated government bond yields have "marked a profound intensification of the crisis." Italy's 10-year government bond was yielding 7.13% Tuesday.


COMMENT: For every $100 produced in Italy, $120 of credit is required. This credit is now compounding at 7% p.a.


2.Turkey Gas and Oil:  Petar Shkrbina told SETimes. "Erdogan knows that Europe needs Turkey and not the other way around. The main networks of gas and oil pipelines will go through Turkey." Analysts are unanimous that the pan-European corridor No. 10, which will connect the Balkan countries with the rest of Europe, will command the economic attention of Turkey. The corridor's left wing will secure a transportation connection between Turkey and the Balkans, and Turkey and the EU. 


3.Russia’s total capital outflows in 2011 were $84bn as political uncertainty in the fourth quarter caused volumes to rise sharply. Most of the total was recorded in the fourth quarter, following the news at the end of September that Vladimir Putin, the prime minister, would be returning as president in this year’s elections. Following that announcement, $37.8 bn in assets were transferred abroad.


COMMENT: This is not an instant crisis. Russia has a consistent source of foreign currency from oil and raw material exports. It is, however, an indicator of an unstable political situation in that country.


4.James Dines has been around a long time. He was the "Original Gold Bug", the "Original Rare Earth Bug" and is a guru on technical analysis of markets. .  He also wrote a book about "Mass Psychology" where he discusses the "Mass mind". He compares the new geopolitical markets to the Mass Mind and coined the word "murmurations". With this word he creates an analogy to a flock of birds flying in unison, or a school of fish all darting in perfect formation. Its amazing how these formations, sometimes miles across, manage a perfect parallel movement. These murmurations are leaderless and remind Dines of todays markets.


5.These leaderless murmurations also have a political analogy. Think Islamic Spring, Occupy Wall Street and The Tea Party. These movements appeared out of nowhere and presently have merged into the landscape.


6.It has been almost non-stop political turbulence for Egypt since the revolution which ousted Hosni Mubarak as president last year. Tourism receipts have declined from $12.5bn in 2010 to $8.8bn last year. The majority of tourists are from Russia, Britain and Germany. It looks like Egypt's loss is Dubai's gain as tourism to that country is increasing.


COMMENT: What's surprising is that they have any tourism at all. Prices have fallen, so follow the money....


7.The United Arab Emirates has become the latest country with which China has signed a currency swap agreement, worth 35bn yuan ($5.5bn), aimed at promoting bilateral trade and that could boost the renminbi’s role in the Middle East. Bilateral trade surged nearly 40 per cent last year to $32bn with Chinese exports to the UAE amounting to $24bn. Since 2008, China has made currency swap agreements, amongst others, with Pakistan, Japan, Indonesia, Thailand and Turkey. In all 14 countries and counting. The idea behind these swaps is to provide “seed money” for China’s trade partners so that trade can be conducted in an alternative currency – read: renminbi – instead of the US dollar. 


COMMENT: Think "murmurations", think of Iran's problem with payments for oil in USD. Make the connection.


MARKETS: The Dow seems to be waiting for a real test. Volume is in the low to average range. This market is making me nervous. GOLD seems to have stabilized and is looking for a reason to rise. The USD is strong at the top of its range, more because of a weak Euro than a strong Dollar. DR COPPER is steady, as is OIL. All this steadiness is an invitation to a murmuration.


The problem with socialism is that you eventually run out of other people’s money -  Margaret Thatcher

KISS news

1.Russia was formally, and finally, admitted into the World Trade Organisation on Friday, 18 years after negotiations began. Russia was the world’s last major economy, and the only Bric, remaining outside of the organization.


2.NY Times: "Just to replace all the jobs lost in the recession and keep up with the population growth, the economy would have to add 275,000 jobs a month for the next five years." 


3.K-Opinion: Both Indian and Chinese stock markets have hit new 3 year lows (a fall of about 40%). The Dow is holding at the 12000 mark, down only from 14200 in 2008. Could it be that the US is retaking the lead as the world's economic engine? As the emerging markets slow, it will be fascinating to see how the US markets react. Follow the money.


4. A side effect of the Asia-European slowdown is the weakness in commodity prices, except of course, oil, which is reacting to geopolitical factors.


5.FT: "It’s another milestone – an emerging economy overtakes a developed one in terms of GDP. Earlier this year it was China overtaking Japan. This time, Brazil has moved ahead of the UK as the 6th biggest economy in the world. The question is: who’s next? And does it matter?" So who is next? Well, Russia and India are set to move up from 9th and 10th respectively, with Italy at 8th in their sights. The CEBR predicts that by 2020, the four Brics will be the 2nd (China), 4th (Russia), 5th (India) and 6th (Brazil) largest economies, with only the US (1st) and Japan (3rd) ahead. Does it matter? Nope. Just another forecast.


6.The creation of a US Rare Earth strategic reserve is more likely to get the go-ahead after China's largest exporter halted production, two congressional sources told dealReporter. Such a move would create another source of demand for the metals, likely aiding a rebirth of the US Rare Earth industry, said two company executives and a company spokesperson. KISS: Rare Earth mining companies appear to be at the lower end of their cycle.


7.China has again outshone the U.S. as the top venue for initial public offerings despite steep share price falls on the mainland and Hong Kong stock markets, highlighting the shift in global financial activity from west to east Companies raised $73 billion from IPOs in Shanghai, Shenzhen and Hong Kong this year, according to Dealogic — almost double the amount of money raised on the New York Stock Exchange and Nasdaq combined. KISS: The interesting thing about these figures is that the Shanghai Stock Market had one of its worst years ever. Possibly because of an oversupply of equity via these IPO's. Simple supply and demand. 


8.FT: US generals measure the war in Afghanistan by numbers, seeking to distil a messy conflict into neat graphs of troop levels, roadside bombings and suicide attacks. To gauge hopes for the country’s future, they might consider a new indicator: sales of Red Bull.
On the one hand, surging imports of the straw-coloured energy drink – now a staple at wedding parties thrown by the Kabul elite – are emblematic of Afghanistan’s galloping economy. They also signal danger: the booming business of war has fed a rise in consumption without fostering enough of the private investment needed to underpin more durable growth. KISS: This paints a bizarre picture of the Afghanistan situation. Elitist wedding parties, suicide bombers and Red bull.


KISS Market Summary: The DOW is still at the top of its trading range. Actually about 200 points above, however volume still on the low side. Most breakouts are accompanied by higher volumes. So in spite of better employment figures, the market is still hesitating. Possibly slow GDP and rising debt is putting a damper on the party. On the positive side, the markets are not showing any signs of panic with regards to the slowdown in Europe and Asia. GOLD and OIL would be a lot more volatile if the money suspected that the chest-beating out of Iran was serious. DR COPPER is stable at $3.40. So folks, as we move into 2012, its business as usual.


You cannot help the brotherhood of man by encouraging class hatred - Abraham Lincoln