The Mogambo Guru Is Fed Up With Fiscal (Non)Policy

Wednesday, November 30, 2005

Gold's brief flirt with the $500 mark has helped the Mogambo Guru out of his bunker that is solidly reinforced with paranoia. As he knows that I see gold and silver as the ultimate investment for the times to come too he has become a bit brash though. In our chat about this week's column, dealing with fiscal (Non)Policy, and the success of his writings of last week he has stepped up his demands for income.
Imagine, a grown-up guy riding his bicycle in a pink baby-suit would ask you for a SILVER DOLLAR! While the latter actually shows he is smart - in contrast to his dressing tastes - I still was shocked. I mean, who shall we take advantage of if not the disadvantaged. Let's not unearth the capitalist principle.
He only backed off when I could make it clear they would not accept silver dollars in the booze store and that he would never make it into a bank in this dress. So I was able to trade in this week's column in exchange for the address of the nearest Oxfam outpost where he can pick up some decent third-hand pants and a shirt.
Get ready for a good laugh when stand-up comedy meets (hits?) the government.

Fiscal (Non)Policy
by the Mogambo Guru
Being in a particularly bad mood, I was hoping that the Federal Reserve had increased Total Fed Credit again this week so that I would have an excuse to go up there and stand on the sidewalk outside their offices and yell "You bastards are killing our money by constantly creating more credit, which becomes more debt!" I had planned to dare Alan Greenspan to come out here and get a punch in the nose from me, and then maybe this new guy, Ben Bernanke, will look out the window and see me knocking the hell out of Greenspan, and maybe he would say to himself "Wow! I better start acting like I got some smarts, or that Mogambo idiot is liable to hit ME in the old bazoo, too!" But, alas, the Fed reduced Total Fed Credit by $2.3 billion last week, which I will call "piddly", just to add a little sardonic ugliness to the whole thing.
On the other hand, the Treasury, bagman for the (being as disrespectful as I can manage) fascist morons in Congress, took fiscal insanity to a new level of, ummm, insanity, and exploded the national debt by a cool $21 billion. In one week! That works out to an extra $210 dollars in debt for every person in this whole country that has a non-government job! In one week! But let ME go out and put my little nuclear family unit into $210 more debt in a whole MONTH, much less a lousy week, and suddenly my wife gets all weird on me and is yelling at me about how we don't NEED another layer of razor-wire in the backyard (yes we do) or we don't NEED to be entertaining my hoodlum friends at Harry's Hothouse of Hooch and Hootchie Cootchie (yes we do) and wanting to know if there something wrong with my stupid little brain that I cannot comprehend that no matter how much she yells at me (yes there is).
Bush Burdened Your Kid With $8,950 New Debt
But this is not about how I never have any fun or have nice things, but about how Congress increased the national debt by $80 billion in just the first 25 days of this month ($3.2 billion per day) and how America is only about $100 billion from reaching the limit on the national debt, again, which means that the jackasses of Congress will simply raise the limit again so that their insane spendthrift ruination of the United States can continue unabated. But let me miss a few payments on my credit card, and the credit card company gets real testy about raising my credit limit a lousy few hundred bucks!
I don’t know if you remember, but they raised the limit on the national debt, from $7.384 trillion to $8.184 trillion, less than a year ago! When George Bush took over, the national debt was about $5.7 trillion. So in five years he and the Congress borrowed and spent $2.6 trillion, which comes out to $26,000 for every non-government worker in the whole freaking country! In terms of the proverbial "every man, woman and child", $2.6 trillion it is a more manageable $8,950 each. But this is not TOTAL debt, but how much MORE debt!
And anyway, I do not like the term "every man, woman and child" because, for one thing there are very few kids who make any money at all, and if you try to, you know, subcontract the damn kids out to some Asian sweat-shop for a little piece-work income, they and the busybody mother and their snotty teachers are all calling up the police, like it is some big emergency or something, and now it's ME that's in trouble, like I did something wrong in trying to turn the expense of having kids into a profit center! "It's the American way!" I tell them! It falls on deaf ears.
Peter Schiff clues us in to why the crushing national debt will get MORE crushing. "Under normal circumstances, debtors would benefit from higher inflation, which would greatly diminish the real burden of repayment. However, these are hardly normal times. Due to the irresponsible debt management of the Clinton and Bush administrations, the average maturity of the eight trillion dollar national debt is now under three years. Therefore our creditors are not stuck holding low yielding, long-term debt. They can simply refuse to roll-over maturing paper, or demand substantially higher interest rates for doing so."
But instead of concentrating on the stupidity of Americans, let's focus, for the moment, on foreign idiots. For example, foreign central banks poured another $11.5 billion into their account at the Fed last week! Hahaha! Buying humonguous loads of US government debt at yields so low that they are already higher than simple price inflation! Hahaha! Hell, I feel brilliant in comparison!
Bernanke Looks For More Ways To Inject More Liquidity
But why all this explosion in debt issuance? This may have something to do with how Ben "Call me Ben, because I've been (get it?) crazy since I was just a kid" Bernanke said that "The Fed could find other ways of injecting money into the system - for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities." The fiscal authorities? He means the government! Alarms went off in my head as I realized that this scares the hell out of me! Because I am both only marginally literate and very, very lazy, I have never actually read the original charter of the Federal Reserve, or its many subsequent distortions, but I am pretty damned sure (and when I say "sure", I mean the "look deep into my eyes so that you can see the utter, solemn sincerity of my words" kind of "sure"), that there is no freaking way in hell that the Federal Reserve was given the duty of, ummm, what was that word again? "Cooperating!" That's it! That's the word! Cooperating! Anyway, there is no freaking way in hell that they are given the mandate to "cooperate" with the government to debase the money! Are we insane? Are we so gol-dangity, ding dongity, damn damn damnity in-freaking-sane or something? This is madness! Maaaaaadnnneeeeesssssss!
But even the Fed acknowledges that they can't do this. In a Fed paper, staffers write "As posed, though, the strategy has a major drawback: it violates the Federal Reserve Act. The Fed isn't authorized to purchase goods and services, apart from those needed for the operation of the Federal Reserve System." So I was right! They can't do that!
But we underestimate the slimy nature of the Fed, as Ben "Bozo" Bernanke himself says, "The strategy can be implemented, however, by coordination with fiscal policy-makers. The Federal government, for example, could purchase goods and services and finance the purchase with new debt, which the Fed in turn would buy - in technical terminology, the Fed would 'monetize' - the resulting debt. By coordinating with fiscal policy, the Fed could even implement what is essentially the classic textbook policy of dropping freshly printed money from a helicopter."
Bernanke's Ideas Led To The Great Depression
Of course you do not have to listen to me, and I would have no respect for you if you did. Rather, let's turn to Llewellyn H. Rockwell, Jr. who is president of the Mises Institute and editor of LewRockwell.com, who has written a terrific essay entitled "Our Money Madness." He notes that "The real blame for the Great Depression lies with precisely the policy that Bernanke favors, that is, a steady and relentless increase in the money supply." See? And you thought I was crazy!
And all of this increasing of the money supply comes through people borrowing money and going into more debt. So, thanks to the horrible Federal Reserve, we wind up with more money, which will result, because it must, in a steady and relentless decrease in the buying power of the money so created, which will show up as an increase in prices. And the credit becomes more money when people borrow money, and thus people are farther in debt! The worst of both worlds! Now you are getting a hint, a twinkling, a glimmer, even perhaps a subtle clue as to why, like the actor in the movie "Network", "I am mad as hell and I'm not going to take it anymore!"
To illustrate how when I am in a bad mood I get real insulting, I will say that this abject stupidity on the part of Alan Greenspan, Ben Bernanke, the entire Federal Reserve and everyone who has ever worked there, the majority of the lowlife mouth-breathers who infest the economics departments of colleges and universities all over this God-forsaken country, and the despicable slugs that leave their trails of slime all over the Congress are taking us down the same path, and I mean the EXACT same path, that resulted in the Great Depression. Only worse. A thousand times worse. A zillion times worse.
And speaking of Bernanke, Aubie Baltin, PhD, says "The BIG danger is that Mr. Bernanke is a product of Princeton, part of an Ivy League clique of economists that have basically been controlling the world's economic theory at least since the 30's. That means that he is a disciple of Keynes and believes in the socialist philosophy, that recessions and depressions are caused by a sudden drop in aggregate Demand that must be made for up by more government spending. Bigger government, more government and more government intrusion and involvement in business has been the mantra in Washington since the 30's." I jump to my feet and shout "Bravo! Bravo! Exactly right, dude!"
Boogerhead
And since we are speaking of Mr. Bernanke, the clever John S. thinks that "Boogerhead" is a good nickname for Ben Bernanke, and I agree. And we both agree that "Boogerhead" is funny as hell and sublimely sophomoric, and the drunker we got, the funnier it got, too! It's a classic now!
But this is not about how another "intervention" to try and straighten out the poor Mogambo has gone horribly awry, but how the Congress has just confirmed the nomination of Ben, and again I use another John-supplied nickname, "Bamboozles", to be the next chairman of the Federal Reserve. The crowd was stunned to see the way I rose to my feet, stood on the bar, and thundered so loudly that even the police dog waiting for me outside, snarling in his impatience, finally shut the hell up. Slurring my words and waving a bottle of Jack Daniels for effect, I said "It seems a lot of people do NOT know it, but let me let you in on a little secret; The Federal Reserve is NOT a part of the government, but is," and here is where my voice rose to a fever pitch. "instead, the Top Dog Boss (TDB) of a lot of greedy and grubby privately-owned banks!"
But this is not about how I laughed a big booming Mogambo drunken laugh (BBMDL), fell off the bar and spent the rest of the night throwing up into the toilet, or how the government and banks are slimy monsters out to get me, or that even police dogs salivate in anticipation of sinking their teeth into the tender portions of the big Mogambo butt (TPOTBMB), but that Mr. Bernanke is NOT bamboozling us! He's merely just exercising his First Amendment Rights and running his stupid mouth and showing his ignorance. He is merely trying to get a great job with a lot of perks and power, and so NOW when he goes to the Bodacious Burger Barn and tries to get, let's say, a lousy hamburger and fries, the cashier, who may be named Shirley who thinks she is so hot, won't point at him and make a joke in Spanish with the stupid cook, and he puts something disgusting in his food, and she laughs, and he laughs, and they look at him and laugh some more, and they are having a great old time.
But now, being the chairman of the Federal Reserve and all, he can now jump up and shout "That's the last time you pull that crap on me, Shirley! And the reason those days are over is that when you are chairman of the Federal Reserve, like me, then you get Secret Service guys to keep an eye on you filthy creeps!"
So Ben "no nickname this time" Bernanke is being right up front, and entirely honest about it. The people who are bamboozling us are Congress. Those elected weenies sat right there during the Bernanke confirmation hearings, listening to what he said, reading what he has said, getting advice from all kinds of people, and they didn't bat an eye when he said that he is going to destroy our money and our economy. And now he is confirmed!
Why The Hysteria Against Deflation?
Or, as Llewellyn H. Rockwell, Jr. writes "The Bernanke hearing was a despicable display in more ways than we can count . Why the hysteria against deflation? We are faced with a real puzzle here. In the whole of the private sector, the number one focus of retailers these days, particularly those dominant retailers such as Wal-Mart and Home Depot, is low prices. This they emphasize above all else because they know that this is what consumers want. And yet in the public sector, we find exactly the opposite: an ironclad promise that prices will not be low but rather will be continually rising. So if Wal-Mart's slogan is 'Always Low Prices,' the slogan of the Fed and the government should be 'Always Higher Prices.' "
Eric Fry, of the Rude Awakening column at the DailyReckoning, was also watching the confirmation hearing, and quotes Ben "Big dummy" Bernanke as saying that he intends "to be flexible and to learn from experience." Hahaha! As a proponent of the modern idiocy of neo-Keynesian/New Age Economics, he actually believes his silly little mathematical equations are economics, so the only thing he will learn from experience that he is a fool and he has wasted his life memorizing that crap.
Decline In Gold Production Will Bring Higher Price
Gold is nearing the $500 per ounce mark, and it will go higher from here, too, as I gather from the Fin24.co.za site where we read "Global gold production is set to decline dramatically over the next four years and this is set to generate a scramble for gold ounces, DRDGold chief executive officer Mark Wellesley-Wood said in the company's latest investor newsletter." So gold demand is higher than supply, creating a deficit, which is making prices go up.
And don't think that there will be many new gold mines started to take advantage of this rising demand. Mr. Wellesley-Wood continues, "Expenditure on exploration peaked in gold mining in 1997, and has been pretty flat since then. There are 29 new gold mines in the pipeline right now and even if all these are developed, it would require a further seven projects every year to make up the deficit."
Mr. Wellesley-Wood goes on to say "The reality is that not all these 29 mines will get the go-ahead as cost inflation, especially capital cost inflation for resources projects, has increased by a great deal more than the gold price. So where are the ounces going to come from?" Good damned question! And it is an especially good question because every jackass from the Fed, to the government, to "economists" on Wall Street are all in full agreement that there is NO inflation, regardless of prices rising alarmingly. Hahaha! Somebody is lying their heads off here, and of the two camps, I note for the record that Mr. Wellesley-Wood has never lied to me before, and I am pretty sure that he is not going to start now.
But you don't want to hear about how your fascist government is lying to you, or that the despicable Federal Reserve is lying to you, or that corporate Wall Street hucksters are lying to you, because I know that you have stories of your own about that that would curl my hair if I heard them, and believe me I do NOT want to hear them because I just got my hair uncurled from the LAST time I heard some of those stories.
But this rise in the cost to mine gold is a theme you hear all over the place, as it takes a lot of expensive energy and expensive labor, and expensive permitting, and expensive fees, and expensive equipment, and expensive taxes to mine gold nowadays, all of which have to be passed along in the price of the gold they mine, which means gold prices will have to go up just to cover the higher costs! For example he notes that "Newmont's cost per troy ounce of gold produced increased by 22% to an average of US$232/oz, while South African costs per oz doubled to an average of $395/oz. From 2002 to 2004, the gold mining industry was also hit by sharp increases in explosives, steel, fuel and water as well as other costs."
Dehedging Will Continue
He then gives us an additional boost to the idea of big price increases in gold. "The dehedging trend is set to continue," he says. And why are people dehedging gold? He replies "Who would want to be short gold in four years in this climate?" Hahaha! Exactly! They'd be financially wiped out if they were!
Finally, he concludes with one last reason to buy gold, as if we needed any more. "Merger and acquisition activity and industry consolidation will continue apace - if you can't find it, buy it."
Fortunately, we unwashed, mouth-breathing troglodyte investors out here can buy both gold bullion, helping to drive up the price by increasing the demand for gold, and we can also buy the shares of the gold miners, too, thus benefiting from the rise in the price of the shares as the price of gold goes up, due to the increased demand of us buying the stuff all the time! It sounds like it should be illegal, but it's not!
Peter Spina of the Global Watch Gold Forecaster also has an idea why gold is rising so fast in price, and it has to do with Exchange Traded Funds. "ETF share demand contributed to 56% rise in investment demand for gold in the third quarter of 2005, whilst total gold demand increased 7% in tonnes and 18% in $ terms. Against this, mine supply was up 3% year-on-year with the two big elements increasing supply coming from more scrap availability and a drop in de-hedging [Producers lowering their buying back of hedged gold, so allowing production through to the spot market]."
Beyond that, he notes that "The gold price has risen in all currencies!"
Newmont's President Pierre Lassonde said that "Worldwide gold production in 2004 had the biggest fall in 39 years." He also said "Demand in India, the world largest consumer, rose 47 percent last fiscal year, and 14 percent in China, the world's fastest growing economy."
Oil Will Rise For The Rest Of Our Lives
As my stupid neighbors stated in their umpteenth official complaint, I am always yelling that people should be buying oil, and that I think that anytime there is a pullback in the price of oil, then you should jump on it and buy buy buy like you have lost your mind. A police report and the testimony of neighbors reveal that it was at precisely 3:26 a.m. that I came unglued and started yelling that the price of oil will continue to increase for the rest of our lives.
Government To Raise Diesel To $5 per Gallon
Jim Puplava of Financial Sense Online hears me running my fat mouth and sees my neighbors hurling lawn furniture at my house to make me shut the hell up, and with a sneering tone to his voice that implies "You ain't seen nuthin' yet!" said, "Remember, we’ve got new regulations that are going to drive the price of diesel up to $5 a gallon." Well, don't tell anyone, but I had no idea that we had any new regulations that are going to drive diesel fuel up to $5 per gallon! This is news to me! But, perhaps, like in most things, the husband is the last to know.
But if there are, and they do, then there is yet ANOTHER damned thing that is going to drive up the cost of everything! I say this because everything you buy in the store was taken there by a truck with a diesel engine, which uses diesel fuel, and most of these trucks are driven by very rude people driving real slow and who won't pull over to let me get by them, no matter how much I honk my horn or make rude hand gestures to clearly indicate that I am both grumpy and in a hurry, and that they ought to pull that ugly truck over and let me by.
But Mr. Puplava is not here to talk how truck drivers are a rude bunch of bastards who are all out to get me, but about inflation, and about how the boneheads in Congress are all up in arms about the "excessive profits" of the oil companies. He says, "but no one ever points out that the biggest profiteer from oil is government itself. In the form of taxes. The government makes more than twice as much in energy taxes as the energy industry makes on exploring, finding, and producing energy itself. It’s absolutely amazing because for every dollar of profit the industry makes, the government makes $2.30." Hahahaha! Go get 'em, Jim! I can see by that look in his eye he doesn't like me acting so familiar, and so I quickly say "I mean, go get 'em, Mr. Puplava!"
Still: Go Long Oil Stocks
I can see him clenching his fists in rage, but he merely goes on to quote Evelyn Garris, who is supposed to know what in the hell she is talking about, who said "Throughout this Winter, cold fronts are going to collide with abnormally warm, wet ocean air, and the East Coast will be buried in snow. Additionally, the wind chill factors of these storms are going to lower the temperature and raise heating bills. So, the smart money is long natural gas, the smart money is long heating oil, and regular oil, and the dumb money is short."
So this is another famous Mogambo investment tip to make a lot of money (FMITTMALOM); go long oil stocks and all that energy-related stuff, because there is going to be some big money made. And when you add in the way the dollar is going to fall because the jerks in the Treasury Department are pressuring China to devalue the dollar, then you are going to make some serious money when oil shoots back up one of these days really, really soon.
Some famous guy said something like "You have a choice to either trust government, or to trust gold. And with all due respect to these lying pieces of dog crap who would sell your soul to the devil and strangle you with their bare hands to get re-elected, I recommend that you choose gold, because if you don't, then it shows you are not only a real stupid person who cannot seem to learn from history, but you are so damned stupid that you can't even stop slobbering all over yourself in your stupefied imbecility long enough to even dimly comprehend the concept at all, even when it is being explained to you using very small words, and that is why you will end up being poor and desperate, and your children and your grandchildren will hate you, and try and steal your stuff when they come over, and who are always whining and saying "We are poor because you trusted a fiat currency!" and I will laugh, "Hahahaha!" and say "Exactly, you stupid bastards! That's the lesson! When you let the banks create all that fiat money and credit, and all that debt, it destroys the currency and the economy! And then you suffer like hell! And for a long, long time, too!"
With the scornful laughter of The Mogambo (SLOTM) ringing in their ears, I will scream in their faces, "That's the lesson! Get it? So congratulations, you dumb bastards! You have now learned something the Hard Way (HW), which is, from experience, a Bad Way (BW). And the last time this kind of BW mental deficiency overtook us, we had the Great Depression, which was caused by conditions a LOT more benign that this load of toxic, over-indebted, cancerous, consumption-addicted, huge-government economic crapola that we call "The American Economy."
Volckers Advice Falls On Deaf Ears
What can be done? Nothing. Nothing can be done, if there is anything to be learned from 5,000 years of history. So I don't know. I'm not sure Mr. Lansing knows either, and that is why he goes on to write, "To help bring about a smooth, orderly adjustment of the imbalance, former Federal Reserve Chairman Paul Volcker has called for the United States to undertake a combination of policy measures to 'forcibly increase its rate of internal saving, thereby reducing its import demand.' "
Paul Volcker, previous chairman of the Federal Reserve who had to choke off inflation in the late 70's and became a legend in the process, says "Policy options to increase internal saving include:
  1. a decision by lawmakers to restore fiscal discipline in the government sector,
  2. tax reforms that encourage saving by shifting the tax base towards consumption, and
  3. the use of monetary policy to lean against asset price bubbles, since these stimulate consumption at the expense of saving."
Hahahaha! This makes me laugh my big, fat patootie off! Like ANY of this is going to happen! Hahahaha! Hey, Volcker! Do a little reading, dude! And, if I may be so bold, I suggest the book "Empire of Debt" by Bill Bonner and Addison Wiggin. And when you read that book, try to find another episode when a government did ANY of these things, even as they lay dying on their backs, feet wiggling comically in the air, consumed by inflation and an angry populace! Hahahaha! And he thinks that now, for the first time since man stood up on his back legs and grunted "Get the government to gimme money and stuff!" we are going to be blessed with lawmakers who WILL? Hahahaha!
Corporate Profit Growth Has An Awkward Base
Kurt Richebacher has heard that companies are sitting on a huge hoard of money, and remarks "And you know why profits are up in the United States? It has nothing to do with healthy, growing businesses. Just the opposite. These businesses have stopped investing in new plant and equipment. So they have much less capital equipment to depreciate. As depreciation collapses, profitability goes up - especially when they're making money from financing activities. But this can't last."
And less I be remiss in extolling the virtues of silver, let me say, for the record, that you should be up to your ears in silver by this time, and if you HAVE been up to your ears in it, then you are also up to your knees in unrealized capital gains, as silver has been on a tear lately! Wow!
Paul van Eeden at PaulVanEeden.com writes that things are getting strange in the world of gold. "We are witnessing a change in central bank behavior. Last year Argentina bought 42 tonnes of gold and now Russia wants to increase the gold in its reserves from 5% to 10%. The Moscow Times quoted President Vladimir Putin this week as saying he supported the Central Bank in paying greater attention to gold in its foreign reserves."
Perhaps this has something to do with the very weird stuff that is happening to the gold lease rates, as they are upside down! Short-term rates are higher than the long-term rates! You pay more to lease gold for one month than to lease it for a year! Weird!
All Price Gauges Are Shooting Skywards
Getting back to the thing that causes me to have nightmares, inflation, Kurt Richebacher writes "U.S. inflation rates of consumer and producer prices are now at the top in the world, even despite the Fed’s gross understatement. As of September 2005, the PPI was up 6.7% year over year. A year earlier, in August 2004, the 12-month rise was 3.3%. As to the CPI, it showed a rise of 4.7% year over year in September, as against 2.5% a year earlier. Import prices are up 9.9%.
"Annualizing the price increases over the last three months, the numbers become outright frightening. For the PPI, in September, it was 14.8%, for the CPI, 9.4% and for import prices, 20.5%."
M3 Will Balloon If Foreigners Buy Less US Debt
Much has been written about how the Fed suddenly decided that they would no longer publish the money supply number known as M3. Bill Buckler, of the Privateer newsletter, writes "The US current account deficit is $US 730 Billion or 6.3% of GDP. That has to be funded on top of the US Treasury's budget deficits. Stop the flow of foreign funds and the US economy contracts by 6.3%. If these external funds don't arrive as loans, the only other 'option' in lieu of a US recession is for the Fed to 'create' these funds. If they do that, the US M3 will explode. That is why the Fed wants to hide it."
To show you the absolute intellectual impoverishment of the people who are teaching our children and/or writing our newspapers, let's turn to an article sent to me by alert reader JC, entitled "Precious Metal's Elusive Value", and written by Andrew Cassel, who is a columnist for the Philadelphia Inquirer.
He quotes Jeremy Siegel, who is a professor at Wharton. Mr. Cassel quotes this, ummm, "professor", who is so smug in his arrogance that he dismisses gold, "If you bought $100 worth of gold in 1802, Siegel says, your inflation-adjusted return would be about 30 percent. That is, you'd have a mere $130 in purchasing power after more than 200 years."
This is exactly the damned point of the stuff, you preening halfwit! Gold preserves purchasing power! Hahaha! What a buffoon! What the lackluster professor Siegel did NOT mention is that if you had saved a $100 in fiat cash, even as late as 1913, then your loss in buying power would have been over 96%! Hahaha! So what do YOU want in your future? Depreciated and stupid fiat money, where you end up broke and bitter? Or gold, where you end up where you started in terms of buying power, or (as now) ahead of the game and making big, big money on gold's rising price? Hahaha!
To show you that journalists are no smarter than college professors, Mr. Cassel, referring to the fact that gold is not usually an investment, comes to the exact wrong conclusion and ends his column with the phrase, "Takes a bit of the glitter off." No it doesn't, you ignorant little twerp! It makes gold shine more brightly than ever!
And keeping with this disrespectful contempt of the idiocy of college economics professors, I cannot pass up a chance to heap some disrespect on Robert Pollin, who is a professor of economics at the University of Massachusetts/Amherst, who said, referring to a proposed hike in the minimum wage and quoted in the St. Petersburg Times last Sunday, said "Businesses won't lose revenue, customers or profits." Hahaha! So hike wages all you want, dudes, as they are immaterial to everything!
Congress Only Has To READ
I bring this up mostly because I am a nasty and mean-spirited little creep, but also as an introduction to the campaign by Bill Bonner and Addison Wiggin to get the members of Congress and the Federal Reserve to read their terrific new book "Empire of Debt." To make it easy for them, a fresh copy was provided free to all 535 of them. I strongly urge you to read it, too, and to pester your Congresspersons to read it and heed it. But they won't, and the reason they won't is, paradoxically, given by Messrs Bonner and Wiggin themselves on page 255, "America's leading economic and political leaders are either rascals or numskulls." Ugh.
****Mogambo sez: Let me quote John Hussman of the Hussman Funds as he says "The current market condition is extremely overbought, and the constellation of internal divergences and interest-rate action has 'whipsaw' written all over it." In short, things will soon start falling apart, and if you are in equities or bonds and not in gold, you will soon be shown the tragic error of your ways, and your sleep will be disturbed as the words of The Mogambo ring in your ears, "We are freaking doomed!"

The Mogambu Guru's straightforward writings are made possible by The Daily Reckoning.
Richard Daughty aka The Mogambo Guru is general partner and COO of the Smith Consultant Group and can be emailed at scgcjs@gte.net

ECB: M3 Slows A Bit, Gold Sales Continue - Worldwide Interest in Burial Of US M3

Tuesday, November 29, 2005

Money supply growth has for the first time this year slowed in the Euroarea. According to a press release from the ECB, M3 growth slowed to 8.0% (8.4%) percent while M1 continued its upward trend at an accelerated pace of 11.2% (11.1%).
The marginally slower trend is still running at the highest levels seen since the inception of the Euro in 2002. Only 12 months ago M3 accelerated at an annual rate of comparatively moderate 5.8%. Money supply growth has its roots in accelerated credit expansion. In Europe both consumers and governments took out more loans again. Credit to governments expanded at an annual rate of 1.9% (1.4%) in October while consumer loans grew at an annual rate of 9.3% (8.9%).
ECB president Jean-Claude Trichet and his chief economist Otmar Issing have been warning for several months that money supply growth is the biggest threat to price stability next to rising energy prices. The ECB will hold its next meeting on Thursday and market participants expect a 25 basis point increase in the leading overnight rate to 2.25%. A 50 basis point hike cannot be ruled out though. Trichet has signaled that the rate hike might be a one-off event and the ECB would not engage itself in series of hikes for the time being.
Central Banks Worldwide Show Interest in Fed's Silent M3 Burial
Readers of this blog were the first ones on the globe to get the news earlier this month that the Federal Reserve will discontinue the publication of (runaway) M3 data. This decision created an uproar not only in blogosphere but raised eyebrows in high places too. Bloomberg reported a week ago that even the National Association of Business Economics (NABE) was surprised by the silent burial of M3 data, one of the longest running data sets collected by the Fed.
"It doesn't seem they reached out very far to get user feedback on the discontinuation of the series," said less than enthusiastic Maurine Haver, president of Haver Analytics and chairwoman of the NABE to Bloomberg reporter Caroline Baum who left her own question marks unanswered in the story.
Looking at my web statistics the interest in US M3 data spans the whole globe.
Central banks, governments and treasuries from Australia, South Africa, Germany, Switzerland, Canada, Thailand, Luxembourg, New Zealand, Israel, France and several more are all following every tidbit of information about the efforts of Alan Greenspan's Fed to protect the world from the broadest monetary aggregate. So do the EU Commission, the IMF, the World Bank, the International Finance Corporation (IFC), the International Labor Organisation (ILO) and the OECD
, not to speak of my countless new readers in many well-known banks and Wall Street firms which all have helped to boost my audience significantly.
This contradicts the arguments of St. Louis Fed economist Dick Anderson who was qouted in the Bloomberg story as following. "It's tough to argue that tax money should be spent collecting data that no one looks at," he said.
I guess it's also tough to argue that tax money is spent on a war - begun under false pretenses - that the majority of the US population does not want anymore.
Shortening the Iraq war by one day only would more than cover the cost of collecting M3 data for the next 100 years. Unfortunately we can be confident that the man in the White House does not have a feeling for getting priorities right. Is it unfair to say that Bush probably knows more about (the gas-guzzling Hummer) H3 than M3?
It is almost ironic that the Fed employs economists to write studies like "Improving Public Disclosure In Banking" while it walks off into the opposite direction itself.
The lack of domestic interest in the issue is obviously seen differently abroad, in economies that have experienced hyper-inflation in one or more periods of their history.
And let's not forget; it is mainly foreign central banks supporting the Bush administration's spending spree with their continued buying of US Treasuries. I think it is safe to assume that creditors will only show up at the Treasury's auctions when they have a complete overview of the (rapidly declining) state of American financial affairs.

Hyper Inflation in Germany 1923

PHOTO: Germany had started inflation on purpose in order to inflate its way out of war reparation payments that were seen as overdone by the German industry. At the end of this process - that naturally ran out of control - it was cheaper to burn the billions then to buy firewood for it. This led to mass unemployment and in the end made the murderous ascent of Hitler possible. An empire went under within 3 decades.
Having read a book on "German Monetary and Credit Policy 1914 - 1963" by Rudolf Stucken, I for my part have learned that exploding monetary aggregates were a most reliable indicator of what was to come. Germany's money supply ballooned ahead of the times of hyper-inflation when a Reichsmark inflated to a rate of 4,200,000,000:1 to the US dollar.
Sure, as there were no credit cards and no electronic money around in the 1920's and therefore no M3, this applies to M1 and M2. But then again, today's ECB would not honor M3 data with the only regular monthly press release of the watchdogs of European price stability.
Of note is also that gold started its bull run exactly on the day the Fed announced the burial of M3. See also the previous post for more context about the gold price and inflation.
Reporting on the issue will continue.
Euro Members Sold Gold For 149 Million Euros Last Week
Three European central banks kept selling in the bull run of gold last week. According to the latest weekly consolidated financial statement of the Eurosystem they sold gold for an amount of 149 million Euros last week, bringing the position gold and gold receivables down to 148.659 billion Euros.
Russian president Vladimir Putin meanwhile is believed to be quite annoyed about the fact that the Russian central bank has leased out 377 of the 500-ton gold treasure of the country. Gold mining being an important sector of the Russian industry he sees this action, which brings only paltry returns of a few million dollars p.a., counterproductive to his goal of ramping up the gold sector. See also the post "Russia To Double Gold Reserves, Boost Mining."
This could result in a major squeeze of gold short-sellers.
ECB Study On Banks' Exposure To Hedge Funds
If you still want more to worry about I refer you the this ECB study: "Large EU Banks' Exposures To Hedge Funds" (pdf). This is certainly a more worthwhile read than the latest monthly bulletin (pdf) of the ECB where the summary is mainly a rehash of the last speeches of Jean-Claude Trichet. The most interesting part about the money supply worries has been discussed already in the post "ECB Very Worried As M3 Growth Is Risk To Price Stability."

Inflation: Time-Lag to Gold Price Is 14 Months

With gold briefly surpassing the $500/oz mark investors and consumers are told a scary lesson. Run for cover as inflation is about to go up over the next year and after that. Gold is a very reliable indicator for future inflation, a study from McClellan Financial Publications concludes.
According to their calculations inflation lags the development of the gold price to the tune of 14 months and the two are strongly correlated.
So even if gold is to correct its recent stellar rise that has propelled it again into the #1 rank of all investments since 1973 expect inflation to pick up in 2006 and 2007.

Gold as Indicator for future inflation

GRAPH: Gold's price pattern has been shifted forward 14 months on the chart to show how its leading indication reveals what lied ahead in terms of inflation. Chart courtesy of McClellan Financial Publications.
Gold and inflation have only diverged in the event of external disturbances, like wars, which drove inflation higher for short-lived periods.
Including such exogenous factors the correlation coefficient of gold and inflation still comes in at a very high 0.69 on a scale from -1 to +1.
This means one can be quite confident in the relation between the universally accepted currency of the last 6000 years and the beast of modern fiat-money times, inflation.
Author Sherman McClellan goes so far as to claim that gold would have to be pushed down to $340/oz if headline inflation, now running at an annual rate of 4.7%, shall come down to 2% again. "That is going to take a lot more than a Fed Funds rate of 4% is going to do," McClellan writes. In other words, forget it.
Gold also acts as a safe haven when real interest rates are close to or below zero.

Gold and real interest rates

GRAPH: The gold price always took off when real interest rates were close to or below zero, as is the case now. Chart courtesy of McClellan Financial Publications.
Summing it all up the outlook for gold is rosier than ever. McClellan says that the Fed would have to move far faster on the Fed Funds rate, an event that is not very likely.
Download the full report (pdf) here.

Markets Ready For Take-Off

Monday, November 28, 2005

Don't get caught on the wrong foot this week. With the major US indices close to this year's highs, abundant liquidity and expectations that the US GDP figures for Q3 may get revised upward there is a lot of fuel that can drive shares higher after they went basically nowhere during 2005 with voatility falling to low levels not seen in many years. As everybody wants to see a year-end rally happen, positive economic data could deliver the primer it needs for a rally. But do not forget the contrarian perspective: If everybody is positioned for higher prices; where shall the follow-through buying come from? Because of the bullish sentiment it is not out of reach that a rally until Wednesday may fizzle in the second half of the week. Don't get too bearish though as fund managers are sitting on sufficient cash to ignite a rally once the Dow goes above 11,000.
Fed chairman Alan Greenspan is due to talk about fiscal imbalances on Friday and if he steps up his language this could be the spark it needs to set off a correction for the stock market that has only known one direction last week.
The Data Cauldron Is Filled To The Top
The data cauldron is filled with lots of economic data. After a slow start on Monday with existing home sales the week will get hotter with durable goods orders, consumer confidence and new home sales on Tuesday. Wednesday will see all traders tiptoeing. Consensus estimates project an upward revision of Q3 GDP to 4.1% (3.8%) while the Chicago NAPM is seen a tad lower at 60 (62.9). On the speaker's front Bank of Japan governor Iwata can be expected to paint a rosy picture of the Japanese economic outlook as can be expected from Fed governor Susan Bies; if she talks about the economy at all at a S&P conference on Basel I and II. ECB council member Mersch will speak in Luxembourg on Wednesday and traders will look for any hints on the size of the rate move of the ECB that is expected to come on Thursday.
Don't forget Europe. Wednesday will see an onslaught of EU and country data that can be found in the international economic calendar in the sidebar.
Those who still use SoftMicro's Internet Explorer: please scroll all the way down. For consensus estimates on US data surf to Econoday.com.
ECB May Hike Rates By 50 Basis Points
If there is only the slightest uppick in European economic indicators and/or a positive growth outlook from the EU body on Wednesday fasten your seat belts on Thursday. After the ECB has made it clear that it will not enter into a series of rate hikes it can be expected that they raise the leading overnight rate by a 50 basis points to 2.5% on Thursday. A lesser step will not be enough to reduce the ample liquidity in Europe which is reflected in runaway money supply growth. I personally I doubt that even a 50 bp hike will be enough to rein M3 growth. New Eurozone M3 data will be released on Tuesday. If the upward trend has been continuing this will reinforce my expectation of a 50bp hike.
In the US jobless claims, construction spending and the ISM manufacturing survey are the key data on Thursday but the market is likely to discard them, waiting on Friday's employment report instead.
As mentioned before - and worth to put out a second alert - Greenspan will address a Philadelphia Fed conference on the bulging fiscal imbalances. Fed Phildelphia president Anthony Santomero will moderate a panel discussion after that. So expect some more quotes to hit the wires.
In San Francisco Fed president Janet Yellen will speak about the economic outlook on Friday.
Not that I am to give in before the game; but looking at all possible market movers during the coming week I doubt I will be able to blog about it all.
As market participants mostly see only a 25bp hike in the Eurozone the dollar's strong performance could come to a passing halt but I see the dollar supported in the medium term by the expectation that the Fed is still a few steps away from the neutral zone. Strong growth data will underpin this expectation.
Gold To Touch $500 But Due For A Correction
And what about gold which has performed better than all major stock and bond markets? After the run to levels last seen in 1987 I am waiting for a correction. Strong economic data should make room for temporary lower prices and allow late-comers to build up positions around $480. But don't bet the house on gold at these levels. The strong technical support is another $24 lower at $456 an ounce or the old high of this year. A price beginning with a 5 is most likely a signal for profit-taking and at the time of writing this it looks as Monday could be the day where gold takes out the 18-year high. Unless you are a greedy dare-devil don't try to short the best investment since 1973. We are still in the early stages of gold's bull market.

Russia To Double Gold Reserves, Boost Mining

Thursday, November 24, 2005

Russia will double the share of gold in its currency reserves from 5 to 10%. The Moscow Times reports that president Vladimir Putin (pictured left) backs the central bank's plan and also wants to introduce measures to boost the gold mining sector of the fifth-largest gold producer in the world.
"I support the proposal that the Central Bank pay greater attention to precious metals in forming our gold and foreign exchange reserves," Putin said.
Natural Resources Minister Yury Trutnev said that the country's annual gold output could hit 250 tons by 2015.
This year gold production is set to drop by 3.1 percent, to 175 tons, and level off at about 160 tons per year through 2010, according to the Union of Gold Producers.
"Obviously, there is a gap between our potential and the real situation," Putin said at a meeting with representatives of the local gold industry.
The president said that the mineral extraction tax for gold fields and other natural resources should be flexible to compensate for differences in the quality and location of mines.
"We must discuss possible measures, including fiscal measures, [to boost] the viability of developing remote fields. This concerns not only gold, but other resources, including oil and gas," Putin said.
The government is working out a system to differentiate the rates of the mineral extraction tax, Trutnev said, and will test it out on the oil industry.
"If this model works in the oil sector, we can spread it further," Trutnev said.
The changes to the tax are not expected to kick in before 2007, however.
Among other measures to help the gold industry, the government plans to privatize its gold-processing firms and also allow miners to directly sell processed gold abroad.
Russia currently exports 133 tons of gold per year, said Finance Minister Alexei Kudrin.
"Today, (gold-processing) enterprises don't need state support. We are gradually putting them up for privatization," Kudrin.
There are nine major gold-processing companies in Russia, four of which are under state control, he said.
Kudrin said the government might also allow individual entrepreneurs to mine gold. Currently, this kind of activity is forbidden and qualified by the Criminal Code as a crime.
The shifts in Russia's currency reserves are all to the disadvantage of the US dollar. Only one year ago Russia held 85% of its reserves in dollars. This share will sink to 60% with the move to more gold as Euros now account for 30% of forex reserves.
Russia is now the third country after Argentina and Mexico that has officially declared to up its gold reserves. The Deutsche Bundesbank has been resisting all attempts by the government to sell part of its gold hoard in order to ease the budget deficit problems of Germany. Austria's central bank said last week that gold is an important part of its currency reserves.
At his last testimonial on Capitol Hill Federal Reserve chairman Alan Greenspan had said that gold is the ultimate money in times of a serious crisis. He said that during world war II foreign payments were transacted in gold.

DB Research Starts Tricks On German Inflation

Germany seems to be very scared that the ECB will raise rates in order to get the leading overnight rate closer to inflation, now running at 2.3% in Germany. A research piece by Deutsche Bank Research provocatively asks whether inflation is really that high and starts playing tricks beyond those that are already applied to the basket of goods that is the foundation of the calculation of consumer prices. The non-driving consumer will benefit the German economy; except maybe the automakers.

German consumer prices

GRAPH: Inflation for non-users of energy does not look that bad. Who can show me a human that does not consume energy. Source: Deutsche Bundesbank
Take out energy and see inflation come down to 1.4%. Take out tobacco and vehicle tax and - wonder over wonder - that dreaded higher price level every citizen feels in his thinner wallet after negligible pay rises in the last years comes down to a mere 0.9%, DB Research says. Taking out food won't help much in Germany as food prices are among the lowest in the Eurozone.
As DB Research finds that higher consumer prices are also attributable to administered prices like fees for government services it of course makes sense to exclude them from a pro-company inflation rate. Large-size German companies have successfully pressured local governments into a tax-competitive downward spiral. Because of community taxes a lot of the financial industry works in Frankfurt but pays taxes in Eschborn (you don't want to work there.) Frankfurt meanwhile sits on empty coffers with a mile of nicely renovated museums but no money for more than just mediocre exhibitions.
This leads me to the question why the EU calculates the HICP (Harmonized Index of Consumer Prices) when there seems to be a gap in the approach towards the economy and the people.
The dreaded concept of core inflation which stands in stark contrast to the present "necessinflation" (inflation is low but all things we buy become more expensive) has arrived at least in the bank towers in Frankfurt/Main. Let us hope it stays there and never arrives in Kaiserstrasse, the seat of the ECB. In a country with a healthy savings quota despite record unemployment interest rates below the inflation rate will lead to a move of capital elsewhere when the gap becomes unbearable. I have to add that I favor the political concept of raising purchasing power in order to get the economy going and not a VAT hike plus corporate tax exemptions that put the lower income classes at the biggest disadvantage. One should not forget that the lower income classes are the fastest growing segment in the European population.

The Mogambo Guru Runs From The Fiscal Train Wreck

Wednesday, November 23, 2005

Ladies and gentlemen, I am proud to bring you the Mogambo Guru's latest column. I only should not have told him about the success of last week's rantings. As soon as word got to him that close to 1,000 readers of this blog had paid attention to his comments on "Monetary Insanity" he asked whether he could borrow a fiver.
Being a bit street-smart myself too I was able to escape the danger zone by asking him, "oh, can I have that beer that is standing in the corner there?" That trick distracted him long enough to give me time to retreat unharmed. Jokes aside, I hope you will not fall out of your armchair when reading his column that deals with fiscal problems, to say the least, this week.
The Fiscal Train Wreck Is Just One Of My Worries
by The Mogambo Guru
Although Halloween is over, you wouldn't know it by looking at Total Fed Credit, the scary satanic wellspring of fiat money that is destroying our money, the economy and my sleep as it went up by $9.6 billion last week. If you could see me now you would probably laugh, as I am typing with one hand, clutching my chest in the throes of a painful heart attack with the other, while, in a burst of amazing Mogambo productivity (AMP), also gagging up blood in my outrage and shouting out of the window that our money is being killed, all at the same time. All of this because the Federal Reserve expanded money and credit by almost ten freaking billion dollars, in one freaking week!
Since I am already in a bad mood because of this, it doesn't take much to push me over the edge, and, sure enough, here comes something to make matters worse, as I notice that the Fed continued its practice of greedily gobbling up things for itself, and so the sub-account of the Fed called U.S. Government Securities Bought Outright jumped by $1 billion last week, too. Grrrr.
And, as my aching Mogambo eyeballs (AME) roll comically around in my head, the foreign central banks bought up, at the Fed, another $10 billion of US government debt last week, too! We now owe these foreign bastards, whom I universally despise because I am an American and John Wayne is an American, a cumulative $1.488 trillion, just in this one account alone! So, anyway, I mean, this is getting too, too weird.
Already Thomas Jefferson Warned Of Foreign Debt
And if you don't see the harm in owing a bunch of money to foreigners, then I suggest that you look at history and see what happened when dirtbag debtors stiffed some foreign creditors for some humongous money. Failing to impress you with that, then perhaps the words of Thomas Jefferson himself, warning us that borrowing all money from foreigners means that one day we will wake up homeless in our own county, will impress you.
But money is being created everywhere! Hell, the Treasury spent last week printing up another $5.4 billion in actual cash! Even M3, the measure of the money supply that is so broad that it includes everything that could possibly be considered as "money," jumped $70 billion dollars in the last four stinking weeks! No wonder the banks and the government are not going to report this statistic anymore, as it is proof positive that the dollar is being murdered!
17 Days - $68 Billion In New Debts
Continuing this terrifying litany of woe, the Gross National Debt also exploded to $8.063 trillion as the Treasury added another $68 billion dollars to the national debt in just the last seventeen days! In seventeen lousy days!
All this money inflation is going to cause price inflation, because that is what must happen. So now let's pull our chairs up and listen to the Aden sisters, who publish the Aden Forecast, as they say that if we are waiting for a pizza to get here, then tough luck, but if we are expecting price inflation to show up, then our wait is over. "Last month, for example," they write, "U.S. consumer prices surged the most in 25 years at a 14.4% annual rate. In the past two months, producer prices soared 22.8% and 8.4% annualized and, along with import prices, both rose the most in 15 years last month. And it's not only in the U.S...inflation moved up in the U.K. in its strongest jump in eight. The main reason why is because energy prices have been soaring and worldwide monetary policies have been loose."
USA Today Fears A "Fiscal Hurricane"
But as frightening and strange as these things are, the thing that REALLY weirded me out is that my wife gets home from a business trip and hands me a copy of USA Today. Naturally, I figure that they have discovered my awful secret, and I am being exposed for the lying and deceitful fraud that I am, and now all is lost and my life is completely ruined. But to my immense relief, it was not about me at all! Instead, on the front page, the headline read "As Social Security surges, and Medicare takes off, the deficit will soar. The Result: 'Fiscal Hurricane.' "
The byline showed that it was written by a guy named Richard Wolff. Although both of our names are Richard, we are entirely different people, although I secretly wish MY name was Wolff, only I'd spell it with one "f", so I would be Richard Wolf, mild-mannered reporter for The Mogambo News, and then when people want to know why I am grabbing them by their nasty little throats in my anger about their irritating, aggravating stupidity, I can say "Hell, my name is Wolf! What in the hell did your stupid client THINK was going to happen, you ugly moron?"
Anyway, my wife (who prefers that I refer to her as my "lovely wife", and not "plaintiff"), always gets a free copy of USA Today wherever she stays on one of her "business trips." After all this time, she considers herself somewhat attuned with USA Today and the type of stuff they write about on their front page, and so she says that she was very surprised to see this kind of article on the front page. That why she was bringing it to me, she says, and NOT because she was hoping that the shock of it would kill me on the spot and then she'd be rid of me once and for all, and how everything would be fine once I was dead, and how much she wishes I was dead, and blah blah blah. But I know what was in her mind.
Sacramento Bee Headlines "Fiscal Train Wreck"
Now, dramatically, the scene changes. Suddenly I am in this big merry-go-round with the postal carrier, who has a "package" for me. Naturally suspicious of packages, I take cover behind the hedge and make her open it, and that is when I find out that it is just a copy of the Sacramento Bee newspaper! With a sigh of relief, I find also included was a note from Roger of the Rocklin Coin shop, with a cheery "Finally, front page for the first time...FISCAL TRAIN WRECK." I know what you are thinking. You are thinking "What? No exclamation points?" and you would be right! Roger must have known that I was going to take points off for NOT concluding with exclamation points, as the subject matter and sentence construction certainly called for it! And look! Notice I how I am using them to great effect right now!
But he, like everybody else, knows that I am easily bribed and have no shame, so he cleverly covers his basses and closed his note with "Have a silver eagle on me!!" Which included two, count 'em, two, exclamation points! And he also enclosed a shiny new silver dollar, too, which I kept and have on my desk right now, which I like very much because it is nice and shiny and bright, providing that essential artistic contrast, since everything else around me is drab and filthy, and full of people who live in a gray gloom and fuchsia fear that I am going to attack them for saying something really, really stupid. And I will, apparently because none of us can help it.
But what a coincidence about this "fiscal hurricane" thing, huh? And beyond these two people delivering hard copy, lots of other people are sending it to me, too, in my email! They want to make sure I saw it. But I would have had to have been freaking blind NOT to see it, because it seemed to be everywhere all over the internet. This is the kind of effect that this unusual front page of USA Today has. And this is how public sentiment is subtly altered, leading to that dramatic moment in the future when you wake up in the middle of the night, drenched in sweat, because you suddenly realize that Something Has Changed.
Eutectic Point Speaks For Gold
Or maybe it has something to do with, according to alert reader Eric P., physics. "In chemistry," he says, "there is a term called the eutectic point. This is where a compound can no long remain in its current state due to environment surrounding it. Be it gas, liquid, or solid, it must change due to temperature, pressure, gravity, etc." Relating this to gold, he says "The converging lines only indicate that the conditions which influence the gold price have reached a point where something has happened and the price must change." So, being the dimwitted guy that I am, I meekly ask, "So does this mean I should buy gold?" His thunderous reply? "Damn! There isn't anything else worth owning, but gold!"
But we were not talking about gold, but about this watershed USA Today event. So, what was in this amazing article? Well, not much. The same old stuff about how we are freaking doomed but everybody ignores the poor old Mogambo, ranting like he does, but they will listen to a guy named David Walker, just because he is the comptroller general of the United States. He said, without even a hint of hyperbole, "We face a demographic tsunami" that "will never recede." Mr. Wolff, taking my ideas and twisting them around until they finally make sense, paraphrases Mr. Walker as saying that the United States is like "Rome before the fall of the empire."
Mr. Walker goes on to say "Our financial condition is 'worse than advertised.' " He calmly explains that we face huge deficits in our budget, balance of payments, savings — and "leadership." Man! I heard THAT! Our leadership is so brain dead that they are leading us down the rocky road to ruination and really rough riding, which is today's gratuitous installment of a Mogambo Pointless And Stupid Alliteration (MPASI).
CBO Is Terrified About Long-Term Budget Deficits
Well, it was the same gloom-and-doom stuff that I have been screaming about for years and years, fearfully explaining to mental health professionals why we are freaking doomed and how they ought to let me go and then we could all go out and buy a lot of gold and make a whole huge pot load of profit when the dollar implodes. But the article does not even mention The Mogambo one damned time. Instead, we read about some guy named Douglas Holtz-Eakin, who is the director of the Congressional Budget Office, and he admits to being "terrified" about the budget deficit in coming decades. Then comes Maya MacGuineas, president of the Committee for a Responsible Federal Budget, who sees a future of "unfunded promises, trade imbalances, too few workers and too many retirees." She figures that the stock market will fall, assets will be lost and we will all suffer a lower standard of living. She mercifully stops short of predicting the ensuing rioting of the desperate people, and the wailing and bellyaching for government help, and cries of "gimme gimme gimme!"
Conservative Heritage Foundation Wants To Cut Social Security
Now you are wondering what she means when she refers to a "lower standard of living." Well, for us old-timers, Stuart Butler of the conservative Heritage Foundation projects that the government has to "renegotiate" the Medicare, Social Security and Medicaid programs, which means smaller checks for everybody, which certainly falls under the heading of "lower standard of living"! This may sound like nothing to you, but let me tell you that once the multiplier takes over, it is going to be a sizable whack to the head to the economy, which is, in German, is probably something like grosse kopfschlag uppensiden ekonomie gewhacken oof!
In case you were wondering, the "fiscal hurricane" phrase came from Isabel Sawhill of the Brookings Institution, who was also the first director of the Congressional Budget Office in 1974, and who says "the growing gulf between what the government spends and takes in to a 'Category 6 fiscal hurricane.' "
Profit Repatriation Supports The Greenback
Speaking of wondering about things, in case you were wondering why the dollar, the currency of the world's biggest idiots, could possibly be going up in value, welcome to the club. It mystifies me. But thankfully we have Chuck Butler of the Daily Pfennig patiently explaining that "The repatriation of dollar profits by U.S. corporations is really playing heck with the currencies as we head into the last six to seven weeks of the year, which is when the window closes on the piece of legislature that allows U.S. corporations doing business overseas an amnesty. Yes, they could repatriate their profits that have been held abroad back to the U.S. at a much reduced tax rate, as long as they used it to promote job creation (of course there is no 'tax police' to make certain that's what they do). This repatriation is much bigger than the breadbox I thought it would be, and now with the year winding down, the activity is furious. This is a huge reason the dollar owns a jackhammer right now!"
So if this is true, then starting to accumulate some puts on the dollar might be in order, and I would, too, if I hadn't lost my big fat Mogambo butt (BFMB) too many times playing with options.
Portfolio Insurance Cannot Work For All
The people at DailyReckoning.com were quoting Dr. Bruce Jacobs, who was talking about the fallacy of "portfolio insurance", by which one tries to protect one's portfolio by trying to "replicate the behavior of a put option by selling short stock index futures," by which you let somebody make a little derivative bet against you, and they pay a little premium for the privilege. If your portfolio goes up, then you deliver it and take the profit. If it goes down, then you have the premium to offset your losses. All it takes is somebody on the other side of the trade willing to take the deal! But as Bonner explains, "one investor could hedge his exposure. All could not."
This is known as "the fallacy of composition" which holds that what is good for one company (e.g. firing The Mogambo for smoking something in the restroom, or some other trumped-up charge) is NOT good for the economy when ALL companies do it (i.e. fire the most incompetent bonehead in the place and fire the guy who hired him, too). He goes on to say, "Who would be on the other side of the trade? The more the idea of 'portfolio insurance' took hold, the less insurance there was. In fact, the more people tried to protect themselves from falling prices all at once...the more they suffered losses."
Then, of course, came Black Monday in 1987, and all hell broke loose. As Mr. Bonner says "Sophisticated investment tools did not make the situation better. They made it worse" as everybody tried to sell at the same time, and you can almost hear them shouting "It is the end of the world! Just like The Mogambo predicted! We're freaking doomed!"
With my amazing mental powers, I can see you are asking yourself "Huh? What in the hell does any of this have to do with anything? And besides, does that big idiot, Mogambo, know that his zipper is down? Hahaha! Now I'm laughing at YOU, you big Mogambo Jerk (BMJ)"). Stung, I bravely hold back my bitter tears, and I continue, tragically, "Now, class, relate this to derivatives, which is the exact same thing, only ten times bigger! Hundreds of times bigger! Thousands of times bigger!" Now stop thinking about it. If you don't stop, you will go crazy. And you can believe me, as you are listening to an Official Mogambo Voice Of Experience (OMVOE) here!
Gold Shorts Amount To 78 Times Of Physical Gold On Earth
Out of the blue, I say "Buy gold, and lots of it!" Jim Willie CB, of the Hat Trick Letter, is startled by my sudden outburst. But since I have brought it up, he notes that he has a little more fundamental reason for buying gold, and, oddly enough, it also relates to that derivatives thing we were just talking about. He reports that "The World Gold Council recently pointed out a huge disparity between the amount of paper gold outstanding and the amount of physical gold to back up that paper obligation, as required by their charter. The same council noted that the gold market has reached a record number of 78 times as much gold sold through paper instruments as there is physical gold in existence!!! They have therefore issued an investor alert regarding ETF funds."
So some people are net short, and short "naked" to boot, via some derivatives and massive leveraging, 78 times as much gold than exists in the whole freaking world? The Mogambo is galvanized to action! He abruptly shouts "Aha!" Everyone is startled, and turns to see what is bothering me now. I see that quizzical look on their faces, and I chastise them for not realizing immediately that this is known in the business as "a classic squeeze-the-shorts" scenario! These clowns are ripe for picking! As the saying goes, "he who sells what isn't his'n, must buy it back or go to prison." And they are going to have to one day buy 78 times more gold than exists on the planet? Wow! Wow-de-wow-wow!
Bob Chapman, of the International Forecaster, says that gold mining companies, some of which also have large short positions, are abandoning their shorts. Remember that you cover (close out) a short position by buying, which means increasing demand, which means a higher price. He writes "Dehedging by gold mining companies slowed in the third quarter from the second quarter, although the book fell 1.0 million ounces to 52.8 million ounces." This means that they are not selling short anymore, and are covering their previous shorts. And remember that you cover a short by buying gold, which is an increase in demand. "They dehedged 1.3 million ounces in the first quarter and 2.7 million ounces in the second quarter. The leading dehedgers were in the Americas."
And since we are talking about gold, Mr. Chapman figures that this is a good time to bring up the fact that the demand for gold by governments and banks is on the rise, too, meaning more demand, which, as if I have to tell you, drives up the price. "A total of 43 commercial banks have ordered 171 tons of gold from Russian producers. Last year 51 bankers ordered 194.5 tons. Russia only produced 180.5 tons last year. Production fell 7.2% year-on-year to 126.12 tons in January-September this year, and could total 183 tons as a whole."
But getting back to this derivative thing, Mark Lundeen was duly alarmed that last Thursday the Bank for International Settlements said something along the lines of "the use of privately-traded derivatives reached a record in the first half of this year with the notional amount of outstanding trades worth $270,000 billion. The notional amount represents the value of the underlying assets on which the derivatives are based. Based on market value, which reflects the actual cost of replacing the contracts, the market grew by 16 percent to $11,000 billion. Interest rate derivatives remained by far the dominant category of the market, accounting for more than three quarters of the total by notional amount and almost two thirds when based on gross market value."
Banks Hold $82 Trillion Derivatives
Mr. Lundeen notes that "In 1985, Barron's had a front page cover and article covering credit derivatives. They were concerned that it was a 185 billion dollar market." Utilizing the amazing Mogambo Calculating Mind (MCM) and a Mogambo Calculating Device (MCD), I quickly discover that 1985 was only twenty short years ago. This may seem like ancient history to the young hotshots you see on TV, but it ain't. And when you are talking about something that is up by an incredible 145,459% in twenty years, Mr. Lundeen goes on to say, "There is only one way to explain this, bad bets are being doubled up in the hopes that on one toss of the dice all will be made well again. I am not counting on it." And remember; this is only counting privately held-derivatives!
For more of the same, Martin Weiss of the Money Report says if you want to talk about derivatives, how about "$82 trillion held by US banks alone, according to the Office of the Comptroller of the Currency (OCC). That's the 'notional' or face amount, which overstates the problem. But it's still far too big - 33 times more than the entire budget of the U.S. government."
Silver Demand Oustrips Demand Since 15 Years
And to that I say, "Exactly! And guess what, dude? It's about SEVEN TIMES as much money as the whole freaking Gross Domestic Product, for the entire freaking year, of the whole freaking United States of, and pardon my French, A-freaking-merica! Hell, it's almost three times the total value of the goods and services produced by the entire planet!" Speaking of precious metals, I interrupt our program, as I see that it is time for an update on silver. First we look at the Mogambo Investment Meter for Silver, and we see it is redlined, and that means you should be buying lots and lots of silver because it so freaking cheap that anybody who buys it will almost certainly end up rich rich rich if they buy enough, and not so rich not so rich not so rich if they don't.
Anyway, there is an article By Kathryn Cooper on Times Online, where she says "The demand for silver from industry and for jewellery and coins has exceeded the supply from mining and recycled scrap since 1990, according to CPM Group, a metals consultancy. Last year, the deficit was an estimated 44.5m ounces. This gap has to be met from inventories - the stocks of silver held by central banks and investors. However, these stocks have declined from an estimated 2.2 billion ounces in 1990 to about 300m today, according to CPM."
This is where I wish I had a bigger brain, because my puny little putz of a brain cannot conceive that in fifteen short years the world has consumed 1.9 billion ounces of silver from inventories, which works out to be a the rate of 126 million ounces a year. And at current rates of deficit, the remaining bit of the entire world inventory of silver will be depleted in less than seven years? My God!
They ignore the way my eyes are glazed over in my stunned incomprehension, and I am wistfully thinking about how high the price of silver will go once this happens, and the greedy side of The Mogambo (GSOTM) takes over, and I am imagining myself standing on top of a mountain of silver, and these beautiful Hollywood starlets are groveling at my feet and saying "Oh, Mogambo! All of this silver has made you rich, and that has finally made you marginally attractive!" So I am smiling to myself and only half-listening when they go on to say that in their 2005 silver report, CPM said, "The amount of silver that remains in inventories is far less than at any time in the past half-century, and in fact since the early 20th century. For the market to rebalance, prices will have to rise enough to stimulate increased supplies from mines or discourage demand."
Early Stage Of A Long-Term Silver Bull
For some confirmation, we turn to Ted Butler, who 1) knows more about the silver market than anybody else and 2) who once bumped into me in the hall and now knows more about The Mogambo than he ever wanted to know, too, and still feels soiled from the experience. Mr. Butler said, "We are only in the very early stages of a long-term bull cycle for silver. The pace of silver consumption is accelerating, given the growth in the world population and economy. Every new washing machine in India and TV in China guarantees increased silver consumption. But we don’t have enough in inventory to subsidize the shortfall in production. We would be lucky if we have 1 billion ounces left above ground, compared with 5 billion of gold. That is why silver is more rare than gold." And while gold is at $489 per ounce today, which is a hell of a bargain in itself, silver is still about eight lousy bucks an ounce! Eight! Bucks! I am incredulous that you can buy pure silver for only $8 and change an ounce right now! Something that is vitally needed by everyone in the whole world is going to completely run out in seven years, and yet it is still selling at a measly eight bucks and change? Unreal!
Jim Jubak, who is the MSN Money Markets Editor for TheStreet.com, writes "The global flow of dollars currently goes from real estate-rich U.S. consumers, via gas pumps, to the portfolios of Middle East (and other oil-exporting) nations and then back into U.S. Treasuries. Home prices don't have to fall to reduce the flow of dollars from those sources: The regular flow of dollars from real estate to gas pump to the Treasury market has depended on a constant rise in real estate prices. There's evidence now that price increases are starting to slow in many of the most overheated markets. That will mean fewer dollars for the pipeline and at some point a reduction in demand for U.S. Treasuries." My ears twitch in alarm! A reduction in demand? Yikes! It seems to me that there was something, something, something about the supply/demand dynamic that said, and correct me if I am wrong, when there is a decrease in demand, especially at the same time as an increase in supply, that means that prices will fall. And when bond prices fall, this means that the imputed interest rate rises. And interest rates will have to rise enough to attract buyers, and that probably means rising by a LOT, because what kind of investment bozo would step in front of a nuclear missile and buy something denominated in dollars over the long-term?
Strangers Still Buy Treasuries - That IS Strange
But, as strange as it sounds, people are rushing to buy US Treasuries! Why? Who is soOOOoooo damn stupid that they would voluntarily lock up their money at these absurdly low yields, knowing that they will rise one day soon and keep rising for a long, long time, and anybody who is buying bonds now is an absolute idiot? I don't expect anyone to raise their hands and say "I am that idiot", although there are lots of people who will raise their hands and say "The Mogambo is an idiot!" So instead, let's just look at how stupid they are. Turning to Doug Noland of the PrudentBear.com site, we read that "Five-year government yields fell 5 basis points to 4.43%, and bellwether 10-year yields declined 7 basis points for the week to 4.49%. Long-bond yields dropped 6 basis points to 4.68%."
This crummy yield is at the inflation rate, for crying out loud! And after deducting for commissions, fees and taxes, bond "investors" are making a lot less than simple inflation rate! They are deliberately losing money, by losing buying power! Invest a buck's worth of buying power, get back less than a buck's worth? What morons! This is the state of the world today.
So, we are looking at bonds falling in price. And, given the enormous gigantic huge whopping colossal pile of American Treasury debt issued in the last few decades, losses on bonds will mean one hell of a big loss for a lot of people. A LOT of people. Lots and lots and LOTS of people.
Monetary Imbecility
And the blame sits squarely on the head of the Federal Reserve, and it looks like a hat made out of dog poop, which is entirely apropos, because the whole stinking, disgusting mess was created by them, as the Fed pounded rates down by flooding the world with money and credit to pay for it all. So no wonder gold is soaring! Such monetary imbecility can mean only heartbreak and misery! It's like nobody at the Fed has ever watched a soap opera in the middle of an afternoon! Imbecility ALWAYS causes heartbreak and misery! And speaking of gold, the gold indexes hit multi-year highs, and gold soared today to over $493 an ounce, the highest in 18 years, and it looks like it is going to power through the $500/oz barrier with ease. Additionally, the gold indexes reached new historical highs of one kind or another and the shares are doing well, too! All in all, it is a great time to be alive if you are a gold bug. And if you are NOT a gold bug, then what you are watching is the gates of hell opening to swallow you up.
And the case is even better than that for silver. I accidentally deleted who said this, but I cover up my incompetence by saying that a mysterious stranger reports "Peru produces 10% of the world's silver, yet physical silver is impossible to find in Peru. Silver warrants on the Lima Exchange are trading at a tremendous premium to spot." Wow!
Melt Your Copper Pennies For A Windfall
Alert reader Zack writes that "I realized that our hoard of old copper pennies are worth more by the pound than by face value." Hahahaha! The money is so worthless that old copper pennies are worth more than a penny! And here's the downside of being a gold bug when gold is rising because things are so freaking crazy like this. He writes "All of a sudden, many people who scoffed at me now want to know, overnight, how to become a gold investor in one easy lesson." I know what you mean, Zack! And although you politely explain that nothing could be simpler, you moron, because the REAL reason they are here is that they do NOT want advice on how to make money by investing in gold, because they ain't got no damned money anyway. What they REALLY want is for me to tell them of some secret, miracle investment that will, in one of those rare instances in financial history, make oodles and oodles of money, and then they always get real testy when I laugh in their faces and insult their intelligence over and over and over and laugh at how their children are all funny-looking little monsters until they yell at me to shut up and leave, which I do. I relate this sad story in case you were thinking of asking for the advice of The Mogambo on this subject matter.
The Prudent Investor reports that Bloomberg TV said that central banks may be behind the rise in the price of gold, as central banks are on the buying side because "demand for the universally accepted currency of the last 6,000 years is rising." I like that use of the 6,000-year thing, as it gives you, as a mathematical certainty, a tip-off as to the near-constancy of gold. Anyway, he goes on to say, "Yesterday the World Gold Council had reported 56% higher demand for bullion and gold ETF's in the 3rd quarter of 2005." To show you that he is not just another pretty face, like so many others, or a raving lunatic like me, he says that "Every week I will be checking the change in the gold position of the ECB in its next weekly statement and will now also check the balance sheet statements of the other major central banks." This could be very interesting, and I say, "Thanks! I'd LOVE to see it, mostly because I am somewhat of a voyeur, and I would love to watch myself getting richer and richer and richer by sitting on gold! Hahahaha!"
Gold Lease Rates Converge To Singularity
I am not sure if it means anything, but I notice that the short-term (1-month, 3 month) lease rates on gold and long-term lease rates (6-months, one year) are converging to a point. Weird! "Ship's log, Stardate 652, mark 42. The gold lease rates have achieved a singularity!" Well, naturally this causes Engineer Scott to freak out, and he rushes to hit his communicator and shouts "Scotty to bridge! Scotty to bridge! What are you, some kind of moron, Jim,? Get the hell out of her, or the economic engines will implode!" And the captain of the Enterprise relies, "Oh, yeah? Well, screw you Scotty! We're all going down with the ship! More money! More power! If you don't get your butt in gear, Scotty, I'm sending Bernanke down there! HE'LL give me what I want, even if it kills us all! Bridge out!" On TV, this is where Mr. Spock would put a little Vulcan nerve-pinch on that jackass Kirk, proceed with a little Vulcan mind meld, put Kirk in a coma, take over the ship, and fly us back through time, using a delicate slingshot effect using a black hole. We would emerge back in time, and use a photon torpedo against anybody who advocated going off the gold standard.
In real life, in case you ain't heard, it don’t work like dat. In real life, you suffer for your mistakes, and there ain't no Communication's Officer Uhuru prancing around the room in that little miniskirt to take your mind off your troubles. But this still does not answer the Mystery Of The Gold Singularity, if indeed there even IS one. But it is weird. Very weird. Ugh.
****Mogambo sez: If you needed any more reasons to buy gold, let me quote Gary North of the Reality Check newsletter for another one. "I think a squeeze is coming that will affect the entire banking system," he writes. "The madness of bankers has become unprecedented." So keep on buying gold and silver and oil. As much as you can carry.
The Mogambu Guru's straightforward writings are sponsored by The Daily Reckoning.
Richard Daughty aka The Mogambo Guru is general partner and COO of the Smith Consultant Group and can be emailed at scgjs@gte.net.

FOMC Minutes Sound Less Dovish Than Markets Read It

Tuesday, November 22, 2005

The latest FOMC minutes have been greeted by equity markets with solid gains. But is the language really as dovish as Wall Street interpreted it initially?
Reading and re-reading the minutes I take note the FOMC stresses two points; ongoing inflationary risks from elevated energy prices - chairman Alan Greenspan said in July that $60 oil would shave 75 basis points from GDP - and robust economic growth bolstered by a rapid pace of productivity gains. This does not sound dovish to me and the paragraph that made stocks rally is not conclusive either.
The FOMC talks about a change in the language for the rate outlook, stressing that this has to be in context with (robust) economic growth and (dangers of higher) inflation.
I do not consider this as a sign that the Fed will stop the rate hike cycle that soon, also remembering the latest Fed speakers who all pointed to the factors already noted twice. To send the Fed's message a third time: Good growth accompanied by inflationary dangers.
The key paragraph from the FOMC minutes:
In their ongoing discussion of the Committee's communication strategy, participants expressed a variety of perspectives about how the policy statement issued at the end of FOMC meetings might evolve over time. Several aspects of the statement language would have to be changed before long, particularly those related to the characterization of and outlook for policy. Possible future changes in the sentence on the balance of risks to the Committee's objectives were also discussed. Participants noted that any forward-looking elements of the statement should clearly be conditioned on the outlook for inflation and economic growth. For this meeting, members concurred that the current statement structure could be retained, as it accurately conveyed their near-term economic and policy outlook.
While Eurodollars immediately took the notion of a change in coming Fed interest rate releases as a primer to see Fed funds not going higher than 4.5% I doubt that the rate train will drive into the garage at this level. This paragraph can also be seen as a preparation for a 50 basis point hike which would help chairman designate Ben Bernanke establish a hawkish reputation. Several Fed members have in the past hinted that the neutral zone might lie somewhere between 4 and 5%, given that economic coditions remain at the levels seen currently.
If the economy remains at its brisk pace seen in the third quarter - the 3.8 growth rate is subject to two revisions - there is no reason to for premature optimism.
Recent consumer surveys all point to a maybe frugal christmas shopping season in the light of rising necessinflation (inflation is low but everything we buy has become more expensive) and stagnating personal earnings. If this outlook becomes reality, combined with a more markedly slowdown in the housing market, the Fed could boost optimism with a pause in the cycle. If oil prices remain high - and the winter season can already be felt through crude oil prices rising again - the pause cannot last long if the Fed wants to remain credible in its inflation fighting efforts. Looking at corporate profits which have been rising in all three quarters of this year further rate hikes certainly can be accommodated in the balance sheets of those who have not leveraged their capital too much.
There are too many ifs in the outlook as that I could take anything for granted.
Of note is also that gold rose after the release of the minutes. According to a study which I can't source now gold and inflation have a positive correlation coefficent of 0.7 since the 1950s. So what is the shiny metal, just short of an 18-year high, telling us?

Euro Members Sold Gold For 226 Million Last Week

The members of the Eurosystem sold gold with a value of 226 million Euros last week. According to the weekly financial statement of the ECB the position gold and gold receivables sank to 148.808 billion Euros accordingly. Since the beginning of the central banks gold sales agreement on September 26 the EU central banks have sold gold with an accumulated value of 1.112 billion Euros. This compares to 3.251 billion Euros in the forst nine months of 2005 and shows that they are selling relatively more gold since October.
As there has been talk of central bank gold purchases in the market it remains to be seen which central bank will show higher gold rerserves. According to the rumors Argentina, Russia and Mexico are buying.
While Russia's gold position has remained steady all year long up to November 11 my Spanish is not good enough to find the gold position in Argentina's daily financial statement. The monthly statement shows that gold reserves this year rose 36.7% to $5.66 billion by the end of October in Argentina. The website of Mexico's central bank returned errors when trying to download the relevant data sets.
Austria seems to stand on the sidelines. Oesterreichische Nationalbank executive Peter Zoellner said last week in Johannesburg that gold will play a prominent role in central bank policy in the future. He said there are not many currencies that are fit to be held as currency reserves and added that gold is a good hedge against a dollar devaluation. Zoellner also said that an environment of low real interest rates would support the attractivity of gold.
The German Bundesbank is also well known to continuously resist the government's desire to sell part of its gold reserves to reduce the budget deficit.
I still expect a correction before the approach to the $500 level.
Dubai Gold Exchange Opened Its Doors Today
Reuters has this story on the opening of the Dubai Gold Exchange:
Dubai staked its claim as a major gold futures market on Tuesday with an exchange designed to help the Gulf emirate cash in on the metal's growing allure for investors.
As gold closed in on a new 18-year peak of $500 an ounce, Dubai's key February contract hit a high of $496.9 an ounce in trading on the exchange, which officials hope will soon become one of the top three in the world.
The most active February contract was trading in volume of 50 lots, overall volume was 63 lots.
Dubai is a hub for the physical gold industry in the Middle East and India, the world's largest consumer. Officials say the Dubai Gold and Commodities Exchange (DGCX), set up with Indian partners, will play to these strengths.
"We're thinking big with this one and it's going to be even bigger," said Sultan bin Sulayem, head of the Dubai Metals and Commodities Centre, a co-owner of the exchange.
The exchange opened at 10 a.m. local time (0600 GMT) and the 13-hour trading day spans the gap between business hours in Tokyo and London, something traders said would open arbitrage opportunities.
"I can see arbitrage opportunities between other futures markets and the DGCX," said Jeff Rhodes, general manager of Standard Bank plc's Dubai representative office.
"There could also be currency arbitrage opportunities between other regional exchanges."
Physical traders said improved hedging opportunities offered by locally traded derivatives would let them devote more time to their main operations.
"It can't take out price risk completely, but it will help reduce it. That will allow us to concentrate on our core business, which is jewellery," said Karim Merchant, managing director of Pure Gold, one of Dubai's leading retailers.
New York and Tokyo are the world's biggest gold futures markets, with London the centre for spot, but other players are muscling in on their business.
Electronically traded gold at the Chicago Board of Trade (CBOT), captured a monthly market share of 7.5 percent of U.S.-listed exchange-traded precious metals futures after just one year of trading.
The 3-year-old Shanghai Gold Exchange plans to launch evening trade in southern China to allow domestic firms to trade the precious metal when London and U.S. markets are open.
Dubai, commercial hub of the United Arab Emirates, has signed a technical agreement with CBOT and set its sights on eclipsing Tokyo as the number two gold futures market behind New York in two to three years.
Physical Trade
What sets the DGCX apart is that buyers are more likely to take advantage of Dubai's "City of Gold" and actually take delivery of the underlying physical gold.
Although traditional demand for gold in the jewellery market has eased, the metal is rapidly gaining a reputation as an investment.
Global "identifiable" investment demand for gold -- either bullion or instruments backed by physical metal -- surged 56 percent in the third quarter of this year, to 118 tonnes, the World Gold Council said last week.
In the UAE, investment in bullion rose 33 percent to two tonnes, the council said.
In 2004, Dubai imported 503.5 tonnes of gold and is expected to import 525-540 tonnes by year end.
Jewellers buy wholesale gold but often face a delay of several weeks before selling it to the public.
"It could assist gold traders to protect and hedge their positions in this volatile market," said Firoz Merchant, chairman of Pure Gold.
The Indian gold futures market is restricted to local individuals and domestic corporates. Non-resident Indians, banks and foreign institutions are not allowed to take part.
"Most major Indian gold and jewellery traders are represented at the DGCX," said a trader at the city's biggest bullion dealer. "There are more arbitrage options open to the people here."
The exchange will initially be open Monday to Friday with a 1 kg gold futures contract. Seven-day trading will start in the first quarter of 2006.
The electronic exchange will operate on a T+1 settlement basis with a subsidiary, the Dubai Commodities Clearing Corporation, acting as the clearing house.
Contracts are identical in format to those on the London Metals Exchange and New York's NYMEX, traders said.
The DGCX already has 50 members but many cautioned that it would take time for trading volumes to pick up.
"This will create a lot of activity in the gold market and we are expecting substantial buying volumes," said Yavuz Karadag of metals traders Capital Assets.

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