Business – Economics – News

The gold market exploded even higher today on the news that Reserve Bank of India (RBI) is in talks with the International Monetary Fund to purchase the rest of the 400 tons that were made available for purchase of this latest round of gold bullion sales.

At the time of this writing, the price of gold is at $1,191.00 per ounce.  At the same time, the U.S. Dollar weaken by 1.05% bring it to 74.249 on a currency weighted basis.  Today is a short trading week and light session so it is too soon to know if they is a real move.

India is open to buying more gold from the International Monetary Fund(IMF). It bought 200 tonnes for $6.7 billion on November 3. The Reserve Bank of India (RBI) may well buy IMF’s remaining hoard of 201.3 tonnes on acceptable terms, which are now under negotiation.

A government official said that the additional purchase would depend on the “successful pitching by RBI”. “RBI is an independent body, and the government does not interfere in its affairs. It will get the gold if its bid is successful and at the price it has offered,” said the official.

Analysis: Too soon to tell but it looks like gold is being “remonetized” as a international money and asset class.  If that is so then it does not bode well for the U.S. dollar as the “sole” reserve currency and if that is to be prevented then a major reform of the currency is needed.

This is definitely a bullish sign for the gold markets to have such a large public purchase of 200 metric tons at record prices ($1064.00/oz. USD at the time of this writing / India bought at $1045.00).  This follows the Chinese Central Bank announcing it has increased their own gold holdings by 454 tons earlier this year as more countries are diversifying their bank reserve holdings.  The U.S. dollar has been slowing losing value against other major currencies after the crisis phase of our global economic recession had passed.  The sentiment is that the U.S. is going to run multi-trillion dollar deficits for the next decade and consumer demand is not going to return to pre-2007 levels so the risk of currency valuation is increasing and this is driving this diversification trend.

“The most important thing is that people want gold even at these prices,” said Ghee Peh, head of mining research, with UBS AG in Hong Kong. “There’s good support for prices for now” from the IMF’s disposal of bullion, he said.

The sale accounts for almost half the 403.3 tons that the Washington-based lender in September agreed to sell as part of a plan to shore up its finances and lend at reduced rates to low- income countries.

Analysis: The death of the U.S. dollar as the sole reserve currency looks to be a foregone conclusion at this point.  If governments are stocking up on the yellow metal then the public better take note and take action or be content to suffer the consequences of unrestrained fiat currencies from real fiscal prudence.

The London Telegraph published an insight piece of commentary on the 24th talking about gold, monetary policy and government policy of devaluing currency instead of doing untenable actions like massive reductions in spending or tax hikes.  Lately the gold price has been hitting nominal highs against all currencies (except Australia who was not affect by the global downturn) but is still well short of its inflation-adjust highs that would peg the yellow metal at over $2,000.00 per ounce.

The article mention that deflation is seen as a much larger threat in the central bankers minds than price inflation.  According to the Telegraph, the Federal Reserve on average raises the federal funds interest rate 19 months after unemployment peaks in the United States.  In my opinion the fear of deflation are much more hyped than real for this simple fact.  It hurts savers much more when you artificially try and maintain prices and make it even harder for people make large purchases because historically incomes have not kept up with the inflation rate over the long-term.  We can see evidence in this with the Dow Jones Industrial average at 10,000 which it was 10 years ago.  Here is the kicker, oil was at $15 a barrel and gold was around $290 per ounce.  So what has  caused this?

Well this article makes reference to this and I agree, the U.S. Treasury is concert with the Federal Reserve have debauched and debased the U.S. dollar at it has shown up in this massive increase in asset prices across the board and the only reason we are seeing this so-called “jobless recovery” is because we have kept interest rates much lower than the real risk in the economy and this also helps corporate earnings and brings people into the stock market because of the negative real rate of return you are getting by sitting in cash.

Arguably, governments have no viable alternative. Drowning in debt they could default, but it is scarcely conceivable that this is being considered in either Washington or London. The only honest way out is the slow grind of tax hikes and spending cuts but anything that is remotely acceptable politically will be totally inadequate fiscally. The required cuts in the US – perhaps a quarter of government spending – are even more implausible.

Printing money remains the time-honoured way out – and it will end as messily as it always has. Hard assets, the king of which is gold, and the shares of companies that produce them are a must for anyone looking to survive this institutionalised generational theft.

Analysis: Deflation is still a real threat and we could see a double-dip or depression.  On the other hand the risk of run-away inflation increases at the same time, it is already apparent if you look at the inflation rate and not take out energy and food prices which affect everyone and the lower incomes much more than is reported.