GOLD - PUTTING THE PIECES
OF THE PUZZLE TOGETHER
by Cliff Küle
November 25, 2008

There are a number of recent developments, fundamental factors, and technical indicators that suggest a large move higher in the price of gold. These developments, factors, and indicators can be seen as pieces of a puzzle and together provide guidance. A number of pieces of the puzzle are presented below.

The first piece of the puzzle has to do with the gold carry trade. This is a method that central banks use to get their gold bullion out of reserves and into the market. Central banks use bullion banks (BB) to lease their gold bullion out. These bullion banks include Barclays, Goldman Sachs, JP Morgan, Bank of America, UBS, and Citibank. The central banks loan gold bullion to the bullion banks typically at a rate called the GOFO (Gold Forward) rate. The GOFO rates are published in the London Bullion Market Association (LBMA) website.¹ The bullion banks take the leased gold from the central banks and sell it in the open market; then take the cash from the sale, and most often buy bonds at some rate close to the LIBOR² rate.

So the net profit to the bullion banks is as follows:

Lease Rate = LIBOR – GOFO

Notice the designation “Lease Rate” – this is often confused with the GOFO rate which is the actual lending rate. The Gold Lease Rate is actually a measure of the profit of the gold carry trade.

At some point, the bullion banks need to return the gold back to the central banks. Since the price of gold can rise before the time to return the gold, standard practice is for bullion banks to hedge by buying futures contracts of gold. In other words, they secure gold for delivery at a specific price, on a specific date in the future. Once they are hedged it doesn’t matter what the price action of gold is. Gains or losses on futures contracts will cancel out the gains or losses on the value of their leased gold.

So in summary, the bullion banks get:

• a profit of “Lease Rate” on the holding of the bonds

and the central banks get:

• a return (interest) on their gold bullion
• offload gold to increase gold supplies in the market
• indirectly (no conspiracies) keep the price of gold suppressed as an alternative currency, measure of wealth, or indicator of inflation
• an increase in overall market liquidity and facilitating lending (important in today’s environment of frozen credit markets).
• creation of a boost in demand for bonds

This is a win-win situation for both the central banks and bullion banks. Cliff Küle will examine who loses in a future article.
To give an idea of the magnitude of the gold carry trade - in 2005, according to Whiskey and Gunpowder’s reference to the London-based Gold Fields Mineral Service (GFMS)³:

• gold leasing was estimated to have added 2,970 tonnes⁴ of supply to the market
• jewelry demand was 2,700 tonnes, world investment was 736 tonnes, and official central bank sales were 656 tonnes

Over the last 10 years, average mine production has run at an estimated 2,500 tonnes per year.⁵ Notice that the amount of gold leased exceeded all of the other statistics mentioned.
It is important also to understand that although the gold bullion is expected to be returned at some point to the central banks, there are constant new gold carry trades being initiated, further unleashing fresh new supplies onto the market. The length of a gold leasing contract can extend anywhere from one month to several years.

What are the current and recent Gold Lease Rates, LIBOR, and GOFO rate telling? See below for the chart of Gold Lease Rates courtesy from www.kitco.com:

What we can see is that the Gold Lease Rates have jumped higher in the last few months. But notice the GOFO rates have been coming lower. See the below table courtesy from the London Bullion Market Association (LBMA) for the GOFO rates⁶.

Notice that the GOFO rates have come down significantly and the short-end is already into negative territory. This negative rate is a rare condition known as backwardation and usually indicative of a bullish market. Think of it from the perspective of the central banks – if their lending rates are 0 or negative, they will get nothing from leasing their gold. The central banks may either slow down or stop their leasing. However, due to current credit market problems, they may continue the gold leasing (albeit at a loss) in order to assist the markets and the economy.

Just a few weeks ago the European central banks appear to have decided to stop lending gold. Here is a quote from a recent Financial Times article: “Central banks have all but stopped lending gold to commercial and investment banks and other participants in the precious metals market, in a move that on Tuesday sent the cost of borrowing bullion for one-month to more than twenty times its usual level. The one-month gold lease rate rocketed to 2.649 per cent, its highest level since May 2001 and significantly above its five-year average of 0.12 per cent, according to data from the London Bullion Market Association.”⁷

Another piece of the puzzle?… The last time GOFO collapsed was in the days leading up to the Washington Agreement on Gold⁸ – gold prices went 40% higher. It is possible that something dramatic is coming again.… Have a good look at the chart below (courtesy of Lance Lewis):⁹

In regard to backwardation of the GOFO rate: this condition is characterized by tightness of supplies in the market. So is this the case with gold now? Cliff Küle has a number of postings on its web site (www.cliffkule.com) in this respect and there does appear to be a current and recent disconnect between physical gold prices and paper-based, exchange-traded gold prices in the market (as many other observers have noted on Financial Sense as well).

This backwardation phenomenon and associated tightness of supply leads to yet another piece of the puzzle - gold spreads. A spread is a difference between two prices, in this case between the gold prices of one exchange-traded monthly contract with another. Commodity Specialist Martin Sweeny of the Friedberg Mercantile Group¹⁰ has provided Cliff Küle the following charts which depict the spread between the December 2008 gold contract and the December 2009 gold contract. Note the recent trend to smaller numbers – this means an increasing backwardation condition. Once the numbers turn positive, it means that the front, nearby month of December 2008 is priced higher than the backend month of December 2009, a very rare and bullish condition indeed.

And the last piece of the puzzle is taken from the December 2008 gold contract on the NYMEX exchange. It is noted that the level of open interest (total number of open contracts – on the December 2008 gold contract is 9.8 million ounces as of 21 November 2008 (see table below the number highlighted in green, courtesy of TFC Charts¹¹), with the first day delivery notice scheduled for Friday 28 November 2008. The problem is that there are only approximately 5 or so million ounces in the exchange warehouse according to various sources (see same reference from Lance Lewis for example), so that if there are enough participants that take delivery this month of December (especially due to the disconnect in physical supply with paper), there is a chance of a short squeeze driving gold to higher prices. There has been some speculation in “gold bug” circles about this potential – the problem with this reasoning is that participants usually take delivery on only 2% of the open interest. However the potential exists when physical supplies are tight.

Gold Contracts on NYMEX Exchange¹²
(for all contract months - open prices, high prices, low prices, last prices,
change in prices from previous day, volume of contacts, settlement price,
open interest, and links to call options and put options)

Putting all the pieces of the puzzle together, the picture emerging for gold is a move in the direction of higher prices. Technical indicators in a previous Cliff Küle article published on Financial Sense¹³ support the bullish picture even further.

One final thought – respected institutional Portfolio Strategist Don Coxe recently called for a revaluation of US government gold (currently valued at $42.22¹⁴ per ounce in its accounting) and for the US government to buy all of the International Monetary Fund’s bullion holdings at $1000 per ounce - as one of a number of proposed solutions of the current financial crisis…similar to what the US did in the 1930s to stimulate the economy…

WHAT I TELL MYSELF WHEN GOLD SELLS OFF
- The Casey Files -
by Jeff Clark

Psychologists say decisions aren’t made simply on what you hear from others but also on what you hear in your own inner dialog. With investing, that can be the kiss of death if you let either fear or euphoria dominate the conversation.

So what did you tell yourself this summer when gold plummeted 20% in 5 weeks and most gold stocks lost a third or more of their value? Did the dialog help you make a wise decision?

I’ll tell you what I told myself. When I saw a chart of gold’s mid-summer drop, it looked scary…

…then I told myself to take a longer look at gold’s history.

What I saw is that gold’s recent drop is a blip in the big picture. So I told myself, “Maybe you should relax a little.”

Then I thought about corrections in past gold bull markets. Compared to the historical record, does the recent sell-off look normal? Or is there something about it that suggests our gold bull market is over? Here’s what I found: past bull markets were interrupted by similar drops – and then they came roaring back.

And even within the current bull market, there have been other pullbacks similar to what we’ve just gone through. Gold dropped 21% in the summer of 2006 – but gained 45% by the end of 2007.

So I told myself, “Corrections, including large ones, are normal in bull markets.The sweet stuff is still ahead.”

But enough of charts. What we really want to know is, is the case for gold still intact, or have the fundamentals changed? And the answer, I believe, will give you some compelling things to say if the recent correction has left you arguing with yourself about buying gold.

Think back to mid-July, when gold was pushing higher and was again within spitting distance of $1,000. How did you feel? Were you optimistic? Excited? Of course, and so was I. But what did that optimism have to do with the reasons for gold’s rise? Nothing! You were happy and tingling because gold was moving your way – yet it was rising because inflation was climbing, the dollar had a long-term illness, the government was printing money, banks were failing, falling house prices were threatening the solvency of more lenders, long-term oil supply was dwindling, and the economy was faltering.

Don’t wait for me to ask. Ask yourself: which of those factors have changed in the last 30 days?

If the bull market in gold were over, it would mean that inflation was under control, the dollar’s long-term problems had been solved, the government had become restrained in printing new money, banks were healthy, house prices had stabilized, a surprising new source of energy had been discovered, unemployment was diminishing, and everyone was smiling. That’s not what I see.

So what do I tell myself? “Every fundamental reason that gold is sought as a safe haven is still growing in importance.”

What about gold’s behavior during the economic problems of the 1970s? From December 1974 to August 1976, gold dropped a whopping 48%, even as inflation and the economy’s condition were worsening. We all know what happened next: by the end of 1976, gold climbed 32%. And by January 1980, gold had risen more than 700%.

Today the U.S. inflation rate is 13.4%, almost as high as the worst of the 1970s. Wait, you say, I thought the CPI was 5.6%? According to John Williams of Shadow Stats, measuring inflation by exactly the same methodology the Department of Commerce used in 1980, shows that the true rate is more than double the bogus figures the government is currently publishing. That’s why gas pump and grocery aisle prices are making a mockery of the government’s numbers.

What do I tell myself? “Inflation is out of control and getting worse.”

Even so, gold’s recent reversal was matched by a recovery for the dollar, which the mainstream media attributed to weakness in European economies. With Europe headed for a recession, the dollar’s fall against the euro was over. But are the happy TV faces correct?

First, fundamentals in the U.S. remain weak, especially in the housing and finance industries. In addition, we still depend on borrowing overseas to finance our spending. This will cap the dollar’s gains. Meanwhile, MZM, the broadest measure of the money supply, has grown 16% in the last twelve months. Due to the bloating federal deficit and the big-dollar promises the politicians have made but that the U.S. can’t possibly pay, further rapid growth in the money supply lies ahead. And that means more inflation, which means the dollar’s recovery will turn out to be temporary. And more debasement of the dollar equals higher gold.

What do I tell myself? “The dollar’s ills haven’t been cured. In fact, we haven’t seen the worst of the currency’s decline.”

I interviewed Doug Casey earlier this month and heard the textbook description of a contrarian investor. Doug was reminiscing about how hard it was to get clients to buy gold and gold stocks in the mid-‘70s, how a client even refused to pay for gold stocks he’d just bought, and how the prospects for gold looked bleak to nearly everyone. What did one of the greatest speculators of all time advise?

“You don’t make money buying when you’re optimistic. You have to actually run completely counter to your own emotional psychology. It’s easy to talk about being smart in theory, but extremely tough to apply in practice when it’s real money and you’re scared. But what am I doing now? I’m buying.”

What do I tell myself? “$800 gold is nothing but a buying opportunity. Grab some cash, Jeff, and head to the local coin dealer while it’s still on the SALE! rack.”

A historical tour of gold price.

From Ed Steer:
(The Casey Research )


.......Changes in open interest for Friday were as follows. Gold o.i. rose 799 contracts and silver went the other way, down 1,841 contracts. There were 716 contracts delivered into on the Comex on Friday, so this contributed to the decline in open interest by that much. Still, over 1,100 longs got liquidated and 1,100 shorts got covered, which is nothing to sneeze at.

Hopefully, the worst of the tech fund long liquidation is behind us...now that the old high of $850 in gold was tested...and held. But as the prices of both metals continue to rise towards the tech fund buying points of the 20- and 50-day moving averages, it will be interesting to see if there is any effort by the Boyz to sell these metals down once they reach that price area. We'll have to wait and see. However, once we finally do break above those moving averages and the tech funds start to buy more aggressively, it will be of more than passing interest to see if the '8 or less' traders...the bullion banks...will go short against them once again...just like they've always done. Ted Butler has more about that in his latest commentary...which I've posted further down.

Both Ted and I have talked about the silver and gold ETFs quite a bit in the last week or so...and how the gold ETF is down big in physical holdings while the silver ETF has rapidly gone in the other direction. ....

Article from Casey Research.

Welcome to "The Room"
The subscribers-only home page of Casey Research



Written: May 2, 2008

Dear Readers,

Some years back, I was a founding partner of a mutual fund group. We started with a single fund and over 9 years, built up the group to 13 funds before selling the whole kit and caboodle to a bank.

While I learned much as a result of my involvement as an investment dealer, the one lesson that sticks with me above all others is that the great mass of investors invariably invest in the wrong investments at pretty much exactly the wrong time and for all the wrong reasons.

The parentage of this phenomenon likely goes back, in my view, to the way people think, a topic I elaborated on recently in these weekly musings (archived edition here.)

Specifically, the shuffling of the greater investment herd towards the next precipice has to do with the reliance of most people on heuristics when it comes to thinking. When casting about for investments, they look at the sector returns from the previous quarter, spot the ones that glowed most brightly, and get it into their skulls that they would like returns such as those presented.

This thinking is then cemented into place via interviews on CNBC and similar outlets, with money managers feted for having outshined their peers over the reporting period.

The problem, of course, is that yesterday’s Kentucky Derby winner is a rare repeat.

This phenomenon was in evidence this week in a report on mutual fund asset flows from Financial Research Corp.

According to that report, the investment herd showed some sense by bailing out, wholesale, from mutual funds over the first quarter of the year; out of the top 25 U.S. mutual funds, all but one showed steep outflows.

But it was the single exception to the exodus that makes my point: the Pimco Total Return Fund, a bond fund, picked up $9 billion in new assets.

Lest the point eludes you, what the report unequivocally shows is that people are pouring into a bond fund at a time when real U.S. interest rates are near record lows.

To even a casual observer, it would seem obvious that this is exactly the time to steer clear of the sector, not pile in. Not only does the combination of low interest rates and high real inflation mean you are actually losing money from the get-go… but as interest rates rise, logically the far more likely direction given said inflation, your bonds will get slaughtered.

You would literally be better off keeping your money under your mattress.

We have much on that topic, including how to play rising interest rates for maximum profits in the just released May edition of the International Speculator. (If you are not a subscriber, this one issue has the potential to pay for your subscription into the next generation. Best of all, you can, as always, try it risk-free for three months. Check it out.)

Gold & Interest Rates

On the topic of interest rates and gold, Bud Conrad, chief economist and head wonk here at Casey Research, shot me an email yesterday you should find of interest.

If the Fed is keeping the short-term rate below the inflation rate, the real interest is negative. That is a time when money held in T-bills is losing value, encouraging people to look to gold as a better protection of their assets.

To examine that premise, inverted real interest rates should tend to go with rising gold. Digging in, I prepared the following chart that shows the relationship with the real interest rate inverted and compared to the change in the price of gold. Note that this uses the CPI. If you use a more accurate measure of inflation, the argument only gets more compelling.

The caveats are that there is usually a delayed reaction to Fed actions, and that there are plenty of other things that affect markets, like oil being affected by strikes in Africa. So the relationship is not exact. Even so, this fits with the fundamental of buying gold for the long term, though the summer “Shopping Season” could keep the price under pressure until August.

David again. While we’re on the topic of interest rates and bonds, yesterday there was this out of Bloomberg… interestingly, they didn’t label it as “Humor”…

Financial market turmoil has caused the fixed rate on the newest issue of Series I inflation-indexed savings bonds to fall to zero for the first time, according to the U.S. Treasury's Bureau of Public Debt. Investors still get a return on the investment as long as consumer prices rise, because the government pays additional interest in lockstep with inflation.

The fixed rate's decline to zero reflects the decline in returns in money markets in the aftermath of the credit collapse, said Kim Treat, a spokesman for the bureau in Washington. The government promotes the savings bonds as ”low-risk” investments for individuals that protect them against inflation.

So, there’s a concept. An investment that pays… zero. Where do I sign up?

And it’s worse than that, because you and I both know that the CPI as currently fabricated -- a topic I’ll have more on momentarily -- is a pale reflection of the real rate of inflation. And so anyone looking for a “low-risk” investment who actually buys one of these inflation-indexed savings bonds is buying into a guaranteed loss.

If you consider that low risk, you might want to consider picking up a McMansion in a California suburb.

Speaking of California housing, the following chart on foreclosures in that beautiful but overbuilt state should provide a not so gentle reminder that the worst is not over…


Faced with the accelerating credit crisis, the government is left with but one politically acceptable option, the only sort of option the pandering politicos even consider: pump up the money supply.

A Golden Week

As you may know, we have been looking forward to the release of the first-quarter 2008 financials by the gold producers. Our anticipation is fueled by what seems to be a near-certainty: that the results are going to break all the right records.

That has, so far, been the case. Last week we reported on Newmont’s record results. This week Centerra released their financials. To quote Reuters:

OTTAWA, May 1 (Reuters) - Centerra Gold (CG.TO: Quote, Profile, Research) said on Thursday that its first-quarter profit soared as results were lifted by higher gold prices and sales volumes, despite a dip in production.

The Canadian-based mid-tier gold producer said it earned $19.3 million, or 9 cents per share, in the quarter. This was up from a profit of $5.9 million, or 3 cents a share, in the year-earlier period.

So, a tripling of earnings, not too shabby. This, of course, reflects the fact that the realized price per gold ounce sold for the quarter would have rung in at well over $900, versus about $780 for the prior quarter, the fourth quarter of 2007, also a record.

But, with gold in a correction mode, what about next quarter? Well, unless it falls off a cliff, the average realized price of gold should still be well over the price realized in the fourth quarter of 2007. In other words, millions of dollars in free cash flow, free-flowing champagne and first-class tickets all around.

(On that “falling off a cliff” thing, I just did a quick calculation and even at $850 gold, the current correction has gold off only about 15%... well short of the largest correction so far in this secular gold bull market, 27.7%. I’m not worried.)

But there is something strange going on, uncovered this week by Jake Weber, the Casey researcher tasked with watching the release of financials. In his words…

My calendar is filling up with companies announcing that they’ll release their Q108 results next week, which is strange because quarterly results from the big ten gold companies have typically trickled out over a couple weeks. Here’s the list of what’s scheduled for next week alone (week of May 5): Mon. -- Endeavor, Goldcorp
Tue -- Barrick, Kinross, AngloGold
Wed -- Yamana
Thu -- Agnico
Fri -- GFI

So there will be a lot of news flooding the market next week – potentially all of it of the record-breaking sort.

David again. It would be pure conjecture to think that maybe the big guys got together and decided to put on a show. But if they did, I’d say that was good thinking on their part. Regardless, I suspect you’ll be hearing a lot more about the gold producers over the course of the next week.

Will it be enough to register in the minds of the investment masses? Probably not. But that’s okay, it just gives us more time to buy more and to upgrade our portfolios.

Unlimited Power

I have pondered in past musings here what actions government, with its unlimited powers, might dream up as it desperately tries to keep things afloat.

One example arrived at the doorstep this week when the Bank of England declared that all details on future efforts to bail out banks will henceforth be verboten and anyone from that institution releasing that information will be brought up on charges.

We have also heard from a subscriber relating a conversation with a friend of his in high position within the Bush Administration. His friend told him that, apparently unhappy at the negative press engendered by the bailout of Bear Stearns, the administration has also shifted to a stealth strategy, which will greatly reduce the amount of information released to the public on further bailouts.

Secrecy in public policy matters is almost never a good idea, because it allows a small group of individuals to act unilaterally without fear of public scrutiny. What if they are wrong? Or, even worse, what if they are even a little bit right? At that point, they will pat themselves on the back and figure if it worked in one situation, it will work in others, too.

Next thing you know, the transparency that is the lifeblood of a free-market system, and of freedom itself, is gone.

Big Lies

The “big lie” theory has it that if you tell a big enough lie, and tell it often enough, in time people will begin to believe it.

On that topic, there is an article by Kevin Phillips in Harpers (www.harpers.org) this week on how the government is now massively manipulating the economic statistics the average person relies on when setting their personal financial course.

I found a website with the article on it -- read it here.

You will know much of what you read, because our readership tends to be the exception to the norm… but you could do your friends and business associates a favor by forwarding them the link.

Of course, Big Lies are not limited to matters of economics alone. One of the early uses of the phrase was found, according to a Wikipedia entry… “in a report prepared during the war by the United States Office of Strategic Services in describing Hitler's psychological profile:

“His primary rules were: never allow the public to cool off; never admit a fault or wrong; never concede that there may be some good in your enemy; never leave room for alternatives; never accept blame; concentrate on one enemy at a time and blame him for everything that goes wrong; people will believe a big lie sooner than a little one; and if you repeat it frequently enough people will sooner or later believe it.”

I find that description of Hitler’s basic approach worth keeping in the back of one’s mind when being exposed to the constant babble emanating from politicians during this election year (or any year, for that matter). It was certainly an idea well understood by George Orwell in his classic 1984.

On a somewhat related topic, Doug Casey sent me a link to an interesting review from LewRockwell.com on a book by Nicholson Baker that looks worth picking up. The book is titled “A New Look at How World War II Happened.”

According to the reviewer, the author has tracked down a multitude of citations that put the personalities of the day under close scrutiny and finds that the impression most people have about who they actually were differs significantly from the historical record. For example, FDR really did know about the pending attack on Pearl Harbor. In fact, he encouraged it! You can read the review here.

Now, this is yet another one of those cases where I dearly wish I owned a Kindle book-reading device, so I could do a quick download of the book. A friend of mine recently gave me a hands-on demonstration of his Kindle and it was very impressive. Within about two minutes of agreeing on a book to buy, it had been purchased and finished downloading... and at less than half the price of the printed version.

But I am stubbornly holding out for the inevitable Kindle V.2., though I must admit my resolve is beginning to weaken. (If you or anyone you know works for Amazon and can update us on the status of a Kindle V.2., drop me a note at David@caseyresearch.com. Thanks!)

Bio-Fool Subsidies – the Worm Begins to Turn

A couple of weeks ago in this column, I commented that the ending of biofuel subsidies was inevitable in the face of soaring food prices, riots and possible starvation.

I didn’t have to wait long for that prognosis to be proved right; this week Congress appears to have agreed on key terms of yet another Farm Bill, one term being the reduction of a key ethanol tax credit from 51 cents per gallon to 45.

Given how uneconomic most biofuel operations have been, even with the current level of subsidization, this could serve to torpedo the struggling remnants of the industry under the water line. At the least, it’s a close warning shot that things are going to change.

Piling on, the European Union is now discussing a change in regulations that would essentially block any U.S. biofuels from being sold on European shores.

Some day in the not too distant future the whole idea of biofuels will be looked upon with derision, with the gullibles that spoke so loudly and persistently in its favor in the first place conveniently developing amnesia on the topic.

Governmentium

While I had seen this before, I hadn’t seen it in a while and so, when an acquaintance emailed it to me this week, I wanted to enter it into the record…

Research has led to the discovery of the heaviest element yet known to science. The new element, Governmentium (Gv), has one neutron, 25 assistant neutrons, 88 deputy neutrons, and 198 assistant deputy neutrons, giving it an atomic mass of 312.

These 312 particles are held together by forces called morons, which are surrounded by vast quantities of lepton-like particles called peons. Since Governmentium has no electrons, it is inert; however, it can be detected because it impedes every reaction with which it comes into contact. A minute amount of Governmentium can cause a reaction that would normally take less than a second to take from four days to four years to complete.

Governmentium has a normal half-life of 2- 6 years; it does not decay, but instead undergoes a reorganization in which a portion of the assistant neutrons and deputy neutrons exchange places. In fact, Governmentium's mass will actually increase over time, since each reorganization will cause more morons to become neutrons, forming isodopes. This characteristic of moron promotion leads some scientists to believe that Governmentium is formed whenever morons reach a critical concentration. This hypothetical quantity is referred to as critical morass.

When catalyzed with money, Governmentium becomes Administratium, an element that radiates just as much energy as Governmentium since it has half as many peons but twice as many morons.

--Anonymous

Correspondence from China

A few weeks back, I discussed the topic of China’s Olympic Torchture (see April 11 edition in the archives, reachable via the link at the bottom of this page.)

At the time I asked the opinion of one of our China-based correspondents, whom I will henceforth call the Dragon, on the topic of the Olympics and how the Chinese are currently viewing the international condemnation it has received thanks to Tibet and other real and imagined transgressions by the Chinese government. The Dragon, whom I have quoted here in the past, is a successful businessman of French origin who lives outside of Beijing with his Chinese wife.

As I think one of the biggest challenges people face these days is getting news that doesn’t pass through the filter of news organizations beholding to, or afraid of, powerful interests, I thought you’d enjoy this unedited exchange with someone on the ground in China.

I apologize for the late reply. Leading the many reasons for the delay is the time required to reflect on how to answer your kind email in a quiet environment, and a Sunday afternoon is a good time. It is just so easy to write complete nonsense about anything, and the subject of China seems to lend itself particularly well to this.

So I will try to be fact oriented and provide you with the contents of my discussions with Chinese people I got to talk to, such as business owners, university deans, scientific research institute professors, bank tellers, taxi drivers, policemen, doctors or restaurant waiters and cooks. Here is what I have heard and seen.

1. The Olympic Games are politicized in China as much as they are in the West. With few exceptions, the Chinese who live here that I met with express tremendous pride in seeing the event taking place in Beijing and feel the world is putting the Chinese to the test. Most of them strongly feel part of a great collective thing called the nation of China, and here face (MianZi in Chinese) is something to be kept collectively as much as it is to be kept individually. Whether things go right or wrong, most of them will take it almost personally. Whether in the West or out here, what is happening in people's minds when they come across the topic of the Olympic Games reflects a widespread pathology: blind belief in government propaganda and the need for government action.

If it were not politicized, the first thing that would pop to people's minds should be nothing more than a mere show of spirit-driven and will-powered bodily performance, which individual athletes only should be proud of.

2. On the subject of Tibet (XiZang in Chinese), most Chinese confirm they entirely agree with what their government is doing there and, when they express how they feel about it, express deep discontent about foreigners' attitudes.

3. The Chinese government has already retaliated against the French by suppressing long-term visas. The only visas other than work permits the French can now apply for are one-month visas. Prior to March 26, 2008, it was still possible for a European passport holder to apply for a one-year multiple entry visa. Thanks to the Sarko-moron of the Elysee, head of the Soviet Socialist Republic of France, and his mirror image in Germany, people like me have to go through additional unnecessary paperwork incurring additional delays and costs. Sorry, I said facts only, but this one had to come out.

4. Large amounts of factories in WenZhou (ZheJiang Province), GuangZhou and DongGuan (GuangDong Province) have already shut down and laid off their workers. The newspapers refer to 30% of all factories manufacturing clothes and shoes and 90% of all companies making lighters (where do they make them now if not in China -- Bangladesh?).

5. Two Chinese authors write and publish in Chinese views independent from the Chinese government, which could be of great interest to Casey Research: they are Mr.LANG Xian Ping and Mr. XIE Guo Zhong (Andy XIE).

As a conclusion, let me give you the opinion of a Chinese business owner who happens to be one of our distributors in China and whom I had dinner with on Friday evening. He is a Buddhist, has low-level connections within the government and is a reasonably wealthy man by Western standards -- a few million dollars in net worth. On the subject of the Olympics, here is what he told me:

"I feel nobody is right -- the Chinese government is not right and foreigners are not right. Foreigners are not right because the Chinese do not interfere in foreigners' affairs when the streets of Parisian suburbs are on fire and the French government is not able to bring back order on his territory. Or when French separatist groups blow cars in the Pays Basque.

“And the Chinese government is not right because we have even bigger problems to deal with than the Olympics. Our U.S. dollar reserves are shrinking in value at a scary pace and I think our government is far too soft. We should dump all our dollars and U.S. bonds onto Westerners' heads and never listen again to what their governments are saying."

How long before this kind of speech translates into action?

Anyway, it is midnight here and I am hopping on a flight to the city of Xian tomorrow at 7, so I will stop here. My wife sends her greetings as well and says she is delighted that the David Galland she has heard so much good of gives such credit to her words and says it expresses only her opinion: her family owned large strips of land and factories in the ‘30s, which were all confiscated by the ancestors of the current junta and her own grandfather escaped execution by a miracle intervention by one of his employees who testified that employees were treated well under his leadership. This just to say that she is a natural-born government skeptic and wants me to tell you that her words are to be taken with a grain of salt.

With kind regards.

To which I then asked if he was concerned about the authorities screening his email and, unhappy with something he has written, knocking on the door. His reply…

I am fully aware that all emails in and out of China transit through a series of servers in Beijing where the Carnivore system filters everything. I am also aware that there are only two ways to bypass it: a satellite connection (which does not exist yet, it seems) or encrypt emails through PGP software, the use of which would require that you install the PGP decryption software on your machine and input a decryption key to read my missives. The password would be sent by fax (using an anonymous http://www.j2.com/ subscription, for instance) or through Skype or phone. A PGP encryption provides 1,024 bits privacy, not only against the CNG but the USG or the FRG as well and has been outlawed by all of them. I clean up my mail boxes, but still need to change the provider of that service.

When I do not use PGP as for my previous emails to you, I try to be cautious with my words (unlike in my previous emails). The risk seems currently minimal as long as words are not published for a large audience to read. But these things can change in the blink of an eye and, like wars, they "come out of the blue" as Jim Rogers would say.

"One better not be in the wrong place at the wrong time" -- Doug Casey's advice is to be remembered clearly -- so with this advice and being the paranoid that I am, I try to make sure that my wife and I can always take off anytime at a moment's notice for another less dangerous spot of the matrix without having to leave anything behind ourselves.

Then, this follow-up, in response to the French government’s condemnation of China over its Tibet policy…

Hi David,

Just a brief piece of news you might be interested in: effective today and until further notice, Chinese authorities do not issue any new visas of any type to any French passport holders -- that is, including diplomatic passports (good for them -- it would do the French ambassador great good to be forced out of the country manu militari).

The main reason? French officials, being the geniuses they are, have granted the Dalai Lama the status of France's Citizen of Honor. Now maybe that moronic reader of yours who adores Marx and thinks he is a great man can explain to me what such a status is or what it is about? All I can say is that it is real funny how yesterday's very good buddy nations -- France and China -- are now sending provocations at each other's face and it is fine as long as it remains only funny. Because such things have the very real potential to send a spark over an ocean of ethanol in no time.

Every single day that passes, wherever I get to go in the world, reinforces my conviction that the ideas you, Mr. Casey and the rest of the Casey Research gang promote are the soundest there are. One day the editions of The Room will be viewed as those of prophets, and until then the new socialists of this world will continue pretending the world is flat while Galileo is out there rationally claiming that it is round and proving it scientifically.

On a very practical level, what all this means is that if I want to get back here in the immediate future and before the ban is lifted, I will have to do so on a St. Kitt & Nevis, Panama or Swiss passport. Though I am not quite sure this is what I want anymore. In any event, I will let you know.

While I blush at our correspondent’s kind words about the home team and wish to thank him for those words, I most of all want to thank him for being brave enough to write with his candid views. While the Chinese have accomplished near miracles with their economy, it is always worth remembering that it is still a communist dictatorship where the expression of thought that is perceived as contrary to the state’s interest can end you up in a dark cell. So, I don’t take my correspondence with the Dragon lightly.

More Correspondence, from Pork Chop Acres

Last week I discussed a report from a hog farming acquaintance of ours that he and his colleagues were starting to kill newly born male hogs rather than suffer the expense of feeding them. One of our subscribers sent me an email on that topic.

I forwarded kin of mine who have a hog farm in eastern Iowa your comments in the current "Room," Food and Politics section. It may be worse than your comments suggest. Here's what they wrote when I forwarded your April 25 comments and asked for their take on it. They replied:


"There are a lot of farm problems coming! Here on Pork Chop Acres, we aren't buying baby pigs for the empty hog houses, as corn prices are too high to feed the hogs at this time. Ethanol takes a lot of corn, so the price of corn is high. It is going to be very expensive to put in crops this year with fuel prices, fertilizer, and seed all way up.

"However, some of the farmers are still building new hog houses costing $150,000 to $200,000, so who knows. Mike still has some hogs he is feeding out and will ’play it by ear.’ If it ever quits raining, field work should be starting. Here's another angle -- what if Iowa doesn't have a good crop season this year and there is only half a corn crop?

"Guess any business is a gamble, so we are used to it. We have survived all these years and done OK with our conservative planning. We only bought land we could pay for at the time, so never had debt problems. If things get too bad, our grandson has quite a herd of goats that are holding their own, with goat milk and goat meat becoming more popular."

I’ve asked our new correspondent to forward further dispatches from Pork Chop Acres (I love that name!) to help keep us in the know on how the farming sector is doing.

And Finally…

As I closed my weekly musings last week, I challenged the readership to guess the high for gold for the week just ended. My forecast was a wide miss at $927, but Donald S., a regular correspondent with a more than passing knowledge of economics, got it right with his call for the top to ring in at $895. Congratulations, Donald! A free one-year subscription to BIG GOLD is yours.

That’s it for this week. As I sign off, the Dow is up modestly at +17 points and gold has struggled back to $856, though based on the news that just came across the wire, it should be trading far, far higher than that.

Specifically, the Fed just announced that it was boosting its Term Auction Facility for banks to $75 billion every two weeks, a 50% increase. Also, they are further loosening the criteria for the collateral they will accept for these handout loans. Per my earlier comments, the spigots are wide open.

The masses clearly do not yet recognize what’s going on… which is why they are piling into bonds. Yet, it is our contention that this remains one of those rare opportunities when you can look over the horizon and see what’s coming… higher interest rates and higher gold prices. (And, yes, the two do tend to move together… another story in this month’s International Speculator.)

Until next week, thank you for reading and for subscribing.






David Galland
Managing Director
Casey Research, LLC.

Gold is moving closer to EMA200 days, as dollar is gaining ground against the EURO. Another possible reason is investor is going back to Equity due to recent movement in NYSE.

I had yet to commit any position in Gold and will lightly to hold my opinion until after Fed's coming meeting. The reason is: If the prospect of further interest rate cuts recedes, the dollar could recover still more ground against the major currencies, further pressuring gold.

from: http://www.financialsense.com/editorials/droke/2008/0429.html

WILL THE FED CREATE MORE

INFLATION IN COMMODITIES?
by Clif Droke
April 29, 2008

Inflation has been investors’ main focus lately. A commonly held assumption is that the Fed’s aggressive lowering of interest rates will only result in more inflation and an even bigger bulge in commodities prices. Is this a necessary outcome of increased liquidity and lower rates?

Let’s examine this belief. Historically, we find that Inflation basically occurs in three situations:

First, the final “runaway” up-leg of the economic long-wave known as the K-Wave causes spiraling inflation. This occurred in the 1970s and early ‘80s in the U.S. Now, however, we’re entering the final runaway deflationary period of the K-Wave. A repeat of ‘70s-style hyperinflation is therefore highly unlikely.

The second way for inflation to rear its ugly head is in war time economies. War is probably the most expensive endeavor known to man. It always causes a rise in natural resource and basic commodity prices as materials are in high demand for waging war. In the early phases of a war, defense spending can lift the economy following a recession, as it did for the U.S. in 2002-2003.

Commodity prices began their meteoric ascent in 2002-2003, around the time that the Greenspan Fed began vigorously loosening money and credit in response to the 2000-2001 recession. It would be easy to conclude that the inflation in money supply led directly to an inflation of hard asset prices, yet the story doesn’t end there. The U.S.-led military actions in Afghanistan and Iraq were also key factors around this time.

It was partly in response to the war-time measures earlier this decade that led to the commodities boom getting started. As we all know from history, during the early stages of a war, commodities prices tend to rally in the face of a dramatic increase in demand.

After an upward spike in 2001 following 9/11 and extending through 2003, defense spending has since waned, as the following chart shows (Source: Haysmarketfocus.com).

Yes, war can create a huge spike in commodity prices. But can we blame the commodity price spirals we’ve seen since 2003 on the Middle East war. Certainly the ongoing military struggles in the Middle East, as challenging as they’ve been, can’t be compared to the high-level wars of say Vietnam or World War II, which burned resources at a drastic rate. The reasons for the commodity price inflation lie elsewhere.

This leads us to make the following statement: The most common “cause” for inflation is a weak economy. A weak economy, in turn, is a consequence of tight money measures by the Federal Reserve. The Fed holds ultimate sway over the fate of our national economy through its control of interest rates and money supply. Every major recession as well as every speculative bubble has had as its root in either a hyper-contractive or a hyper-expansive Fed monetary policy. The latest bout of economic weakness is no exception. It actually started back in 2004 when the Fed started tightening money and has now reached the critical point of “maximum recognition” where public awareness is widespread.

Indeed, domestic price inflation was brought to us courtesy of the Fed’s tight money policy. This flies in the face of conventional “wisdom” yet it’s so patently obvious to anyone who ignores the talking heads and pays attention to the correlations.

In his book, “The End of Economic Man,” economist George Brockway writes, “The price of bonds falls as the interest rate rises, and so does the ‘worth’ of money. This is another way of saying that a rise in the interest rate causes a fall in investment and a rise in the price level. In short, [the Fed] raising the interest rate causes both stagnation and inflation.”

In a position paper entitled, “The Sins of the Federal Reserve (How Rate Increases Actually CAUSE Inflation),” Steve Todd observes, “The Fed fancies that by raising rates, they combat inflation. Actually just the opposite is true. Short term borrowing is a cost of doing business for many firms. If that cost is raised, you have only three choices. One, you absorb it and take in less profits. Two, you raise prices. Three, you cut back production. The latter two are inflationary and all three are bad for the financial markets. Raising rates actually causes inflation. Only an economist could fail to see this.”

The bottom line is that we have gone through a period of economic contraction, and consequent stock market volatility and domestic price inflation, because of a tight money policy embraced by the Fed from 2004-2007.

As Todd observed, “…inflation is a function of a bad economy, not a good one….Venezuela has 31% inflation. Iran has 17%. Zambia checks in at 22%. Ghana at 27%. Haiti 39%. It might be added that these nations also have very high unemployment rates. Low inflation is reserved for the strong economies. Japan has 0.3% inflation. In Germany it’s 1.0%. By the Fed’s ‘reasoning’ Africa should have the world’s strongest economies to produce such high inflation.”

The tide has shifted, however, and now the Fed is embracing a much looser monetary policy. It will take a while for the full effects of this loose money policy to be felt in the overall economy. One thing is for certain, however, and it’s that the newly embraced Fed’s loose money policy will eventually do its work in galvanizing the economy and equities as it has always done in the past.

This is one instance where history always repeats.

Gold has broken the bull trend and now heading towards EMA200. RSI is oversold and MACD remain in negative zone. For time being, I will wait and not jumping in until London & NY trading tonite to give further signs.

below is a very interesting statement from Casey Research.Com :
.....With options expiry in progress, and first day notice for silver delivery next week, the boys are shaking this tree as hard as they can to get all the weak longs and tech funds to cough up their positions so they can cover. This bear raid is totally illegal, of course. It's like a Mafia/Nazi controlled town...there's nothing that we can do except sit and watch and mutter obscenities at them under our collective breaths. When will this be over? Don't know. Are they gunning for the 200-day moving averages? Don't know that either. Only they know, and they aren't about to tell us. Note the rise in the US$ yesterday...up a bunch. Funny thing is, that gold is never allowed to rise that much when the dollar heads south...

gold to climb higher? I reckon gold will do that as we are approaching quarter end with less encouraging news from business around the globe