November 2008


Citigroup says gold could rise above $2,000 next year as world unravels
By Ambrose Evans-Pritchard
Telegraph.co.uk
Last Updated: 4:48PM GMT 26 Nov 2008

Gold is poised for a dramatic surge and could blast through $2,000 an ounce by the end of next year as central banks flood the world’s monetary system with liquidity, according to an internal client note from the US bank Citigroup.

The bank said the damage caused by the financial excesses of the last quarter century was forcing the world’s authorities to take steps that had never been tried before.

This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.

“They are throwing the kitchen sink at this,” said Tom Fitzpatrick, the bank’s chief technical strategist.

“The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock.

“Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop. We don’t think this is the more likely outcome, but as each week and month passes, there is a growing danger of vicious circle as confidence erodes,” he said.

“This will lead to political instability. We are already seeing countries on the periphery of Europe under severe stress. Some leaders are now at record levels of unpopularity. There is a risk of domestic unrest, starting with strikes because people are feeling disenfranchised.”

“What happens if there is a meltdown in a country like Pakistan, which is a nuclear power. People react when they have their backs to the wall. We’re already seeing doubts emerge about the sovereign debts of developed AAA-rated countries, which is not something you can ignore,” he said.

Gold traders are playing close attention to reports from Beijing that the China is thinking of boosting its gold reserves from 600 tonnes to nearer 4,000 tonnes to diversify away from paper currencies. “If true, this is a very material change,” he said.

Mr Fitzpatrick said Britain had made a mistake selling off half its gold at the bottom of the market between 1999 to 2002. “People have started to question the value of government debt,” he said.

Citigroup said the blast-off was likely to occur within two years, and possibly as soon as 2009. Gold was trading yesterday at $812 an ounce. It is well off its all-time peak of $1,030 in February but has held up much better than other commodities over the last few months – reverting to is historical role as a safe-haven store of value and a de facto currency.

Gold has tripled in value over the last seven years, vastly outperforming Wall Street and European bourses.

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N.B. You can read the 9-page Citigroup report on gold, cited above and written by CitiFX analysts Tom Fitzpatrick and Shyam Devani, HERE

Below is an extract from Enrico Orlandini‘s latest dispatch from Dow Theory Analysis S.A.C.“:

“… Now with respect to gold, I must admit that I am extremely bullish the yellow metal at this point in time. More so than I have been in a long, long time and I do not think my enthusiasm is misplaced. I have been following gold for nine years and buying gold since early 2002. I do so, not out of any emotional attachment, but rather because my technical analysis tells me that gold is going to rally up to US $3,000 by 2012 or 2013. I have expounded that belief for six years, as most of you are painfully aware. The funny thing is that as gold goes higher, the harder it is to convince anyone that it should be bought. Everyone loves to call a top to the bull market in gold and yet the top is not even close to materializing.

Until March of this year, the ride had been relatively smooth as we rallied from the 2001 low of US $252.50 to the March 2008 high of US $1,033.90. You can see the move up in gold’s historical chart posted above. The biggest correction was a measly 25% and that made investors greedy and complacent, a deadly combination when placing money in any market. In March the markets took it upon itself to humble investors and remind them just who was boss.

Then comes the inevitable correction. Gold fell from the 1,033.90 high, all the way down to the 681.00 low posted just last month, and that is a 45% retracement of the entire bull market. A significant correction to say the least! Immediately after the 681.00 bottom was posted the gold price moved back up over 700.00 and began to build a base, most of which has occurred close to the 38.1% retracement level at 735.80. As you can see below in the daily chart, a range has been established that reaches from the 720.20 support on up to the 760.60 resistance.

You can also see that price is being compressed into a tighter and tighter trading range and in a bull market the odds favor an upside breakout.

Currently the December gold futures contract is moving toward the top of the range trading up 13.70 at 749.70. It is rallying in spite of a good rally in the dollar and bond market, and in spite of the fact that almost all other commodities are down in negative territory. I am looking for a move and a close above the important 772.70 level.



 
Once that happens then I think gold will move back up to tackle the old all-time high at 850.00 yet again. For the first time in a long time the P & F chart for gold has a bullish price target of 825 and although it may not seem like much, it is a step in the right direction.

In conclusion,

we are suffering from significant deflationary pressures where everything loses value. When that happens, folks tend to search out a real store of value and that would be gold. The yellow metal is the world’s oldest store of value. Other countries have a long history of this and Americans will follow suit. I have no doubt that the US government will try to outlaw gold at some point in time, just like they did back in 1932. They will also implement other measures in an effort to pacify Americans, but sooner or later they’ll catch on and that is when the real trouble begins. Social unrest and civil disobedience will come to the surface as people look for their rights, they so carelessly gave up. A struggle for power will ensue.

Bernanke’s only discussions about gold involve selling it.
Fiat Dollar Reserve System Dead?
New World Reserve Currency?
Does the Subject of Gold Ever Come Up?

At Tuesday’s meeting of the House Financial Services Committee, Rep. Ron Paul, R-Texas, got a couple of minutes to ask Federal Reserve Chairman Ben Bernanke about the prospects for a new international reserve currency system and about whether Bernanke has ever discussed with other central bankers a place for gold in such a new system. Bernanke replied that there are no such plans and that the only discussions he has with other central bankers about gold involve central bank gold sales. At least that much was pretty revealing, suggesting that as the international financial system falls apart, central bankers talk about selling gold, as if such selling is a mechanism for holding the system together — as of course it is, gold being a competitive international currency.
From Dow Jones Newswires
via FXStreet.com
Wednesday, November 19, 2008

BEIJING — China’s central bank is considering raising its gold reserve by 4,000 metric tons from 600 tons to diversify risks brought by the country’s huge foreign exchange reserves, the Guangzhou Daily reported, citing unnamed industry people in Hong Kong.

The newspaper didn’t elaborate on the plan.

China’s forex reserves, at $1.9056 trillion at the end of September, are the world’s largest. U.S. dollar-denominated assets, including U.S. treasury bonds and mortgage agency bonds, account for a big proportion of the forex reserves.

* * *

By Xiao Yu and Ron Harui
Bloomberg News
Friday, November 14, 2008

China, the second-biggest overseas holder of U.S. Treasuries, should increase its bullion holding to diversify its reserves because the dollar may decline, the country’s gold association said.

“China should have at least several thousand tons of gold in its reserves, five to six times the officially announced 600 tons,” Hou Huimin, vice chairman of the China Gold Association said by phone from Beijing. The group represents producers, traders, and retailers.

The U.S. budget deficit climbed to a record in October, and some investors are betting the dollar may weaken as the Treasury would need to sell more debt to finance its $700 billion financial-rescue package. Gold has tumbled 29 percent from its March record.

“There’s no doubt that gold would be attractive, as U.S. debt is likely to swell,” said Kenichiro Ikezawa, who oversees about $3 billion as a fund manager at Daiwa SB Investments Ltd. in Tokyo. “In the long term, both the dollar and Treasuries will probably weaken. It’s possible that China will buy more gold, though the country is likely to do so gradually.”

The dollar dropped 0.5 percent against a basket of six major currencies at 3:25 p.m. Beijing time. Gold declined 0.8 percent to $730.54 an ounce.

China has the world’s biggest foreign-exchange reserves at $1.9 trillion, according to data compiled by Bloomberg. It is also the largest overseas holder of Treasuries after Japan. China’s demand for gold jumped 23 percent in 2007, making it the world’s second-largest consumer.

The Asian nation may buy more gold for its reserves on concern the $700 billion U.S. bank bailout will cause declines in the dollar and Treasuries, the Standard newspaper in Hong Kong reported today, citing an unidentified person.

The People’s Bank of China spokesman in Beijing declined to comment on the newspaper report.

Zijin Mining Group Co., China’s largest gold producer, and rivals Shandong Gold Mining Co. and Zhongjin Gold Corp. jumped by their daily limit of 10 percent in Shanghai trading.

Zijin rose to 3.87 yuan at the 3 p.m. close, the highest in a month. Shandong Gold gained to 38.13 yuan, and Zhongjin Gold climbed to 29.34 yuan.

“Chinese gold stocks are probably rising on the speculation that China may buy more bullion,” said Wayne Fung, a Hong Kong-based analyst at China Everbright Securities Ltd. “It won’t surprise me if China goes ahead, as it’s not the first time the rumor has emerged in the market.”

Some Asian central banks may seek to build up gold holdings a little as the percentage in their reserves is rather low, said Dominic Schnider, commodities analyst at UBS Wealth Management Research. “But I don’t think they will go into the market and destroy the balance and push it to ridiculous prices,” he said.

Gold more than doubled in the past six years and reached a record $1,032.70 an ounce March 17 as the dollar slumped and oil advanced, increasing concern inflation would accelerate. In the past eight months, the precious metal has plunged about 30 percent as the dollar rallied, oil collapsed and the global credit crisis pushed the world toward a recession.

The U.S. dollar index advanced to a 30-month high yesterday.

“The dollar has gone up and gold come down, so if you want to diversify it’s a decent time to do so,” Larry Kantor, head of research at Barclays Capital, said in Singapore. If countries want to shift into gold from currencies, “they will do it over a very long period.”

The U.S. budget deficit climbed to an all-time high of $237.2 billion in October, spurred by the purchase of stakes in some of the nation’s largest banks, according to Treasury Department data released yesterday in Washington.

The Treasury this month said it will more than triple its planned debt sales this quarter to help finance this year’s budget shortfall. The government needs to raise money not only for the package, but also to pay for its bailouts of mortgage companies Fannie Mae and Freddie Mac.

* * *

By Benjamin Scent
The Standard, Hong Kong
Friday, November 14, 2008

The mainland is seriously considering a plan to diversify more of its massive foreign-exchange reserves into gold, a person familiar with the situation told The Standard.

Beijing is considering changing its asset allocations during the financial tsunami in order to build up gold reserves “in a big way,” the source said.

China’s fears about the long-term viability of parking most of its reserves in US government bonds were triggered by Treasury Secretary Henry Paulson’s US$700 billion (HK$5.46 trillion) bailout plan, which may make the US budget deficit balloon to well over US$1 trillion this fiscal year.

The US government will fund the bailout by printing new money or issuing huge amounts of new debt, either of which will put severe pressure on the value of the greenback and on government bond yields.

The United States holds 8,133.5 tonnes of gold reserves valued at US$188.23 billion. China holds gold reserves of just 600 tonnes, worth only US$13.89 billion.

Beijing’s reserves could easily go up to 3,000 to 4,000 tonnes, Tanrich Futures senior vice president Colleen Chow Yin-shan said.

Until now the United States has had little choice but to issue massive amounts of debt to fund its deficits, and China has had little choice but to purchase it, as there are not many markets deep enough to absorb the mainland’s US$30 billion to US$40 billion in monthly capital inflows.

Government officials involved in the management of China’s reserves are beginning to see gold as an attractive place to park some of these funds. They see it as a real, tangible asset that will not lose its value over time — in stark contrast to the greenback, which is becoming more disconnected from economic realities as more bills are printed.

“It’s the right time to increase the gold reserves, as the price is about US$710 to US$720 per ounce,” said Wan Guoli, vice secretary general of the China Gold Association.

The International Monetary Fund has made reducing global payment imbalances one of its priorities in the aftermath of the financial tsunami.

“I think China probably will expand its strategic reserves into commodities during this downturn,” said a Hong Kong-based strategist.

“China will continue to buy treasuries … otherwise the system would get distorted,” he said. “But I think China will diversify its reserves.”

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Excerpts from Murray N. Rothbard‘s “Egalitarianism as a Revolt Against Nature“:

“…the major focus of my interest and my writings over the last three decades has been a part of this broader approach — libertarianism — the discipline of liberty. For I have come to believe that libertarianism is indeed a discipline, a “science,” if you will, of its own, even though it has been only barely developed over the generations. Libertarianism is a new and emerging discipline that touches closely on many other areas of the study of human action: economics, philosophy, political theory, history, even — and not least — biology. For all of these provide in varying ways the groundwork, the elaboration, and the application of libertarianism. Some day, perhaps, liberty and “libertarian studies” will be recognized as an independent, though related, part of the academic curriculum.”

“…A fundamental reason and grounding for liberty are the ineluctable facts of human biology; in particular, the fact that each individual is a unique person, in many ways different from all others. If individual diversity were not the universal rule, then the argument for liberty would be weak indeed. For if individuals were as interchangeable as ants, why should anyone worry about maximizing the opportunity for every person to develop his mind and his faculties and his personality to the fullest extent possible? The essay locates the prime horror of socialism as the egalitarian attempt to stamp out diversity among individuals and groups. In short, it reflects the grounding of libertarianism in individualism and individual diversity.”

Please click HERE for more.

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